IGI Logo

Cleansing the path ahead to empiric profitability

A proxy to the FMCG industry Galaxy surfactants is well-positioned to capitalize on growing demand for personal care and home care (HPC) products globally. Its relentless focus on expanding the high-margin specialty care product segment, currently fetching ~40% of revenues, is expected to drive an EBITDA CAGR of ~14.3% over the span FY24-27. Fading geopolitical challenges and improving rural dynamics should bring stability and restocking in H2FY25. As regards the raw material volatility, Galaxy has the ability to pass on the hike to consumers with a lag, thereby normalizing its margins annually. Galaxy’s capacity expansion of Rs1.5bn capex, with utilization projected to rise from 70% to ~85% over the next three years, ably supports 6-8% volume CAGR. Galaxy has a well spread-out geographical presence across India, AMET & ROW. Further, it is debt-free with free cash flow likely to touch Rs3.5bn by FY27. We initiate coverage with an ADD rating and a target price of Rs 3,250.

Investment Rationale:

Stabilization and restocking: We are cautiously optimistic about H2FY25, expecting stabilization and restocking in AMET with easing geopolitical and logistical challenges, alongside a gradual recovery in India driven by urban demand normalization and improving rural dynamics. ROW markets are set to sustain growth, led by premium specialties and sustainable formulations. Galaxy's focus on high-margin specialties, accelerated product launches, and facility expansions in Jhagadia and Suez, combined with R&D investments, should boost EBITDA/MT and mitigate raw material pressures, positioning the company for long-term growth in HPC markets.

Focus on specialty care products for margin expansion: Products like mild surfactants, non-toxic preservatives, and high-end emollients fetch pricing power and thicker margins for the business. Growing demand for such products particularly in Europe and America would significantly increase segment contribution over the years, expanding EBITDA margins by 190bps by FY27.

Buoyant demand from emerging markets: Emerging markets, particularly in India, Africa, and Southeast Asia, are expected to remain key growth drivers. Rising income levels and increased awareness of personal hygiene would boost consumption of personal care and cleaning products. These regions should trigger volume-based growth as lion’s share is contributed from the performance segment here.

Resilience against raw material volatility: Fatty alcohol makes up ~60% of the Raw materials. While its prices have been volatile, the company has historically passed on ~80-90% of cost increases to customers with a 1-2 quarter lag. Long-term contracts with FMCG giants provide them insulation from immediate input cost fluctuations. Sticky customers due to long approval periods: Galaxy's products often have life cycles of 6-7 years or longer, mirroring those of their customers’ products. The validation process, requiring rigorous quality and safety checks is time-consuming and expensive, with multinational clients taking 2-3 years for approval before commercial production. Clients hence tend to favor established suppliers like Galaxy, whose products have undergone extensive testing. The lengthy approval timelines also deter newer suppliers, reinforcing client trust in proven vendors.

ROCE recovery: Galaxy clocked a ROCE of 15.7% in FY24 which should expand by 182bps in FY25 to 17.5% and sustain over next two years. This aligns with the cardinal principle of PAT growth being higher than EBITDA growth, and EBITDA growth being higher than volume growth, ensuring a positive outlook for the company.

Valuation

We expect overall volumes to grow ~6.9% annually over FY25e-27e, banking on an EBITDA/MT of Rs 21,500- 23,300 for FY25-27e. The OCF yield over FY25-27e would likely be in the range of 4.0-5.2%. Capex above Rs1.5bn would fetch a FCFF of Rs 3.5bn by FY27e (yield at 3.5%). The company is almost Debt-Free, leading to negligible interest burden. Currently the stock trades at 27.3/24.0/21.5x FY25e/26e/27e PER. We value it on a PER basis assigning a multiple of 25x on FY27e EPS and initiate coverage with an ADD rating at a target price of Rs 3,250.

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632