Galaxy Surfactants Limited (GALAXYSURF) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Galaxy Surfactants Limited Q2 and H1 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not 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. Unnathan Shekhar, Promoter and Managing Director of Galaxy Surfactants Limited. Thank you, and over to you, sir.

Thank you. Ladies and gentlemen, a very good morning to all of you, and it gives me immense pleasure to welcome you all once again to this Galaxy Surfactants' quarterly investor con call. Let me begin by extending on behalf of Galaxy Surfactants, warm seasons greetings to you and your families. May the festival of lights bring immense joy, wealth and happiness and safety in your lives. As we begin, the final chapter of the year 2020, I can just say the year 2020 shall stay edged in our memories for years to come. A year, which has seen the world speaking just one language, focus on and worry about just one thing and work together towards finding just one simple solution to cure the pandemic, finally seems to be coming to an end. As the world opens up, while fears of the wave 2, slowing economies and lives in the post-COVID world, era, dominate the headlines, green shoots have started reappearing. Normalcy seems to be slowly coming back. And the Home & Personal Care industry, which has yet again remained fairly resilient, starring discretionary categories seems to be getting its mojo back. Ladies and gentlemen, this quarter, the quarter 2 of financial year 2020/'21 has been a stellar quarter for us. It gives me immense pleasure to share with you all that Galaxy Surfactants have registered its highest quarterly volumes, EBITDA and PBT in this quarter. Our consolidated PBT has crossed the INR 100 crores mark for the first time in this quarter. Before I get into details, I want to especially like to acknowledge my team at Galaxy. The grid and determination demonstrated by the entire team has been impeccable. I thank one and all Galaxites across all geographies and all our stakeholders who have played a pivotal role in helping us achieve this fleet despite the numerous challenges and difficulties. Ladies and gentlemen, as India opens up, and as wholesalers, distributors and retailers stock up, demand for Home & Personal Care products is slowly and steadily inching up. While the demand for essentials have remained fairly strong, the masstige category now seems poised to make a comeback. With the rural economy firing and discretionary spending picking up, we believe we are at the cusp of a fresh upcycle as far as the Home & Personal Care consumption is concerned. Improving demand/supply dynamics, restocking of inventory by channel partners, which had got disrupted due to the pandemic, and opening up of the economy clearly played a key role in our outperformance. Our India business grew 27% by volumes for the quarter and 12.5% for the first half, driven primarily by the essential Performance Surfactants. We see this positive momentum continuing. While volumes do have an element of pent-up demand, which got carried forward from the second -- from the first to the second quarter, the overall performance is very encouraging. Africa, Middle East, Turkey continues to grow ahead of the market. But in absolute volumes, the local Egypt market has yet again registered growth, it is a performance logged in by rest of AMET, excluding Egypt, comprising of Turkey despite the COVID and currency situation, Saudi Arabia, Morocco and South Africa, which has been encouraging. Overall, the Africa, Middle East, Turkey region registered a 6.1% volumes growth for this quarter and the same stands at 8.1% for the first half. While Performance Surfactants have been the key growth drivers for the India and AMET markets, the growth registered by some of our masstige specialty products in these markets has also been satisfying. Specialty segment has made a strong comeback in this quarter. While year-on-year, the growth is 2.1%, sequentially, the same has grown by 39.4%. With our new age preservative and mild surfactants solutions gaining traction, these are exciting times for our new age Specialty Products. The CapEx for our new age specialities remains on course, and they should become operational by the quarter 1 of FY '21/'22. The Rest of the World has locked in a decline of 4%. Supply chain challenges with respect to availability of ships hampered volumes in this quarter. Demand visibility has improved significantly versus quarter 1 FY '21. And sequentially, we have grown 25% vis-à-vis quarter 1. Barring any operational challenges, we remain confident of growth returning in the ensuing quarters. Before we move on to the question and answers, some key parameters we rank our performance on are: volume growth which stood at 10.4% for this quarter and 2.8% for the first half, driven by Performance Surfactants, which grew 15.3% in this quarter and 11.7% for the first half. The EBITDA growth stood at 41.1% for this quarter and 16.3% for the first half. EBITDA per metric tonne touched INR 19,992 per metric tonne for this quarter and INR 18,900 per metric tonne for the first half, a growth of 13.2%, driven by improving share of new products, improving specialty mix and better capacity utilizations. Our PBT grew by 57.1% for this quarter and 22.2% for the first half, and our ROCE stood at 25.1% as on 30th of September 2020. Before I conclude, ladies and gentlemen, consistency is what defines us and despite the volatility, operational challenges and difficulties, yet again, we have ensured we deliver a consistent performance. Thank you, one and all. Thank you, over to you.

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

Couple of questions. First, on the margin side. More importantly, gross margin, which has come in at 36%. We were at 30%, 31% run rate. How sustainable is it? And is there any one-off or inventory gain or anything of that kind in this margin? Or it purely because of the new product, which is delivering the strong growth is driving the margin higher? So that's my first question. Second on the EBITDA per tonne. Now we are touching 20,000. Our guidance is 15% to 17%. So we are very ahead of our guidance. And probably it also warrants a relook at our guidance. So just wanted to get your thought on the EBITDA per tonne guidance? So these are the 2 questions.

Yes, Sanjesh, so first, responding to your Q1 -- question one. See, one of the reasons in terms of the margins going up, as you rightly said, one is, as Shekhar mentioned in the initial address, the Specialty Products mix in terms of new products certainly has been one of the contributor. Other thing also in terms of -- which obviously is going to be getting better as we commission our new projects online next year, the other important factor also is that the costs have got abnormally low in this particular corresponding year. So obviously, that's something that we need to be looking at as things has been back to normal. Okay. And as regards to the guidance that you're talking about, okay, obviously, as the trajectory talks about it getting on better. But as of now, things are not at the -- we would like to state that the guidance is something that would stay at 15% to 17%, but we see the trajectory consistency looking up.

Just a couple of follow-ups on those things. One, what is the contribution of this new product today, the Specialty? And what is the capacity addition we are talking of adding in 1H '22? That's one. Number two, this 20,000 and 17,000 looks way too far to maintain that margin guidance. Are we still fearing that the margins can retreat to the older levels?

Sanjesh, as we have mentioned, see, EBITDA is a derivative, okay, for us. We are focusing both on Performance Surfactants as well as Specialty Ingredients. However, a number of new product launches are coming on stream, are happening, and these are going to certainly impact our revenues as well as contributions, as well as realizations. Now particularly in the last 6 months, the new age preservatives have been launched. And as you know, we are setting up our CapEx which will go on line in the first week of -- in the first quarter of the next year. And this will continuously add up to our top line as well as margins. Now as far as what are the various parameters which will determine the trajectory of this EBITDA per tonne, one is, of course, the mix of performance in our Specialty. And as I said, with our new innovative products, the Specialty ingredient percentages is certainly growing year-on-year. For example, in the last quarter, the mix between Performance and Specialty was almost 61 to 39, okay, which was -- something the 61 to 33 in the first quarter, Okay? This will keep up growing up, one. Number two, our capacity utilizations also will grow. I mean, we did talk about commissioning of our Jhagadia CapEx for Performance Surfactants last year. Now it has really come to our aid during this particular period of time, and our capacity utilization for the last quarter was almost 71%, which was something in the 61% at the close of the last year, okay? So the capacity utilization also is growing up. And the third is for this particular quarter, because of the pandemic, certain costs have not happened, okay? Now we'll be able to -- we have to wait and watch all this cost, whether they can sustain, but we would go by what the industry wants, what the market wants, what the customer wants. If the customers want to travel, I think, we would certainly indulge in that travel, okay? There has been savings with respect to fares, exhibitions, travel and so on, okay? Then another important thing which has happened in this last quarter has been certain translation impacts which have come from the various subsidiaries in terms of the depreciation of the rupee with respect to the dollar, which has happened. So as to your question of, let us say, EBITDA per tonne, I mean, this is going to -- the trajectory is on an improving more. This will only keep growing up. I mean, if you see our progress over the last so many quarters, it has -- it keeps on growing, and it will keep inching up. I mean, this is a natural derivative of our strategy, and you would see this growing up -- keep growing up.

