January 9, 2015
Initiating Coverage
ICICI Securities Ltd | Retail Equity Research
Detonating to explosive growth… Solar Industries India (SIIL) is the market leader in the Indian industrial explosives market with a 27% market share. The company also has the distinction of being the largest exporter of explosives with 50% market share. SIIL’s core strength lies in its ability to grow continuously through smart revenue diversification that it has achieved by being the leader in all categories of explosives & through geographical expansion via exports & overseas manufacturing operations. With a revival in mining operations in India, the next phase of growth for SIIL will come through strengthening of its leadership position, focus on expanding exports & overseas operations and foray into the defence segment. We expect revenues & PAT to grow at a CAGR of 20.5% & 25.2% in FY14-17E along with 261 bps EBITDA margin expansion & return ratios improving to 20.2%, 20.3% (RoE, RoCE), respectively. We initiate coverage on SIIL valuing it at 26x P/E on FY17E EPS of | 128.6 with a target price of | 3342 & BUY rating. Well poised to capitalise on opportunity from mining sector In FY09-14, SIIL achieved a volume CAGR of 2.2x volume CAGR of the overall industry (bulk + cartridge), which was at 5.8%. In the same period, production in coal mining, the largest consumer of explosives, grew at a muted 2.9% CAGR. However, with an expected revival in mining activity coupled with the government’s thrust on increased infrastructure spending, we believe SIIL is well placed to witness a volume CAGR of 16.9%, 12.5% in bulk, cartridge segment in FY14-17E, respectively. Higher capacity utilisation and product diversification will ensure revenues grow at a CAGR of 20.5% to | 1657.7 crore and | 1971 crore in FY16E and FY17E, respectively. Overseas operations & defence business to provide incremental growth SIIL’s high margin overseas operation has a notable contribution in the consolidated revenues, with its share increasing from 12.8% in FY11 to 18.8% in FY14. We expect the share of the overseas operation to increase to 21.6% in FY17E, with its revenues expected to increase at a CAGR of 25.5% to | 459.8 crore in FY17E. Significant revenues from the defence business from FY16E onwards (6% of consolidated revenues in FY17E) are expected to provide an uptick in revenue growth. Growth story far from over We believe SIIL possesses a wide moat in the form of de-risked business model, industry leadership, significant entry barriers and optimal product mix to benefit the most from a revival in mining & infrastructure activity. We initiate coverage on Solar Industries with a target price of | 3342, valuing the company at 26x P/E (implying PEG of 1x over FY14-17E) on the FY17E EPS of | 128.6. We have a BUY recommendation on the stock. Exhibit 1: Financial Performance (Consolidated) (Year-end March) FY13 FY14 FY15E FY16E FY17ENet Sales (| crore) 1,119.7 1,125.7 1,337.6 1,657.7 1,971.0 EBITDA (| crore) 190.0 203.0 265.4 336.0 406.6 Net Profit (| crore) 116.3 118.4 154.7 190.8 232.7 EPS (|) 64.3 65.4 85.5 105.4 128.6 P/E (x) 44.7 43.9 33.6 27.3 22.4 Price / Book (x) 9.1 7.9 6.6 5.5 4.5 EV/EBITDA (x) 28.5 27.1 20.4 16.0 13.1 RoCE (%) 18.1 15.9 18.5 19.8 20.3 RoE (%) 20.3 17.9 19.6 20.1 20.2
Source: Company, ICICIdirect.com Research
Solar Industries (SOLEXP)| 2875
Rating Matrix Rating : Buy
Target : | 3342
Target Period : 18-24 months
Potential Upside : 16%
YoY growth (%)
(YoY Growth) FY14 FY15E FY16E FY17ENet Sales 0.5 18.8 23.9 18.9EBITDA 6.8 30.8 26.6 21.0Net Profit 1.8 30.6 23.3 22.0EPS (Rs) 1.8 30.6 23.3 22.0
Valuation summary (Consolidated)
FY14 FY15E FY16E FY17EP/E 43.9 33.6 27.3 22.4Target P/E 51.1 39.1 31.7 26.0EV / EBITDA 27.1 20.4 16.0 13.1P/BV 7.9 6.6 5.5 4.5RoNW 17.9 19.6 20.1 20.2RoCE 15.9 18.5 19.8 20.3
Stock Data
Stock DataMarket Capitalization | 5203.2 CroreTotal Debt (FY14) | 442.8 CroreCash and Investments (FY14) | 147.7 CroreEV | 5498.2 Crore52 week H/L 3.5Equity capital | 18.1 CroreFace value | 10MF Holding (%) 14.9FII Holding (%) 0.8
Comparative return matrix (%)
Return % 1M 3M 6M 12MSolar Industries 4.1 13.9 32.6 205.2Premier Explosives 12.9 38.0 91.5 230.0Keltech Energies (1.5) 48.4 87.7 211.7Gulf Oil Corp. (7.7) 0.5 1.9 80.8
Price movement
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Research Analyst
Chirag J Shah [email protected]
Nishit Zota [email protected]
ICICI Securities Ltd | Retail Equity Research Page 2
Company background Solar Industries India (SIIL), founded by Satyanarayan Nuwal, is the largest manufacturer of industrial explosives & initiating systems in India with 27% market share in the domestic market and 50% market share in exports market. SIIL has a licensed capacity of 2,16,107 metric tonne (MT) of bulk explosives and 74,665 MT of cartridge explosives as of H2FY15. Playing on the economies of scope, the company has established itself as a major player across the product value chain with a product basket that includes bulk explosives, cartridge explosives, detonators, detonating fuse, cast boosters, Pentaerythritol tetranitrate (PETN - raw material for detonators) and High Melting Explosive (HMX - warhead in missiles). Mining industry is a major consumer of explosives accounting for 90% of total explosives demand (coal industry consumes 70% of total demand). Coal India (CIL) is the largest consumer of SIIL. The company enjoys a location advantage, as all its 16 facilities of bulk explosives are located in a 50-60 km radius from major mining regions. SIIL expanded its base to other geographies by setting up manufacturing facilities in partnership with local trading companies in countries like Zambia, Nigeria and Turkey. Consolidated revenues in FY14 were at | 1,126 crore, with domestic, overseas & export segments contributing ~70%, ~20% & ~10%, respectively. A huge demand-supply gap along with a set of progressive policies has driven SIIL to enter the defence sector. The company has already obtained an industrial license for HMX, propellants & new generation explosives. SIIL has commissioned an HMX plant with capacity of 50 MT. The HMX business will start generating revenues from FY15 onwards while its capacity will be gradually raised from 50 MT to 150 MT. The company is also in the process of setting up an initial propellant capacity of 2500 units where it has a license to manufacture 10,000 units.
Exhibit 2: Solar Industries India milestones
s
Starts production of explosives with a license capacity of 6000 MT
Starts plants in Waidhan for production of bulk explosives
Commences business as a trader in explosives
Commences production of detonators Starts exporting & slowly gains acceptance in international market
Initial public offer; gets listed
1984 1998
Establishes another bulk explosive unit in Chandrapur with 7750 MT capacity
Imports first cartridge manufacturing machine from US
Expands domestic operations to 19 locations
Starts exporting to 25 countries
2007-20141996 2000 2002-2005 2006
Introduces cast boosters & PETN in product portfolio Manufacturing units in
Zambia, Nigeria & Turkey
Expansion in Zambia
Foray into defence business by setting up up manufacturing facilities of HMX & propellant
2001
Source: Company, ICICIdirect.com Research,
Shareholding pattern (%) – Q2FY15
Shareholder's Category Holding (%)
Promoters 72.9
Institutional Investors 18.9
General Public 8.2
FII & DII holding trend (%)
1.3 1.2 1.1 1.2 1.2 1.2 0.8 0.8
18.6 18.9 19.0 18.7 18.3 18.1 18.1 17.9
0
5
10
15
20
Q3FY
13
Q4FY
13
Q1FY
14
Q2FY
14
Q3FY
14
Q4FY
14
Q1FY
15
Q2FY
15
%
FII DII
ICICI Securities Ltd | Retail Equity Research Page 3
Exhibit 3: Holding Structure of SIIL’s overseas subsidiaries
100% 100% 100%
99.99% 99.99%
65% 100% 55% 100% 80%
65% 74.5% 54% 80%
Solar Industries IndiaLtd
Solar IndustrieeMozambique Limitada
Solar OverseasMauritius Limited PT Solar Mining Resources
Solar Overseas NetherlandsCooparatie UA
Solar OverseasSingapore PTE
Ltd
Solar ExplochemZambia Ltd
Solar ExplochemMauritius Ltd
Nigachem NigeriaLtd
Solar OverseasNetherlands BV
Solar Mining ServicesAustralia PTY Ltd
Solar Nitrochemicals LtdIlci Patlayici Maddeler
Sanayi Ve TicaretAnonim Sirketi
PATSAN PatlayiciMaddeler Sanayi Ve
Ticaret
Solar Explochem
(Ghana)Ltd
Source: Company, ICICIdirect.com Research
Exhibit 4: Key overseas markets
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 4
Investment Rationale Explosives industry: Beneficiary of revival in end-user demand growth The fortunes of the explosives industry are closely linked to the metal/mineral extraction industry. More than 75% of explosives produced globally are consumed in mining operations. In India, mining accounts for more than 90% of the total consumption of explosives. The coal industry consumes more than 70% of total demand. Given that explosives comprise a substantial share (18-20% in coal mining) of the raw material consumed in mining, it is important to understand the quantum of demand for explosives in mining.
