Solara Active Pharma Sciences Initiating Coverage Research Report Of Axis Securities

EMERGING AS A GLOBAL PURE-PLAY API PLAYER

We initiating coverage on SOLARA with BUY rating and a target price of Rs 1,350 (P/E of 18x for FY23E earnings) which implies an upside of 25% from the current levels. Solara being a global pure-play API player having highest 80+ commercial APIs could be benefitted due to dual source qualification by global Pharma players and import substitution from China after Covid-19 outbreak. Solara has the highest gross margins ~57% in the industry that reflects the company has pricing power and value added products in the portfolio. Solara has filed 150+ DMs across the globe and adopted strategy of geographical expansion and new products launchevery year to drive topline growth. We expect revenue & PAT CAGR of 20.8% and 33.0% over the period FY20-FY23E.

OUR INVESTMENT THESIS IS BASED ON THE FOLLOWING PREMISES

India’ APIs Industry: dual source qualification and import substitution a structural tailwind The Indian API market is estimated to be ~INR 798 bn, growing at 8.8% annually. Out of this market, INR 525 bn is domestic consumption and API exports are INR 273 bn. Further, India’ API imports INR 249 bn from China has increased up to 68% of overall API import in last 8 years. We believe dual source qualification by global Pharma players and import substitution from China could generate a structural demand from Indian APIs manufacturers after a Covid-19 outbreak. Solara, being a pure-API player with 80+ molecules in the product basket is well placed to grab this opportunity. Further, GoI has launched the production-linked INR 100 bn incentive scheme for 53 products that could strengthen the domestic APIs manufacturing and less import from China.

Strong product portfolio of generics and commercial APIs across niche therapeutic categories

Solara has strong product portfolio (80+ commercial APIs and 25+ APIs under development) that comprises high volume APIs like Ibuprofen, Gabapentin, and Ranitidine, low volume (niche) products like Oseltamivir, Sevelamer, Venalfaxine and Nizatidine. Solara has the highest gross margins ~57% in the industry that reflects the company has pricing power and value added products in the portfolio. The company’s top 10 products accounted for 77% of revenue and new products accounted for 7% of overall revenue. We believe, Solara’ API portfolio could deliver revenue CAGR of 19.0% over the period FY20-FY23E.

Contract Research and Manufacturing Services (CRAMS)

Solara offers contract development and manufacturing services that accounts for 10% of total revenue pie. Solara has earmarked funds, raised through equity subscription from promoters (INR 260 crore) and the TPG group (INR 200 crore), for inorganic acquisition. Solara expects to win some new business in FY21E, based on new bids for new proposals. We believe, CRAMS business could generate INR 330 crore revenue in FY23E (from INR 135 crore in FY20.).

High APIs’ realizations have improved industry’ Gross margins

Industry trend reveals gross margins of API players were almost sustainable in last 10 years while in last 2 quarters these were majorly driven by increase in APIs’ realizations after the breakout of Covid-19. We believe high realizations of API could sustain till the stabilization of supply chain disruptions and Covid-19 pandemic. Solara has the highest gross margins ~57% in the industry due to niche products in the portfolio as compare to peers.