Got it.

Mr. Jain, sorry to interrupt, but for any follow-up request you to rejoin the queue please. [Operator Instructions] The next question is from the line of Rohit Nagraj from Sunidhi Securities.

And congrats on good set of numbers. So the first question is whether there are any optimistic sales during the quarter because of which the volumes have been substantially higher other than the pent-up demand and probably good margins on those opportunistic sales?

No. The opportunistic sales contribution as far as this quarter has not been very significant at all. I mean, these are all nonopportunistic, but regular sales. As we said, the demand has been pretty strong, not only in India, but across the world. All our subsidiaries have done well, whether it is GSL India or the U.S. operations or the Egypt operations. All of the subsidiaries have done pretty well, driven by our strong relationships, one, strong and robust demand across the various regions. And of course, introduction of the new products that have happened in the last 3 months -- 3 to 6 months or so.

Sir, the second question is, what was the capacity utilization for second quarter? And a question to Ganesh, sir, whether -- what was the reduction in terms of cost due to this savings from fare with the distance travel, et cetera, particularly for Q2?

The capacity utilization for the second quarter was about 71.3%. And for the full first half, H1, it was about 64.4%. And we have said that the capacity utilization by the end of last year was 61%. So that's the number. And Ganesh can you -- Rohit, can you please repeat your question for Mr. Ganesh?

Yes. So you indicated there were savings due to cancellation of these fares, exhibitions, travel, et cetera. So what was that amount pertaining for Q2? And how much of that can be sustainable in Q3, Q4?

See the COVID savings are essentially related to administrative expenses, right, okay, relating to travel, exhibitions, as Shekhar had said. Now how much of this will the system require going forward? And how much may not be required because now what is going to happen is that people are now got used to work from home also. So what is going to happen is that administrative level of expenses may not fully get restored to the past level, but some sort of restoration will happen. Other than that, for us, logistics cost, personnel cost and your depreciation, they constitute the major of the expense. They are driven essentially by your scale of operations.

The next question is from the line of Abhisar Jain from Monarch Network.

Congratulations for a great performance. Sir, my question is related to the Specialty Care segment. After the Q1 quarter and during our last interactions, you had mentioned that Specialty Care segment could take some time given the scenario and the pandemic. But it's been a pleasant surprise seeing the volume in the Specialty segment this quarter. So while you mentioned the new products driving that, but still would want a little bit more color of what drove this? And would this number be improving from here on quarter-to-quarter?

So, I want to say that right from the second quarter, the demand has been pretty robust and pretty strong across the various geographies. And we expect this tempo to continue. I mean, okay, so we are pretty optimistic and we should be able to -- we do see, as I said, a good scene as we go forward.

Okay. Understood. And sir, on the Rest of the World, okay, the volumes seems to be quite a bit not in sync with the other 2 markets, while the opening up or relaxation of norms was largely across the world. And now, of course, in the developed world, we are seeing a little bit of a second wave. So any color on the Rest of the World market of why degrew in Q2 if we compare with other markets? And what you see for H2?

See, in general, as we have said, the discretionary spending has been impacted, okay? But we do see things coming back. And the Rest of the World also was impacted because of some supply chain challenges that we experienced in the last quarter, particularly on logistics and shipping. And so I mean, we would be -- expect that this would slowly dilute themselves and get eliminated. But that was what impacted the Rest of the World. And we remain optimistic as far as the Rest of the World also is concerned as we go forward.

The next question is from the line of Suraj Nanda from ICICI Prudential Asset Management.

I just wanted to...

Mr. Nanda, can you speak closer to the handset, please? Your voice is not audible.

Is it audible now?

Yes, sir.

Yes. So sir, I just wanted to understand on the gross margin front because when you say that it's a function of product mix. But when I see Specialty Care volumes that has grown by just 2.1%, right? And the gross margin change has been significant. And when I see the P&L, the changes in inventory has been significant at INR 19 crores, which have not been seen in the previous quarters. So is this change in inventory kind of sustainable? Or like, I think it should come back to normalcy in the next quarter?

Yes. So inventory, so INR 19 crores is -- it's not a very significant sum. So it probably is a timing situation. So because we also have -- the inventory planning is done based on the way that we're looking at in terms of our imports and local buying. So that keeps changing. So the INR 19 crores is not something which is significant, okay? And so that, obviously, and there are also price impact. So you also have prices volatility that is there, like, for example, your oil and chemical prices have gone up significantly in the current -- since the last one month. So those will keep happening. But we are very tight on our inventory to ensure that we are able to deliver best value to our customers without compromising on our internal metric as well as ensuring that we serve the customers well. So that we are very clear. On gross margin, when you look at Specialty, although they've grown only by 2%, the mix, as Shekhar said earlier, that we have had certain new launches that we did on our preservatives, new age preservatives and our mild surfactants brands, okay? That obviously came in, in the last quarter, okay? And important also is that our -- like your -- if you look at between Specialty and this thing in the quarter 2, we were at about 62% to 38%, 62% Performance and 38% Specialty whereas in -- we also had our Tier 3 customers registering a good increase, okay, in terms of the demand because they all came back in quarter 2, okay, significantly. So our Tier 3 customers essentially were at almost 36% of our total sales as compared to 32% earlier. So where they also came because a lot of them are into launching products on the e-commerce channel, and we are well positioned with them in terms of serving their demand when they needed the product. So that also helped.

But sir, this INR 19 crores changes in inventory in the P&L changes your gross margin by roughly 3 percentage, right, which also kind of then flows back to like your EBITDA per tonne, which you are seeing is sustainable, right?

Of course, on the inventory, how it does impact, I didn't understand?

No. In the P&L, when you're calculating the gross margin, you include the changes in inventory of finished goods, right, that is INR 19 crores negative.

Basically to work out the material consumption. See changes in inventory is done, given opening and -- basically to work out the material consumption, gross margins -- so it presented in an accounting phenomenon, but finally, it is to arrive at the material consumption.

And finally to arrive at the material consumption. So that I don't think is going to be important in the P&L.

Momentary levels in the balance sheet will basically tell you what is there in the stock, right? Okay. Here, it is just to work out the material consumption, opening and closing inventory, right?

No. One thing if you have a question essentially asking us to see whether there is any onetime plus or something, that is not the case, that I can clarify to you very clearly.

Okay. Okay.

Yes. So that I can tell you.

The next question is from the line of Sneha Talreja from Edelweiss.

Congratulations on very good set of numbers. So just 2 questions from my end. Firstly, we have seen any phenomenal growth. One of the parameters you attributed towards the new product launches. Could you quantify what would be the contribution coming in from these new product launches, which we have done in 3 to 6 months, mainly preservatives and those mild surfactants?

We would say that approximately 4% of the revenues came from these new products, which have been launched in the last 2 years or so.

Which was -- in last 2 years?

Means, these have been launched in the last 2 years, and they contribute approximately 4% of the revenues.

Okay. Sir, given that, that doesn't look very significant. What could be the reason of the very, very strong growth apart from pent-up demand? Or if at all, we can quantify that how much could be the pent-up demand for -- I mean, seeing 27% sort of an increase in the Indian market?

Yes, there is a pent-up demand, which is a flow from the first quarter. And we should expect approximately...

About 3,000 to 4,000 tonnes.

Okay. So around 3,000 to 4,000 tonnes can be contributed to the pent-up demand, remaining of which you can see as a structural growth which will continue given the...

