Centrum Solar Industries Initiating Coverage

Initiating Coverage
Institutional Research
India I Capital Goods
07 February, 2022
Solar Industries India BUY

Price: Rs2,340
‘Propelling' To Next Growth Orbit Target Price: Rs2,775
Forecast return: 19%
Solar Industries India (SOIL) is a market leader in the industrial explosives sector with Market Data
~25% domestic market share. The industrial explosives offer healthy growth prospects Bloomberg: SOIL IN
as it is a key consumable product for mining and infrastructure sector. We expect a 52 week H/L: 2,938/1,198
robust 27% revenue CAGR over FY21-24E owing to (a) rising infra capex in India, (b) Market cap: Rs211.7bn
foraying in larger overseas markets and (c) imminent exponential growth in the Shares Outstanding: 90.5mn
defence segment. The margin profile is strong (EBITDA margin of 19-21% since past Free float: 26.9%
seven years), due to presence of price variation clause, and is expected to improve Avg. daily vol. 3mth: 93,394
further led by improving revenue mix with rising share of defence and packaged Source: Bloomberg
explosives. The valuation is likely to remain rich considering high growth prospects SOIL relative to Nifty Midcap 100
(35% earnings CAGR over FY21-24E) and robust margin profile in an industry which
260
continues to be licensed controlled with high entry barriers. We value SOIL at 42x SOIL
210
1HFY24E EPS (1.2x PEG ratio) and assign BUY rating with a target price of Rs2,775.
160
Market leadership in domestic market
SOIL is a leader in the domestic explosives market with ~25% market share and highest 110 NIFTY Midcap 100
licensed capacity. SOIL is a key beneficiary of strong outlay planned in infra capex in India 60
in sectors such as roads, railways, bridges, tunnelling work as well as mining and Feb-21 May-21 Aug-21 Nov-2 1 Feb-22
quarrying. In addition, cost leadership through widest manufacturing base, critical entry Source: Bloomberg
barrier in the form of high regulatory clearances and margin safeguards such as price Shareholding pattern
variation clauses are additional business strengths which would aid SOIL’s growth. Dec-21 Sep-21 Jun-21 Mar-21
Overseas markets (~40% of total sales) a key growth driver Promoter 73.2 73.2 73.2 73.2
With an ambition to be a truly global player, SOIL has set up manufacturing plants in six FIIs 6.4 5.8 5.5 5.4
African countries over the past decade and has registered 22% revenue CAGR over FY17- DIIs 15.4 16.2 16.7 16.8
21. It aims to expand presence to ten countries and is foraying in Asia Pacific region. The Public/other 5.1 4.9 4.7 4.6
Source: BSE
overseas market will continue to be the main growth driver of SOIL driven by (1) healthy
market share in established geographies, (2) scale up of market share in newly forayed
geographies, and (3) entering in the large mining markets such as South Africa, Australia
and Indonesia where market size is equal to or larger than India.
Defence scale up imminent due to multiple large opportunities
The defence business (5-7% of total sales) provides exponential growth prospects. With
a large multi-mode hand grenade order and future opportunities such as Pinaka rockets,
Akash boosters, Brahmos propellents and regular off-take of consumables such as HMX,
pyros and fuses, the defence scale up is imminent. The current order book is Rs5.4bn,
while the gross block can support turnover in excess of Rs10bn vs. FY21 sales of Rs1.2bn.
Defence scale-up would also aid margin and return ratios as SOIL has already deployed
Rs5bn capital to widen portfolio (almost 1/3rd of total) and is ready to reap the benefits.
Initiate coverage with a BUY rating and a target price of Rs2,775
We expect a strong revenue/earnings CAGR of 27%/35% over FY21-24E. The valuations
will remain rich as SOIL offers market leadership, strong growth prospects and robust
margin profile in a licensed controlled industry with high entry barriers.
Financial and valuation summary
YE Mar (Rs mn) FY20A FY21A FY22E FY23E FY24E
Revenues 22,373 25,156 37,572 44,014 51,759
EBITDA 4,343 5,146 7,064 8,627 10,714
Chirag Muchhala
EBITDA margin (%) 19.4 20.5 18.8 19.6 20.7
Capital Goods
Research Analyst, Capital Goods

Adj. Net profit 2,674 2,764 4,069 5,200 6,760 +91-22-42159203
[email protected]
Adj. EPS (Rs) 29.6 30.5 45.0 57.5 74.7
EPS growth (%) (0.1) 3.3 47.2 27.8 30.0
PE (x) 79.3 76.8 52.1 40.8 31.4
EV/EBITDA (x) 50.0 42.1 30.9 25.3 20.3
PBV (x) 15.4 13.4 11.1 9.2 7.4 Rahul Kumar Mishra
RoE (%) 20.4 18.7 23.4 24.6 26.1 Research Associate, Capital Goods
+91-22-42159265
RoCE (%) 17.1 14.9 18.2 19.4 20.9 [email protected]
Source: Company, Centrum Broking
Please see Disclaimer for analyst certifications and all other important disclosures.
Solar Industries India 07 February, 2022
Thesis Snapshot
Centrum vs consensus Valuations
Centrum Consensus Variance Centrum Consensus Variance We value SOIL at 42x H1FY24E EPS and arrive at the target price of Rs2,775.
YE Mar (Rs mn)
FY22E FY22E (%) FY23E FY23E (%)
Revenue 37,572 36,259 3.6 44,014 44,326 (0.7) Valuations Rs/share
EBITDA 7,064 7,065 (0.0) 8,627 9,146 (5.7) H1FY24E EPS 66.1
EBITDA Margin 18.8 19.5 (70bps) 19.6 20.6 (100bps) PE (x) 42
Adj. PAT 4,069 4,058 0.3 5,200 5,442 (4.4) Target price per share 2,775
Diluted EPS (Rs) 45.0 44.9 0.3 57.5 60.1 (4.4)
Source: Bloomberg, Centrum Broking P/E mean and standard deviation
60
Solar Industries India versus NIFTY Midcap 100
1m 6m 1 year 50
SOIL IN (0.3) 32.0 88.4
40
NIFTY Midcap 100 (3.2) 7.8 34.4
Source: Bloomberg, NSE 30
Key assumptions 20
Feb-17
Feb-18
Feb-19
Feb-20
Feb-21
Feb-22
Aug-17
Aug-18
Aug-19
Aug-20
Aug-21
YE Mar FY22E FY23E FY24E
Revenue growth YoY (%)
Sales to Coal India 60.0 14.0 12.0
P/E Mean
Institutional sales 83.0 13.0 12.0
Mean + Std Dev Mean - Std Dev
Infra & Housing 35.0 14.0 13.0
EV/EBITDA mean and standard deviation
Exports & Overseas 39.3 18.3 20.8
Defence 108.6 37.4 35.7 60
Source: Centrum Broking
50
40
30
20
Feb-17
Feb-18
Feb-19
Feb-20
Feb-21
Feb-22
Aug-17
Aug-18
Aug-19
Aug-20
Aug-21
P/E Mean
Mean + Std Dev Mean - Std Dev
Source: Bloomberg, Centrum Broking
Centrum Institutional Research 2

