Is Galaxy Surfactants a New Multibagger in Making?

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Galaxy Surfactants

Galaxy Surfactants is India’s leading manufacturers of surfactant and other speciality ingredients for Home and personal care. 

What are surfactants ?

Surfactants are compounds that lower the surface tension (or interfacial tension) between two liquids, between a gas and a liquid, or between a liquid and a solid.

Surfactants may act as detergents, wetting agents, emulsifiers, foaming agents, and dispersants. The word surfactant is a blend of surface-active agents.

Surfactants can be classified into 5 types:

  • Anionics (largely cleaning applications)
  • Non Ionics (cosmetics and personal care applications)
  • Cationics (conditioning, softening aids)
  • Amphoteric Surfactants (Mild Surfactants)
  • Surface active preparations (pre-formulated blends of surfactants)

History of Company:

Galaxy Surfactants was incorporated in 1980 and first filed for IPO in 2011(Withdrawn) and successfully in 2018.

They are manufacturers of surfactants and other speciality ingredients for the personal care and home care industries (essentially oleochemicals). 

Business Overview:

Galaxy Surfactants is a very diversified company in the surfactant industry. It enjoys more than 60% Market share in the home and personal care segment (Earlier it was more than 80% till BASF started its operations in Dahej) in India, 70 to 80% market share in Egypt and more than 35% market share in Africa.

Galaxy Surfactants is leading producer of preservatives 17% market share and amongst the largest producers of Alkyl sulphates.

Galaxy Surfactants has diversified revenue share also:

ROW – Rest of the world
AMET – Africa, Middle east, Turkey
  • Galaxy Surfactants has 7 manufacturing facilities in which 5 are located in India, 1 in the US and 1 in Egypt. GFL’s Jhagadia and Suez plants also have environmental clearance and additional land for expansion,which gives additional leverage to the company for future growth.
  • Company faced challenging times in Egypt (Due to significant slowdown), hence AMET volumes fell by 5%.
  • Strong product pipeline and R&D focus make GSL ahead of its competitors. 
  • Core Competence – Expertise and Experience lies in the Home and Personal Care Space. One of a kind company globally which focuses wholly and solely on creating surfactants and Specialty Care Ingredients for the Home and Personal Care Space
  • Its Products application includes personal and home care (Shampoo,detergent,toothpaste,liquid soaps,conditioner, dishwasher detergent etc.)

Galaxy Surfactants Geographical foot-print

  • Company has a strong geographical reach. Caters to 1750 clients and across 75 countries with 200+ products.
  • Company claims that 9/10 Indian Consumers use Products which have Galaxys surfactants or specialty care products at least once in their Daily Routine

GFL Competitive Edge:

  • Galaxy surfactants earned 60 patents globally since 2000, which shows the capability of companies R&D facilities. And 26 patent applications are pending.
  • It can expand capacity in the future at minimal cost via debottlenecking and brown field expansion. GSL has access to additional land at existing manufacturing facilities at Jhagadia (Gujarat) and Suez (Egypt), which provides significant headroom for future growth. The company recently completed a brown-field expansion at Jhagadia for performance surfactants which was operational from 1st April 2019. The company further plans to incur INR1.0-1.25bn capex in FY20.
  • GFL has developed strong R&D facilities which shows its R&D focus business.
  • GFL has a 200 product portfolio in oleochemical and strong clientele including MNCs and local players.
  • It specialises in oleochemical-based products (~70% of portfolio), which are based on green chemistry and benefiting from shifts from petrochemical-based ingredients.
  • Galaxy Surfactants is located in Suez, near to ports which helps it to export in 40 countries and due to port, GSL has a competitive edge to its closest competitor BASF(located in TURKEY)
  • After the BASF entry, GSL lost their market share. However, the AMET region’s 10% CAGR (with stabilisation of Egypt operations) offset the volume dip in India, helping GSL clock overall 4% volume CAGR over FY14-16. This shows management capabilities.
  • Above mentioned points create strong Entry barriers and put them into the Moat business category.
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Company’s Important Products:

GSL’s end-user industries include personal & home care segments which are growing at a fast clip. The company is planning to leverage its existing relationships in specialty care products to exploit cross sell opportunities.

Galaxy surfactants has many innovative products which are acknowledged by industries.

  1. Green Catalyst for Amino Acid Surfactants: GSL’s R&D at Galaxy used their mastery in Chemistry and came with a breakthrough in Fatty Acid Chloride manufacturing by use of the finished product itself as catalyst. This “Green Chemistry Process” of manufacturing Fatty Acid Chloride has challenged the Amino Acid Industry globally and has won Galaxy global patent for this marvel.
  2. Galsoft GLI-21 : GLI 21 provides high foam volume and quality due a synergistic combination of Acyl Isethionate and Acyl Glutamate which cannot be achieved through physical blending of these products. The unique patented manufacturing process of making both the Acyl Isethionate & Acyl Glutamate together is an art.
  3. TBB(Transparent Bathing bar) : this innovation was a disruptive innovation in 2001 and made transparent soap and hence patented.

