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Speciality Care performing well

Our BUY recommendation on GALSURF with a price target of INR 2,750 is premised on (1) stickiness of business as 55% of the revenue mix comes from MNCs, (2) stable EBITDA margin at >12% since fluctuations in raw material costs (RMC) are easily passed on to customers, and (3) strong return ratios (RoE/RoIC of 23/23% in FY23E). 3Q EBITDA/APAT was 16/32% higher than estimates due to lower-than-expected raw material costs and opex, higherthan-anticipated other income and lower-than-anticipated tax outgo.

* Revenue: 3Q revenue was INR 7bn -6/+8% QoQ/YoY, on account of better sales volumes in both Performance Surfactants and Speciality Care business, and a better sales mix.

* Margins: Gross margin jumped by 144/511bps QoQ/YoY to 37.7% on the back of improving share of specialities, new products mix and higher capacity utilisations. EBITDAM grew 80/458bps QoQ/YoY to 17.7% in 3Q.

* Volumes: Total volumes in 3Q came at 58kT (-8/+7% QoQ/YoY). Performance Surfactants (63% of volume mix) volumes were at 37kT (- 12/+5% QoQ/YoY) and Speciality Care volumes came to 22kT (+0/+12% QoQ/YoY). Speciality Care made a strong comeback and registered YoY growth for the first time in a quarter. Growth was driven by both the segments across geographies in 3Q. India’s market grew 14.4% YoY, AMET grew 2.9% YoY and Rest of the World grew 4.3% YoY in 3Q.

* Concall takeaways: (1) Out of the Capex plan of INR 1.5bn to be spent in FY21, INR 0.75bn to be spilled over to FY22 due to COVID-19 led disruptions. Capex guidance for FY22 at INR 1.0-1.5bn. (2) 5% of the revenues in 3Q came from sulphate free surfactants, proteins and other new products. (3) Volume growth guidance given of 5-8% YoY for medium term. (4) The Board has declared an interim dividend of INR 14 per equity share for FY21.

* Change in estimates: We raise our FY21/22 EPS estimates by 12.5/8.6% to INR 87.8/101.7 to account overall performance in 9MFY21.  DCF-based valuation: Our price target is of INR 2,750 (WACC 10%, Terminal growth 3.5%). The stock is trading at 19.8x FY23E EPS.

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