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Going from strength to strength

With ~3x price move in ammonium nitrate over FY22, we were happy to witness a QoQ improvement in gross (standalone) / EBITDA (standalone + consolidated) margins. Management, on the other hand, is still comparing margin print to pre inflationary levels. Management highlighted the gap that still exists between increase in RM prices and the realised increase in end-product prices (over a longer duration of one year) and is therefore focussed on the roadmap to retrieve the same. To add to that, the trend of creep up in market share for SOIL as competition feels the heat of inflation, SOIL is in a unique place. Thus, SOIL is also increasing capex (including selection of greenfield capex sites to increase pan-India presence). Add to that the upcoming opportunities in India defence, and many locations in overseas waiting to rampup – a CAGR growth guidance of ~25% in the medium term appears very much possible. We maintain HOLD with an increased target of Rs2,900 (Rs2,800 earlier); valuation constrains our rating

Strong guidance. Management provided 30% revenue growth guidance for FY23. 15% will be driven by volumes and rest by pricing. Volume increase is guided at ~15% p.a. over next 2-3 years. EBITDA margin guidance for FY23 stands at 18- 19%. EBITDA margins can retrace 20%+ levels once the inflationary environment recedes (current management estimates ~3% lag between realisations and costs).

Overseas market yet to see volume contribution from Australia/South Africa. Volume growth for overseas market was ~10%YoY in FY22. RM price increase was not as significant as in domestic market, allowing for lower price hikes (bit counter intuitive)

Others. Translation loss for FY22 was Rs1.8bn. Q4FY22 other expense had Rs250- 300mn of one-off gains (Rs150mn of forex gain and rest being writeback of provisions due to better recovery).

Defence revenues expected to increase substantially. Current order book of Rs4.75. SOIL had to supply 10 lakh pieces; it has supplied 40%, the rest will be supplied in FY23. There are expectations of repeat order. Also, for Pinaka, RFP is expected over next two quarters

Capex to target higher market share in India. Capex guidance of Rs 4-4.5bn in FY23 includes strategic investments such as investment in ZMotion (including the possible investment in the PLI scheme). SOIL has zeroed down on 3-4 land parcels and will finalise in a couple of months. The management is looking to increase footprint in Indian market; given SOIL’s performance on timely delivery and quality of products, management sees no reason why SOIL can’t increase its market presence in the country. In fact, given the current inflationary environment, management commentary suggests a creep up in market share towards 30% as competition suffers in a high inflation environment.

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