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Buy Solara Active Pharma Ltd For Target Rs.2,050

Solara 2.0 to target faster growth

* Backward integration in Ibuprofen, at the Visakhapatnam facility, makes SOLARA one of the only two fully backward integrated API players in the world.

* The recently acquired ALS will enhance its Generic APIs capabilities and move SOLARA ahead in the competitive landscape in CDMO.

* Solara 2.0 lays down a path for accelerated growth, better profitability by FY25, and aims to grow the CDMO segment faster than what it has done previously.

Generic APIs – healthy traction in ‘other markets’

 With backward integration in the Ibuprofen manufacturing process, SOLARA has become one of the only two fully backward integrated Ibuprofen manufacturers in the world. It will start accruing commercial benefits in coming quarters. This will help it gain market share, improve margin, and navigate price volatility in Ibuprofen.

 It is on track to file 10-12 DMFs in the US in FY22. The acquired portfolio of AURORE is expected to increase the breadth of SOLARA’s offerings due to minimum overlap. The acquisition also adds an Anti-Viral product portfolio to its offerings. The management expects to launch 25 products in FY22, leveraging its ALS capabilities. We expect 31% CAGR in API sales to INR27b over FY21-23E.

CRAMS adds differentiated capabilities to fast-track growth

 SOLARA grew the opportunity pipeline by 40% QoQ. The management is now focusing on increasing projects in the R&D stage. It intends to build its CRAMS business through strong expertise in chemistry, and adds science-based differentiation and technological capabilities. We expect CRAMS sales to expand 4.5x to INR3.6b over FY21-23E.

Synergy benefits from the ALS acquisition to aid margin expansion

 SOLARA expects INR1.5-2.2b in synergy benefits in the first year of operations post the merger. It estimates savings of INR500-750m in overhead costs, INR250-350m from R&D cost rationalization, INR250-300m in procurement, and INR500-750m in additional gross profit from cross-selling opportunities.

Solara 2.0 aims at faster growth and better margin

 SOLARA unveiled its goal of being among the top 10 global pure-play API players. It is targeting 25% sales CAGR over FY21-25, 23-25% EBITDA margin, and a 30% revenue contribution from CRAMS by FY25. Growth is expected to be achieved through organic and inorganic expansion, including the recently announced ALS acquisition.

Valuation and View

We continue to value SOLARA at 13x its 12-month forward EV/EBITDA to arrive at our TP of INR2,050. We expect 38% revenue CAGR over FY21-23E, led by a 31%/112% CAGR in API/CRAMS revenue. With operating leverage and synergy benefits, we expect EBITDA to grow at 42% CAGR over FY21-23E.

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