R & D driven company offers long term value!
The company is promoted by technocrats experienced in the line of business. Good financial report card, reasonable valuation and strong reliance on R & D promise long term value. However, its Egyptian manufacturing foray is a bit of a concern.
|
OFFER AT A GLANCE |
|
|
Name |
Galaxy Surfactants Ltd |
|
Offer Quantity |
59,30,000 eq shares of Rs 10 each |
|
% on Total Equity |
25.07% |
|
Offer Amount |
Rs 192.7 cr to Rs 201.6 cr |
|
Offer Price |
Rs 325 to Rs 340 |
|
Bid Quantity |
20 & multiples of 20 |
|
Bid/Offer Opens |
May 13, 2011 |
|
Bid/Offer Closes |
May 19, 2011 |
|
Rated By |
CRISIL |
|
Rating |
4/5 |
|
Lead Managers |
Motilal Oswal Investment Advisors, Centrum Capital |
|
Registrars |
Link Intime India |
Issue Objective
The company is making the current issue to part finance the following projects:
- Capex of its step down subsidiary, GC Egypt, which is
setting up its manufacturing facility in Egypt at a cost of Rs.212 cr
- New manufacturing facility at Jhagadia, Gujarat, costing Rs.70 cr
- Expansion of capacities at its Tarapur and Taloja plants at Rs.60 cr
Parentage
Incorporated in 1986, Galaxy Surfactants Ltd (GSL) is promoted by technocrats comprising of U. Shekhar, G. Ramakrishnan, S.R. Shanbhag and S.D. Patil. Before promoting GSL, the promoters have been associated with multinational companies of repute like Hindustan Unilever and Colgate Palmolive. The company also boasts of an experienced and erudite board of directors.
Business
The company manufactures surfactants and specialty chemicals for the personal home care (PHC) segment. Surfactants are surface active agents which reduce tension between two phases. Starting with only 2 products initially, GSL now manufactures and markets 66 products globally. These products find applications in skin, hair, oral and sun care, body wash, household cleaners and fabric care segments.
GSL commands a dominant position in the Indian surfactant market with a market share of over 60%. The company’s domestic customers include Ayur, CavinKare, Dabur, Emami, ITC, Marico and Proctor & Gamble.
For a medium-sized company, GSL possesses strong Research & Development capabilities as evidenced by its 18 patents in India and 10 in USA. It has also filed for 12 patents in India and 1 in Europe. Not surprisingly, it is a preferred vendor for some of its clients.
On the financial performance, GSL grew its consolidated revenues from Rs.382 cr in fiscal 2008 to Rs.648 cr in the 9-month period ended Dec 31, 2010. The company’s EBITDA margin of about 12.5% over the years is reportedly comparable to its global peer group. On the cash flow terms, though GSL’s operating cash flow has consistently been positive, its cash flow after working capital changes for the 9-month period ended Dec 31, 2010 witnessed a sharp dip on account of significant inventory build up.
Project Status
GSL’s present capacity to manufacture surfactants and specialty chemicals is 1,55,440 tonnes, which it is seeking to increase to 3,48,460 tonnes by setting up new manufacturing facilities at Egypt (through its step down subsidiary) and Jhagadia, Gujarat, and expanding its Tarapur and Taloja capacities.
The project at Egypt is to come up in two phases – 50,000 tpa by August 2011 and an additional 40,000 tpa by August 2012. The manufacturing plant at Jhagadia, Gujarat would add to GSL’s capacity by 77,000 tpa and is expected to be completed later this year. The expansions planned at Tarapur and Taloja are much smaller at 2,750 tpa and 5,000 tpa respectively.
Prospects
The prospects for surfactants appear good, driven by strong growth in end-user personal and home care segments. The company is expanding its manufacturing capacity at just the right time to consolidate its domestic market share as well as to find newer markets abroad. The company may be in a position to leverage its strong relationships with global majors.
Valuation & Peer comparison
GSL posted consolidated annualized earnings per share of Rs.32.20 for the 9-month period ended Dec 2010. Its book value as on that date stood at Rs.105.20. GSL’s offer price at the higher end of the price band of Rs.340 per share discounted its annualized EPS and book value 10.6 and 3.2 times respectively.
The company has claimed that it does not have any listed peers in India. However, the current market price of Clariant Chemicals, a multinational of repute, which is somewhat comparable to the business domain of GSL, discounted its fiscal 2010 EPS and book value 25x and 5.1x respectively. Hence, the valuation at which GSL’s shares are being offered compares reasonably with its only listed peer.
How Galaxy Surfactants compares with peer
|
DESCRIPTION |
COS |
M-CAP |
P/E |
P/BV |
P/FV |
P/R |
Div.Yld |
PRICE |
|
|
|
(Rs Cr) |
(X) |
(X) |
(X) |
(X) |
% |
(Rs) |
|
Clariant Chemicals |
|
1,867 |
25.0 |
5.1 |
70.0 |
1.9 |
4.3 |
700.25 |
|
Market Composite |
2,901 |
6,652,081 |
17.4 |
2.7 |
32.6 |
1.7 |
|
|
|
Galaxy Surfactants High |
|
804 |
10.6 |
3.2 |
34.0 |
0.9 |
1.2 |
340.00 |
|
Low |
|
769 |
10.1 |
3.1 |
32.5 |
0.9 |
1.2 |
325.00 |
Concerns
- The company its setting up its maiden overseas manufacturing facility at Egypt at a time when the region is embroiled in a bitter civil war
- The company is dependent on a single supplier for one of its main raw materials, Ethylene Oxide
- Possible delay in implementation of projects at Jhagadia, Taloja and Tarapur
- Average cost of holding of equity shares held by promoters is as low as Rs.3 per share
Conclusion
Given the current market conditions, the company’s present offer may not fetch immediate returns. However, investors looking for long term value can participate in GSL’s IPO.