SOIL – Business overview

SOIL is India’s largest manufacturer and exporter of industrial explosives and initiating
systems. Founded in 1995, SOIL has evolved from a single site manufacturing firm to a
globally recognized industrial explosives company with 34 manufacturing facilities. It has
attained a large presence in global markets with footprints in 55 countries.
Industrial explosive sector has two components namely bulk explosives and packaged
explosives. Bulk explosives are used in coal mining & other deep underground form of
mining, where larger intensity of explosion is required. Packaged explosives (also known as
cartridge explosives) are used in sectors such as housing, roads and infrastructure, where
relatively lesser intensity of explosion is needed during construction.
The global industrial explosive industry size is $14bn. India accounts for ~10.7% of the global
industry and is the seventh largest market. The explosives industry offers a steady growth
prospects as it is a core consumable product for its end user industries. In addition, there
are strong entry barriers in the form of extensive regulations, strict license controls, long
gestation period and heavy capital investments which favours incumbents.
SOIL’s business can be broadly divided in three categories of domestic market, overseas
market and defence. The domestic market forms ~55% of consolidated sales. SOIL is the
market leader in the domestic market with ~25% market share. SOIL has the highest
licensed capacity in India’s explosive industry at 450,000 MTPA (total industry capacity is
~1.7 mn MTPA). SOIL has the largest single location manufacturing capacity for packaged
explosives in the world at Nagpur. The key growth driver in the domestic market is the
infrastructure and construction activities such as roads, railways, bridges, tunnelling work,
etc and hence SOIL is a key beneficiary of the rising infra capex outlay in India.
The exports and overseas market forms ~40% of SOIL’s consolidated revenue. SOIL has an
ambition of becoming a major global player in explosives and is following a cluster based
approach in setting up overseas manufacturing plants. Over the past decade, it has set up
manufacturing plants in 6 African countries. Now it is in the process of setting up plants in
the Asia Pacific region. The current overseas manufacturing capacity of SOIL stands at
130,000 MTPA. In the near term, SOIL expects to have manufacturing base in 10 countries,
up from six currently.
The defence business provides exponential growth prospects. It currently forms 5%-7% of
consolidated sales. However, SOIL has deployed significant capital (Rs5bn) in this business
(almost one-third of total capital employed in the company). After witnessing a slower off-
take in the initial years, it is on the cusp on reaping rewards due to multiple growth levers.
Exhibit 1: SOIL’s sales mix across product categories
Sales to Coal India Institutional Infra & Housing Exports & Overseas Defense
100 0.7 1.9
6.9 5.5 4.9 6.8 8.0 9.2
90
29.9
80 37.7
35.2 35.4 41.5 38.7
70 39.1 40.2
60
25.1
(%)
50
25.5
26.9 27.5 22.6 22.0
40 25.0 21.1
20.6
30
16.8 11.6 12.9 12.9 12.4
20 10.5 11.8
10 23.0 17.4 18.0 17.5

17.0 17.1 16.8 16.6
0
FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
Source: Company Data, Centrum Broking

SOIL’s dominant presence in Indian market

Bulk Explosives
The bulk explosives are used for carrying out large intensity blasting operations. Hence,
mining is the core end-user industry for bulk explosives. In India, coal mining is the largest
end-user of bulk explosives accounting for ~80% of total off-take while Coal India is the
largest customer followed by other miners such as Singareni Colliers. Bulk explosives are
procured through tender route by mining companies. To produce 1 ton of coal,
approximately 1.6kg of explosives is required. Ammonium nitrate is a key raw material
which contributes 65% to 70% of the total raw material costs. SOIL sources them largely
from the domestic fertilizer firms like Deepak Fertilizer, GNFC, RCF etc while imports forms
less than 10% of total needs. In addition, the contracts of bulk explosives have price
variation clause for key inputs like ammonium nitrate, and thus safeguards explosives
makers from raw material cost volatility. Bulk explosives forms, on an average, ~30% of total
revenues of SOIL. Coal India accounts for 17% of total sales and other miners (like Singareni
Colliers) forms 13% of total sales as on 9MFY22. SOIL has gradually reduced its dependence
on Coal India from 31% of total sales in FY14 to 17% now by scaling up its presence in
packaged explosives as well as overseas markets. SOIL’s market share in explosives supplies
to Coal India has remained steady in ~20% range.
Exhibit 2: SOIL’s market share in Coal India’s explosives offtake
SOIL's market share in CIL
25
24
22.8
23
22 21.3
21.0
(%)
21 20.4
20
19.1
19
18
17
FY17 FY18 FY19 FY20 FY21
Source: Coal India, Centrum Broking
Exhibit 3: Reducing dependence on Coal India revenues

SOIL sales to Coal India % share in total sales
10,000 23.0 25
9,000
8,000 18.0 17.5 20
17.0 17.4 17.1 16.8 16.6
7,000
6,000 15
(Rsmn)
(%)
5,000
4,000 10
3,000
2,000 5
1,000
- 0

Exhibit 4: SOIL’s institutional revenue and as % of total sales

Institutional revenue As a % of total sales
7,000 25
20.6
6,000
20
16.8
5,000
12.9 12.4 11.8 15

