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Well set for a prospective FY22

Domestic capital spending on roads infra, continue to add tailwinds to Solar Industries’ (SOIL) earnings. Q4FY21 witnessed ~47/50% QoQ/YoY increase in Housing and Infra revenues. The strength of the segment also manifests in higher standalone margins, up ~ 350bps QoQ/YoY. Change in stewardship has clearly not affected the ability to execute opportunities in the segment. Overseas/exports grew 31% YoY for FY21, allowing an impressive consolidated revenue growth of 12% YoY in a pandemic year. There are umpteen revenue and profitability triggers yet to be captured in the overseas business segment. New capex plan for packaged explosives across three greenfield sites highlights future growth potential (FY22 capex plan has been upped to Rs3.2bn against Rs 2,7bn YoY). Net debt management has been impressive, maintained flat YoY at Rs6.2bn. We upgrade to ADD with a revised target of Rs1,458 (Rs1,257 earlier).

Standalone revenues take support of ‘Housing and Infra’ segment, margins expand.

Gross margins at 34% improved 300bps QoQ and were flat YoY. Majority of the YoY EBIYTDA margin expansion of 344bps is coming from operating leverage rather than business mix. QoQ expansion is driven by improved mix (better Housing and infra mix of 31% against 26% QoQ) as well as operating leverage. FY21 witnessed an impairment loss of receivables in the standalone business of Rs163.2mn.FY21 standalone capex has been Rs1272mn (significantly up YoY, shows in the CWIP of Rs1297mn).

Overseas business turnaround continues to aid revenue/margins.

Overseas and exports revenues were up 67% YoY for Q4FY21M, ended FY21 being up 31% YoY. We continue to highlight the significant triggers towards profitability improvement that overseas operations exercise. Turkey has scripted a turnaround, which has helped revenues as well as margins. Ghana operations have reached breakeven, South African operations were expected to reach breakeven in Q4FY21 while Australian operations will soon start contributing meaningfully. SOIL has started two new operations in Burkina Faso and Albania. There has been impairment loss on financial assets of Rs 342.5mn in consolidated operations for FY21 (including receivables write down of Rs163.2mn seen in standalone operations). Also Rs108mn has been spent on acquisition of additional stake in subsidiaries in FY21.

Multimodal hand grenade order execution was expected to start from Q4FY21

Management did highlight in Q3FY21 conference call that ~Rs700mn of defence revenues were deferred to Q4FY21. However, defence revenues at Rs195mn were down 15% QoQ. Orderbook is flat QoQ at Rs6.8bn. Management has highlighted that ‘ due to covid there were some disruptions in new order processing and in execution of existing orders’.

Upgrade to ADD with an increased target price of Rs1,458share.

We value SOIL at 30x FY23E P/E (from 26x earlier). There has been certain traction seen with Skyroot, a space age startup helping ISRO with propulsion systems; SOIL has invested Rs175mn into the same. With subsequent rounds of funding, MTM value of SOIL’s investment into the name can bring in a surprise or two. Net debt is largely flat YoY – a positive surprise.

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