Solara Active Pharma Sciences Limited (SOLARA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Solara Active Pharma Sciences Limited Q3 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you, sir.

Thank you. A very good afternoon to all of you, and thank you for joining us today for Solara Active Pharma Sciences Earnings Conference Call for the Third Quarter and 9 months ended financial year 2025. Today, we have with us Arun, Solara's Founder; Poorvank Purohit, CEO; and Arun Kumar Baskaran, CFO, to share the highlights of the business and financials for the quarter. I hope you've gone through our results release and the quarterly investor presentation, which have been uploaded on our website as well as the stock exchange website. The transcript of this call will be available in a week's time on the company's website. Please note that today's discussion may be forward-looking in nature and must be viewed in relation to the risk pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to the Investor Relations team. I now hand over the call to Arun to make his opening remarks.

Thank you, Abhishek, appreciated. Thank you all for joining us today. So let me start off saying that it has been a very disappointing quarter in terms of our revenue performance. And this is mainly a design situation that we have been confronted with increased pricing competition on our portfolio of our ibuprofen range of products. We have been taking conscious decisions, as you would notice, over several quarters to be focused on operating leverage higher and improved margins and discipline of the balance sheet. I think we have come a long way in several of those key metrics. But we decided not to accept price challenges on our products that would be detrimental for our business on a long-term basis. Consequently, it's very rare that we revise the guidance downwards. We have, this time, in the case of Solara, revised the guidance downwards on the revenue standpoint, but I'm also at the same time pleased to confirm that our margins are actually trending ahead of -- our Q3 margins are trending significantly ahead of our H1 numbers in terms of an average percentage point, and we will see growth coming back to the business in a more disciplined and organized manner. I'm also pleased with the gross margin expansion of 500 basis points, and that is a good start point for us to build the business from there. All of this, obviously, results in improved free cash generation, resulting in reduced debt. And while the revenue guidance downwards is disappointing, we are not changing the EBITDA guidance previously provided at INR 230 crores to INR 260 crores. And we expect Q4 is typically a high quarter for the pharma API industry, we expect that to be the case for Solara, too. And while we have, obviously, reduced our revenue guidance, we had to adjust our EBITDA guidance by about INR 10 crores. But overall, EBITDA for the year for that -- I mean, INR 10 crores for the quarter of Q4, but the EBITDA for the entire quarter, which was guided earlier, will be maintained. We are trending quite nicely on the debt-to-EBITDA times that we have guided, and we'll continue to improve on this. A major decision we have taken is obviously to give focus to our CRAMS business, it's been suboptimal, if I may say, over the last 2 to 3 years. And it requires a very different approach to build value and also capabilities. And as most of you know, we have been mothballing our Vizag facility for a long period of time, although it's been FDA approved. We have invested significant amounts of capital there. And the carve-out of the CRAMS business will be beneficial to shareholders. We -- albeit, the size of the business is small today at INR 120 crores, the gross margins -- the EBITDAs will trend at around a significant higher than the company average, more in the 25% to 30% range. But we do acknowledge that this business is very suboptimal at this stage. But given the infrastructure that we have in Vizag, which is one of the largest sites in the API sector, and having 2 consecutive 0483 inspections, we think that we are well poised to have significant capabilities built out of Vizag, away from the catalog generic business and at the same time, pushing down about INR 200 crores of debt into the new CRAMS business and also funding it separately as and when it's required. It just gives the ability for the Solara retail business to be significantly set balance sheet -- I mean, a lighter balance sheet and will deliver significant outcomes in terms of financial key ratios. Consequent to all of this successfully complete -- in getting completed and obviously subject to shareholder approvals and other regulatory approvals, which would take upwards of between 12 and 15 months, we believe that the debt-to-EBITDA in Solara will be closer to the 1x range, which is in a very healthy position for us to then grow the business. The carving out of the Vizag facility will not impact our capacity and for the next, at least foreseeable 2 to 3 years in our core catalog business, as we currently operate the business at around 65% capacity utilization. Even though we have made significant cost improvement strategies, our OpEx and under recovery continues to be a challenge in this business. And therefore, rather than adding significant new under recoveries by kick-starting Vizag within the same P&L, we thought it was prudent and in the interest of all stakeholders to strategize this operation separately. Yes, so that's a slightly longish opening note, but both Poorvank, Arun and I am happy to address questions that you may have. We continue to believe strongly in the quality of the business that is emerging in Solara's reset strategy. And I'm sure that we will deliver improved results in the coming quarters. Thank you.