In terms of -- no, see, as you would see the results announcement by all our customers, see what happened in quarter 1 because many of them could not produce, okay, the channels actually ran dry. And all of them started destocking in Q2 when everyone opened up, okay? So that essentially is what happened. So if you see every -- all of the customers also talked about good volume growth in Q2 year-on-year. So essentially, it is making up for the lost time, okay, of Q1. So the same thing holds good for us as well. Now the question that we need to -- what we need to be now looking for is whether the consumption, given that the rural demand is pretty healthy and even urban consumers are coming back because of the opening up, as all this sustains moving forward because what has come into as part of stocking of the inventory channel, that will continue to remain as inventory, meaning to say how the consumer demand is pitching up. And that essentially will give the guidance moving forward as to what sort of volumes we can expect moving forward in terms of growth.

Okay. Got that. So with the current increase that we have seen only the inventory in the system is normalized, now it will be a normal growth, which will continue?

That is our understanding. Obviously, this sort of -- every person, every customer of ours has reported a significant growth. All of them are talking about double-digit in terms of their volumes, okay? So it means that the inventory -- in the pipeline, the inventory now has not restored. Now the further growth will all be in terms of how the consumers now start pitching up from the shop shelves, okay, that's important. And given that the economy now is in a better shape based on whatever we have seen in terms of the numbers that are coming in terms of GST and all that and the rural demand that is pretty good, we do -- we are optimistic that this should sustain in terms of consumer demand.

Got that, sir. Sir, that was helpful. My second and last question was related to AMET. So we have seen a recovery again there. What would be the increase in Egypt alone that we have seen during Q2? And what's the contribution of Egypt right now in our revenues from the AMET region?

The local Egypt share is approximately 1/3 of the AMET.

AMET revenues, yes.

AMET volumes -- of the AMET volumes, the local Egypt will be approximately 1/3.

Okay. And how much of that has seen an increase, sir, during the current quarter?

It's about 2% to 3%.

2% to 3%. Sir, have you come back to the normalcy there, sir? Yes. I'm just done with the question, sir.

Egypt actually in the operations never got impacted even in Q1. So Egypt operations are pretty normal, okay? So there's no cost of consumption.

Egypt has been more on the normal for the last fiscal year also.

Yes.

The next question is from the line of Abhilasha Satale from Dalal & Broacha.

Sir, again, digging a little bit on the margins. You said the impact of gross margin is also towards product mix. However, during the quarter, our contribution has gone lower -- if I say, Performance Chemicals has gone up as compared to Specialty Chemicals. So do you do you see going forward, as you pass on the raw material price decline to the customers and all, you will be getting back around like 30%, 31% kind of gross margin on a normalcy basis? Or do you think that because of the consistent product shift towards better mix, this margin is sustainable?

See the various factors which have contributed to margin this quarter are: one is, let say, better capacity utilization, one. Number two, the Performance and Specialty mix, which is about 62% to 38% this quarter versus for the entire half year, which is about 67%, 33%. The third is reduction of costs for this quarter, which are very specific with the pandemic situation, okay? As we said, the travel and exhibitions, et cetera, there has been saving of costs from that particular thing. The fourth is increase of T2, T3 customers as far as this quarter is concerned compared to the previous quarter, quarter-on-quarter. Then we have also had, as we talked about new launches of new products, which have again contributed to this particular margin. So all of these have contributed together. And as we say, going forward, firstly, the demand is pretty robust and strong across the various geographies. So we remain very, very optimistic for the quarters coming up, okay? And another important thing is that our CapEx implementation is again caught up, and we are very optimistic that we should be able to commission certain CapEx projects by the first quarter of next year, which will also progressively add to our margins and EBITDA per tonne.

Okay. Sir, my question is basically for the gross margin. So like we are not expecting to pass on the whatever delta we are getting because of raw material and finished good prices to the customers eventually over next H2 or so. So my...

