Rating Rationale
November 02, 2020 | Mumbai
Galaxy Surfactants Limited
 
 
Rating Action
Total Bank Loan Facilities Rated Rs.906.33 Crore
Long Term Rating CRISIL AA-/Stable
Short Term Rating CRISIL A1+
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

 

Detailed Rationale

CRISIL ratings on the bank facilities of Galaxy Surfactants Limited (Galaxy; part of the GSL group) continue to reflect the group's established and improved market position in the specialty chemicals sector, healthy operating efficiencies, and healthy financial risk profile. These rating strengths are partially offset by the moderately working-capital-intensive operations and partial vulnerability of its operating margins to volatility in raw material prices.

On October 26, 2020, CRISIL had upgraded its ratings on the bank facilities of Galaxy to 'CRISIL AA-/Stable/CRISIL A1+' from 'CRISIL A+/Positive/CRISIL A1'.

The upgrade factored in the expectation of sustained improvement in the GSL group's business risk profile, supported by strong operating performance across geographies and segments, which in turn is driven by healthy demand for health and hygiene products. The GSL group's business position is further augmented by long standing relationships with leading global and national fast moving consumer goods (FMCG) players, and particularly the home and personal care (HPC) segment, which is less susceptible to business cyclicality. The group derives 50-55% of its revenue from global and multinational customers, thus providing stable revenues. Besides, the group's financial risk profile continues to remain healthy, supported by steady cash generating ability (over Rs 200 crore per annum), and moderate debt levels, translating to strong debt protection metrics.
 
The GSL group is expected to register revenue growth of 3-5% in fiscal 2021 (factoring in a weak first quarter), and between 8-10% annually over the medium term, while its operating profitability will range between 14-15%. The growth is driven by the expectation of recovery in domestic and rest of the world (ROW) segments, coupled with continued growth in the Africa Middle East and Turkey (AMET) region. Though the GSL group has witnessed moderation in volumes in speciality care segment in the fourth quarter of fiscal 2020 and the first quarter of fiscal 2021, CRISIL believes that this is only temporary, and volumes are already recovering and will continue to sustain, as the impact of the pandemic wanes out.
 
In the first quarter of fiscal 2021, the group reported revenue de-growth of 9% on account of drop in the speciality care segment (27% of the overall revenue) by 39%. Revenue to an extent was supported by 12% growth in the performance surfactants segment (73% of the total revenue). Yet, operating margin was healthy at around 15% on account of the pass through clause in prices of raw materials, which displayed volatility, and due to lower operating expenses, including on travel and marketing. In fiscal 2020, revenue de-grew by 6% on account of lower realisations following softening in prices of lauryl alcohol (the main input commodity) coupled with overall lower volume growth of 4% (9% in fiscal 2019). Operating margin, however improved by 100 basis points (bps) to around 14%, due to lower feedstock prices and higher value added product mix.
 
Complementing the GSL group's strong business performance is its healthy and improving financial risk profile. The group incurred capital expenditure (capex) of around Rs 460 crore in the past three fiscals, of which half was in fiscal 2020. Steady cash accruals, prudent funding of capex and working capital management, has enabled the group to keep debt levels under control, despite sizeable capex. As a result, gearing improved to 0.36 time on March 31, 2020 from 0.49 time on March 31, 2018, while the interest cover improved to over 16 times in fiscal 2020 (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 largely be funded from internal accruals. With steady business performance, debt metrics will continue to remain strong.
Analytical Approach

For arriving at its ratings, CRISIL 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 1,750 customers across 80 countries, consisting of reputed HPC FMCG multinationals and domestic customers. The group caters to three regions namely India (35% of revenue), AMET (32%) and ROW (33%). 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 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 75 strong member team, which works at a dedicated R&D centre, which houses a pilot plant. The group has 72 approved patents and has also applied for another 14, which will add to its ~205 product base over time. Through cost optimisation and focus on increasing the share of value added products, the group has been able to increase its earnings before interest, tax, depreciation, and amortisation (EBITDA)/tonne to around Rs 16,700 in fiscal 2020 from Rs 15,086 in fiscal 2018, and improve EBITDA margins to 14% from around 12%. Volatility in raw material prices has not been much of a challenge, because a substantial portion of revenues have pass through raw material clauses. With increased focus on enhancing share of value added products, and steady volume growth, EBITDA margins are expected to remain range bound.

* Healthy and improving financial risk profile: The GSL group's financial risk profile is marked by healthy net worth, improving gearing and strong debt protection metrics. While capex spend was sizeable in two of the last three fiscals, steady cash accruals, prudent funding of capex and efficient working capital management, has enabled the group to keep debt levels under control. As a result, gearing improved to 0.36 time on March 31, 2020 from 0.49 time as on March 31, 2018, while the interest cover improved to over 16 times in fiscal 2020 (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 largely be funded from internal accruals. With steady business performance, debt metrics will continue to remain strong.

Weakness
* Moderately working capital intensive operations: The GSL group maintains inventory of 50-60 days, while it's receivable cycle is also similar, translating to gross current days averaging around 120 days. Further, the group has to extend credit of 40-60 days to its customers. Around 40% of these current assets are funded by creditors, and the balance by working capital borrowings. CRISIL 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 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.
Liquidity Strong

While cash surpluses are modest at around Rs 50 crore, the GSL group's liquidity is strong, supported by low bank limit utilisation (average utilisation of 17% over last twelve months ended September 2020) and healthy cash generation of over Rs 200 crore annually. In contrast, long term debt obligations range between Rs 50-53 crore annually over the next three fiscals, which can easily be serviced from accruals.
Outlook: Stable

CRISIL 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 spend.
 
