Galaxy Surfactants’ (GSL) Q4FY22 EBITDA/kg at Rs25 (vs Rs13.2 in Q3FY22) shows resilience in GSL’s business model. Previously, margins were impacted by various factors, and it has adjusted new contracts to negate the impact of operating cost inflation. GSL has guided for EBITDA /kg of Rs16-18 (unchanged) for FY23 with bias towards the upper end. However, volume growth will be challenging particularly in AMET region which is also fighting currency depreciation. GSL continues to incur capex of Rs1.5-2bn to augment capacity, and has launched new products in specialty which is helping it drive better margins/ ROCEs. Working capital increase is transitory to safeguard production schedules and should normalise on easing logistic situation.

Sales volumes dipped 8.7% YoY. GSL’s revenue rose 34.4% YoY to Rs10.5bn driven by 47% growth in realisation to Rs183 per kg (on RM inflation) while volume declined 8.7% to 57.5kte due to demand shock in AMET which is fighting added inflationary pressure from local currency depreciation in Egypt and Turkey (two markets for GSL). AMET volumes were down 29.1% YoY, while India and RoW volumes grew 3.3% and 11% YoY, respectively. Performance product volumes dipped 15% YoY while specialty care volumes were up 3.8% YoY. Previously (in Q2 and Q3FY19), AMET had volume pressure when currency depreciated, and in two quarters it rebounded. Specialty volumes benefited from new plant commissioning and better RoW sales.

Gross profit per kg was Rs60, up 33% YoY (37% QoQ). Gross profit was up 21% YoY to Rs3.5bn; gross profit margin was 33% (up 550bps QoQ), and gross profit per kg was up 33% QoQ to Rs60 due to 1) annual contract renewal allowed pass through of inflation even in operating cost; 2) better product mix with specialty volume at 38.4% (+190bps); and 3) some inventory gains. EBITDA rose 24% YoY / 90% QoQ to Rs1.45bn despite other expenses up 31% YoY / 13.3% QoQ. EBITDA /kg was Rs25.3 (vs Rs13.2 in Q3FY22; company’s guidance was in the range of Rs16-18/kg). Net profit grew to Rs984mn, up 25% YoY / 116% QoQ. Egypt and US subsidiaries have performed much better with gross profit margin of 48%, up 12.8pps.

Conference call highlights. 1) Demand in Egypt is much lower than company anticipation, and it is making efforts to place excess capacity. Previously, AMET took two quarters to turnaround with current situation being more challenging. Partial impact could also be from channel inventory drawdown; 2) specialty volumes benefit will sustain from capacity addition in non-toxic preservative, mild surfactants and proteins - capacity addition of 10ktpa by Q1FY23; 3) EBITDA/kg guidance maintained at Rs16-18/kg with bias towards upper end of guidance. The company does not expect EBITDA /kg sustaining at Rs25/kg levels achieved in Q4FY22 as some of the factors are non-recurring; and 4) capex in FY23E will be Rs1.5-2bn.