ET Intelligence Group : Investors may subscribe to the initial public offering (IPO) of Galaxy Surfactants, a contract manufacturer of ingredients used in personal and home care products, because of its fair valuation, dominant market share, and as a proxy play on the FMCG volume growth. At the upper end of its price band, the stock is valued at 35 times its annualised earnings of the current fiscal, translating into a 26 per cent discount to the average for FMCG companies. The multiple seems reasonable, considering the 25 per cent an nual earnings growth in the past three years. SH Kelkar, a supplier of fragrances to FMCG companies, trades around 39 times FY18 earnings.
BUSINESS MODEL
It makes about 200 ingredients used in personal care and home care and supplies to HUL, Colgate, L'Oreal, P&G, and Henkel. Exports account for about 50 per cent of revenue. Galaxy has plants in the US and Egypt. The market for personal care products in India may touch $22.5 billion by 2024, a growth of 7.9 per cent a year.
FINANCIAL SNAPSHOT
Revenue grew 8 per cent annually in the past four fiscals to reach Rs 2,171 crore in FY17. Net profit rose 25 per cent annually to Rs 146 crore during the same period. In the first half of the current fiscal, it reported revenue of Rs 1,197 crore and Rs 75.1 crore net profit. Earnings growth in the first half was impacted due to local body tax levied on its Taloja plant and inventory drawdown due to the implementation of the GST. EBITDA was 10.2-13.2 per cent in the past four years. The company has average return on equity of 22.4 per cent. Despite capital expenditure of Rs 200 crore in the past four fiscals, Galaxy is free cash flow positive. It sold volumes of 177,479 metric ton in FY17, a growth of 11.9 per cent over the previous year.
RISK FACTORS
The principal raw material of its ingredients is lauryl alcohol, which is obtained from palm kernel, and price fluctuations could affect profits. The raw material accounted for about 70 per cent of the total revenue in FY17. The company is also dependent on a single supplier for ethylene oxide, which constituted 6.8 per cent of the total cost of input materials in FY17.