4,000
(Rsmn)
11.6
(%)
10.5
3,000 12.9
10
2,000
5
1,000
- 0
Packaged Explosives
The packaged explosives are required to carry out medium to low intensity blasts. Hence,
the core end user industry is infrastructure and housing sector for construction work such
as building of roads, railways, bridges, tunnels, etc. The packaged explosives are sold
through regional dealers, who in turn supply them to EPC companies for local infrastructure
and housing projects. Packaged explosives are off-the-shelf products and hence
manufacturers can make price revisions, based on changes in input prices, at a regular
interval of 10-15 days. SOIL sells them in cylinder shaped packaging under the brand names
like ‘SolarPrime’ and ‘Superpower90’ etc. SOIL is operating at peak capacity utilization and
is in the process of setting up three new manufacturing plants in the near term. Packaged
explosives forms, on an average, ~25% of SOIL’s total sales. Infrastructure and housing
sector has been a key growth driver for SOIL’s domestic business and has reported revenue
CAGR of 22% over FY17-21.
Exhibit 5: SOIL’s Infra & Housing revenue and as % of total sales
Infra & housing (Rsmn) Share in total sales (%)
12,000 30
10,000 26.9 27.5 22.6 25

25.1 25.5 25.0 22.0 21.1
8,000 20
(Rsmn)
(%)
6,000 15
4,000 10
2,000 5
- 0
Initiating Systems
Initiating systems includes products such as detonators, detonating fuse and cast boosters
which are needed to ignite the explosives. Hence, initiating systems are accessories which
derives its demand based on sales of bulk and packaged explosives. However, initiating
systems generally have a higher profitability then explosives. SOIL is the largest
manufacturer and exporter of initiating systems in India with exports to more than 40
countries. Initiating systems formed 13% of total sales of SOIL in FY21 and has registered
revenue CAGR of 13% over FY17-21.

Exhibit 6: Initiating systems revenue and as % of total sales

Initiating systems revenue As a % of total sales
6,000 16
13.2 12.9 14
12.7
5,000
10.4 10.6 12
10.3
4,000
10.6 10.4 10
(Rsmn)
(%)
3,000 8
6
2,000
4
1,000
2
- 0

SOIL’s key business strengths

1. Wider manufacturing presence provides cost leadership
Considering the bulky nature of the explosives, the logistics cost as well as risk associated
in transportation, its manufacturing needs to be localized. Hence, to attain a larger market
share and scale, a company needs to set-up multiple manufacturing plants across India
which needs higher capital outlay. SOIL has manufacturing plants at 23 locations in India
while six more are under the process of being set-up. Majority of these plants are being set-
up closer to the mines (within 60km) which provides SOIL with a critical advantage of lower
transportation costs (as explosives needs to be ferried from the plant to the mine multiple
times during a year) and quick supplies. This also helps in lowering of the total cost of
operations, which in turn, helps SOIL in bidding competitively in a tender. This large and
widespread network of plants and own transportation systems has led to SOIL becoming a
market leader with ~25% market share in India while it continues to give SOIL a competitive
edge in new tenders of mining companies. SOIL’s market share in Coal India has been steady
at ~20% while its total order book of explosives in India has seen a strong expansion from
Rs8.4bn in FY18 to Rs22bn as on 9MFY22.
Tender process of Coal India: All the seven subsidiaries of Coal India floats tenders
separately. In the technical round, the explosive suppliers are evaluated based on
parameters like total experience, manufacturing infrastructure, presence near mines,
random product tests (criteria - powder factor, quantity of strata exploded, range, velocity,
vibration), distribution system, delivery performance in previous tender (it should be at
least 90% of tender quantity) etc. In the financial bidding round, the L1 (lowest) bidder is
decided through e-auction process by reverse bidding system and gets maximum quantity
whereas two to three more bidders also gets to supply smaller quantity at L1 bidder’s price.
Generally, Coal India’s tenders are for their next two year’s explosive requirements.
Exhibit 7: Explosives order book
Explosives Order Book

25,000
21,960
20,000
15,000
(Rsmn)
9,420
10,000 8,370 8,300
7,500
5,000
0
FY18 FY19 FY20 FY21 9MFY22
2. Need of high regulatory clearances is a critical entry barrier

The production of explosives in India is still under the license controlled regime as it is a
hazardous product by nature. To set-up a manufacturing plant needs a long process of
approval which generally takes up to 4 to 5 years. The key departments from where an
approval is required are (a) an Industrial License & Clearance from Home Ministry, (b) NoC
from District Magistrate, (c) License from Chief Controller of Explosives (Government of
India), (d) Daily Reporting to PESO & Local Police on Production and Sales, (e) Clearance
required from IB regarding safety of location & antecedents of Directors, (f) NoC by District
Magistrate after clearance by Police, PWD, Grampanchayat, (g) For underground (Gasy
mines) use permission required from DGMS. All these extensive regulations as well as long
gestation period and heavy capital investments acts as a key entry barrier and as a result
incumbents who have already built a size and scale are at an advantageous position.

3. Presence of price variation clause for key inputs safeguards margin

One of the key features of supplying explosives to mining companies via tender is the
presence of price variation clause which helps explosive makers to manage commodity cost
volatility. For bulk explosives, mining firms like Coal India and Singareni Colliers, provide
price variation clause as the contract to supply explosives are generally for a longer period
of one to two years. Coal India gives price variation clause for ammonium nitrate, diesel and
labour index with quarterly price revision. Singareni Colliers provides price revision on
monthly basis. These price revisions happen based on the pre-decided formula which tracks
the prices of the input costs. In case of packaged explosives, since it’s an off-the-shelf dealer
driven business models, explosive firms anyway have a liberty to fix price based on their
cost structure at a regular interval of 10-15 days. This helps in better cost management and
pricing of explosives, generally with a lag of a quarter. This has aided SOIL to manage its
operating margins which have consistently been in the range of 19%-21% over the past
seven years.

