Galaxy Surfactants Limited (GALAXYSURF) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Galaxy Surfactants Limited Q3 And 9-Month FY '21 Results 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 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. Unnathan Shekhar, Promoter and Managing Director of Galaxy Surfactants Limited. Thank you, and over to you, sir.

Thank you. A very good afternoon to all of you, ladies and gentlemen. Welcome to this conference call. Yesterday, the 8th of February, marked the third anniversary since Galaxy Surfactants got listed in 2018. And this quarter 3 performance adds to this momentous occasion. Before we delve on the results, I would like to take a few minutes to reflect on this journey, a journey which, though, began only in 2018 has been existence and has been created brick-by-brick since 1980. Steve Jobs says, if you really look closely, most overnight success took a long time. Since listing, Galaxy's consolidated profits have grown from INR 158 crores in FY '18 to INR 223 for 9 months ended December FY '21. Such has been the pace this year that we have not only grown despite the challenges, but we have nearly achieved the last year's number of INR 230 crores in just 9 months. While this may look like a one-off, let me assure you that this growth is sustainable growth that has been achieved on the back of sustainable volumes and margins, driven by segments, customers and geographies. But as Steve Jobs had said, what appears as overnight success in reality is a mixture of discipline, persistence and consistency. And this performance and consistency has been demonstrated by our company over the last 40 years. I would like especially to acknowledge my co-promoters, Board members, all our employees, past and present across all the geographies, stakeholders and well wishers who stood by us at all points of time and enabled us to reach this level of consistency. Moving on to our performance. If Q2 stood for recovery, the quarter 3 stands for normalization, sustenance and resumption of the growth trajectory. The robust momentum of Q2 has sustained in Q3. We are pleased to share that Q3 marks the first quarter in FY '21 where your company has grown in every area, be it segments, regions or each of the financial parameters we measure ourselves on. This quarter also marks the first in financial year '21 where our specialty portfolio has registered a year-on-year growth, arresting the declines reported in the last few quarters. Demand environment continues to remain robust, thus clearly highlighting the resilience and underlying strength of your company's business model. With the vaccination drive gaining traction, opening up of the economies with greater consciousness about health and hygiene should auger well for our performance, masstige as well as premium specialty products. While demand environment continues to remain robust, pricing vulnerability in raw material prices, supply chain disruptions pose the biggest risks in servicing this underlying demand. But despite the challenges are none bigger than the one seen this year, we remain confident and optimistic about our growth journey. This conclusion, ladies and gentlemen, emerges on account of several factors. One is our product mix, which caters to multiple categories of the Home & Personal Care space, be the established ones like toothpaste and shampoos or the emerging ones like hand washes, premium laundry, face wash or baby care. To elaborate, for our Q3, our Performance Surfactants, which form the base of cleaning formulations, grew 4.7% and year-to-date have grown at 9.3% on year-on-year basis. The Specialty Care products, which impart functional features to the formulations, grew 12% for Q3, the first quarter of year-on-year growth in FY '21, thereby arresting the decline of last few quarters. And for the 9 months ending December '20, the Specialty Care products stands at minus 4.4%. Secondly, our innovations, that is new products emerging from our innovation funnel, shall form the bedrock of our next decade of growth. These are products designed to cater to emerging trends of nontoxicity, sulfate-free, green and natural solutions. Our new products in the nontoxic preservation, sulfate-free and proteins range accounted for 5% of revenues in Q3. Our geographical spread and customer mix, which comprises of presence in over 80-plus countries catering to multiple tiers for customers, adds to the robustness of the business model and enables risk mitigation. To elaborate, in Q3, all regions of India, the Africa, Middle East, Turkey region and the rest of the world recorded growth. India maintained its momentum from Q2 and registered a 14.4% growth in quarter 3. The YTD growth stands at 13.2%. AMET grew 2.9% in Q3. The 9-month period growth stands at 6.3%. Rest of the world, after declining for the last 2 quarters, registered a growth of 4.3%, driven by Specialty Care products. On the YTD basis, the rest of the world has declined by 10.1% in volumes. Post the lockdown, smaller businesses were most impacted. But post-June, we have seen a strong improvement in our business share with our non-MNC customers. The T1 revenue share, which stood at 63.8% in Q1 now stands at 50.4%, thus highlighting the improving share of our non-T1 customers, which has aided growth. Thus, our overall volume growth for the quarter stood at 7.3%. And for YTD, the same stands at 4.2%. The EBITDA includes export incentives realized in Egypt accounted for on-receipt basis. The net incremental export incentives included in Q3 over previous year equals to INR 14 crores. And adjusted for that, our EBITDA per metric tonne stood at INR 18,630 per metric tonne. For the year-to-date, the same stands at INR 18,515 per metric tonne. Given that we have been sustaining about the upper range of the band stated, that is INR 15,000 to INR 17,000 metric tonne, we would like to upgrade the band now to INR 16,000 to INR 18,000 per metric tonne. To summarize, ladies and gentlemen, businesses that stand the test of time and persistently deliver consistent performance year-on-year are the businesses that last for decades. At Galaxy, our forte is consistency and persistence, and this year's performance yet again demonstrated That. Thank you, ladies and gentlemen. I would like to open the floor for questions now.

