Galaxy Surfactants Limited (GALAXYSURF) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Galaxy Surfactants Limited Q3 and 9M FY 2020 Earnings Conference call. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. U. Shekhar, Promoter and Managing Director. Thank you, and over to you, sir.

Thank you. Good evening to all of you, ladies and gentlemen. It gives me immense pleasure to welcome you all once again for our quarterly investor call. Ladies and gentlemen, globally, the business environment remains subdued. Consumption, while it continues to grow, the growth today is fairly modest across the globe. While the premiumization trend continues to show traction, mass and masstige products continue to face challenge. Rising geopolitical tensions and outbreak of the latest Coronavirus epidemic will only compound the slowdown. Uncertainty impacts consumption, and we believe this is the biggest risk going ahead in 2020. Before we get into details of this quarter, I would like to highlight that this has been a modest quarter for us. But in the midst of uncertainty and somberness, there have been a couple of positives like the revival of Egypt and volume growth in India. Revenue showed a decline due to lower fatty alcohol prices, which accounts for 52% of our raw material buying and which declined 6.6% -- 6.7% in its prices for the quarter under review. EBITDA was impacted primarily due to the following reasons: the incremental costs due to the new plant start-up at Jhagadia and continuation of the trade restrictions with our neighboring country, which, again, had an adverse impact of INR 1.5 crores. So total impact for the year, because of this, stands at about INR 2.6 crores for the 9 months ended December. As highlighted earlier, despite the uncertainty, there are a couple of positives. While the volume growth stood at 2.4%, Performance Surfactants registered at double-digit 10.2% growth, primarily driven by the AMET markets, which grew at 14.2%. Egypt continues its momentum, registering a 34% growth in this quarter. This is a significant positive for us. India, after 2 quarters of slowdown, is finally seeing some signs of pick up. The 4.8% volume growth registered in this quarter is encouraging. We remain optimistic and believe this slow recovery should continue in the ensuing quarters. Specialty segment driven by the Rest of the World markets saw a decline of 9.1%. The Rest of the World consequently saw a decline of 15.1%. This, we believe, is a temporary quarterly blip, and we do see the momentum coming back in the next quarter. Seasonal holidays and delayed consumption primarily drove this. EBITDA per metric tonne stood at INR 15,754 per metric tonne, in the range of INR 15,000 to INR 17,000 per metric tonnes, primarily impacted by the mix change and are mostly impacted by the factors highlighted previously. We are so pleased to share that our Jhagadia plant recently received the Gold Level Recognition in the National Awards for Manufacturing Competitiveness in October 2019. NAMC is an awards platform that is aimed at encouraging and recognizing manufacturing units who have adopted global manufacturing practices in their journey to become world class. Galaxy was also certified as a Great Place To Work by the Great Place To Work Institute in December 2019, a testimony of the efforts we have taken over the years to build a high on trust and performance organization. To conclude, despite the headwinds for 9 months ended December, we have seen a volume growth of 5.6%. This has been driven primarily by growth across segments and regions. This is a positive for us. We remain optimistic that barring any global slowdown due to the trade restrictions, geopolitical uncertainties or epidemic breakout, which could impact consumption significantly, growth momentum should improve slowly and steadily going ahead. CapEx lined up for our new sustainable innovative products remains on track. Qualifications are on, and we are receiving very encouraging response from our customers. Ladies and gentlemen, before we move on to our Q&A, I would like to state that the inherent robustness of our business model has been clearly demonstrated in the last few quarters, underscoring our ability to respond to the changing external conditions and business dynamics. Our presence in 75-plus countries with 1,750-plus customers has enabled us to sustain the growth momentum. Going ahead as well, we remain committed and confident about our growth story. Thank you, ladies and gentlemen. Now I would like to open the floor for Q&A.

[Operator Instructions] The first question is from the line of Nav Bhardwaj from Anand Rathi.

A short question, I wanted some clarification that you could provide as to how do we read the move from the Indian government as to banning the palm oils? And how much does it affect us? And do we have any long-term tie-ups with any RSPO-certified firms in Malaysia? And if that's going to adversely impact us?

Yes. Natarajan here. I'll take this question. So see, first of all, what the government has done is in terms of restricting the imports of RBD palm oil. That is refined, bleached, and deodorized palm oil. What we source for is palm oil derivatives, essentially palm oil and palm kernel derivatives. So this particular move by the Indian government is no way impacting us. And we are -- all the palm oil derivatives and palm kernel oil derivatives that we source are all from RSPO-accredited vendors. So we are in a pretty much a good place in terms of our vendor portfolio for sourcing all palm and palm kernel oil related products.

All right. So, basically, this is a non-event for us and does not impact us?

Yes. Yes.

