Is Galaxy Surfactants IPO worth subscribing?

Galaxy Surfactants Limited (GSL), a personal and home care industry, commenced its initial public offering (IPO) on Monday, in order to raise nearly Rs 937 crore.
 
GSL, offering up to 6,331,674 equity shares, will be available for subscription till January 29, 2018.
 
Price band has been fixed at lower end of Rs 1470 per share and upper end of Rs 1480 per share.
 
50% of the issue is allotted to Qualified Institutional Buyers (QIB), while 35% is kept for retail individual investors (RII) and remaining 15% from non-institutional investors (NII).
 
Book running lead managers (BLRM) for the issue were ICICI Securities Limited, Edelweiss Financial Services Limited and JM Financial Institutional Securities Limited.
 
Objective of the issue is to achieve the benefits of listing on the stock exchanges and the sale of equity shares by the selling shareholders 6% holding.
 
GSL expects that listing of the Equity Shares will enhance its visibility and brand image and provide liquidity to its existing Shareholders.
 
It may be noted that GSL will not directly receive any proceeds of the offer and all the proceeds of it will go to the selling shareholders in the proportion of the equity shares offered by them.
 
At the higher end of the price band of Rs 1,480, the issue is priced at P/E of 35.9x (post dilution) on FY17 and 34.9x on H1FY18 (annualized) basis, which appears to be fairly valued.
 
Nidhi Agrawal, analysts at Angel Broking, said, “The company has seen 25% CAGR in the last 3 years in earnings. We expect the company to maintain a 20%+ growth trajectory in the coming few years, considering growing personal care markets, its increasing product offerings and geographies. We recommend ‘SUBSCRIBE’ on the issue for a mid-to-long term period.”
 
Mrinalini Chetty, Research Analyst at Centrum Wealth Research, said, “As GSL is a global supplier to a host of FMCG players focused on the personal and home care segment, there is a likelihood of significant demand potential in the future irrespective of market conditions, owing to the daily utility of products.”
 
Given the decent financials and future growth prospects, Chetty said, “the IPO could garner interest in the current market environment. Hence, we believe that despite fair valuations, the listing may still be at a premium to the offer price.”
 
On a consolidated basis, over FY14-17, GSL reported revenue and PAT CAGR of 8% and 24%, respectively, with average EBITDA (operating profit) margins of 12% and average RoE (return on equity)of 25%.
 
Debt to equity has reduced from 1.1x in FY14 to 0.6x in FY17. Over the last 4 years, despite capex (Rs 200 crore), GSL has reported positive free cash flows.
 
Also, GSL’s customer base has increased from 1,200 in FY13 to 1,700 in FY17.
 
Looking at the strong fundamental and financial performance, Astha Jain, Research Analysts at Hem Securities, said, “we recommend “Subscribe” on issue.”
 
Jain also said, “The co is bringing the issue at p/e multiple of 35 on annualized H1FY18 eps at higher price band of Rs 1470-1480/share.”
 
However, Centrum also highlighted few risk factors for the company.
 
They are: 1) Lack of long term agreements with suppliers, could expose to volatility in raw material prices; 2) Client concentration (Top 10 customers contributed ~55% to FY17 revenue); 3) Change in government regulations (Emission norms/approvals/permits).
 
Post issue, Centrum expects the company’s market capitalisation to range between Rs 5,212 crore and Rs 5,247 crore.