Solar Industries posts solid 3Q results

Solar Industries India reported its 3QFY25 results on February 5, 2025, demonstrating significant outperformance from the prior corresponding period. Sales increased 38% YoY to INR19.7bn, while EBITDA grew 46% to INR5.4bn. Consequently, net income surged by 52% to INR3.4bn.

Domestic explosives quantity increased by 1% YoY to 155,222MT, however, price broadly remained flat. Solar Industries is also well poised for revenue expansion, backed by a solid order book of INR71.2bn from marquee clients as of 3QFY25 end. Customer-wise Coal India Limited (CIL) formed 13% of the sales mix; Non-CIL & Institutional, 14%; Housing & Infra, 13%; Defence, 21%; International, 38%; and Others, 1%.

Solar Industries India Limited, incorporated in 1995 and based out of India, has expertise in developing next-generation explosive devices and ammunitions. The company predominantly caters to customers in the mining, defence and space application domains. Solar Industries has built an established footprint in over 82 countries globally.

Additionally, the group has 27 manufacturing units in India and 9 facilities worldwide. In FY24, revenue from Indian customers comprised 53% of the sales mix, overseas customers made 45%, and 2% derived from other operating revenue.

Favourable industry tailwinds aiding growth

Increasing population and urbanization have led to a rapid growth of infrastructure projects, leading to a subsequent rise in mining and construction activities. As a result, the global industrial explosives industry landscape has witnessed positive tailwinds in recent years and the company anticipates the sector to grow at a CAGR of 5.8% during 2021-2026 to reach USD10.5bn.

In particular, the Asia-Pacific region dominates the industrial explosives market globally, with a share of 44% in 2020. The growth is expected to be led by China, the world’s largest construction market, which is expected to drive the demand for explosives in the region.

Following decent global demand, the industrial explosives industry in India is also witnessing significant expansion, with the industry expected to reach USD1.5bn by FY28, driven by the mining, quarrying, construction and infrastructure sectors (Source: Invest India). Additionally, the domestic explosives industry is sweetly poised to reap the benefits of Government initiatives including the Make in India campaign, smart cities, and rural electrification.

As a result, a positive performance trajectory is anticipated for Solar Industries with analysts expecting a CAGR of 23% in net sales over the period FY25-27 to INR112.2bn. Operating income is expected to outpace top-line growth, registering a CAGR of 24.2% over the same period to reach INR27.1bn, aided by margin expansion of 44 bps to 24.2%.

Sustained solid long-term performance

Solar Industries delivered resilient performance over the period FY19-24 with revenues rising at a CAGR of 19.8% to INR60.7bn. The operating income performance even outpaced revenue growth, rising at a CAGR of 25.5% to INR14.2bn in FY24, along with demonstrating significant margin expansion of 488 bps to 23.4%. Consequently, the net income surged at a robust CAGR of 26.2% to reach INR8.4bn in FY24.

Positive bottom-line trajectory led to an increase in cash inflow from operations, which eventually strengthened the cash position by over 4x to INR2.6bn as of FY24 end, from INR610mn as of FY19 end. The rise in cash from core operations has also kept the net debt profile in check, despite an increase in total debt over the same period. As a result, equity expansion has led to moderation in leverage ratio from 46.9% in FY19 to 33.2% in FY24.

On the other hand, the company’s peer - Premier Explosives reported a muted revenue CAGR of 1.4% over the past five years to reach INR2.7bn in FY24. However, operating income demonstrated an impressive CAGR of 19.2% to INR470mn during the same time. The rise in operating performance was aided by a robust increase of 959 bps in margins to 17.3%, driven by efficiencies in operations. As a result, net income increased at a CAGR of 20% to INR284mn.

Premium valuations indicate high interest

Solar Industries is currently trading at a P/E of 65x, based on the estimated FY25 EPS of INR135.9, which is much higher compared to the global peer average of 31.8x and 10-year historical average of 46.8x.

Taking positive cues from the fundamentals, the stock price has delivered stellar returns over the past year, surging over 30%. Out of the 5 analysts covering the company, 4 have given a ‘Buy’ recommendation, and 1 gave a ‘Hold’ rating for an average target price of INR11,447. This suggests an impressive upside potential of approximately 28% from the current market price.

Overall, the outlook looks encouraging for the company, backed by a solid order book, diversified client base, strong fundamental base and decent balance sheet position. Additionally, the presence of sectoral tailwinds owing to growing demand across key industry verticals should aid the company in the domestic, as well as global markets. However, the company’s operations are prone to strict regulatory purview surrounding the storage, transportation, and usage of explosives. Non-compliance can have a significant adverse impact on operations and profitability, but adherence can lead to reputational gain and additional business.