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Healthy top line growth; margins hurt due to rise in raw material prices
* Net sales increased by 40% YoY to INR 6.5bn in 3QFY19, driven by robust performance in Overseas & Exports, and Housing & Infra segment. Revenue from overseas & exports segment (37% of total revenue) grew by 42% YoY to INR 2.4bn and Housing & Infra segment, led by government initiatives (25% of total revenue) grew by 38% YoY to INR 1.6bn. Revenues from Coal India Limited (19% of total revenue) grew 51% YoY to INR 1.2n and defence sector (6% of total revenue) showed a massive growth of 313% YoY to INR 409mn.
* Revenues from explosives grew by 43% YoY to INR 3.5bn led by growth in prices of explosives by 25% YoY to INR 36,920/ton, coupled with a volume growth of 15% YoY to 95,719 MT. Revenue from initiating systems stood at INR 630mn, up 23% YoY. The management anticipates sales volume of explosives ~3,60,000 MT by end of FY19 over 3,30,000 MT in FY18 despite negative OB removal as it expects firm demand from road construction and housing.
* EBITDA grew by 16% YoY to INR 1.2bn. However EBITDA margin dropped 380 bps YoY to 18.6%, contracting because of its South African operations operating at low utilizations and increased raw material prices. Going forward, management expects margins to recoup to 22% levels with commodity prices stabilizing and better utilizations.
* The total order book as of 9MFY19 totals to INR 13.3bn (CIL: INR 6.1bn, SCCL: INR 2.9bn & Defence: INR 4.3bn). Management reassured that they are confident on meeting its top line and bottom line growth guidance of 25% YoY for current fiscal. Revenue from defence for FY19 is forecasted to be INR 1.7bn and INR 4bn in FY20E. Exports are likely to cross INR 1.6-1.7bn and INR 2bn for FY20E and Overseas revenue to yield INR 7.5bn for FY19 and INR 10bn+ for FY20E.
* Out of the guided overall capex of INR 3bn for FY19, the company has incurred INR 2bn and expects to incur another INR 650-700mn, spilling over the rest to FY20. Going ahead, most of their capex requirement will be met through internal accruals and hence we expected net debt will not see any significant increase. The manufacturing facilities in Australia and Ghana are on track to start production by 1QFY20E.
Strong order book, overseas expansion, anticipation of higher coal production and revival in mining activity and overburden removal coupled with demand from infrastructure segment will be the key growth drivers going forward. At current levels, the stock trades at P/E of 21x its FY21E; we maintain a BUY rating on the stock, assigning P/E of 25x to FY21E EPS to arrive at a target price of INR 1183. Risks: Political risk at overseas facilities, spike in prices of ammonium nitrate are amongst the key concerns.
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