Why is Solara Active falling/rising?

Recent Price Movement and Market Context

Solara Active’s shares have gained momentum over the past three days, delivering a cumulative return of 7.98% during this period. On 03-Dec, the stock outperformed its sector by 5.76%, reaching an intraday high of ₹580.9, representing a 10.73% surge from the previous close. The stock traded within a wide range of ₹55.9, indicating heightened volatility and active trading interest. However, the weighted average price suggests that a larger volume of shares exchanged hands closer to the day’s lower price levels, hinting at some selling pressure despite the overall price rise.

While the stock’s price is currently above its 5-day moving average, it remains below its 20-day, 50-day, 100-day, and 200-day moving averages. This technical positioning reflects a short-term positive trend amid a broader longer-term downtrend. Notably, investor participation appears to be waning, with delivery volumes on 02-Dec falling by 31.12% compared to the five-day average, which could signal cautious sentiment among shareholders.

Valuation and Profitability Insights

Despite the recent price appreciation, Solara Active’s year-to-date and one-year returns remain deeply negative at -17.93% and -33.65% respectively, underperforming the Sensex which has gained 8.92% and 5.27% over the same periods. Over five years, the stock has declined by 51.86%, contrasting sharply with the Sensex’s robust 90.68% gain. However, over a three-year horizon, the stock has delivered a modest 30.04% return, somewhat narrowing the gap with the benchmark’s 35.37% rise.

The company’s return on capital employed (ROCE) stands at 5.2%, which, combined with an enterprise value to capital employed ratio of 1.4, suggests an attractive valuation relative to peers. Furthermore, Solara Active’s profits have surged by 101.8% over the past year, a positive sign amid the stock’s negative price performance. The price-to-earnings-to-growth (PEG) ratio of 3.1 indicates that the stock may be somewhat overvalued relative to its earnings growth potential, which could temper investor enthusiasm.

Challenges Weighing on the Stock

Despite some encouraging profit growth, Solara Active faces significant headwinds. Its operating profits have declined at a compound annual growth rate (CAGR) of -13.96% over the last five years, signalling weak long-term fundamental strength. The company’s ability to service debt is limited, with a high debt-to-EBITDA ratio of 3.95 times and a debt-equity ratio of 4.40 times as of the half-year mark. This elevated leverage raises concerns about financial stability and risk.

Profitability metrics also remain subdued, with an average return on equity (ROE) of just 2.54%, indicating low returns generated on shareholders’ funds. The latest quarterly profit after tax (PAT) was a loss of ₹10.10 crores, a steep decline of 264.8% compared to the previous four-quarter average. Additionally, the company has not declared any dividend per share (DPS) recently, which may disappoint income-focused investors.

Another factor exerting downward pressure on the stock is the high proportion of promoter shares pledged, standing at 35.32%. In volatile or falling markets, such pledged shares can exacerbate price declines as lenders may seek to liquidate holdings to cover margin calls.

Conclusion: Short-Term Gains Amid Long-Term Concerns

In summary, Solara Active’s recent share price rise on 03-Dec reflects short-term buying interest and a rebound from prior weakness, supported by attractive valuation metrics and strong profit growth over the past year. However, the company’s weak long-term earnings trajectory, high leverage, poor profitability ratios, and significant promoter share pledging present substantial risks that have weighed on investor confidence and contributed to the stock’s underperformance relative to broader market indices.

Investors should weigh these mixed signals carefully. While the stock’s current momentum may offer trading opportunities, the fundamental challenges suggest caution for those considering a long-term investment in Solara Active Pharma Sciences Ltd.

Get 2 full years of MojoOne Premium for only Rs. 12,999. Subscribe for 1 year and we'll add another year FREE. Offer valid for a limited time. Start Saving Now →