Defense Sector : The big-bang growth driver By Emkay Global Financial Services Ltd
We interacted with the management of Solar Industries India. KTAs are 1) The defense segment is expected to be a major growth driver, given increasing defense budgets, led by geopolitical tensions and security concerns globally. 2) The strong focus on indigenization would further propel defense growth in the domestic market. 3) The recent strategic MoU with the Government of Maharashtra would enhance capacities and capabilities. 4) A pickup in infrastructure spend would drive industrial explosives growth. Overall, the product pipeline remains strong (eg the ongoing development of Nagastra-2 with enhanced capabilities; successful initial trials for counter drone system (Bhargavastra) micro missile). The management has guided for revenue of Rs100bn (+33% YoY) in FY26, with defense revenue at Rs30bn, led by strong order wins. Margins are likely to be akin to FY25 levels. The company is trading at premium valuations, given the strong run-up recently due to robust order wins and execution. RoE/RoCE remained healthy at 31%/37% in FY25.
Defense to be a major growth driver
Started in 2010, Solar’s defense vertical has remained the fastest growing segment in the last five years (62% revenue CAGR over FY20-25), led by strong order inflows (domestic and international), healthy execution and a focus on continuously expanding the portfolio. Solar recently secured a Rs60.8bn defense contract for the Pinaka multiple rocket launcher system from the Ministry of Defense. The company’s order backlog of ~Rs152bn (11.2x FY25 defense revenue), along with its robust pipeline, offers strong growth visibility in this segment, in our opinion. With a strong order book and surge in demand for defense products globally, Solar has guided for defense revenue of Rs30bn in FY26 and expects Rs80bn in 4-5 years (at ~40% CAGR).
Long-term strategic investments/capex line-up
In FY25, Solar entered an MoU with the Government of Maharashtra to set up a mega defense and aerospace project in Nagpur over the next 10 years, with an investment of ~Rs127bn. The project is aimed at enhancing various defense products like drones, UAVs, counter drone systems, energetic material, new-gen explosives, and new military transport aircraft for the security forces. The company has also guided for capex of Rs25bn in FY26, with a focus on further expanding its product portfolio.
Pick-up in infrastructure capex to drive industrial explosives growth
With the general elections and heavy monsoons, explosives volumes were subdued (+7% YoY at 588,834mt) in FY25. The current order book for explosives stands at Rs18bn. Solar enjoys a leading share of ~25% in the domestic industrial explosives market. The company is well poised to grow steadily, led by healthy demand prospects from segments like mining, housing, and infrastructure. In exports also, the management indicated steady demand across overseas markets which would lead to further revenue growth.
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