ICICI Securities Places A "Buy" Call On This Defence Stock, Sees Good Upside

Good orders likely from the defence space

According to ICICI Securities, Solar Industries is getting future-ready for defence and space. "Company, in our view, is well-placed to reap the benefits of likely orders in the defence sector. Key points: 1) Facility to integrate propulsion, detonating units and warheads for Pinaka rockets; 2) state-ofthe-art CoE for lifecycle assessment of explosives and propellants; 3) company is working towards commercialising drones and loitering ammunitions; 4) latest successful testing of Vikram-S affirms Solar's successful foray in the space sector. "On the export front, Solar is comfortably placed with ammunition orders worth Rs 3 billon and potential orders for rockets and missiles from overseas. We believe the company's product expertise fits well into the India government's indigenisation initiative and thrust on exports," the brokerage has said.

Defence sector offers great opportunities

According to ICICI Securities, revenue from defence segment is expected to increase from a mere Rs 769 mn in FY18 to Rs7,500mn in FY24E driven by the fast-moving ammunitions segment and increasing penetration in integrating rockets and missile systems.

Solar has submitted proposals to manufacture two high-mobility long-range precision rocket systems, Maheshwarastra-1 (range of 150km) and Maheshwarastra-2 (range of 250km), under the Make II category of the Make in India initiative. Besides, Solar has developed a counter-drone system called Bhargavastra.

Impressive earnings growth potential.

According to the ICICI Securities report, Solar's earnings trajectory remains robust led by: 1) volume growth in explosives segment at ~15% p.a.; 2) gradual traction in defence business; and 3) export orders for ammunitions, missiles and rockets. As a result, the brokerage expect EPS CAGR of 47% through to FY24E with EBITDA margin progressively improving to 22% by the same year. Slower than expected execution of defence orders is a key risk to our estimates.

Buy the stock with a price target of Rs 4760

ICICI Securities sees Solar maintaining a healthy EBITDA margin of 18-20% in FY23E. Furthermore, owing to focus on exports/defence, we expect EPS CAGR of 47% through to FY24E. "We value the stock at 45x FY24E EPS resulting in a target price of Rs 4,760/share and upgrade the stock to a BUY," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.