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Galaxy Surfactants Limited Date :15thMay2011 Issue Summary

Type Public Issue 100% Book Building

Shares on offer Fresh Issue of 5.9 m shares

Size Rs 1.9 bn to Rs 2.0 bn

Face Value Rs 10 per share

Offer Price Rs 325 to Rs 340 per share

Pre/Post-issue promoter holding 75.97% / 56.92%

Minimum subscription Public Issue 100% Book

Building Promoters

Mr Unnathan Shekhar, Mr Gopalkrishnan Ramakrishnan, Mr Shashikant Rayappa Shanbhag, Mr Sudhir Dattaram Patil

Listing BSE and NSE Lead Managers Motilal Oswal Investment Advisors Private Limited, Centrum Capital Limited

Bid/Issue opens 13-May-2011

Bid/Issue closes May 19, 2011

Issue structure

Qualified Institutional Bidders (QIBs)

Non-institutional Investors Retail Investors

No of shares (m) 3.0 0.9 2.1 % of total size 50% 15% 35% Minimum Bid/Application size

Rs 100,000 Rs 100,000 20 equity shares

Minimum Bid/Application size

Not exceeding issue size Not exceeding issue size

Rs 200,000 in multiples of 20 shares

Objects of the issue

The company has proposed to raise capital through this IPO for the following purposes:

Proposed Expenditure Program (Rs m) Estimated total cost Fund capex of GC Egypt (step down subsidary) 2,123

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Fund capex of setting up new manufacturing facility at Jhagadia, Gujarat 701 Fund expansion of existing manufacturing capacity at Tarapur 470 Fund expansion of existing manufacturing capacity at Taloja 135 General corporate purposes 99 Total* 2,016

*At upper price band. Rest of the money is from internal accruals, debt, etc. Company background

Business

Galaxy Surfactants Limited (GSL) established in 1980 is a leading manufacturer and marketer of surfactants and speciality chemicals with a portfolio of 60 products. The company's products are used in the manufacture of skin care, hair care, oral care, body wash, sun care, household cleaners and fabric care products. The company counts some of the big multinationals personal products companies among its customers. A few of GSL's international customers include Beiersdorf, Colgate Palmolive, Ecolab, Henkel, Diversey, L'Oreal, Reckitt Benckiser and Unilever. Domestic customers of the company include Ayur, CavinKare, Dabur, Emami, ITC, Marico, Procter & Gamble Home Products Limited.

GSL has a well-equipped R&D centre at Navi Mumbai. The company develops new products, technologies and applications here. The company's R&D efforts also comprise of standardizing new analytical methods and identifying substitutes for certain raw materials. As a result of research over the years, the company holds 18 patents in India and 10 patents in USA. In addition, GSL has applied for 12 patents in India and 1 patent in Europe.

The company has three manufacturing units in India and one in USA. Of the three units in India, one is based in Tarapur while two are based at Taloja (both locations are in Maharashtra). One of the units at Taloja is a 100% Export Oriented Unit (EOU). In July 2009 GSL had bought TRI-K and its 100% subsidiary Maybrook Inc. These two companies are in the business of speciality chemicals catering to Personal Care Industry. GSL plans to set up additional capacity at Jhagadia, Gujarat and Suez, Egypt. At present, the company has a capacity of 140,000 MTPA of OSAA, capacity of 8,500 MTPA of FA/FAE and 6,940 MTPA of speciality chemicals.

OSAA or organic surface active agents reduces interfacial tension between two phases. This property is used in emulsifying phases like oil and water. It is also used for removing dirt from skin, hair and fabric surface. Fatty alkanolamides and fatty acid esters or FA/FAE find use as foaming agents in products such as shampoos, soaps, shaving creams, liquid detergents, shower gels and bubble baths. Speciality chemicals of GSL include organic and inorganic UV absorbers, cosmetic preservatives and conditioning hair care polymers.

Consolidated top line of the company in FY10 was Rs 6.4 bn while the bottom line stood at Rs 379 m. For 9mFY10 sales of the company stood at Rs 6.4 bn while net profit stood at Rs

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429 m.

Revenue break-up based on product group

Category FY08 FY09 FY10

Rs m % Rs m % Rs m % OSAA 3,259 85.3% 4,830 86.9% 5,005 84.8% FA/FAE 179 4.7% 245 4.4% 269 4.6% Other speciality chemicals 383 10.0% 485 8.7% 620 10.5% Others - 0.0% - 0.0% 5 0.1% Total 3,821 100.0% 5,560 100.0% 5,899 100.0%

Source: GSL Red Herring Prospectus

Geographical break-up of revenue

Category FY08 FY09 FY10

Rs m % Rs m % Rs m % APAC 535 14.0% 754 13.5% 686 11.6% India 1,722 45.1% 2,662 47.9% 2,814 47.7% America & Europe 231 6.0% 294 5.3% 614 10.4% ROW 1,333 34.9% 1,850 33.3% 1,785 30.3% Total 3,821 100.0% 5,560 100.0% 5,899 100.0%

Source: GSL Red Herring Prospectus

Key management personnel Mr Unnathan Shekhar, 57, is the Managing Director and Promoter of GSL. Mr Shekhar

holds a Bachelors Degree in Chemical Engineering from the University Department of Chemical Technology, Mumbai and a Post Graduate Diploma in Business Management from Indian Institute of Management, Calcutta. He holds over 30 years experience in the chemical manufacturing industry and prior to joining GSL, had worked with Hindustan Unilever Limited and Lupin Laboratories Limited.

