This pharma share is up 175% since January, Macquarie says it’s still cheap; check upside, target price

Solara Active Pharma, a company carved out from the demerger of human API segments of Strides Pharma and Sequent Scientific in the beginning of 2018, has risen along with a list of pharma stocks on Dalal Street that shrugged off pandemic worries and zoomed ahead. After moving 175% higher since the beginning of this year when it traded at Rs 427 per share, to now at a 52-week high of Rs 1,245 apiece, Solara Active Pharma scrip has come a long way. However, analysts at Macquarie believe that not only there is still more upside to the stock, this is the cheapest API stock globally.

Company profile

“Solara is among the top three pure-play API manufacturers in India with a commercialised portfolio of 50+ APIs,” Macquarie said in a report. With over 100 filings and 80 products in its portfolio, Solara Active Pharma has a presence in over 75 countries. At the end of the previous fiscal year, regulated market sales contributed ~76% to Solara’s sales, according to the report. The business of the company is spread across, United States, Europe, Japan, South Korea, and even China.

Focused on long-term

Analysts at Macquarie believe Solara is very well placed to capitalise on the huge opportunity for Indian API companies owing to its strong 30+ year track record, robust customer relationships with a long term focus, cost-efficiencies, and healthy DMF filings. “One of the biggest strengths of Solara is that it is a pure play API company. Solara’s strategic focus is leading to higher penetration for existing molecules,” the report said. Additionally the company focuses on long-term contracts. Over 50% of the company’s contracts are long-term spanning from 3-5 year in length, these offer visibility on the company’s future.

Strength of the company lies in development and manufacturing of polymer-based APIs, analysts at Macquarie said. “Also, Solara is focusing on sterile, high potent and fermentation-based APIs. In high volume APIs like Ibuprofen, Solara enjoys a global cost leadership,” they added. Solara Active Pharma plans 8-10 filings annually over the next half a decade. Tracking the company’s sales, big pharma companies constitute 40% of the sales while 60% are to generic companies. “ For its key molecules, Solara has relationships with its clients for more than 15-20 years. This is demonstrated by Solara’s ability to seamlessly pass on RM price hikes to its clients,” the report added.

Compliance record of the Solara Active Pharma is termed as spotless. “Barring the recent OAI for Cuddalore (which, in our view, was largely linked to the Ranitidine NDMA impurity issue and Solara has since discontinued Ranitidine), Solara has had a spotless US FDA compliance track record.”

Shareholders increase stake

According to data available on the Bombay Stock Exchange, the promoter group of the company held a 41.88% stake in the company at the end of June this year. However, Macquarie says that at the end of September, the promoter group holds a 45% stake in the company. Global private equity firm TPG Capital is also a stakeholder in the company post January 2019 equity infusion. “In January 2019, the promoters and global private equity player, TPG Capital, had announced an infusion of Rs 4.6 bn in the company. At the time of the announcement, the stock price was Rs 389. Out of this, the promoters infused Rs 2.6 bn (6.5m warrants at a conversion price of Rs400/share) and TPG infused the remaining Rs 2 bn (4m warrants at a conversion price of Rs500/share),” the report noted.

The global firm values Solara at 13x Sep-22 EV/EBITDA multiple, which is still at a significant discount to most of its global and Indian API peers. “Accordingly, we assign a target price of Rs1,680 for Solara and initiate coverage with an Outperform rating on the stock. In the bear/bull cases, we derive a value per share of Rs 1,320 / Rs 2,064,” the report said.