Galaxy Surfactants IPO may be good for the long-term

By VS Fernando

Galaxy Surfactants, whose public offering of shares opened last Friday, is a good share to hold for the long-term. A company promoted by technocrats experienced in the line of business, Galaxy sports a good financial report card and has reasonable valuations. Its strong reliance on R&D promises long-term value. However, its Egyptian manufacturing foray is a bit of a concern.

Issue Objective

The company is making the current issue to part-finance the following projects: (1) Capital expenditure of its step-down subsidiary, GC Egypt, which is setting up a manufacturing facility in Egypt at a cost of Rs 212 crore; (2) A new manufacturing facility at Jhagadia, Gujarat, costing Rs 70 crore; and (3) Expansion of capacities at its Tarapur and Taloja plants at Rs 60 crore,

Parentage

Incorporated in 1986, Galaxy Surfactants Ltd (GSL) has been promoted by technocrats U Shekhar, G Ramakrishnan, SR Shanbhag and SD Patil. Before promoting GSL, the promoters were associated with multinational companies of repute like Hindustan Unilever and Colgate Palmolive. The company also boasts of an experienced and erudite board of directoRs

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The company manufactures surfactants and specialty chemicals for the personal home care (PHC) segment. Surfactants are surface active agents which reduce tension between two phases. Starting with only two products initially, GSL now manufactures and markets 66 products globally. These products find applications in the skin, hair, oral and sun care, body wash, household cleaners and fabric care segments. GSL has a dominant position in the Indian surfactants market with a market share of over 60%. The company’s domestic customers include Ayur, CavinKare, Dabur, Emami, ITC, Marico and Proctor & Gamble.

For a medium-sized company, GSL possesses strong Research & Development (R&D) capabilities, as evidenced by its 18 patents in India and 10 in the US. It has also filed for 12 patents in India and one in Europe. Not surprisingly, it is a preferred vendor for some of its clients.

GSL grew its consolidated revenues from Rs 382 crore in fiscal 2008 to Rs 648 crore in the nine-month period ended 31 December 2010. The company’s margins on earnings before interest, tax, depreciation, and amortisation (EBITDA) of about 12.5% over the years is reportedly comparable to its global peer group. Regarding cash flows, though GSL’s operating flows have consistently been positive, its cash flow after working capital changes for the nine-month period ended 31 December 2010 witnessed a sharp dip on account of significant inventory build-up.

Project Status

GSL’s present capacity to manufacture surfactants and specialty chemicals is 1,55,440 tonnes, which it is seeking to increase to 3,48,460 tonnes by setting up new manufacturing facilities at Egypt (through its step-down subsidiary) and Jhagadia (Gujarat), and by expanding its Tarapur and Taloja capacities.

The project in Egypt is to come up in two phases - 50,000 tonnes per annum (tpa) by August 2011 and an additional 40,000 tpa by August 2012. The manufacturing plant at Jhagadia, Gujarat, would add to GSL’s capacity by 77,000 tpa and is expected to be completed later this year. The expansions planned at Tarapur and Taloja are much smaller at 2,750 tpa and 5,000 tpa respectively.

Prospects

The prospects for surfactants appear good, driven by strong growth in the end-user personal and home care segments. The company is expanding its manufacturing capacity at just the right time to consolidate its domestic market share as well as to find newer markets abroad. The company may be in a position to leverage its strong relationships with global majors.

Valuation & Peer comparison

GSL posted consolidated annualised earnings per share (EPS) of Rs 32.20 for the nine-month period ended 31 December 2010. Its book value as on that date stood at Rs 105.20. GSL’s offer price at the higher end of the price band of Rs 340 per share discounts its annualised earnings per share (EPS) and book value (BV) at 10.6 and 3.2 times respectively.

The company has claimed that it does not have any listed peers in India. However, the current market price of Clariant Chemicals, a multinational of repute, which is somewhat comparable to the business domain of GSL, discounts its fiscal 2010 EPS and book value by 25 and 5.1 times respectively. Hence, the valuation at which GSL’s shares are being offered compares reasonably with its only listed peer.

Concerns

• The company its setting up its maiden overseas manufacturing facility in Egypt at a time when the region is embroiled in political turmoil
• The company is dependent on a single supplier for one of its main raw materials, ethylene oxide
• There could be delays in the implementation of projects at Jhagadia, Taloja and Tarapur
• The average cost of holding of the equity shares held by promoters is as low as Rs 3 per share

Conclusion

Given current market conditions, the company’s present offer may not fetch immediate returns. However, investors looking for long-term value can participate in GSL’s IPO.

Syndicated by India Aarthik Research (Feedback to vsf@iarlive.in)

V S Fernando is a veteran IPO Analyst who has been tracking domestic public offerings since 1986.