With 16/21/30% Sales/EBITDA/EPS CAGR and improved Adj. Net Debt/Equity ratio of 0.8x (v/s 1.4x in FY18), we believe the stock is trading at attractive valuations of 16/10x on FY20/21E P/E. However, the developing Ranitidine story related to NDMA impurities could be an overhang in the near term. If Solara successfully clears the impurity hurdles, it could turn out to be a big bonanza; else, sizable Ranitidine sales could be at risk. We assign a fair value of Rs 655 (15x FY21E EPS). We recently met the management of Solara and the company is on track to expand its API and CRAMS presence over the next three years. Long-lasting contracts in high-volume APIs will provide a solid base while high-value low-volume APIs and scale-up in the CRAMS business will drive both top-line growth and profitability. We believe a 15% CAGR in top-line and 20% CAGR in EBITDA looks achievable. The recent fundraising of Rs 4.6bn will be utilized in developing capabilities in both these segments

At CMP, the stock is trading at 16.4/10.2x FY20/21E EPS, a ~30% discount to the sector-avg. We assign a fair value of Rs 650 (15x FY21E EPS). In light of environmental issues in China, the API market place is likely to present an enormous opportunity for established Indian API manufacturers. The global API market is close to US$ 160bn with China having a 30%+ market share, while India is at 8-10%. Solara is one of the leading API manufacturers in India having the capability to benefit from this opportunity due to a large API portfolio of 50+ molecules.

Currently, the stock is trading at 9.2/6.6x FY18/19 EV/EBITDA, at a ~35% discount to peers. Sustained revenue growth, improving debt/EBITDA ratio and likely reduction in interest cost due to better credit rating to drive multiples in coming years. We recently met the Solara management and the company is confident in achieving its guidance of 15/20% YoY growth in revenue/EBITDA for FY19. So far, Solara has delivered 26/35% YoY growth in revenue/EBITDA in 1HFY19. Despite witnessing momentary pricing tailwinds in key products, Solara is expected to expand profitability over FY18-21E by higher asset utilization, new product launches and cost control post merger.