Galaxy Surfactants Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

BUSINESS

Galaxy Surfactants Limited is one of the leading players in the world of Surfactants and Specialty Care Ingredients catering to the Home and Personal Care Industry. Our products can be broadly categorised in the following two categories:

• Performance Surfactants which comprise ingredients which form the core of any cleansing and foaming solution and

• Specialty Care Products which perform special functions when incorporated in any home and personal care formulation

From a humble beginning in 1980, today your company supplies to over 80 countries; has a product portfolio of 215+ products and caters to over 1,385 customers having manufacturing setups in India, Egypt and USA.

GLOBAL ECONOMIC OVERVIEW

Global economy continues to present a mixed picture. Multiple factors like the on-going geopolitical conflicts, widespread elevation of debt, extreme weather conditions and elections in many parts of the world continue to contribute to the uncertainty of the Global Economic Outlook.

Global growth, estimated at 3.2% in 2023, is projected to continue at the same pace in 2024 and 2025. The pace of expansion is low by historical standards, owing to both nearterm factors, such as still-high borrowing costs and withdrawal of fiscal support, and longer-term effects from the COVID-19 pandemic and Russias invasion of Ukraine; weak growth in productivity; and increasing geoeconomic fragmentation.

Encouragingly, inflation has softened from the highs of the previous year and is expected to continue to moderate. Global headline inflation is expected to fall from an annual average of 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies. Easing inflation and macroeconomic stability are the pre-requisites for sustainable growth.

Risks to the global outlook are now broadly balanced. On the downside, new price spikes stemming from geo-political tensions, including those from the war in Ukraine and the conflict in Gaza and Israel, could, along with persistent core inflation where labour markets are still tight, raise interest rate expectations and reduce asset prices. High interest rates could have greater effects than envisaged as fixed rate mortgages reset and households contend with high debt, causing financial stress. In China, without a comprehensive response to the troubled property sector, growth could falter, hurting trading partners.

Amid high government debt in many economies, a disruptive turn to tax hikes and spending cuts could weaken activity, erode confidence, and sap support for reform. Geoeconomic fragmentation could intensify, with higher barriers to the flow of goods, capital, and people implying a supply-side slowdown. On the upside, looser fiscal policy than necessary could raise economic activity in the short term, although risking more costly-policy adjustment later. Artificial intelligence and stronger structural reforms than anticipated could spur productivity.

As the global economy approaches a soft landing, the nearterm priority for central banks is to ensure that inflation touches down smoothly, by neither easing policies prematurely nor delaying too long and causing target undershoots. Near-term risks also stem from elongated supply chains mainly due to the ongoing Red Sea crisis and congestions at key ports. From a business context, inflationary pressures along with higher lead times arising from this, poses a risk to demand.

THE INDIAN ECONOMY

Indias GDP growth estimate for FY 24 has been revised upwards from 7.3% to 7.6% in the second advance estimates, highlighting the enduring strength of the Indian economy. India grew above 8% for three consecutive quarters, reaffirming her position as a standout performer amidst sluggish global growth trends.

Indias external account is stable despite persistent geopolitical headwinds.

Retail inflation remained stable and within range for 6 consecutive months. Driven by strong domestic growth and benign global commodity prices, core inflation is declining continuously. Strong aggregate demand has stirred manufacturing and construction activities accompanying professional, financial and real estate services.

The end February 2024 release of the National Statistical Office (‘NSO) surprised strongly on the upside. Real GDP expanded at a six-quarter high rate in Oct-Dec 2023, powered by strong momentum, robust indirect taxes and lower subsidies.

Steady consumption demand is backed by resilient urban demand conditions. The recovery in rural consumption demand is expected to be strengthened by the forecast of normal monsoon in FY 25. Strengthening of urban demand is evidenced by rising passenger vehicle sales, booming/ increasing housing sales, higher domestic air passenger traffic, increased digital payments and improved consumer confidence. Domestic passenger vehicle sales have continued to increase, rising by 25.7% YOY in FY 25 (Apr-Feb).

High Frequency Indicators point towards continued verve in domestic demand conditions in Feb 2024.

Direct tax collections grew by 23.5% (YOY) during Apr-Jan 2024, with income tax and corporate tax growing at 27.3% and 20.1% respectively, reflecting increased compliance, higher advance tax collections and widening of tax base. Indirect tax collections grew 4.7% (YOY) with GST and Customs revenues growing 9% and 1% respectively. Overall, gross tax revenue grew by 14.5% over previous year led by robust growth in direct tax collections.

In March 2024, the HSBC India Manufacturing PMI surged to an impressive 59.2, a notable increase from the figure of 56.9 recorded in the previous month. This upswing was driven by robust demand marking the fastest growth in factory activity since Feb 2008. Notably, output and new orders experienced substantial growth, reaching the highest levels in nearly three and a half years.

Indias inflation outlook for the upcoming months is positive. Core inflation is trending downwards, indicating a broad- based moderation in price pressures. On the external front, the narrowing merchandise trade deficit and rising net services receipts are expected to result in an improvement in the current account balance in FY 24.

Overall, India continues to be the fastest-growing major economy with positive assessments of the growth outlook for the current financial year, for India by international organisations and RBI.

BUSINESS PERFORMANCE FY 24

After four years of flat volumes, this year saw your company register a 7.7% volume growth meeting the 6-8% guidance stated at the start of the year.

The EBITDA/MT at 20,019/MT too has come in within the guided range of 19,500 - 20,500/MT with Q-O-Q improvement starting from Q-2 FY 24. The change in product mix, reversal of one-time benefits realised in FY 23 saw the EBITDA/MT decline to 20,019/MT from 25,051/MT. While this may appear significant, it needs to be understood factoring in the 7.7% volume growth as well as the lower Export incentives realised at Egypt for this year. Structurally, the improving EBITDA/MT trajectory remains the key.

FY 18	FY 24	CAGR 2017-24
15,086	20,019	+4.8%

Moving on to the Individual Markets

India continues to remain a bright spot for us registering a 11% growth in FY 24. While the momentum remains strong, rural recovery remains the key going ahead. Below average rainfall or slowdown in premiumisation remain the key risks.

Easing inflation, stabilising macros did help in recovery of mass segments in the AMET Market. While volume growth did decline by 1.5% for FY 24, this was primarily due to the adverse volumes hit we faced in January on account of the Red Sea escalation. Despite the elongated supply chain and Red Sea escalation, we strongly believe barring for any further escalation, easing inflationary pressure should bode well for demand.

ROW made a strong comeback in H-2 FY 24 registering a healthy 29% volume growth. This is a very positive sign as it implies the end of the destocking cycle and stabilisation of demand. Going ahead as demand stability returns, an uptick in premium specialties and restocking will be the next big triggers. Accelerated approvals for new products along with uptick in premium specialties will ensure improvement in EBITDA/MT going ahead. While volume growth stood at 13.3% for FY 24, going ahead for FY 25, we expect the mix to gravitate towards premium specialties leading to better profitability.

Business Segments Performance

FY 24 saw your company register volume growth across regions, across segments. Driven by strong double-digit growth in India and recovery of global growth momentum especially from H-2 FY 24; both the segments registered healthy volume growth. Our Performance Surfactants segment driven by India clocked +4.1% volume growth whereas our Specialty Care segment on the back of pickup in masstige specialties registered +14.9% volume growth.

