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On a strong growth trajectory

The FY22 annual report of Solar Industries India (SOIL) focusses on the company’s robust growth journey through its enhanced offerings and rising opportunities. After a strong FY22 (57%/60% YoY revenue/PAT growth), it aims to continue its robust and profitable growth journey with a target to deliver 30% YoY revenue growth in FY23. The growth is likely to be aided by (1) rising capex in India for infrastructure, real estate, mining and allied industries, which would propel explosives demand, (2) widening presence in overseas markets through new plants and (3) a scale up in the defence business led by government’s accelerating indigenization and SOIL’s broadening product portfolio

Industrial explosives continues to offer robust growth prospects

In the domestic market, the industrial explosive consuming end user industries such as mining, construction, roads, railways, ports, airports etc have a healthy capex outlay lined up. This will result in good demand for industrial explosives, of which SOIL will be a major beneficiary due to its market leadership position. During FY22, SOIL won large orders worth Rs14.7bn from Coal India to supply explosives over a two-year period, leading to a 202% YoY jump in its domestic explosive order book to Rs25.1bn, its highest ever level. Post FY22, it has received another large explosives order worth Rs15.6bn from Singareni Collieries (supply over two years) in May’22, which has further enhanced its revenue visibility. In international markets, SOIL continues to widen its presence and has a new cartridge explosive plant proposed in Australia and a foray planned in Thailand, which would expand SOIL’s manufacturing base to 10 countries.

Accelerating indigenization to boost defence business

Defence indigenization has been rising with 25% of defence R&D budget earmarked for private sector, 68% of defence capex assigned for domestic procurement and $25bn turnover aimed by 2025. SOIL’s defence capabilities are rising and product portfolio is widening with FY22 marking successful commercial production of multi-mode hand grenades as well as foray in drones and loitering munitions.

Cash flow and working capital analysis over FY12-22

Over FY12-22, OCF has risen by 20% CAGR compared to 15%/16% CAGR in revenue/PAT. Ex-cash NWC cycle has remained broadly stable at 100 days. Over FY12-22, OCF/EBITDA was 61% while OCF/PAT was 107%. Over FY12-22, the conversion of OCF (Rs24.6bn) to FCF (Rs4bn) was 16% as explosives industry is capex intensive. Fixed asset turns are in the range of 2x. Return ratios are decent with FY22 RoE/pre-tax RoCE of 25% each.

Reiterate BUY rating with a target price of Rs3,400

We expect a strong revenue/earnings CAGR of 22%/29% over FY22-24E. The valuations are likely to remain rich as SOIL offers (1) market leadership, strong growth prospects and robust margin profile in a licensed-controlled explosive industry with high entry barriers and (2) imminent defence scale-up. We reiterate BUY rating on the stock with a target price of Rs3,400 based on 42x FY24E earnings (1.4x PEG ratio).

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