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Solar Industries’ (Solar) Q4FY23 consolidated EBITDA of Rs3.6bn (up 36% YoY) was 14% ahead of the street’s estimates. Key points: 1) revenue growth of 47% YoY was aided by robust growth in exports and non-CIL and institutional segments; 2) consolidated EBITDA margin at 18.5% was down 80bps QoQ, mainly due to (non-cash) hyperinflation and forex translation loss of Rs478mn; 3) the quarter saw highest-ever revenue from defence at Rs1.1bn; 4) inventory days were down to 92 in FY23 (FY22: 122). Going ahead, despite volatility around ammonium nitrate prices, management has pegged: 1) FY24 EBITDA margin at 20-22% (FY23: 18.6%); and 2) volume growth at 15-20% YoY in both domestic and overseas explosives business as lower explosives prices are likely to spur demand in the cost-sensitive (but highermargin) infrastructure segment. We introduce FY25E estimates at this stage and roll over to FY25E EPS for valuation. We cut our P/E target multiple to 40x (from 45x) due to raw material price volatility and lower EPS growth over the high base of FY23. Our revised target price works out to Rs4,700 (earlier: Rs4,760) on 40x FY25E EPS. Maintain BUY.

* Impressive performance, ahead of estimates Solar’s Q4FY23 performance was ahead of consensus estimates. Key points: 1) Overall revenue growth of 46% YoY led by 90-92% YoY growth in non-CIL and institutional revenue and exports; 2) in explosives business, domestic sales volume grew 13% YoY to an all-time high of 135kte while realisation grew by a mere 1.5% YoY to Rs70,173/te; 3) EBITDA margin at 18.5% was impacted by Rs478mn of non-cash impact pertaining to hyperinflation and forex translation loss in certain overseas operations; 4) working capital days were at 95 against the target of 90; however, management has guided for 85 days in FY24 as raw material prices cool off. Going ahead, management has provided the following guidance for FY24: 1) volume growth of 15-20% YoY, which would substantially offset the impact of potentially lower realisation on explosives, tracking the dip in ammonium nitrate prices; 2) capex of Rs7.5bn (FY23: Rs4.7bn) in defence, exports and domestic operations to maintain growth; and 3) EBITDA margin at 20-22% (FY23: 18.6%).

* Higher contribution from defence likely. Revenue from defence was Rs4bn in FY23 (as guided). Besides, the management has guided for defence revenue to increase 2x in FY24 to Rs8bn. Company has already got an order worth Rs2.1bn for supplying 450 nos. Nagastra-I within one year. Besides, management expects the product evaluation of Pinaka rockets to be completed in 3 months and the orders therefrom to provide thrust to defence revenue in the coming years. Furthermore, the company has indigenised the Brahmos booster and is participating in development of propellant unit for Pralaya missile. Hence, potential exists for defence revenue to touch Rs12bn in FY25E.

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