Unilever Stock – Why you should accumulate the stock of Galaxy Surfactants
Galaxy Surfactants is a leading manufacturer of surfactants and specialty chemicals for use in the home care and personal care segment.
While Galaxy Surfactants’ revenue from specialty care products took a sharp hit in the June 2020 quarter, the business from performance surfactants remained robust all through FY21. The latter serve as inputs into consumer staples, the demand for which is relatively inelastic, ensuring a steady demand for the company’s products. Galaxy Surfactants serves as a global supplier to multi-national, regional and local FMCG companies.
The company is also expanding its specialty products (mild surfactants and non-toxic preservatives) capacity at Jhagadia in Gujarat. With a resurgence in Covid-19, the company can continue to be a beneficiary of greater demand for personal hygiene and sanitation products. Localised lockdowns imposed to limit the spread of Covid-19 may, however, lead to temporary disruptions. An increase in the price of fatty alcohol, a key raw material, could also compress margins in the March 2021 quarter. These are however temporary factors and unlikely to impact long term performance.
The stock of Galaxy Surfactants has multiplied 2.4 times since the low in March 2020. At ₹2,575, the stock trades at 32 times its trailing twelve-month price-to-earnings ratio (TTM P/E), higher than its three-year average P/E of 25 times. Since listing in March 2018, the stock has traded within a TTM P/E range of 20 to 35 times, by and large. Based on FY22 estimated earnings (Bloomberg), the stock is trading at a one-year forward P/E multiple of 29 times.
While there is no exact Indian peer for Galaxy Surfactants, we can compare its valuations with those of a few MNCs such as Clariant AG, Croda International, Evonik Industries, Solvay and Stepan Company. The stocks of these companies are trading at forward P/E multiples of 13.4 to 30.6 times.
With the stock trading at the higher end of its historical valuation band, and given the near-term uncertainty due to Covid-related lockdowns, investors can accumulate the stock on dips.
About the business
Galaxy Surfactants manufactures performance surfactants and (60 per cent of revenue) specialty care products (40 per cent) that find application in skin care, oral care, hair care, cosmetics, toiletries, and detergent products.
Galaxy Surfactants serves as a global supplier to FMCG companies across India, the Asia Pacific, Africa, Middle East and Turkey (AMET), America and Europe. Its customers comprise multi-national, regional and local FMCG companies, including Cavinkare, Colgate-Palmolive (India), Dabur India, Henkel, L’ORÉAL, P&G, Reckitt Benckiser and Unilever.
While the company’s performance surfactants are a source of steady revenue, its specialty products, though a discretionary spend, provide scope for higher margins. Galaxy Surfactants expanded its production from 1,53,374 MT to 2,24,237 MT (volume) and revenue from ₹1,872 crore to ₹2,596 crore between FY15 and FY20, a compounded annual growth rate of 8 per cent and 7 per cent, respectively. During this period, its EBITDA per tonne went up from ₹12,518 to ₹16,716 per tonne (6 per cent CAGR).
Galaxy Surfactants is also well-placed to benefit from the trend of increasing premiumisation with rising disposable incomes, and rising interest in natural, safer and milder products.
While Galaxy Surfactants has a concentrated customer base — over 55 per cent of revenue comes from top ten customers — the long-term nature of its relationship with customers offers comfort.
Raw material cost accounts for 70 per cent of Galaxy Surfactants’ sales revenue. Fatty alcohol constitutes 60 to 65 per cent of the raw material cost. The absence of long-term supply contracts exposes the company to volatility in raw material prices. On the other hand, the company’s periodic contracts — which allow it to pass on raw material cost increases to its customers — help mitigate risk. The cost pass-through also applies in case of a fall in raw material prices.
Galaxy Surfactants grew revenue 6.8 per cent and operating profit 16.4 per cent, both CAGR, between FY15 and FY20. Expansion of the specialty products portfolio aided the growth in operating profit. For the nine-month period ended December 2020, Galaxy Surfactants expanded its revenue 3 per cent (y-o-y) to ₹2,001 crore. This, along with low-cost inventory benefit, led to operating profit rising 28 per cent to ₹281 crore from a year ago. The June 2020 quarter performance was impacted by 39 per cent (y-o-y) decline in revenue from specialty care products, and geographically from all regions, except AMET. The financial performance, however, recovered from the September 2020 quarter.