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‘Partner of Choice’ in API/CRAMS space

* Solara Active Pharma Sciences (SOLARA) has a differentiated business model, formed by demerging the API business of Strides Pharma and integrating it with the Human API business of Sequent Scientific. While young in terms of listing, it has almost three decades of experience, with sales of INR16.2b / an EBITDA margin of 23.9% over the past 12M.

* SOLARA has built a multi-pronged strategy through a) capacity expansion in core products, b) enhanced offerings, c) expansion into newer geographies, and d) acquiring new customers – to benefit from formulators’ inclination to reduce their dependency on select regions to procure APIs.

* In addition to the API base business, the merger of the Aurore Life Science (ALS) business would accelerate SOLARA’s CRAMS business –~INR800m over the past 12M v/s INR1.5b for ALS. ALS’s established relationships with the innovator for the CRAMS business bodes well for SOLARA to cross-sell its other offerings as well. Additionally, this would enable SOLARA to gain entry into the ARV product segment and strengthen its position in Japan / South Korea, along with improving its footprint in China.

* SOLARA has a wide gamut of service offerings across the value chain of new chemical entities, making it suitable for increased CRAMS offerings outsourced by the innovator.

* Overall, we expect a 42%/46% CAGR in EBITDA/PAT over FY21–23, led by strong traction in both API/CRAMS, well supported by merger of ALS.

* We value SOLARA at 13x 12M forward EBITDA, factoring in a) favourable prospects in the API industry, b) cost efficiency driving market share leadership in base products, c) upside from ALS merger, d) wide portfolio offerings, e) diversified facilities, and f) encouraging CRAMS opportunity.

* Initiate with BUY, with Target Price of INR2,000.

Favorable macro/capacity additions – key to achieve 30% API sales CAGR over FY21–23E

* The primary API demand drivers remain steady, supported by a rising aging population in developed countries, increased affordability in developing countries, and faster genericization. Supply-side disruption due to a) environmental concerns in China and b) de-risking efforts by customers to lower country-specific dependency has significantly improved the business prospects of Indian API companies.

* Given this backdrop, SOLARA’s API segment (~89% of sales) is wellplaced to benefit from the opportunity on account of a) an established presence (leading market share in base products, coupled with additional capacity to outperform industry growth), b) new launches (10% of API sales in FY21), and c) a growing presence in newer markets.

* The recent merger with ALS a) increases its quantum of product offerings (40+), including some niche products, b) enhances the product pipeline (20+ DMFs filed), and c) increases its knowledge base and production capacity. Accordingly, we expect a 30% sales CAGR for this segment over FY21–23.

Capability/Capacity in place for CRAMS; execution is key

* SOLARA has built capabilities across the value chain, from the pre-clinical to the commercial phases in the CRAMS segment (~11% of sales). It has also set up a dedicated facility for this segment to manufacture higher volumes. Considering the cost advantage, the availability of technical skill sets is the key driver for India’s CRAMS industry. Based on the right mix of resources/capacity and addition of ALS CRAMS business, we expect SOLARA to quadruple CRAMS sales in FY23 to INR3.4b.

Valuation and view

* With a focus on new launches, geographical expansion, augmented capacity from the new Vizag plant, better traction in base products and addition of ALS business, we expect a 36%/42%/46% sales/EBITDA/PAT CAGR to INR29.8b/INR7.8b/INR4.7b over FY21–23. We value SOLARA at 13x 12M forward EBITDA, arriving at TP of INR2,000.

* In the Bull case scenario, we factor in faster execution in both API and CRAMS as well as higher market share gains, leading to a 47% EBITDA CAGR over FY21–23. Accordingly, we assign a higher multiple of 14x 12M forward EBITDA to arrive at TP of INR2,190, implying an upside of 47% from current levels.

* Slower execution and the escalation of regulatory issues may lead to a 39% EBITDA CAGR over FY21–23. We assign a lower multiple of 10x 12M forward earnings in our Bear case scenario to arrive at TP of INR1,420, implying a limited downside of 10% from current levels.

* We initiate SOLARA with a Buy rating, with a 28% upside from current levels.

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