Solar Industries Ltd: Financial and Market Analysis

Hi, have you ever heard of Solar Industries India Limited? Don't let the name fool you - I am not here to talk about solar panels and sunshine. So if you've been wandering with visions of solar panels dancing in your head, I'm here to burst your bubble, dear reader. We are entering the world of explosions! 💣🤯 

Think of those massive highways and tunnels built by breaking mountains; how do they do that? Explosives, that's how! And guess who is the genius behind the explosion? You got it – “Solar Industries India Limited”. These guys don't play with solar power; they are all about controlled kabooms.💥

Whether mining wonders, clearing out infrastructure or even supplying explosive magic to defense world, these guys are true masters of BOOM and DOOM. Are you interested? Well, hold on to your hats as I reveal all the dhamakedaar details about this company. 
 
But wait, before we ignite the information bomb, do you want to discover a hidden gem of a company? Click here for a bonus adventure.

Say goodbye to your solar dreams because I am about to blow your mind quite literally.

About the Solar Industries Company

Started in 1995 as a small-scale manufacturer of explosives for mining and infrastructure projects in India, the company now offers products for industrial explosives, defense and aerospace applications. They have a market value of ₹39,350.96 crore, recognized as India's largest producer of industrial explosives with around 24% market share and one of the world's largest producers of packaged explosives with an extensive overseas presence.

Based in Nagpur, they have the largest single-site cartridge factory, a strategic advantage that contributes to their economies of scale. Furthermore, due to strict regulations and demanding licensing conditions, the barriers to entry for potential competitors are significantly high. Moreover, their wide range of products fits perfectly with the 'Make in India' campaign, especially for the defense sector. 

It's essential to understand the sector to which your business belongs. So let’s read about it.

The Explosives Industry's Powerhouse: Key Sectors at Play

In this case, it's not just about the explosive sector's growth, there's a bunch of other sectors adding fuel to the fire. Check below:

1. Real Estate & Housing: Explosives are widely utilised in the construction sector since they are needed to blow through rocks and other materials during the excavation process. The Pradhan Mantri Awaas Yojana budget has been greatly enhanced by the Finance Ministry from ₹48,000 crore to ₹79,000 crore for FY 2023–24. By March 2024, they hope to have 295 lakh homes built, with 211 lakh already completed. Therefore, the expansion of the real estate industry is a key factor in India's need for explosives.

2. Cement and limestone: The cement industry is another significant consumer of explosives since it uses them to smash limestone into powder. India is the second-largest cement manufacturer in the world after China, and the sector contributes over 8% of the nation's GDP. 

3. Steel and iron ore industry: By FY 2030-31, the Steel Authority of India (SAIL) wants to increase its capacity from 20.63 to 35 million tonnes. Along with limestone, coal, and dolomite, this requires 444 million tonnes of iron ore, which might come in favour of this industry.

4. Mining: The mining industry is the largest user of explosives in India. We have 1,531 active mines that produce 95 minerals, and explosives are used to extract these minerals from the mines.

Confused? Allow me to explain how these industries are related:

• The real estate sector requires cement and steel to build houses.
• The cement sector requires limestone to produce cement.
• The steel sector requires iron ore to produce steel.
• The mining sector requires explosives to extract minerals from the ground.

Growth in any of these sectors triggers a domino effect, similar to a chain reaction, which increases the need for explosives. It's a web where each industry relies on another, spinning the wheel of progress.

Now that we've got a bird's-eye view of the company and the industry it operates in let's zoom in and explore what makes up its range of products.

Product Segments

Industrial Explosives & Defence make up the company's two primary product categories. Under these two segments, it offers multiple products, which are mentioned below:

Industrial Explosives

• Packaged Explosives: Explosives that have been pre-packaged in cartridges or other containers. They have many different uses, including mining, construction, and quarrying.
• Bulk explosives: These are explosives that must be packaged by the client and are sold in bulk. They are used in larger applications, such as tunnelling and demolition.
• Initiating Systems: These are devices that are used to initiate the explosion of explosives. They include detonators, detonating cords, and fuse holders.

