Solara Active Pharma Sciences Ltd

Market Capitalization: 3,800 Cr	Current Price:  1,055 (12 Nov 2020)
Stock P/E: 24	Debt to equity: 0.71
ROCE: 12.2%	ROE: 11.5%
Promoter holding: 44.2%	Cash Cycle: 64 days
Asset Turnover: 0.68	Net Profit Margin: 9.7%

Company Overview

Solara Active Pharma Sciences Ltd (Solara) was formed in October 2017. It was formed through demerger of API business from Strides Shasun Ltd (currently names Strides Pharma Sciences Ltd). Subsequently, Solara acquired the human API business from Sequent Scientific Ltd around the same time resulting in a pure-play API company. It offers a basket of diversified, high-value commercial APIs and contract manufacturing services in over 75 countries. The company caters to requirements of every scale, from milligram to metric tonne. It covers the entire life cycle of a new chemical entity, from pre-clinical phase to validation and commercial supply, while fully complying with domestic and international guidance. Though the company was formed recently, it benefits from a legacy of over three decades of expertise and technical know-how of its parent businesses from Strides and Sequent Scientific Ltd. In December 2019, Solara appointed Bharath Sesha as the CEO. Bharath has over two decades of experience across diverse industries. His expertise spans across the pharmaceutical, healthcare and material sciences industries. He has operated in countries like USA, Hongkong, China, Middle East, Africa, and Europe.

Business Analysis

Important Player in Key API’s

Solara is well positioned in the API space with its global presence and leadership position in top 10 APIs. It develops and produces generics and commercial APIs across niche therapeutic categories, with proven capabilities in complex products like APIs based on polymers and injectables. It has a diversified and strong customer base with regulated markets making up 75% of its revenues.

A key strength of Solara is development and manufacturing of polymer-based APIs. It is also focussing on sterile, high potent and fermentation-based APIs to cement its position as a pure-play API company.

The company’s existing portfolio includes 80+ commercial APIs and 25+ APIs under development across high-value low volume product segments.  Solara’s 80+ commercial API’s predominantly address anthelmintic, anti-malarias, anti-infective, neuromuscular insomnia and anti-psychotic hyperkalemia segments, among others.

Solara reinforces entry barriers to competition and builds strong intrinsic value through market specific launches. Further, the 25+ API’s under development are in niche segments like Anthelmintic, Anti-Coagulants, Anti-infective, Beta Blockers, Muscle Relaxants, and other niche segments.

Solara has filed 150+ DMF filings across the world to further deepen its footprint in high-margin markets and build strong inherent value through market specific launches. The company plans to file 10+ DMF’s in the current financial year as well.

Its dependence on China for raw materials is limited as the company has consciously developed backward integration and reduced its dependence on China to bare minimal.

Well Positioned for Growth with New Capacity

Solara has undertaken a greenfield expansion at Visakhapatnam at a cost of around INR 250 crore. The first phase of the project is expected to commence operations in the second half of FY2021. Phase 1 will increase Ibuprofen capacity from 4,800 TPA to 8,400 TPA and is expected to reach peak capacity in the first 12 months after launch.

BASF recently restarted its Texas Ibuprofen plant leading to expectations that it can impact Solara. However, Solara supplies Ibuprofen API to its long-term customers at much lower rates compared to BASF at around US$12-14 per kg. Further, Solara operates based on long-term contracts with large customers and is confident to see strong business growth in this stream. The company is also a leading player in Ibuprofen derivatives which is among the fastest growing market segment in many regulated markets.

Vizag site area is 17 acres leaving scope for potential future expansion. The company will be servicing its global customers from Vizag as and when regulatory and customer audits are completed. The phase II for Vizag will cater to both large volume and niche API’s. It will have multipurpose block that can cater to both small and mid-volume API’s. Validation for phase II is expected at the end of this calendar year. The Vizag facility will remain under tax holiday for a period of 3 years.

CRAMS Business to Propel Growth

Within CRAMS, Solara aims to offer services across the value chain of a new chemical entity, right from the pre-clinical stage to commercialisation. Considering its long-standing relationship with big pharma and biotech companies and clean reputation, Solara expects to scale up its contract development and contract manufacturing (CDMO) vertical at a stronger pace. CRAMS today account for 10% of the overall revenues with strong pipeline of 25+ products, at different stages of development.

The company is looking to expand its CRAMS business with two R&D centers in Chennai and Bangalore hosting 200+ Scientists with strong technical capabilities. Solara is committed to spend INR 50-60 crore on R&D per year going forward. Solara has issued warrants to promoters and private equity investor TPG Capital which got subscribed in Q2FY21. The share capital of the company increased from 26.8 million shares to 36.0 million shares post the warrant conversion leading to capital infusion of INR 280 crore. Solara is looking to use these funds for potential acquisition in US in the form of kilo lab facilities having certain technological capabilities and cut down debt.

Solara is also looking to build the business in organic way with a dedicated facility for CRAMS in the Vizag facility. Since the margins in the CRAMS segment are upwards of 30%, the management is targeting 20%+ EBITDA consolidated margins over the next few years. It intends to grow its CRAMS business both organically and inorganically to contribute 30% to overall sales in the next 5 years.

As shown below, Solara is targeting next leg of growth through customer centricity, continuous improvement, new products/markets, CRAMS and Inorganic expansion.

Key Risks

• The recent Official Action Indicated (OAI) on the company’s Cuddalore is a blot on Solara’s spotless regulatory compliance record. Regulatory risk is the paramount concern in this kind of industry. On this occasion, it was largely linked to the Ranitidine NDMA impurity issue.
• High client and product concentration as Solara’s top 10 molecules and top 10 customers constitute 76% and 48% of its top line respectively.
• Production of few products involves waste discharge, which needs to be treated in Effluent Treatment Plants (ETPs). Thus, Solara needs to invest continuously to upgrade ETPs and bring efficiency in the process to reduce waste discharge.
• Large working capital requirements and susceptibility to fortunes of the end user industries.

Key Positives

• Solara has 150+ regulatory filings across 75+ countries, including more than 82 Drug Master Filings (DMFs). These could translate into strong business momentum in future.
• Has strong portfolio of APIs in key therapeutic segments, with expertise in anthelmintic, anti-malaria, anti-infective and non-steroidal anti-inflammatory segments.
• The recent capital infusion of INR 280 crore has strengthened the capital structure of the company. This extra cash can fuel business expansion plans in high margin CRAMS space.
• Promoters holding has increased by 6.04% over last few quarters.
• Debt levels should come down and Cash flow generation should improve as high capex phase is behind and the new Vizag facility should start contributing from H2 FY21.

Valuation and Outlook

Solara can be strong medium to long-term bet considering the renewed focus on API industry and strategy of formulation companies to diversify their API sourcing from China. China plus one sourcing trend is very much visible and can accelerate going forward considering India is still negligible player in the API space.  Solara is attractively valued at around 24 PE considering the large expansion coming onstream in H2 FY21. Management has guided for 30% growth in revenues and 40% growth in EBITDA in FY21 over FY20 despite flattish growth in H1 FY21. This strong guidance is on the back of newly commissioned Vizag facility, continued momentum in base products, renewed focus on new products and increasing wallet share from existing customers. Operating profitability shall remain healthy supported by economies of scale in its key products and sharp uptick in sales of high-margin and niche products.

Disclaimer: Have personal investments in Solara Active Pharma at the time of writing this note. Information in this blog is for educational purposes only. The articles  may contain external links , references and compilation of various publicly available articles. All copyrights and trademarks of images belong to their respective owners and are used for Fair Educational Purpose only.