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Recovering business provides respite

Solara Active Pharma (Solara) has reported better-than-estimated result in Q4FY22 led by business recovery, which achieved ~90% of normalised revenue. Revenue, EBITDA and PAT declined ~19%, ~86% and ~97%, respectively, on a YoY basis. However, sequentially, revenue grew ~260% on an impacted base of Q3FY22 which was on account of inventory adjustment. Solara announced withdrawal of merger with Aurore due to subdued performance of both the entities. While we believe near-term performance would remain under pressure due to business volatility, cost inflation and withdrawal of Aurore merger, sharp correction in stock (down 34% from Q3 result and 49% in last 6 months) has priced in most concerns. Recovery in business, normalising of high costs and use of own front-end bode well for growth and profitability over the long term. Upgrade to ADD from Reduce with a revised target price of Rs721/share.

Business review: Revenue, EBITDA and PAT declined 18.8%, 86.3% and 96.9% YoY, respectively, in Q4FY22. Q4FY22 revenue stood at Rs3.6bn which is ~90% of Q2FY22 revenue of Rs4.0bn. Hence, we believe, the company is on target to achieve normalised level of financials by Q2FY23. Regulated market and emerging markets declined 12.1% YoY and 31.7% YoY, respectively, in Q4FY22 due to pricing pressure and demand volatility. EBITDA margin stood at 3.7% in Q4FY22 against 22.3% in Q4FY21 mainly due to inventory adjustment and negative operating leverage. Sequentially, business has witnessed healthy recovery with revenue growing ~260% and EBITDA and PAT turning positive. Solara announced the withdrawal of merger with Aurore for the following reasons: 1) Aurore missed financial goals set for FY22 due to weak demand for covid products and other tactical opportunities and 2) in the current challenging scenario, Solara Board wants the company to focus on its core strength and organic growth.

Key concall highlights: 1) Expects to file 6 products in FY23, 2) it is waiting for USFDA inspection at Kallur plant, 3) CRAMS is 8% of revenue, grew 35% YoY in FY22, 4) Ibuprofen - realisation is ~US$11-12/kg; demand started returning with inquiries from new clients and 5) company expects 50-55% gross margin in H2FY23

Outlook: We estimate Solara to report revenue/EBITDA CAGRs of 18.9%/98.8% over FY22E-FY24E led by recovery in base business and new launches. The company is likely to generate FCF to ~Rs5.9bn over FY23-24E. Return ratios will improve, but remain below 10%.

Valuation and risks: Cut revenue and EBITDA estimates by 33-34% and 36-45% for FY23E-FY24E to reflect withdrawal of Aurore merger. Sharp correction in stock price largely factors in near-term concerns. Upgrade to ADD from Reduce with a revised target price of Rs721/share based on 10x FY24E EBITDA (prior: Rs908/share on 11x Sep’23E EBITDA). Key downside risks: Higher competition, cost inflation and regulatory hurdles.

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