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Robust volume growth subject to macroeconomic stability

* GALSURF is one of the leading players in the world of Surfactants and Specialty Care ingredients, exclusively focused on catering to the Home and Personal Care industry. Nine out of the 10 Indian consumers incorporate GALSURF’s Surfactants or Specialty Care products at least once in their daily routine.

* We hosted the company for investor meetings. Below are the key highlights from the same.

Management confident of robust volume growth

* India has been one of the brighter spots for the company in terms of volume growth coming out of COVID. Volumes have grown in the range of ~9-11% over FY21-23, and this momentum has continued into 1HFY24, with GALSURF posting a strong double-digit growth in India.

* Volumes have declined in the AMET region in the past couple of years due to various ongoing issues, including currency depreciation and other geopolitical reasons. However, there was revival seen with growth in the mid-single digits in 1HFY24.

* Growth in the RoW region was strong in FY22, but waned in FY23, with volumes declining 4.6%. The US faced challenges such as supply chain disruptions and fluctuations in interest rate during this period. Inventory destocking is another phenomenon that was witnessed by GALSURF coupled with demand cutbacks toward the end of CY22.

* The management has already guided for a volume growth of 6-8% with bias toward the upper band of the guided range. Management highlighted that 8- 10% volume growth could also be achieved going forward provided that the global economic growth is supportive and there are no further macroeconomic shocks.

* The B2C segment is growing at a much faster rate, particularly in smaller markets that are expanding at a faster rate than traditional ones. Smaller players account for 30-35% of the company’s overall volumes, and Indian volumes within this segment are growing at 10-15%. This trend suggests that the B2C segment has the potential to significantly contribute to robust volume growth.

Other highlights

* Fatty Alcohol is one of the main RMs of the company and contracts are structured around quarterly adjustments, reflecting changes in raw material prices. In these contracts, 55-60% is pass-through, a mechanism typically implemented with a one-quarter lag.

* The company does not consider customization of products under new products developed (but these customized products definitely add value to the customers). New products contribute 4-5% to the overall revenues on a fiveyear rolling basis and GALSURF has introduced 3-4 products in the past three years. A dedicated R&D center is in place for the purpose of product developments.

* The company engages in co-development projects, often with a lead time of 2- 2.5 years. In this business model, GALSURF conducts R&D, after which it develops the product to be supplied. The qualification process is quite stringent, with product approval for quality taking 6-12 months in some cases.

* Freight and container rates have shot up significantly due to the ongoing Red Sea issue and this rise in rates usually takes a couple of quarters to settle down. Management expects the same this time as well. And this is going to be the case for everyone with delays in delivery and increased logistical costs in India. Customers do consider and take into account all such issues as it is a global event.

* Asset turns are generally in the range of 2.5-3x for GALSURF. Capex guidance remains at INR1-1.5b with INR350-400m being maintenance capex.

Valuation and view – maintain Buy

* The continued focus on R&D (with an annual expenditure of INR400-500m) and increased wallet share from its existing customers should drive volume growth. Margin is also expected to expand gradually.

* We estimate a volume CAGR of 8% over FY23-26E. This growth is led by robust volumes in the domestic market and a recovery in the Specialty Care Products volumes in developed markets, where indications of growth have already begun to emerge.

* The stock is currently trading at ~25x FY25E EPS of INR111.5 and ~15x FY25E EV/EBITDA. We value the company at 30x Dec’25E EPS to arrive at a TP of INR3,760. We reiterate our BUY rating on the stock.

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SEBI Registration number is INH000000412