Defence Products

• Ammunition: This is a term used to refer to all types of military projectiles, including bullets, shells, and rockets.
• Propellants: These are substances that are used to propel projectiles. They include gunpowder, rocket propellants, and jet fuels.
• Warheads: These are the explosive parts of bombs, missiles, and other projectiles.
• Bombs: These are exploding objects that are designed to be dropped from aircraft or launched from missiles.
• High Energy Materials: These substances possess a strong explosive power. They are used in the production of military propellants, ammunition, and explosives.
• Military Explosives: These are explosives that are used for military purposes, such as bombs, warheads, and ammunition.
• Pyros: These are devices that produce a flash of light or a loud noise. They are used in a variety of applications, such as signalling and safety.
• Integration of Rockets: This is the process of assembling the various components of a rocket, such as the propellant, the warhead, and the guidance system.
• Initiating Systems

To further understand the Product-wise Revenue generation, check the graph below.

Explosive Ventures: Discovering Clients 

The majority of its revenue comes from contracts with the government, mostly with Coal India Ltd. (CIL). However, the company is smart. It does not just depend on Coal India Ltd. It derives revenue from sources other than defence and mining explosives, which helps to even things out and lessens its dependency on Coal India even though it is a significant consumer of mining explosives.

The following list includes the industries that the company caters to:

1. CIL (Coal India Limited) 
2. Non CIL & Institutional 
3. Housing & Infrastructure 
4. Exports & Overseas 
5. Defence
6. Others

Check this,

Looking at the graph, we can see that around 15% of this year's revenue came from Coal India. It's quite noticeable that revenue from exports and overseas has increased from 36% in the fiscal year 2022 to 40% in the fiscal year 2023. On the other hand, revenue from the Defence sector remained the same at 6% for the last two years. Meanwhile, there has been a decline in revenue from Housing and Infrastructure, going from 25% to 19%.

Let’s take a look at the…

Shareholding Pattern of Solar Industries

The company has 73.15% of its shares held by promoters, 5.79% by FIIs, 15.02% by DIIs and the rest with the public.
They have not raised loans during the year on the pledge of securities. Also, the promoter holding has remained constant.

Let's now examine the company's,

Financial Performance of Solar Industries

To give you a quick insight, ammonium nitrate, which constitutes 94% of the mixture when creating industrial explosives, is a crucial component. A price rise clause allows the business to charge customers extra. While recent years had slow growth due to high ammonium nitrate costs, the situation improved in Q1FY24 as prices of it dropped.

• From ₹2461.57 crore five years ago to ₹6,922.53 crore in 2023, revenue increased significantly📈.
• Profits went from ₹455.47 crore in FY22 to ₹811.17 crore in FY23. Refer to the graph below for a visual representation of revenue and profit over the past five years.

The increase in sales growth can be attributed to expansion in institutional and non-CIL (Coal India Ltd) sectors as well as exports and overseas business. And the rationale for Profit Growth is that the operating margin has not changed much, and the bottom line now follows the trend of the top line.

• Strong return ratios have been achieved by the company, most notably a growing Return on Equity (ROE) and Return on Capital Employed (ROCE). As seen in the provided image, the ROCE increased well, going from 25.56% in FY22 to 36.34% in FY23. Over the past year, the company's profitability has significantly increased, outpacing that of its competitors, which is the reason for the improvement of ROE and ROCE.
• In FY23, the company had Operating cash flows of ₹656.48 crore and investing cash flows of ₹518.98 crore, mainly used for buying property, plant, and equipment.

Although profits are growing, the free cash flow isn't substantial enough to cover the expansion plans.

• The company lowered its debtor and inventory days in the last 3 years.
• The total debt stands at ₹1,169.23 crore, including long-term and short-term liabilities.
• Recently, the company acquired Rajasthan Explosives and Chemicals (RECL) with a 98.39% stake, funded by issuing Redeemable Preference Shares.
• The company plans a ₹750 crore capex for FY'24.