Exports & Overseas – Expanding manufacturing

bases to become a major global player
With an ambition to be a truly global player, SOIL set-up its first overseas manufacturing
plant in Zambia in June 2010 followed by Nigeria in December 2010. It has been following a
cluster based manufacturing approach. Over the past decade, it has set-up manufacturing
plants in 6 African countries namely Zambia, Nigeria, Turkey, South Africa, Ghana and
Tanzania (which has operationalized in FY22). Now it is in the process of setting up plants in
the Asia Pacific region starting with Australia and Indonesia. In the near term, it aims to have
manufacturing presence in 10 countries, up from six currently.
SOIL began exports in 2006 and is currently services 55 countries globally. It is currently the
largest exporter of packaged explosives and initiating systems. However, the need for
setting up overseas plants (instead of just exporting from India) is because of (1) restriction
in global shipment as explosives are hazardous items (not allowed to ship via cargo planes
or merchant ships. Only shipping via Navy vessels is permitted for bulk explosives, that too
only to friendly countries). (2) Higher cost of transportation as bulk explosives are bulky
items in nature. (3) In certain countries, there is a legal compulsion to have a localized
manufacturing plant.
The exports and overseas markets together accounts for ~40% of consolidated revenues of
SOIL, with overseas operations forming a major chunk at ~33%-35% of sales while direct
exports are ~6% to 7% of consolidated sales. The scale up in exports and overseas markets
has been the main growth driver with revenues rising by 22% CAGR over FY17-21 while its
share in total consolidated sales has risen from 30% in FY17 to 41% in FY21. In FY21, the
revenue contribution from the key geographies was Turkey (Rs3.8bn), Nigeria (Rs2bn),
South Africa (Rs1.2bn) and Zambia (Rs1.1bn). SOIL has captured a market share of 40% in
Nigeria, 22%-23% in Turkey and 8%-10% in other countries. The plants at Ghana and South
Africa have recently started in the past five years while Tanzania has started in FY22. The
overseas market will continue to be the main growth driver of SOIL driven by (1) healthy
market share in established geographies (where growth will be in 10%-15% range), (2) scale
up of market share in newly forayed geographies, and (3) entering in the large mining
markets such as South Africa, Australia and Indonesia where market size is equal to or larger
than India.
Exhibit 8: Exports & Overseas revenue and % share in total sales
Exports & Overseas revenue As a % of sales
25,000 41.5 45
39.1 40.2
37.7 38.7
35.4 40
35.2
20,000 35
29.9
30
15,000
25
(Rsmn)
(%)
20
10,000
15
5,000 10
- 0

Exhibit 9: Country wise overseas sales trend

7,000
6,000
5,000
(Rsmn)
4,000
3,000
2,000
1,000
0
Nigeria Zambia Turkey South Africa New countries

Defence – Exponential growth prospects

The defence business provides exponential growth prospects. It currently forms 5%-7% of
consolidated sales. However, SOIL has deployed significant capital in defence over the past
few years (in excess of Rs5bn, almost one-third of total capital employed in the company)
to widen its product portfolio. After witnessing a slower off-take in the initial years, it is on
the cusp on reaping rewards due to multiple growth levers. SOIL expects defence business
to eventually become 15%-20% of the consolidated revenue. Based on its current gross
block, the defence business has the capability to generate turnover in excess of Rs10bn,
compared to its FY21 sales level of Rs1.2bn.
SOIL ventured in to manufacturing of HMX and propellants for the defence segment in FY11.
SOIL became the first private company in the domestic market to supply HMX and HMX
compounds to the defence sector. Apart from HMX, SOIL also manufactures propellants for
missiles and rockets, ammunition filings, pyros, igniters and fuses and assembly of missiles.
It continues to increase capacities and have expanded the product portfolio such as
composite propellants for missiles (Pinaka, Aakash, Brahmos etc.), rocket integration and
Multi-mode hand grenades. Total defence explosives market size per annum is Rs150bn, of
which Rs80bn is imported, while Rs70bn is indigenously produced.
The defence business of SOIL offers strong scalability with three main demand sources such
as (1) Supply to government’s defence undertakings (Bharat Dynamics etc) for defence
products such as HMX, propellants, pyros and ammunition to the defence ministry (used in
missiles like Akash, Pinaka, Konkur, Invar and Brahmos), (2) Supply to private sector under
purview of strategic defence partnership and (3) Exports (to friendly countries of India as
per Indian government’s approval).
In FY21, defence formed 5% of total sales at Rs1.2bn while in 9MFY22 defence formed 7%
of total sales at Rs1.7bn. SOIL has seen significant delay in scaling up its defence revenues
over the past few years due to (a) significant approval time in becoming a qualified vendor
in Defence companies, (b) time taken in validating the products by the defence ministry/PSU
personnel and (c) delay in tendering activities/order placement/final offtake by defence
ministry / government companies.
However, the defence business is now looking favourable due to a large multi-mode hand
grenade order received by SOIL worth Rs4.5bn (2 year order to supply 1mn units, revenue
booking started from Q1FY22, it is likely to become a recurring purchase through follow-up
orders). This order has expanded SOIL’s defence order book to Rs6.8bn in FY21 compared
to Rs3.6bn in FY20. In addition, SOIL has large business opportunities from likely future
ordering of (1) Pinaka rockets (RFP of 1,000 units/pa for 10 years issued, SOIL has
participated), (2) Brahmos propellents (trials completed, commercial order expected), (3)
Akash boosters, and (4) HMX, pyros, fuses (gets regular orders as these are consumable
items). We expect SOIL’s defence business to scale up to Rs3.5bn in FY23E and Rs4.7bn in
FY24E as we believe the participation of private companies will rise in defence sector after
a major reform of splitting up Ordinance Factory Board.

