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Management confident on both demand and supply going forward

Galaxy Surfactants (GALSURF) reported a miss on our estimates with EBITDA (INR/kg) at INR13.2 (-10% est., -36% YoY) on higher opex (+12% QoQ to INR30.8/ kg). Total volume was flat both YoY and QoQ at 58tmt (v/s 58.8tmt in 2QFY22).

Management reiterated that demand scenario continues to remain robust and the supply chain issues might well be behind the company, albeit, elevated raw material prices and key feedstock could pose margin pressure in the near term

Guidance remain unchanged for volume growth at 6-8% YoY for FY23E-24E and 3% YoY for FY22E, with EBITDA margin likely to recover to INR16-18/kg in the medium term from current levels. Loss in volumes owing to container issues and the company moving to natural gas from coal (in line with its green initiatives) at its Tarapur plant, negatively affected EBITDA to the tune of INR90m in 3QFY22

Fatty alcohol prices rose 42% QoQ to USD2,602/mt (up 67% YoY) in 3Q; however, it has crossed USD3,000/mt currently. Prices have stabilized at this level for now.

The company’s units at Tarapur and Jhagadia manufacture mild surfactants and nontoxic preservatives, which is seeing good traction and the management expects the momentum to continue going forward.

Continued focus on R&D (with an expenditure of INR400-500m every year) and increased wallet share from existing customers are likely to drive volume growth and expand EBITDA margin. Its volume has recorded an ~8% CAGR over the last five years and we build a similar growth over FY22-24E as well (in line of the guidance). Maintain BUY with a TP of INR3,625, implying 29% potential upside.

Higher operating costs continue to put pressure on margin

Net revenue was in line with our estimate at INR9.3b (+38% YoY, +6% QoQ).

EBITDA came in at INR764m (14% lower than our estimate; down 36% YoY, but up 8% QoQ).

Gross margin stood at 27% (+90bp QoQ), with EBITDAM at 8.2% (est. of 9.8%) in 3QFY22.

PAT stood at INR456m (14% lower than our estimate, down 46% YoY, but up 26% QoQ)

For 9MFY22, revenue rose 32% YoY to INR26.3b, with EBITDA at INR2.6b (-23% YoY) and PAT at INR1.6b (-26% YoY).

Valuation and view – maintain Buy

9MFY22 realization was at INR149/kg with gross margin at INR42/kg (flattish YoY) and EBITDA/kg at INR14 (down 24% from INR19/kg in 9MFY21). Total volume grew 2% YoY to 177tmt, with Performance Surfactants volume at 114tmt (+7% YoY) and Specialty Care Products volumes at 63tmt (flattish YoY).

Capex guidance for the company was at INR1,500-2,000m every year for the next couple of years with an outlay of INR1,500m already done for 9MFY22. Expansion of products to be across the board but focus would be mainly on the specialty care products.

GALSURF has reduced its debt considerably from FY14 levels. We expect it to turn net cash by FY24, despite capex plans of INR4b over FY22-24.

The stock is trading at 31x FY24E EPS and 19x FY24E EV/EBITDA. We value the company at 40x FY24E EPS of INR91 to arrive at our TP of INR3,625. Maintain BUY with a 29% potential upside.

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