Solar Industries India

While the company has secured orders exceeding ₹1,800 crore from its esteemed client, Coal India Limited, contributing to a robust order book totalling ₹3,912 crore, its attempt to beef up its presence in the defence sector is likely to lead to volume growth

Solar Industries India Limited stands as a prominent domestic producer of bulk and cartridge explosives, detonators, detonating cords and related components. In the fiscal year 2009-10, the company expanded its operations into the defence sector, engaging in the manufacturing of high-energy explosives, delivery systems and ammunition filling, including pyro fuses. Solar Industries India has earned global recognition as a leading manufacturer of bulk explosives, packaged explosives and initiating systems, serving diverse applications in the mining, infrastructure and construction sectors.

The company further diversified its portfolio in 2010, entering the defence segment and extending its manufacturing capabilities to include propellants for missiles and rockets, along with warheads and warhead explosives. The company’s revenue is primarily categorised into three segments:

Industrial Explosives - This segment contributed 78 per cent of FY23 revenue. The company’s explosive offerings cater to a diverse range of industries, spanning from the mining industry to the housing and real estate sector, with a global presence extending to 51+ nations

Defence Segment - This segment contributed 9 per cent of FY23 revenue. Solar Industries India has the distinction of being the inaugural private entity to establish a facility for the production of RDX, HMX and TNT—integral components utilised by the defence industry in propellant, warhead and rocket manufacturing. The company’s defence portfolio extends to the production of warheads, grenades and rocket assembly.

Initiating Systems - This segment contributed 13 per cent of FY23 revenue. An initiation system combines explosive devices and accessory components designed to transmit a signal and activate an explosive charge. The product line-up includes electronic detonators, nonelectric detonators, electric detonators, plain detonators, cord relays, cast boosters, detonating cords and aluminium-elemented detonators.

Solar Industries India is globally recognised as one of the premier explosives manufacturers, commanding a substantial 24 per cent share in the explosives industry. Notably, its manufacturing facility in Nagpur stands as the world’s largest single-location cartridge plant.

Sector Overview
Industrial explosives play a crucial role in blasting operations, primarily in the fields of mining and construction. The application of explosives in mining dominates the market, spanning coal mining, quarrying, non-metal mining and metalmining. The industry is experiencing growth, driven by the increasing demand for blasting materials in mining and construction. The surge in population and rapid urbanisation is creating significant opportunities for ongoing and upcoming industrial and commercial projects, all of which necessitate explosives for various purposes. As inflation trends downward, the industrial explosives market is poised for substantial growth during the forecast period. 

Projections indicate a compound annual growth rate (CAGR) of 5.4 per cent, propelling the global industrial explosives industry to surpass USD 16 billion between 2023 and 2028. In the realm of defence, the Indian defence industry, standing as the world’s second-largest armed force, is undergoing a transformative phase. The government has identified the defence and aerospace sector as a key focus area within the self-reliant India initiative. This initiative emphasises the establishment of indigenous manufacturing infrastructure supported by a robust research and development ecosystem.

India currently holds the position of the third-largest global military spender, allocating 13.18 per cent of its total budget to the defence sector. Two dedicated defence industrial corridors in Uttar Pradesh and Tamil Nadu have been established to act as clusters for defence manufacturing, leveraging existing infrastructure and human capital. In alignment with the self-reliant India initiative, the share of domestic capital procurement has been increased from 68 per cent in FY2022-23 to 75 per cent of the capital acquisition budget for the defence services in FY 2023-24. 

The government has introduced initiatives like iDEX (Innovations for Defence Excellence) and DTIS (Defence Testing Infrastructure Scheme) to foster innovation within the defence and aerospace ecosystem. With an augmented defence budget and a focus on modernisation, the Indian armed forces are witnessing an increasing demand for defence products and services. The Indian Army, Navy and Air Force are actively modernising their inventories, procuring new weapons, platforms, ships, submarines, fighter jets and helicopters to meet evolving security challenges.

