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Flattening the Competition

Solar Industries will benefit from infrastructure needs, high spend by the defence sector & impressive exports…

Here is one company that has literally blasted its way to success. Solar Industries India Limited (SIIL), formerly known as Solar Explosives Limited, got incorporated as a company, headquartered at Nagpur, in 1995 and started production of explosives the following year. SIIL today is one of the largest manufacturers and exporters of explosives in India.

Industry overview
In India, mining sector is the dominant consumer of explosives which accounts for nearly 80-90 per cent of the total demand, which in turn is dominated by coal mining. Coal India Limited (CIL) utilises 60-70 per cent of the total production. The domestic market growth is pegged at 6-7 per cent CAGR.

Strengths
It goes without saying that it is a highly-regulated industry and licensing requires strict norms. SIIL’s licensed capacity is highest in India. SIIL supplies to the domestic market and also exports to more than 26 countries, and has a manufacturing unit each in Zambia, Nigeria, with Turkey soon to be added to the list. SIIL has a 50 per cent market share in export of explosives and accessories from India.
• It has a market share of 27 per cent in India. Moreover, the company’s scrip was included in the list of BSE500 index in May 2012
• Coal India accounts for the 26 per cent of the total revenue earned by the company which has declined from 58 per cent in FY-07. This signifies SIIL is shifting its dependency on single largest buyer to others
• Over the years, SIIL has invested in extensive backward integration. The company manufactures almost all raw materials (except ammonium nitrate) used in manufacturing explosives. This integration has helped in cutting down the raw material cost and widening the margins
• Exports accounted for 11.33 per cent of the total revenues while those from overseas operations accounted for 10.88 per cent in 2011-12

Growth drivers
The government is spending a hefty amount on defence needs and has also opened up the sector to private players. Leveraging this opportunity, SIIL has entered into manufacturing of defence products such as propellants, next-generation explosives, HMX, etc.
The company has already received necessary approval and industrial licence for setting up manufacturing facilities. It has planned capex of Rs 220 crore to install production capacity for propellants and HMX, expected to be operational from FY15 onwards. To partly fund the project the company passed a special resolution in August 2012 to issue shares worth Rs 72 crore to private equity firm Oman India Joint Investment Fund which is around 4.5 per cent of the current equity capital.

• Infrastructure work will continue to fuel explosives’ demand in India. Also, government has prioritised building roads and projects along the mountainous ranges on the border due to rising security concerns. SIIL can easily encash this opportunity
• The rising overseas footprint is a huge opportunity where it can tap the explosive needs of mining and constructions through its plants abroad

Concerns
SIIL has invested Rs 108.56 crore in two coal mines in Chhattisgarh in partnership with Chhattisgarh Mining Development Corporation. But their names have come up in the recent Coalgate scam. This may lead to cancellation of the allotment or further delay in the project, escalating the cost.
• The mining sector alone accounts for 90 per cent of the explosives market. So, any adverse policy changes can hinder the explosives industry
• There are 30 explosives manufacturers in India. SIIL faces competition from players such as Orica, Gulf Oil Corp and Premier Explosives in the domestic market and Orica, Sasol and BME in Africa. And not to forget the unorganised market

• Unexpected increase in raw material costs could significantly impair operating profitability
• SIIL’s fortunes are closely linked to the growth in mining activities, which in turn are dependent on growth in power, metals, cement and investment in road infrastructure. So, slowdown in the overall economy could impact the demand

Financials
It has raised $9 million through external commercial borrowings, maturing in November 2015. Repaying does not seem to be problematic as the debt-to-equity ratio is healthy 0.21. SIIL has been able to push down the net working capital requirement significantly over the years, thus freeing up the funds.
Revenue and net profit has grown 40 per cent CAGR over past five years. Return on equity averages above 25 per cent for the same period.

Valuations
At a price of Rs 985 it is trading at earnings multiple of 16.6 which is 15.5 per cent premium to its five-year median of 14.4. Given the earnings growth of the company PEG (earnings multiple to growth) stands at 0.41. Earnings are expected to maintain their growth levels which makes it a growth stock.
The stock has also made it to our Stock Ideas screen of ‘Attractive smallcaps’.