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

Ladies and gentlemen, good day, and welcome to Solara Active Pharma Sciences Limited Q2 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference call over to Mr. Abhishek Singhal. Thank you, and over to you, sir.

Thank you, Iqra. Good evening, and thank you all for joining us today for Solara's earnings call for the second quarter and half year ended September 30, 2026. Today, we have with us Sandeep, MD and CEO; and Sarat, CFO of the company to share the highlights of the business and financials for the quarter and H1 FY '27. I hope you've gone through our results release and quarterly investor presentation that have been uploaded on our website as well as stock exchange website. The transcript for this call will be available in a week's time on the company's website. Please note today's discussion may be forward-looking in nature and must be viewed in relation to the risks pertaining to our business. After the 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 Sandeep to make his opening comments.

Thank you, Abhishek. Good morning, good afternoon, good evening, and thank you all for joining us today for our Q2 FY '27 earnings call. I sincerely appreciate your time and presence on this call. To start with Q2 FY '27 has been our best quarter in about five years. And surprisingly, it's been on all the profitability metrics, gross margin, EBITDA and PAT. Overall, revenue grew 33% year-on-year to INR 418 crores. EBITDA more than doubled to INR 77 crores, up 118%. And PAT was at INR 28.5 crores against a loss of around INR 10 crores in the same quarter last year. And the good part is we delivered this quarter as the West Asia crisis continued. We continue to face pricing pressures and raw material availability challenges, which led to intermittent production stoppages. But despite that, I think we recorded a good set of numbers. Some commentary on our base business. Our base business continues to lead our growth. Revenue grew 37% year-on-year to INR 327 crores, staying above the INR 300 crore number for the third quarter in a row. EBITDA grew 68% to INR 77 crores, with the margin up about 440 basis points to 23.6%. Regulated markets continue to contribute about 78% of revenues, which reflects a very healthy product mix. Some commentary on the Ibuprofen business. Ibuprofen this quarter has performed better than expectations, driven primarily by market dynamics. Revenue grew 21% year-on-year and 18% quarter-on-quarter to INR 91 crores, supported by better price realizations as also higher volumes. The EBITDA loss has narrowed. You can see we are almost breakeven compared to the roughly INR 9 crore loss that we had in Q1. The business is now close to breakeven from a loss margin of around 21% just two quarters ago. Having said this, I will reiterate that the overall environment around Ibuprofen still remains challenging, and we haven't lost our focus on servicing large brands and marquee customers with whom traditionally we've had long-term associations. Other highlights outside of the base business, business, other highlights. On the regulatory front, we filed our second DMF for the year. If you remember, I had mentioned that we should be filing five DMFs in this financial year. So we filed in quarter 1, one now, and we are hoping to file three more before the end of this financial year. Our Mangalore facility successfully completed an ANVISA audit in August. If you recollect, we had a successful ANVISA audit of our Cuddalore facility in May. I am also pleased to share that CRISIL has upgraded our ESG rating from adequate to strong. That just shows about the improving health of our business. On a very important point, I'm sure a lot of you are expecting us to talk about the strategic review of the Ibuprofen business, so I will address it upfront. This process is taking us time. We estimate that we will be able to close this in 12 weeks. So we will come back to you with an update on the outcome of the review and the next steps, as I said, in a period of 12 weeks. I personally sincerely appreciate your patience. You really supported us and be patient with us as we build our base business. And I will request a similar patience as we close out on the Ibuprofen strategic review. Our balance sheet has strengthened meaningfully during the first half of FY '27, and Sarat will take you through the financial details. As always, I would like to thank our shareholders for your continued support and trust. And I would also like to thank the Solara teammates for all the effort that is being put in. Before I hand over to Sarat for his opening remarks, a happy festive season to all. Over to you, Sarat.

