A Beneficiary of Indian Government’s Infrastructure led development

Summary

Leading private sector ammunition player in India
Strong exports and overseas expansion plans are future growth drivers
Can leverage R&D capabilities to develop future solutions within the industry landscape

Solar Industries India Ltd. (NSE: SOLARINDS) is a leading integrated global player in explosives. It is one of the leading global manufacturers of industrial explosives for the mining and infrastructure sector. The company has a history dating back to 1995 and has evolved from a single manufacturing site company to a globally recognised Industrial Explosives manufacturer in just two and a half decades. Solar Industries has an annual production capacity of 3,00,000 MT of explosives.

Solar Industries Advantages

i) Deep domain expertise and experience - Solar Industries has rich experience in the Industrial Explosives segment, and has entered into the Defence sector as well. The company has set up one of the world’s most integrated facilities for ammunition and modern packaged explosives and detonators facilities across strategic locations. Solar Industries’ defence product portfolio comprises products such as high energy materials, propulsion systems, pyros, ignitors, and rocket assembly. It operates through an integrated operating model, state of art multi-locational manufacturing as well as extensive R&D facilities. Solar Industries’ products can be categorized into Industrial, Explosives, and Defence. It derives more than 40% of its revenues from exports, 25% from trade and 17% from Coal India Ltd. The company has a strong presence in 55 countries with 34 manufacturing facilities worldwide. Solar Industries enjoys a 70% market share in the explosives export market. It has manufacturing bases in countries like India, Zambia, Nigeria, Turkey, South Africa, and Ghana.

ii) Indian Government focus on structural reforms - Solar Industries’ products find applications across several downstream industries such as infrastructure, mining, defence, and space. Solar Industries is pivotal to building the Aatmanirbhar Bharat model of economic growth with a ~28% market share in the Indian explosives market. The company stands a good chance to benefit from a slew of economic packages and policy support for the manufacturing sector. Bidding for commercial mining of coal in India, investments from global mining majors, affordable housing buzz, programs for the roads and highways as well as the defence sector, act as strong growth drivers for Solar Industries.

iii) New Product Invention and Expansion plans - Solar Industries’ expansion in overseas markets contributed significantly to revenue realisation in FY21. The company incurred Capex of Rs. 214 Crore till CY 2021 and R&D expenses of Rs.10.6 Crore in FY21. Solar Industries' total R&D expenditure was Rs. 77.5 Crore in the last five years. It continues to scale new heights and expand its market share across its diverse product portfolio. Some of its new product innovations across slurry and emulsion explosives, low-density bulk emulsion, electronic detonators, multilayer shock tube, hand grenades, igniters, and high energy materials for warheads and munitions have delivered improved performance and are accepted well by customers.

iv) Large Order Book and Impressive Customer base - Solar Industries’ domestic order book totalled Rs. 2,733 Crore at the end of the third quarter. It also includes orders signed with SCCL for a period of two years. The company also received orders for the supply of multi-mode hand grenades from the Ministry of Defence, worth Rs. 450 crores in FY21, which was to be delivered over a period of two years. Solar Industries has also partnered with ISRO to supply propulsion systems that are in sync with its ammunition business. Customers trust Solar Industries for its product quality, expertise, and strong brand recall. The company sports a 95% customer retention rate with an average of 20 years of association. Solar Industries has a price escalation clause with its clients, ensuring adequate provision for any price volatility.

Source: Investor Presentation

Challenges

a) Rising input cost – Around 53% of the total cost is material cost and the company is feeling the pressures of rising inflation. Ammonium Nitrate, a key raw material price remains highly volatile in the international market. Diesel and other industrial chemicals linked to commodity prices that are internationally traded also impact the cost of raw materials.

b) Operational Challenges - The company’s operating environment is dependent upon a number of environmental, social, operational, financial, technological, and regulatory compliances.

c) Competitive landscape – Solar Industries has the first-mover advantage and is one of the leading players in the industry in explosives for mining, defence and space applications. But it faces intense competition from the likes of Kama Holdings, Fine Organic Industries, Vinati Organics, etc.

Valuation

Solar Industries has a market capitalization value of Rs.27,000 crores increasing three-fold in just two years’ time. Shares are not cheap, currently trading at 74 times its earnings given the company's strong upside potential. Shares of Solar Industries are currently near Rs.2,990 which is just 6% shy of its 52-week high price. The stock performance has been stellar growing by 270% in the last five years. Its promoter holding stood at 73%. The company has paid regular annual dividends to its shareholders since FY 2008-09.

Solar Industries had total debt of Rs. 929 crores at the end of the third quarter comprising a working capital loan of Rs.256 crore and a term loan of Rs.672 crore. Sales in FY21 grew by 12%. Solar Industries’ integrated business model is an added advantage as it offers operating leverage to sustain new financial conditions.

Future Opportunities

Solar Industries is strengthening its prowess in manufacturing industrial and military explosives globally. The company is planning to enter three to four new countries in the next five years. The global explosives market is expected to reach $10.9 billion by 2027 with an annual growth rate of 5.5% between 2020 and 2027. Mining and related sectors are projected to expand due to increased infrastructure and construction spending, which will aid the demand for industrial explosives.

Solar Industries is expecting volume growth in its downstream sectors including mining, road and infrastructure, housing, defence, space, etc. The company is also targeting to maintain product and service costs through constant re-engineering and improvement in all business processes.

Conclusion

Solar Industries is well placed to capitalize on opportunities from overseas markets and sustain revenue growth in the coming years given the rising demand for explosives for mining in these markets as well as its presence in key geographies. Growing demand for the construction of roads, buildings and infrastructure act as a strong tailwind for the company. Though the prices are very high at the moment, shares are a good buy for long term investors looking to gain from India’s infrastructure-led development plan, investments in mining, and defence as well as the Aatmanirbhar campaign.