Scrip Code: 532725 / SOLARINDS

CMP: Rs. 681.10; Market Cap: Rs. 6,163.28 Cr; 52 Week High/Low: Rs. 759.45 / Rs. 567.06

Total Shares: 1,80,98,011 shares; Promoters : 1,32,08,207 shares – 72.98 %; Total Public holding : 48,89,804 shares – 27.02 %; Book Value: Rs. 95.87; Face Value: Rs. 2.00; EPS: Rs. 18.99; Dividend: 225.00 % ; P/E: 35.70 times; Ind. P/E: 53.69; EV/EBITDA: 20.09 times. Total Debt: Rs. 400.34 Cr; Enterprise Value: Rs. 6,526.58 Cr.

SOLAR INDUSTRIES INDIA LTD: The Company was founded in 1983 and is headquartered in Nagpur, Maharashtra, India. The company was earlier known as Solar Explosives Limited and changed its name to Solar Industries India Ltd in 2009. Solar Industries India Limited is an explosives manufacturing company. The Company manufactures, supplies and exports industrial explosives and initiating systems. It manufactures various explosives products, such as Slurry and emulsion base explosives, bulk explosives, detonators, pentaerythritol tetranitrate (PETN) and accessories. The Company's products include Large Dia slurry Explosives, Small Dia Emulsion, Small Dia Slurry Explosives, Solar Detonators, Supreme Detonators, Supreme Electric Detonators, Economic Sod, Eco Det, Cord Relay, Cast Booster and Detonating Fuse. Its products are used across mining and infrastructure sectors. It also offers high melting explosive (HMX) and HMX Compounded products to the defense sector. The Company has 25 manufacturing plants eight states in India and three in overseas locations. The Company offers its products to 42 countries across the globe. The Company has manufacturing facilities at Zambia, Nigeria and Turkey. The company came with an IPO in 1980 with an offer of 4,41,000 equity shares of Rs. 10 each at par. The company has not declared any bonus. Company has declared Split in face value of its shares from Face value of Rs. 10 to Rs. 2.00 on May 16, 2016. SOLAR INDUSTRIES INDIA LTD is locally compared with Premier Explosive Ltd, Indo Gulf Industries, GOCL Corp Ltd, Hardcastle & Waud Manufacturing Co Ltd, UPL Ltd, CDET Explosive Industries Private Ltd, Salvo Explosive & Chemicals Pvt Ltd, Thangavel Match Ind, Vetrivel Explosives Pvt Ltd, Dai-Ichi Karkaria Ltd globally compared with Saudi Explosive manufacturer of UAE, African Explosives (Tanzania) Ltd of Tanzania, Austin Powder Company of USA, Maxam Brasilia LTDA of Brazil, Maxam Corporation of Spain, African Explosives (Ghana) Ltd of Ghana, Davey Bickford of France, Elviemak Sa of Greece, European Federation of Explosives Engineers of UK, Fabchem China Ltd of china, Biafo Industries Ltd of Pakistan, Hyflux Ltd of Singapore.

Investment Rationale:

Solar Industries India Ltd (SIIL) founded in 1995, is one of the largest comprehensive explosives & initiating devices manufacturing company in India. Solar Industries India Limited has grown to become India’s largest manufacturer of Industrial explosives and explosives initiating systems and spreading its presence to global markets with manufacturing plant at Zambia, Nigeria and Turkey. Solar Industries India Ltd manufacturing facilities span in 19 Locations across India with 3 manufacturing units in Overseas with distributors network in more than 40 countries. The company offers high quality and services that are backed by stringent safety standards, a robust infrastructure companies including the recognized names like Coal India Ltd, Singareni Collieries company Ltd, Vedenta, Tata, Sasan Power, L&T, and many more. Solar Industries products includes Cartridge explosives, Detonators, Detonating cord, Cast booster, Multi-layer Shock Tubes, Underground Bulk, Explosives for military Application, Pyros, Propellants, Ammunitions. Industrial explosives comprises of cartridge explosives, bulk explosives, ANFO based explosives, which includes boosters and PETN as well as accessories for explosives such as safety fuses, detonating fuses and detonators. The global explosives market is largely driven by bulk explosives. The mining industry is the largest consumer of industrial explosives, with coal mining demand dominating over others, due to increasing demand for coal. Other segments that utilises explosives include limestone and metal mines besides infrastructure segments like roads, dams, canals and tunnels. Despite India’s huge reserves of various natural minerals, the share of the mining and quarrying sector as a percentage of Gross Domestic Product (GDP) has declined from 2.8 % in FY 2010-11 to 2.1% in FY 2013-14 (Provisional Estimates). This decline came against the backdrop of various judicial pronouncements and the Justice Shah Commission Report, which led to the suspension of several mining leases or closure of mines. The revival of the mining sector is now linked to providing a level playing field between domestic and foreign investors. The proposal is aimed not only at remedying the problems in the sector but also at creating an enabling environment based on sound principles of transparency and efficiency. Once the mining sector is back on track, the explosives industry is set to witness a new phase of growth. Also the Government has set an excavation target of 1.35 Billion Tonnes of coal by FY 2020. According to the plans firmed up by Coal India along with the Union Coal Ministry, total output envisaged for Coal India’s subsidiaries is about 900 Million Tonnes and other proposed New Projects for is about 100 Million Tonnes. Its plans for each of the subsidiaries are in place, though, and it also envisages opening up 70-100 mines to achieve the FY 2020 target. Iron Ore mining industry is currently facing some hurdles in securing approvals to restart mines, especially in the three states of Odisha, Karnataka and Goa. Nevertheless, once these mines begin production, iron ore output is set to grow at a robust pace of 10 % during FY 2015. Against an output of 140 Million Tonnes in FY 2014, domestic production is set to reach 155 Million Tonnes in FY 2015. Some positive developments that are imminent include the renewal of leases for mines in Goa, the formation of a new government in Jharkhand, issuance of clearances and permits in Odisha and revival of mines in Karnataka. India was the world’s largest arms importer, largely due to lack of domestically produced arms. To reduce significant outflows of valuable foreign currency as well as to promote domestic growth of the industry, the Government presented the Defence Procurement Policy in FY 2013, under which all Government procurements would need to have a minimum 30 % of such purchases with indigenous content. This has opened up new business opportunities for the explosives sector in India. Budget 2015-16 has also provided an outlay of Rs. 2,46,727 Cr for defence. The Government’s ‘Make in India’ initiative, seeking to promote self-reliance, indigenisation, technology upgradation and achieving economies of scale and developing capabilities for exports in the defence sector, will also open up a large