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Strong Growth Momentum Continues
Solar Industries India (SIIL) reported consolidated revenues of Rs6.7bn in 4QFY19 (highest-ever quarterly sales), up 17% YoY and 6% above our estimate. The top-line growth was driven by housing and infrastructure segment (up 43% YoY at Rs2.3bn) as well as sales to Coal India (up 19% YoY at Rs1.3bn). Defence segment’s sales were healthy at Rs573mn, while exports and overseas revenues declined 16% YoY to Rs1.7bn impacted by softer sales in Turkey and Zambia. Sales of explosives grew 15% YoY to Rs3.8bn driven by 10% YoY volume growth (105,244MT) and 5% YoY rise in realisation (Rs36,324/MT). EBITDA grew 20% YoY to Rs1.4bn, translating to a 60bps YoY rise in operating margin to 21.1%, in line with our estimate. PAT grew 9% YoY to Rs716mn, 6% above our estimate. Excluding an exceptional item of Rs61mn (investment write-off), adjusted PAT grew 15% YoY net of tax. SIIL continued its strong growth momentum with revenue/PAT growth of 29%/19% YoY, respectively, in FY19 and expects it to be 20% in FY20. Net working capital fell to 90 days in FY19 versus 105 days YoY, and is likely to reduce further. Capex for FY20 is likely at Rs2.7bn (Rs900mn earmarked for defence). We remain positive on SIIL’s business scalability as well as strong financial health. We have marginally tweaked our earnings estimates and retained Buy rating on SIIL with a revised target price of Rs1,380 (Rs1,390 earlier) based on 32x FY21E earnings.
Infrastructure demand drives growth in domestic explosives:
The growth in domestic market was driven by demand for explosives in infrastructure and housing segment led by road construction. This segment’s revenues grew 43% YoY to Rs2.3bn in 4QFY19 and 36% YoY to Rs6.6bn in FY19, accounting for 27% of total sales. Sales to Coal India (CIL) grew 19% YoY to Rs1.3bn in 4QFY19 and 32% YoY to Rs4.3bn in FY19, partly owing to a low base, while the unexecuted order book stands at Rs5.3bn. However, lower overburden removal impacted sales of institutional segment (non-CIL miners) as revenues declined 17% YoY to Rs661mn in 4QFY19 and 11% YoY to Rs2.8bn in FY19. Overall revenues from explosives grew 21% YoY to Rs12.7bn in FY19 driven by 9% volume growth (359,116MT) and 11% rise in realisation (Rs35,442/MT). SIIL expects 15% volume growth in FY20, but a further rise in realisation is unlikely considering the high ammonium nitrate prices.
Overseas revenues decline in 4QFY19 is a one-off:
Revenues from exports and overseas segment declined 16% YoY to Rs1.7bn in 4QFY19 (25% of total sales) primarily impacted by the adverse climate and municipal elections in Turkey and also truncated supply to Zambia because of local economic issues. However, FY19 revenues grew 20% YoY to Rs8.7bn driven by healthy overseas/exports revenues at Rs7bn/Rs1.7bn, respectively. With normalisation of supplies to Turkey and Zambia in 1QFY20 and likely commencement of production in Australia and Ghana in FY20, SIIL expects overseas sales of at least Rs9bn in FY20. SIIL is looking to set up new production facilities in African and European countries.
Defence segment update:
Revenues in 4QFY19 stood at Rs573mn, leading to a healthy jump in FY19 sales to Rs1.7bn (versus Rs372mn in FY18). With a healthy order book of Rs4bn and rising demand for products such as HMX, propellant, pyros and fuses, SIIL targets FY20 sales of Rs3bn. The RFPs for BMCS project as well as missile tenders are yet to be opened as the technical evaluation phase is underway.
Outlook and valuation:
Over FY19-FY21E, we expect SIIL to register healthy revenue/earnings CAGR of 18%/21%, respectively. We believe SIIL is likely to command a premium valuation considering the healthy growth outlook in explosives and strong scale-up prospects in overseas markets as well as in the defence sector - a regulated industry having strict licencing controls.
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