Galaxy Surfactants: FDA inspection procedural with no financial impact

Anubhav SahuMoneycontrol research

Galaxy surfactants reported that its two facilities in Tarapur have been subjected to FDA inspection. While the chemical companies been subjected to FDA inspection is a novel phenomenon and may require deep dive understanding on the implications, our preliminary check and the interaction with the management suggest there is no financial impact.

Also read, Galaxy surfactants IPO note.

What is in focus?

USFDA (US Food & Drug Administration) inspection is for two facilities in Tarapur (M3 & N46) which manufacture products Octyl Methoxy Cinnamate and Octocrylene. It’s noteworthy that company has five manufacturing facilities in India (Taloja-1, Tarapur-3, Jhagadia-1). Products under scanner are used as ingredient for sunscreens and lipbalms.

Nature of FDA inspection

FDA inspections are periodic in nature (generally every two years), however, in this case, the company has been subjected to inspection for the first time.

In our interaction with the company’s management it was clarified that all the USFDA observations (13) are procedural in nature and none of them are related to any data integrity.

Why FDA is interested in sunscreen products?

Unlike other regions, sunscreen sold in the USA is regulated as a drug. FDA interpretation is that the product claims to help prevent sunburn or to decrease the risk of skin cancer and early skin ageing caused by the sun.

FDA approved active ingredients for sunscreen

Also read: FDA guidelines on sunscreen.

What next?

While the company has been issued form-483, post which Galaxy has to respond on observations in a stipulated time period (generally 15 days). Since the observations are procedurals, they are not expected to have any financial impact. Nevertheless, company mentioned that US revenue from these products comprise less than 1 percent of the consolidated revenue.

Stock valuation remains at premium

With respect to stock recommendation, we continue to like the surfactant industry in which company is operating, partially guided by the steady demand from the FMCG industry. Additionally, the company’s capability and share of speciality care products augurs well for the margins. However, though company is currently trading below its IPO offer price, it is still at a premium (29.3x 2019e earnings) to its peers.

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