Financial Overview
Solar Industries India boasts a market capitalisation of ₹66,877 crore. The promoters currently hold about 73.15 per cent of the shares, while FIIs and DIIs possess around 5.89 per cent and 15.24 per cent of the shares, respectively. The free float of the company is at 5.71 per cent. Looking at the quarterly financial performance of Solar Industries India, on a consolidated basis in Q2FY24, the company reported revenue of ₹1,347 crore which declined by 14 per cent as compared to ₹1,567 crore in Q2FY23, while the EBITDA of the company grew by 13 per cent and stood at ₹344 crore as against ₹303 crore in Q2FY23.

Similarly, the net profit jumped by 11 per cent to ₹209 crore as compared to ₹189 crore in Q2FY23. Additionally, in Q2FY24, the company achieved record-high EBITDA and PBT margins, reaching 25.52 per cent and 21.12 per cent, respectively. This was primarily attributed to a decline in commodity prices, steady currency movement and operational efficiencies during the quarter. Moreover, the company has received orders worth ₹1,800+ crore from its prestigious customer, Coal India Limited, with a strong total order book of ₹3,912 crore. Looking at the half yearly financial performance of Solar Industries India, on a consolidated basis in H2FY24, the revenue of the company stood at ₹3,030 crore.

This indicates a marginal decline by 5 per cent as compared to ₹3,182 crore in H2FY23, while the EBITDA of the company grew by 13 per cent and reached ₹675 crore as against ₹595 crore in H2FY23. Similarly, the net profit of the company jumped 11 per cent to ₹411 crore as compared to ₹371 crore in H2FY23. Furthermore, on an annual basis, the company has been able to grow its sales by 46 per cent (CAGR) over the past three years and the net profit has grown by 41 per cent (CAGR) over the same period. Furthermore, upon examining the company’s financial health in terms of liquidity and solvency, it is observed that the current ratio stands at 1.67, the interest coverage ratio is 11.9 times and the debt-to-equity ratio is 0.37. These figures collectively suggest a strong liquidity and solvency position for the company. 

Also, its noteworthy performance indicators include a robust return on equity (ROE) of 33.4 per cent and return on capital employed (ROCE) of 34.7 per cent. Delving into key valuation metrics, the company is trading at a price to earnings (PE) ratio of 82.7 times, which is substantially higher than its historical median of 31.9 times. Its EV/EBITDA stood at 49 while the price to sales ratio was at 10 times and the price to earnings to growth (PEG) ratio was at 2.99. 

Outlook
The company has secured orders exceeding ₹1,800 crore from its esteemed client, Coal India Limited, contributing to a robust order book totalling ₹3,912 crore. Anticipating substantial growth, the company is aiming for a 20 per cent volume increase in FY 2024, surpassing the 13 per cent achieved in the first half of the current financial year. With the government’s emphasis on infrastructure development and the resulting surge in demand for urban housing, the housing and infrastructure sector is poised for significant expansion.

Successful completion of the final trials for Pinaka multi-barrel rocket launcher marks a notable achievement. Requests for proposals (RFPs) have been released, and the company foresees the imminent receipt of substantial orders, representing a pivotal milestone. Considering the geopolitical landscape and a healthy order book of ₹1,050 crore, the company anticipates a substantial rise in defence revenue going forward. For the ongoing fiscal year, the company has earmarked approximately ₹700 crore for capital expenditure. 

Presently, an expenditure ranging from ₹230 crore to ₹240 crore has already been incurred. Anticipating a subsequent increase in capital expenditure, it is projected that the company will likely reach a total expenditure in the range of ₹650 crore to ₹700 crore by the end of the financial year. Despite moderate raw material prices supporting international operations, the company faces challenges in the form of geopolitical tensions, higher interest rates and hyperinflation.

Factors such as higher interest rates and hyperinflation could lead to foreign exchange volatility in the near term. However, the company has taken notable strides in expanding its global footprint, diversifying the product portfolio for the defence sector and strengthening domestic presence through acquisitions and the initiation of greenfield projects. With high expectations regarding volume growth in mining, housing infrastructure and defence in the upcoming quarters, the company expects the EBITDA margin to surpass the earlier guided range of 20 per cent to 22 per cent. Hence, we recommend HOLD.