Detailed Rationale

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

 

The ratings continue to reflect the established market position of the group in the specialty chemicals sector, supported by the diversified customer base, segmental coverage and geographic reach, and longstanding relationships with leading global and national fast-moving consumer goods (FMCG) players, particularly in the home and personal care (HPC) segment. The ratings also factor in the healthy operating capabilities and strong financial risk profile of the company. These strengths are partially offset by vulnerability of the operating margin to microeconomic headwinds and volatility in raw material prices.

 

Revenue declined by around 15% year-on-year to Rs 3,794 crore, due to a drop in realisations and correction in raw material prices (mostly linked to movement in crude oil prices). Leading global chemical players also adjusted their inventory levels, amidst slowdown in USA and Europe. That said, volume grew by around 7%, led by strong demand from India. Operating margin stood at 12.2% in fiscal 2024, due to lower fixed cost absorption, and is projected at 12-13% over the medium term.

 

The financial risk profile remains healthy, marked by strong debt protection metrics. Gearing should remain below 0.10 time while interest coverage is likely to be healthy over 40 times in the medium term. 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

CRISIL Ratings has combined the business and financial risk profiles of Galaxy and its subsidiaries, collectively referred to as the GSL group herein, as they have 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 HPC intermediates market: The GSL group has been engaged in manufacture and sale of surfactants and specialty chemicals used as intermediates by the HPC industry for more than four decades. The group caters to over 1,450 customers across more than 80 countries, including reputed multinationals and domestic customers, and is one of the leading players globally. India accounted for 35% of revenue in fiscal 2024, followed by Africa, Middle East and Turkey (AMET: 24%) and rest of the world (ROW: 41%), which comprises the US, Europe and Asia-Pacific. Wide geographic and customer diversification de-risk the exposure to a single region. Products find applications across mass, mid-priced and premium range of customers.

 

Longstanding association with clients and strong research and development (R&D) capabilities should enable the group to maintain its leadership position. Overall revenue is likely to grow at a steady rate over the medium term, in line with demand from 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, and one each in Egypt and the US. The group has a strong R&D focused team which works at a dedicated centre. As of March 2024, the group has 96 approved patents and has applied for 21 more patents, which will support its growing product base (220+) over time. Through cost optimisation and focus on increasing the share of value-added products, the group was able to increase its earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne from Rs 15,000 in fiscal 2018 to over Rs 20,000 in fiscal 2024.

 

• Healthy financial risk profile: Financial risk profile of the GSL group is marked by a healthy networth, improved gearing and strong debt protection metrics. Steady cash accrual and prudent funding of capex have enabled the group to maintain debt levels. Gearing improved to 0.06 time as on March 31, 2024, from 0.15 time as on March 31, 2023, due to lower reliance on bank limit. Interest coverage ratio rose to over 37 times in fiscal 2024, from 9.4 times in fiscal 2018. The group is expected to incur capex of Rs 150-175 crore per annum over the medium term, funded entirely through internal accrual. With steady business performance, debt protection metrics will remain strong over the medium term.

 

Weaknesses:

• Moderate working capital intensity in operations: Gross current assets were high ranging from 130 to 150 days over the three fiscals ending March 31, 2024, led by inventory of 60-70 days and receivables of 60-65 days. Working capital requirement is met via creditors (60-70 days) and bank debt. Though ramp up in scale may lead to increase in overall working capital requirement, healthy cash generation should help cover the incremental expenses. Also, the strong credit profile of customers provides the group flexibility to discount receivables and generate liquidity, if required.

 

• Partial susceptibility of operating profitability to volatility in raw material prices: Cost of lauryl alcohol forms majority of raw material cost. The group derives bulk of its revenue through the cost-plus model. Under the non-cost-plus model, revenue depends on the prevailing market price. Operating profitability remains partially susceptible to volatility in 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

Expected cash accrual of over Rs 400 crore per annum and cash and cash equivalents (including investments) of Rs 437 crore as on March 31, 2024 (Rs 250 crore as of March 31, 2023) aid liquidity. Utilisation of the fund-based was low, averaging 21% over the 12 months ended March 31, 2024. The group has long-term debt obligations of Rs 15 crore per fiscal during 2025 to 2027. Internal accrual, cash and cash equivalents, and unutilised bank limit should suffice to cover the debt obligation.

Outlook: Stable

The GSL group will continue to benefit from its strong market position and established clientele in the domestic and global markets. The financial risk profile should remain healthy, aided by steady cash accrual.

Rating Sensitivity factors

Upward factors

• Double digit growth in revenues supported by volumes while operating margins remain steady
• Sustenance of healthy financial risk profile and debt protection metrics

 

Downward factors

• Deterioration in operating performance, leading to cash accrual below Rs 150 crore
• Any large, debt-funded capex or sizeable stretch in the working capital cycle, constraining the financial risk profile

About the Group

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 its facilities at Tarapur and Taloja in Maharashtra, which have an installed capacity of around 1.91 lakh MTPA, and a 1.33 lakh MTPA ethoxylation (intermediate process) plant at Jhagadia, Gujarat.

 

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, a step-down subsidiary of GSL, markets the group's products in the US, and manufactures proteins for the global cosmetic and personal care industry.

Key Financial Indicators

As on / for the period ended March 31		2024	2023
		Actual
Revenue	Rs crore	3,794	4,445
Profit after tax (PAT)	Rs crore	301	381
PAT margin	%	7.9	8.6
Adjusted debt/Adjusted networth	Times	0.06	0.15
Interest coverage	Times	22.15	37.44

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	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	Letter of credit & Bank Guarantee	NA	NA	NA	270.4	NA	CRISIL A1+
NA	Proposed Term Loan	NA	NA	NA	27.93	NA	CRISIL AA-/Stable
NA	Term Loan#	NA	NA	Sep-2026	88.57	NA	CRISIL AA-/Stable
NA	Term Loan$	NA	NA	NA	98	NA	CRISIL AA-/Stable
NA	Term Loan*	NA	NA	Jul-2027	71.43	NA	CRISIL AA-/Stable

*Rs 20 crores not availed

#Rs 60 crores not availed

$Rs 98 crores not availed

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Galaxy Chemicals Inc., USA	Full	Strong managerial, operational, and financial linkages
Galaxy Holdings (Mauritius) Ltd	Full	Strong managerial, operational, and financial linkages
Rainbow Holdings GmbH	Full	Strong managerial, operational, and financial linkages
Galaxy Chemicals (Egypt) S.A.E.	Full	Strong managerial, operational, and financial linkages
TRI-K Industries Inc., USA	Full	Strong managerial, operational, and financial linkages