No, see, pricing is a function of what the market requirements are. So it's a question of how do we see, and that's obviously a pretty dynamic stuff, okay? So our objective is to ensure that we are able to serve our customers well, ensure that we make fair returns, okay, and ensure that we are able to keep up the growth momentum. Now with regard to your question whether these gross margins will sustain, as Shekhar explained, what is important -- what we would want for this to continue, we need to see -- we need to -- we should not have any operational challenges coming in, in terms of this COVID raising its head again in India. Even with a low property event, we want to keep our fingers crossed on that. Demand side is pretty healthy as we would like to maintain. And the mix that we're talking about in Specialty and Performance and our mix between our customers in terms of Tier 2, Tier 3 customers who require certain specialized products and blends and all that, okay, that has come back pretty good in Q2. And we only hope that, that would sustain. If that's the case, we would continue to be on that particular growth trajectory.

Next question is from the line of [indiscernible] Bhatia from SMC Global.

Congratulations for the excellent set of numbers you have posted. Sir, there are just 2 questions I want to take about. First of all, sir, I was going through your annual report of FY '20. Can you explain, means your cost of raw material consumption, you have mentioned that alcohol is a part of your cost of material consumption. So can you tell me, means, how much it is contributing to your cost of material consumed? And secondly, can you give some guidance on the EBITDA margins going forward? Like you have posted a very strong set of EBITDA margins this time of 16.85%, so going forward, can we expect in the rest of the quarters?

Yes. I think the second question we'll answer first because that I think has been answered at least 3 times before in terms of what was the reasons why we had a good EBITDA margin this year and what we expect in terms of the trajectory being maintained in terms of the increasing trend, okay? So that, I think we have explained. Anything more you require on that, then I'll come to you first question because I think that we just recently answered. So anything more insights you require, other than what we already shared, then I would answer that.

No, sir, you can answer my first question. I just want to know what is the percentage of contribution from the [indiscernible] side?

Out of our total olive chemicals contribute to about 70% of our entire raw material consumption, okay? So that's where we are. So -- and all the olive chemicals essentially driven by your palm value chain, okay? So that's where we are. So it includes fatty alcohol, fatty acids and everything.

And sir, how are you seeing the demand in the urban India especially because we all know rural India is firing all the cylinders. So if you can -- I mean, how you are seeing the upcoming demand in the urban India especially?

Based on the commentary that we have made, this is something what is urban demand in terms of urban consumers picking up is something that we seek insights from what our customers seem to be seeing. So what they said is that with the opening of economy, people moving out, okay, they do expect because even urban consumers, they have started -- the offtake is getting better, but they've said most of the growth in last quarter was driven by the rural demand, okay, and being better, and urban is picking up. And they have all said they would only hope that this particular momentum in terms of the pickup in urban demand gets sustained, okay? And we also look forward to that, probably we'll be able to make a statement when the current -- the Q3 numbers are seen and then we listen to their commentary, okay? So as of now, everyone is only hoping that the momentum that was there in terms of urban demand picking up in Q2 continues into Q3.

The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance.

And hearty congratulations to the team for a great set of results. Sir, 2 questions. First, just I want to understand how the sequence of event for the broad time line. So when our customers give us visibility about their demand or the production schedule, so I'm not looking for specific exit numbers, but generally how long this entire time line is where we get the visibility of our production schedule force in next 1 month or 2 months? So that is first question.

So, typically, see, the entire industry works on many of the larger customers, Tier 1 customers have a better planning methodology with them. So typically, they will give you a one month firm plan and a directional plan for the next month. And then they'll keep on rolling it in terms of new numbers. So that's the way it is. So you can take it as one plus one, okay? And we have our own ways of estimating demand. So that keeps us pretty much glued in terms of what we would expect demand coming in. So it is typically a one plus one that people would do. So either a contraction of demand or increase in demand would always give us, okay, a clear 2 months notice.

Okay. Understood. And sir, the second question is on -- if you can throw some light on what are the current, say, CapEx plans going on right now? And any CapEx plans considering the faster pickup than anticipated by everyone? So CapEx plans in rupee terms as well as from capacity or capability point of view, what are the current plans going and what are the future plans for next year?