Mr Gopalkrishnan Ramakrishnan, 56, is the Whole-time Director of GSL, in charge of Business Creation and Innovation Process. Mr Ramakrishnan holds a masters degree in commerce from University of Mumbai and is a Chartered Accountant as well as a qualified Company Secretary. He has over 30 years of experience in Personal and Home Care industry.

Mr Shashikant Rayappa Shanbhag, 56 years, is the Whole–time Director of GSL, in charge of People Energy and Business Excellence Processes. Mr Shanbhag holds a Bachelors Degree in Commerce from University of Mumbai and is a qualified Chartered Accountant. He has 30 years of experience in the chemical manufacturing industry.

Mr Uday Krishna Kamat, 56, is the Whole–time Director of GSL in charge of Finance,

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Information Technology and Systems and Corporate Governance Processes. He holds a Bachelors Degree in Commerce from University of Mumbai and is a qualified chartered accountant. Mr Kamat has over 30 years of experience in the field of finance, commerce, project management and general management.

Sector GSL manufactures and markets personal care ingredients (PCI) for use in the personal

products space. The PCIs include surfactants (including emulsifiers), emollients, humectants, rheological additives and other speciality chemicals such as active ingredients, UV absorbers, conditioning polymers, hair fixatives, antimicrobials and fragrance. The surfactants also serve as cleaning agents in home care products. The size of markets for surfactants having application in personal care and household cleaning products are US$ 3.88 bn per annum and US$ 8.87 bn per annum respectively. It may be noted that global market size of personal care industry was valued at US$ 145 bn in 2007 and is expected to reach US$ 218 bn by 2015 at CAGR of 5% while that of household cleaning agents was valued at US$ 35 bn in 2007 and is estimated to exceed US$ 43 bn by 2015.

The size of Indian PCI market is estimated at US$ 300 - 350 m per annum and is expected to double over the next four years. The industry growth is expected to come on the back of sizable Indian population coupled with rising disposable income. This offers the personal care industry a large middle class to market a large variety of consumer products. Driven by increase in consumer preference for products with better functional benefits, the PCI market is expected to grow even faster than the personal care products market which is estimated to grow at 15%-16% p.a. While there continues to be a demand for low or medium-priced products, rising disposable income of India's middle-class consumers has opened up the market for better quality and higher performance goods at high price points.

Global surfactant demand for personal care by geography (in US$ bn)

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Geography/Market 2007 2015 CAGR West Europe 0.9 1.2 3.9% North America 1.1 1.5 4.1% Japan 0.3 0.4 3.8% Asia pacific 1.0 1.6 6.6% Rest of the world 0.7 1.2 5.8% Total 3.9 5.7 5.0%

Source: GSL Red Herring Prospectus

Global surfactant demand for home care by geography (in US$ bn) Geography/Market 2007 2015 CAGR West Europe 2.3 2.5 1.4% North America 2.5 2.8 1.3% Japan 0.7 0.8 1.2% Asia pacific 1.9 2.6 4.2% Rest of the world 1.5 2.0 3.3% Total 8.9 10.7 2.3%

Source: GSL Red Herring Prospectus Reasons to apply

Aggressive expansion plans: GSL has plans to invest a major part of the IPO proceeds into increasing its capacity. The company plans to set up 77,000 MTPA capacity in Jhagadia which will consists of 65,000 MTPA of OSAA and 12,000 MTPA of speciality chemicals. The commercial production of this will start in August 2011. In Egypt, the company will create a capacity of 50,000 MTPA of OSAA in the first phase and 22,000 MTPA of OSAA in the second phase. The first phase will start operation in August 2011 and the second phase will start operations in August 2012. This translates to a total capacity addition of 149,000 up from 155,440. This means that the company is effectively doubling its installed capacity by FY13. Moreover, the company is expanding its facilities at Tarapur and at Taloja. This will provide another boost to the company's production capabilities.

Furthermore, the new unit in Egypt is exempt from paying taxes for life. Moreover, it will help the company service the fast growing Middle East regions. The company is confident that it will be able to sell whatever it produces after it enhances its capacity as it is quite small in the global market with a market share of under 1%. This provides the company additional head room for growth in the coming years.