window of opportunity for the explosives sector. These developments will cumulatively facilitate the emergence of a more efficient and productive coal sector. This will, in turn, trigger greater demand for the explosives which is good for this industry. SOLAR INDUSTRIES LTD commands a dominant volume market share of 25 % among more than 40 players in 1 mt Indian explosive market in which large 6 player’s accounts for 75 % market share and tedious licencing procedures act as high entry barriers. Explosives industry clocked a combined volume CAGR bulk & cartridge explosives of 9 % while Solar Industries Ltd’s combined volume CAGR bulk & cartridge explosives was 16 % over FY09-FY16. Solar Industries will continue to outperform the industry, given the various triggers in domestic and overseas markets. Unlike capital goods, explosives are industrial consumables and to a large extent immune to the vagaries of intense cyclicality faced by its main user industry i.e. mining. This can be witnessed from the fact that SIL’s combined volume CAGR for bulk and cartridge explosives has been 16 % over FY09-FY16 as against coal production CAGR of 3.8 %, iron ore production CAGR of -5.8 %, and lignite/limestone production CAGR of 2.9 % /4.0 %, respectively, over the same period. SIL is well placed with its recent addition in licensed capacities due strategic acquisitions of M/s Blastec (India) Private Ltd & M/s Emul Tek Private Ltd. The current licensed capacity in this segment stands at 3, 00,000 MT. As per the management, volumes from tender business are also expected to improve significantly, with increased focus of government on Coal India and Singareni Collieries to increase their mining volumes. SIL’s newly commissioned facility at kothagudam (Andhra Pradesh) along with two new facilities at Barbil (Odisha) & Kota (Rajasthan) will also contribute significantly to the volume growth. SIL has achieved superior volume growth compared to the industry. The same trend is expected to continue and SIL’s bulk volumes can grow at a CAGR of 24 % to 2,82,014 MT in FY16-18E, Cartridge volumes are expected to grow at 12 % CAGR over FY16-18E. With the improvement in the realisations is mostly due to increase in exports as cartridge fetches higher realisations in the export market. As per management, both cartridge volumes and realisations are expected to improve from here, on account of higher demand from domestic private infrastructure players, private miners and continued up-tick in exports. SIL has witnessed improved demand from the defence segment from Q4FY16. The current order book of the company in this segment is now Rs. 80 crore. The same is executable by H1FY18E. SIL had already executed Capex of Rs. 200 crore in this segment for setting up a production capacity of 50 tonne per annum (TPA) of HMX and 10,000 propellants. The same was utilised to set up a capacity of 2500 propellant and 50 TPA of HMX. Going ahead, the company has capex plans of Rs. 50 crore in FY17E and FY18E to increase the propellant capacity from 2,500 units to 10,000 units and HMX capacity from 50 TPA to 100 TPA. The integrated pinaka rocket launcher facility is likely to come up in the next four or five months. The management is confident of winning orders in this segment as it believes that the upcoming facility addresses an area where there are capacity constraints, especially the ordnance factory board (OFB) end. SIL is also planning to foray into manufacturing of bi-modular-charge systems (BMCS) for artillery guns. BMCS is a crucial component required to propel the shell out of the barrel, this was so far imported, mainly from France. In last one year around 10 lakh modules were imported. BMCS can increase the rate of firing, especially for a gun like Bofors. Ordnance Factory Board's (OFB) plans to have a dedicated factory for making BMCS Could not take off after being conceived 15 years ago. The government now plans to open this area to private players. SIL has already applied for necessary licenses in this segment and is waiting for the approval. SOLAR INDUSTRIES LTD being one of the leaders in the industry has very strong footing and has strong cash flow which thrusts the growth for the company, and strong financials with sustained cash flow makes it attractive for long term investment.

