India Equity Institutional Research I Explosives

Result Update

Solar Industries India Ltd

Sailing smooth

Rs 730
BUY
Target Price (Rs): 976 Potential Upside : 34% Previous TP (Rs): 949 Market Data Shares outs (Cr) Equity Cap (Rs. Cr) Mkt Cap (Rs. Cr) 52 Wk H/L (Rs) Avg Vol (1yr avg) Face Value (Rs) Bloomberg Code Aug 2nd, 2011 1.73 17.32 1264 797/395 2164 10 SOIL IN

Core business has registered impressive sales growth: Solar has clocked Net Sales of Rs 242cr during Q1FY12 which is up 51% Y-o-Y and 20% Q-o-Q. Explosives sales has gone up by 49% Y-o-Y (Rs 207cr vs Rs 139cr) while trading income has gone up by 57% Y-o-Y( Rs 34.5 cr vs Rs 22cr). Explosives sales in rupee terms has grown 52% Y-o-Y while accessories sales has gone up by 35% on back of volume growth of 34% and 11% respectively. Remaining growth has been contributed by growth in realization. High raw material cost led to contraction in operating margin: Operating Profit in Q1FY12 stands at Rs 39.33 cr which is up 32% Y-o-Y but operating margin has gone down by 246 bps (16.09% vs 18.55%). Adjusting for trading income Q1FY12 saw raw material cost at 60% of sales compared to 47% in Q1FY11. Key reason for high raw material cost is change in sales mix during the quarter in favour of Bulk explosives. Bulk explosives volume has gone up by 56% Yo-Y. Ammonium Nitrate comprises of 70-75% of total raw material cost for bulk explosives compared to 60-65% for cartridge explosives. Ammonium Nitrate Price has gone up by 30% Yo-Y (USD 390/Ton vs USD 300/Ton) .Pass through of the hike in raw material takes place with the lag of a quarter . Combined impact of all these factors led to contraction in operating margin by 246 bps Y-o-Y. Net margin is reflecting the trend in operating margin: Net profit for Q1FY12 is up 39% Y-oY (Rs 26.64cr vs Rs 18.02cr) but net margin is down by 30 bps (10.89% vs 11.19%) in spite of 90% increase in other income. This is actually reflection of the Operating margin trend for the quarter. Other Developments: Solar gets Mega Project status for its capex at Nagpur: During the quarter Government of Maharashtra has granted Megaproject status to Solars capex at Nagpur. The status is granted in case an enterprise gives employment to additional 600 labourers. Mega Project status entitles company to several benefits which include 7 year exemption from Electricity Duty, 100% exemption from Stamp duty, Industrial Promotion Subsidy equivalent to 100% of investment and deferment of sales tax on incremental sales. The company expects to get benefit of Rs 10 cr at PBT level due to this development in FY12E. Nigeria plant will start production from Q2FY12: Nigeria plant of the company has successfully completed its trial run and is expected to start production from this quarter. Construction work at Turkey Plant is underway. Production from Turkey Plant will start by end of FY12/beginning of FY13E. Bhatgaon Coal Block will start production from FY14E: Solar Industries has got stake in two coal mines in Madanpur and Bhatgaon, both in Chhatisgarh. Madanpur Coal Block is still a No Go area while for Bhatgaon Coal Block Public hearing is complete and Rehabilitation & resettlement has been accepted. The company has submitted revised mine closure plan and final clearance from MOFE is awaited. Company will start acquiring land after receiving approval .Development work is expected to start from H2 FY13E and commercial production will start from FY14E. View: New capacity in Africa and Turkey will lead to higher export in turn lead to margin enhancement. As spending on infrastructure creation is irreversible process, we view Solar Industries business more as utility than commodity and expect smooth earnings growth going ahead. Value unlocking from coal block can lead to significant upside to proposed price of the stock. Recommendation: We have used SOTP method to value Solar Industries where we are valuing Core business at 13xFY12e EPS and Coal blocks on NPV basis. Core Business (1) Coal Block (2) Total Value(1+2) 13x 57 180.23+54.70 741 234.93 976

Market Info:
SENSEX NIFTY 18,109 5,456

Market data as on 2nd Aug, 2011

Price Performance
25000 20000 15000 10000 5000 0 800 600 400 200 0

Sep-10 Oct-10 Nov-10 Dec-10

Jan-11 Feb-11 Mar-11 Apr-11 May-11

Aug-10

SENSEX

Solar Ind

Share Holding pattern (%)

