Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ratings on the bank facilities of Galaxy Surfactants Limited (Galaxy; part of the GSL group).

 

The ratings continue to reflect the GSL group's established market position in the specialty chemicals sector supported by its customer, segmental and geographic diversity, along with its long standing relationships with leading global and national fast moving consumer goods (FMCG) players particularly in the home and personal care (HPC) segment. The ratings also take into consideration its healthy operating capabilities and financial risk profile. These strengths are partially offset by the moderately working-capital-intensive operations and vulnerability of its operating margin to volatility in raw material prices.

 

In fiscal 2022, GSL’s top-line is expected to grow by 20% driven by increase in realisations coupled with sustained demand for its end products due to continued focus on health and hygiene. Operating margin is expected to moderate to 11-12% (against over 16% in fiscal 2021), with earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne of over Rs 16,000, on account of modest operating performance in the first half of current fiscal owing to supply side constraints.

 

The group’s performance moderated in the first half of fiscal 2022 owing to supply side constraints coupled with steep rise in freight cost in the second quarter of current fiscal. Consequently, operating margins moderated to 10.5% and EBITD per ton to over Rs 15,000 levels. However, operating margin is expected to improve in the second half of the current fiscal, as the company will be able to fully pass on the hikes in raw material prices as well as freight cost to customers. In fiscal 2021, the company reported revenue growth of over 7% driven by sustained volume growth and realisations. Operating margins improved by 200 basis points to over 16% driven by healthy performance of performance surfactants, recovery of speciality care segment in the second half of fiscal 2021 and overall lower raw material costs.

 

Complementing the group's strong business performance is its healthy financial risk profile. Steady cash accrual and prudent funding of capital expenditure (capex) are expected to keep debt levels under control and strengthen the financial risk profile of the group.

Analytical Approach

For arriving at its ratings., CRISIL Ratings has combined the business and financial risk profiles of Galaxy and its subsidiaries collectively referred to as the GSL group herein, having significant operational synergies and financial linkages.

 

Please refer Annexure – List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the home and personal care intermediates market: The GSL group has for over four decades been engaged in the manufacture and sale of surfactants and specialty chemicals used as intermediates by the HPC industry. The group is one of the leading players globally in the HPC intermediates industry, driven by long-standing customer relationships. It caters to a large client base of over 1,400 customers across 80 countries, consisting of reputed HPC FMCG multinationals and domestic customers. The group caters to three regions namely India (35% of revenue in fiscal 2021), Africa Middle East and Turkey (AMET: 36%) and rest of the world (ROW: 29%) which largely compromises of the US. Wide geographic and customer diversification de-risks its exposure to a single geography. Its products find applications across mass, mid-price and prestige range of customers.

 

CRISIL Ratings believes that the GSL group will maintain its established market position in the HPC segments over the medium term, in view of its longstanding association with clients and strong research and development (R&D) capabilities; and expects the group’s revenues to grow at a steady rate over the medium term, in line with demand from the end-user segments.

 

• Healthy operating capabilities: The group is integrated across the full value chain of the HPC industry. It has seven strategically located facilities with in-house project execution capabilities; five in India, one in Egypt, one in the US. The group has a strong R&D focus, with a 74 member team, which works at a dedicated R&D centre. The group has 80 approved patents and has also applied for another 15, which will add to its ~216 product base over time. Through cost optimisation and focus on increasing the share of value added products, the group was able to increase its EBITDA per tonne to over Rs 19,000 levels in fiscal 2021 from Rs 15,000 levels in fiscal 2018. Though the group’s performance moderated in the first half of the current fiscal owing to supply side constrains, CRISIL Ratings expects operating margins to improve in the second half as the group will be able to pass on the higher raw material prices and higher freight costs to customers.

 

• Healthy financial risk profile: The GSL group’s financial risk profile is marked by healthy net worth, improving gearing and strong debt protection metrics. Steady cash accruals and prudent funding of capex has enabled the group to keep debt levels under control. As a result, gearing improved to 0.21 time as on March 31, 2021, from 0.49 time as on March 31, 2018, while the interest coverage ratio improved to over 34 times in fiscal 2021 from 9.4 times in fiscal 2018. The group is expected to incur capex of Rs 100-150 crore per annum over the medium term, which will be funded through a healthy mix of internal accruals and debt. With steady business performance, debt protection metrics will continue to remain strong over the medium term.