CONSOLIDATED BUSINESS SUMMARY - FY 24

Area	FY 23	FY 24	Change
Total Volumes (MT)	230,785	248,618	+7.7%
Performance Surfactants	153,126	159,396	+4.1%
Specialty Care	77,659	89,222	+14.9%
India	103,788	115,250	+11.0%
AMET	71,059	69,992	-1.5%
ROW	55,938	63,376	+13.3%
EBITDA/MT ( /MT)	25,051	20,019	-20%
EBITDA	578	498	-14%
PAT ( Cr.)	381	301	-21%
Cashflow from Operation ( Cr.)	573	518	-9.5%
Debtors Turnover	7.0	6.2	-11.5%
Inventory Turnover	4.6	4.3	-6.1%
Interest Coverage Ratio	22.8	17.8	-22.1%
Current Ratio	2.4	2.8	19.8%
Debt Equity Ratio*	0.1	0.1	-58.2%
Operating Profit Margin (%)	11.2%	10.6%	-5.8%
Net Profit Margin (%)	8.6%	8.0%	-7.3%
ROCE*	23.9%	17.7%	-26.2%
RONW*	22.0%	14.8%	-32.7%

* Better Debt Equity ratio due to repayment of borrowings

* Lower due to lower profitability in current year

TRENDS & OPPORTUNITIES AT PLAY - HOME AND PERSONAL CARE INDUSTRY India

• Premiumisation - Higher spending on premium beauty and personal care products as well as home care products (Liquid Detergents/Liquid Dishwashes/Premium Detergent Powders) bodes well for us. Enhanced expenditure on Home and Personal Care Products and Consumer Durables (Washing Machines and Dish Washers) along with greater awareness about sustainability, mildness and quality will further aid growth.

• The ‘Aware and Informed Consumer - The median age of Indias population is 28.2 years. Today, at least 50% of Indias population has access to the Internet. These macro factors are important as todays young Indian consumer has the 3As -

o Greater Accessibility to Home and Personal Care Products

o Greater Awareness about Quality and Sustainability of these Products

o Greater Affordability given the increase in number of products consumed per household when compared to the previous decade

• Home and Personal Care Industry Composition

- Entry of New players, Private labels and D2C Brands gaining traction will be beneficial for both our segments. Improving penetration of niche categories will aid specialty growth and migration of consumers from mass to masstige and prestige categories through improved distribution channels will add further momentum.

The Future - Decadal Opportunities that will ensure sustainable long-term growth for Performance

Surfactants [Long-Term Outlook]

• Migration - Petrochemical Based Surfactants to Natural Oleo Chemical Based Surfactants for manufacturing Home Care Products.

• Premiumisation - Migration from Mass Powder detergents to Washing Machine based Powder and Liquid Detergents. Migration from Bars to Dishwashing Liquids.

• Sustained Rise in Consumption - Greater consumption per Household of Home and Personal Care products by members of different age groups. Greater access and penetration of emerging categories like Face Wash, Body Wash, Body Lotions, Washing and Dishwashing Liquids will further ensure sustained growth.

The Future - Decadal Opportunities that will ensure sustainable long-term growth for Specialty Care Products [Long-Term Outlook]

• Greater Affordability and Consumption - India and AMET: Today specialty consumption in India and AMET is low compared to the developed countries. Uptick in per capita consumption driven by sustained growth will ensure greater discretionary spending thus driving demand for masstige and prestige products ensuring growth for our specialty care products.

• Premiumisation and Greater Awareness - Globally the demand for sustainable, mild, non-toxic, high quality and functional attribute-based products is rising. Consumers are not only opting for these but are also willing to pay more for these products. Your company has exclusively designed its specialty portfolio to cater to these needs.

• D2C Brands, Private Labels and E-Commerce Channels -

The global emergence of Private labels, D2C Brands and E-Commerce players catering to niche categories will further drive penetration and demand for our specialty care products. The revival of Europe and Americas post the 2022-23 Inflation episode will act as the first trigger for pickup of our premium specialties going ahead.

The Indian ‘Story - Why we believe the best is yet to come?

Volumes	CAGR 2017 - 2024
India	+8.9%

Your company is perfectly positioned to capitalise on the emerging Discretionary Consumption boom in the Home and Personal Care Space, but the key here is to understand

• Triggers and sustainability of these Triggers which will drive this Boom

• Where are we relatively vs. US and China

• Industry Tailwinds which will ensure sustainable growth

DRIVERS OF SUSTAINABLE GROWTH - THE TRIGGERS

DID YOU KNOW?

