India's brokerage firm ICICI Securities has given a Buy rating to Galaxy Surfactants Ltd and predicted that the companys' gross profit per kg may grow at 2.3 per cent CAGR over FY21-23E to Rs 40.6 (6.2% CAGR over FY18-20) on rise in new-age ingredients. EBITDA per kg may rise at 6.3 per cent CAGR to Rs 19.6 during the same period (6.3% CAGR over FY18-20).

However, H1FY21 performance indicates significant upside risk to our estimates as it has achieved EBITDA per kg of Rs 18.4. ICICI Securities’ estimates factor EBITDA and net profit growth of 16.6% and 19.4% CAGR, respectively, over FY21-23E, and ROIC reach to 22.4% (up 310bps since FY20) by FY23E. ICICI Securities believes Galaxy’s valuations are reasonable at 22xFY22E and 19xFY23E EPS. It raises the target price to Rs 2,298 (from Rs 2,133).

According to ICICI Securities, Galaxy has seen its gross profit per kg and EBITDA per kg rise by 4.1 per cent and 12.1 per cent in H1FY21 (YoY) to Rs 40.8 and Rs 18.4, respectively. Many investors remain suspicious on improvement in profitability, which they believe may have benefited from higher lauryl alcohol prices, ICICI Securities states. “The company has denied any benefit from higher lauryl alcohol prices to gross profit. Nonetheless, we have analysed the sensitivity of the movement in lauryl alcohol prices to gross profit/kg since FY13; and we have not seen any relationship as verified by the company. Moreover, large FMCG companies are well-informed customers. These companies are unlikely to allow Galaxy make any transitional profit while they fight cost inflation,” ICICI Securities report reads.

The analysis of specialty care contribution and gross profit per kg has shown strong relationships during the same period. During FY15-19, 100bps rise in specialty care contribution has added Rs 0.8 to gross profit per kg and vice-a-versa. But in the past 18 months, gross profit/kg has improved despite a fall in specialty care contribution; the company assigned the benefit from rise in contribution from new-age ingredients.

New-age ingredients have a long runway for growth. Preservatives and mild surfactants contributed 35 per cent to specialty care and 13 per cent total revenue for Galaxy in FY21. According to the report, regulatory push and rising consumer awareness on paraben-free products are driving higher demand for non-toxic preservatives. Meanwhile, the contribution of mild surfactants is just 5 per cent of SLES and therefore, it has a long runway for growth in next decade. “We believe revenues from preservatives and mild surfactants will grow at 2x (15-18%) of Galaxy’s growth in next decade,” it adds.

The report suggests that the gross profit per kg and EBITDA per kg will grow at CAGR of 2.3 per cent and 6.3 per cent over FY21-23E. Last three years’ volume growth has suffered from weakness in AMET from currency depreciation in Egypt and Turkey, two key markets, and slowdown in India. “We expect demand to normalise in AMET and India over the next two years on favourable base in FY21 due to Covid-19 pandemic. We are assuming volume to grow at 9% and 11% CAGR over FY21-23E in performance products and specialty care, respectively. We expect EBITDA per kg to grow at 6.3% CAGR over FY21-23E on flat operating cost per kg, which should benefit from rise in plant utilization,” the report reads.