Strong growth continues… • Solar Industries India :: ICICI Securities, report

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Strong growth continues… • Solar Industries India’s (SIIL) topline grew 12.4% YoY to | 319.8 crore. This was led by volume growth of 36% YoY in bulk explosives and 34.5% YoY growth in cartridge explosives • The EBITDA margin came in at 18.7%, expanding 23 bps YoY and contracting 53 bps QoQ. The contraction in EBITDA margin on a QoQ basis is attributable to a decline in revenue share of overseas & exports from 31% in Q2FY15 to 22.2% in Q3FY15. This resulted in lower realisations for the cartridge, detonator & detonator fuse segments. Another reason for the lower margins is higher sales of bulk explosives (execution of Singareni Collieries order in Q3FY15), where the raw material cost is higher than the other segments • Net profit grew 21.7% YoY to | 35.4 crore in Q3FY15 vs. | 29.1 crore in Q3FY14 on account of revenue growth and 14.9% YoY reduction in interest cost. The interest cost reduced with the reduction in total borrowing from | 442.7 crore at FY14 end to | 381.5 crore by 9MFY15 Beneficiary of revival in end-user demand growth In FY09-14, when production in coal mining grew at a muted CAGR of 2.9%, SIL achieved a volume CAGR of 2.2x the volume CAGR of the overall industry (bulk + cartridge), which stood at 5.8%. In FY14, the topline of SIIL grew merely by 1%, as SIIL lost business in Singareni Collieries due to non-remunerative pricing & unachievable performance criteria set by Singareni Collieries. However, with the revival in coal production growth in 9MFY15E (CIL’s coal production grew by 7.3% YoY in 9MFY15E) and SIIL receiving maximum order quantity from Singareni Collieries for FY15E & FY16E, SIIL has witnessed revenue growth of 21.3% in 9MFY15E. Going ahead, we believe SIIL is well placed to witness a volume CAGR of 18.8%, 12.5% in bulk, cartridge segment in FY14-17E, respectively. Strategic expansion, higher capacity utilisation and product diversification will ensure revenues grow at a CAGR of 21.5% to | 1725.3 crore and | 2034.4 crore in FY16E and FY17E, respectively. Overseas operations & defence business to boost growth & margins SIIL’s high margin overseas operation has a notable contribution in consolidated revenues, with its share increasing from 12.8% in FY11 to 18.8% in FY14. In 9MFY15, overseas revenues have grown 46.1% YoY to | 241.7 crore. We expect the share of the overseas operation to increase to 22.1% in FY17E, with its revenues expected to increase at a CAGR of 27.5% to | 482.6 crore in FY17E. Significant revenues from the defence business from FY16E onwards (5.8% of consolidated revenues in FY17E) are expected to provide an uptick in revenue growth. The margin expansion from 14.3% in FY09 to 17.9% in FY14 is due to high degree of operating leverage and increasing revenue share of higher margin yielding overseas business. Going ahead, EBITDA margins are expected to expand 261 bps from 17.9% in FY14 to 20.5% in FY17E due to further increase in share of overseas business. Maintain BUY on favourable growth story with target price of | 3442 We believe SIL possesses a wide moat in the form of a de-risked business model, industry leadership, significant entry barriers and optimal product mix to benefit the most from the revival in mining & infrastructure activity. Hence, we maintain our BUY recommendation on the stock with a target price of | 3442. We value the stock at 1.0x PEG, implying P/E of 26x FY17E EPS.

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