And sir, in terms of even the volume pickup that you've seen in the markets that you operate on, how much of it do we think is sustainable? And then can we consider this to be a turnaround for us?

See, in India, what we have grown in the -- after the last 2 quarters, the way we've grown in the last quarter by almost 5%, okay, gives us sufficient reason to believe, okay, that the slowdown in India is starting to correct. We'd have to wait for 1 more quarter, that is Jan-Feb-March quarter to make a clear statement on that. But I think we have sufficient optimism to believe that this particular growth momentum that we have gained in the last quarter would continue. And in Egypt and in AMET, okay, we are well positioned, and we expect this particular growth momentum to continue.

[Operator Instructions] The next question is from the line of Sanjesh Jain from ICICI Securities.

Yes. Few questions from my side. First, on the specialty chemicals. Last year, it has been a wonderful year for us. Though we are on a high growth, but the dip in the volumes look certainly very steep. So what went behind it? And was it a particular product led? Or can you give certain more color on what was the reason behind decline particularly, RoW?

Yes. So Sanjesh, essentially, see the one of the 2 impacts, 2 reasons for this. The Q3 of last year, that is financial year '19/'20, was the significantly high quarter as far as specialty [ indiscernible ] driven by certain [ indiscernible ] that the customers did and the sort of pull that we had for those products where the projects in the pipeline matured with certain customers. And that's how the volume pickup happened. Now that I think got stabilized in the quarter -- the last quarter of '20/'21 that we're talking about, okay, we did see that there was some amount of demand pickup that got pushed, okay, to the next quarter. If you see our first half, in the most, specialty surfactants was a pretty good, this thing. So it is more in terms of people either advancing their requirements, okay, or some of them pushing it. So that's the only reason we see. In terms of our projects with customer and the sort of business pipeline that we have, we don't see this continuing, we see this reversing.

Yes. We see this as a temporary blip. What is also important is that our traction with respect to new customer creation, new customer development and projects in pipeline, they're all moving pretty well, and we remain optimistic as far as our specialty ingredient portfolio is concerned.

And one of the other reasons also, Sanjesh, is that in the last -- in the quarter of '19/'20, Q3 '19/'20, we also had the volumes getting into Pakistan of the special ingredients. In this quarter, okay, it is actually 0. So that also has been an additional impact.

Okay. So it is -- is it fair to believe that from the next quarter, we will see the normal growth, at least, if not the super-normal growth we were seeing?

Yes, yes, yes. See we have always maintained that we would like to see a growth of approximately 10% or so. And this is something that we should see happening.

So you are confident that we will, again, bounce back, probably, [indiscernible] the end of this third quarter?

Yes, yes, yes.

Pretty much, pretty much.

One on LA prices. So we understand that the LA prices in the month of December has seen a significant jump, probably 30%, 40% jump in terms of pricing. Whereas the petroleum-based surfactant would not have seen that jump, right, because chloride has been more or less stable. Do we see any risk in terms of volume movement from LA to petro-based surfactant?

See, the matter of fact, some of this can be very speculative. What has gone up has come down also in this month, okay. So these volatilities keep happening, and this is something that we have been used to.

See other thing, Sanjay, is the markets in which we can do LA-based products, okay. They all basically consume your natural alcohol based products. The synthetic derivative products are majorly used in Europe, okay, where they have the source of the synthetic-based derivatives, okay. And in those markets, though, we are only catering to those where they need natural alcohol-based products, okay. So we don't see this as a significant issue.

so particularly from India, Tier 3, who are very price-sensitive, even a small blip in the transfer of volumes from, say, synthetics are -- sorry, LA to synthetic surfactant can hurt us, right, so -- but that one is incremental growth?

See the synthetic surfactant is not that we can -- it's not an immediate replacement. It's not fungible in the true sense, okay. So it's only -- the formulations cannot take the fungibility, okay. It's not that it's only the pricing. The formulation changes have to be significantly done. So you have to look at the overall cosmetics or the formulation, will it shift from natural to synthetic. And we have seen these situations happening even before where the delta was significant, okay, but no such formulation changes happened.

And in any case, we haven't heard about usage of this synthetic as a substitute for natural-based products, SLES, in this country till date.

No. I have heard from somebody that they can switch between LA and TDA. I don't know how...

What is TDA? Oh, that is, in terms of -- you are talking about not in personal care and...

In particular, in the laundry detergent.

So, yes, yes, see, laundry detergent, we don't -- name convention is unilateral benzene sulfonate, okay. So someone tends -- they're deciding to shift to triglyceride alcohol will impact that. So we don't see that there's an issue impacting us.

So that is not an area where we cater a lot LA, right?

Yes, yes, yes.