We can take the Q&A now.

[Operator Instructions] The first question is from the line of Amresh Kumar from Geosphere Capital.

This is regarding the carve-out of CRAMS business. So if you can give just a history of this business, how you have grown it so far? And the idea behind -- you have explained it in a bit, but a little bit more detail and how it will compete in the current environment? And how does the separate identity for this business help us as a Solara? And what are the technological capabilities we have developed in this business so far? Some details, and how big is the business in the context would be helpful?

Thank you, Amresh. I mean like you rightly said, most of your questions have been addressed in my opening statement, but just to reemphasize. Staying in the catalog generics business, we believe Solara has not -- does not have the required bandwidth of leadership and the financial resources to build this business while it is resetting its own proprietary catalog business. So the need to do this was obvious. Vizag is a very significant plant with almost 700 KL capacity and has the ability to double that capacity easily, which is what typically potential partners would look at large capacities if they were going to come our way. Our CRAMS business has been very suboptimal. It's been very stagnant and not been growing so much. But we believe that with a renewed focus, we can add significant velocity to the growth of the business. This business currently in FY '25 is approximately INR 120 crores. It delivers that 25% to 27% range adjusted EBITDA. And of course, when we take this revenues into the new company, the first several years, there would be not necessarily great numbers as we'll have under recoveries and additional expenses in terms of building new capabilities, but overall, I think the polymers -- pharmaceutical polymers business that we have, have got a lot of legs to grow, and we will build that business quite significantly, but it will take us 2 to 3 years before you see the emergence of a challenger or a new player in the CRAMS API business. We have several types of chemistry and capabilities that we can offer from this plant. At this time, our primary focus is going to be the polymer-based API chemistry, which not many players have out of this country. Yes, thank you.

The next question is from the line of [ Jagdish Sharma ], an individual investor.

I have a couple of questions for the carve-out CRAMS and polymers business. You just mentioned that you have INR 120 crores of top line for this business. What are the EBITDA margin currently you've made in this quarter?

We can't give you -- I don't think we can give you specifics for this quarter, but generally, the business delivers about 25% EBITDA.

Okay. So my second question was like you mentioned this business is subscale, right? It's currently at subscale level. What is our aspiration over the next 3 years in terms of revenue and margin?

I think we believe that we can take revenue expansion, obviously, to be in the 35% to 40% EBITDA range has to happen to be a serious comparable CRAMS player. I think we can triple or even quadruple our turnover from the current INR 120 crores. We do have a nice pipeline. And with a new arrangement that is being proposed, we think in about 3 to 4 years, we can get to that INR 500-odd crore number.

The next question is from the line of Naman Bhansali from Nine Rivers Capital.

First question is, you've mentioned in the presentation that we received 6 key product approvals and 11 market extensions in the Q3 quarter. So could you elaborate a bit on this? And if you have any material product approvals that can come out of these?

Yes. I'm going to request Poorvank to answer your question...

Yes. So specifically, we have already mentioned about this that we are doing -- we are strongly focusing on the polymer space and we did get some of the approvals in the polymer space for some of the key markets. And then there were some approvals that we got in the ibuprofen-plus space, wherein we actually talk about some of the markets which we have not catered for some of the existing customers. So it is adding to a mix of new geographies and that is actually adding to our -- opening new markets for us.

Got it. That is helpful. And second question is on the financial side of the CRAMS and polymer business. So if you could share what is the total capital employed till date for this business? And what incremental CapEx would we need to do for this particular facility?

