Makes sense to buy post listing if available cheaper
Galaxy Surfactants Limited is tapping the capital market with its IPO which has opened on Friday the 13th of May. The issue is for 59.3 lakh shares in a price band of Rs 325-340. The issue closes on Wednesday the 18th of May for QIB’s and on Thursday the 19th of May for non QIB bidders. The company had done an allotment to 3 anchor investors at the top end of the price band of Rs 340 for 8,89,500 shares.
| Price Band | Rs 325 – Rs 340 |
| Offer size in shares | 59,30,000 Equity Shares |
| Issue Size | Rs 192.72 crs at Rs 325 to Rs 201.62 crs at Rs 340 |
| Anchor Investors | Anchor Investors alloted 8,89,500 Equity Shares at Rs 340 |
| QIB’s | 29,65,000 Equity Shares |
| Non Institutional Investors | 8,89,500 Equity Shares |
| Retail Investors | 20,75,500 Equity Shares |
| Book Running Lead Manager | Motilal Oswal Investment Advisors Private Limited |
| Centrum Capital Limited | |
| Isssue Opening Date | Friday 13th May |
| Isssue closing date for QIB’s | Wednesday 18th May |
| Issue closing date for other than QIB’s | Thursday 19th May |
| IPO Grade | CRISIL grade 4/5 indicating above average fundamentals |
| Paid -up Capital Pre IPO | 1,77,27,376 Equity Shares |
| Paid -up Capital Post IPO | 2,36,57,376 Equity Shares |
| Market Cap post listing | Rs 768.86 crs at lower band to Rs 804.35 crs at higher band |
| Bid Lot | 20 shares |
| Bidding Amount for Retail | 580 shares at Rs 340 or Rs 1,97,200 per application |
Business
Galaxy Surfactants Limited is one of the leading manufacturers and marketers of surfactants and speciality chemicals in India for the Personal and Home Care industry. Galaxy produces a range of vital cosmetic ingredients including active ingredients, UV protection and functional products. Galaxy caters to some of the largest global brands in the FMCG sector and find applications in skin care, hair care, oral care, body wash, sun care, household cleansers and fabric care segments.
The business today comprises of a portfolio of 66 products and sales in 70 countries. Some of the global customers include names like Beiersdorf, Ecolab, Henkel, Diversey, L’oreal, Reckitt Benekiser and Unilever. The domestic customers include Ayur, Cavinkare, Dabur, Emami, ITC, Marico, Procter & Gamble Home Products Limited. The company is in the process of expanding its facilities and setting up a unit in Egypt at Suez. The company has acquired the business of TRI-K and its subsidiary Maybrook in the USA. In India it has manufacturing facilities at Tarapur and Taloja.
Objects of the Issue
The objects of the issue are as follows: –
| Fund the capital expenditure of our step down subsidiary GC Egypt | Rs 2123 m |
| Fund the capital expenditure for setting up new facility at Jhagadia | Rs 701 m |
| Fund the expansion of capacities at existing manufacturing units at Tarapur | Rs 470 m |
| Fund the expansion of capacities at existing manufacturing units at Taloja | Rs 135 m |
| General Corporate Purposes | XX |
| TOTAL |
Means of Finance
The above requirement of funds shall be financed as follows: –
| Project loan from IFC | Rs 576 m |
| External Commercial Borrowing (ECB) from Standard Chartered Bank | Rs 336 m |
| Term Loans from domestic Banks | Rs 600 m |
| Net Proceeds from the issue | XX |
| Internal Accruals | XX |
| TOTAL |
Financials
The consolidated revenues of the company have grown from Rs 5693 million in 2008-2009 to Rs 6497.97 m in 2009-10 and to Rs 6823.51 m in the nine months ended December 2010. The net profit after tax has grown from Rs 267.73 m to 360.32 m and to Rs 427.95 m in the nine months ended December 2010. The net margins have grown from 4.70% to 5.55% and to 6.27% in the nine months ended December 2010.
| Rupees in Millions | year 2009 | year 2010 | 9 months |
| Dec-10 | |||
| Sales of manufactured products | 5541.29 | 5949.54 | 5902.87 |
| Sales of Traded Products | 18.90 | 493.03 | 577.41 |
| Total Sales | 5560.19 | 6442.57 | 6480.28 |
| Other Income | 133.06 | 55.40 | 343.23 |
| Total Income | 5693.25 | 6497.97 | 6823.51 |
| Total Expenses | 5224.49 | 5795.86 | 6111.22 |
| Profit before dep and tax | 468.76 | 702.11 | 712.29 |
| Profit Before Tax | 321.42 | 523.44 | 546.27 |
| Net Profit After Tax | 267.73 | 360.32 | 427.95 |
| NET MARGINS | 4.70 | 5.55 | 6.27 |
The company is setting up a new unit in Egypt to be closer to customer as the finished product has roughly 2/3rd by volume of water and the new location would reduce transportation costs as well as be closer to the customer in terms of time and delivery. This unit is exempt from income tax for 25 years. The new unit in India is being set up in Jhagadia in Gujarat. The new units are expected to be operational in August 2011 and there would be substantial capacity expansion available in the second half of the current year 2011-12.
Comparisons
The company believes there are no listed companies in India that operate exclusively in the same line of business as Galaxy. Hence the company has chosen not to compare itself with anybody. At the end of the day the company can be described as a speciality chemicals company manufacturer. This industry segment would trade at a discount to the SENSEX or NIFTY valuations which is currently trading at 14.77 times the expected earnings for 2011-12. Motilal Oswal the broking house expects the SENSEX earnings for the current year ending March 2012 to be Rs 1252. It may be mentioned that Motilal Oswal is also one of the book running lead managers for the company.
With the SENSEX being available at 14.77 times why should a speciality chemicals company command valuations in the same region or higher? The net profit for the nine months ended December 2010 was Rs 427.95 million which if annualised comes to Rs 570.6 million. On a fully diluted post issue equity capital of 2,36,57,376 equity shares the EPS would be Rs 24.11. Galaxy Surfactants Limited is trading at a price earnings multiple of 13.47 times at the lower end and at 14.1 times at the upper end of the price band. With the SENSEX trading at 14.77 times expected earnings the discount to the sector is not there.
Conclusion
There are issues with valuations and the fact that the sector does not enjoy a premium status. The net margins for a speciality chemical manufacturer considering that the player is not in the commodity business of detergents and washing powder seem to be on the lower side. There has been very sharp net margin expansion from 470 basis points to 627 basis points which may not be sustainable going forward. With a sharp increase in capacity availability in the second half of the current year, margins may come under pressure. The valuations certainly seem overstretched and leave no room for expansion post listing. Returns may only be available one year down the line once results from the new facilities are available.
Looking at the spate of IPO’s and their performance post listing as witnessed in the last ten days, it may make better sense to buy this company once the shares are listed and available at lower valuations than the present offering price.
SEBI Disclaimer: – I do not intend to subscribe to the above issue.