Exhibit 10: Defence sales trend and as a % of total sales

Defence revenue As a % of total sales
5,000 9.2 10
4,500 9
8.0
4,000 8
6.9 6.8
3,500 7
3,000 5.5 6
4.9
(Rsmn)
(%)
2,500 5
2,000 4
1,500 3
1.9
1,000 2
0.7
500 1
- 0
Exhibit 11: Defence order book
8,000 Defence Order Book
6,800
7,000
6,000 5,370
5,000
3,960
(Rsmn)
4,000 3,620
3,000 2,550
2,000
1,000
0
FY18 FY19 FY20 FY21 9MFY22

Historical analysis of cash flows and balance sheet

over the past decade
SOIL has seen a healthy trend of consistent improvement in operating cash flow generation
over the years with OCF in FY21 at Rs3.6bn compared to Rs480mn in FY12. Ex-cash net
working capital has reduced from 87 days in FY12 to 77 days in FY21. While receivables days
has averaged at 62 days and has been largely range-bound, the creditor days has expanded
from 20-25 days range to 42 days in FY21. Its total OCF/EBITDA ratio is at 66%. Over FY12-
21, the conversion of OCF (Rs21.6bn) to FCF (Rs3.8bn) has been at 18% as explosives
industry has a high capex intensity (average annual capex of ~Rs1.8bn over the past
decade). While fixed asset turns are in the range of 2x, the return ratios are decent
(RoE/pre-tax RoCE of 18.7%/20.5% in FY21).
Healthy cash flows from operations: Operating cash flow has been on a consistent rising
trend from Rs480mn in FY12 to Rs3.6bn in FY21. Working capital intensity has increased
over FY17-21 compared to FY12-16, due to higher scale and increased revenue from
overseas markets.
Exhibit 12: Cash flow from operations – consistently rising trend
Op profit before Wk cap change (Rsmn) Wk cap change (Rsmn) OCF (Rsmn)
4,500
2,500
(Rsmn)
500
(1,500)
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Analysis of working capital movement: Over FY12–FY17, ex-cash NWC days increased
moderately from 87 days in FY12 to 97 days in FY17. However, since FY17, the NWC has
reduced and in FY21 it stood at 77 days. The core reason for the same was rise in creditor
days which averaged 19 days over FY12-17, but rose to an average of 30 days over FY18-21.
The debtor days has averaged 62 days over the past decade and has largely remained range-
bound. Inventory days were range-bound at 44 days over FY12-FY19, but increased to 54/64
days in FY20/21, owing to pandemic situations.
Exhibit 13: Net Working capital days – on a reducing trend
Inventories Debtors Other current assets
Creditors Other current liabilities Ex-cash NWC
125
100
Days of sales
75
50
25
-

Exhibit 14: OCF/PAT Exhibit 15: OCF/EBITDA
185% OCF/PAT OCF/EBITDA

100%
135% 80%
60%
85%
40%
35% 20%
0%
-15%
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
Source: Company Data, Centrum Broking Source: Company Data, Centrum Broking
High capex intensity sector; OCF to FCF conversion at 18% over the past decade: Explosives
manufacturing is a high capital intensive sector. SOIL has consistently invested back in the
business (average capex of Rs1.8bn over the past decade), for increasing its market share
and manufacturing presence in domestic market, as well as expanding manufacturing bases
in overseas markets and to scale up defence portfolio. Hence, the conversion of OCF to FCF
stands at 18% over the past decade, which is reasonable according to us. Compared to total
OCF of Rs21.6bn over FY12-21, the total FCF conversion stood at Rs3.8bn.
Exhibit 16: OCF to FCF conversion trend
4,000 OCF (Rsmn) Capex (Rsmn) FCF (Rsmn)
3,000
2,000
1,000
(1,000)
(2,000)
(3,000)
Fixed asset turn has averaged 2x: Over FY12-FY21, SOIL’s fixed asset turnover has averaged
at 2x, which is in-line with the industry norms. As explosive manufacturing has a high capex
intensity, the gross block base also needs to increase consistently in line with revenue
growth. Compared to initial years, the fixed asset turn is lower at 1.6x in FY20 and FY21 due
to recent commissioning of overseas and domestic manufacturing plants as well as
investment in defence. Once, the new plant and defence business achieve scale, it is likely
to normalize back to 2x.
Exhibit 17: Fixed asset turn – in-line with industry at 2x
Fixed Asset turn (x) 2.9 2.6 2.0 1.9 1.6 1.9 1.9 2.1 1.6 1.6
Stable debt/equity; decent return ratios: Leverage on SOIL’s balance sheet has remained
stable with net-debt/equity in the range of 0.3x. Despite capex, the company has set a
criteria that the net debt/equity will not be allowed to increase more than 0.5x. The return
ratio profile is decent with FY21 RoE/pre-tax RoCE at ~19%/21%. The return ratio profile is
lower than a decade ago due to a sizeable investment in defence (total capital employed in
excess of Rs5bn, almost one-third of company), which is yet to bear fruit as defence business
has not scaled up on expected lines till FY21. However, with rising order book, revenues
from defence are on the verge of a major scale-up and will also improve the return ratio
profile of SOIL materially.

Exhibit 18: Leverage ratios

Leverage ratios (x) FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Net Debt/Equity 0.5 0.4 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3
Exhibit 19: Return ratios

Return Ratios (%) FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
RoE 29.3 25.8 20.8 22.5 21.2 21.5 21.9 23.1 20.4 18.7
RoCE (Pre-tax) 29.7 21.4 18.3 20.5 24.8 23.2 25.4 27.7 20.6 20.5
RoIC (Pre-tax) 29.3 22.7 20.1 22.2 25.3 23.7 26.2 28.6 19.7 21.0

Key financial parameters and estimates

Exhibit 20: Revenue trend Exhibit 21: Margins trend
Revenue trend YoY growth % Gross Margin EBITDA Margin PAT Margin
60,000 49.4 60 54
45.7 46.5
50 42.6 44.5 43.1 42.8 43.1 43.6
50,000
40 44
28.5
40,000 21.3 30
17.1 17.6
(Rsmn)
12.4 34
30,000 9.1 20
(%)
21.5 20.7
(%)
10 24 20.5 20.4 19.4 20.5 18.8 19.6
20,000
(9.1) 0
10,000 (10) 14
- (20) 11.8 11.5 10.9 12.0 11.0 11.8 13.1
10.8
FY22E
FY23E
FY24E
FY17
FY18
FY19
FY20
FY21
4
Exhibit 22: Return ratios trend Exhibit 23: Net profit trend
ROCE ROE ROIC Net profit YoY growth (%)
8,000 50
29 26.1
24.6 7,000 47.2
23.1 23.4 40
21.9 21.8
24 21.5
19.8 20.4 19.7
6,000 27.8 30.0
18.0 18.7 18.6 30
17.0 5,000
19 16.4 18.2 18.6
(Rsmn)
15.2 20.9
(%)
4,000 14.0 20
(%)
19.2 19.4
17.5 18.2
14 16.6 17.1 3,000
14.9 2.2 3.3 10
2,000
9
0
1,000
4 - (10)
FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E FY17 FY18 FY19 FY20 FY21 FY22EFY23EFY24E
Exhibit 24: Fixed Asset turnover trend