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

So a couple of questions from my side. You touched on the innovation funnel and, Shekhar sir, you did mention that in Q3, 5% of our revenue came from proteins and sulfate-free. Just wanted to understand the outlook on these new products, which includes protein, sulfate-free, mild surfactants and phenoxyethanol, which is our preservative portfolio. All put together, what is the revenue contribution as on 9 months? And in next 3 to 4 years, what could be or what kind of revenue contribution are we expecting from this -- these products plus the new product portfolio, which we are seeding today? It would be great if you can give some outlook on this and the outlook on the new product portfolio seeding that we are doing today.

What I can only say is that, Sanjesh, that these specialty ingredients have performed very well and they are progressively growing. As you know, every single new product introduction, particularly which is specific to a particular customer takes a period of time in terms of testing, formulating, stability and so on. But what is significant and important to note is that there has been a secular trend of acquiring new customers and growing consistently. So -- and as we reiterated, the growth will be on proteins and where vegetable proteins is a forte of innovation for Galaxy, the mild surfactants in their various subdivisions, and of course, the nontoxic preservatives, and of course, the syndet and transparent bathing bars, which have of late become much more prominent and gained visibility, quite a bit of visibility.

So what is the percentage of contribution here from all these products? I know last year, we mentioned in our annual report, of course, of 20% growth in lot of these products. Do you think that kind of growth is sustainable over the next 4 to 5 years?

Yes, yes, of course. See, these particular new products, obviously, are new to the industry, okay, and they are driven by the consumer trends where the consumers are seeking nontoxic products, sustainable products, natural products, vegetable products. And these products are developed to respond to these consumer needs and trends. So these products will be the engine for growth as far as Galaxy is concerned. And as far as Performance Surfactants, see, we said the engine for growth is the evolving geographies and the emerging country -- emerging economies like Africa, Middle East. Of course, India still continues to remain as a geography where Performance Surfactants will continue to grow.

Good that you touched upon performance products. I was just coming to that. AMET, looks like the volume growth has somehow tapered down versus what we have done in the first half. Was there any impact of second wave or -- so why -- because we haven't seen a lot of disruption in the Egypt, which is our key geography and a different geography. It is more because of exports to Europe from Egypt, which is hurting this growth?

No. As a matter of -- Sanjesh, you would have noted that Performance Surfactants grew by 9.3% in the last quarter, okay? And for the 9-month period, they have grown by 4.2%. I'm sorry, Performance Surfactants grew by 4.90 -- it is the reverse, 4.7%. And for the entire year -- for the 9-month period, it has grown by 9.3%. See, there can be always some amount of ups and downs during this quarter, particularly because there has been a huge amount of disruption on the supply chain. So customers have -- tend to stock in anticipation of the various disruptions that they could foresee. So what is important for us to note is the growth of the 9-month period, not a specific quarter -- this specific quarter of 4.2% this year doesn't indicate any sort of decline or anything.

Particularly on AMET, what happened to AMET. It was 2.9% Y-o-Y growth there.

Yes. AMET is Africa, Middle East, Turkey region. See, a large part of it is also due to the supply chain disruptions, Sanjesh, okay? Now -- I mean, given a very, very normal situation, we would have always been able to sell more.

Okay. So this is nothing to read in this 2.9%?

Yes, yes, yes, nothing.

Logistical and nothing to get concerned about in the AMET region?

