Galaxy Surfactants IPO Review: A play on specialty chemicals

Galaxy Surfactants IPO opens next week and it has already set the expectations high among investors as one of the most promising upcoming public offers this year. Priced in the range of INR1,470 – 1,480 per share, the IPO is not offering any discount to retail investors but this is not going to be a deal breaker as we will see later in this analysis. In total, the IPO of the specialty chemicals company will raise anywhere from INR930.76 crore to INR937.09 crore by selling shares of existing shareholders. Specialty Chemicals sector has been a silent wealth generator for savvy investors and it will be natural to benchmark the offer against the industry standards. Has the company’s business model potential to generate strong profits for the years to come and reward investors? We try to figure out the answers through Galaxy Surfactants IPO Review.

Galaxy Surfactants IPO Review: No fresh shares to be issued

All the 6,331,674 shares to be sold in Galaxy Surfactants IPO will be offered by existing shareholders. Of the total, 2,107,804 shares will be sold by promoters and people of promoter group. The remaining 4,184,620 shares will be offered by 291 executives. This means that Galaxy Surfactants IPO will make several employees lakhpatis and crorepatis.

A look at the list of largest shareholders in the company reveals that there are no external investors in the company. It is uncharacteristic of businesses in expansion phase to not take help of external equity capital. Nevertheless, Galaxy Surfactants has done exactly that without sacrificing growth.

Since it is purely an OFS IPO, the company will not get any funds. Even though we don’t like pure OFS IPOs because they are often used to offer exit to promoters and private investors at high prices, not all OFS fall into this category.

Galaxy Surfactants IPO Review: Specialty chemicals, from mass to class

Incorporated in 1986, Galaxy Surfactants is one of the biggest manufacturers of surfactants and other specialty ingredients in India. The products are used in personal and home care products. The company has an extensive product portfolio comprising over 200 product grades, which are marketed to more than 1,700 customers in over 70 countries. Broadly, the company’s products are organized into two groups:

Performance Surfactants: Over 45 product grades, and includes anionic surfactants and non-ionic surfactants. This category contributed 65% to the company’s top line in FY2017.

Specialty Care Products: Over 155 product grades, and includes amphoteric surfactants, cationic surfactants, UV filters, preservatives, preservative blends and surfactant blends, speciality ingredients such as mild surfactants, syndet and transparent bathing bars and proteins, fatty alkanolamides and fatty acid esters, and other care products. Specialty Care Products account for nearly 35% of revenues to the company.

The company has an impressive list of customers which includes a favourable mix of domestic and global FMCG players. This includes Cavinkare, Colgate-Palmolive, Dabur, Henkel, Himalaya, L’ORÉAL, Procter & Gamble, Reckitt Benckiser and Unilever. Multinational clients accounted for 52% of revenues in FY2017 while national level domestic players contributed 40%. Galaxy Surfactants also caters to regional players and this business contributed 8% to the revenues.

Galaxy Surfactants IPO Review: Financial performance

As the table below mentions, the company has been making a steady progress in expanding its business and this is reflected in revenues. Except FY2016, sales revenues have followed an upward trend. This growth in revenues has also driven profits in the last five years from a mere INR27.8 lakh to INR146.3 crore. The quality of increasing profits is seen in improving margins. In the latest year ended 31 March 2017, the company posted a net profit margin of 6.7%, its best in the last five years.

The company has demonstrated a good control on costs and has been working on reducing debt. This has brought down the debt equity ratio from 2.0 in FY2013 to 0.7 in FY2017.

Galaxy Surfactants IPO Review: Should you invest?

In Galaxy Surfactants IPO analysis so far, we couldn’t really find anything negative with the company’s business and strategies. There are a number of things the company is doing well and are worth highlighting. As we mentioned earlier, absence of private equity investors has not resulted in any detrimental effect on the company. This is quite an achievement in itself that the company managed to expand its business to become the leading player in its field without taking external capital.

Another positive we noticed about the company has been its ability to plough back the profits in the business, expand operations and reduce debt. This has helped a great deal in expanding profit margins. Although the debt equity ratio now stands at a comfortable level of 0.7, there is scope for further reduction. The company has a high dependence on few customers and the 10 biggest clients accounted for 54.75% of FY2017 revenues. However, this is a structural issue and is true for almost every B2B company.

One of the company’s strategies going forward is to grow the share of specialty care products in its overall sales mix. Historically, specialty care products have offered higher margins vis-à-vis the performance surfactants products. This, along with continued debt reduction, represents potential for further improvement in profitability margin. Although the development and production of speciality care products requires multi-stage processing and unique technical competencies, the company appears well positioned to capitalize on this opportunity. Galaxy Surfactants places a high emphasis on research and development (R&D) and has received 47 patents across the world since 2002.

Valuation-wise, the company’s Earnings Per Share (EPS) of INR41.27 in FY2017 puts the Price/Earnings (P/E) ratio in the range of 35.61 to 35.86. The company claims there is no listed peer so these numbers can’t be benchmarked against other players. However, the numbers appear to be on the higher side considering other specialty chemicals players. For example, a smaller surfactant player Ultramarine & Pigments currently trades at a P/E ratio of 27.5 despite sporting double-digit margins. Galaxy’s Return on Net Worth (RONW) of 28.68% is quite strong but it appears the pricing factors-in the expected upturn in margins.

There is no doubt the company is favorably placed to benefit from the growing demand and China’s crackdown on polluting factories is likely to be a positive for the sector. Overall, Galaxy Surfactants IPO Review reveals that the well-managed company is in a sweet spot and stands to benefit from better margins going forward. Nevertheless, valuations look stretched indicating that the IPO is for investors with high risk appetite. Although grey market prices indicate the IPO commands a strong premium, GMP alone should not be an investment criterion.