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Impressive performance sustains

Solar Industries’ (Solar) Q3FY23 consolidated EBITDA of Rs3.5bn (up 96% YoY) was ahead of consensus estimates by 17%. Key points:

1) revenue growth of 78% YoY was aided by robust growth in exports and non-CIL & institutional segments; 2) consolidated EBITDA margin was at 19.3%, up 180bps YoY; 3) it was the second consecutive quarter of defence revenue exceeding Rs1bn; and 4) orderbook was healthy for both defence and explosives business. Going ahead, despite likely decline in ammonium nitrate prices, management has raised its revenue growth guidance for FY23 to 65% YoY from 50% YoY (in Q2FY23). Besides, EBITDA and PAT margins are likely to remain at healthy levels of 18-21% and 11% respectively in FY23. We find the operating prospects healthy driven by volume growth of 15- 20% p.a., opportunities in defence and expansion in more overseas territories – Australia and Indonesia – in Q1FY24. Maintain BUY on Solar with an unchanged target price of Rs4,760 based on 45x FY24E EPS.

Impressive performance exceeding estimates.

Solar’s Q3FY23 performance was ahead of consensus estimates. Key points: 1) overall revenue grew 78% YoY led by 133% YoY growth in non-CIL and institutional revenues, and 93% YoY growth in the export business; 2) in the explosives business, domestic sales volume grew 17% YoY to 122kt while realisation grew 46% YoY to Rs71,745/te; 3) revenue from Initiating Systems was up 32% YoY to Rs1.33bn; 3) working capital days at Q3FY23- end were at 100; however, management expects it to reduce to 90 by Mar’23 end; 4) gross and net debts as at Q3FY23-end were at Rs14bn and Rs12.8bn respectively. Going ahead, management has guided for revenue growth of 65% vs the earlier guidance (Q2FY23) of 50%, despite likely reduction in ammonium nitrate prices. Besides, entry into new export markets – Australia and Indonesia – from Q1FY24 is likely to contribute to the topline.

Defence and space capabilities likely to aid margins.

Revenue from defence crossed Rs1bn for the second consecutive quarter, and is on track for achieving the FY23 target of Rs4bn. Company has participated in various RFPs, including RFP for one of the Pinaka variants and another one for drone-based loitering munitions. Besides, the company is sharpening its focus on the space sector post the successful launch of Vikram-S and static test of PSOM XL rocket motor made for ISRO. In our view, over the years the company has developed enough capabilities to cater to propellants and explosive-related requirements for these sectors.

Outlook:

Sanguine times ahead. We see Solar maintaining a healthy EBITDA margin of 18-21% through to FY24E. Furthermore, owing to focus on exports/ defence, we expect an EPS CAGR of 46% through to FY24E. Maintain BUY with an unchanged target price of Rs4,760/share implying 45x FY24E EPS.

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