Published on 23/03/2020 3:54:06 PM | Source: ICICI Securities Ltd

Hold Solar Industries Ltd For Target Rs. 980 - ICICI Securities

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Adjusting to new realities

We have reduced our FY21E and FY22E earnings of Solar Industries (SOIL) by 35% and 19% respectively. Management has reiterated its guidance for FY21E. Yet we exercise discretion to moderate earnings. We now expect FY21E EBITDA to decline 13% YoY, due to: i) disruptions in mining activity in India on account of COVID-19 outbreak (we have started witnessing similar disruptions globally); ii) potential slow-down in road and infra development capex, further impacted by the NBFC crisis; and iii) possible slowdown/seizure in overseas mining / construction activity as both global mining and ‘One Belt One Road’ project re-adjusts to the new reality. Maintain HOLD with a reduced target price of Rs940/share.


* Management interaction highlights confidence in FY21 guidance. Our management discussion highlights that there has not been a material impact on SOIL yet. Management has reiterated its confidence in the previous guidance for FY21E. Low leverage, exceedingly high market share, recovery in Coal India’s production, and an inherent propensity of the Indian government to spend on roads / infra helps SOIL. Also, global business for SOIL is more about increasing market share. While mining and infrastructure projects may slow down, SOIL may find a way to diversify customers and maintain its revenue guidance.


* Yet we exercise discretion to moderate earnings. The impact of COVID-19 cannot be pre-empted, nor can a management readjust to the severe shock it may unleash. We have seen housing and infra share expand to 23.3% of topline in 9MFY20 – and this may get impacted in FY21. We have earlier factored-in ‘Trade and Infra’ and ‘Exports and Overseas’ to constitute 24.3% and 38.2% respectively of FY21E topline (consolidated). We see majority of the risks emanating from these two segments, hence we have reduced our FY21E topline by 23% and PAT by 35%. There is an element of operating leverage benefit that SOIL (standalone operations) has experienced over the years. The same may unwind with a contraction in India business. Every 10% decline in bulk/cartridge volumes (India) leads to ~20% decline in FY21E PAT.


* Translation loss may accrue due to depreciation of foreign currencies. Over the past month, we have seen 16% depreciation of the Zambian kwacha and 7% depreciation of the Turkish lira.


* We have not yet moderated expectations from the defence business. Orderbook as at Q3FY20-end stood at Rs3.8bn. We continue to work with a defence segment valuation of Rs181/share, assuming revenues of Rs2.5bn / Rs4.1bn in FY21E/FY22E. Orderbook-driven revenue accretion has relatively lower chance of disruption though revenue booking may be delayed.


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