IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

Arun has over 15 years’ experience covering the Technology sector. During this time, he has worked with technology start-ups and as an equity analyst in investment banks and independent research firms. He was formerly a Technology Analyst for Canaccord Genuity, Altium Securities, Espirito Santo Investment Bank, Noble Group and Clear Capital. He has a dual Master’s degree in Financial Engineering and Industrial and Operations Engineering from the University of Michigan. He obtained his Bachelor’s degree in Mechanical Engineering from the Indian Institute of Technology, Bombay. He is also a CFA charterholder.

IPOs and Catalysts/Events

Galaxy Surfactants IPO Review - Selling Shares at 6.5x of Its 2011 IPO Valuation

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Global Equity Research Ltd

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Equity Capital Markets

Galaxy Surfactants Ltd / Equity Capital Markets

<p>Galaxy Surfactants is one of India’s leading speciality chemicals firms. Galaxy will IPO through a secondary share sale of 6.3m shares, which is 18% of shares outstanding. At the mid-point of the IPO price range, Rs1,470-1,480 per share, Galaxy will have a market cap of Rs52.3 billion ($840 million). Galaxy had previously tried to IPO in May 2011 but had to withdraw it due to poor response from investors. The overall offer was subscribed just 0.30 times, according to press reports. In 2017, <a href="http://www.livemint.com/Companies/C3byVYdlEtunkz66Pre5hP/Swiss-chemicals-maker-Clariant-may-buy-Mumbais-Galaxy-Surfa.html" target="_blank">press reports</a> suggest that <a href="https://www.smartkarma.com/entities/22575" target="_blank" data-smartkarma-citation="entities:22575:1">Clariant AG (CLN VX)</a> and another company were in discussions with Galaxy to buy a controlling stake in a deal potentially worth Rs13-15 billion.  </p><p>Over FY13-17, Galaxy has demonstrated strong financial performance with profits growing 3x faster than revenues. Galaxy has a strong ROIC profile which has averaged a respectable 15% over FY13-17. However, its EBITDA margins are in the bottom-quartile among its peers. With margin pressure unlikely to abate, we believe that proposed IPO price range is unattractive due to: </p><ol><li>Galaxy’s margins are dependent on its product mix. A higher revenue mix of speciality care products is desirable as these products tend to have higher prices and margins. Consequently, Galaxy’s strategy is to increase speciality care products in its revenue mix. We believe that this plan is at risk as the volume growth of speciality care products has significantly slowed down from 6% in FY16 to 1% in 1H18.</li><li>Like peers, to maximise profits, Galaxy must maintain optimum levels of capacity utilisation. Overall, Galaxy’s capacity utilisation increased from 59.7% in FY17 to 62.5% in 1H18. However, Galaxy’s EBITDA margins decreased from 12.8% in FY17 to 12.1% in 1H18 due to steadily declining capacity utilisation of higher margin speciality care products.</li><li>Based on our estimates at the IPO mid-point, Galaxy lies above the linear trend line for EV/EBITDA vs ROIC and P/E vs ROIC, i.e. trades at a premium to fair value for the ROIC it delivers. Consequently, to lie at the linear trend line and trade at a fair value for the ROIC it delivers, the maximum IPO price can be Rs1,300. This price is 12% below the IPO mid-point price of Rs1,475.</li></ol>

Galaxy Surfactants is one of India’s leading speciality chemicals firms. Galaxy will IPO through a secondary share sale of 6.3m shares, which is 18% of shares outstanding. At the mid-point of the IPO price range, Rs1,470-1,480 per share, Galaxy will have a market cap of Rs52.3 billion ($840 million). Galaxy had previously tried to IPO in May 2011 but had to withdraw it due to poor response from investors. The overall offer was subscribed just 0.30 times, according to press reports. In 2017, press reports suggest that Clariant AG (CLN VX) and another company were in discussions with Galaxy to buy a controlling stake in a deal potentially worth Rs13-15 billion.  Over FY13-17, Galaxy has demonstrated strong financial performance with profits growing 3x faster than revenues. Galaxy has a strong ROIC profile which has averaged a respectable 15% over FY13-17. However, its EBITDA margins are in the bottom-quartile among its peers. With margin pressure unlikely to abate, we believe that proposed IPO price range is unattractive due to: Galaxy’s margins are dependent on its product mix. A higher revenue mix of speciality care products is desirable as these products tend to have higher prices and margins. Consequently, Galaxy’s strategy is to increase speciality care products in its revenue mix. We believe that this plan is at risk as the volume growth of speciality care products has significantly slowed down from 6% in FY16 to 1% in 1H18.Like peers, to maximise profits, Galaxy must maintain optimum levels of capacity utilisation. Overall, Galaxy’s capacity utilisation increased from 59.7% in FY17 to 62.5% in 1H18. However, Galaxy’s EBITDA margins decreased from 12.8% in FY17 to 12.1% in 1H18 due to steadily declining capacity utilisation of higher margin speciality care products.Based on our estimates at the IPO mid-point, Galaxy lies above the linear trend line for EV/EBITDA vs ROIC and P/E vs ROIC, i.e. trades at a premium to fair value for the ROIC it delivers. Consequently, to lie at the linear trend line and trade at a fair value for the ROIC it delivers, the maximum IPO price can be Rs1,300. This price is 12% below the IPO mid-point price of Rs1,475.

Galaxy Surfactants IPO Preview: Selling Shareholders Cleaning Up