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Strong growth continues

Solara Active Pharma (Solara) reported strong growth in Q4FY21 led by healthy growth in the non-regulated markets. Consolidated revenues grew 49.7% to Rs4.4bn led by growth across geographies, adjusted EBITDA margin was up 540bps YoY but declined 240bps QoQ to 22.3% and adjusted PAT grew 217.7% to Rs566mn.

We believe the key moats of the company:

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 places Solara in a strong position to monetise the growing API business opportunities which would be augmented by the recent announcement of merger with Aurore Life. Reiterate BUY with a target price of Rs2,004/share.

* Growth driven by non-regulated markets:

Solara reported a healthy revenue growth of 49.7% YoY and 4.1% QoQ. This was largely supported by growth in nonregulated markets which grew 212% YoY and 57.6% QoQ. Supplies from Vizag plant which saw doubling of capacity utilisation QoQ to non-regulated markets was the key reason for this strong performance. Regulated market also reported a growth of 5.0% YoY led by growing demand for the API products. Company filed 11 DMFs globally (8 in US) in FY21 as well as 23 market extensions and expects to file 10-12 DMFs in FY22. This augurs well for the future growth of the API business. CRAMS has underperformed in FY21 owing to delay in volume offtake by few customers due to COVID-19, however, it is expected to normalise in the coming months. Solara was also able to add four big pharma clients in the last fiscal that would support growth.

* Margins suppressed but are expected to improve:

Company reported a decline of 430bps YoY (-390bps QoQ) in gross margin largely due to sharp jump in revenue from non-regulated markets which contributed ~43% to sales in Q4FY21 vs general trend of ~23-24%. This also led to EBITDA margin decline of 240bps QoQ, however, better capacity utilisation supported EBITDA margin YoY which improved 540bps. Improving sales, higher utilisation and growing CRAMS business should all support margins in the future and we expect rise of 160bps to 25.5% over FY21-FY23E.

* Outlook:

We estimate Solara to report revenue, EBITDA and PAT CAGRs of 35.2%, 39.7% and 42.6% over FY21E-FY23E with higher demand for API and CRAMS, business boost post-merger with Aurore, and improving margin profile. We expect it to generate FCF of ~Rs5bn over FY22E-FY23E. While RoE and RoCE would be under pressure due to the merger with Aurore, excluding goodwill the ratios will remain strong at 21.2% and 18.8% respectively.

* Valuation and risks:

We largely maintain our estimates and recommend BUY with a target price of Rs2,004/share based on 13xFY23 EBITDA. Key downside risks: higher competition in API space, currency fluctuations, and regulatory hurdles.

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