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On track for course correction

Work in progress to better outlook of Vizag facility

* Solara active Pharma (SOLARA) delivered better-than-expected operating margins, driven by superior product mix and cost-control measures. With better demand for its products and inventory normalization in the distribution channel, SOLARA is expected to further improve its performance going forward.

* We revise our earnings estimate to a loss of INR214m from a loss of INR341m for FY23 and slightly raise our earnings estimate for FY24 by 3% to factor in a) a scope for improved utilization, driving better profitability of the Vizag facility, b) the benefits accrued of backward integration, c) better product selection with focus on higher gross margin and d) ongoing cost improvement programs.

* We continue to value SOLARA at 11x EV/EBITDA to arrive at price target of INR520. SOLARA continues to rework on its portfolio and focus on customer markets and improving manufacturing efficiency. We reiterate our Buy rating on the stock with a TP of INR520.

Third consecutive quarter of an uptrend in EBITDA margin

* Sales declined 16% YoY to INR3.4b (our est: INR3.5b) in 2QFY23.

* Gross margin contracted ~1000bp YoY to 44%, largely due to continued disruption in ibuprofen business and volatility in raw material prices.

* However, gross margin improved sequentially, expanding 330bp QoQ, implying stability in pricing and demand for Ibuprofen derivatives.

* EBITDA margin contracted 970bp YoY to 8.1% (our est 6.6%) in the quarter. However, EBITDA margin expanded 430bp on a QoQ basis.

* Consequently, EBITDA declined 62% YoY to INR276m (our est: INR233m) in the quarter.

* SOLARA reported a loss of INR99m for the quarter (our est. loss of INR188m).

* In 1HFY23, revenue/EBITDA declined 17%/75% YoY, respectively. However, SOLARA reported a loss of INR264m in 1HFY23 vs a profit of INR805m in 1HFY22.

Highlights from the management commentary

* It aims to achieve quarterly sales run-rate of INR4b by 4QFY23

* From the current under-recoveries of INR131m for the Vizag facility, Solara intends to achieve EBITDA breakeven by the end of 4QFY23.

* The USFDA inspection at the Vizag facility, triggered by one of the customers, is expected in 2HFY24

* SOLARA is on track to file 6 DMFs in FY23.

* The company continues to remain confident of achieving its gross margin of 50% by the end of FY23

* It is also planning to sell certain products in less regulated market for better utilization of facilities.

* CRAMS revenue stood at 5% of sales for 2QFY23.

* It aims to achieve debt: EBITDA of 2.5x in FY24. ? Net debt stood at INR9.2b at the end of 2QFY23.

* The overall capacity utilization stands at 75% in 2QFY23.

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