Fixed Assets Turnover
2.5
2.3 2.1
2.1 2.0
1.9 1.9 1.9 1.9
1.9
1.6 1.6
1.7
(%)
1.5
1.3
1.1
0.9
0.7
0.5
Source; Company Data, Centrum Broking

Exhibit 25: Cash conversion cycle trend Exhibit 26: Ex-cash net working capital trend
Inventory Debtor Creditor Ex-cash net working capital as a % of sales
124 16,000 26.6 26.2 30
105 104
100 14,000 23.5 25.8 24.1
104 92 95 25
22.3
12,000
84 71 20
(No of Days)
69 65 67 10,000 21.2
63 19.7
(Rsmn)
57 60 60 59
55
(%)
64 68 8,000 15
60 59 63 59 6,000
44 10
48 4,000
24 40 40 40 5
2,000
4 0 0
FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
Exhibit 27: Cash flow trend

Operating cash flow Free cash flow
6,000
5,000
4,000
3,000
(Rsmn)
2,000
1,000
-
(1,000)

Exhibit 28: Quarterly Financial Snapshot

Y/E March (Rs mn) Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 YoY (%) QoQ (%)
Revenue 5,475 4,911 5,873 6,459 7,914 8,252 7,877 10,179 57.6 29.2
Direct Costs 2,963 2,697 2,887 3,516 4,367 4,695 4,419 5,998 70.6 35.7
Gross Profit 2,512 2,214 2,985 2,942 3,547 3,558 3,458 4,181 42.1 20.9
Staff Cost 574 488 560 595 663 680 655 674 13.3 2.8
Other Expenses 1,040 806 1,166 1,025 1,239 1,131 1,485 1,727 68.5 16.3
Total Expenditure 4,578 3,992 4,614 5,136 6,268 6,505 6,559 8,399 63.5 28.1
EBITDA 897 919 1,259 1,322 1,646 1,747 1,318 1,780 34.6 35.1
Depreciation 221 228 239 244 225 252 273 272 11.6 (0.2)
EBIT 676 691 1,020 1,079 1,420 1,495 1,045 1,508 39.8 44.3
Interest 144 123 117 109 105 103 118 134 22.6 13.6
Other Income 199 39 19 132 24 8 110 71 (46.6) (35.8)
PBT 730 607 922 1,102 1,340 1,401 1,037 1,444 31.1 39.3
Tax 198 168 246 287 389 392 290 394 37.0 36.0
PAT 532 440 676 814 950 1,009 748 1,051 29.0 40.5
Less : Minority Interest 32 19 24 34 40 33 10 30 (12.4) 203.1
PAT after minority 500 421 652 780 910 975 738 1,021 30.8 38.4
EPS (Rs/share) 5.5 4.7 7.2 8.6 10.1 10.8 8.2 11.3 30.8 38.4
As a % of revenue
Direct Costs 54.1 54.9 49.2 54.4 55.2 56.9 56.1 58.9
Gross Margin 45.9 45.1 50.8 45.6 44.8 43.1 43.9 41.1
Staff Cost 10.5 9.9 9.5 9.2 8.4 8.2 8.3 6.6
Other expenses 19.0 16.4 19.9 15.9 15.7 13.7 18.9 17.0
EBITDA Margin 16.4 18.7 21.4 20.5 20.8 21.2 16.7 17.5
PAT Margin 9.1 8.6 11.1 12.1 11.5 11.8 9.4 10.0
Tax rate 27.2 27.6 26.7 26.1 29.1 28.0 27.9 27.3

Exhibit 29: Quarterly Segmental Snapshot

Y/E March Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 YoY (%) QoQ (%)
Revenue (Rs mn)
Coal India 1,064 985 866 979 1,386 1,427 1,182 1,918 96.0 62.4
Other institutional sales 702 487 530 731 892 1,031 886 1,474 101.5 66.3
Infrastructure 1,628 1,073 1,115 1,661 2,443 2,169 1,555 2,146 29.2 38.0
Exports and Overseas 1,738 2,071 2,661 2,804 2,911 3,117 3,576 3,773 34.5 5.5
Defence 265 235 569 229 195 467 572 728 217.6 27.3
Others 78 62 130 54 88 42 106 140 157.4 31.8
Total 5,475 4,911 5,873 6,459 7,914 8,252 7,877 10,179 57.6 29.2
Revenue mix (%)

Coal India 19.4 20.1 14.8 15.2 17.5 17.3 15.0 18.8
Other institutional sales 12.8 9.9 9.0 11.3 11.3 12.5 11.2 14.5
Infrastructure 29.7 21.8 19.0 25.7 30.9 26.3 19.7 21.1
Exports and Overseas 31.7 42.2 45.3 43.4 36.8 37.8 45.4 37.1
Defence 4.8 4.8 9.7 3.5 2.5 5.7 7.3 7.2
Others 1.4 1.3 2.2 0.8 1.1 0.5 1.3 1.4
Domestic revenue (Rs mn)

Explosives 2,950 2,410 2,220 2,790 4,180 4,190 3,280 5,130 83.9 56.4
Initiating Systems 730 610 610 920 1,110 960 840 1,010 9.8 20.2
Total 3,680 3,020 2,830 3,710 5,290 5,150 4,120 6,140 65.5 49.0
Domestic Revenue mix (%)

Explosives 80.2 79.8 78.4 75.2 79.0 81.4 79.6 83.6
Initiating Systems 19.8 20.2 21.6 24.8 21.0 18.6 20.4 16.4
Volumes (MT)
Domestic Explosives 94,927 70,287 69,194 86,265 107,336 101,782 80,337 104,717 21.4 30.3
Realization (Rs/MT)
Domestic Explosives 31,027 34,240 32,074 32,304 38,922 41,161 40,874 49,004 51.7 19.9

Key Management Personnel

Exhibit 30: Key management personnel
Name Designation Brief Profile
Chairman & Executive

Mr Satyanaryan N Nuwal Founder and promoter of SOIL
Director
Chartered Account by qualification. Associated
Mr Manish S Nuwal MD & CEO with SOIL since 1999 and became Managing
Director on 1 April 2016.
B.Tech in Mining Engineering from IIT Kharagpur
Mr Suresh Menon Executive Director and has been associated with the group from
the past 11 years.
Plant Locations
Exhibit 31: SOIL’s manufacturing locations
Key risks
 The demand for explosives are dependent on the growth of mining and infrastructure
sector. Any slowdown in construction activities will impact demand for explosives.
 SOIL derives ~40% of its total consolidated revenues from international markets. If SOIL
is unable to manage any sharp fluctuations in currencies through hedging, it will impact
its margin.
 Ammonium nitrate is a key raw material. Inability to procure the same due to demand-
supply mismatch or inability to pass on its price hike due to competitive pressure may
impact margins.
 There is a litigation underway between the two promoter brothers of SOIL. Any adverse
outcome of the same can impact SOIL negatively.

P&L Balance sheet

YE Mar (Rs mn) FY20A FY21A FY22E FY23E FY24E YE Mar (Rs mn) FY20A FY21A FY22E FY23E FY24E
Revenues 22,373 25,156 37,572 44,014 51,759 Equity share capital 181 181 181 181 181
Operating Expense 12,150 13,468 21,491 25,044 29,192 Reserves & surplus 13,620 15,613 18,867 22,982 28,385
Employee cost 2,066 2,306 2,743 3,169 3,675 Shareholders fund 13,801 15,794 19,048 23,163 28,565
Others 3,814 4,236 6,275 7,174 8,178 Minority Interest 515 627 627 627 627
EBITDA 4,343 5,146 7,064 8,627 10,714 Total debt 6,102 6,272 7,272 8,172 8,872
Depreciation & Amortisation 845 935 1,097 1,167 1,230 Non Current Liabilities 0 0 0 0 0
EBIT 3,498 4,211 5,966 7,460 9,484 Def tax liab. (net) 533 461 784 784 784
Interest expenses 550 454 488 541 597 Total liabilities 20,951 23,155 27,732 32,746 38,849
Other income 411 214 278 306 343 Gross block 13,830 15,283 20,107 23,107 26,107
PBT 3,358 3,971 5,757 7,226 9,230 Less: acc. Depreciation (2,356) (3,119) (4,216) (5,382) (6,613)
Taxes 571 1,090 1,583 1,915 2,354 Net block 11,474 12,165 15,891 17,725 19,494
Effective tax rate (%) 17.0 27.5 27.5 26.5 25.5 Capital WIP 1,522 2,824 1,000 1,000 1,000
PAT 2,787 2,881 4,174 5,311 6,877 Net fixed assets 13,735 15,804 17,707 19,540 21,310
Minority/Associates (112) (117) (105) (111) (116) Non Current Assets 1,214 1,524 2,254 3,081 3,882
Recurring PAT 2,674 2,764 4,069 5,200 6,760 Investments 24 10 10 10 10
Extraordinary items 0 0 0 0 0 Inventories 3,310 4,405 6,771 7,547 8,398
Reported PAT 2,674 2,764 4,069 5,200 6,760 Sundry debtors 3,703 4,555 6,691 7,718 8,934
Cash & Cash Equivalents 1,201 1,812 1,243 1,917 3,203
Ratios Loans & advances 57 42 113 220 259
YE Mar FY20A FY21A FY22E FY23E FY24E
Other current assets 1,564 1,443 2,066 2,861 4,141
Growth (%) Trade payables 1,544 2,861 4,122 4,528 4,959
Revenue (9.1) 12.4 49.4 17.1 17.6 Other current liab. 2,208 3,462 4,884 5,502 6,211
EBITDA (13.5) 18.5 37.3 22.1 24.2
Provisions 105 117 117 117 117
Adj. EPS (0.1) 3.3 47.2 27.8 30.0
Net current assets 5,978 5,817 7,761 10,115 13,648
Margins (%) Total assets 20,951 23,155 27,732 32,746 38,849
Gross 45.7 46.5 42.8 43.1 43.6
EBITDA 19.4 20.5 18.8 19.6 20.7 Cashflow
EBIT 15.6 16.7 15.9 16.9 18.3 YE Mar (Rs mn) FY20A FY21A FY22E FY23E FY24E
Adjusted PAT 12.0 11.0 10.8 11.8 13.1 Profit Before Tax 3,358 3,971 5,757 7,226 9,230
Returns (%) Depreciation & Amortisation 845 935 1,097 1,167 1,230
ROE 20.4 18.7 23.4 24.6 26.1 Net Interest 550 454 488 541 597
ROCE 17.1 14.9 18.2 19.4 20.9 Net Change – WC (1,032) 462 (3,244) (2,507) (3,047)
ROIC 16.4 15.2 18.6 19.7 21.8 Direct taxes (942) (1,162) (1,260) (1,915) (2,354)
Turnover (days) Net cash from operations 2,668 4,543 2,733 4,400 5,541
Gross block turnover ratio (x) 1.6 1.6 1.9 1.9 2.0 Capital expenditure (2,142) (2,927) (3,000) (3,000) (3,000)
Debtors 63 60 55 60 59 Acquisitions, net 0 0 0 0 0
Inventory 92 105 95 104 100 Investments 303 14 0 0 0
Creditors 48 60 59 63 59 Others 0 0 0 0 0
Net working capital 98 84 75 84 96 Net cash from investing (1,839) (2,914) (3,000) (3,000) (3,000)
Solvency (x) FCF 829 1,629 (267) 1,400 2,541
Net debt-equity 0.3 0.3 0.3 0.3 0.2 Issue of share capital 0 0 0 0 0
Interest coverage ratio 7.9 11.3 14.5 16.0 18.0 Increase/(decrease) in debt 1,457 171 1,000 900 700
Net debt/EBITDA 1.1 0.9 0.9 0.7 0.5 Dividend paid (543) (543) (814) (1,086) (1,357)
Per share (Rs) Interest paid (550) (454) (488) (541) (597)
Adjusted EPS 29.6 30.5 45.0 57.5 74.7 Others (909) (192) 0 0 0
BVPS 152.5 174.5 210.5 256.0 315.7 Net cash from financing (545) (1,019) (302) (726) (1,254)
CEPS 38.9 40.9 57.1 70.4 88.3 Net change in Cash 284 611 (569) 674 1,287
DPS 6.0 6.0 9.0 12.0 15.0 Source: Company, Centrum Broking
Dividend payout (%) 20.3 19.6 20.0 20.9 20.1
Valuation (x)
P/E 79.3 76.8 52.1 40.8 31.4
P/BV 15.4 13.4 11.1 9.2 7.4
EV/EBITDA 50.0 42.1 30.9 25.3 20.3
Dividend yield (%) 0.3 0.3 0.4 0.5 0.6
Source: Company, Centrum Broking