Yes, yes, yes.

One on the margin. Now that we have upped our guidance INR 5,000 per metric tonne, both on the lower end and on the bottom end, and our guidance that we will keep seeing this new product growth inching up, in the future as the contribution of this new product goes up, it is fair to assume that there could be more upside in this guidance?

Yes. So there will be a progressive growth as far as EBITDA per tonne is concerned in line with the increasing -- whenever there is an increased share of the specialty ingredients in our portfolio. But that will not happen in 1 or 2 years, because as we have always said, both these categories will grow.

Okay, okay. That's fair. Just last a book-keeping question. On the dividend distribution policy, now that we have announced INR 14 interim dividend and we are comfortable on the net debt level and we don't see a large CapEx outflow, is there any revised thought process on the dividend distribution policy?

So actually, the dividend paid last year and current year suggest that we have been increasing the payout, right? We started with INR 8. Last year, we gave INR 14, right? And this year, interim also, we have given INR 14. What we generally do is that earlier we used to give 25% of the stand-alone profits. Now we may inverse a bit depending upon the growth required.

So have we relooked at 25% stand-alone profit as a dividend now that we are already now at last year's dividend in terms of interim, that means we can expect a little bit more in the final. Are we relooking at this 25% profit as a dividend? Are we looking at increasing this number?

See, the interim paid itself is INR 14 now declared.

Sir, that's what I'm telling. Are we relooking at this policy of 25% stand-alone profit as a dividend? Do -- Are we planning to increase...

It depends upon the CapEx plan of coming years also, depending. Generally, the preference is for growth, right? Okay, we can increase the payout depending on the growth requirements.

So what I can say, Sanjesh, Natarajan here, is that although our bias is towards increasing the dividend payout, but as of today, we're not revising our payout policy, okay? So that probably should answer.

Yes, that answers the question, yes.

[Operator Instructions] The next question is from the line of Keyur Haresh Pandya from ICICI Prudential Life Insurance.

U.S. question forward. So if you can throw some light on what are CapEx plans. Looking at the demand revival, are we looking at, say, accelerated CapEx?

See, as you know that we had initiated a number of CapEx -- one was CapEx at Tarapur to take care of new products. The second was our expansion of R&D center in our TTC that is in, I know, in Vashi, Mumbai. The third was for mild surfactants and nontoxic conservatives in Jhagadia. These CapExs, we had initiated in FY '20. They did get hindered because of COVID almost for about 7 to 8 months of this year, but they have started in right earnest, and we are quite optimistic that we should be able to commission them in the first quarter of the next financial year. So the CapEx continues to be high on our agenda. As a matter of fact, we are intended to spend about approximately INR 150 crore of CapEx in this financial year. I think we would manage to incur only about maybe INR 70 crores or INR 75 crores, and this will get pushed to the next year.

Okay. So all these are announced CapEx. Anything other than that under consideration?

I'm sorry -- yes, yes. We are -- there are also some more CapExs, which got initiated this year is concerned, and they are in the process of getting executed.

So what's the guidance for, say, '22 to '23 or 2 years as a block, whichever you can share?

I think approximately, we may...

INR 100 crores to INR 150 crores. Earlier, we had mentioned, what happens is that we have one or the other production line where the capacity will get utilized. And generally, we have been investing around INR 100 crores to INR 150 crores in a year. That should continue.

Okay. Sir, second question, as you mentioned, probably it is better to look at year-to-date numbers than, say, a particular quarter. So when I see your, say, performance effect and volumes Q-on-Q changing or reducing, there shouldn't be -- I mean, anything -- nothing to be read in that, right? Or is there any seasonality or any deceleration?

No, no, no. We should not read that, because if you see, only the break can happen due to any sort of disruptions like what happened with COVID, okay? Otherwise, the growth of Performance Surfactants should be secular. As you know, the growth rate in India has been around 8% to 10%. At a global level, it has been about 2% to 3% as far as the personal and home care industry is concerned. So that should tell you the growth rate that this industry experiences.

Okay, okay. Sir, last question. So as I -- when I look at the block, I'm just comparing, say, FY '19 year-to-date number, basically first 3 quarters of FY '19, I think we had similar mix between the Specialty and Performance, first 9 months of FY '21. So the mix has not changed between performances. Despite that, per tonne gross margin as well as per tonne EBITDA margin have improved both. So what has -- without change in mix, this has happened?