Yes. So basically, the CapEx that has been invested in Vizag is close to about INR 500 crores. But not all of that capital will be useful for a CRAMS business because it was predominantly an ibuprofen facility. So I would like to say that the good effects that the CRAMS business can enjoy would be about in the range of INR 250 crores to INR 300 crores because the rest of the plant has to be retrofitted. We probably need to invest at least another INR 100 crores to INR 150 crores in the next 3 years to achieve the goals of what we want to be. And then -- yes, so that should take us to the next big level we want to build this platform to.

The next question is from the line of Sajal Kapoor from Antifragile Thinking.

Solara made an excellent move, I think, by separating CRAMS, polymer and HP API. A couple of questions from my side, if I may, Arun and Poorvank you as well. Can you share some perspective on the R&D infrastructure? Do we have -- as on today, do we have separate teams for CRAMS and generics? And what is the combined team size on the R&D side today and where do you see this number growing over the period?

So basically today, our R&D is combined for both generics for the CRAMS business, and that is one of the key reasons that we need to separate and segregate the 2, considering that we need a very different level of capabilities and infrastructure to attract customers. So this move of ours would facilitate that. We think that we will end up adding at least 100 new scientists for our CRAMS division in the next 12 months.

Yes, that's helpful, Arun. On the gross margin side, clearly, CRAMS is a higher gross margin business, we all know that. But it's subscale today, it's low volumes and as disclosed. Now given that it's a higher-margin business and it's contributing almost negligible amount, let's say, 10% to the overall. Our consol gross margins are still 56%, which is very healthy. And that kind of suggests that the other business, the non-CRAMS business, is also not having very low gross margins as of today. Is that a fair assumption?

It is. Because of our focused attention to margins, and that is what has caused the revenue drop. So our attention has been that when we are price-challenged, we are happy to let go of business. And we give credit to the new challengers for having built plants which are very modern at very large scale. But considering that we've been an ibuprofen player for 40 years, obviously, we find ourselves pitted against very young challengers, and we are happy to let go of business in the interest of margins. But -- and you rightly pointed out that our -- and if you look at Poorvank's commentary, 76% of our business continues to be in the regulated market. So they are very sticky businesses. There are long-term partnerships where we would rather service those customers and increase the wallet share than trying to expand markets at price. So you are right, at 55%, I think we have achieved our first threshold of an ideal margin situation. I don't think the carve-out to the CRAMS business is going to drop this dramatically, may drop it by 100, 200 bps. But even 53%, 55% range is what we want to first establish. Growth, given the structured approach of not chasing revenues will come because seeding customers and geographical expansions, and that is why we highlighted that we got new -- same products expanded to new territories or acquiring new customers are good healthy signs where we can show growth. So I think growth will be tepid on the top line, but I think you can see margin expansion, OpEx leverage, inefficiencies in our manufacturing infrastructure and our corporate overheads coming down dramatically. And if you see our presentation, you'll see in the last 5 quarters, we've had a very successful run on cost management.

Brilliant thinking, Arun. Definitely, a masterstroke, no doubt. I'm done with my questions.

The next question is from the line of [ Divya Shah ], an individual investor.

My question was on -- one, on the top line guidance, which has been revised down. So if you look at the FY '25 as a whole at the midrange of your Q4 guidance, we'll be doing a mid-single-digit revenue growth in FY '25. And if I take a 3-year view, what is the potential growth that we can achieve for Solara? That's my first question.

Low double digits would be a fair assumption.

Okay. Got it. And my second question was on the EBITDA margin side. So I mean, we've already reached a 20% EBITDA margin in this quarter. So going forward, if we take a long-term view of 3 to 4 years, again, what kind of margins can Solara catalog API business do?

I don't think we can go much further from here. I think 20% to start off. And if you can have 3 or 4 consistent quarters of this percentage numbers, then we can start accelerating because incremental growth will flow through, margins will improve if we keep the gross margins. So at this time, I'm following the group strategy of consolidation every 3, 4 quarters and then growth coming after. And it's worked well, and I think it will flow through here, too. I think the margin expansion from 20% to 22%, 23% in this 3-year horizon that you are talking about is feasible, but let's take 1 year at a time. And I think, importantly, if we can have another 5 quarters of 20% EBITDA and even if the growth is only 10%, it delivers close to INR 350 crores to INR 400 crores of free cash in that period. And the first target is to make the balance sheet even lighter and make the company debt-free. And that's my goal, and I think we'll get there.

The next question is from the line of [ Jagdish Sharma ], an individual investor.

Our gross margin improved to 55% during this quarter, that's a 500 bps sequential jump. What were the main drivers for this margin expansion and is this number sustainable going forward?

You want to...

Yes. So basically, what we have done is basically, while -- as Arun mentioned about the fact that we have significantly focused on profitable products, and one of the questions was also that while we are talking about CRAMS business, there are other businesses wherein we have actually been able to sustain our margins. Having said that, with respect to this, we did debottlenecking of capacities on some of the high-margin products, while also while continuous focus on the cost improvement program that we had in place, which actually allowed us to expand the margins and that's how we have been able to do that. And we see a demand coming for these 2 products, which would sustain in the coming quarters.

Okay. Okay. My second question is like our other expenses have reduced to INR 56 crores in this quarter. Is it sustainable going forward? What were the key initiatives taken by us to bring this efficiency?

One is -- you see, over the last four quarters, our OpEx has been coming down. It's mainly because of [indiscernible] couple of sites. We have [indiscernible] Vizag and Mysore site. Plus, we have also taken some OpEx correction measures in other sites, which has brought down these costs.

The next question is from the line of Aditya Sen from RoboCapital.

I got my answer just now. Sir, can you please come back on the revenue guidance for the next 3 years? I guess you answered, but I missed that point.

Low single digits.

Low double digits.

And asset turn for the Vizag plant would be 1.2x to 1.3x, that's right?

Correct. Asset turn, yes.

The next question is from the line of Sunil Kothari from Unique PMS.

Sir, my question is a little bit on a broad to understand. Arun Kumar your success of getting -- acquiring assets, merging and then demerging and then creating value is very highly successful. Very few entrepreneurs has, up to now, done this type of successful restructuring and creating value. Sir, my question is, are you -- internally, you have a capable team and you've proven yourself. Are you seeing larger external opportunity maybe because of regulated markets, supply chain disruptions or maybe China plus One? If you can talk a little bit more on those opportunities will be really helpful.

Yes, let's respect our conversations to Solara at this time. I think Solara is a classic case of a legacy business, which missed out on the CRAMS one. And I think our primary focus today is to segregate the business, give it the attention it requires, resource the capital, get the teams the technical capabilities, and that is a lot to do. And I think that itself will create value to Solara stakeholders. So that's what we do well as a group like you rightly said, and we'll stay focused on that approach here, too.

And sir, your thoughts on external opportunity. Is there any major shift happening compared to, say, last 10, 15 years or this is the opportunity which was there and it is continuing or maybe increasing? How do you see this?

You see, CRAMS as an opportunity increasing. I think there is some benefit of the China plus One strategy. I don't see it's tsunami coming our way. I just think that the pharmaceutical industry and the life sciences industry is looking at India as a very serious player just that we now have the capabilities, infrastructure, people, skill sets, and we're benefiting from that. But we still are a very small part of the global supply chain in terms of CRDMO activities. But I think we still have a chance, some of the chemistries that Solara has is historically in a good spot, and we are benefiting from that opportunity by doing what we did. On your themes, I think internationally, there are several opportunities, but I think valuations are high and building international assets at this stage on the API platform is not necessarily what we are looking at. Thank you, Sunil.

The next question is from the line of [ Rakesh Banerjee ], an individual investor.

My question -- first of all, congratulations for hitting 55% gross margin. That's really awesome at this stage of the business. What I was trying to understand, you have already mentioned that you've got 6 approvals in the last quarter. So if you can elaborate a bit on the expected approvals in the coming quarters as well, maybe in the next or next 2 quarters, that would be really helpful? And also, if you can comment on out of the 6 approvals that you have already obtained, if there is any major molecules which got approved and that would be also very insightful?