Exhibit 5: Explosive requirement per unit of mineral & final product Mineral Ore mined [million (mn) tonne] Explosives required (tonne) Final product Ore quantity needed Explosives reqd/mn tonne of final product
Coal 1 1080 - - -
Iron ore 1 200 Steel 1.7 340
Limestone 1 166 Cement 1.4 240
Source: Company, ICICIdirect.com Research
The explosives industry in India has kept pace with the mining industry, thus pegging the market size for industrial explosives in India at | 3500 crore in FY14 from | 2100 crore in FY09. The vigorous volume CAGR of 10.7% in FY09-14 in the market for explosives can be mainly attributed to the increasing demand in the mining & infrastructure space.
Exhibit 6: Demand forecast for explosives based on commodity demand Unit FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
CommodityCoal mn tonne 490 515 533 540 556 566 604 624 659
Iron ore mn tonne 213 213 219 167 136 152 120 130 150Cement mn tonne 187 207 216 230 248 256 282 305 328
Explosive required for miningCoal tonne 529200 555660 575208 583200 600923 610891 652428 674244 712152
Iron ore tonne 42600 42600 43800 33458 27160 30412 24000 26000 30000Cement tonne 44866 49591 51835 55318 59575 61341 67721 73308 78806
Total tonne 616666 647851 670843 671976 687658 702645 744149 773552 820958Total explosive demand tonne 685184 719835 745381 746640 764064 780716 826832 859502 912175
Source: ICICIdirect.com Research
Coal production levels remained stagnant over the years, with production growing at a meagre 2.9% CAGR from 490 mn tonnes in FY09 to 565.6 mn tonnes in FY14. In the same period, share of coal mining in explosives consumed by the mining sector increased from 85.8% in FY09 to 86.9% in FY14. Going ahead, burgeoning demand from India’s power sector (capacity expected to rise significantly from 253 GW in September 2014 to 288 GW in 2017), huge untapped coal reserves (125.9 billion tonnes) and a conducive regulatory environment for the coal sector are expected to boost coal production volumes to 659.4 mn tonnes in FY17E. In the same period (FY14-17E), explosives demand from the coal sector is expected to go up from 6,10,891 tonnes in FY14 to 7,12,512 tonnes in FY17E. In the long term, de-allocation of coal block by the Supreme Court in 2014 and subsequent e-auctioning by the Central Government are expected to clear the logjam and expedite coal mining. Coupled with this, the 300 km rail line being laid by CIL will sort out excavation bottlenecks and increase domestic supply by ~300 million (mn) tonne, further boosting the growth opportunity for the explosive industry. Another crucial catalyst for growth of the explosives industry is the stiff target of 1000 mn tonnes set by the Coal & Power Ministry for CIL by FY19. This target implies coal production volume will record 17.2% CAGR in FY14-19E, thus leading to an incremental demand of 5,80,500 tonnes for explosives from CIL alone.
Burgeoning demand from India’s power sector (capacity expected to rise significantly from 253 GW in September 2014 to 288 GW in 2017), huge untapped coal reserves (125.9 billion tonnes) and a conducive regulatory environment for the coal sector are expected to boost coal production volumes to 659.4 mn tonnes in FY17E
Target of 1000 mn tonnes set by the Coal & Power Ministry for CIL by FY19 can lead to an incremental demand of 5,80,500 tonnes for explosives from CIL alone
ICICI Securities Ltd | Retail Equity Research Page 5
The second most important segment for the explosives market is the construction sector. The sector that attracted investment of | 12.5 trillion in FY09-14, is expected to witness 1.5x growth in investment (| 19 trillion) in the next five years. This will generate strong steel demand in India. It will also generate demand for iron ore (an important raw material for making steel), whose production has contracted over the last few years due to regulatory issues. From the highs of 213 mn tonnes in FY09, production has fallen to 152.1 mn tonnes in FY14. In the same period of FY09-14E, the share of iron ore mining in the explosives demand pie has declined from 6.9% in FY09 to 4.3% in FY14. The iron ore production is expected to bottom out in FY15E to 120 mn tonnes. However, with a number of mines in Karnataka and Goa receiving clearances, iron ore production is expected to revive FY15E onwards, growing at a CAGR of 11.8% in FY15-17E to 150 mn tonnes in FY17E. Non-CIL + institutional (mostly steel sector) contribute ~18% of SIIL’s sales and explosives demand. Explosives demand from iron ore mining is expected to be at 30,000 tonnes in FY17E.
Exhibit 7: Coal production to grow at 5.3% CAGR in FY14-17E
490 515 533 540 556 566604 624
659
0
100
200
300
400
500
600
700
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E(M
n to
nne)
CAGR of 5.3%
CAGR of 2.9%
Source: Company, ICICIdirect.com Research
With a number of mines in Karnataka and Goa receiving clearances, iron ore production is expected to revive from FY15E onwards, growing at a CAGR of 11.8% in FY15-17E to 150 mn tonnes in FY17E. Explosives demand from iron ore mining is expected to be 30,000 tonnes in FY17E
Exhibit 8: Iron ore production to grow at 11.8% CAGR in FY15-17E
213 213 219
167
136152
120130
150
0
50
100
150
200
250
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(Mn
tonn
e)
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 6
Another sector that would be the beneficiary of a pick-up in investment activity in construction space is the cement sector. The capacity utilisation of the cement industry has bottomed out at ~69% in FY14. Low capacity addition and demand recovery driven by increased investments in infrastructure sector are expected to push utilisation levels to 78% in FY17E. Total cement production in India is expected to grow from 255.6 mn tonnes in FY14 to 328.4 mn tonnes in FY17E, implying a CAGR of 8.7%. The explosives find their application in mining of limestone, which is a key raw material for manufacturing of cement. The growth in cement production is expected to drive explosives demand from 61,341 tonnes in FY14 to 78,806 tonnes in FY17E. Exhibit 9: Cement production to grow at 7% CAGR in FY14-17E
187207 216
230248 256
282305
328
0
50
100
150
200
250
300
350
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(Mn
tonn
e)
Source: Company, ICICIdirect.com Research
Total cement production in India is expected to grow from 255.6 mn tonnes in FY14 to 328.4 mn tonnes in FY17E, implying a CAGR of 8.7%.The growth in cement production is expected to drive explosives demand from 61,341 tonnes in FY14 to 78,806 tonnes in FY17E
ICICI Securities Ltd | Retail Equity Research Page 7
SIIL well positioned to play resource boom Exhibit 10: Porter’s five forces analysis for Indian explosives industry (SIIL stands out as it has relatively de-risked business model)
Industry rivalry (moderate)-Highly concentrated market-Product differentiation is low-Locational proximity to mines an advantage
Bargaining power of buyers (high)Consuming industry dominated by coal industry (70+%). CIL is a monopsonist with 80% market share in coal industry
Threat of new entrants (low)-Many approvals required-Location proximity to mines an advantage
Threat of substitute products (low)- No direct substitute available
Bargaining power of sellers (low)-Price of ammonium nitrate (key raw material) linked to import parity prices-There is domestic availability of ammonium nitrate
However, SIIL has a diversified revenue base with CIL's contribution to SIL's revenues at 30%
However, SIIL is the market leader with 27% market share. Company enjoys benefit of backward integration for almost all raw materials (except ammonium nitrate). Lastly, SIIL has a wide product range being the market leader in each product
All bulk explosive units of SIIL located at 50-60 km radius from major mining regions.
Source: Company, ICICIdirect.com Research
SIIL possesses wide moat in form of high entry barriers & backward integration
The explosive industry is governed by a stringent regulatory environment resulting in high entry barriers that mute the threat of new entrants. A slew of approvals and licenses are needed in different life cycle stages like manufacturing, storing, marketing and consumption of explosives.
Exhibit 11: Key licenses & approvals for industrial explosives Industrial license from DIPP (Department of Industrial Policy & Promotion)Clearance from Home Ministry
Clearance from Intelligence Bureau regarding antecedant of promoter & location's safety
No objection certificate (NoC) from District Magistrate after clearance by police, PWD & Gram Panchayat
Manufacturing license issued by CCE (Chief Controller of Explosives)Directorate General of Mines Safety's permission is necessary for underground use of explosives
Source: Company, ICICIdirect.com Research
As a consequence of high entry barriers, there is a high concentration of the top 6 players, controlling 74% of the market, which has 30 manufacturers. Further, the top two players, viz. SIIL and Orica cumulatively command 43% of the overall market. This entry barrier benefits the industry, as a whole, as existing incumbents of the explosive industry are expected to grow due to mining growth without any threat of new players.
Due to high entry barriers, there is a high concentration of the top 6 players, controlling 74% of the market, which has 30 manufacturers. Further, the top two players, viz. SIIL and Orica, cumulatively command 43% of the overall market
ICICI Securities Ltd | Retail Equity Research Page 8
Exhibit 12: SIIL - Market leader Company Market Share (%)
Solar Industries 27Orica 16
IBP (IOCL) 11Gulf Oil 10
Premier Explosives 5Keltech Energies 5
Total 74
Source: Company, ICICIdirect.com Research
Coupled with this structural entry barrier, SIIL possesses a strategic entry barrier in the form of location proximity to the mines. For bulk explosives, distance is an important parameter, as it has to be the least between a seller and a buyer. All bulk explosive units of the company are located at a 50-60 km radius from the major mining regions.
Exhibit 13: Location of SIIL’s manufacturing plants in India State No of Plants Clients Served
Maharashtra (Chakdoh,Nimji,Sawanga, Warur) 4 Western Coalfield Ltd., SCCLMP (Waidhan 1, Waidhan 2) 2 Northern Coalfield Ltd., Reliance Power (Sasan)
Chattisgarh (Korba,Manendragarh) 2 South Eastern Coalfield Ltd, Jindal Power, Sharda Energy,Lafarge, Parsak (Adani group)Jharkand (Dhanbad, Ramgarh Cant) 2 Tisco,Central Coalfield Ltd., Bharat Coking Coalfield
Odisha (Jharsuguda,Talchar) 2 Mahanadi Coalfield Ltd., TiscoAP (Ramagundam, Kothagudem) 2 SCCL
Rajasthan (Bhilwara) 1 Hindustan Zinc, Jindal SawWest Bengal (Asansol) 1 Eastern Coalfield Ltd.
Source: Company, ICICIdirect.com Research
The main raw material for industrial explosives is ammonium nitrate (AN), which accounts for ~70% of the raw material consumed. SIIL procures this key raw material domestically from Rashtriya Chemicals & Fertilisers (RCF), Gujarat Narmada Fertiliser Corporation (GNFC) and Deepak Fertilizers based on monthly contracts and quantity wise pricing. After the implementation of the Ammonium Nitrate Rules 2012 under Explosives Act, which requires the approval of the Chief Controller of Explosives for import of AN, 90% of the required AN is sourced domestically and 10% through imports. SIIL enjoys the benefit of backward integration for the rest of the raw material required like PETN, sodium nitrate, zinc nitrate, calcium nitrate, sodium percolate, etc. This benefit enables the company to enjoy healthier margins compared to the rest of the industry.
SIIL enjoys the benefit of backward integration for all raw materials except ammonium nitrate. This benefit enables the company to enjoy healthier margins compared to the rest of the industry
ICICI Securities Ltd | Retail Equity Research Page 9
Strategic expansion + product diversification = Pole position in concentrated industry
SIIL, a late entrant in the Indian explosive industry, today has a licensed capacity of 2,16,107 metric tonne (MT) of bulk explosives and 74,665 MT of cartridge explosives, making the company the leader in the sector (27% market share in domestic market and 50% market share in exports of industrial explosives in value terms). SIIL has achieved this feat by recognising that its future competitiveness depends on quickly expanding its capacity at strategic locations and diversifying to meet the growing resource demand. The company has not only scaled up its capacity since inception but has also developed a well diversified portfolio of products.
Exhibit 15: Well diversified product portfolio
Detonators
Products
Cartridge ExplosivesBulk Explosives Detonating FuseSegments
106988 tonnesVolumes 68955 tonnes 133 million nos 59 million metre
Performance
Volume CAGR: 14.7%Revenue(FY14) :|380.3 croreTopline Contribution: 30.6%Rev CAGR (FY09-14) : 21.6%
Volume CAGR: 9.2%Revenue(FY14):|400.8 croreTopline Contribution: 32.3%Rev CAGR (FY09-14) : 15.6%
Volume CAGR: 12.8%Revenue(FY14):|174.1 croreTopline Contribution: 14%Rev CAGR (FY09-14) : 15.9%
Volume CAGR: 18.4%Revenue(FY14):|44.6 croreTopline Contribution: 3.6%Rev CAGR (FY09-14) : 23%
End-use Large open caste minesUnderground & small open cast
mines, infra projects To initiate explosives To initiate explosives
Source: Company, ICICIdirect.com Research
Exhibit 14: EBIT margin profile of explosives segment of industry players (standalone)
12.313.8
12.1 12.4
6.0
-0.6
3.5
15.4 16.2 15.7
7.6
10.09.8
0.5
5.5
10.7
6.89.0
2.21.5
-202468
1012141618
FY10 FY11 FY12 FY13 FY14
(%)
Solar Industries Gulf Oil Corp. Premier Explosives Keltech Energies
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 10
Exhibit 16: Domestic capacity of SIIL Product Licensed CapacityBulk explosives 219,240 MTCartridge explosives 74,655 MTDetonators 190 Mn. UnitsDetonating Fuse 75 Mn. MetersCast Boosters 1,500 MTPETN 1,650 MTHMX 50 MTComposite Propellants 2500 MT
Source: Company, ICICIdirect.com Research
Exhibit 17: Volume CAGR of bulk & cartridge segment
8.7
14.7
1.2
9.27.3
13.6
5.46.6
0
4
8
12
16
20
Industry SIL Industry SIL
Bulk Cartridge
(%)
FY09-14 FY14-17E
Source: Company, ICICIdirect.com Research
Bulk volumes expected to grow at 16.9% CAGR over FY14-17E In the bulk segment, SIIL has witnessed a rapid and strategic build-up in capacity, starting from a modest capacity of 6,000 MT at a single location of Waidhan (Madhya Pradesh) in 2000, to the current capacity of 219,240 MT spread across 16 locations in India. SIIL’s volumes in the bulk segment have grown from 53,912 MT in FY09 to 1,06,988 MT in FY14, implying a CAGR of 14.7%. In the same period (FY09-14), industry volumes in the bulk segment have grown at a CAGR of 8.7% from 3,43,019 MT to 5,21,419 MT. Bulk explosives volumes declined from 1,14,330 MT in FY13 to 1,06,988 MT in FY14, as SIIL lost business in Singareni Collieries due to non-remunerative pricing and the unachievable performance criteria set by Singareni Collieries. However, Singareni Collieries floated a tender with revised norms for FY15 and FY16 in which SIIL has received maximum order quantity. Additionally, SIIL has already commissioned a new bulk explosive facility at Kothagudem (Andhra Pradesh), which will add ~10,000 MT to the utilised capacity. Two new proposed facilities at Barbil (Odisha) and Kota (Rajasthan) in H1FY16 are expected to add another ~15,000 MT to the utilised capacity. This additional capacity will contribute significantly to volume growth. In FY09-14, when India’s coal production was stagnant and grew at a CAGR of just 2.9%, the bulk segment of the industry grew at a healthy CAGR of 8.7%. Going ahead, domestic coal production is expected to grow at a CAGR of 5.2% from 565.6 MT in FY14 to 659.4 MT in FY17E. Given the context of better growth rates in coal production, we have pencilled in a conservative CAGR of 7.3% for the industry, where bulk explosive volumes are expected to increase to 6,45,000 MT by FY17. Historically, SIIL has achieved superior volume growth compared to the
Historically, SIIL has achieved superior volume growth compared to the industry. SIIL’s volumes in the bulk segment grew at a CAGR of 14.7% in FY09-14, when industry volumes in the bulk segment grew at 8.7% CAGR
ICICI Securities Ltd | Retail Equity Research Page 11
industry. We expect the same trend to continue. Hence, we expect SIIL’s bulk volumes to grow at a CAGR of 16.9% to 170881 MT in FY17E. Exhibit 18: Industry volumes (bulk segment) expected to grow at 7.3% CAGR over FY14-17E
343019389825
359943
483838 495946 521419554000
598000645000
0
100000
200000
300000
400000
500000
600000
700000
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(MT)
Source: Company, ICICIdirect.com Research
Although SIIL was a late entrant in the bulk segment, location proximity and strategic expansion have been key to SIIL’s market prominence, whose market share in the bulk explosive segment has increased from 16% in FY09 to 21% in FY14. Going ahead, we expect the market share in the bulk segment at 26.5% by FY17E, on the back of capacity expansion and higher utilisation. Exhibit 19: SIIL volumes (bulk segment) expected to grow at 16.9% CAGR over FY14-17E
53912 5785779880
170881155347
129455
106988114330
94962
26.526.023.420.5
23.119.622.2
15.7 14.8
0
25000
50000
75000
100000
125000
150000
175000
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(MT)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
(%)
Bulk (Solar) Market Share
Source: Company, ICICIdirect.com Research
Cartridge volumes expected to grow at 12.5% CAGR over FY14-17E The cartridge segment is not too far behind in its contribution towards SIIL’s growth story. Volumes in the cartridge segment have grown from 44,312 MT in FY09 to 68,955 MT at a CAGR of 9.2%, whereas in the same period, the industry grew a meagre 1.2% from 2,54,808 MT to 2,69,999 MT, clearly indicating that SIIL ate into other player’s market share. The estimated investment of | 19 trillion in the construction sector in FY14-19E is expected to be a potent demand booster for steel, cement and power production. An increase in the production of coal, iron ore and other minerals will augur well for accelerated cartridge demand. Riding on these demand boosters, we expect industry volumes in the cartridge segment to grow at a CAGR of 5.4% to 3,16,000 MT in FY17E. In the same period (FY14-17E), we expect SIIL’s cartridge volumes to grow at a CAGR of 12.5% to 98,123 MT.
Location proximity and strategic expansion have led SIIL’s market share to increase from 16% in FY09 to 21% in FY14
ICICI Securities Ltd | Retail Equity Research Page 12
Exhibit 20: Industry volumes (cartridge segment) expected to grow at 5.4% CAGR over FY14-17E
254808225615
183533
238193267275 269999
287000301000
316000
0
50000
100000
150000
200000
250000
300000
350000
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(MT)
Source: Company, ICICIdirect.com Research
SIIL’s superior growth in the cartridge segment, relative to the industry growth, translated into a gain in market share for SIIL from 17% in FY09 to 26% in FY14. Given that the superior growth in the cartridge segment is expected to continue, the market share may correspondingly increase to 31.1% in FY17E. Exhibit 21: SIIL’s volumes (cartridge segment) expected to grow at 12.5% CAGR over FY14-17E
981239085584125
689557576166071
502065548844312
31.130.2
29.325.5
28.327.727.4
24.6
17.4
0
20000
40000
60000
80000
100000
120000
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(MT)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
(%)
Cartridge (Solar) Market Share
Source: Company, ICICIdirect.com Research
Detonator, detonating fuse to grow at 8.2%, 10.1% CAGR, respectively, in FY14-17E Apart from being the market leader in the bulk explosives & cartridges explosives segment, which cumulatively contributes 63% of SIIL’s consolidated revenues, SIIL also holds the pole position in the segment of initiating systems (detonators & detonating fuse) that contribute 17.6% of the company’s consolidated revenues. SIIL’s detonator volumes have grown at a CAGR of 12.8% from 73 million units in FY09 to 133 million in FY14 while the detonating fuse has grown at a CAGR of 18.4% from 26 million metre in FY09 to 59 million metre. By FY17, we estimate detonator volumes will grow at a CAGR of 6.7% to 162 million units while the detonating fuse will grow at a CAGR of 6.9% to 72.6 million metre.
SIIL’s superior growth in the cartridge segment, relative to the industry growth, translated into a gain in market share for SIIL from 17% in FY09 to 26% in FY14
ICICI Securities Ltd | Retail Equity Research Page 13
Exhibit 22: Industry volumes (detonator) expected to grow at 2% CAGR in FY14-17E
610698 724
971 992 1032 1053 1074 1095
0
200
400
600
800
1000
1200
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(Mn
nos.
)
Source: Company, ICICIdirect.com Research
Exhibit 23: SIIL volumes (detonator) expected to grow at 8.2% CAGR in FY14-17E
123 141 133 128147
169
108
73
1031215 15
1314
13 1214
15
0
30
60
90
120
150
180
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
(Mn
nos)
0
3
6
9
12
15
18
(%)
Detonators (Solar) Market Share
Source: Company, ICICIdirect.com Research
Exhibit 24: Industry volumes (detonator fuse) expected to grow at 8% CAGR in FY14-17E
334391
285
371
649
428462
499539
0
100
200
300
400
500
600
700
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(Mn
met
re)
Source: Company, ICICIdirect.com Research
Exhibit 25: SIIL volumes (detonator fuse) expected to grow at 10.1% CAGR in FY14-17E
26 30
7969
605949
6759
8 8
2118
8
14 13 14 15
0
15
30
45
60
75
90
FY09
FY10
FY11
FY12
FY13
FY14
FY15
E
FY16
E
FY17
E
(Mn
met
re)
0
5
10
15
20
25
(%)
Detonating Fuse (Solar) Market Share
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 14
Prudent diversification: key to stability of revenues SIIL has successfully diversified its revenue base by catering to newer customers in the domestic market, enhancing exports and venturing into overseas geographies. Diversification has aided the company to grow even in periods of tepid demand. Exhibit 26: Revenue diversification
Diversification
Customers
Overseas
Geography
Exports
Source: Company, ICICIdirect.com Research
Mitigation of concentration risk through balanced customer portfolio Coal India (CIL) accounts for a major portion of consumption of the domestic explosive industry’s output, which gives it significant bargaining power. For pricing, CIL uses a vendor rating system that incorporates evaluation parameters such as manufacturing infrastructure, random tests of products, distribution systems and delivery performance in the previous year, to be qualified for price bid. Given that CIL effectively acts as a price setter for most non-traded explosives and its pricing mechanism plays a significant role in the explosive industry’s health, SIIL has smartly diversified its revenue base in recent years by increasing the share of institutional players, export & overseas. CIL’s contribution to SIIL’s consolidated revenue has declined from 58% in FY07 to 33% in FY14. The company has reduced its concentration on CIL but at the same time retained its leadership position by spreading its markets to other segments. SIIL is still the largest supplier of explosives to CIL, meeting 27.5% of CIL’s requirement in FY14.
Although CIL’s contribution to SIIL’s consolidated revenue has declined from 58% in FY07 to 33% in FY14, SIIL remains the largest supplier of explosives to CIL, meeting 27.5% of CIL’s requirement in FY14
ICICI Securities Ltd | Retail Equity Research Page 15
Exhibit 27: Customer revenue trend - CIL’s share in SIIL’s topline has declined
58
45
3126 27
33
7 6 7 73
36
4740
35 35 37
6 8
22 22
106
2
25303535
2823
1014 101815
0
10
20
30
40
50
60
70
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
(%)
Coal India SCCL Inst. & Trade Export & Overseas A.N. Trading & others
Source: Company, ICICIdirect.com Research
Expanding footprint through exports & overseas operations SIIL started exporting explosives & accessories to various African, South-East Asian and Middle-East countries in FY04. Acceptance in the international market got translated to repeat business from international customers, despite intense competition from other global players. Today, SIIL exports to over 22 countries with a market share in explosive exports of 50%. Cartridges and initiating systems have helped SIIL strengthen its position in the export market. SIIL’s export revenues have grown at 10.7% CAGR from | 72.2 crore in FY09 to | 119.9 crore in FY14. Given that India’s explosive export account for just ~$40 million in a global explosive market size of $10 billion and as India is a cost-efficient manufacturer, there is huge potential in export of explosives & initiating systems. In FY14, exports comprised 10% of SIIL’s consolidated revenues. Exhibit 28: Exports grow at 10.7% CAGR in period FY09-14
7261
7566
90
120
0
20
40
60
80
100
120
140
FY09 FY10 FY11 FY12 FY13 FY14
| cr
ore
Source: Company, ICICIdirect.com Research
India’s explosive export account for just ~$40 million in a global explosive market size of $10 billion and as India is a cost-efficient manufacturer, there is huge potential in export of explosives & initiating systems
ICICI Securities Ltd | Retail Equity Research Page 16
The company set up a strong dealer network and marketing tie-ups with institutional buyers in the countries to which it exported. In line with its broad strategy to expand business overseas, the next step for SIIL after exports was to set up manufacturing facilities in markets with untapped demand. The company ventured into newer geographies by partnering with local companies to acquire licenses. SIIL started its first overseas manufacturing unit in Zambia in FY11, by manufacturing bulk explosives under the 65% subsidiary Solar Explochem Zambia Ltd. Going ahead, SIIL expanded its overseas business by setting up manufacturing capacities in Nigeria through a 55% stake in Nigachem Nigeria in FY11 and in Turkey through a 74.5% stake in the company Ilci Patlayici Maddeler Sanayi Ve Ticaret Anonim Sirketi in FY13. Exhibit 30: SIIL’s overseas operations Country SIL's stake (%) Product Licensed Capcity ExpansionZambia 65 Bulk 10,000 MT 10,000 MT
Cartridge 5,000 MTNigeria 55 Bulk 2,000 MT
Cartridge 5,000 MTTurkey 74.5 Bulk 2500 MT
ANFO 40,000 MTCartridge 5,000 MT
Detonators 6 mn nos
Source: Company, ICICIdirect.com Research
SIIL’s choice of geographic locations for its overseas operations has been strategic because:
• All three countries are growing economies
• Zambia is a mineral rich land-locked nation (Africa’s leading copper producer); tax benefits to mining related industry
• Nigeria’s explosive market is dominated by a single player Nigachem Nigeria Ltd (SIIL’s local partner in Nigeria). The company’s previous experience as a distributor of explosives in Nigeria augured well for setting up capacity
• Turkey’s explosive market is equivalent to India’s in terms of size
Exhibit 29: Global industrial explosives market
Global Market - $10 bnIndian Exports - $40 mnAustralia
13%
North America25%
Latin America12%Western Europe
5%Eastern Europe5%
Africa7%
Russia5%
China16%
India5%
South East Asia7%
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 17
Exhibit 31: Annual GDP growth of Zambia, Nigeria & Turkey
67.3
6.44.9 4.3
5.4
-4.8
9.2 8.8
2.1
4
6.87.67.86.9
-6
-4
-2
0
2
4
6
8
10
12
2009 2010 2011 2012 2013
(%)
Zambia Nigeria Turkey
Source: World Bank, ICICIdirect.com Research
Exhibit 32: Revenues & profit from overseas operations
FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14Revenues 14.8 69.2 61.4 35.6 71.8 74.3 107.4 148.8 9.6 19.7 16.6 48.4
PBT 1.8 14.6 5.5 -1.1 16.0 12.4 26.7 36.2 0.2 -0.2 -0.1 1.3PAT 1.8 14.6 5.3 -0.4 10.9 8.5 18.6 24.7 0.2 -0.2 -0.1 1.3
Zambia Nigeria Turkey
Source: Company, ICICIdirect.com Research
As seen in Exhibit 31, the Nigeria and Turkey operations are running smoothly, as can be inferred from their earnings growth. However, Zambia’s financials have been volatile, with revenues dropping from | 61.4 crore in FY13 to | 35.6 crore in FY14 while profitability of | 5.3 crore turned into losses of | 0.4 crore in FY14. This can mainly be attributed to the tumbling prices of copper. Falling copper prices coupled with the high cost base of the Zambian mining industry has put mining players under pressure. Mining players, in a bid to reduce their operating cost, have attempted to lay off employees. This has brought them into a face-off with the government, which has threatened to revoke their mining licenses. Lower mining output has impacted explosives sales.
Exhibit 33: Falling global copper prices
6000
6800
7600
8400
9200
10000
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
($/M
T)
Source: Bloomberg, ICICIdirect.com Research
Exhibit 34: Zambia’s copper production
534
698 686 668 690
830
500
600
700
800
900
1000
2008 2009 2010 2011 2012 2013
(Mn
tonn
e)
Source: U.S. Geological Survey, ICICIdirect.com Research
SIIL tried to mitigate this risk by diversifying its product basket in Zambia and setting up a cartridge facility in FY14. We expect to see a pick-up in revenue of the Zambian subsidiary with a revival of global copper prices.
Zambia’s financials have been volatile, with revenues dropping from | 61.4 crore in FY13 to | 35.6 crore in FY14 while profitability of | 5.3 crore turned into losses of | 0.4 crore in FY14
ICICI Securities Ltd | Retail Equity Research Page 18
In FY11-14, revenues from overseas operations recorded growth at 34% CAGR. Going ahead, SIIL is in the process of enhancing the bulk capacity in Zambia and Turkey by 10,000 MT and 2,500 MT, respectively. The company will also explore opportunities in other African countries like Tanzania and Mozambique. Owing to the company's focus on expansion in overseas operations, we estimate the overseas revenues will grow from | 232.9 crore in FY14 to | 459.8 crore in FY17E at a CAGR of 25.5%. Given that the overseas business yields EBITDA margins in excess of 20% (higher than domestic operations), we expect a gradual improvement in EBITDA margins at the consolidated level.
Defence business: Important trigger for next wave of growth A demand-supply mismatch, huge potential in terms of increased defence outlay and economies of scale prompted SIIL to foray into the defence space in FY12. The company plans to tap the opportunity in the defence sector by supplying propellants and HMX explosives (warheads) to Bharat Dynamics (BDL) and ordnance factories for use in missile systems. Currently, India imports almost all its entire requirement of HMX. SIIL had an initial capex plan of | 220 crore for setting up a production capacity of 50 tonne per annum of HMX and 10,000 propellants. The company has already invested | 156 crore in the defence space, which was utilised to set up a capacity of 2500 propellant and 50 TPA of HMX. Going ahead, the company has capex plans of ~| 90 crore to increase the propellant capacity from 2,500 units to 10,000 units and HMX capacity from 50 TPA to 100 TPA. The company has participated in tenders for HMX, which are expected to yield revenues of | 5 crore in Q4FY15. The additional HMX capacity of 50 TPA is expected to be commissioned in FY16E. Given that SIIL will be the only player in India to supply HMX, we have assumed a higher capacity utilisation of 80% and 100% for FY16E and FY17E, respectively. Assuming realisation of | 1 crore per tonne of HMX, we have estimated the HMX production will generate revenues of | 40 crore and | 100 crore in FY16E and FY17E, respectively. SIIL has also participated in the limited tender floated for 500 units of Pinaka missile and 700 units of Akash missile. The company has guided that Pinaka missile order will be executed in FY16 while the execution of the Akash missile order will be spread across FY16 and FY17. Assuming a realisation of | 6 lakh per propellant for Pinaka and | 7 lakh per propellant for Akash, we estimate the Pinaka and Akash missile orders will generate revenues of | 30 crore and | 49 crore, respectively.
ICICI Securities Ltd | Retail Equity Research Page 19
Exhibit 35: Return profile of defence business for expected order book Unit FY15E FY16E FY17E
ProductionHMX tonne 5 40 100
Propellant (Akash) nos. 0 300 400Propellant (Pinaka) nos. 0 500 0
RealizationHMX | crore 1 1 1
Propellant (Akash) | crore 0.07 0.07 0.07Propellant (Pinaka) | crore 0.06 0.06 0.06
RevenueHMX | crore 5 40 100
Propellant (Akash) | crore 0 21 28Propellant (Pinaka) | crore 0 30 0
Total | crore 5 91 128EBITDA
Margin % 20 20 20EBITDA | crore 1 18 26
Depreciation | crore 0.04 0.73 1.02EBIT | crore 1.0 17.5 24.6
Capital employed | crore 245 245 245ROCE % 0.4 7.1 10.0
Source: Company, ICICIdirect.com Research
As seen in exhibit 35, we expect defence revenues to jump from | 5 crore in FY15E to | 128 crore in FY17E. Although the company has guided for a 25-30% EBITDA margin for the defence business, we have assumed a conservative EBITDA margin of 20% for the initial years of operation. The RoCE of 7-10% for FY16-17E may appear below par due to lower utilisation levels. However, once the additional capacity gets commissioned and the business stabilises, we expect higher utilisation levels to drive significant jump in the profitability, margins and return ratios.
ICICI Securities Ltd | Retail Equity Research Page 20
Financials Revenue growth of 20.5% CAGR in FY14-17E to be driven by all segments We expect consolidated revenues to increase from | 1,133 crore in FY14 to | 1,980.9 crore in FY17E at a CAGR of 20.5%, mainly on the back of stable domestic growth, expanding overseas operations and a burgeoning defence business (largely FY16E onwards). Over FY09-14, SIIL registered consolidated revenue CAGR of 18.4% on the back of growing market share in India from ~23% in FY09 to ~27% in FY14. Revenues from overseas operation commenced from FY11, which scaled up from | 95 crore in FY11 to | 232.9 crore in FY14 at a CAGR of 34.8%. Exhibit 36: Revenues to grow at 20.5% CAGR in FY14-17E
1121.8 1133.01343.7
1665.9
1980.9
0
500
1000
1500
2000
2500
FY13 FY14 FY15E FY16E FY17E
(| c
rore
)
Source: Company, ICICIdirect.com Research
Going ahead, we expect revenues from domestic operations to grow at a CAGR of 15.2% from | 1,008.5 crore in FY14 to | 1,543 crore in FY17E. Growth in domestic revenues is expected to be driven at 21.6% CAGR in bulk explosive revenues for FY14-17E. The cartridge, detonator and detonator fuse revenues are expected to grow at a CAGR of 13.4%, 8.1% and 7.6%, respectively, for the same period. Overseas operations are expected to continue the growth momentum, with overseas revenues expected to grow from | 232.9 crore in FY14 to | 459.8 crore at 25.5% CAGR in FY14-17E. Defence business revenues are expected to grow rapidly from | 5 crore in FY15E to | 128 crore in FY17E, contributing a meaningful 6% in FY17E consolidated revenues.