Okay. One on the China situation. So does it open, at least, a temporary opportunity for -- in the export market where Chinese have been aggressive, and now that the production may get delayed there, do we see interim opportunity in terms of selling some volumes in the market where Chinese were normally aggressive? And any such opportunity exists for us in the near term?

First of all, right now, I think you all have to pray for the things coming under control and people recovering and the mortalities coming down, and the rate of infection happening has to come down. So having said that, okay, it's too early for us to comment, okay. But if we -- supply chain in China is [ indiscernible ] for a significant amount of time, okay, so obviously, yes, we have to wait and watch, okay. If China is unable to supply anything at all out of China, then the markets, that they're catering to, would probably have to approach others. But we need to wait and watch because it's too early for us to comment because they've just opened the markets in China. And they're going to -- government has said from February 13, they can start the factories. Now whether the situation worsens, which we do not want to in terms of the impact on the people there, but yes, if it continues for a significant period of time and the shutdown happens, then we'll have to then see.

Okay. But in general understanding, which are the markets where we see competing with Chinese?

See China typically is placed in markets, of say, Latin America, they play in the markets of Africa, Middle East, Turkey, in Asia Pacific, in these all markets, yes.

So mostly closer to our Egypt facility and not really the India facility, where we can see Jhagadia utilization ramping up faster than expected.

Yes, it's not that. Suppose that China doesn't supply them, they would want whoever can give materials, so whether Egypt or Jhagadia, if the situation worsened significantly. But we don't see that -- we don't want to be commenting on that right now. We'll have to wait and watch as to how the situation unfolds.

Okay. One on this -- just one bookkeeping question. What was non-Egypt growth in AMET?

Non-Egypt growth in AMET was about 7 -- about -- this quarter was about 4.5%. YTD was about 7%.

So we have come down significantly in non-Egypt volume in AMET.

See, that's because -- Sanjesh, what we need to realize is that when Egypt market was underperforming, we had to find markets where we need to position our products. If Egypt really starts performing well, okay, we don't want to be doing that. So we will reverse it. Are you getting me? So we don't want to be positioning our products aggressively when Egypt comes back on track. So that's basically what has happened.

So you're telling that we were going aggressive into the non-Egypt market? Was it more pricing-led? Or how was it?

Obviously, it will be pricing. That's what we told in the last this thing also in terms of the pricing that -- the position that we had to take. Because when Egypt was not performing, we had to take those calls and then positioning the products in the other markets. We are reversing.

So you're reversing that pricing-led strategy. So you're coming back to the normalization.

Yes, yes, yes.

Can you slightly give some color on how the Jhagadia plant is performing now that we have commission? And can you give breakup of what was the incremental fixed cost above EBITDA? And the depreciation came in because of commissioning of Jhagadia?

Including depreciation, it's about INR 12 crores per annum.

And what was for this quarter?

For this quarter, it's above -- approximately INR 3 crores.

So it includes depreciation. You're telling it includes full depreciation.

Yes. It includes full depreciation.

Okay. So it's not that bigger hit to our margin?

Yes. See what happens is that as far as EBITDA is concerned, there are 2, 3 factors which influence the EBITDA. One is your -- this new capitalization which has happened. The second thing, essentially, is that we have incurred certain developmental expenditures as well, that was regulatory expenses. See, what we do is that REACH expenses and all, we don't capitalize it. We charge it off to the P&L. You got me? So it's not that these expenses are incurred every year, and when they are incurred, they are quite substantial.

So in this quarter, have we incurred any REACH related...

Not in this. I was talking in the context of 9 months as far as the exceptional expenses are concerned.

Okay. No, I was more looking from this quarter perspective? Yes. And some color on the Jhagadia plant commissioning. Whether it was smooth? And how was it?

No. It was very smooth.

So what -- at what utilization are we running now, Jhagadia plant? Actually, see at Jhagadia, our normal thing is very -- come to a full utilization in a matter of 4 years, okay. So we are -- as on an overall basis, for Galaxy, we are at about approximately 62% capacity utilization. And if I want to look at only Jhagadia, will it be less than 10% as of now?

No. It will be more than that. It'll be more than that.

It will be more than that.

So it will be more than that.

Yes, yes, yes.

[Operator Instructions] The next question is from the line of Saravanan Viswanathan from Unifi Capital.

So at this point, would you have -- I mean would you be able to provide us any volume guidance for next financial year?

No. Next financial year, our own this thing is to grow ahead of market. And then for next financial year, we'll not be able to provide guidance now because we are into our annual planning exercise, okay. So next financial year, suffice to say that, yes, we'll continue the growth momentum that we have.

Okay. And have we launched any new products in this quarter -- in the quarter went by -- that went by?

So there is nothing that we launched in the quarter. But as I said, the products that we have launched in the category of mild surfactants and nontoxic preservatives, good amount of projects are getting concluded with customers. There are various days of maturity. So those are all going on and pretty good traction we have seen there. But there's nothing new that we launched in this quarter.

