IGI Logo

Overseas business outperforms

Solar Industries’ (SOIL) has delivered an in-line EBITDA print for Q3FY21. While standalone margins disappointed (gross margins down from 41% to 31% QoQ), strength in overseas business driven by a turnaround in Turkey operations helped. Drop in standalone margins is on account of sharp inflation in commodity prices. Management expects the same to be passed on to customers in coming quarters. Standalone revenues are flat YoY, key highlight being 27% YoY increase in housing and infra revenues. Change in stewardship has clearly not affected the ability to execute opportunities in the segment. Overseas and defence underline 15%+ YoY topline growth guidance for FY22E along with improving margins. New capex plan for packaged explosives across three greenfield sites highlights future growth potential. Maintain HOLD with a revised target price of Rs1,257 (previously: Rs 1,006/share).

* Standalone revenues take support of exports, margins continue to surprise.

Gross margins at 41% were at 5-6-year high. This is despite no significant tailwind from the trade and infra segments, the traditional margin contributors. Higher exports would have driven margin trends in the standalone segment. Buildup in trade receivables (Rs550mn) and working capital investment in H1FY21 (Rs840mn) come as a negative surprise.

* Overseas business turnaround continues to aid revenue/margins.

Consolidated revenues increased 15% YoY. This was helped by 45% YoY growth in subsidiary revenues. We will continue to highlight the significant triggers towards profitability improvement that overseas operations exercise. What stands out from FY20 annual report analysis is PAT loss of ~Rs800mn in South Africa and Australia combined. Excluding these two locations, overseas business PAT was almost flat YoY at Rs1.3bn.

* Turkey has scripted a turnaround, which has helped revenues as well as margins.

Ghana operations have reached breakeven, South African operations are expected to reach breakeven in Q4FY21 while Australian operations are yet to start. Management expects Australian operations to achieve breakeven within one year of starting of operations.

* Multimodal hand grenade order execution to start from Q4FY21.

This will help defence revenues as orderbook stands at healthy Rs6.78bn. Management highlighted ~Rs700mn of defence revenues were deferred to Q4FY21.

* Maintain HOLD with an increased target price of Rs 1,257/share.

We value SOIL at 26x FY23E P/E (rolled over from FY22E). There has been a traction with Skyroot, a space age startup helping ISRO with propulsion systems; SOIL has invested Rs175mn into the same. With subsequent rounds of funding, MTM value of SOIL’s investment into the name can bring in a surprise or two. Net debt is largely flat QoQ

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer