GALAXYSURFNSEQ1 FY 2022-23August 16, 2022

Galaxy Surfactants Limited

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13analyst exchanges

2executives

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Management on call

Unnathan Shekhar

PROMOTER & MANAGING

K. Natarajan

EXECUTIVE DIRECTOR & CHIEF

Key numbers — 29 extracted

101 Crore

members a safe and healthy living. In the financial year 2016, Galaxy’s full-year profit stood at 101 Crores. It gives me immense pleasure to share with you all that despite numerous challenges we have wit

rs,

leasure to share with you all that despite numerous challenges we have witnessed in the last 6 years, Galaxy’s march has consistently continued. As we see the world gradually moving back to normalcy,

100 Crore

ve note for your company as well. For the first time in the history of Galaxy we have crossed the 100 Crores profit mark. Despite facing a setback in Q2 and Q3 of last year, we not only rebounded in Q4, bu

Rs. 26,418

hieve this growth. As you would have noticed our EBITDA per metric tonne for the quarter stood at Rs. 26,418. While we have a good start the strong persistent inflationary headwinds impacting both the devel

21%

ts volumes and this impact was particularly adverse in AMET. The AMET region declined by almost 21% year-on-year. The energy crisis in Europe and the impending slow down remains a cause of worry an

5.5%

ur speciality care products going ahead. This is reflected in our ROW performance, which declined 5.5% year-on-year; however, on the brighter side demand in India continued to remain stabl

8.5%

in India continued to remain stable and showed signs of improvement quarter-on-quarter by growth 8.5%. With the upcoming festive seasons, we believe the demand will pick up momentum from Q2 onwards.

23%

with our US and Egypt, there the margins continues to increase significantly, now we are there at 23% EBITDA margin, 48% gross profit margin, two part in it, how is the US doing, number two is that

48%

pt, there the margins continues to increase significantly, now we are there at 23% EBITDA margin, 48% gross profit margin, two part in it, how is the US doing, number two is that specialty which we a

Rs.26

derstanding? Unnathan Shekhar: Yes. Sanjesh Jain: Continuing with the margin, now we are at Rs.26 per kg kind of EBITDA, our guidance is 16 to 18, it looks like we have come a long way from 16 to

150 Crore

e higher end of this band facilitating us. Sanjesh Jain: Just to understand is this EBITDA of 150 Crores what we have done in this quarter right, forget about the EBITDA per kg and all, is this 150 sus

Rs.16,000

then you are cautioning us that the margins may go back to the previous year of your guidance of Rs.16,000 to Rs.18,000 per ton so the products which you have launched are definitely new age and , our clea

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Guidance — 16 items

Unnathan Shekhar

opening

“As stated previously, FY2023 will be all about managing supply as well as demand side risks.”

Unnathan Shekhar

opening

“While Q1 FY2023 has been a good start going ahead a conducive environment will be helpful to ensure that the momentum continues.”

Unnathan Shekhar

“Sanjesh, yes, the US has done well and has been pretty consistent in the last maybe 18 to 24 months and touchwood, we would expect it to continue, but we have to be candid enough to say that one does see the stress on consumption even in the US market.”

Sanjesh Jain

“No, that I got the point, I am telling you what is this incrementally driving the strong growth, is the combination of all this product, it is mild surfactant portfolio, it is preservative portfolio, it is protein portfolio and how much will be the volume?”

Unnathan Shekhar

“You have seen Sanjesh, you would have seen that our concern will be the volume de- growth that we have seen at the overall level, so the strong performance has been because of the mix and the introduction of new products.”

Sanjesh Jain

“Continuing with the margin, now we are at Rs.26 per kg kind of EBITDA, our guidance is 16 to 18, it looks like we have come a long way from 16 to 18, so we still want to stick with 16 to 18 or we think sustainably we have to move?”

Sanjesh Jain

“Just to understand is this EBITDA of 150 Crores what we have done in this quarter right, forget about the EBITDA per kg and all, is this 150 sustainable and can grow from here now considering this is on a lower volume our volumes will come back, do we think this 150 Crores is sustainable and this becomes a new base and we will grow it from here?”

Rohan Gupta

“16,000 to Rs.18,000 at the upper end guidance, but do you see that the RM prices sustain here maybe 10% lower from there, can we expect our EBITDA percentage margins what we are enjoying right now in terms of percentage can sustain like 13% to 14%?”

Rohan Gupta

“Sir, we had seen that our specialty capacity is launched last year and if you can give us some sense in kind of utilization is there and what are our utilization right now and capex plan for the current year and I think that our capex will be much lower than the free cash flow, which we will be generating, so what are the plan for our additional free cash flow this year?”

K. Natarajan

“With regards to our deployment of the cash, we have said to you know this is our capex outlay would be about 150 Crores per annum and we do have project that has been rolled out on both the performance and specialty ingredients segment over the next two years, so per annum we are doing Rs.”

Risks & concerns — 7 flagged

While we have a good start the strong persistent inflationary headwinds impacting both the developed and developing economies though with varying intensity remains a cause of concern for us.

— Unnathan Shekhar

The energy crisis in Europe and the impending slow down remains a cause of worry and risk for our speciality care products going ahead.

— Unnathan Shekhar

You have seen Sanjesh, you would have seen that our concern will be the volume de- growth that we have seen at the overall level, so the strong performance has been because of the mix and the introduction of new products.

— Unnathan Shekhar

We have explained this thing, we have a very good risk management mechanism to ensure that the impacts were minimum, I mean its not that we are totally immune to any impact, but the impacts are pretty minimal, so that has been the case, so we have not had any significant impact because of this.

— Unnathan Shekhar

I think Europe being in trouble probably is good news for us because they will try to do more outsource and the production cost of the local surfactants with any which way is sold at a very thin margin so for them to compete will be very difficult so for AMET market we become even more efficient to look at in Europe does not it make us even more efficient to export from AMET to Europe and that market opens up very well for us?

— Sanjesh Jain

The consumer demand to come back and thirdly, the inflation to correct because that will ensure that the wallet of a consumer is able to appropriately devote some of it to the prestige product which is what has driven the specialty portfolio and which will drive a specialty portfolio consistently, see when there is a stress with respect to his wallet, the customer reverts back to minimal whatever he wants to consume that is what we have seen.

— Unnathan Shekhar

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Q&A — 13 exchanges

Good afternoon, Sir. Thanks for taking this question. Few from side, this quarter looks like performance in two half, India still struggling, I mean standalone still struggling, margin are dipping, while the consol minus standalone, which I think the pre-dominantly with our US and Egypt, there the margins continues to increase significantly, now we are there at 23% EBITDA margin, 48% gross profit margin, two part in it, how is the US doing, number two is that specialty which we are manufacturing now and supplying to US a significant portion of margin is captured in the US subsidiary and this i

Unnathan Shekhar

Sanjesh, yes, the US has done well and has been pretty consistent in the last maybe 18 to 24 months and touchwood, we would expect it to continue, but we have to be candid enough to say that one does see the stress on consumption even in the US market. That is it the US operations also sells products of Galaxy because as you know it is important that we maintain the stocks of these products at the warehouse in USA so that we are enabled to serve our customers from our warehouses there, so a number of specialty products which goes from India it gets serviced through the US subsidiary, so Egypt

Sir, good morning and congratulations on such a strong set of numbers despite we are seeing the pressure on volumes. Sir, just extending from the previous conversation that definitely the performance from non-surfactants and specialty business has been very solid and it is especially coming from the developed markets, you gave that reason for that is basically the new product launches which has led to a strong profitability and higher margins, once we come back to the previous levels in terms of product mix with the higher revenue coming from the surfactants then you are cautioning us that the

Unnathan Shekhar

Rohan, thank you. See, we have seen the end use market and particularly this year because of the real hyperinflation, the stress on consumption we have started experiencing across various markets, customers when there is hyperinflation like its happened about three years back, four years back, tend to downtrade okay and when that happens the store brands start gaining traction for that particular period of time of course the consumers come back to the mass and masstige when I talk about the speciality assume that the specialty products find use or find their place in masstige and prestige bran

Thanks for the opportunity and congrats on a very strong set of numbers. Sir, first question I mean asking on the EBITDA per ton so is it differs where you are seeing a lag in terms of the input cost inflation which you passed on and prior to two quarters back we have struggled to keep the EBITDA per tonne at our current levels and because of which this impact has come in Q4 as well as Q1 and incrementally as the raw material price substance based on your commentary it will normalize to our 16,000 to 18,000 level, is that the right understanding?