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 metrics; for instance gearing remaining below 0.5 time on a steady state basis.
*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 September 30, 2020, with mutual funds holding 13% and public holding the remaining.
 
For the first quarter of fiscal 2021, the group reported net revenue of Rs 607.2 crore (Rs 665.0 crore in the first quarter of fiscal 2020), and a PAT of Rs 56.5 crore (Rs 52.6 crore).
Key Financial Indicators
As on/for the period ended March 31 2020 2019
Revenue Rs.Crore 2,596 2,763
Profit After Tax (PAT) Rs.Crore 230 191
PAT Margins % 8.9 6.9
Adjusted Debt/Adjusted Networth Times 0.36 0.34
Interest coverage Times 16.4 11.9

Any other information: Not applicable
Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
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 Term Loan NA NA Feb-23 27.50 NA CRISIL AA-/Stable
NA Term Loan NA NA Jan-21 6.79 NA CRISIL AA-/Stable
NA Term Loan NA NA Sep-23 16.25 NA CRISIL AA-/Stable
NA Term Loan NA NA Feb-25 40.00 NA CRISIL AA-/Stable
NA Cash Credit NA NA NA 265.00 NA CRISIL AA-/Stable
NA Factoring/Forfaiting NA NA NA 85.00 NA CRISIL A1+
NA Letter of Credit & Bank Guarantee NA NA NA 270.40 NA CRISIL A1+
NA Proposed Long Term Bank Loan Facility NA NA NA 195.39 NA CRISIL AA-/Stable
 
Annexure - List of entities consolidated
Name of entities Extent of consolidation Rationale for consolidation
Galaxy Chemicals Inc 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
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fixed Deposits  FD    --    --    --    --  27-07-17  Withdrawal  FA+/Stable 
Fund-based Bank Facilities  LT/ST  635.93  CRISIL AA-/Stable/ CRISIL A1+  26-10-20  CRISIL AA-/Stable/ CRISIL A1+  31-07-19  CRISIL A+/Positive/ CRISIL A1  24-04-18  CRISIL A+/Stable/ CRISIL A1  27-07-17  CRISIL A/Positive/ CRISIL A1  CRISIL A/Stable/ CRISIL A1 
Non Fund-based Bank Facilities  LT/ST  270.40  CRISIL A1+  26-10-20  CRISIL A1+  31-07-19  CRISIL A1  24-04-18  CRISIL A1  27-07-17  CRISIL A1  CRISIL A1 
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Name of Lender Amount (Rs.Crore) Rating
Cash Credit Citibank N. A. 30 CRISIL AA-/Stable
Cash Credit Development Bank of Singapore 15 CRISIL AA-/Stable
Cash Credit HDFC Bank Limited 50 CRISIL AA-/Stable
Cash Credit IDBI Bank Limited 15 CRISIL AA-/Stable
Cash Credit Kotak Mahindra Bank Limited 10 CRISIL AA-/Stable
Cash Credit Societe Generale - French and Intl. Bank 15 CRISIL AA-/Stable
Cash Credit Standard Chartered Bank Limited 80 CRISIL AA-/Stable
Cash Credit The Hongkong and Shanghai Banking Corporation Limited 20 CRISIL AA-/Stable
Cash Credit The Saraswat Co-Operative Bank Limited 30 CRISIL AA-/Stable
Factoring/ Forfaiting Standard Chartered Bank Limited 85 CRISIL A1+
Letter of credit & Bank Guarantee Citibank N. A. 60 CRISIL A1+
Letter of credit & Bank Guarantee Development Bank of Singapore 20 CRISIL A1+
Letter of credit & Bank Guarantee IDBI Bank Limited 50 CRISIL A1+
Letter of credit & Bank Guarantee Kotak Mahindra Bank Limited 10 CRISIL A1+
Letter of credit & Bank Guarantee Saraswat Bank 5.4 CRISIL A1+
Letter of credit & Bank Guarantee Societe Generale - French and Intl. Bank 35 CRISIL A1+
Letter of credit & Bank Guarantee Standard Chartered Bank Limited 70 CRISIL A1+
Letter of credit & Bank Guarantee The Hongkong and Shanghai Banking Corporation Limited 20 CRISIL A1+
Proposed Long Term Bank Loan Facility Not Applicable 170.89 CRISIL AA-/Stable
Proposed Long Term Bank Loan Facility Not Applicable 24.5 CRISIL AA-/Stable
Term Loan Hsbc Bank (Mauritius) Limited 6.79 CRISIL AA-/Stable
Term Loan Kotak Mahindra Bank Limited 16.25 CRISIL AA-/Stable
Term Loan The Hongkong and Shanghai Banking Corporation Limited 40 CRISIL AA-/Stable
Term Loan The Saraswat Co-Operative Bank Limited 27.5 CRISIL AA-/Stable

This Annexure has been updated on 26-Sep-2021 in line with the lender-wise facility details as on 17-Aug-2021 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation

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