Global growth opportunities in home and beauty care

The global Home Care market ($150 bn) and Beauty Care market ($350 bn) is driven by new guiding consumer-centric principles – mild, non-toxic, bio-degradable environmentally friendly products!

The preference for natural beauty products is a global trend. The facial care segment ($100 bn) and the Baby Care segment ($15 bn) is growing rapidly spurred by mild non-toxic surfactants. 65 percent of Indian mothers make their purchase decisions for their kids based on the quality of ingredients.

India is a $6 trillion consumption story in cosmetics, facial care, baby care and men's grooming. The forecasted spend on personal care is moving up Income Level Ladder versus current and is poised for 2.5x spend.

Speciality chemicals – silent heroes

Edelweiss report (June 24, 2019) titled "Speciality Chemicals - A Balanced Equation" said, “India’s specialty chemicals industry has clocked 12 percent growth over FY07–18.

In spite of rising environmental concerns and sharpening cost focus, the sector has sufficient dry powder to sustain this pace led by 1) burgeoning underlying demand from end-user industries; 2) outsourcing opportunity from the West; and 3) emerging export and import substitution opportunities due to the clampdown on chemicals manufacturing in China.

While these drivers create a conducive environment for the entire chemicals universe, we argue specialty chemicals players – owing to strong entry barriers and high growth visibility (10–15 percent end-user industry growth) – are poised to benefit the most.

Moreover, the industry has, in order to capture the promising potential, prudently increased capex by 60 percent-plus cumulatively over FY19–21 versus FY16–18, which we believe would pay rich dividends.”

Global suppliers to global brands

Galaxy Surfactants Limited (“Galaxy” or “GSL”) is a leading manufacturer of Performance Surfactants and Specialty Care products with over 200 product grades.

These products are used in consumer-centric Home and Personal care products such as hair care, oral care, skincare, cosmetics, soap, shampoo, lotion, detergent, cleaning products, etc.

Galaxy is the preferred supplier to leading MNC’s, Regional and Local FMCG brands with 1750+ customers across 75 countries; key customers such as Unilever, Reckitt Benckiser, P&G, L’OREAL, Himalaya, Colgate Palmolive, CavinKare, etc.

In the last decade (FY09 to FY19), Galaxy's volumes have grown 3 times, EBITDA (Rs. crores) has grown 5 times, PAT has grown 7 times and Speciality revenues have grown 6 times.

The Company has its manufacturing facilities located in India (5), Egypt (1) and USA (1). Their presence in markets like India & Africa, Middle East and Turkey (AMET), puts them in a position to capitalise on these opportunities going forward.

India is still a small market for SCP though very promising. Galaxy sees four key themes in HPC (Home & Personal Care): 1) fast growing categories, viz. baby care, face care, men’s grooming and affordable luxury; 2) Sulphate- and paraben-free products; 3) Ayurveda and naturals; and 4) online retail (omni-channel).

Baby care market is expected to become Rs 50bn by FY22 (from just Rs 0.7 bn in FY09). Men’s grooming market size has grown 2x in past five years to Rs110bn and is expected to grow at a CAGR of 13 percent over FY08-FY22.

Premium beauty care category is expected to grow at 17 percent CAGR over FY08-FY22. GSL believes it has right to play in these categories as it is already supplying intermediary products to MNC clients in other geographies.

Analysts bullish

ICICI Securities maintained a ‘BUY’ recommendation in its report dated June 9, 2019, stating, “We attended Galaxy Surfactants (GSL) analyst meet themed Value Creation through Innovation and Sustainability where the company provided insights into emerging categories within HPC, and how GSL is placed to benefit.

GSL’s close relationship with MNC clients, right R&D efforts and economical process has helped repeat its success in the Performance Products category even in Specialty Care Products (SCPs).

SCPs grew at 37 percent CAGR over past 10 years with GSL capturing a significant presence in global mild surfactants and non-toxic preservatives. GSL is in the process to expand its R&D facility area by 1.5x and invest into pilot and mini plants with an outlay of Rs 1.2bn. Reiterate BUY.”

JM Financial's report dated June 7, 2019, said, "Galaxy highlighted that Indian Baby care segment has been growing rapidly and is expected to reach Rs 50 bn by 2022 (Rs 700 mn in 2009).

Additionally, sales of men’s grooming products have reached Rs 100 bn in India and is growing at 13 percent annually. Galaxy has taken advantage of these trends and has developed specific patented products and processes that can provide Galaxy a competitive edge.

Galaxy detailed three specific patented products – two products based on their in-house process and one unique process to provide broad spectrum preservative.

Galaxy believes that such innovations with a clear understanding of the trends will continue to provide volume growth at a rate faster than the industry growth, EBIDTA growth at a rate higher than volume growth, PBT growth at rate faster than EBIDTA growth and PAT growth at a rate faster than PBT growth.

We maintain BUY with a TP of Rs 1425 with no changes to our estimates.”

R&D spurs innovation

The two blockbuster products were: 1) non-toxic preservatives, which grew to Rs2.5bn product in FY19 from just Rs0.2bn revenue in FY09 (28 percent CAGR, and contributed 24 percent to Speciality Care Product’s (SCP’s) revenue in FY19), and 2) mild surfactants, which rose to Rs1bn in FY19 from nil revenue in FY09 (10 percent of SCP revenue in FY19). The US and EU markets contribute 60 percent of SCP revenue.

Galaxy spends 4-4.5 percent of SCPs revenue on R&D. The focus is not just to develop new products but also commercialisation, which is reflected in the fact that 33 of GSL’s 62 patents are commercialised.

GSL’s new products in ultra-mild surfactants and blended preservatives have been well recognised, and the installed capacities for these products are over-booked. GSL is in the process to increasing its R&D facility area by 1.5x, and build pilot and mini plants with an outlay of Rs 1.2bn.

Galaxy focused on three patented products/processes. The first technology is in the mild cleansing segment that has surfactants with amino acid for personal cleansing.

Mild surfactants have been gaining market share as they cleanse without harming the skin. Therefore, this is the preferred product for uses like Baby skin (which has been gaining market share), dry skin, etc.

Galaxy poised for growth

Edelweiss estimates GSL’s strong FMCG linked structural growth model (12-15 percent volume growth), stable margin (12-13 percent EBITDA margin) and return ratios (ROCE of 20 percent plus) to command a premium over specialty chemical companies. Its report has initiated coverage on the stock with ‘BUY’ and September 2020 target price of Rs 1,405 (22x P/E).

Galaxy’s strong desire to create new value through innovation has led to such stellar results. The process of manufacturing is based on smart chemistry, wherein the surfactant is used to catalyse the synthesis of the precursor of the same surfactant.

This is a case of ‘surfactant catalyses the synthesis of surfactants’, making it a closed-loop manufacturing process. Galaxy is committed to developing an ecosystem that supports disruptive thoughts to create new products or processes and add value through Innovation.

Galaxy is ready for the next decade of sustainable growth.