Exhibit 37: Domestic revenue break-up (including exports)
683.5
408.8
164.6
59.9
582.5
472.5
380.3384.9
583.8517.9
467.6400.8
220.1191.4174.1150.555.541.435.344.630.1 8.7
0100
200300400500600700
FY13 FY14 FY15E FY16E FY17E
(| c
rore
)
Bulk Cartridge Detonator Detonator Fuse Trading
Source: Company, ICICIdirect.com Research
Exhibit 38: Consolidated revenue break-up
84.7 81.2 79.2 74.4 72.4
15.3 18.820.5 21.6
5.1 6.020.40.3
0
20
40
60
80
100
FY13 FY14 FY15E FY16E FY17E
(%)
Domestic Overseas Defense
Source: Company, ICICIdirect.com Research
Over FY09-14, SIIL registered consolidated revenue CAGR of 18.4% on the back of growing market share in India from ~23% in FY09 to ~27% in FY14
ICICI Securities Ltd | Retail Equity Research Page 21
Higher proportion of overseas & defence business to boost margins The consolidated EBITDA is expected to increase from | 203 crore in FY14 to | 406.6 crore in FY17E at a CAGR of 26.1% while EBITDA margins are expected to expand 261 bps from 17.9% in FY14 to 20.5% in FY17E. The margin expansion from 14.3% in FY09 to 17.9% in FY14 can be attributed to a high degree of operating leverage and increasing revenue share of higher margin yielding overseas business from 12.8% in FY11 to 18.8% in FY14. Going ahead, we expect the growth trajectory in EBITDA and margin expansion to come through a further increase in revenue share of the overseas business from 18.8% in FY14 to 21.6% in FY17E as well as commencement of the high margin defence business (margins in excess of 20%). The contribution of the defence business in the revenue share is expected to increase from 0.3% in FY15E to 6% in FY17E. Exhibit 39: Consolidated EBITDA to grow at 26.1% CAGR over FY14-17E
190.0203.0
265.4
406.6336.0
16.917.9
19.820.520.2
0
100
200
300
400
500
FY13 FY14 FY15E FY16E FY17E
(| c
rore
)
15.0
17.0
19.0
21.0
23.0
25.0
(%)
EBITDA EBITDA margin
Source: Company, ICICIdirect.com Research
Consolidated PAT to grow at 25.2% CAGR in FY14-17E We expect consolidated PAT to grow at a CAGR of 25.2% from | 118.4 crore in FY14 to | 232.7 crore in FY17E. Historically, growth in net profit has tracked revenue growth as degree of combined leverage has always been more than 1. In FY09-14, when revenues grew at 18.4% CAGR, net profit grew at 21.8% CAGR. As we expect the degree of combined leverage to continue to be higher than 1 for FY14-17E, the growth in profitability may continue to be higher than revenue growth. PAT margins are also expected to improve from 10.5% in FY14 to 11.7% in FY17E.
Exhibit 40: Consolidated PAT to grow 25.2% CAGR in FY14-17E
116.3 118.4
154.7
190.8
232.7
10.4 10.5
11.511.7
11.5
0
50
100
150
200
250
FY13 FY14 FY15E FY16E FY17E
(| c
rore
)
9.5
10.0
10.5
11.0
11.5
12.0
(%)
PAT PAT Margin
Source: Company, ICICIdirect.com Research
The margin expansion from 14.3% in FY09 to 17.9% in FY14 can be attributed to a high degree of operating leverage and increasing revenue share of higher margin yielding overseas business from 12.8% in FY11 to 18.8% in FY14
ICICI Securities Ltd | Retail Equity Research Page 22
RoE, RoCE set to improve to 20.2%, 20.3%, respectively, by FY17E In the last few years, the RoE, RoCE have declined from 22.1%, 21% in FY10 to 17.9%, 15.9%, respectively, in FY14. This was on the back of the company incurring a capex to increase the licensed capacity for domestic operations, its expansion in overseas subsidiaries and foray in the defence business. However, going ahead, we expect RoE, RoCE to resurrect back to 20.2%, 20.3%, respectively, on the back of expansion in margins & improvement in asset turnover due to higher capacity utilisation in bulk operations (current capacity utilisation for bulk explosives is 49%). Exhibit 41: RoE, RoCE trend
20.3
18.1 18.517.919.6
20.220.1
15.9
20.3
19.8
10
13
16
19
22
25
FY13 FY14 FY15E FY16E FY17E
(%)
ROE ROCE
Source: Company, ICICIdirect.com Research
Cash flows set to improve; CFO/EBITDA at 0.5x; D/E to reduce to 0.5x The company is expected to generate strong cash flows with cash flow from operations (CFO) increasing from | 123.1 crore in FY14 to | 218.4 crore in FY17E. Strong CFO will ensure repayment of working capital loans and smooth execution of the annual capex of | 100 crore p.a. guided by the company for the next three years. The FCF that is expected to turn positive on the back of strong CFO may grow to | 118.4 crore in FY17E. The CFO/EBITDA, a measure of quality of earnings, is also expected to stabilise at ~0.5x by FY17E. The D/E is expected to reduce from 0.7x in FY14 to 0.5x in FY17E.
Exhibit 42: CFO, EBITDA, CFO/EBITDA trend
218.
4
203.
0
265.
4
336.
0
406.
6
164.
5
233.
8
123.
1
92.9
190.
0
0.50.6
0.9
0.5 0.5
050
100150200250300350400450
FY13 FY14E FY15E FY16E FY17E
(| c
rore
)
0.0
0.2
0.4
0.6
0.8
1.0
(x)
CFO EBITDA CFO/EBITDA
Source: Company, ICICIdirect.com Research
Exhibit 43: Free cash flow, free cash flow yield
133.8
64.5
118.4
(19.0)(37.4)
2.3
1.2
2.5
-0.4-0.7
-50
0
50
100
150
FY13 FY14E FY15E FY16E FY17E
(| c
rore
)
-1.0-0.50.00.51.01.52.02.53.0
(%)
FCFF FCFF yield
Source: Company, ICICIdirect.com Research
The return ratios are set to improve on the back of expansion in margins & improvement in asset turnover due to higher capacity utilisation in bulk operations
ICICI Securities Ltd | Retail Equity Research Page 23
Exhibit 44: Trend in debt & debt/equity
344.5
442.8 445.4
515.4
581.4
0.6
0.7
0.60.50.5
300
350
400
450
500
550
600
FY13 FY14 FY15E FY16E FY17E
(| c
rore
)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
(x)
Debt Debt/Equity
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 24
Risks & Concerns Lower volume growth due to slowdown in mining & infrastructure Coal mining & infrastructure currently account for 51% of SIIL’s revenues. Non-CIL institutional clients (mostly metal & steel sector) account for 18% of SIIL’s revenue. Any slowdown in mining, power & infrastructure sectors can affect SIIL’s volume growth negatively. However, in FY09-14, when mining & infrastructure activity was muted, revenue diversification and an increasing market share enabled SIIL to witness volume growth of 14.7%, and 9.2% CAGR in bulk and cartridge explosives, respectively. Given that the bulk and cartridge segment contribute 63% of consolidated revenues, we have calculated the sensitivity of FY16E and FY17E EPS to the volume growth in the bulk & cartridge segment.
Exhibit 45: Sensitivity of FY16E EPS to volume growth
Bulk volumes growth (%)
106.85469 -10 10 20 30 40
-8 90.2 96.8 100.2 103.5 106.8
0 92.8 99.5 102.8 106.1 109.4
Cartridge volume growth (%) 8 95.5 102.1 105.4 108.7 112.1
16 98.1 104.7 108.0 111.4 114.7
24 100.7 107.3 110.7 114.0 117.3
Source: Company, ICICIdirect.com Research
Exhibit 46: Sensitivity of FY17E EPS to volume growth (assuming base case for FY16E)
Bulk volume growth(%)
130.38957 -10 0 10 20 30
-8 113.9 118.2 122.5 126.9 131.2
0 116.9 121.2 125.5 129.9 134.2
Cartridge volume growth (%) 8 119.9 124.2 128.6 132.9 137.2
16 122.9 127.2 131.6 135.9 140.2
24 125.9 130.3 134.6 138.9 143.3
Source: Company, ICICIdirect.com Research
We have estimated the consolidated EPS of | 105.4 and | 128.6 for FY16E and FY17E, respectively (base case). As can be seen in exhibit 50, every 10% point change in FY16E bulk volume growth will result in | 3.4 change in FY16 EPS whereas an 8% point change in FY16E cartridge volume growth will result in | 2.6 change in FY16E EPS. Similarly, every 10% change in FY17E volume growth will result in | 4.3 change in FY17E EPS while an 8% change in FY17E cartridge volume growth will result in a | 3 change in FY17E EPS.