Yes. So Keyur, Natarajan here. So one is, although the spread between -- the split between Performance and Specialty hasn't undergone a change compared to the corresponding period last year, but what we need to understand is that within the Specialty ingredients portfolio, there has been a change in terms of the product categories. Okay? So we have been able to do more preservatives. We have been able to do more proteins. Okay? So that is one contributing factor. Okay? So -- and second, also in the Performance Surfactants category, we have been able to look at various opportunities where we are able to better our realization. So that probably explains.

Understood. And sir, just last question. Looking at the size of the industry, which we are catering to, and our portfolio of new, say, product additions, the way we have increased our guidance for EBITDA per tonne, do you think -- is there -- I mean is there a possibility to increase our revenue growth guidance, also debt range that we really talk about to, say, mid- or to high single digits? Can that go up? Or why we cannot grow at, say, double-digit consistently? Just your thought on that, that is it.

Yes. Even so, we do not hazard any guess on giving guidance on revenue growth, because that's a combination of many factors like your feedstock prices and all that. So typically, what we say is that we will go out of the market, and that's what we have been doing in terms of volume terms, okay, continuing to focus both on the developed and the emerging markets as well as in both the segments, both Performance and Specialty ingredients. And that would continue, okay? So hazarding any guess on revenue growth, okay, is obviously not right.

Sorry, my mistake. Basically, volume growth, I meant. So pricing is a different thing. Volume growth, can we accelerate our volume growth guide -- I mean can we accelerate the volume growth or our guidance on the volume growth, considering our size in the overall scheme of things as well as our speed of innovation?

See, if you look at the -- our CAGR of volume growth for the last about 5 years has been about 8 -- 5 and 3 years has been about 8% and last 10 years has been about 11%. So as I have always been saying that I think this 8% -- 5% to 8% is something that we would like to continue in terms of our guidance on volume growth. Okay? Now in terms of it growing in double digit, I think we'll probably come to that stage sometime later once we have...

Yes, all of us would wish that our markets really grow at double digit. We would like to be optimistic about it.

[Operator Instructions] The next question is from the line of Dhruv from HDFC Mutual Funds.

Sir, first question was on the fatty alcohol. You gave prices for fatty alcohol in your presentation. As a share of total RM, what would this would be of RM cost?

That's -- Fatty alcohol is close to about 60% to 65% of total RM consumption.

65%?

60% to 65%.

And so what I was trying to do is I was looking at the total cost of material on a per kg basis, the RM cost on per kg or per tonne basis, as you would see. So if I see, the cost has been flattish or has declined on a Q-o-Q or Y-o-Y basis versus the fatty alcohol on a dollar basis that you have reported has increased. So is there something to read? Or is the mix changing? Or what's happening? How should I...

No, first of all, what we need to understand is that the fatty alcohol prices, what is given in the presentation in terms of what has been the quoted prices, okay, the quoted market prices, okay, now -- published market prices. Now the fatty alcohol prices started registering a significant jump post middle of November, okay? So if you look at it, the surge started happening, okay, post middle of November. So the average that has been put there is essentially in terms of what the published prices are. And it has been majorly taken up the average by what happened week-on-week post middle of November. Okay? So for this to be getting reflected in the revenue growth terms, okay, in terms of higher price of fatty alcohol going into our -- this thing would probably happen more towards this quarter.

Okay, got it. Okay. Because even on a Y-o-Y basis or even in the previous quarter, there was a decline. So I was just wondering, is there some efficiency change in -- I mean some procurement model change or something else which is also probably flowing out and helping us?

See, the -- what is important is that we ensure that we buy competitively, and we ensure that we price competitively. So the market situation in terms of the way the prices move up and down, our policy in terms of managing the risk on our feedstock is extremely robust. And we ensure, within that framework, we see as to what best job we can do in terms of maintaining a competitive sourcing of our feedstocks.

And sir, as this -- the fatty alcohol starts reflecting the RM costs in the subsequent quarters, that will also reflect in your realization also. So that way it gets offset largely?

What do you mean by realization?

In your pricing in the final product. So basically, I'm trying to say the margins would remain -- will not be influenced because of the change in the RM cost?

