The specialty chemicals space has been an investor favourite for the past few years, delivering returns higher than the broader indices. Galaxy Surfactants has been in the chemical and specialty chemicals business for the last 40 years but got listed on Indian stock exchanges in February 2018. Following its listing, the share price traded in a narrow range between Rs 1,000 and Rs 1,500 per share for nearly two years, but  doubled over the past year crossing a price of Rs 3,000 per share.

Galaxy Surfactants’ business consists of two verticals. The first is performance surfactants which find application as a raw material in FMCG (fast moving consumer goods) like soaps, detergents, handwash, shaving cream, floor cleaners, etc. The second vertical consists of specialty products which are used as raw material for cosmetics like sunscreens, moisturisers, conditioners etc. 

The pandemic had an unexpected impact on Galaxy Surfactants’ products. With the focus on washing hands and sanitisation, the changing habits of consumers proved to be a positive trigger for the company’s products. The demand for hand wash, soaps and cleaning products went up drastically and this trend continued in Q4FY21 with YoY revenue growth at 30.2% for performance surfactants.

Quick Takes

• Revenue of performance surfactants grew 30.2% YoY to Rs 496 crore in Q4FY21

• The company’s total revenues grew 19.7% YoY to Rs 786 crore in Q4FY21 and net profit 25.3% YoY to Rs 79 crore 

• EBITDA/MT (metric tonne) grew by 16.4% YoY to Rs. 19,465 for FY21

• A challenging scenario would be one of reduced demand and increasing raw material prices, which the management does not foresee in the near future.

Surge in demand for cleaning chemicals continues in Q4FY21

FY21 was a challenging year for virtually every industry due to the pandemic, as well as lockdowns impacting production and sales, particularly for brick and mortar industries.

Galaxy Surfactants faced challenges with production, logistics and raw material prices. Handling these challenges right from the start of FY21 and actions taken in every subsequent quarter have had a definitive impact on the results of  Q4FY21. The results demonstrate that the company was able to overcome these issues effectively and deliver a YoY revenue growth of 19.7%. 

A key point was the company’s ability to maintain earnings before interest, tax, depreciation and amortisation (EBITDA) margins above 15% in every quarter of FY21. This is despite a consistent increase in raw material prices, particularly fatty alcohol (accounting for 50%-55% of total raw material costs), which had risen by almost 80% through FY21, with the prices being at their highest level in Q4FY21. 

One of the reasons for revenue growth in Q4FY21 is the company’s ability to pass on the increase in raw material costs to its customers. According to the management, the company will be able to sustain current margin levels going forward as demand is strong for performance surfactants. A challenging scenario would be one of reduced demand and increasing raw material prices, which the management does not foresee in the near future.

The growth in FY21 can be attributed to the growing demand for hand wash and other cleaning products.The management guided for a volume growth of 6-8% for the next few years. With growing demand, this would be sustainable only if Galaxy Surfactants is able to stay ahead of its competitors. Sensing the opportunity, other players like Rossari Biotech, Aarti Surfactants etc, are also positioned to take advantage and  there is intense competition for market share.

Revenue contribution from multinational companies stood at 53% for FY21 with the company’s long-standing relationship with multinationals like Hindustan Unilever, Colgate Palmolive, L’Oreal and Henkel. Regional players contributed 13% and local & niche players contributed 34% of FY21 revenues.

Performance surfactants are a bigger revenue contributor with lesser number of products in its portfolio as compared to speciality surfactants.

Most of the products in the performance category are supplied to local and multinational companies, while there are limited exports for performance surfactants. Conversely, the India pie of specialty products is only around 15%, while the rest is exports.

The ROW (rest of the world) market for Galaxy Surfactants was impacted in Q4FY21 due to issues with the supply chain, primarily on account of the logjam in the Suez Canal, which delayed shipments by fifteen days. Due to this, there was only a 3.8% volume growth in the ROW market in Q4FY21, which was much lesser than other geographies. The management expects the situation to improve in Q1FY22.

The export markets are a big contributor to the topline of Galaxy Surfactants and looking at the trend for Q4FY21, there has been growth across the export markets. The numbers for the full year FY21 present a different picture though, and growth is not uniform across geographies. While the volume growth in Africa, Middle East & Turkey (AMET) markets in FY21 was 8.2% YoY in FY21, ROW has shown a negative growth of 6.8%. 

Adapting to trends and innovating with newer products

An area of focus for the company is new products that would qualify as ‘environment friendly’. Globally, the trend is to move away from harmful ingredients and potential carcinogens. There is a shift towards creating these products from oleochemicals rather than petrochemicals.

Galaxy Surfactants' new specialty products are moving towards oleochemicals. These include products used as preservatives in personal care products such as lotions, shaving creams, conditioners, etc. The management is optimistic about the prospects of this business.

The company has new projects lined up with a focus on being ‘environment friendly’. These were delayed due to the second wave of the pandemic by 5-6 months and are expected to be completed over the next two quarters. In addition to this, the company is looking at deploying another Rs 150 crore of capex in FY22.

Galaxy Surfactants revenues in Q4FY21 are higher than competition

Aarti Surfactants and Rossari Biotech are the closest competitors of Galaxy Surfactants in the listed space. All of these companies produce raw materials which go into the final products of handwash, cosmetics and healthcare products. Galaxy has much higher revenues than its competitors due to its  presence in this business for 40 years, and its long standing relationships with customers. 

The other players have also been able to capitalize on this opportunity and deliver higher revenues and net profits over the past year. While Galaxy Surfactants has grown in YoY revenue by 19.7%, Aarti Surfactants and Rossari Biotech grew by much larger margins which were above 35%. The competition is currently smaller in size when compared on revenues, but are competing hard to gain market share.

Rossari Biotech has been in business for 11 years, and the HPPC (home, personal care and performance chemicals) constitutes about 50% of its business. The remainder comes from textile chemicals and animal health compounds. 

Aarti Surfactants has been in  the surfactants business for 19 years, and was demerged from parent company, Aarti Industries in 2019. It is now an independently listed company with a focus on home and personal care products, and the company’s revenues are driven by surfactants.

The growing demand for washing and cleaning products is expected to continue in the post pandemic world. Investors have an opportunity to play this space via the surfactants space as this is a raw material that goes into the final product.

Given the resilience shown by Galaxy Surfactants during FY21, and the plans based on innovation and eco-friendly substitution of its products, Galaxy is a  promising presence in the surfactants space in FY22.