This Mid Cap Chemical Sector Stock Likely To Surge 18%, Brokerage Suggests Buy

Stock Outlook & Performance

The stock of the company closed at Rs 2,742.10 apiece, the previous close was Rs 2,789.90 apiece. It is trading Rs 447.85 below its 52 week high of Rs 3,189,95 apiece recorded on 6 April 2022. It recorded the 52-week low at Rs 1,607.25 apiece on 28th July 2021. It has a market capitalization of 24,813.28 crores.

Solar Industries stocks in last week have fallen 2.61%, and gained 0.16% in last 1 month, respectively. It has given positive returns of 68.5%. In the last 3 and 5 years, it has given a multibagger return of 136.63% and 204.98%, respectively. In long-term investment tenure, the stock has performed good and given multibagger returns to shareholders.

Buoyant performance; strong growth outlook intact

Solar Industries (SIIL) posted a strong performance in 1QFY23 as the revenues expanded to Rs 16.2bn, up 95.8% YoY/+22.7% QoQ, on improved volumes & better realizations. The EBITDA scaled to Rs 2.8bn (+62% YoY/+7.7%QoQ) while PAT increased to Rs 1.7bn, up 63.4%YoY/1.4% QoQ. The higher RM cost during the quarter weighed on EBITDA margin as it dipped by 370bps YoY/240bps to 17.5%. The EBITDA margin got contracted due to elevated raw material prices and lower realizations from one of SIIL's key customers. The gross margin deterioration persisted during the quarter as it dropped to 34.0% vs 43.1% in 1QFY22. The management anticipates easing in RM cost in recent phase to turn beneficial in coming quarters.

All-round sectoral performance

Explosives volume/realizations rose by 12.8%/74.4%YoY. The Non-CIL & Institutional segment posted robust growth of 181.2%/90.2% YoY respectively. The export & overseas segment along with CIL vertical recorded 83.3%/75.7%YoYgrowth respectively. The Others segment registered a stellar growth of 398.3%YoY/77%QoQ. The Defence vertical posted moderated growth of 36.9% YoY growth yet management expects it to gain momentum from next quarter. The order book expanded to Rs 38.4bn as of 1QFY23 vs ₹29.8bn as of FY22 end. The defence sector has a contribution of Rs 5.4bn. The management anticipates defence revenue to scale past Rs 4.0bn in FY23.

Expanding foothold

The company has taken a strategic decision to make an investment in North India-based explosive manufacturing company (RECL) after making recent investments in Skyroot and Zmotion to increase the product portfolio for various high-end applications & enhance geographical footprints. Going forward, the management projects inflationary environment & consequential policy rate tightening measures to impact the global demand. However, the government's thrust on housing and infra, rising coal demand & Atmanirbhar Bharat promoting towards indigenization of defence products will enable the company to achieve the expected annual growth guidance. Defence continues to be a catalyst to the company's top line growth, and to escalate the progress, the company has taken initiative to penetrate the field of drones, embracing both offensive and defensive roles of these equipment.

Debt & Capex Status

The company incurred a capex of Rs 840mn in 1QFY23 and aims to spend Rs 4-4 Rs 5bn for entire FY23. The management projects to spend Rs 1.6bn/Rs1.0b non defence & overseas market while rest will be utilized for geographical and product portfolio expansion on domestic basis. SIIL's working capital term loan status has marginally improved to Rs 2.1bn in 1QFY23 (Rs 2.4bn in Q1FY22). The net debt accounted to Rs 7.0bn in Q1FY23vs7.8bninQ1FY22 implying partial repayment of the outstanding loans. The capex is at ₹840mn currently when compared to Rs 2.9bn in Q1FY22. The company has significantly reduced its capital expenditure and outstanding loans in Q1FY23 YoY.

Valuation - Buy for a Target Price of Rs 3,210

The upbeat earnings growth trajectory is projected to persist following the key growth catalysts of leadership position, strong demand for packaged explosives, rising opportunities in defence sector, improving overseas market dynamics & buoyant margin profile. The strong earnings trajectory, leadership position & upbeat commentary clearly reflected in high valuations.

"We maintain our OUTPERFORMER rating on the stock with a price target of Rs 3,210, valuing the company at 40x FY24 EPS," the brokerage has said.

According to the brokerage firm, the risks are High inflation & consequential policy rate tightening. 

About - Solar Industries India Limited

Established in 1995, Solar Industries India is the largest manufacturer of industrial explosives and explosive initiating systems in India and has the world's largest manufacturing facility for packaged explosives. With a licensed explosives capacity of over 290,000 MT/annum, the company has ~28% market share in India. Solar, with a 70% market share in exports from India, exports to 51 countries around the world. Economic Explosives, a 100% subsidiary, manufactures detonators. In recent years it has expanded its manufacturing base to Nigeria, Zambia, South Africa, Turkey, Ghana and Australia. SIIL also has interests in the coal mines (in Chhattisgarh) through two JVs.