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Solar Industries
3500
3000
2500
2000
1500
1000
500
0
Feb-19 Aug-19 Feb-20 Aug-20 Feb-21 Aug-21 Feb-22
Solar Industries India Ltd
Source: Bloomberg

Disclosure of Interest Statement
1 Business activities of Centrum Broking Centrum Broking Limited (hereinafter referred to as “CBL”) is a registered member of NSE (Cash, F&O and Currency Derivatives
Limited (CBL) Segments), MCX-SX (Currency Derivatives Segment) and BSE (Cash segment), Depository Participant of CDSL and a SEBI registered
Portfolio Manager.
2 Details of Disciplinary History of CBL CBL has not been debarred/ suspended by SEBI or any other regulatory authority from accessing /dealing in securities market.
3 Registration status of CBL: CBL is registered with SEBI as a Research Analyst (SEBI Registration No. INH000001469)
Solar Industries India
4 Whether Research analyst’s or relatives’ have any financial interest in the subject company and nature of such financial interest No
5 Whether Research analyst or relatives have actual / beneficial ownership of 1% or more in securities of the subject company at the end of the month
No
immediately preceding the date of publication of the document.
6 Whether the research analyst or his relatives has any other material conflict of interest No
7 Whether research analyst has received any compensation from the subject company in the past 12 months and nature of products / services for which
No
such compensation is received
8 Whether the Research Analyst has received any compensation or any other benefits from the subject company or third party in connection with the
No
research report
9 Whether Research Analysts has served as an officer, director or employee of the subject company No
10 Whether the Research Analyst has been engaged in market making activity of the subject company. No
11 Whether it or its associates have managed or co-managed public offering of securities for the subject company in the past twelve months; No
Whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company
12 No
in the past twelve months;
Whether it or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage
13 No
services from the subject company in the past twelve months;
Member (NSE and BSE). Member MSEI (Inactive)
Single SEBI Regn No.: INZ000205331
Depository Participant (DP)

CDSL DP ID: 120 – 12200
SEBI REGD NO.: CDSL: IN-DP-CDSL-661-2012
PORTFOLIO MANAGER
SEBI REGN NO.: INP000004383
Research Analyst
SEBI Registration No. INH000001469
Mutual Fund Distributor

AMFI REGN No. ARN- 147569
Website: www.centrum.co.in
Investor Grievance Email ID: [email protected]
Compliance Officer Details:

Shivshankar Kamath
(022) 4215 9000/9106; Email ID: [email protected]
Centrum Broking Ltd. (CIN :U67120MH1994PLC078125)

Corporate Office & Correspondence Address
Registered Office Address
Centrum House
Bombay Mutual Building,
6th Floor, CST Road, Near Vidya Nagari Marg, Kalina, Santacruz (E), Mumbai
2nd Floor, Dr. D. N. Road,
400 098.
Fort, Mumbai - 400 001
Tel: (022) 4215 9000 Fax: +91 22 4215 9344

Centrum Solar Industries Initiating Coverage

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Initiating Coverage

Solar Industries India BUY

Research Analyst, Capital Goods

Centrum Institutional Research 2

SOIL – Business overview

10 23.0 17.4 18.0 17.5

Source: Company Data, Centrum Broking

Centrum Institutional Research 3

SOIL’s dominant presence in Indian market

Source: Coal India, Centrum Broking

Exhibit 3: Reducing dependence on Coal India revenues

Source: Company Data, Centrum Broking

Centrum Institutional Research 4

Exhibit 4: SOIL’s institutional revenue and as % of total sales

12.9 12.4 11.8 15

Source: Company Data, Centrum Broking

10,000 26.9 27.5 22.6 25

Source: Company Data, Centrum Broking

Centrum Institutional Research 5

Exhibit 6: Initiating systems revenue and as % of total sales

Source: Company Data, Centrum Broking

Centrum Institutional Research 6

SOIL’s key business strengths

Explosives Order Book

2. Need of high regulatory clearances is a critical entry barrier

Centrum Institutional Research 7

3. Presence of price variation clause for key inputs safeguards margin

Centrum Institutional Research 8

Exports & Overseas – Expanding manufacturing

Centrum Institutional Research 9

Exhibit 9: Country wise overseas sales trend

Centrum Institutional Research 10

Defence – Exponential growth prospects

Centrum Institutional Research 11

Exhibit 10: Defence sales trend and as a % of total sales

Exhibit 11: Defence order book

8,000 Defence Order Book

Centrum Institutional Research 12

Historical analysis of cash flows and balance sheet

Source: Company Data, Centrum Broking

Centrum Institutional Research 13

Exhibit 14: OCF/PAT Exhibit 15: OCF/EBITDA

185% OCF/PAT OCF/EBITDA

4,000 OCF (Rsmn) Capex (Rsmn) FCF (Rsmn)

Source: Company Data, Centrum Broking

Centrum Institutional Research 14

Exhibit 18: Leverage ratios

Exhibit 19: Return ratios

Centrum Institutional Research 15

Key financial parameters and estimates

Exhibit 24: Fixed Asset turnover trend

Source; Company Data, Centrum Broking

Centrum Institutional Research 16

Exhibit 27: Cash flow trend

Centrum Institutional Research 17

Exhibit 28: Quarterly Financial Snapshot

Centrum Institutional Research 18

Exhibit 29: Quarterly Segmental Snapshot

Revenue mix (%)

Domestic revenue (Rs mn)