Product Capacity MTPA FY08A FY09A FY10A FY11E FY12E FY13E OSAA Installed capacity 97,000 112,500 140,000 138,240 268,240 293,240 Available capacity 91,983 106,458 118,958 138,240 229,990 289,573 Production 71,958 84,093 103,101 125,112 195,856 245,786 Utilisation 78.0% 79.0% 87.0% 91.0% 85.0% 85.0%

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FA/FAE Installed capacity 6,600 6,600 8,500 9,000 90,000 17,000 Available capacity 6,600 6,600 7,142 8,667 9,000 15,000 Production 2,322 2,300 3,382 4,420 8,152 9,607 Utilisation 35.0% 35.0% 47.0% 51.0% 91.0% 64.0% Other Installed capacity 5,500 6,090 6,940 6,990 22,220 38,220 speciality Available capacity 5,500 5,548 6,465 6,948 15,379 32,387 Chemical Production 3,563 3,296 4,305 5,786 13,421 20,095 Utilisation 65.0% 59.0% 67.0% 83.0% 87.0% 62.0%

Source: GSL Red Herring Prospectus Strong R&D support: GSL has a R&D Centre at Navi Mumbai to develop new products,

technologies and applications for the personal and home care industry. The R&D centre helps the company identify substitutes for certain raw materials and helps standardizing new analytical methods. As of March 31, 2010, the company employed a team of 24 scientists including doctorates and engineers on its R&D team. As a result of strong R&D support over the years, GSL has 18 patents in India and 10 patents in US. In addition, the company has applied for 12 patents in India and 1 in Europe.

As GSL is in the chemicals business which is seen as a commodity, R&D helps distinguish the company from its peers and helps in keeping up with the changing demand. In FY10, GSL spent 1% of its sales on R&D.

Play on Indian consumer demand: The Indian personal care market has been growing at

over 10% CAGR over the last 5 years while the PCI market has been growing in line with it. This consumption growth is being fuelled by increase in per capita income.

GSL is an established player in the PCI space in the country with a 60% market share. The company supplies to companies such as Ayur, CavinKare, Colgate Palmolive, Dabur, Emami, Hindustan Unilever, Henkel, ITC, L'Oreal, Marico, and Procter & Gamble Home Products Limited. Hence, the company is well positioned to leverage the growth opportunity offered by the Indian market. Furthermore, the company supplies to all the big consumer product companies in the market and competition between companies will have no impact on the business of GSL. Thus, the company is an indirect play on the Indian growth story.

Strong management team with proven capability: GSL was established in 1980. Since

then it has grown into an over Rs 6.4 bn company exporting to over 70 countries. Its promoters are part of the management team which is guiding the company. The management team is professional and has hands on experience of running the company over the last 30 years. A strong and focused management team is very important as it is the driving force behind the company. Over the discussion with the management, it was clear that the management team understands the business very well and is making efforts to turn it into a multinational company.

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Thrust on Speciality Chemicals: GSL is planning to increase its production capacity of

speciality chemicals by 5.5 times by the end of FY13. Specialty chemicals are higher margin products. They require multi stage processing and strong technical competencies. These products are characterised by functionality like mildness, sun protection, emolliency, substantivity which they impart to the end product. The company has set up an application laboratory to focus on the development of these products. Currently the company's portfolio of specialty chemicals comprises of sunscreen actives, mild surfactants, formulated mixtures, conditioners, cosmetic preservatives, syndet and transparent bar soap base, etc.

Reasons not to apply

Dependent on single supplier: GSL is dependent on a single supplier for one of its raw materials. This raw material Ethylene Oxide is a key raw material supplied by Reliance. Any disruption in supply could have an adverse effect on the company's business. Furthermore, as the company is dependent on one producer, the pricing power for this raw material resides with the supplier. Any increase in raw material costs which GSL is not able to pass on can affect the company's bottom line. Moreover, in case the company decides to pass on the price increase, it may make GSL uncompetitive vis-a-vis its competitors.

Dependent on a few major customers: Based on GSL's standalone results, the

company's top 10 customers contributed 70% of sales in FY09, 67% in FY10 and 66% in 9mFY11. Top 3 customers of the company contributed 54% of sales in FY09, 46% in FY10 and 44% in 9mFY11. As it can be observed, the company is dependent on only a few customers for its revenues. Furthermore, GSL does not have any legal agreement or commitment with its customers for supply. This means that loss of a major customer can adversely affect the company's business.

Entry of competition: GSL holding 60% of the market share in India with fragmented

competition. However, the company faces competition in the international markets from global players like Croda International Plc, BASF Corporation, The Dow Chemical Company, Huntsman Corporation, Rhodia, Stepan Company, Clariant Limited, Sasol Limited etc. While the surfactant portfolio for these companies for the personal and home care segment is small, their entry into the India markets may impact GSL's domestic market share and profitability. Moreover, there are several Chinese companies in the same space. However, they are currently not in competition with GSL as the quality of the products is not very good.

