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EBITDA/kg at higher level sustains

Galaxy Surfactants’ (GSL) Q4FY23 EBITDA/kg at Rs23.2 benefited from lower other expenses while gross profit/kg has dipped 9.6% YoY to Rs54.6. Volume growth was just 0.6% YoY to 58kte, and was impacted by a decline in Egypt, and destocking / down trading in US and Europe. India continues to grow fast at 14.6%. GSL expects to grow volume by 6-8% pa in FY24 (we see upside risk if AMET and RoW recover), while EBITDA and PAT may grow faster than volumes. We have modelled EBITDA/kg to stabilise at Rs21 for the next few years which means FY24 may see a dip in EBITDA (vs company’s guidance of growth). Specialty care products growth is key to sustain higher EBITDA/kg, which is seeing headwinds. GSL’s FCF generation will likely remain strong as capex will be stable at Rs1.5bn pa. We have cut our EPS estimates by 1-5% for FY24-25, and accordingly reduced our target price to Rs2,440 (from Rs2,555), valuing GSL at PE multiple of 22x FY25E EPS (unchanged). We downgrade our rating to HOLD (from Add). Key risks: 1) Significant drop in EBITDA/kg and 2) continued weakness in RoW.

* Volumes up 0.6% YoY. GSL’s revenue dipped 7.5% YoY to Rs9.7bn affected by a dip of 8% in realisation to Rs168/kg, while volumes rose 0.6% to 58kte due to weak demand in AMET and RoW. AMET volumes dropped 2.5% YoY largely due to lower volumes in Egypt, and excluding Egypt, volumes grew 7%. Egypt has been hurt by higher inflation and currency depreciation. RoW volume declined 15.9% YoY due to destocking in the US and down trading in Europe. India is a bright spot with volume growth of 14.6%. The company expects volume to grow at 6-8% pa with India volume growth of 8-10%. AMET and US are expected to grow from H2FY24. Performance surfactants’ volumes grew 11.9% YoY to 40kte with better product mix as indicated by higher realisation; specialty volumes dipped 17.5% YoY to 18kte with inferior mix.

* Gross profit/kg was Rs54.6, down 9.6% YoY (6.7% QoQ). Gross profit was down 9.1% YoY to Rs3.2bn, and had gains from exports rebate of Rs200mn in Q3FY23. Gross profit margin was 32.4% (up 80bps QoQ), and gross profit per kg was Rs54.6 vs Rs58.5 in Q3FY23. We believe GSL benefitted from better product mix in performance chemicals, and lower contribution from AMET. Other expenses declined 18% YoY to Rs1.2bn which has helped cap EBITDA drop to Rs1.3bn (down 7.2% YoY). EBITDA/kg was Rs23.2 (vs Rs25.2 in Q4FY22 and Rs26.4 in Q3FY23). Net profit dipped to Rs0.9bn, down 8% YoY.

* Commitment of volume < EBITDA < PAT on growth stays. Despite high EBITDA/kg of Rs24.6 for FY23, company believes it will continue to deliver 6-8% volume growth. EBITDA growth is likely to be higher than volumes, and PAT will grow the fastest in FY24. RoCE stands at 22%. We see risk to EBITDA/kg due to - 1) rise in AMET contribution on jump in volumes; and 2) CVD on fatty alcohol in India. GSL said industry is contesting on implementation of CVD which is inflationary for consumers. US and Europe volume recovery is also critical to aid higher EBITDA/kg which is seeing destocking and down trading and has hurt high margin specialty volumes for GSL.

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