Mr. Nilesh Ghuge & Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities.
Galaxy Surfactants (Q4FY20 Results Review): Higher per unit EBITDA leads profitability. BUY
(TP Rs 1900, CMP Rs 1479, MCap Rs 52bn)
Our BUY recommendation on GALSURF with a TP of INR 1,900 is premised on ((1) 55% revenues come from MNCs, which ensures stickiness of business, (2) EBITDA margins are stable at >12% since fluctuations in RMC are easily passed through to customers, and (3) Strong return ratios (RoE/RoIC of 26.3/24.1% in FY22).
View on the result: EBITDA/APAT were 31/40% above expectations as vols were 13% higher than anticipated at 58.1kT.
Despite vol growth, lower RMC result in a muted top-line: In 4Q, revenue jumped 5% QoQ to INR 7bn attributable to (1) 7% jump in overall volumes, (2) Offset by, 3% decline in per unit realisation as RMC declined by 1% (direct pass on to customers). In FY20, despite the 4.4% YoY jump in blended vols, revenue declined by 6% YoY to INR 26bn as per unit realisation dropped by 10% YoY (RMC per tonne decline 15%).
Dramatic improvement in margins: RMC per unit declined by 15% while realisation declined by 10% only. This has resulted in higher Gross margins to 36.3% (+374/473bps QoQ/YoY). EBITDA margins improved as well to 15.6% (+250/166bps YoY/QoQ).
Operational performance: FY20 volumes grew 4.4% YoY to 224kT, led by Performance Surfactants (+6% YoY) to 144kT. Specialty care (36% of vol mix) grew 2% YoY to 81kT. Blended vols growth was largely driven by the Africa/Middle East/Turkey (AMET) market +9% YoY (42% of vol mix) followed by 1% jump in vols sold in the Rest of the World (25% of mix).
Outlook on consolidated EBITDA: We expect EBITDA to dip by 20% YoY in FY21 to INR 3bn dragged by 19% dip in per ton EBITDA to INR 13K and muted volume outlook given supply side restrictions because of Covid-19. In FY22, EBITDA should jump 81%YoY to INR 5bn led by 17/55% increase in blended vols/per unit EBITDA to 260kT/INR 20.6K per ton. This is owing to recovery in global demand and greater stress on personal hygiene.
View on the consolidated balance sheet: The company's cash jumped 2.4x YoY to INR 603mn leading to a 5% YoY dip in Net debt to INR 2,593mn. Consequently, Net Debt/Equity and Net Debt/EBITDA reduced to 0.2/0.7x vs. 0.3x/0.8x in FY19. RoE/RoIC remained at a steady 23/19% in FY20 vs. 24/18% in FY19 and 24/17% in FY18.
Change in estimates: We raise our FY22E EPS estimate by 9% to INR 93.5 in anticipation of faster recovery in demand.
DCF based valuation: Our TP is INR 1,900 based on Sep-21E cash flows (WACC 10%, Terminal growth rate 3.0%). The stock is trading at 15.8x FY22 EPS.
Shares of Galaxy Surfactants Ltd was last trading in BSE at Rs.1558.5 as compared to the previous close of Rs. 1479.45. The total number of shares traded during the day was 3436 in over 667 trades.
The stock hit an intraday high of Rs. 1564.45 and intraday low of 1485. The net turnover during the day was Rs. 5292954.