Multi Baggers

KR Choksey

5.30 AM Jan 1st 1970

Solar Ind

BSE ID : 532725 NSE ID : SOLARINDS

RECOMMENDED PRICE 406.00

PEAK FROM RECO 4999.00 1,131.28%

CURRENT PRICE 8536.15 Resource id #18

Solar Industry's FY11E EPS is Rs 41. At 12x FY11e PE, Solar’s Value is Rs 492. Per share contribution from Bhatgaon Coal mines (NPV basis) is Rs 85. Total target price is Rs 577.

Solar Industries

Company Introduction:

Solar Industries Ltd (incorporated Feb 24, 1995) is India’s largest manufacturer and exporter of explosives and associated devices. It holds 19% share in domestic market of $ 500 million (annual size). Exports its products to around a dozen and half countries globally. Production facilities are spread across 14 locations domestically. Have recently opened production facility in Zambia and two more facilities will start in next 3 quarters in other African countries.

Key Investment Rational:

1) Increase in planned infrastructure spending will boost demand for explosives:

Explosives uses matrix:

1 Mn Ton Cement 240 metric Ton explosives
1 Mn ton Steel 340 metric Ton explosives
1 MW Power 799 metric tons explosives

11th Plan envisages 78000 MW power generation capacity addition and 12th plan additional 100000MW capacity.

Ministry of Steel wants 200 Mn Ton Steel production capacity in India by 2015.

Planning commission expects cement capacity to grow at GDP+2% over years.

Ministry of Road and Surface transport has set 20km roads per day target.

All this will lead to 10% CAGR for Indian explosives sector for next 5 years.

Solar Industry accounts for 19% market share and will be default beneficiary of these planned capex.

2) Entry into African market will speed up further growth:

Solar Industries has made a foray into African market and are establishing manufacturing facilities in Zambia, Nigeria and Tanzania.

Place Capacity Commissioning Schedule:

Zambia 10000MT Q1 FY11
Nizeria 10000MT Q3 FY11E
Tanzania 10000MT Q4 FY11E

Africa is 6th largest marker for explosives with annual demand approximating $ 700 million.

3) Price escalation clause with Coal India Ltd to stabilize margins:

Ammonium Nitrate constitutes large chunk of raw material (approx 72% ) and its prices are very volatile in nature.

Coal India Ltd (37% revenue contribution in FY 10) has now agreed for price escalation clause which means any volatility in raw material price (Ammonium Nitrate and Diesel is a pass through).

Other customers like Singareni Coal, TISCO, Hindustan Zinc have all incorporated the same.

This will protect margin going forward.

Key Concerns:

Indian explosives Industry is dictated by buyers, specially Coal India Ltd . They can change pricing terms which may have adverse impact on bottom line of Solar industries. There is too much concentration of business with few clients( CIL accounts for more than one third of top line. Any loss of business from these clients can have substantial impact on business prospects. Though the company is actively trying to diversify the client base. Volatility in raw material prices can put pressure on companies. Any delay in Infrastructure projects can have adverse impact on demand of explosives.

Valuation and Recommendation:

Particulars (Rs Cr)	FY06	FY07	FY08	FY09	FY10
Sales/Services Income	169.46	237.65	321.04	530.38	590.19
growth (%)		40.24	35.09	65.21	11.28
Material Cost	82.67	129.01	162.52	294.09	326.65
% of sales	48.78	54.29	50.62	55.45	55.35
Other Cost	32.92	47.4	59.13	123.96	151.53
% of sales	19.43	19.95	18.42	23.37	25.67
Total Expense	115.59	176.41	221.65	418.05	478.18
EBITDA	53.87	61.24	99.39	112.33	112.01
EBITDA (%)	31.79	25.77	30.96	21.18	18.98
PAT	22.16	19.22	36.12	44.14	58.59
NPM (%)	13.08	8.09	11.25	8.32	9.93
EPS (Rs)	18.2	11.1	20.9	25.5	33.8
growth (%)		-39.01	88.29	22.01	32.55
No of Equity (Cr)	1.73	1.73	1.73	1.73	1.73

Solar Industry's FY11E EPS is Rs 41. At 12x FY11e PE, Solar’s Value is Rs 492. Per share contribution from Bhatgaon Coal mines (NPV basis) is Rs 85. Total target price is Rs 577. We recommend BUY on Solar with 12 months price target of Rs 577, an upside of 42% from CMP of Rs 406.

Disclaimer:

This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any investments. Kisan Ratilal Choksey Shares & Sec Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, KRC Research Reports only provide information updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of KRC Investment Advisory Services. As a matter of practice, KRC refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that,Kisan Ratilal Choksey Shares & Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation.