I also feel market has over-reacted to the demerger news…Actually just to re-check the thesis, now that demerger is given, did some rough valuation maths as below…
FY25 est rev: 1300+ cr (120 cr crams, 1200 cr base business).
FY29 est rev - crams: 500 cr FY29 est rev - base business (12-14% cagr): 2000 cr @ 20% ebitda
Assuming by FY29
Debt will be repaid and
For crams, PE will come for 20% stake…
Rough FY29 mcap could be:
Crams: 4000 cr (8x-10x P/S), 3200 cr for existing shareholders since 20% will be owned by PE
Base business: 4000 cr (10x Ebitda)
Current mcap : 2300 cr Estimate mcap for existing shareholders (FY29): 7200 cr (3x returns)
I have started reading about the business recently. Please help me with two doubts:
As per my understanding, the Vizag plant will be shifted to the new demerged entity. This new business will get 200 cr of debt. They will have to invest 100 to 150 crores over the next 3 years to retrofit this plant. From the recent conference call,” The first several years there would be not necessarily great numbers as we will have under-recoveries and additional expenses in terms of building new capabilities”.
My question is will it not become one more debt-laden business? So much debt and Capex for a 120 crore topline business where all the costs are front-loaded. There is no certainty about how will the business shape up. Please someone throw light on this, if possible.
What will happen if the stock price goes below 375 (a 20% fall from here)? Will it lead to a delay in debt restructuring? I am assuming management will not issue the call for the pending rights amount if CMP is below the rights price.
One more management change. Mr Poorvank Purohit (turnaround specialist) has resigned. Sandeep Rao is replacing him. He will also get 3.5 lakh ESOP at 375/ per option.
There will be more equity dilution in the polymer chemistry spin off, as they raise funds through equity. They have experience in corporate activity reading from onesource listing recently. I looked at dmf database it is very evident that they have more dmf filings in upcoming polymer based apis and also there is not competetion from India I think in one product Laurus labs filed for an api. It is reasonable to assume that they are good in polymer chemistry based apis(purely from dmf database read through).
On the rights part even if retailers don’t subscribe institutions will that is significant enough like 75% of 450 crores, in the case of stock price falling below 375. There is a reason it is trading at that valuation. considering a stock price of 450 it has a mcap of 1800 cr with debt of 820 cr. Take quarterly sales of only 300 cr with 55% gross margin and annualise it. 1200 cr revenue and an EV of 2600 cr. It is a cheap valuation in my opinion factoring in the known negatives like shares pledge, subsciption of rights, rationalisation of business.
Want to add the cashflow part too. 20% margin will give them 240 cr ebitda. Subtract 100 cr for interest expense. Without rights issue not getting fully subscribed like 50% their debt level will come down in 2 years significantly to less than 1.5 debt to ebitda. (140(fcf)+150(rights)+(180fcf)) 2 year exit debt will be 320 cr. I believe my estimates are conservative.
Exactly… looks like a good development… leadership will be stable…& with the experience of 25 yrs in the industry should help Solara scale new highs… promoter doing rights issue buying from. Open mkt every signs in the place + available at 1.6 price to book…wat more u could ask for… it’s like heads I win tails i won’t lose much especially from. CMP…
Scaling up Vizag is a very uphill task, also it is a dedicated facility for ibuprofen now they let go of that business where they are not able to compete it has to converted to multi purpose facility. Also even if it is converted they dont have products yet to launch to utilise such a large capacity after it is converted to multi purpose facility. We will see how the story plays
A very good discussion is going on. Yes, the promoter’s buying is an excellent signal.
But my thinking is that starting a fresh CRDMO from scratch is not an easy task. We don’t know how many years it will take. PI Industries is struggling to ramp up its Human CDMO business even after many years.
So, basically, it all boils down to OPPORTUNITY COST.
If you have plenty of PATIENT capital, one can invest at CMP, or if not much capital, wait for the wedding card invitation ( as Sajal Kapoor sir says) aka actual turnaround in numbers, then one can invest at slightly higher valuations.
My personal opinion.
Not holding any position. I ‘may’ buy if it falls below 400, as it will provide a better margin of safety.
