Solar Industries - Blasting its way to growth - Centrum

We like Solar Industries (Solar) on account of its enviable track record of net sales and EBITDA CAGR of 23.1% and 28.1% respectively during FY09-13 through increase in capacities and market share (expanded to ~30% in FY13 from 17% in FY08). Solar's management has diversified its revenue stream smartly and its focus on increasing exports, expanding overseas explosives operations and foray into defence segment provides multiple future growth triggers. We expect consolidated revenue and EBITDA CAGR of 18.6% and 23.6% during FY13-16E along with strong return ratios and view the stock as a steady wealth creator for investors in the long run backed by quality management team. Initiate coverage with a BUY rating and a target price of Rs1025.

Explosive growth backed by aggressive expansion and increase in market share: Solar has achieved explosive volume growth in its product segments (CAGR of 17%/14% for bulk/cartridge explosives during FY07-13) backed by expansion and gradually increased its market share from 16.2% in FY08 to 25.2% in FY13 in domestic volumes of explosives. We expect bulk/cartridge explosives segments to continue their growth trend and register volume CAGR of 13.3%/5.3% during FY13-16E.


Diversification through increase in exports and expansion of overseas subsidiaries: Solar diversified its revenue stream through increase in exports (CAGR of ~38% during FY07-13) and set up overseas subsidiaries (in CY11) which contributed ~15% of revenues in FY13 and offered higher margins (~20%). Together with exports (~7% of revenues) this has helped bring down Coal India's share in revenues to ~27% in FY13 from ~58% in FY07. Backed by ongoing expansions, we see revenue CAGR of 21.2% for overseas subsidiaries during FY13-16E which will maintain the diversified revenue streams for Solar.

Defence foray to trigger next phase of growth: Solar is foraying into the niche space of supplying explosive equipment to the Indian Defence sector and is setting up the capacity to manufacture propellants and HMX at its plant locations in Nagpur. Total capex for the project is Rs2.2bn and we estimate that the project has the potential to generate revenues of ~Rs2.2bn/Rs4.7bn in FY16E/17E, triggering the next phase of growth for the company with healthy margins.

Initiate with a buy: We expect consolidated revenue and EBITDA CAGR of 18.6% and 23.6% during FY13-16E along with strong return ratios and view the stock as a steady wealth creator for investors in the long run. It currently trades at 9.7x FY15E P/E and 6.5x FY15E EV/EBITDA which are lower than its historical average as the company could command premium multiples on account of its stupendous past growth with FY09-13 sales and EBITDA CAGR of 23.1% and 28.1% respectively. We value the company on average of DCF, EV/EBITDA and P/E methodology and arrive at a fair value of Rs1025. Initiate with a buy. Key downside risks include lower volume growth, delay in defence and overseas projects and new regulations.

Source : Equity Bulls

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