The acquisition of RECL and the Capex plan could strain the company's financial stability in the short term.

• Dividends of ₹8 per share were paid in 2023, up from ₹7.5 per share in 2022.
• To support expansion, the company is raising its debt limit from ₹1500 crore to ₹3000 crore.

For more details about the Solar Industries' financials, click here.

The company's expansion efforts are leading to increased debt levels, which indicates a risk of higher financial obligations, which could impact the company's creditworthiness and overall financial health.

Let me now walk you through the risks that the business faces.

Risks Associated with the Business

As per the customer-wise revenue mix, 40% of the revenue comes from the exports & overseas segment, which obviously has some risk.

• Material Availability and Inflation Risk: The explosives industry faces risks from supply and price fluctuations of chemicals, metals, minerals, and logistics.
• Liquidity Risk: Can arise from unexpected expenses, delays in payments for short-term obligations, or changes in the domestic as well as overseas market conditions.
• Interest Rate Risk: To satisfy its finance needs, the firm borrows money from both local and foreign markets, which exposes it to risks brought on by interest rate fluctuations.

Although there have been no indications of capital misallocation as such from the management, the firm lost ₹80 crore in 2023 as a result of currency depreciation. However, they now borrow money in local currency to mitigate the risk of exchange rate changes.

• Foreign Exchange (FX) Risk: Fluctuations in prices affect material costs and international competitiveness.
• Regulatory Compliance Risk: The explosives industry is subject to strict regulations related to safety, environmental impact, and transportation. Also, it needs to comply with international laws and regulations.

Peer Comparison

To offer a comparative analysis, I looked at similar businesses. While some might question the comparison between Pidilite and SRF, it's important to note that this is due to the company's association with the chemical sector, making such comparisons relevant. To make sense of this, please refer to the table below.

	Sales (₹ crore)	5Y Sales Growth	Profit (₹ crore)	5Y Profit Growth	PEG
Solar Industries	6922.53	29.29%	811.17	28.27%	1.59
GOCL Corp. Ltd	921.00	13.8%	211	47.3%	0.22
Premier Explosives	202.00	-5.35%	7	-5.23%	-14.6
Keltech Energies ltd.	562.85	22.73%	11.92	9.56%	1.19
Pidilite	11799.10	14.19%	1288.7	5.93%	17.8
SRF	14870.25	21.62%	2162.34	36.18%	0.98

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Does the Company have Pricing Power?

Pricing Power refers to a company's ability to raise prices without hurting demand. It shows how much control a company has over its product's market price. Having pricing power allows a company to charge more and earn higher profits.

In this case, yes, the company does possess pricing power within its product segment. Notably, many raw materials are produced in-house, saving costs. Also, the price escalation agreement lets the company pass on increased costs to customers.

Unique Business: This business is not easy to replicate. It demands substantial investment and expertise in explosives manufacturing. The company's backward integration further deters copycats.

Dependency and Cyclical Nature: Solar's product demand relates to various sectors, impacting revenue cycles. A significant chunk comes from housing and infrastructure, making the business cyclical as these sectors are tied to economic fluctuations. Government policies also influence this cyclicality.

Price Expectations: The company anticipates raw material prices to drop this financial year, potentially boosting demand in the market.

The Bottom Line

Looking back, the company's journey began locally, with Coal India accounting for 36% of its 2014 sales. It's interesting to observe how it has extended its reach internationally and is now offering items for export and serving other markets.

What really stands out is the lack of direct competition in explosive manufacturing, granting them a strong advantage with a 24% market share. 
Their order book is sizable, demonstrating stability and the possibility for future expansion. Their ambitions for development into nations like Thailand, Australia, and Indonesia offer promising signals of continued success.

Overall, the company seems well-prepared and positioned to capitalise on upcoming opportunities, making it an exciting business to watch. 

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.