Solar Industries - Overseas and defence key to profitability - ICICI Securities

Solar Industries' (SOIL) conference call underlined the strength of the business model; growth opportunities will determine the next phase of investment thesis. Management commentary highlighted: i) Overseas operations - with the desired experience of getting into the big league of mining through presence in South Africa and Australia eventually to reap dividends and ii) defence - where SOIL's own preparedness meet with government readiness to entertain private sector, thereby, increasing probability of order inflows. ISRO opportunity will be delineated once better clarity emerges. We maintain our REDUCE rating on the stock.

- Overseas business recovery is one of the key levers for profitability going forward. While South Africa and Australia incurred significant losses of Rs645mn and Rs186mn for FY20, respectively, management reiterated that business profitability will improve going forward. Management stays prospective of US$1bn explosives market opportunity in African continent (Ghana manufacturing has started in Q1FY21 as per annual report) and US$580mn opportunity in South Africa. With expansion into Australia and South Africa, SOIL has broken into big league of mining - an experience developed over the past five years, with players like Anglo American as prospective customers. SOIL currently has 125,000te of overseas explosive capacity and produced ~100,000te in FY20.

- Apart from overseas, defence can be the next big opportunity for SOIL. SOIL is prepared, through suitable investments to capture any opportunity that come towards private sector for ammunition manufacturing. Product capability includes high energy materials, composite propellants, explosive filling for ammunitions, rocket integration, fuses, pyros and igniters etc. Management also highlighted that i) SOIL is expected to receive final orders for execution of multi-modal hand grenade orders - while not disclosing the amount of the contract. It would entail supply of 1mn pieces over two years and ii) Indian army has successfully tested Pinaka integrated and supplied by Solar Industries - this can be a big opportunity for SOIL as and when it materialises.

- Balance sheet management. Management will seek to maintain 0.5x net debt to equity. FY21 capex will be Rs2.1bn; FY22 capex, yet to be finalised based on extant opportunity, is likely to be ~Rs2.5bn. Capital allocation continues to be directed towards overseas as well as domestic operations. Packaged scheme of SGST benefits in Maharashtra will continue till FY22. Capex for Q1FY22 was Rs488mn and planned capex for FY21 is Rs2.1bn.

- Maintain REDUCE. Management expects infra and housing segments to recover in H2FY21. The business is currently being overseen by Mr. Suresh Menon (Executive Director). We value SOIL at 26x FY22E P/E.

Shares of SOLAR INDUSTRIES INDIA LTD. was last trading in BSE at Rs.1058.25 as compared to the previous close of Rs. 1070.05. The total number of shares traded during the day was 560 in over 166 trades.

The stock hit an intraday high of Rs. 1067.8 and intraday low of 1036.45. The net turnover during the day was Rs. 589521.

Source : Equity Bulls

Keywords