Particulars Promoters FII DIIs Public Total Jun-11 74.60 0.13 14.44 10.83 100.0 Mar 11 74.60 0.36 14.87 10.17 100.0 (0.23) (0.43) 0.66 Chg

Analyst : Shailesh Kumar Shailesh.kumar@krchoksey.com 91-22-6696 5555, Ext-422

www.krchoksey.com 91-22-6696 5555

91-22-6691 9569

Our 12month price target for Solar Industries comes out to be Rs 976, which gives upside potential of 34%. FY13 top line and bottom line has been revised upwards due to better earnings from overseas.
KRChoksey Research is also available on Bloomberg KRCS<GO>, ThomsonReuters, Factset and Capital IQ

Jun-11 Jul-11

Solar Industries India Ltd

Key Financials Particulars Net Sales EBITDA PAT EPS PE OPM(%) NPM(%) 17.9 12.1 19.8 10.8 20.8 11.3 20.2 12.0 20.8 11.3 FY11 679.5 121.9 82.1 43.2 FY12E Previous 876.5 173.4 94.9 54.8 Revised 876.5 181.9 99.1 57.3 FY13E Previous 1053.0 212.5 126.0 65.3 Revised 1156.4 240.9 130.6 75.5 Remarks

Rs Cr

Higher overseas income will improve topline in FY13E. Sales Tax deferrment is bolstering EBITDA

Y-o-Y top line grew by 51% mainly due to 34% growth in volume.

Operating margin has contracted Y-o-Y by 246 bps due to 56% jump in sale of bulk explosives. Bulk explosives consume higher amount of ammonium nitrate.

Net margin is reflecting the trend in operating margin.

Source: Company Data, KRChoksey Research

KRChoksey Institutional Research

Solar Industries India Ltd

12% revenue in Q1FY12 is coming from overseas compared to nil in Q1FY11.

Source: Company, KRChoksey Research

Bulk explosive comprises 33% of topline inQ1FY12 compared to 25% in Q1FY11.

Source: Company, KRChoksey Research

Steep rise in price of Ammonium Nitrate is a key reason behind margin contraction. Hike is passed on the consumer with a lag of one quarter.

Source: company, KRChoksey Resear

KRChoksey Institutional Research

Solar Industries India Ltd

Q1FY12 Result (Rs Crore) Key Financials

Particulars(RsCr) Grosssales ExciseDuty NetSales Otheroperatingincome TotalIncome (Increase)/DecreaseinStock

% of sales

Q1FY12 257.98 15.56 242.42 2.03 244.45 9.92 4.06 160.94 65.84 10.2 4.17 43.9 17.96 205.12 83.91 39.33 16.09 2.85 1.17 36.48 14.92 6.38 2.61 42.86 17.53 3.65 1.49 39.21 16.04 12.57 32.06 26.64 1.59 25.05 10.25 1.73 14.48

Q4FY11 215.71 13.75 201.96 0.15 202.11 5.45 2.70 108.2 53.54 8.88 4.39 40.28 19.93 162.81 80.56 39.3 19.44 2.06 1.02 37.24 18.43 9 4.45 46.24 22.88 6.58 3.26 39.66 19.62 13.99 35.27 25.67 5.48 20.19 9.99 1.73 11.67

Q1FY11 172.1 11.2 160.9 0.1 161.01 1.9 1.19 90.0 55.90 6.6 4.11 32.6 20.24 131.14 81.4 29.87 18.55 2.0 1.25 27.86 17.30 3.4 2.0 31.22 19.39 3.0 1.86 28.23 17.53 10.2 36.17 18.02 0 18.02 11.19 1.7 10.42