K Natarajan

Yes, that is the right understanding, only thing is what we need to when the Q2 and Q3 of last year performance was seemingly impacted, we said the raw material prices have been increasing both in frequency and intensity of the increase was pretty high, and then by the time you are passing on one increase the price will go further and from Q4 it stabilized although at the higher levels and that continues, so you are right with your understanding because it enables us to not have an impact because we have not able to pass on, we will pass on say with the lag of the quarter. Right, got it. Sir,

Good morning, Sir. Anupam, here. Sir, wanted to understand a little in detail if possible in terms of green surfactants, so I am sure you guys also have green surfactants in your portfolio, but the way things are being defined now, so whether let us say a sulphate-free surfactant can be classified as a pure greens surfactant or it is a partial green surfactant and is there any newer kind of product with very different technologies are being accepted in the market has been surfactant and where our product development stands in terms of this journey to reach to pure green surfactant if you can h

Unnathan Shekhar

Yes, thank you, Anupam. I think Galaxy has been a significant player and leader as far as green surfactants are concerned, as you know our amino acid surfactants, which has a world patent, an exclusive patent is totally based on green chemistry, which gives us an exclusive edge, one, again our nontoxic preservatives are from green sources, we introduced product called sodium lauroyl lactylate, which is totally green surfactant cum emulsifier in this particular year, so and that is a matter of fact a significant amount of growth that we have seen in the last three years with respect to specialt

Okay.

Management

The question is EBITDA per tonne where for the past two quarters you have been around 40% higher than your normal range, so if you actually saying that you will revert to the 16,000 to 18,000 k and your volumes do not grow up drastically that would have a big impact on your profits?

Unnathan Shekhar

See, as we said for a couple of parameters which were at play in the last two years, one was of course the supply chain geopolitical disturbances and the supply chain disturbances which impacted your rhythm of operations both the predictability of operations or planning of operations or rhythm of operations and the output of operations, apart from that the challenges with respect to outgoing cargo also put a stoke in terms of your dispatches and delivery, so there was a huge supply chain elongation which one the world experience including us, the second is of course because of this geopolitica

Sir, congrats on a good set of numbers. Sir, just two questions from my side, so the first is just wanted to check, has there been any addition of value-added products in your performance products portfolio over the last couple of quarters?

Unnathan Shekhar

We did mention as far as the performance products is concerned our view, the innovation that we worked on GalEcoSafe is having very, very low dioxane, which would help our customers to meet the New York regulations with respect to dioxane, we have already launched this in Europe as well as USA and we have already done a significant amount of business or some businesses on this thing with our customers in Europe and US. Sir, just on a followup on that, so what would be the contribution of this in the current performance surfactant like maybe a ballpark number should do, not an exact numbers? No

Sir, actually I just want to have a broad outlook on performance and specialty, so we have revenue segregation on performance and specialty, so on a moving trajectory like 4 to 5 years are will be on the same line or will specialty contribute to let us say 50:50 so can you give some trajectory towards that?

Unnathan Shekhar

Yes, see we have always said that the split between performance and specialty will be 65:35, but this ratio will certainly go towards maybe to 60:40 or even maybe 55:45, but not overnight or immediate, but over a horizon let us say five to ten years or so. Okay and Sir, my broad understanding would be so the majority of our sales you can say would be on performance, but the margins would be contributing from specialty so more of the margin performance improvement will be from the speciality and the sales performance could be majorly from the performance, right, is my understanding correct? Yes

Thanks for taking my question, again. More on the volume side, I wanted to understand how are we trending on a month-on-month basis, I know for the quarter we have declined by 29%, last quarter it was 29%, just wanted to understand the progression, is it on the improving side are we seeing the pressure coming down that is one, number two on the rest of the word side where we had declined 5.5% in the volume terms like last quarter it was positive and now given that we have commissioned the plant that should give us the momentum in the new product as well, how should one think about the volume p