These patented products are growth drivers for the companies and show the strong R&D capabilities of the company.

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Galaxy Surfactants has set up a new Project technology group which is capable of in house engineering and project execution. Company will continue to rely on its team and will review manufacturing capacity periodically. 

Galaxy Surfactants, in a business of oleochemical which consist of oleo-chemical derivatives which is the most profitable segment. 

Value chain of Oleochemicals.

Raw Materials : Fatty alcohol accounts for 50-55% of GSL’s total raw material requirement. Historically, Fatty alcohol prices have remained volatile(as the company said in annual reports); however, GSL’s stable gross margin indicates that the company works on pass through contracts with minimum off take  agreements for the majority of its customers.

Also Watch: Galaxy Surfactants Fundamental and Technical Analysis

Customer Base:

  • Galaxy Surfactants has a strong presence in emerging markets which gives strong growth to companies. Company added around 550+ customer since 2013 (from 1200 to 1750+)
  • Company has a total 1750+ customers includes giants like Colgate-palmolive, Dabur india,L’OREAL and Unilever
  • GSL derives 56% of revenue from MNC giants, 10% from regional and 34% from local FMCGs.
  • It enjoys 10+ long term relationships with each of the top customers which shows faith in the company from its customers.

FINANCIALS

Here company’s financial shows an increase in sales over last 4 along with EBITDA and improved ROCE over the past few years. Most important thing to look at is that company’s revenue growth is backed by its strong volume growth over a past few years.

Moreover, a company’s asset light business model enjoys high asset turnover and it will result into a higher return on capital employed.

Cash flows from operating activities increase from 76cr(2012) to 238cr(2019). 

Operating profit of company in 2019 is 269 crore and CFO is 238 crore, which shows the efficient operations of company.

Galaxy surfactants has reduced its debt from 270crore(2016) to 153crore(2019), which will give higher cash flows in future. Company is able to increase its Operating profit margin from 10% to 16% which shows that the company is able to pass their increasing cost to the customer. 

INR 50 Crs of R&D in 2016-18.. R&D expense in FY18 was 13.62 Crs which was approx 10% of FY18 Profit (112 crore).

Cash conversion cycle has been increased from 28 to 53, which shows the concern, but if we compare it to the Indian scenario then the average small cap company’s CCC is around 65.

Business opportunities in Future:

  • Data shows that Asia pacific region would exhibit the highest CAGR in the world between 2018-2025.
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Source : Markets and Markets

  • Rising market share in developed markets
  • Future capacity expansion at minimal cost
  • GSL deserves premium valuations compared to its peers as it manufactures oleo chemicals surfactants and as its growth is linked with FMCG industry ensuring stable growth and returns.
  • Personal care industry needs customer trust which ensures customer stability in industry and hence creates a high entry barrier.
  • Rising disposable income leads people to buy premium personal care products so lower chances of margin deterioration in long term.

KEY RISKS

  • Fatty alcohol which is a key raw material for GSL is very volatile which is purchased from south east asia hence minor disruption makes a larger effect.
  • Companies derive around 52% revenue in FY19, From top 10 customers. So the exit of one customer can have larger impact on topline and bottom line.
  • One of its raw materials (Ethylene oxide- which is 7% of raw material requirement) via a single supplier. Any kind of disruption leads to disruption in GSL’s manufacturing operations.
  • Company exports 65% of products, hence there is a risk, however, the company said that they import 60% of raw material hence they are naturally hedged.
  • Company withdrew its IPO back in 2011, which creates questions about the company management. 

So from above information, Galaxy Surfactants is an indirect consumption play and after COVID-19, there will be a spike in demand for premium personal care products. This will create a great opportunity for Galaxy Surfactants. 

GSL has a strong benefit of long term relationships with their big MNC customers. Also premium personal care needs higher quality requirements, hence there are very less chances of cut off customers. (   High Entry barriers).

In a country like India, we are talking about Aatmanirbhar Bharat and 5 trillion $ economy, company like Galaxy surfactants can grow faster.

Sources of Information: Company website, Company reports, Edelweiss speciality chemical report, DRHP 2017, Screener.com.

Note: The above is not a research report but information as available on public domain and it should not be treated as a research report

Disclosure: Readers should consult their financial advisory before any investments.

PS: Updated on 1st October with latest video analysis



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Adish Vakharia
Adish believes in identifying future opportunities, studying well about the sectors, and developing a circle of competence.
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