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Healthy growth to continue; Realization to remain firm

We expect the healthy growth prospects of Solar Industries India (SOIL) to continue, led by robust demand of packaged explosives, rising scale in overseas markets and increasing ramp-up of defence segment. In its recently released FY22 annual report, the management has re-iterated its aim to deliver 30% YoY revenue growth in FY23, despite a high base (FY22 saw 57%/60% YoY revenue/PAT growth, respectively). The key growth drivers highlighted were (1) rising capex in India for infrastructure, real estate, mining and allied industries, (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. We expect the growth momentum to continue in Q1FY23 as well and note that the Ammonium Nitrate (AN) prices have remained firm in Apr-June’22 on QoQ basis and hence realization of explosives is likely to remain high. We reiterate BUY rating on the stock with a target price of Rs3,400 based on 42x FY24E earnings (1.4x PEG ratio).

Ammonium Nitrate (AN) prices have remained firm in Q1FY23

With the rise in global commodity prices, the AN prices has also risen sharply. The domestic explosive realization for SOIL increased from Rs34,797/MT in FY21 to Rs50,417/MT in FY22. In Q4FY22, the realization was even higher at Rs65,948/MT. The higher realization is on account of elevated AN prices, which rose from the range of US$600/MT-US$700/MT a year ago, to US$1,000/MT in Q4FY22. Our channel check suggests that AN prices have remained firm and has averaged $1,050 in Q1FY23, and hence higher realization for explosives will sustain on QoQ basis.

Q1FY23 result preview

We expect SOIL to report 39% YoY growth in revenue at Rs11.5bn, led by higher realization and 12% YoY domestic volume growth. EBITDA margin is likely to decline 290bps YoY to 18.3%, on a high base. PAT is expected to rise 29% YoY to Rs1.2bn.

Reiterate BUY rating with a target price of Rs3,400

We expect a strong revenue/earnings CAGR of 22%/29% over FY22-24E. The revenue visibility from domestic mining segment has improved after two large orders (Rs14.7bn order from Coal India in Oct’21 and Rs15.6bn order from Singareni Collieries in May’22), which have to be supplied over the next two years. Thrust on infra capex will continue to drive packaged explosives business in the domestic market while scale-up of newly forayed geographies will aid growth in overseas markets. Defence revenue visibility is also healthy for FY23 led by Rs4.7bn order book inclusive of multi-mode hand grenade order (out of Rs4.1bn 1mn units order; 414,304 units are supplied in FY22 while the rest will be supplied in FY23). 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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