K. Natarajan

Sanjesh, as far as the AMET volumes are concerned I think we would have to wait for the Egypt and Turkey market to really start coming back once we adjust to significant inflation that they are having, so that is going to be very critical and to your question whether we are seeing some green shots and this is a improving trend, I would say that directionally improving, but we are not be able to make any comment that they will sustain because we have also Eid, which was there in the month of July so we were not be able to make so we will be able to make clear statement on the direction by end o

Sir, thanks for the opportunity. One question, how historically the FMCG company price hyperinflation has behaved, generally once the FMCG consumers product if rise to a particular level, you said that prices do not correct, so historically what is our understanding of this in the last maybe 12 to 25 years?

K Natarajan

So, what you have seen is how the consumer responds, so overall if it doesn’t pinch the consumers too much in terms of the disposable income then they would not mind continuing the high prices, but if you ask my personal opinion in terms of what would be the response to the current situation, I think everyone wants to be incentivizing consumer demand and they would certainly end up passing on any reductions, but yes, they would want that to get going to sustain so they did not want to be reducing or increasing it again so they would probably wait for some months, but surely everyone wants to p

Thank you so much for taking my question. Sir, I am just trying to understand, there being two reasons, first it that obviously they has been constraints on the volume side as we were talking about inflationary scenarios in your target market and secondly with your RM price is coming down as you had mentioned that even the lower prices you will have to be passing them on to the consumers, so I am just trying to understand in both ways you know these situations are not really working in our favour so what exactly are the growth drivers for say the coming two, three quarters or is the scenario j

Unnathan Shekhar

See, let us admit and acknowledge that the consumer demand is a very, very extremely important parameter, if the consumer does not buy, I do not think any unique strategy will make your sales grow, so it is important that consumer demand comes back to robust levels, now all indications for right to happen because the commodity prices are correcting and you would have also seen some of the festival season is coming back, people today obviously when they are coming back to normalcy with respect to daily life I mean maybe for the first time India will be celebrating the festivals in full mission

Thank you for the follow up. Sir, first question is on our working capital itself, so last year because of the sharp increase in input prices we have seen a large part of our cash flows was deployed in working capital and that led to almost flattening of the debt level and even also it was added up with the capex, which you had close to 200 Crores plus, this year we see that reverse is slightly to happen with the fall in raw material prices I mean we are expecting some relief of the working capital so just to give some numbers on the balance sheet last year we had deployed close to Rs.300 - 35

Abhijit Damle

See, this working capital increase which has happened has basically happened from the borrowing and this will be distributed in the different jurisdictions in different subsidiaries. So as the raw material prices correct obviously there is also going to be a release of working capital, which will essentially go on to reduce the borrowing. So, you are saying that this still would be having surplus cash on the balance sheet distributed to the shareholders? Yes, correct. Sir, second question is on our realization, so definitely even the current quarter also we had seen that on quarter-on-quarter

Thank you, ladies and gentlemen. We would once again meet about three months from now. Thank you once again.

Management

Speaking time

Unnathan Shekhar

Moderator

Sanjesh Jain

Rohan Gupta

Rohit Nagraj

Bobby J

Anupam Tiwari

K Natarajan

Krishan Parwani

Poojan Shah

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Opening remarks

Unnathan Shekhar

Thank you. A very good afternoon ladies and gentlemen. I would like to welcome you all to our first quarterly earnings call for FY 23 and let me wish all of you and your family members a safe and healthy living. In the financial year 2016, Galaxy’s full-year profit stood at 101 Crores. It gives me immense pleasure to share with you all that despite numerous challenges we have witnessed in the last 6 years, Galaxy’s march has consistently continued. As we see the world gradually moving back to normalcy, the year FY2023 began on a very positive note for your company as well. For the first time in the history of Galaxy we have crossed the 100 Crores profit mark. Despite facing a setback in Q2 and Q3 of last year, we not only rebounded in Q4, but we were also able to sustain the momentum in Q1 of FY2023. Improving supply chain conditions, better mix, realizations, new-age products and leveraging on emerging opportunities, have helped us achieve this growth. As you would have noticed our EB

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