 

Weakness

• Moderately working capital intensive operations: The GSL group maintains inventory of 50-70 days, while it’s receivable cycle is also similar, translating to gross current days averaging around 128 days over last three fiscals ending 2021. Around 40-50% of these current assets are funded by creditors, and the balance by working capital borrowings. CRISIL Ratings believes that while GSL group’s working capital requirement would increase on account of the increase in the scale of operations, expectations of healthy cash generation would support the incremental working capital requirement needs. CRISIL Ratings also takes comfort from the strong credit profile of the customers which provides the group flexibility to discount debtors to generate liquidity if required.

 

• Partial susceptibility of operating profitability to volatility in raw material prices: The GSL group has a high dependence on lauryl alcohol which contributes to a majority of its raw material costs. The group derives most of its revenue (65-70%) through cost plus model while for balance through non-cost plus model whereby it derives its revenue on the basis of the prevailing market price. The operating profitability of the group therefore remains partially susceptible to volatility in the prices of key raw materials, such as fatty alcohol, fatty acids, ethylene oxide, phenol, and linear alkyl benzene, as witnessed in the current fiscal.

Liquidity: Strong

While cash surpluses were modest at Rs 113 crore as of September 30, 2021, the GSL group’s liquidity is strong, supported by low bank limit utilisation (average utilisation of 31% over last twelve months ended November 2021) and healthy cash generation of over Rs 250 crore per annum. In contrast, long term debt obligations range between Rs 35-40 crore annually over the next three fiscals, which can easily be serviced from accruals.

Outlook: Stable

CRISIL Ratings believes that the GSL group will continue to benefit over the medium term from its strong market position and established clientele in the domestic and global markets. The group is also expected to sustain its healthy and improving financial risk profile, aided by steady cash generation, and prudent capex spends.

Rating Sensitivity Factors

Upward Factors

• Better than anticipated operating performance, also leading to annual cash accruals exceeding Rs 350 crore
• Sustained healthy financial risk profile and debt protection metrics
• Increase in liquid surplus and liquidity.

 

Downward Factors

• Material deterioration in business performance, leading to annual cash accruals dipping below Rs 150 crore
• Large debt-funded capex or acquisitions, or stretch in working capital cycle, leading to moderation in debt metrics, e.g. gearing increasing beyond 1-1.2 time on steady state basis.

About the Company

The GSL group, set up in 1980, manufactures, sells, and distributes surfactants and specialty chemicals, which are used as intermediate raw materials in HPC products. GSL has four manufacturing plants in Tarapur and Taloja near Mumbai, Maharashtra, having an approximate installed capacity of around 1.87 lakh MTPA. A 77,000 MTPA ethoxylation (intermediate process) plant was commissioned in February 2012 at Jhagadia, Gujarat and the current capacity stands at 1.31 lakh MTPA. Galaxy Chemicals (Egypt) SAE, a step-down subsidiary of GSL, set up a greenfield project in Suez, 140 km from Cairo in Egypt, where it operates a manufacturing plant with an installed capacity of around 1.18 lakh MTPA. Tri-K is based in the US and markets the group's products in that geography and also manufactures proteins for the global cosmetic and personal care industry.

 

The company’s promoters held around 71% stake as on December 31, 2021, with mutual funds holding 13% and public holding the remaining.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon rate (%)	Maturity Date	Issue size (Rs.Cr)	Complexity levels	Rating Assigned with Outlook
NA	Cash Credit	NA	NA	NA	265	NA	CRISIL AA-/Stable
NA	Factoring/Forfaiting	NA	NA	NA	85	NA	CRISIL A1+
NA	Term Loan	NA	NA	Feb-2023	12.9	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Dec-2023	100	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Feb-2025	100	NA	CRISIL AA-/Stable
NA	Term Loan*	NA	NA	NA	98	NA	CRISIL AA-/Stable
NA	Letter of Credit and Bank Guarantee	NA	NA	NA	245.43	NA	CRISIL A1+

*Not yet drawn