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Business overview

SOIL is our top pick in the Capital Goods sector due to (1) leadership in industrial explosives with 25% market share (2) robust growth prospects in packaged explosives (a proxy play on infra capex) and (3) strong scale up in defence and overseas segment. Our target price of Rs2,775 is based on 42x H1FY24 EPS

Key investment rationale

Robust revenue CAGR of 27% expected over FY21-24E due to (1) rising infra capex in India, (2) foraying in larger overseas markets (such as South Africa, Australia and Indonesia) and (3) imminent exponential growth in defence due to existing order book and good pipeline of tenders.

Strong margin profile (19-21%) over last 7 years due to price variation clause in bulk explosives. Packaged explosives is a dealer driven business where price hikes can be taken in 10-15 days. Margin to improve in future due to improving revenue mix with growing share of defence and overseas segment.

22% revenue CAGR over FY17-21 in exports & overseas segment. Strong scale up likely with manufacturing presence rising to 10 countries (vs. 6 currently).

Defence is the key driver for revenue growth, margin/Return Ratio expansion. SOIL has deployed capital worth Rs5bn and has ability to support turnover in excess of Rs10bn compared to FY21 sales of Rs1.2bn and current o/b of Rs5.4bn.

Key triggers in the near to medium term

Winning large defence orders of Pinaka rockets, MMHG etc as well as large explosives orders in mining tenders are key upside triggers.

Key risks

Slowdown in mining and construction activities may hamper demand for explosives.

With 40% of revenue from international markets, delay or inability in managing sharp fluctuations in currencies may negatively impact SOIL’s margins.

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