QoQ(%) 19.6 13.2 20.0 1253.3 20.9 282.0 48.7 14.9 9.0 26.0 0.1 38.3 2.0 29.1 7.3 44.5 1.1 10.2 3.8 24.1 0.0 24.1

yoy(%) 49.9 38.9 50.7 1745.5 51.8 616.7 78.8 54.1 34.7 56.4 31.7

Rawmaterial&Tradedgoods
% of sales

Employeecost
% of sales

Otherexpenditure
% of sales

Totalexpenditure
% of sales

EBITDA EBITDA(%) Depreciation

% of sales

41.8 30.9 89.9 37.3 22.1 38.9 23.1 47.8 39.0 0.0 39.0

EBITbeforeotherincome
% of sales

OtherIncome
% of sales

EBIT
% of sales

Interest&Financecharges
% of sales

PBT
% of sales

Taxexpenses
% of PBT

PAT Minorityinterestinsubsidiary PAT NPM(%) No.ofEquityshares(Cr) EPS

KRChoksey Institutional Research

Solar Industries India Ltd Projected P&L Account : Particulars( Rs Cr) Gross sales Excise Duty Net Sales Other operating income Total Income (Increase)/Decrease in Stock Raw material & Traded goods Employee cost Other expenditure Total expenditure EBITDA Depreciation EBIT before other income Other Income EBIT Interest & Finance charges PBT Tax expenses PAT Minority interest in subsidiary PAT No. of Equity shares( Cr) EPS Projected Balance Sheet: Particulars( Rs Cr) Capital Reserves & Surplus Net Worth Loan Funds Minority Interest Deferred Tax Liability(Net) Total Liabilities Gross Fixed assets Depreciation Net Fixed assets CWIP Goodwill Investments Current assets Inventories Sundry Debtors Cash & BB Loans & Advances Current Liabilities& Provisions Current Liabilities Provisions Net Current assets Miss Exp Not w/off Total Assets 5 FY10 17.32 247.92 265.24 107.74 0 14.2 387.18 151.33 36.57 114.76 20.84 0 10.45 390.14 37.95 89.77 93.98 168.44 153.04 123.93 29.11 237.1 4.04 387.18 FY11 17.32 298.72 316.04 161.68 27.45 16.92 522.09 241.05 45.06 195.99 25.83 3.27 12.26 418.12 59.21 96.86 67.02 195.03 138.93 107.22 31.71 279.19 5.55 522.09 FY12E 17.32 377.6 394.92 185 36.45 16.92 633.29 340 60.31 279.69 21.76 3.27 15.03 489.31 94.6 128 61.71 205 177 145 32 312.31 1.23 633.29 FY13E 17.32 483.91 501.23 167 53.45 16.92 738.6 400 77.81 322.19 18.96 3.27 16.32 566.51 105 155 94.51 212 191 152 39 375.51 2.35 738.6 FY10 590.19 32.77 557.42 0 557.42 1.12 326.64 21.81 121.82 471.39 86.03 7.85 78.18 25.97 104.15 13.36 90.79 32.2 58.59 0 58.59 1.73 33.87 FY11 722.9 43.4 679.45 0.42 679.87 -5.0 390.0 31.3 141.7 557.99 121.88 8.49 113.39 26.58 139.97 12.75 127.22 45.08 82.14 -7.35 74.79 1.73 43.23 FY12E 952.7 76.22 876.48 0 876.48 0 507 38.5 149 694.5 181.98 15.25 166.73 18 184.73 16.5 168.23 60.13 108.1 -9 99.1 1.73 57.28 FY13E 1257 100.6 1156.4 0 1156.4 0 670.48 48.5 196.52 915.5 240.9 17.5 223.4 23 246.4 18 228.4 80.85 147.55 -17 130.55 1.73 75.46

KRChoksey Institutional Research

Solar Industries India Ltd

Rajiv Choksey Anuj Choksey Naveen Fernandes Kunal Dalal

Director Head-Institutional Equities Head-Institutional Broking HeadInstitutional Research

rajiv.choksey@krchoksey.com anuj.choksey@krchoksey.com naveen.fernandes@krchoksey.com kunal.dalal@krchoksey.com

+91-22-6696 5555 +91-22-6696 5500 +91-22-6696 5554 +91-22-6696 5574

Solar Industries India Ltd Date 2-Aug-2011 3-Jun-2011 13-May-2011 12-Nov-2010 2-Sep-2010 Disclaimer: CMP 730 628 595 595 455 Target 976 949 925 782 632 Recommendation BUY BUY BUY BUY BUY Reduce Sell Our Rating Buy Hold

Rating Legend Upside More than 15% 5% - 15% 0 5% Less than 0%

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KRChoksey Institutional Research