Solara Active Pharma Sciences - Emerging as large player in pure API business - ICICI Securities

Solara Active Pharma (Solara) is emerging as a large-scale player in pure API segment with a large product portfolio and presence across developed and emerging markets. Company was formed by combining the demerged human API businesses of Strides and Sequent Scientific in FY18. Key moats of the company have been: 1) presence only in the API and CRAMS space thereby removing any potential conflict with clients, 2) maintaining large market share in key products, 3) long term business relationships with customers, and 4) strong regulatory track record. We believe Solara is well placed to monetise the growing API business opportunities from India and the recent announcement of merging Aurore Life Sciences would further strengthen its positioning. Initiate coverage with a BUY rating with a target price of Rs2,004/share.

- Building strengths to monetise the growing API opportunity: Solara came into existence with the merger of Strides' API business (erstwhile Shasun) and Sequent Scientific's human API business in FY18. It has since been gradually strengthening its product portfolio. It currently has >150 DMF filings, of which >80 are commercialised. More than 25 products are in the pipeline, which would be filed going forward. Solara has cost leadership in ibuprofen, which is the largest revenue contributor for the company. Other key molecules include gabapentin, mycophenolate mofetil, praziquantel, etc. Recent capex at the company's Vizag facility would significantly improve capacity (including for ibuprofen). We believe Solara is well positioned to monetise the growing API opportunity (global market size: ~US$180bn). ~60% of Solara's revenues come from long term contracts and this approach would be the key driver for sustaining longer term growth momentum.

- Aurore merger to augment API positioning and CRAMS outlook: Solara recently announced merger with Aurore Life, which is also engaged in API and CRAMS. We believe this merger is positive as Aurore brings in a complementary product portfolio, larger CRAMS business (~10% of combined sales vs current ~5%), potential cost synergies and merger at reasonable valuations (~12xFY21E EBITDA). Synergies would accrue in terms of a wider product portfolio, significant increase in new product launches, access to ARV portfolio, backward integration and strengthening presence in APAC region. We expect Aurore to contribute 25% and 27% to total revenues and EBITDA respectively in FY23E.

- Strong and consistent financial metrics: We estimate Solara to report revenue/EBITDA/PAT CAGRs of 36%/38%/41% over FY21E-FY23E with higher demand for API/CRAMS, business boost post-merger with Aurore, and stable margin profile. We expect it to generate FCF of ~Rs6bn over FY21E-FY23E. Both RoE and RoCE excluding goodwill will be strong at 21.2% and 18.8% respectively.

- Initiate with BUY: We initiate coverage on Solara with a BUY rating and target price of Rs2,004/share based on 13xFY23E EBITDA. Key downside risks: higher competition in API space, currency fluctuations, and regulatory hurdles.

Shares of Solara Active Pharma Sciences Ltd was last trading in BSE at Rs.1523.5 as compared to the previous close of Rs. 1498.95. The total number of shares traded during the day was 5404 in over 590 trades.

The stock hit an intraday high of Rs. 1544.9 and intraday low of 1490.75. The net turnover during the day was Rs. 8253591.

Source : Equity Bulls

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