[ Rakesh ], we don't give any specifics on products. Obviously, that's not what most companies do. Like Poorvank mentioned, we do have some nice products in some difficult-to-make products approvals, mainly portfolio maximization strategies that is new markets, not necessarily new products. They will funnel growth to the guidance that we are giving long term that low double-digit growth with a focus on keeping the margins. So we do not have any specific answers to your question.

And to add to what Arun just mentioned, we have also mentioned earlier that we have close to 95 DMS -- already active DMS, which are filed in the U.S. And we are actually roughly selling -- just to give a ballpark, we are selling close to 30 products only. So there is still a lot of value that -- intrinsic value in the system that needs to be capitalized and that's where we are getting into cost improvement programs and seeding the market, seeding the new consume customers and seeing the growth coming from there.

The next question is from the line of [ Manas ] from [ Xylem Investment ].

So my question is regarding what is the time line for the demerger of this CRAMS business?

So typically, any demerger through an NCLT process takes between 9 and 12 months. So that's what we expect this to also take.

Okay. And you are guiding for low single-digit guidance, right? Did I hear correctly?

Low double digit.

The next question is from the line of [ Parth Jariwala ], an individual investor.

I have 3 questions. Here is the first one. In the previous quarter, it was mentioned that the revenue was expected to be in the range between INR 1,400 crores to INR 1,500 crores by the end of FY '25. Do you believe this target is achievable? And what's your expectation regarding EBITDA and operating profit margin for the same period? And second question is regarding the debt. Your guidance was provided to reduce up to INR 500 crores by the end of FY '25. Do you believe this target is achievable and what strategy are in the place to ensure a smooth reduction in the debt level? And third question regarding ibuprofen contribute 34.1% of total turnover, respectively, a key driver of revenue. Could you provide insight into the contribution from other segment or a product set mix?

So [ Parth ], all of these questions are already addressed, but we will respect your time today. I think you probably came in late. I did mention we actually guided for a reduced revenue in Q4. It's already part of our guidance and our EBITDA. So consequently, we will not get to the INR 1,400 crores, INR 1,500 crores range. We'll be more in the INR 1,300 crores, INR 1,400 crores range, which means that there is a drop in approximately INR 100 crores of revenue. And we've clocked INR 10 crores of EBITDA in Q4. That means that our exit run rate will not be in the INR 500 crore number that you are referring it. It will be more in the INR 300 crore number, I do not know where you got the INR 500 crores in the first place. It was never there before. And we will continue to build from here focusing on margins. Our debt has already reduced quite significantly. If you look at our debt book, we are now sub-2x debt-to-EBITDA -- I mean, 2.5x debt-to-EBITDA compared to almost 6x when we started this reset journey about 6 quarters ago. And we expect the debt to be under 1, 1.5 in the next 12, 14 months after the carve-out is complete. Thank you.

The next question is from the line of [ Anupam Jain ] from [ Indira Securities ].

I just wanted to know the current CRAMS facility you're retrospecting, how much will be the cost for that, additional cost because you've already incurred INR 500 crores costs, as you said?

So like I said, [ Anupam ], we did say that Vizag has invested -- question of how much money Vizag has invested? It's about INR 500 crores, of which I also mentioned that I believe that the effects that are useful for the CRAMS business is not more than INR 300 crores. So that is the useful value of the assets. We probably have [indiscernible] INR 100 crores to get to where we want to be.

Yes. So basically, the facility was [indiscernible] and divided into ibuprofen, high-potent API and polymer division.

Correct. But ibuprofen block is not going to be -- has to be retrofitted because we plan to convert that into a different segment, which we will shortly make certain update announcements in the next quarter.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for the closing comments.

Thank you. Thank you all. And be in touch with us or with our Investor Relations team if you have any questions. Appreciate your time, and have a good weekend. Thank you.

Thank you, ladies and gentlemen. On behalf of Solara Active Pharma Sciences, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.