Yes, yes, because it all depends on the complete dynamics. And yes, logically, the increased raw material prices, okay, do get reflected in our realizations in terms of selling prices.

Got it. And sir, the second question was I was trying to split your consol profit between stand-alone, which I believe is largely India, and the subsidiaries. So the consol minus stand-alone and I get the subsidiaries number. So there has been an impressive improvement in the subsidiaries margins. So India business is -- the stand-alone business has also improved in margins, but the subsidiaries are driving a bigger improvement, even excluding the INR 14 crores of one-off. So sir, anything that you should -- you can highlight what's driving this? How sustainable this is?

This is -- as we have said, there has been a good robust growth as far as our Egypt operations are concerned. So we have grown pretty well for the 9 months as far as Galaxy Chemicals Egypt is concerned, driven by good growth in local Egypt. We have also grown very well on our specialty proteins in our -- from our USA operations. So all in all, both the subsidiaries have done pretty well in the first 9 months of this year, despite a wash out in the first quarter. The first quarter was very, very difficult, I think, where all of us started with a lot of pessimism. But I would say, ending quarter 3, both Galaxy Chemicals Egypt and Tri-K have grown very well.

Okay, okay, noted. And sir, the last question was just to get an industry macro scenario. I'm not very sure about how the dynamics in the industry plays out, if you can help us, is, for example, after this COVID, has there been any supply disruption from the suppliers of surfactants in products like you, which have probably gone out of the market and probably is benefiting us and will probably continue to benefit us in the future also, given that these players are now probably -- because of some of the other reason, probably financials or something else, they are out of the market?

So what I'd like to state is that there's nothing very -- this is something in terms of supply is going on and out in various regions, okay, keeps happening every year, okay, in terms of [indiscernible] here or there. So that has not been anything significant. But what has been significant this time has been in terms of the way the global ocean logistic situation has played out. The last about 3 to 4 months have been pretty bad in terms of availability of container space and the way the freight rates have moved up significantly. Okay? They all -- in some sectors, they have gone on to almost 4 to 5x . Okay? So these discussions obviously then lead to the supply balancing and all very differently. But we would expect this particular situation to continue in terms of the global logistics disruption at least till June as per what reports we read. Okay? So other than that, there has been nothing where we have had very significant rebalancing in terms of the supply situation, barring for these reasons.

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

Again, congrats for a good set of numbers. Sir, the first question is, again, taking from the earlier participant on the gross margins. So just on the mathematical calculation basis, if I take that 60% of our raw material price has increased by, say, 10%, and which on a Y-o-Y basis, you have indicated 33% increase in fatty alcohol prices. So if I do the math on a Y-o-Y basis, our gross contribution or the cost of goods sold has reduced by about 7%, so which effectively means that there has been almost 30% decline in the rest of the 30% of our raw material basket. So is there anything which I'm missing or why there has been such a stark decline in our cost of goods sold by about 7%?

One thing that I'd like to say, Rohit, is that what we give as fatty alcohol prices are the published prices and their average of the published prices which gets published week-on-week, okay? So trying to compare that, because my actual buying doesn't happen on a weekly basis, okay? So when you try to come to conclusions basis, this what we put as published prices, okay, you may not come to the right conclusion. So that is my first communication to you. Because what we give is what are the published prices, which is there for everyone to see. But buying will not be in line with the published prices.

So then I think this is a distorted number, which we are saying, because then we are absolutely looking at ...

The objective of -- Rohit, the objective of giving the fatty alcohol prices, where one of the major feedstock is for the community to know as to how the prices are moving. But how is it that I will be giving my actual buying prices, that can't be expected. Correct, Rohit?

No, no, no. I'm just saying that, because the thing is that then probably -- for us, it is very difficult to justify why there has been a decline in cost of goods sold, despite being the -- our revenues at similar level and raw material prices going up by 33% Y-o-Y.

Correct.

I mean it's a little bit difficult even if I put it mathematically, even taking a 0% increase in 60% of my raw material. Then also it just says that my other raw material portfolio, 30% of portfolio, has declined on Y-o-Y basis.

It happened in November. It...

Yes. So first of all, the alcohol prices started going up significantly only post mid-November, as I explained initial part of the call. Okay? So it will not reflect in your October, November, December numbers. Because the whole pipeline is almost of 1.5, 2 months, correct? So it only started moving up significantly from mid-November onwards.