Slowdown in overseas subsidiaries’ growth Overseas subsidiaries (Zambia, Nigeria and Turkey) contributed 18.8% of SIIL’s consolidated revenues in FY14 while the share is expected to increase to 21.7% in FY17E. The Zambian subsidiary runs the risk of volatility in earnings due to dampened copper prices. SIIL’s Nigerian operations also face a risk given that concerns regarding the Nigerian economy are rising with falling crude prices. Crude oil accounts for ~75% of the government revenues and ~90% of exports for Nigeria. This African country is also prone to insurgencies, with the latest being Boko Haram, a militant movement based in Northern Nigeria. These factors could impact the stability of operations in Nigeria, which contributed 63.9% of the consolidated revenues in FY14. SIIL has always tried to mitigate such political & operational risk by partnering with local companies for its foreign operations. We draw some comfort from the fact that SIIL has been associated with Nigachem Nigeria since 2005 (previously as a dealer).
Given that the bulk and cartridge segment contribute 63% of consolidated revenues, slowdown in mining, power and infrastructure can adversely impact the company’s profitability
Every 10% change in FY17E volume growth will result in | 4.3 change in FY17E EPS while an 8% change in FY17E cartridge volume growth will result in a | 3 change in FY17E EPS
Overseas subsidiaries (Zambia, Nigeria and Turkey) contributed 18.8% of SIIL’s consolidated revenues in FY14 while the share is expected to increase to 21.7% in FY17E
ICICI Securities Ltd | Retail Equity Research Page 25
Exhibit 47: Sensitivity of EPS to overseas revenue CAGR
Overseas Revenue CAGR (FY15-17E)
EPS (|) -5 10 25 30 35
FY16E 96.4 100.9 105.4 106.8 108.3FY17E 110.9 118.3 128.6 132.1 136.3
Source: Company, ICICIdirect.com Research
Volatile raw material prices The price of the key raw material, ammonium nitrate, can exhibit volatility, which can have an adverse impact on the profitability of SIIL. Prices of ammonium nitrate are largely linked to natural gas prices. However, sales of AN, except spot sales, have price escalation clauses, thus insulating the company from raw material price volatility. Exhibit 48: Sensitivity of EPS to raw material (as percentage of net sales)
EPS (|) 49.7 51.7 53.7 55.7 57.7FY16E 130.7 118.1 105.4 92.8 80.1
Raw material (% of Net Sales)
Source: Company, ICICIdirect.com Research
Regulatory risk The explosives industry is stringently regulated, where various approvals are required for manufacturing, transportation, storage ad marketing. Any kind of adverse decision from concerned authorities may impact SIIL’s core operations.
Accident prone industry SIIL’s business is prone to accidents given the nature of products manufactured and raw material handled. In the explosives industry, 18 accidents were reported under the Explosives Act in FY14. Any such incidents may hamper SIIL’s operations and, thus, its profitability.
Currency fluctuation Currency volatility may impact export/overseas revenues and, consequently, margins. Given the current fall in crude priceds have led to strong depreciation of oil producing nations like Nigeria which can impact margins of consolidated entity.
ICICI Securities Ltd | Retail Equity Research Page 26
Valuation SIIL possesses a wide moat in the form of a de-risked business model, industry leadership, significant entry barriers and an optimal product mix to benefit the most from a revival in mining & infrastructure activity. Even in the export & overseas business, we believe SIIL has just scratched the surface of growth, with many more un-penetrated markets yet to be explored. A foray in new business segments like defence will further solidify SIIL’s business model at a time when the government’s prerogative is to indigenise defence manufacturing, which will allow SIIL to scale the defence business at a faster pace. Even during times of moderate/muted business environment, SIIL had witnessed robust revenue CAGR of 18.4%, over FY09-14, backed by a strong 12.4% volume CAGR (bulk + cartridge) coupled with capacity expansion and market share gains. This speaks volumes for the pedigree of the management and business model that has evolved over time and reiterates our confidence in the company to capture the upcoming opportunity with a revival in industrial activity. Hence, SIIL is a rare combination of excellent growth track record, proactive management, conservative leverage approach, expanding margins & return ratios along with 25%+ growth guidance from management for the next three years. Going ahead, the Coal & Power Ministry have set CIL a stiff target to achieve 1000 mn tonnes of coal production till FY19E. This implies 17.2% production volume CAGR over FY14-19E. This, in turn, will create an incremental demand of ~7,71,008 tonnes of explosives, implying a rise of ~99% over the same period. Being the largest player, SIIL is well set to capitalise on the forthcoming opportunity given the kind of product mix, existing capacities and future capex plans it commands. We expect revenues, EBITDA and PAT to grow at a CAGR of 20.5%, 26.1% and 25.2%, respectively, over FY14-17E. Consistency in revenue, PAT growth, disciplined capex programmes (leverage of 0.7x) and logical overseas and new segment diversification have already led to a re-rating of the P/E multiples of the stock. The YTD rally of 205% in the stock price has made the forward multiples look rich at 22x F17E EPS given the markets are pricing in 8-10% growth for the industry over FY16E-17E. However, SIIL, on an average, has produced industry beating growth rates owing to the factors discussed above. Also, as the leader of the industry, SIIL deserves premium valuations. The crucial catalyst for a further re-rating depends on the execution of the 1000 mn tonne target of coal production by FY19E. Hence, in case the stiff coal production target sees the light of the day, then the Street would be undermining the earnings growth for the industry and SIIL, in particular. However, to capture the emerging growth opportunities in the explosives and defence business, we would base our valuations on the basis of PEG ratio. We are pencilling in 25.2% PAT CAGR over FY14-17E for SIIL and ascribing a PEG multiple of 1x, implying a target P/E of 26x. Hence, we arrive at a fair value of | 3342 and initiate coverage with a BUY rating.
SIIL is a rare combination of excellent growth track record, proactive management, conservative leverage approach, expanding margins & return ratios along with 25%+ growth guidance from management for the next three years.
ICICI Securities Ltd | Retail Equity Research Page 27
Trading multiples
Exhibit 49: Two year forward P/E
0
500
1000
1500
2000
2500
3000
3500
Oct-0
8
Jan-
09
Apr-0
9
Jul-0
9
Oct-0
9
Jan-
10
Apr-1
0
Jul-1
0
Oct-1
0
Jan-
11
Apr-1
1
Jul-1
1
Oct-1
1
Jan-
12
Apr-1
2
Jul-1
2
Oct-1
2
Jan-
13
Apr-1
3
Jul-1
3
Oct-1
3
Jan-
14
Apr-1
4
Jul-1
4
Oct-1
4
(|)
Price 23x 19x 16x 12x 10x 8x 7x
Source: Reuters, ICICIdirect.com Research