Lack of pricing power: Since 2007, the top line of GSL has grown at a CAGR of 26%

while the bottom line has grown at a CAGR of 14% YoY. The management has indicated this is because, the company has made a conscious effort to not play on the volatility of input costs. Therefore when the prices of raw material go up, the company passes on the price increase to its customers. When the prices reduce, the company also brings down the prices of its products. As per the management of the company, GSL tries to maintain its profit per tonne. This means that the company makes money only when its volumes increase. GSL with a highly concentrated customer base and competition cannot afford to make super normal profits. Thus, the profitability of the company will not be cyclic in nature.

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Instead the company will make money as demand for its products increase or it increases its market share.

Financials Analysis

Consolidated financial analysis

Profit and Loss (Rs. m) FY08 FY09 FY10 9mFY11

Sales 3,821 5,560 6,443 6,480

Growth rate^ 16.0% 45.5% 15.9% 34.1%

Expenditure 3,308 4,912 5,636 5,652

EBITDA 513 649 806 829

EBITDA (%) 13.4% 11.7% 12.5% 12.8%

Other Income 28 27 43 23

Interest Expense 84 112 126 138

Depreciation 121 147 179 166

Profit before tax 337 417 544 547

Exceptional Items 2 95 21 (0)

Tax 73 54 163 118

Effective tax rate 21.5% 12.9% 30.0% 21.6%

Minority Interest - - (18) 0.0%

Net Profit/Loss 263 268 379 429

NPM (%) 6.9% 4.8% 5.9% 6.6%

No. of shares(m) 17.1 17.1 17.1 17.7

Fully diluted EPS (Rs)* 11.1 11.3 16.0 18.1

Balance Sheet

Networth 921 1,142 1,508 1,865

Debt 1,018 1,295 1,617 2,149

Debt/Equity (x) 1.1 1.1 1.1 1.2

Current Assets 1,459 1,844 2,135 2,879

Current Liability 622 807 1,031 1,464

Current Ratio 2.3 2.3 2.1 2.0

Return on Equity^ 28.6% 23.4% 25.1% 30.7%

Inventory days 59.0 44.8 44.9 56.0

Debtor days 61.9 52.3 44.9 40.7

Creditor days 59.4 53.0 58.4 61.9

* Calculated on post issue no. of shares outstanding ^ 9mFY11 numbers calculated on an annualised basis

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Concluding remarks

GSL is trading at 13.4 times its annualised FY11 earnings at its lower price band and at 14.0 times its annualised FY11 earnings at its upper price band. While there is a risk to the company's business in India from large multinational and Chinese players, we believe that such competition is still a few years away. The company has a large debt component for its capital needs. In case of further interest rate increases, the company would be under pressure to make payments. Furthermore, we appreciate the fact that GSL is a commodity player and operates in the market based entirely on its relationships with clients. In addition, as the company grows its operations internationally, it will have to incur higher marketing and selling costs which will weigh on its bottom line.

On the other hand, GSL is an old and established company which has built up a large business from humble beginnings. This has been on the basis of its relationship and goodwill in the market. The company has strong return ratios and is not capital intensive. The company's fixed assets from FY06 to FY10 increased by 80% while its top line over the same period increased by 139%. For FY10, sales to net fixed asset ratio was 3:1. GSL has a lot of head room to grow in the international markets and change in product mixed with a higher percentage of sales of specialty chemical will help boost the company's bottom line. Moreover, sales from the Egypt unit would help the company service the Middle East region and help it boost margins as no tax is payable for manufacture at its Egypt unit. In addition, the company will benefit from strong growth in personal care and home care products.

For these reasons we believe the future is bright for GSL. While it may not become a multi bagger of any sorts, it has the potential of giving decent returns to investors going forward. Hence, after taking all these factors into consideration, we recommend an "APPLY" to this issue. ********************************************************************************************************* Disclaimer: This Service is provided on an 'As Is' basis by pardiwala securities pvt ltd. pardiwala securities pvt. ltd and its Affiliates disclaim any warranty of any kind, imputed by the laws of any jurisdiction, whether express or implied, as to any matter whatsoever relating to the Service, including without limitation the implied warranties of merchantability, fitness for a particular purpose. Neither pardiwala securities pvt ltd nor its affiliates will be responsible for any loss or liability incurred to the user as a consequence of his or any other person on his behalf taking any investment decisions based on the above recommendation. Use of the Service is at any persons, including a Customer's, own risk. The investments discussed or recommended through this service may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors as they believe necessary. Information herein is believed to be reliable but pardiwala securities pvt. ltd and its affiliates do not warrant its completeness or accuracy

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