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EBITDA/kg guidance raised for FY23; demand scenario remains uncertain

* GALSURF reported an EBITDA/kg of INR22.2 (est. INR20.8, up 84% YoY). Supply chain disruptions have reduced, with a significant decline in freight rates and raw material prices. Total volumes were flat QoQ at 59.3tmt (v/s 55.3tmt in 1QFY23). The muted volumes were on account of inflationary pressures in the AMET region, while the slowdown in Europe impacted Specialty Care volumes in 2QFY23.

* The management said demand in India remains robust. GALSURF is close to surpassing domestic sales volumes of 100tmta. The structural uptick that was seen during the COVID-led lockdown period has sustained, with the company expecting to grow its domestic business further.

* A decline in volumes and a reversal in multiple supply-led factors has resulted in a higher EBITDA/kg in the past few quarters. In line with the same, the management has raised its FY23 EBITDA guidance to INR21-22/kg from INR16-18/kg. However, with volumes recovering from FY24, there will be a decline in per kg margin.

* Fatty alcohol prices declined by 35% QoQ and 18% YoY to USD1,490/mt in 2QFY23. Even though volumes remained muted in 1HFY23, realization stayed firm at INR209/kg (up 45% YoY). We expect this trend to continue in 2HFY23. Subsequently, we have raised our FY23/FY24 revenue estimate by 26%/24%.

* A continued focus on R&D (with an annual expenditure of INR400-500m) and increased wallet share from existing customers is likely to drive volume growth and expand EBITDA margin. Volume grew by ~6% CAGR over the last five years. We build in a similar growth over FY22-24 as well. We maintain our Buy rating with a TP of INR3,390.

EBITDA beat, margin declines sequentially

* Revenue grew 40% YoY and 6% QoQ to INR12.3b.

* EBITDA grew 86% YoY, but fell 11% QoQ, to INR1.3b (est. INR1.2b).

* Gross margin fell 390bp QoQ to 26.9%, with EBITDAM down 210bp to 10.7% in 2QFY23.

* PAT grew 100% YoY, but fell 16% QoQ, to IN839m (est. INR774m)

* In 1HFY23, revenue/EBITDA/PAT grew 40%/56%/55% YoY to INR24b/INR2.8b /INR1.8b.

* EBITDAM expanded to 11.7% v/s 10.5% in 1HFY22.

Valuation and view

* The management’s continued focus on R&D (with an annual expenditure of INR400-500m) and increased wallet share from its existing customers is likely to drive volume growth and expand EBITDA margin. Although GALSURF plans an across the board expansion in its products, its focus will mainly be on the Specialty Care Products segment.

* The stock is currently trading at 33x FY24E EPS and 22x FY24E EV/EBITDA. We value the stock at 40x FY24 EPS, or INR85, to arrive at our TP of INR3,390 (a potential upside of 20%). We maintain our Buy rating.

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