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Motilal Oswal
Solar Industries (Buy)
CMP: ₹3,505.10
Target: ₹4,100
Solar Industries India Ltd (SOIL) is the largest manufacturer of industrial explosives and initiating systems in India, with about 24 per cent share (in volumes). Over FY09-15, explosives volume growth was constrained at just 3.4 per cent, exactly mirroring the CAGR in coal production. We believe FY16 will be the turning point (with growth rates of 13.8 per cent), given intense efforts to improve coal availability through i) auction/transfer of de-allocated mines; ii) attempts by Coal India to double production to 100 crore tonnes. We expect SOIL to witness volume CAGR of 17 per cent during FY15-17, with possibilities of more meaningful ramp-up going forward. We expect revenue CAGR of 20 per cent during FY15-17 in overseas operations, largely led by commissioning of new manufacturing plants, exports to nearby countries and expansion into new geographies. The premium valuations are also justified given that optimum revenues for defence business stands at about ₹700 crore (possibly around FY20), while revenues in FY17E are estimated at just ₹100 crore.
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