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Destocking of Ibuprofen; Auroure merger delayed.

Solara Active Pharma (Solara) reported Q2FY22 performance was below estimate specially at the profitability front due to lower demand for Ibuprofen in the regulated markets and rising costs. Revenues remained flat YoY at Rs4.0bn, EBITDA margin dropped 670/460bps YoY/QoQ to 17.9% and adjusted PAT declined 47.5% to Rs298mn. We remain positive on the long term outlook considering presence only in the API and CRAMS space thereby removing any potential conflict with clients, maintaining large market share in key products, strong regulatory track record places Solara in a strong position to monetise the growing API business opportunities which would be augmented by the potential merger with Aurore Life. Reiterate BUY with a revised target price of Rs1,595/share.

* Business review: Solara’s revenue in Q2FY22 remailed flat YoY with developed markets declining 51.3% YoY due to demand contraction for Ibuprofen, that was offset by strong growth in CRAMS and non-regulated markets. Demand for Ibuprofen will take few quarters to recover post the inventory destocking completes. Supplies from Vizag plant, where capacity utilisation is consistently increasing, to nonregulated markets was the key reason for strong growth in other markets. CRAMS business grew 40% YoY and expects this growth movement to continue with strong order book. Company expects to file 10-12 DMFs in FY22E, which augurs well for the future growth of the API business. New products contribution down to ~11% in Q2FY22 vs ~20% QoQ. EBITDA margin dropped 670/460 bps YoY/QoQ owing to change in mix coupled with rising raw material and logistical expenses. Recovery in its key products, higher utilisation and growing CRAMS business will support growth in the near term however, elevated costs will keep margins in check.

* Key Concall Highlights: 1) India Export of Ibuprofen down ~30% compared to past eight quarter average 2) expects 30+% 2-3 years CAGR in CRAMS with 5-8% higher margins than generic business 3) Vizag plant will be converted to a multipurpose plant 4) Supply of molnupiravir intermediates is expected Q3FY22 onwards 4) Merger of Aurore has been delayed by 6 months 5) Guided capex of Rs2.25-2.5bn in FY22

* Outlook: We estimate Solara to report revenue/EBITDA/PAT CAGRs of 29.3%/26.4%/28.8% over FY21E-FY23E with higher demand for API and CRAMS and business boost post-merger with Aurore. While RoE and RoCE would be under pressure due to the merger with Aurore, excluding goodwill the ratios will likely remain strong at 21.9% and 18.6% respectively for FY23E.

* Valuation and risks: We have cut revenue and EBITDA estimates by 9-33% and 18- 46% respectively to factor in low demand for Ibuprofen and delay in Aurore merger. Maintain BUY with a revised target price of Rs1,595/share based on 13xFY23 EBITDA (earlier Rs2,000/share). Key downside risks: higher competition, currency fluctuations, and regulatory hurdles.

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