IGI Logo

Q1 miss; outlook intact

Solara Active Pharma (Solara) reported Q1FY22 performance was below estimate due to demand pressure in some products including Ibuprofen in the regulated markets and temporary shutdown of plants due to COVID-19. Consolidated revenues grew 16.4% to Rs4.1bn led by strong growth in non-regulated markets, EBITDA margin was down 160bps YoY but flat QoQ to 22.5% due to lower proportion of regulated markets and adjusted PAT grew 19.9% to Rs507mn.

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.

* Growth driven by non-regulated markets, regulated markets dropped: Solara reported a healthy revenue growth largely supported by growth in non-regulated markets which grew 228% YoY and 19.5% QoQ. Supplies from Vizag plant, where capacity utilisation is consistently increasing, to non-regulated markets was the key reason for this strong performance. However, regulated market reported a decline of 36.9% YoY due to demand pressure in certain key products including Ibuprofen and the same is expected to recover to normal levels in 2-3 quarters. Company expects to file 10-12 DMFs in FY22. This augurs well for the future growth of the API business. New products contribution increased to ~20% in Q1FY22 vs 8-10% in previous quarters. Solara added 4 new customers in CRAMS business in Q1FY22 and CRAMS business would grow over 50% in FY22E.

* Margins stable and likely to improve: Company reported a decline of 160bps YoY (+20bps QoQ) in EBITDA margin largely due to sharp jump in revenue from nonregulated markets which contributed ~57% to sales in Q1FY22 vs 20% YoY. This also led to gross margin decline of 100bps. 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 including Aurore.

* Outlook: We estimate Solara to report revenue, EBITDA and PAT CAGRs of 35.4%, 40.1% and 44.1% 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 ~Rs4bn 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 21.9% and 19.1% respectively. The company expects revenue of Rs2.8bn with EBITDA margin of 23-25% in FY22 post Aurore merger.

* Valuation and risks: We largely maintain our estimates and maintain BUY with a revised target price of Rs2,000/share based on 13xFY23 EBITDA (earlier Rs2,004/share). Key downside risks: higher competition, currency fluctuations, and regulatory hurdles.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer