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Add Solar Industries Ltd For Target Rs.1,645

Solar industries (SOIL) management guided for 30% topline growth in FY22E. 15% will be driven by volumes and 15% will be driven by higher realisations. PAT growth will be higher than 30%. EBITDA margins will move up to 22% over next few years driven by i) operating leverage ii) significant growth in overseas revenues and iii) defence business revenues picking up.

Management targets to increase domestic capacity significantly over the course of next 5-10 years; setting up new facilities in South and North India – the only risk we could sense from the commentary is the indication that one of the reason for setting up these new facilities is to mitigate single location risk. Management is confident that RoCE will move back closer to 30% as revenue and profitability ramps up in the medium term. We upgrade the stock to BUY from ADD with a revised target of Rs1,645/share (Rs1,458 earlier).

* Topline growth guidance of 30% for FY22E, margins to gradually move up to 22%. FY22E volume as well as realisation growth guidance is 15%. Spot Ammonium Nitrate prices are higher than FY21 average by 23%. Part of the margin accretion driven by operating leverage will be dedicated towards CSR expenses. FY22E EBITDA margin, nevertheless, may see a bump. As commodity driven price escalation recedes, management highlighted i) higher overseas volumes with ramping up of several geographies particularly Australia and South Africa, and ii) better defence execution (which to our understanding would have still reported an EBITDA loss in FY21) would lead to a gradual increase in margins to 22%.

* Planning to create multiple facilities to capture incremental domestic market share as well as mitigate single-location risks. SOIL is looking prospectively at domestic demand over next 5-10 years for capacity creation. Certain levers are augmenting higher market share capture visibility i.e the stress witnessed by the smaller players in a higher RM cost, high working capital environment. SOIL is also looking to create two new facilities in Southern and Northern India to go closer to customers as well as to mitigate single location risks. Also, logistics costs advantage will accrue, helping market share gains. Resultantly, management expects both CIL and non-CIL market share to move up meaningfully.

* RoCE guided at 30%. With topline growth guidance of 30% for FY22E and ~15- 20% in the long-run, management expects RoCE to move up to 30%. Increase in overseas revenues, execution of current Rs6.8bn of defence orderbook, including Rs4.5bn of Multimodal hand grenade order will be key to achieving the milestone. SOIL is also looking at export opportunities from defence. Also, there will be new business opportunities in defence from RFPs of i) BMCS ii) 30mm ammunition and iii) Pinaka assembly (US$2bn contract awaited). Normalisation of FY21 translation loss of Rs 1.2bn can also help return profile. It appears a large part of the capex increase for FY22 (to Rs3.17bn) has been driven by commodity cost inflation.

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