Shares of Solara Active Pharma Sciences hit a record high of Rs 1,245, up 19 per cent on the BSE, in the intra-day trade on Wednesday on the back of heavy volumes. Stock of the smallcap pharmaceutical company surpassed its previous high of Rs 1,114 touched on September 30, 2020.
Global brokerage Macquarie Capital Securities, on October 6, initiated coverage on the stock with an 'Outperform' rating and a target price of Rs 2,064 in bull-case scenario.
Analysts at the brokerage expect Solara's strategy of working with customers on a long-term basis (50-60 per cent contracts are long-term) rather than capitalising on short-term opportunities to lead to higher wallet share among existing clients as well as help in winning new customers. As a result, the brokerage firm believes Solara's growth is more sustainable than some of its Indian API peers.
"With strong API growth visibility, increasing importance of pure-play API suppliers, rising CRAMS contribution, an improving margin profile and a strong regulatory track record, we expect the stock to re-rate further," the brokerage firm said in a stock update.
It assigned a 13x Sep-22 EV/EBITDA target multiple to Solara, which is still at a significant discount to most of its global and Indian API peers, and incorporate risks like high client and portfolio concentration. "Accordingly, we assign a target price of Rs 1,680 for Solara and initiate coverage with an Outperform rating. Our TP implies 12 per cent revenue and 16 per cent EBITDA CAGRs over FY20-30E. Our bear/bull cases derive values per share of Rs 1,320/ Rs2,064," it said.
In the past eight trading days, market price of Solara Active Pharma Sciences has soared 34 per cent after credit rating agency CRISIL, on September 25, 2020 upgraded the rating for the long and short term instruments of the Company. In comparison, the S&P BSE Sensex was up 9 per cent during the same period.
The upgrade reflects CRISIL's belief that Solara's business risk profile will improve over the medium term supported by its established market position in key active pharmaceutical ingredients (APIs). Revenue is expected to grow at a healthy rate of 25 per cent over the medium term while operating profitability will be at 23-25 per cent.
"The ratings reflect Solara's established market position in its key APIs, such as Ibuprofen and Praziquantel, and strong relationships with its customers and suppliers. The company successfully commissioned the first phase of its new plant at Visakhapatnam in Andhra Pradesh. Revenue growth will be supported by steady demand for its existing products and increasing sales of new products over the medium term," CRISIL said in rating rationale.
Capacity addition in its key product, Ibuprofen API, is expected to support the revenue growth from the second half of fiscal 2021. Operating profitability shall remain healthy supported by economies of scale in its key products and is expected to improve as the sales of high-margin, niche products increase, it said.
In the past three months, the stock of Solara Active Pharma Sciences has rallied 83 per cent, as against 8.6 per cent gain in the S&P BSE Sensex. While in the past six months, it has zoomed 135 per cent, as compared to 32.5 per cent rise in the benchmark index.
At 01:18 pm, the stock was trading 11 per cent higher at Rs 1,170 on the BSE, as against 0.76 per cent gain in the Sensex. Trading volumes on the counter jumped over 8-fold with a combined 813,000 equity shares changing hands on the NSE and BSE till the time of writing of this report.