Solar Industries bags order worth Rs.14.7 billion from Coal India

Solar Industries has won an order of INR14.7bn from Coal India (CIL) which is to be delivered in two years. Order size has almost doubled from the last one. This is on account of increased production expectation by CIL ,sharp increase in the price of key raw materials and removal of higher overburden . Moreover, the company has handed over the first batch of Multimode hand grenades (MMHG) to the Indian Army during 2QFY22. With strong visibility in international markets and defense segment along with recent improvement in domestic business, Solar's growth should happen from all the directions. Management has guided 30% revenue growth in FY22 which includes 15% volume and 15% value growth. There will be an increased FY22/23 EPS by 7%/15% respectively and introduced FY24 EPS. We have factored revenue/EBITDA/EPS CAGR of 29%/30%/37% over FY21-24E. Further, we roll over the target price to FY24E EPS. Maintain BUY with TP of INR2,780 (earlier INR1,910) based on 35xFY24E EPS.

Domestic business: strong traction across segments like CIL, housing, and infra 

The strong pick-up witnessed in housing and infra is now extended in business from CIL. CIL has doubled the order size for the bulk explosives and is to be delivered over the next two years. It covers steep inflation in RM (ammonium nitrate) and higher explosive requirement gave the acute coal shortage the power plants in the country are facing. The contribution from CIL stood at 17% of the revenue (INR4.2bn in FY21, stagnant since the last five years). However, despite the doubling of the order book for CIL for the next two years, the market share of Solar has remained at 28-30% indicating similar growth for other players as well. With a view of reducing dependence on imported coal, we expect a strong off-take from CIL to continue providing robust visibility for the domestic business of Solar. We believe that the price of key RM, ammonium nitrate is up 20-25% in the last quarter which could put pressure on margin in the near term but new order wins reflect enough price hikes to cover the RM inflation over the long term. We have built a revenue CAGR of 29% over FY21-24 in the domestic business of Solar. International geographies on a steady path; Defence - Scaling up on expected lines Revenue from international geographies continues to be on a steady growth led by the strategy of expansion in newer markets. Although, there is some delay in starting operations in Australia and Indonesia on account of COVID. The company is expected to start the operation in Tanzania in 3Q and Australia in 4QFY22 while other geographies like Turkey, Ghana, 
Nigeria, Zambia, and South Africa continue to drive the growth of the company. During the 
2QFY22, Solar started the dispatch of the MMHG to the Indian army. Solar had received the order of 1mn units (INR3bn) of MMHG to be delivered in two years. The company had guided revenue of INR3bn during FY22 (INR1.3bn in FY21) from the defense business. 

Valuation and outlook 

Being a market leader in a highly regulated domestic explosives industry with huge entry barriers, 
SOIL is well-positioned for robust growth with multiple levers in place. All the business categories of Solar - International market, defense, housing & infra and even the CIL which was stagnant for last five years is on a strong growth trajectory now. With improved revenue growth, the company is back above 25% RoCE currently from 19% in FY21 and we believe ROCE to improve and reach 33% by FY24. The stock currently trades at 32x FY24E EPS and we have valued at 35x FY24E EPS with a TP of INR2780. Any slowdown in industrial production activity and adverse currency movement in international geographies are major risks.