Outlook and Valuation:

Solar Industries India (SIL) is the largest manufacturer of industrial explosives and explosive initiating systems in India. The Nagpur-based company has licensed capacity of 4,02,000 tn with its plants across the country. The company’s offerings include bulk and packaged (cartridge) explosives, apart from a wide array of initiating systems comprising detonators, detonating fuses and cast boosters. SIL currently owns and operates the world’s largest single-location manufacturing capacity for cartridge explosives besides India’s largest manufacturing capacity for bulk explosives. Over the past three decades, SIL has gradually expanded its product offerings from cartridge to bulk explosives and from detonators to detonating cord and cast boosters. The recent addition to its vast bouquet of products were multi-layer shock tubes, underground bulk explosives, explosives for military application, pyrotechnics, propellants and ammunition developed through intensified efforts of state-of-the-art R&D centre. Hence, SIL has significantly widened its bouquet of products and is today a one-stop-shop for industrial explosives. Currently, SIL has 25 manufacturing facilities, spanning 10 states across India and 3 overseas units - in Zambia, Nigeria and Turkey. It also supplies to corporate giants such as Steel Authority of India, Oil and Natural Gas Corporation, Tata group, Adani group, Jindal group, Vedanta, Reliance Power, NHPC, Aditya Birla Group, etc. SIL is the largest exporter of explosives from India, supplying to more than 22 countries. The company has also taken a strategic leap into the defence sector recently through the execution of some early orders in this space. Looking forward, the defence foray offers immense scope for growth. Solar Industries is the India’s largest manufacturer of industrial explosives and initiating systems. Having complete explosives range with a presence across product value chain. It has the World’s largest single-location cartridge manufacturing facility at Chakdoh near Nagpur. It is the India’s first private sector company to obtain the licence for setting up manufacturing facilities for HMX (a warhead explosive) and HMX compounded products. SIL has displayed similar attributes in the past decade since its listing on the bourses. SIL became the largest player in 1 mt domestic industrial explosives market over a period of past 10 years with its volume market share at 2.5 x from 10 % in FY06 to 25 % in FY16. SIL has grown at higher-than-industry rate over the same period. SIL’s average volume CAGR across bulk and cartridge explosive, detonator and detonator fuse was 13 % over FY09-FY16 against Indian explosives industry’s average volume CAGR of 7 % over the same period. The company successfully managed to keep competition at bay on account of its ability and intention to keep investing in the business, rationalise the cost structure to remain cost-competitive in fact it achieved the leadership position by going for backward integration, widening its product portfolio and maintaining strong client relationship. SIL offers the widest portfolio of products with end-to-end solutions and maintains its numero uno position as an industrial explosives and initiating systems supplier to largest consumer of explosives in the country, Coal India, for the past few years. SIL satisfies nearly 30 % of the explosives requirement of Coal India. Moreover, after opening up of India’s defence sector for private players, the company is eyeing multibillion dollar Indian defence space which is being catered to by either government owned defence establishments or through imports. After consolidating its position in India, the company successfully moved to other big explosive-consuming markets by setting up plants in Zambia, Nigeria and Turkey over the past five years. It is now in the process of setting up a plant in South Africa. The company has realised the importance of global opportunity (more than US$10bn) and taken steps to grab the share through overseas expansion and focus on exports. SIL possesses wide moats in the form of industry leadership, significant entry barriers, optimal product mix and carefully pre-planned capacity additions to benefit the most from the revival in mining & infrastructure activity. Even in the export & overseas business, SIL has just scratched the surface of growth, with many more un-penetrated markets yet to be explored. New business segments like defence business will further solidify SIL’s business model at a time when government’s prerogative is to indigenise defence manufacturing, which will allow SIL to scale the defence business at a faster pace. Even during times of moderate business environment, SIL had witnessed robust revenue CAGR of 40 %, over FY12-16, backed by a strong 15 % volume CAGR (bulk + cartridge) coupled with capacity expansion and market share gains. This speaks for the pedigree of the management and business model that has evolved over time and reiterates our confidence on the company to capture onto the upcoming opportunity with the revival in industrial activity. Hence, SIL is a rare combination of excellent growth track record, proactive management, conservative leverage approach, expanding margins & return ratios and a 20 %+ growth guidance from the management for the next three years. The company is expected to generate better cash flows with cash flow from operations (CFO) improving from Rs. 157.3 crore in FY15 to Rs. 210 crore in FY18E. CFO is likely to remain subdued in FY17E due to higher capex of Rs. 135 crore in FY16-17E. The same is likely to continue as the management has guided for higher capex of Rs. 200 crore for FY17E-18E. The FCF is also expected to grow to Rs. 50 crore in FY18E. The CFO/EBITDA, a measure of quality of earnings, is also expected to stabilise at 0.5 x in FY18E. With the robust performance, the company looks forward to a future full of promise. All the sectors which form company’s consumer caucus - mining, infrastructure and construction - are witnessing policy changes that are expected to result in structural strengthening and phenomenal growth. This gives plenty of reason to be optimistic. The defence sector too, which is moving strategically from imports to domestic sourcing of its requirements, has opened up colossal opportunities for company. At the current market price of Rs. 681.10, the stock is trading at a PE of 32.74 x FY17E and 25.22 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 20.80 in FY17E and Rs. 27.00 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	1,344.70	1,532.80	1,757.40	2,149.80
NET PROFIT (₹ Cr)	147.40	166.10	188.30	244.80
EPS (₹)	16.30	18.40	20.80	27.00
PE (x)	39.70	35.20	31.10	23.90
P/BV (x)	7.50	6.70	5.80	5.00
EV/EBITDA (x)	24.20	20.70	17.90	11.20
ROE (%)	20.50	20.20	20.10	22.50
ROCE (%)	16.20	18.00	18.50	20.60

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*As the author of this blog I disclose that I do not hold SOLAR INDUSTRIES LTD in my of the portfolios.

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