Solara Active Pharma Science bets big on API amid price hikes, supply disruption in China

API is defined as the raw materials that makes the drug and is then sold to formulators.

The stock has seen a steady run in the past one month and promoters have been hiking their stake since listing as H1FY19 looked strong on the back of growth in base business and new product launches.

Management has guided for mid-teens growth in revenue over next three years and 20 percent EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) growth that will be key for the stock going forward.

Strides Shasun contributes less than 20 percent to total revenues of the company. As per the annual report, Solara Active Pharma will supply API to Strides Shasun at prevailing market price.

The success in new products would be based on cost efficiency and good relationship with the existing customers in other geographies.

The key reason for the spotlight turning to API makers is that prices of key raw materials have gone up by more than 20 percent to 30 percent and in some cases even more.

Over the past year and a half, reports suggested that nearly 150 API manufacturers in China have closed down their facility to comply with environmental standards.

More than 60 percent of APIs in India are sourced from other countries and for some specific APIs, the dependence is more than 90 percent, according to the department of pharmaceuticals under the ministry of chemicals and fertilisers.

In a bid to reduce India’s dependence on China for APIs, the ministry of chemicals and fertilizers has joined hands with other ministries to draw up a road map for increasing their production in the country.

The net debt of Solara Active Pharma has increased to Rs 672 crore in September 2018 against Rs 586 crore at the start of FY19. The key reasons are the hit in foreign exchange rate of Rs 14.3 crore and due in Goods and Services Tax (GST) refunds of Rs 54 crore.

The company has stated that forex loan component has reduced from $38 million in March 2018 to $20 million in September 2018 and these measures will counter the volatile currency environment.

On the valuation front, API companies command anything between 8x to 12x EV/EBITDA, while Solara Active Pharma currently trades at 7.6x EV/EBITDA assuming FY19E EBITDA at Rs 190 crore.

Considering a higher multiple, the valuation could raise up to the following levels assuming FY19E EBITDA of Rs 190 crore.

 

Going forward, the stock may rise due to continued shutdown of Chinese API shutdown that will support prices, potential debt reduction and the company reporting the guided projections on the EBITDA front, which can deliver FY20E EBITDA at Rs 220 crore odd.

In the future, Solara Active Pharma may face the come back of stronger Chinese API firms, which will put immense pressure on the much commoditised Indian companies.