As per KANTAR -

• Washing Machine Penetration stands at 22% in 2022

• Washing Liquids have grown at a CAGR of 35% from 2014-2022

• Dish Washing Liquids have grown at a CAGR of 18% from 2014-2022

But still the Penetration of Dishwash Liquids, Washing Liquids is less than 25% in India Indias Standing vs. US in 1960-61 & vs. China in 2006

Parameter	India in 2022	US 1960-61	China in 2006
Average Age	29	29	31
Essential Spend % (Food + Housing + Clothing)	57%	63%	56%
Per Capita Income ($)	2,100	3,007	2,000
Working Age Population	71%	69%	72%
Personal Care spend per Household	24$	155$	40$

India stands at the same inflection point as China stood in 2006 and USA in 1960s. Today, the US and Chinese Personal Care Markets are 6x and 5x the size of Indian Personal Care Market.

INDUSTRY TAILWINDS - THE GROWTH CATEGORIES!

While the Penetration of Shampoos and Toothpastes stands at >90% in India, multiple newer applications have emerged which will drive the next leg of growth for our Performance as well as Specialty Care Products

CATEGORIES WHERE PENETRATION IS < 25% IN INDIA AND IS AN ADDRESSABLE MARKET FOR US

Stable Macros + Rising Per Capita spending + Growing Population and Work Force are the key triggers for HPC Consumption. With all pre-requisites in place, India remains a structural decadal story which has just started to unfold.

THE SUPPLY SIDE PICTURE

Fatty Alcohol Prices remained in a narrow range throughout FY 24. Post the volatility experienced in the past 2 years, we believe the range bound movement may not continue in FY 25.

Crude Oil Prices posted a rally till September, thereafter corrected to 70 USD/Barrel. Rising tensions between Israel and Palestine added momentum post December 2023 and this remains the biggest trigger going ahead in FY 25.

RISK ASSESSMENT

Global Risks

Macro Headwinds on account of accentuated currency depreciation or escalation of Israel- Palestine conflict which may further deteriorate the Red Sea situation or geopolitical situation in Middle East remains the biggest risk. This will have a direct impact on your companys business

Climate Risk

Delay in Monsoons or Below Average Monsoons in India may halt the growth momentum. Rural recovery critical requisite to ensure demand momentum in India. Catastrophes on account of climatic disasters pose the risk to global supply chains and while the risk cannot be quantified;

it does adversely impact consumption

Operational

Risks

Unavailability of Key feedstocks / Constrained availability of critical raw materials or slower than expected recovery in demand may have a bearing on volumes which may adversely impact our FY 2025 performance

Gestation

Risks

While Destocking cycle has ended, delay in new launches or slower than expected restocking / recovery cycle of Premium specialties will adversely impact profitability going ahead

Logistic

Risks

Container unavailability or sudden increase in Freight costs or increased lead times due to sudden change in routes as seen during the Red Sea crisis pose risk to volumes and overall profitability

OUTLOOK FOR FY 25

To conclude, as the World emerges from the after-effects of the pandemic, localised wars and hyperinflation; macro stability remains the key pre-requisite for growth. The refocus on volumes by the Home and Personal Care companies, revival of global consumption and reduction of interest rates will play a key role in reviving as well as sustaining this global recovery. India remains the bright spot, but we consciously believe this year barring for any unforeseen macro event, our global portfolio should make a strong comeback. Volume growth should continue in the 6-8% band. If FY 24 was the year of normalisation of our volumes, FY 25 will be the year of normalisation of our profitability trajectory. We expect premium specialties to pick up from H2 FY 25 which should bode well for our margins and thus ensure compliance of our cardinal principles i.e. PAT Growth > EBITDA Growth > Volume Growth with ROCE of 22%. To conclude, with the ethos and relationships built over decades; at Galaxy, we remain fully committed towards ensuring we build an organisation that lasts for decades; an organisation led by high performing talent that grows sustainably, ethically and responsibly.