Does this surfactant manufacturer have the potential to make your portfolio shine or mop it up?
29-Jan-2018
Note: This article has no recommendation to either buy or avoid this IPO. Instead, we have presented all the relevant information based on which you can make your own decision.
About the company
Incorporated in 1986, Galaxy Surfactants is a manufacturer of surfactant (Used to remove dirt from surfaces) and other speciality ingredients which primarily caters to personal care and home care industries. Its products are primarily used as raw materials for shampoos, sunscreens, conditioners, body wash, soap bars, liquid soaps, toothpastes, laundry and dishwashing detergents. Its client list includes FMCG companies like Cavinkare Private Limited, Colgate-Palmolive (India) Limited, Dabur India Limited, Henkel,Himalaya, L'OREAL, Procter & Gamble Home Products, Reckitt Benckiser, Ayur Herbals (Private) Limited, Jyothy Laboratories and Unilever.Currently, its product portfolio comprises of over 200 product grades with 1,700 customers in over 70 countries.
Currently, it has seven manufacturing facilities out of which five are located in India and two are located overseas (USA and Egypt). It also holds 10 patents in USA and 2 patents each in China, India, The European Union, Japan and Russia. It operates in two segments: Performance Surfactants and Speciality Care. Performance Surfactants includes anionic and non-ionic surfactants and Speciality Care products includes amphoteric,cationic, UV filters, preservatives and preservative blends. Of the two segments, Performance Surfactants constitute 67.3 per cent while Speciality care products constitute 32.7 per cent of its total sales volume,as on September 30, 2017. Speciality care products carry higher margins, so the company plans to increase its focus on this segment in the future.
Industry outlook - As per prospectus
Global personal care market is expected to grow by 5.8 per cent with skin care and cosmetics sector growing the fastest at a rate of 6.7 per cent and 6.5 per cent respectively during 2018-24. Whereas personal care market in India is expected to grow at a rate of 7.9 per cent during 2018-24 from Rs 90,000 crores to 1,43,000 crores. Home care market in India is expected to grow at a rate of 7.2 per cent during 2018-24 from Rs 18,000 crores to 27,500 crores.
Indian surfactants market in which Galaxy operates is expected to grow at 6 per cent from Rs 10,200 crores to Rs 14,500 crores during 2018-24.
Where is the money going?
Entire issue is offer for sale. Company will not be receiving any proceeds from the IPO.
Additional details
Company / Business
1. Are the company's earnings before tax more than Rs 50 cr in the last twelve months?
Yes, its consolidated earnings before tax for FY17 was Rs 204 crore.
2. Will the company be able to scale up its business?
Yes, personal care and household market in India is expected to expand with rural India being a major driver of its growth. Its capacity utilization stands at just 62.5 per cent which gives it additional room to meet future demand.
3. Does the company have recognisable brands, truly valued by its customers?
No, its customers can shift to other suppliers with significant cost advantage. Additionally, it lacks long term contracts with most of its major customers even though it is has long standing relationships with them. It indicates that its customers prioritize cost and brand value plays little role.
4. Does the company have high repeat customer usage?
Yes, the company has relationship of more than five years with each of its top 10 customers.
5. Does the company have a credible moat?
No, the company operates only in B2B segment with intense competition, low bargaining power and little known brand. New or larger players with significant cost advantages can take the business away from the company.
6. Is the company sufficiently robust to major regulatory or geopolitical risks?
No, since chemical industry is heavily regulated it requires several approvals from the government to run its operations. It requires regular approvals from central, state and local governments and countries in which it operates. Any delay in approval or change in rules and regulations can significantly impact its operations.
7. Is the business of the company immune from easy replication by new players?
No, its business can be replicated by existing chemical companies willing to diversify their operations or FMCG companies planning to integrate backwards. The company also expects new entrants to enter the market and competition to increase.
8. Is the company's product able to withstand being easily substituted or outdated?
Yes, its products are primarily used in personal care and home care products like soaps, toothpaste, detergent and shampoo which will always be in demand.
9. Are the customers of the company devoid of significant bargaining power?
No, it deals with very well known brands which do not rely on a single supplier. Galaxy`s top 10 customers accounted for 54.7 per cent of its total revenues in FY17 which leaves it with very limited bargaining power.
10. Are the suppliers of the company devoid of significant bargaining power?
No, the company is dependent on a single supplier for ethylene oxide which is one of its key raw materials. It constituted 6.8 per cent of the total cost of raw material in FY17. Further, the company does not have long term contracts with its suppliers which exposes it to volatility in prices of raw materials.
11. Is the level of competition the company faces relatively low?
No, it operates in highly competitive market. Further, the company expects the competition to intensify through consolidation of existing players and entry of new players.
Management
12. Do any of the founders of the company still hold at least a 5 per cent stake in the company? Or do promoters totally hold more than 25 per cent stake in the company?
Yes, the promoter and promoters group jointly hold 76.9 per cent of the pre-offer paid up equity capital, which will fall to 70.9 per cent of the post-offer paid up capital.
13. Do the top three managers have more than 15 years of combined leadership at the company?
Yes, Unnathan Shekhar (Managing Director and Promoter) is associated with the company since inception from 1986 whereas Chairman and CFO are associated with the company since 2007 and 2004 respectively.
14. Is the management trustworthy? Is it transparent in its disclosures, which are consistent with Sebi guidelines?
Yes, we have no reason to believe otherwise.
15. Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
Yes, we have no reason to believe otherwise. Whereas, there is an ongoing litigation against Unnathan Shekhar (Promoter and Managing Director) who is charged for misclassifying custom duty. It is not expected to impact the company significantly.
16. Is the company's accounting policy stable?
Yes, they appear to be stable.
17. Is the company free of promoter pledging of its shares?
Yes, no promoter holding is pledged.
Financial
18. Did the company generate current and five-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
Yes, the company's average five-year ROE and ROCE were 20 and 19.9 per cent respectively. Current ROE and ROCE stands at 28.7 and 25.2 per cent respectively.
19. Was the company's operating cash flow positive during the previous year and at least four out of the last five years?
Yes, the company had positive operating cash flow in all five years.
20. Did the company increase its revenue by 10 per cent CAGR in the last four years?
No, its revenues increased at a rate of 8.1 per cent during the last four years.
21. Is the company's net debt-to-equity ratio less than 1 or is its interest coverage ratio more than 2?
Yes, its net debt to equity ratio stands at 0.5 times as on Sep 30,2017. As of March 31, 2017 its interest coverage ratio stood at 8.1 times.
22. Is the company free from reliance on huge working capital for day to day affairs?
Yes, its working capital requirements stood at 17 per cent of revenues in FY17 which can be considered reasonable. Galaxy regularly funds its working capital requirements through short term borrowings.
23. Can the company run its business without relying on external funding in the next three years?
No, it regularly funds it business through short and long term debt, similar trend is expected to continue in the future.
24. Has the company's short term borrowings remained stable or declined (not increased by greater than 15%)?
No, its short term borrowings have increased by 43.4 per cent during FY17. But, they have remained stable in a range of 8 to 12 per cent of revenues during the last five years.
The Stock/Valuation
25. Does the stock offer operating earnings yield of more than 8 per cent on its enterprise value?
No, it will offer operating earning yield of 3.7 per cent based on post-IPO fully diluted basis.
26. Is the stock's price to earnings less than its peers' median level?
No, its post-IPO fully diluted price to earnings stands at 35.7 times in comparison to its peers' median of 26 times.
27. Is the stock's price to book value less than its peers' average level?
No, its post-IPO fully diluted price-to-book stands at 9.1 times in comparison to its peers' median of 3.8 times.
