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Our Take:

Solar Industries Ltd (SIL), is a formidable player in the industrial explosives space in India and has a global manufacturing base across 6 countries around the globe. In the domestic market, SIL is one of the largest supplier to Coal India (CIL) and has been a dominant player in the distribution driven Trade channel (Housing and Infra).

On the export side, its products (mainly cartridge explosives and accessories) are exported to 57 countries around the world. The exports and overseas segment has been a key growth driver for the company reporting 19% CAGR over FY12-21. Apart from this, SIL had ventured in the defense business in 2010 and had entered into highly synergic consumable products like Multi-mode hand grenade, HMX (High Melting explosives) & HMX compounds, composite propellants, pyros, igniters, fuses & rocket integration etc.

We believe, post the investment phase over the last decade, the defense segment is at an inflection point and can multiply over next 2-3 years. As per the management guidance, defense in FY22 is likely to achieve a revenue of Rs. 300Cr v/s Rs.123Cr in FY21 and expects this segment to achieve a milestone of Rs. 600 of revenues by FY24. As on Q1FY22, its total order book stood at Rs. 633Cr. SIL has a market share of 28–30% in domestic industrial explosive space; its market share in the housing and infrastructure segment also is in a similar range.

The company has also guided an overall revenue growth of 30% in FY22 over FY21. SIL’s CIL and Singareni Collieries (SCCL) order book as on Q1FY22 stood at Rs. 1071Cr up 50/29% on a YoY/QoQ basis.

Solar Industries Ltd and recommended to buy at LTP at Rs 1557 and add further on dips to Rs. 1412 for base case target of Rs 1704 and bull case target of Rs 1826. The stock has achieved its bull case target recently on 13th Sept 2021. Given healthy growth outlook and strong set of numbers in Q1FY22, we re-iterate our positive view on the stock and expect the stock to further get re-rated. Consequently, we have now revised earnings and increased target price for SIL.

Valuation & Recommendation:

We believe, within the Industrial explosives space, SIL is a unique company which has strong pricing power and has been exhibiting consistent better than industry performance for more than 2 decades. Going forward, we expect SIL’s revenue, EBITDA & PAT to report a growth of CAGR 23/24.5 and 31% respectively over FY21-23E.

Segment-wise we expect Defense revenues to reach Rs. 500Cr by FY23 up 4x over FY21 while exports and overseas are expected to grow by 20.7% CAGR for next 2 years. Apart from these, domestic business like CIL/ institutional and trade channel are expected to grow at a CAGR of 12.5/13.9 and 13.5% respectively over FY21-23E.

The stock is currently trading at valuation of 37x FY23E earnings. We feel the Base case fair value of the stock is Rs. 2130 (40x FY23E) and Bull case fair value is Rs. 2290 (43.5x FY23E). We feel investors can buy the stock at LTP and further add at Rs 1789.

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