Solar Industries (SIIL), market leader in the domestic industrial explosives segment and largest Indian exporter, is poised to sustain its fast-paced growth on back of its leadership position and high entry barriers in explosive industry. Moreover, with the company expanding geographically via exports as well as scaling up overseas manufacturing operations, surge in profitability is imminent. Its proposed defence project provides growth visibility even beyond next two-three years. Initiate coverage with ‘BUY’.
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Market leader in high entry barrier explosives industry
SIIL has posted robust 28% domestic revenue CAGR to become market leader by enhancing market share from ~10% in FY06 to ~27% in FY12. While the domestic explosives industry is estimated to grow over 8% annually in the next few years, the company is likely to grow at a much faster clip owing to its leadership position coupled with increasing capacities and high entry barriers in the industry likely to keep new entrants at bay. SIIL is on track to garner over 30% market share within the next 2 years.
Overseas expansion, exports surge to boost profitability
Revenue contribution from SIIL’s high margin overseas operations is likely to catapult from 13% in FY11 to over 20% in FY14E, with the company expanding its manufacturing operations in Zambia, Nigeria and Turkey. It has also been expanding exports, which posted 64% CAGR over FY06-11, and currently account for over 65% of Indian exports.
Defence venture to propel growth beyond FY15
SIIL is entering the defence segment to supply propellants and HMX to government defence entities, for which it has already received manufacturing approval. The project, with the potential to garner over INR2bn and INR4bn revenue in FY16E and FY17E, respectively, is likely to commence in H2FY15 and completed at a cost of INR2.2bn.
Outlook and valuations: Strong fundamentals; initiate with `BUY’
The stock is available at 12.2x and 9.8x consolidated P/E and at 8.3x and 6.7x consolidated EV/EBITDA for FY13E and FY14E, respectively. Based on DCF valuation, we arrive at fair value of INR1,045/share and initiate coverage with ‘BUY’ recommendation.
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