Okay. And a bookkeeping question. What would be the total debt as of 9 months?

See total debt as of 9 months is INR 286 crores.

INR 286 crores.

It is lower than the -- it has gone down, actually, debt equity has gone down from 0.34% to 0.27%.

Okay. So do you intend to keep debt equity at this range? Or depending on the CapEx and any inorganic opportunities...

No. CapEx is in the pipeline, correct, right. That's why -- otherwise, to -- see either you have to invest or you have to give a payout, one of the two.

The next question is from the line of Rohit Nagraj from Sunidhi Securities.

Sir, you indicated that with mass and masstige products continued to face challenges. So what could be the trigger for the market to come back to normalcy?

See, as we said, firstly, the challenging situation is at the global level. There is a slowdown, okay. What we have said is that we would be able to grow ahead of the market wherever we are. That is what is our way of looking at our business, one. Number two, we also said that subsequent to 3 slow quarters in India, India is seeing a, a sort of a revival okay. And we would like to believe that this particular tempo will continue, this momentum will continue. So what we've talked about in the coming year -- quarter and coming year is that we will continue to strive to grow ahead of the market.

Right. And sir, you also commented that given the uncertainties related to the global markets, 2020 can be a bit of a challenging year. So in such an environment, would there be impact on the overall volume growth for us for the next year -- financial year, as such?

See what we said, it could possibly be a challenging year, okay? Because there are, obviously, sudden headwinds, including the Coronavirus syndrome. But this could also be temporary, okay. So one has to obviously be cautious when we look at the coming year. But we don't -- we -- I mean what we would like to say is that we don't think that the whole consumption will decline significantly. It could be a mild growth and a modest growth like what we have seen possibly in this year. At the most, could be a modest growth like what we have seen in this year.

Correct. Sir, earlier, we had indicated that for FY '20, the volume growth guidance would be about 6% to 8%, and EBITDA growth would be higher than the volume growth. So given that 9 months are over and 1 month of the fourth quarter, do you foresee that this guidance could be met on a lower side or probably go below 6% on volume front?

I think we are optimistic that we should be in that particular range.

All right. And sir, just last question. On the U.S. Tri-K facility, so what is the current progress? And how...

It has already got commissioned about 15 days back. The new facility got completed on time, and that has got commissioned also.

And any understanding on the orders for this new facility? Because I think earlier plant in each is running at almost full utilization?

Yes. So as you said, when we build any capacity for long term, and particularly, facilities like this, we build a facility over an 8-year horizon. I've always said for performance chemicals -- Performance Surfactants, I know the horizon is about 4 years. And for any specialty ingredient, horizon can be even 8 years or so. So mainly because when we incur a CapEx or build a facility, the permissions, it should take some time, and we need to ensure that we build a capacity over a long horizon, which brings an inherent competitiveness and the ability to respond to various market situations. So I think it has just about started -- it is just about started.

[Operator Instructions] The next question is from the line of Abhisar Jain from Monarch Networth Capital.

Sir, my question is related to the product mix. So as we have seen that Specialty Care Products segment was doing very well for us in FY '19 and also in H1 FY '20, while we have seen a significant dip in Q3. So just want your sense around this mix, which was improving for us all the while and has seen a dip, maybe, due to the structural issues that you mentioned, the Rest of the World market. But how do you see it going forward? Because it seems to have had an impact on our EBITDA per tonne also, which we make.

No. We see it coming back. As we said in the beginning itself, we see this as a temporary blip, and then we'll come back.

See, but what we all should understand is that we also wanting to grow our Performance Products portfolio. So this particular range, of like, YTD December, we are 63-37, okay. In Q3 FY '19, we're at 60-40. We are now at 62-38 for this quarter 3, okay. So that is our significant movement. But this will keep happening. Because we are also wanting to grow the performance portfolio. We don't want to grow the specialty portfolio at the expense of the performance portfolio. Because our strategy is to grow both these mix simultaneously add up the market.

So both of these classifications will grow. As we said, we want to reiterate that what we -- what is important for us that we are going ahead of the market, whether the market is for Performance Surfactants or Speciality Ingredients, okay.

Right. And sir, in that endeavor per-se, we would be looking at the overall absolute volume rather than higher focus on the EBITDA percent, is that the...

Right, right. No, no. Our EBITDA, as we said, will be in the range of INR 15,000 to INR 17,000 per metric tonne. And for your information, the EBITDA per metric tonne has more or less remained the same, whether it was in Q3 FY '19 or Q3 FY '20.

Yes. I was just looking at maybe the whole of FY '19 as well as H1 versus what we did in Q3, that's why.