Published on 28/09/2020 11:09:28 AM | Source: ICICI Securities Ltd

Reduce Solar Industries Ltd For Target Rs.883 - ICICI Securities

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FY21 may surprise positively

Key takeaways from Solar industries’ (SOIL) Q4FY20 conference call: i) Expect turnaround in overseas business driven by the start of manufacturing in Ghana, Australia and Tanzania, ii) defence execution pick up to ensure higher topline and margins going forward and iii) re-clarified on the vacation of the office by Vice Chairman and Executive director Mr. Kailash Chandra Nuwal. Management expects to achieve revenue growth in FY21E while acknowledging the risks that Covid-19 pandemic presents; as a conservative assessment, management feels that recurring disruption in production and demand on account of Covid-19 crisis may lead to 5-10% revenue decline in the worst case. FY21E capex has been guided at Rs2.15bn. We maintain REDUCE on SOIL. Refer to our note post Q4FY20 result here

* Turkey’s revenue decline impacted overseas performance; management remains prospective on overseas business in FY21. FY20 overseas revenue of Rs6.46bn declined 3% YoY. Reduction in commodity prices resulting in a reduction in realisations, reduction in revenues from Turkey by ~18% and from Zambia of ~10% and a translation loss of Rs450mn in FY20 were key to a muted revenue performance. Management guided that FY21 revenues from overseas may be closer to the originally guided FY20 revenues.

* Three new overseas geography on the verge of start. Capex for the first phase of Ghana is over. In Tanzania, construction has started, and Q3FY21 should see start of manufacturing. For Australia, construction will be completed in five months.

* Mr. Kailash Nuwal’s voluntary (automatic) vacation of office. Management highlighted that the event related to voluntary vacation (rather than being relieved) of office and the shareholding will remain with him.

* Defence opportunity. Earlier guided revenue target couldn’t be reached because of delay in shipments and deferment of orders. Current RFP of multi-mode hand grenades (MMFG) which is in final stages will boost defence revenues. ~1mn grenades will be supplied over two years and SOIL will be the production agency. Existing facility, technology absorption make SOIL a major contender for production agency of Pinaka Mk I and Mk II. Defence capital employed stands at ~Rs5.5bn, and can lead to significant improvement of RoCEs.

* Cost initiatives undertaken. Annual increase in wages from Jan 20, lower sales due to pandemic, and lower-than-expected growth in defence and overseas segment led to higher fixed overheads as % of revenue. As growth returns from H2FY21, management expects fixed costs (as % of revenues to normalise). Management mentioned that the key initiatives undertaken to reduce costs will be shared post Q1FY21 result.


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