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GSL upgrade EBITDA guidance

Galaxy Surfactants’ (GSL) Q3FY21 adjusted EBITDA/kg at Rs18.1 raises confidence on sustainability of higher profitability, and management has increased its guidance under this parameter by 6-7% to Rs16-18 (from Rs15-17). We take it that the guidance upgrade has come from strong performance in new-age products including mild surfactants, preservatives and proteins. We expected these product-categories to sustain >20% revenue growth in the foreseeable future, and create more headroom for EBITDA/kg expansion. Volume growth is likely to stay in the range of 8-11% p.a. GSL is investing in expansion of its R&D facility to enhance focus on innovation, which should boost new product funnel. We increase our FY21E EPS estimate by 12.3%, but maintain our FY22E EPS. We raise our target price for the stock to Rs2,583 (from Rs2,298) at 25x P/E (vs 24x) on rollover of valuation to FY23E. Maintain BUY.

* Specialty chemical volumes rose 12% YoY. GSL revenues rose 7.8% YoY to Rs6.7bn driven by strong volume growth in India and recovery in RoW. Volumes grew 7.3% YoY to 58kte driven by India volume growth of 14.4% YoY and AMET 2.9% while RoW, which was declining, has grown 4.3% (vs dip of 4% YoY in Q2FY21). Performance product volumes rose 4.7% YoY, but shrunk 11.6% QoQ as Q2FY21 had benefited from pent-up demand from channel inventory filling in India. Specialty care volumes rose by a strong 12% YoY due to normalisation of demand and better performance in RoW.

* EBITDA rose 45% YoY to Rs1.2bn. Gross profit rose 24.7% YoY to Rs2.5bn, and benefited from Rs140mn export incentive received in Egypt; adjusted gross profit increased 17.8% YoY. Adjusted gross margin improved 380bps YoY to 36.4%. It benefited from better product mix, acceleration in new-age products, better customer mix (tier-1 contribution dipped to 54% from 63% in Q1FY21), and some likely inventory gains. EBITDA rose 45% YoY to Rs1.2bn and adjusted EBITDA jumped 28.4% YoY. EBITDA/kg (adjusted) was at Rs18.1, up 19.7% YoY, and GSL has revised its guidance under this parameter to Rs16-18/kg (from Rs15-17 earlier). Net profit grew 78% YoY to Rs852mn.

* Conference call highlights. 1) AMET volumes were hurt from logistic issues. 2) Specialty portfolio benefited from strong performance in new-age products such as mild surfactants, preservatives and proteins. In fact, sulphate-free products and proteins contributed 5% to revenues in Q3FY21. Company believes these new-age product revenues can continue to grow at 20% for next few years. 3) New-age products are witnessing progressive growth with new customer acquisitions, and GSL’s strength lies in vegetable proteins, sub-divisions of mild surfactants (spread of variants), and by gaining traction in syndet and transparent bathing soaps. 4) Though the company has increased its EBITDA guidance by 6-7%, it sees scope for higher growth in EBITDA/kg as new-age products’ contribution rises. 5) Growth in performance products would be led more by geographical expansion. 6) Capex for FY21 is seen at Rs0.8bn (vs Rs1bn-1.5bn) due to lockdown, and should catch up in FY22.

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