Sensitivity Analysis We have constructed a bull and bear-case scenario analysis around our revenue CAGR estimates of SII to better assess the risk reward outcomes. Bull case scenario… In the bull case, we expect consolidated revenues to grow to | 2174.4 crore at a CAGR of 24.3% over FY14-17E. Domestic explosives revenues are expected to grow at a CAGR of 18.6% (vs. 15.2% in the base case). We expect the overseas business to grow at CAGR of 29% (vs. 25.5% in base case). We expect defence revenues to touch | 200 crore in FY17E (against our estimate of | 128 crore). The PAT is expected to grow at a CAGR of 29.8% over FY14-17E (vs. 25.2% in the base case). For the bull case, we ascribe 1.0x PEG over FY14-17E earning CAGR to arrive at a target multiple of 30x and derive a target price of | 4299 providing a robust upside potential of 49.5%. Bear case scenario… In the bear case, we have assumed a volume CAGR of 10% for all segments in explosives (bulk, cartridge, detonator & detonating fuse). Accordingly, we expect consolidated revenues of SIIL to grow to | 1721.6 crore at a CAGR of 15% over FY14E-17E. Domestic explosives revenues are expected to grow at a CAGR of 10.7%. We expect the overseas business to grow slowly at CAGR of 15.2%. We maintain the base case assumptions for the defence business. The PAT is expected to grow at a CAGR of 18.8% over FY14-17. For the bear case, we ascribe 1.0x PEG over FY14-17E earning CAGR to arrive at a target multiple of 19x and derive a target price of | 2084, implying a downside of 27.5%. Exhibit 50: Bull-base-bear sensitivity
Base Case Bull Case Bear Case
Revenue (FY17E) 1980.9 2174.4 1721.6
Revenue CAGR (FY14-17E) 20.5 24.3 15.0
EBITDA Margin (FY17E) 20.5 20.5 20.5
FY17E EPS 128.6 143.3 109.7
Fwd P/E FY17 (x) 22.4 20.1 26.2
PEG Ratio (x) 1 1 1
PAT CAGR (FY14-17E) 25.2 29.8 18.8
Target P/E (x) 26 30 19
Target Price 3342 4299 2084
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 28
Exhibit 51: Peer comparison (Financials) Company EBITDA Margin (%)
FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14
Domestic
Solar Industries 5203 976 1122 1133 175 190 203 18.0 16.9 17.9 101.2 116.3 118.4 25.0 20.3 17.9 22.4 18.1 15.9
Premier Explosives 266 108 109 145 18 10 17 16.2 9.0 11.8 11.9 5.3 9.2 29.3 11.4 17.4 30.1 13.2 19.3
Keltech Energies 78 178 155 154 10 10 12 5.6 6.2 8.1 5.0 4.3 5.9 10.4 8.2 19.1 10.7 9.5 17.8
Gulf Oil Corp Ltd 762 1236 1265 1301 68 23 41 5.5 1.8 3.2 48.2 50.2 67.7 6.4 4.7 6.1 7.9 -5.4 5.1
International
Orica Ltd 34340 36157 38675 38175 6341 6706 6472 17.5 17.3 17.0 2182.2 3328.2 3384.3 12.3 16.9 14.8 16.4 20.4 19.1
Incitec Pivot Ltd 28998 18966 19119 18828 3962 3658 4148 20.9 19.1 22.0 2766.7 2062.1 1388.0 13.2 8.9 5.7 20.8 7.1 10.0
Revenues EBITDA ROEPATMcap (| crore)
ROCE
Source: Bloomberg, ICICIdirect.com Research
Exhibit 52: Peer comparison (Valuation) Company Mcap (| crore) P/E Mcap/Sales
FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
Solar Industries India Ltd 5203 33.6 27.3 22.4 20.4 16.0 13.1 3.9 3.1 2.6
Orica Ltd 34340 11.4 10.7 9.9 7.5 7.1 6.8 0.9 1.0 1.0
Incitec Pivot Ltd 28998 14.9 13.7 11.0 9.1 8.5 6.9 2.0 1.9 1.7
EV/EBITDA
Source: Bloomberg, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 29
Financial Summary (Consolidated) Exhibit 53: Profit and Loss (| crore)(Year-end March) FY13 FY14 FY15E FY16E FY17E
Net Sales 1,119.7 1,125.7 1,337.6 1,657.7 1,971.0
Other Operating Income 2.1 7.3 6.1 8.3 9.9
Total Operating Income 1,121.8 1,133.0 1,343.7 1,665.9 1,980.9
Total Revenue 1,141.8 1,144.1 1,354.5 1,677.9 1,992.9
- - - - - -
Raw Material Expenses 650.1 590.8 727.7 890.7 1,057.2
Employee Expenses 55.6 67.3 73.7 82.9 98.6
Other Expenses 226.2 271.9 276.9 356.4 418.5
- - - - - -
- - - - - -
EBITDA 190.0 203.0 265.4 336.0 406.6
Interest 30.9 17.9 20.4 38.4 43.9
Other Income 20.0 11.2 10.8 12.0 12.0
PBDT 179.1 196.3 255.7 309.6 374.7
Depreciation 17.0 21.9 27.9 33.2 37.5
PBT 152.2 164.4 222.8 276.5 337.2
Total Tax 25.7 34.9 55.4 69.1 84.3
PAT before MI 126.4 129.5 167.4 207.4 252.9
Minority Interest 10.1 11.1 12.7 16.6 20.2
PAT 116.3 118.4 154.7 190.8 232.7
Source: Company, ICICIdirect.com Research
Exhibit 54: Balance Sheet (| crore)(Year-end March) FY13 FY14 FY15E FY16E FY17E
Liabilities - - - - -
Equity Capital 18.1 18.1 18.1 18.1 18.1
Reserve and Surplus 554.6 643.5 770.5 931.7 1,132.6
Total Shareholders funds 572.7 661.6 788.6 949.8 1,150.7
Secured Loan 325.0 340.6 343.2 378.2 411.2
Unsecured Loan 19.5 102.2 102.2 137.2 170.2
Deferred Tax Liability 20.7 27.0 27.0 27.0 27.0
Minority Interest 40.5 38.1 50.8 67.4 87.6
Liability side total 978.5 1,169.5 1,311.8 1,559.5 1,846.7
Assets - - - - -
Total Gross Block 442.5 582.5 723.5 823.5 923.5
Less Total Accumulated Depreciation 70.0 91.6 119.6 152.7 190.2
Net Block 372.5 490.9 604.0 670.8 733.4
Total CWIP 60.6 81.0 40.0 40.0 40.0
Total Fixed Assets 433.1 571.9 644.0 710.8 773.4
Other Investments 9.5 10.5 11.5 12.5 13.5
Liquid Investments 39.4 14.7 14.7 14.7 14.7
Inventory 136.1 152.8 164.9 204.4 243.0
Debtors 155.9 185.3 197.9 245.2 291.6
Loans and Advances 144.8 142.5 133.8 165.8 197.1
Other Current Assets 96.9 141.7 133.8 165.8 197.1
Cash 92.2 133.0 233.0 315.1 443.0
Total Current Assets 626.0 755.4 863.3 1,096.3 1,371.8
Creditors 108.7 169.1 201.6 249.8 297.0
Provisions 20.8 13.9 20.2 25.0 29.7
Total Current Liabilities 129.5 183.0 221.7 274.8 326.7
Net Current Assets 496.5 572.3 641.6 821.5 1,045.1
Assets side total 978.5 1,169.5 1,311.8 1,559.5 1,846.7
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 30
Exhibit 55: Cash flow statement (| crore)(Year-end March) FY13 FY14 FY15E FY16E FY17E
Profit after Tax 116.3 118.4 154.7 190.8 232.7
Depreciation 17.0 21.9 27.9 33.2 37.5
Cash Flow before working capital changes 164.1 158.1 203.1 262.3 314.1
- - - - - -
Net Increase in Current Assets (46.7) (88.6) (8.0) (150.8) (147.7)
Net Increase in Current Liabilities (24.6) 53.5 38.7 53.0 51.9
Net cash flow from operating activities 92.9 123.1 233.8 164.5 218.4
- - - - - -
(Purchase)/Sale of Fixed Assets (112.1) (160.7) (100.0) (100.0) (100.0)
Net Cash flow from Investing Activities (145.9) (133.1) (88.3) (84.4) (80.8)
- - - - - -
Inc / (Dec) in Equity Capital 0.8 - - - -
Inc / (Dec) in Loan Funds 58.1 15.5 2.6 35.0 33.0
Inc / (Dec) in Loan Funds 3.2 82.7 - 35.0 33.0
Net Cash flow from Financing Activities 82.3 50.8 (45.4) 2.0 (9.7)
- - - - - -
Net Cash flow 29.3 40.8 100.0 82.1 127.9
Cash and Cash Equivalent at the beginning 62.9 92.2 133.0 233.0 315.1
Closing Cash/ Cash Equivalent 92.2 133.0 233.0 315.1 443.0
Source: Company, ICICIdirect.com Research
Ratios
Exhibit 56: Ratio Analysis (Year-end March) FY13 FY14 FY15E FY16E FY17EPer Share DataEPS 64.3 65.4 85.5 105.4 128.6 Cash EPS 73.6 77.5 100.9 123.7 149.3 BV 316.4 365.5 435.8 524.8 635.8 Operating profit per share 105.0 112.1 146.6 185.7 224.7
Operating RatiosEBITDA / Total Operating Income 16.9 17.9 19.8 20.2 20.5 PAT / Total Operating Income 10.4 10.5 11.5 11.5 11.7
Return RatiosRoE 20.3 17.9 19.6 20.1 20.2 RoCE 18.1 15.9 18.5 19.8 20.3 RoIC 22.0 19.3 23.2 25.5 27.4
Valuation RatiosEV / EBITDA 28.5 27.1 20.4 16.0 13.1 P/E 44.7 43.9 33.6 27.3 22.4 EV / Net Sales 4.8 4.9 4.0 3.3 2.7 Sales / Equity 2.0 1.7 1.7 1.7 1.7 Market Cap / Sales 4.6 4.6 3.9 3.1 2.6 Price to Book Value 9.1 7.9 6.6 5.5 4.5
Turnover RatiosAsset turnover 1.3 1.0 1.1 1.2 1.2 Debtors Turnover Ratio 7.2 6.1 6.8 6.8 6.8
Creditors Turnover Ratio 10.3 6.7 6.6 6.6 6.6
Solvency RatiosDebt / Equity 0.6 0.7 0.6 0.5 0.5 Current Ratio 4.8 4.1 3.9 4.0 4.2 Quick Ratio 3.8 3.3 3.2 3.2 3.5
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 31
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;
Pankaj Pandey Head – Research [email protected]
ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093
ICICI Securities Ltd | Retail Equity Research Page 32
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