Thank you, Sandeep. Good morning, good afternoon, and a very good evening to everyone, and thank you for joining our Q2 FY '27 earnings call. Sandeep had already covered the headline results and the highlights of the business. So I will actually focus on the broad level financial metrics. For this quarter, Q2 FY '27, the overall business has clocked a gross margin of INR 197 crores odd, which is roughly 28% increase over Y-o-Y as well as 9% improvement on a Q-o-Q basis. And this gross margin came at a 47.2% of gross margin profile, which is slightly higher than Q1, but albeit it is slightly lower by roughly 200 basis points as compared to last year, which was predominantly driven by incremental raw material costs as well as input costs driven due to the West Asia crisis. Having said that, our base business has clocked gross margin of 50% plus. Again, we actually do acknowledge this is slightly lower than the previous quarters. driven by a fact of product mix for this quarter as well as incremental input costs, which I spoke about because of the West Asia crisis. On the other hand, ibuprofen gross margins has actually recovered to a 36% level during the quarter, driven by changing market dynamics, which saw a spike in demand as well as slightly better pricing as compared to the previous quarters. But as Sandeep mentioned, this is something -- commodity pricing market, and this is something which we have to watch for the next quarter as well. On the operating cost front, we have been able to sustain our cost base roughly around INR 120-odd crores, which is predominantly flat over the previous few quarters, hence, enabling the incremental gross margin flow through to the EBITDA. Our overall EBITDA margin expanded to 18.4% from 11% around last year, and it is a significant improvement of roughly 720 basis points as compared to Y-o-Y and also up by close to 200 basis points as compared to Q1 of FY '27. On the depreciation front for the quarter, depreciation was close to INR 266 million, which was in line with the previous quarters. However, our net finance cost has actually dropped by close to INR 27-odd million as compared to previous quarters, and that's a reduction of roughly 17% and that has resulted because of a reduction of debt by close to INR 114-odd crores during H1. We have recorded an exceptional loss item of INR 45 million, which was predominantly because of unutilized equipment lying at our Vizag facility, which we have sold, and that is something which we wanted to recover cash. And because of this, our PAT, although it has been the highest in the last five years, we had recorded a PAT, which is roughly 75% higher on a Q-o-Q basis, resulting in an earnings per share of INR 5.92 per share. Adjusted for this exceptional item, EPS would have been further better by close to INR 1 per share. For the first half of FY '27, EBITDA was consolidated at close to INR 140-odd crores, up 51% at an EBITDA profile of 17.5% as compared to close to 15% last year. PAT is something which have recorded close to INR 45-odd crores in H1. Again, this was something as compared to H1, H1 was almost at a breakeven level. Net debt is something which we are focused on as a company, and we have been able to reduce net debt to close to INR 500-odd crores from INR 614-odd crores, which was there as on March '26. Of this reduction, INR 100-odd crores came from the rights issue money, balance INR 14 crores was from the operational cash flows. Given this fact, net debt has -- net debt-to-EBITDA ratio multiple has actually improved to close to 1.8x as compared to 3.2x what we had last year. And this is something we should be able to be in the similar range over the next medium term. However, on a sequential basis, the net debt has moved up by close to INR 20-odd crores as compared to June '26. since we had invested in additional working capital to sustain the sustained growth in the business as well as some sort of maintenance CapEx. Going forward, we will continue to focus on operating cost leverage and margin expansion and on our working capital discipline, and we'll try to fund our growth CapEx while keeping our balance sheet strong. As always, we actually thank you for your support and patience as we continue to work towards turning around the company. And now we'll be happy to take your questions, if any.

[Operator Instructions] First question is from the line of Sajal Kapoor from Antifragile Thinking.

Congratulations on a very strong quarter, especially given the challenges the company has been navigating. I've got a few questions, please. First is regarding this review, Sandeep. I mean you said the Q2 results would set out the clear path last time around in July. What is still unresolved? And has this quarter's improvement changed the options you are considering -- and is the INR 45 million Vizag loss a one-off cleanup or the start of a wider reassessment of the INR 182 crore Vizag project according to the annual report? That's my first question.

Good afternoon, Sajal. Nice speaking to you again, and thanks for staying invested with us. Regarding the IP review, I know we did make a mention in earlier calls that you would hear back from us in Q2. And as I said, we need to -- we need many of you to have patience with us because this is not an easy decision. Nothing has changed at options Sajal. I mean the options staring at us are the couple of options that we talked about. One is repurposing the plant from being a single product dedicated facility into a multiproduct facility. And in that multiproduct facility, among others, we can do intermediates as well, the intermediates that we use for captive consumption. And of course, the other option is the internal option of finding an appropriate buyer who can take the facility. I think nothing has changed in the options we have, but we just need a little more time to make a decision that's good for all our stakeholders. So I'm hoping that while there will be a lot of questions around it, I'm requesting everybody's patience for that additional 12 weeks to sort of come out with that final analysis. I'm sure that whatever we decide on will be extremely good for Solara as well as all the stakeholders.

And that Vizag one-off claim for us, is that a one-off or?

Sajal, currently, that's -- there is something which is purely one-off and hence, we have actually categorized that as an exceptional item. Having said that, once we complete this entire review around the Ibuprofen piece of the business, that is something at that point of time, we'll be having much more information in terms of if we have certain wider spread as well. Otherwise, at this point of time, from Vizag standpoint, we don't foresee anything further coming at this point of time.

So this INR 4.5 crores is purely the ibu-related assets from Vizag, right?

Correct, yes.

We are just trying to monetize our assets, and we got a buyer for some of these ibu assets that we had in Vizag. So we thought it's better to monetize it and have it just line idle out.

No, no, absolutely. That's -- in fact, that's now positive. And Sandeep, I mean, just to better understand, I know we have got big pharma relationship on ibuprofen, and it has been a very long-standing relationship. Is -- and with the same relationship with the same customers, we may be having other products as well in one or more markets. So that is a significant dynamic? I mean, other than that relationship thing, what has changed structurally in ibuprofen, meaning cost position, customer mix or market share as opposed to simply the market being benign, thanks to the BASF-related supply disruption. And if everything normalizes, let's say, tomorrow, we live in a random chaotic uncertain world, right? So if the BASF or some sort of a supply constraint, whatever we are facing, and that's why ibuprofen prices are high today, tomorrow, if that situation reverses, are we then back to that 10 to 15 quarter -- INR 10 crores to INR 15 crore quarterly loss you guided in July?

So let's speak about ibuprofen this quarter, and I think Sarat gave a view into this. See a lot of it is macroeconomic conditions. I think the West Asia crisis continues, solvent prices are rising, raw material availability continues to be an issue. But thankfully, given the credibility we have with our customers, a lot of customers have really helped us by increasing the prices, right? So it's a mix of better prices and some macroeconomic conditions that has helped us break even in this quarter, okay? And so that's the piece of ibuprofen. Will we get back to the earlier days when we had INR 10 crores, INR 15 crores. It's very difficult to say that at this time. But I can tell you that the general health of the ibuprofen business has improved as well. But in this particular instance, it's more macroeconomic conditions that's driving the breakeven.

Sure, sure. And Sarat, one bookkeeping balance sheet question for you before I rejoin the queue. I see in the published number, the trade receivables have increased more than fourfold Y-o-Y. I mean what is driving that increase? Is it primarily higher revenue, longer payment terms? Or is it something like customer concentration or some late shipments that has resulted in this unusually higher receivables? Any color will be helpful.

So as you rightly said, our trade receivables are slightly on the higher side. That is actually predominantly driven by two factors. One is, if you see our entire revenue base has actually gone up by as compared to last year by close to 50% plus, okay? Second, so right at the quarter end, again, just like most of the other companies, we also have a challenge of linearity. Most of our billing happens in the last one week to 10 days of the quarter. And because of challenges with respect to container availability because of all this crisis, what's going on, all those shipments are actually not being able to move out by 30th of that particular month or something. So because of that, whatever is getting moved, say, if my earlier SLAs of billing to shipment was close to two or three days, now that is extending up to five to seven days plus. So because of that, that entire chunk of one week billing plus increased revenue on an overall quarterly basis, that is actually impacting this particular trade receivables. Having said that, we have not extended any payment terms or something for any customers or we have not changed our payment terms adversely.

Next question is from the line of Shilpa Saboo from Lotus Wealth.

Congratulations on the great set of numbers, sir. A small but important remark on our gross profit margin. In last three quarters, PPT, our GPM is calculated after sales and distribution costs, which is by any company. And generally, for API companies, marketing costs are 3% to 4% distribution costs are 5% to 6%. So I feel our gross profit margin is 60% and not 50%. And due to this, we might not be able to a fair valuation data.

We take your input on board, but that's the accounting methodology that we use. But we have noted what you have to say. Thank you Shilpa.

Okay, sir. And secondly, out of the amount that is increased in our net debt, how much has increased on behalf of CapEx?

So again, as we had previously said, we are close to committing to close to INR 40 crores, INR 50-odd crores of CapEx on a yearly basis. So out of that, on an average, every quarter, we normally spend close to INR 10 crores to INR 15 crores kind of a range in terms of CapEx. So some part will be that because of INR 10 crores. And then balance INR 10 crores, INR 15 crores, if you see our inventory numbers, we -- our inventory numbers are slightly higher by close to INR 20-odd crores during this quarter because again, because we are seeing so many challenges in terms of raw material security or supply issues, we want to have sufficient stocking so that we have the entire flexibility of manufacturing what we want for a particular quarter.

Next question is from the line of Kushal Goenka from Mangal Keshav.

Congratulations on a good result. My question is that Solara derived INR 328 crores of revenue in FY '26 from Strides itself. That's like a quarter of FY '26 revenue based from a related party. And also the receivables from Strides have increased from INR 63 crores to INR 160 crores at a time when our balance sheet really needs some juice. A follow-up to this, what Sajal Kapoor also said that the receivables in Q2 FY '27 is around, I think, INR 506 crores. So is that a majority of it from a related party? So how do you see into these transactions and what plans to maintain a more prudent [indiscernible].

So again, so from a related party transaction point of view, Strides on an average contributes to roughly 25% of the business only. So that business contribution has actually not changed drastically over the period. But however, for each subsequent quarter, depending on the individual product mix because, again, Strides also considers certain billings on a production campaign basis. And we also supply to Strides based on whatever production campaigns, which we run. So depending on that particular thing, certain quarters, that number can be slightly more than 25% up to 30%, 35% as well. But average for the full year will not be beyond 25%, 26%.

Next question is from the line of Ameya Deosthali from ValueEquity.

First of all, congratulations on a good set of numbers and the plan on the base business and DMF filing seems to be doing very well. So I had a question along those lines. So on the recent filing, right, of valbenazine, what is the kind of outlook we have here with the customer in the U.S.? What are we targeting here? Are we the sole supplier? So I would appreciate if we get some more dynamics on this filing and way forward in the R&D side.

So you are right. We have filed a DMF in this quarter. And I would not like to get into the dynamics of the -- to how that market goes, but we can, of course, take the question offline, right? I mean, needless to say that we do our analysis before we pick a product, and there is -- there are certain reasons based on number of DMFs filed or the patent expiry horizon or the market size, the kind of players in the market that decides which products we get into.

Right, right. No, I understand that. And I think I just want to highlight that is a positive because as we see DMF filing picking up, it's going to contribute further on as the business goes post ibuprofen as well, right? So I just wanted some more outlook on this. So on the R&D side, do we continue this trajectory of filing two to four DMS per year over the next three years you say.

That's right, Ameya. I will comment on this year first because I keep saying if we can get this year right, we will get the future years right as well. This year, we believe that we can do five DMF filings. We've done one last quarter. We've done one this quarter, and I'm hopeful that we can do three more by the end of this financial year. Coming from a space where we didn't file a single DMF in the last three years, I think we have a good trajectory on the R&D efforts and the DMF filings.

[Operator Instructions] We will take our next question from the line of [ Ayush from Vardhman Family Office ].

Sir, just a small request on the ibuprofen side. So is that the ibuprofen business is doing great in this quarter? So we are -- the question, something the plan which I have done because we have delayed from -- I think so from Q3 that you have told. So it's from now Q2 FY '27. So it's been four quarters. So would you like to throw some light on the same?

So is the ask that has the time line of our review been extended because of this performance? Is that the question?

The question is that are we re the things -- this quarter, the ibuprofen business is doing good. So we are analyzing the plan again or something like that?

No, no, Ayush, it's -- we are not -- of course, look, we are analyzing the -- we are reviewing our strategic options that we have. And some of these feedbacks, including the one that people mentioned about one of the big ibuprofen manufacturers trying to exit will play on the decision that we take, right? But these -- in these strategic reviews, we are not looking at one-off or quarterly performance. There will be big strategic decisions based on big market conditions.

Next question is from the line of [ Maulik Wadia from 36O ONE Capital ].

Sir, just wanted to understand on the base business, our gross margin is slightly under pressure. So what would be a sustainable gross margin over a medium to long term?

