Galaxy Surfactants’ (GSL) Q1FY23 EBITDA/kg at Rs26.8 (vs guidance of Rs16-18, which remains unchanged) shows resilience in GSL’s business model in challenging times. Further, we suspect some inventory gains, and/or opportunistic sales, which boosted margins. Galaxy’s US subsidiary Tri-K has been performing extremely well with its portfolio in proteins, and new products launched by GSL. Volumes continued to decline (down 7.7% YoY) on weakness in AMET, and GSL anticipates slowdown in Europe and the US, and destocking, to keep volumes under pressure. India remains a bright spot where the company expects volumes to pick up with the approaching festival season, and falling raw material prices. 

Sales volumes dipped 7.7% YoY. GSL’s revenues rose 40.2% YoY to Rs11.6bn driven by 52% growth in realisation to Rs210 per kg (on RM inflation) while volumes declined 7.7% to 55kte due to weak demand in AMET (which is fighting added inflationary pressures due to local currency depreciation in Egypt and Turkey, two markets for GSL). AMET volumes were down 21% YoY and RoW’s down 5.5%. India saw volume growth of 2.6% YoY. Performance product volumes dipped 8.6% YoY and specialty care volumes fell 6% YoY. GSL believes India will continue to perform better and falling prices and upcoming festival season may aid volumes. AMET continues to struggle and GSL is cautious on RoW due to slowdown risk in Europe and the US. Performance in the past two quarters was aided by strong show in Tri-K.

Gross profit per kg was Rs64.6, up 48% YoY (7% QoQ). Gross profit was up 36% YoY to Rs3.6bn. Gross profit margin was 30.8% (down 220bps QoQ), but gross profit per kg was up 48% QoQ to Rs64.6 on better product mix, new product launches and likely inventory gains. EBITDA rose 36% YoY / 2% QoQ to Rs1.5bn despite other expenses being up 48% YoY / 2.3% QoQ. EBITDA/kg was Rs26.8 (vs Rs12 in Q1FY22; company’s guidance was in the range of Rs16-18/kg). Net profit grew to Rs1bn, up 31% YoY / 2% QoQ. Egypt and US subsidiaries have performed much better with EBITDA margin at 22.6% vs standalone at 9.3%.

Conference call highlights. 1) AMET volumes had some benefit of festival season in Egypt in Q1FY23, but expect the situation to improve. Management believes demand in Europe and US may taper. 2) It believes higher energy cost in Europe could help sell more from its Egypt facility. 3) Tri-K (US subsidiary) has benefited from strong performance in proteins and launch of new products in specialty chemicals. 4) Company said it would wait for a few more quarters to sustain margin trajectory, but for now maintained its EBITDA/kg guidance of Rs16-18. It anticipates volumes in performance products to pick up (particularly from AMET), which will compress margins though there will still be absolute EBITDA growth. 5) GSL now expects specialty mix in the long term to increase to 40-45% from 35% currently.