After rallying 6 times in 3 years, this API maker just got first ‘sell’ rating

NEW DELHI: Solara Active, which has been rallying for three years now, has suddenly got its first ‘sell’ rating. As if on cue, the stock tanked 3.5 per cent in Mumbai trading on Thursday.

The stock, which got listed at Rs 288 on June 27, 2018, hit a record high of Rs 1,859 on Wednesday, rising a solid 550 per cent, or 6.45 times, in less than three years. Six brokerages that cover the stock, all still have ‘buy’ ratings.

But Antique Stock Broking initiated coverage on it on Thursday with a ‘sell’ rating. It valued the stock at Rs 1,425, giving it an 18 times P/E multiple on FY23 estimated earnings. This target suggests 22 per cent downside from Wednesday’s closing price of Rs 1,815.55. The stock closed 3.5% lower at Rs 1,753 on Thursday.

Motilal Oswal initiated coverage on the stock on May 10 with a price target of Rs 2,000. Sharekhan had on May 6 raised its price target to Rs 2,000. Also, on April 29, ICICI Securities had initiated coverage on the stock with a ‘buy’ rating and a price target of Rs 2,004.

Antique expects FY22 to be a better year for the company but competitive intensity is likely to heighten in FY23 in certain key products. It also sees a higher effective tax rate going ahead.

“The business has priced in most part of future growth,” the brokerage said.

Solara Active Pharma (Solara) is a research-centric and customer-driven active pharmaceutical ingredients (API) manufacturer. It was formed by demerging the API business of Strides Pharma and integrating it with the Human API business of Sequent Scientific. The company recently merged Aurore Lifescience (Aurore) with itself, which is also engaged in API and CRAMS, with self in an all-stock transaction, effective from April.

“There are strong tailwinds in the API & intermediate industry in relation to large supply chain shifts happening away from China. However, that pricing inflation in API industry may not sustain in the long run, and there may be downward pressure as cost of procurement becomes the focal point for large customers,” Antique said.

Others, however, still maintain a bullish outlook for the business.

Motilal Oswal Securities projects the stock price at Rs 2,000 in a ‘neutral’ scenario and at Rs 2,190 in a bullish scenario. “Slower execution and escalation of regulatory issues may lead to a 39 per cent Ebitda expansion CAGR over FY21-23. We assign a lower multiple of 10 times 12M forward earnings in our bear case scenario to arrive at of Rs 1,420, implying limited downside from current level," the brokerage said.

ICICI Securities said Solara is well-positioned to monetise the growing API opportunity with a global market size of $180 billion. This is as nearly 60 per cent of Solara’s revenues come from long term contracts. This approach would be the key driver for sustaining longer term growth momentum, it said.

ICICI, too, sees higher competition in the API space, besides risks from currency fluctuations and regulatory hurdles. “The merger of Aurore is positive as it brings in a complementary product portfolio, larger CRAMS business (10 per cent of combined sales vs current 5 per cent), potential cost synergies and merger at reasonable valuations. Synergies would accrue in terms of a wider product portfolio, significant increase in new product launches, access to ARV portfolio, backward integration and strengthening presence in APAC region,” the brokerage. It expects Aurore to bring in 25 per cent of total revenues and 27 per cent of Ebitda in FY23.