So, Maulik, if you -- so we have been always maintaining that we are very comfortable to sustain a gross margin of close to 52% to 55% kind of a range. So adjusted for the raw material price increase, which we have not been able to fully recover as a pass-through mechanism due to this West Asia crisis. So once we adjust to those numbers, we -- our reported gross margins of roughly 50.5% will be close to 53% plus. So this is something which we are comfortable in terms of retaining those levels.

Understood, sir. And also, is there any lever for our EBITDA margins to expand further?

So from a cost perspective, I believe we will be more or so flattish in this particular range, maybe plus/minus 2%, 3% a year. But at the same time, now going forward, any gross margin expansion from -- either by expansion of volumes or expansion of territories, what we are working on, that should actually flow significantly through to the EBITDA.

I think two things, this is Sandeep here, Maulik. I think two things that we are also working in the background is how do we manage our OpEx and create meaningful capacity. So all the operational excellence initiatives we are taking up and all the incremental -- all the debottlenecking that we are doing with incremental CapEx for high-margin products will only help us better that EBITDA number.

Next question is from the line of Sajal Kapoor from Antifragile Thinking.

Sandeep, how was this CPHI different from previous years from your perspective? I mean what stood out for you and team this time around?

To start with, our stall was much bigger, brighter than better. So that's the first observation. But I think it was a very productive CPHI. I think we had a full team out there. We had a lot of customer footfall as well, and we could get that feel of reaching out to newer markets and finding newer customers for our products. So that's from a Solara perspective. From a market perspective, I think customers from some countries could not make it to CPHI, so they were solely missed, right? But in general, I think I saw all the big Indian and Chinese manufacturers out there at CPHI and the Europeans as well.

No, definitely, Sandeep [Foreign Language] I had to go around several angles, [Foreign Language] just to get the evidence, right? On that CPHI, I think the key theme was AI-led manufacturing. So I mean, as AI accelerates research and more molecules move from discovery into manufacturing, that may not happen tomorrow, but maybe next year or the year after. I mean, do you see that creating a structural increase in demand for physical reactor capacity and therefore, a larger opportunity for CRAMS for us?

Definitely, Sajal. As the product development time lines shrink and more molecules make it to the patients, I think there is a bigger role for API companies to play. So if AI helps in reducing development times, that is helpful for API companies as well, right? But I think there is a lot of play for AI even on the manufacturing front in terms of reducing cycle time, improving yield, reducing cost and so on. So AI has got a big role to play within the API companies as well, not only putting new products on the table, but also helping connect the organizations.

Next question is from the line of Bhavika Singhvi from Niveshaay.

First of all, congrats for a good set of numbers. So first question I have is on the Vizag plant, which we are -- for which we are evaluating the options. So just want to understand what view we are making like once we have the decision to sell it, where are we expecting it to use? Because in the last call, you have mentioned that you have been evaluating a few high potential API manufacturing capability. So just wanted to understand that are we on the path to do that? Or have we started doing the approval process and all for that? And the second, as we are planning to like diversify from that business, have our customers started approaching us for the -- like they are ready to give us more volume so that we continue the business. Like just wanted to understand from the Vizag business, which we are evaluating.

So, Bhavika, a couple of questions you asked us. The Vizag facility, as you know, is mothballed. We are not currently manufacturing anything there, okay? So the question of customers giving us additional products for Vizag today does not arise. Regarding the first question about selling of Vizag, I don't think we made an announcement to that effect anywhere. All we said is we're looking at strategic options for Solara. And those strategic options sort of revolve around the CRAMS piece, the Vizag piece and ibuprofen. But we have never explicitly stated what we are going to be doing on Vizag. So I'd request your patience and wait until we complete the review, and we've asked for 12 weeks, and we will come back to you with the final answer.

Yes, yes, understood. But you mentioned before that you have like some assets might you have sold like machinery or maybe like that?

Yes, that was just equipment. There were certain equipment that we had purchased for ibuprofen in Vizag. Since Vizag is not manufacturing ibuprofen and this is fairly new equipment. So we decided to monetize it because we had a buyer for it. So sometimes, as I was telling somebody, it's better to monetize an asset than just let it collect dust on the shelf. So that was the context behind selling specific equipment related to manufacturing, but it's got nothing to do with the site as a whole.