Hold Solar Industries, target price Rs 940: ICICI Securities

ICICI Securities has given a hold rating to Solar Industries with a reduced target price of Rs 940/share. The brokerage has reduced the FY21E and FY22E earnings of Solar Industries (SOIL) by 35 per cent and 19 per cent respectively.

Though the company management has reiterated its guidance for FY21E, the brokerage has exercised its discretion to moderate earnings. I-Sec expects FY21E EBITDA to decline 13 per cent YoY, due to disruptions in mining in India on account of Covid-19 outbreak, potential slow-down in road and infra development capex, which has been further impacted by the NBFC crisis and a possible slowdown/seizure in overseas mining and construction activity. The share price has moved down by -8.93 per cent from its previous close of Rs 966.30. The last traded stock price was Rs 880. Incorporated in 1995, Solar Industries is a midcap company with a market cap of Rs 8706.95 crore.

Investment Rationale

The brokerage earlier had factored in ‘Trade and Infra’ and ‘Exports and Overseas’ to constitute 24.3 per cent and 38.2 per cent respectively of consolidated FY21E topline. Most of the risks are expected to emanate from these two segments and hence has reduced FY21E topline by 23 per cent and PAT by 35 per cent. The reduction in estimates takes the FY21E PAT estimate closer to FY17/FY18.

The brokerage sees the valuation multiple for the industrial explosive business at 23 times FY22E EPS with a corresponding value of Rs758/share (earlier: Rs987/share). The multiple ascribed to SOIL’s industrial explosive business is at a significant premium to what multiple global explosive manufacturers are drawing (e.g. Orica, Insitec and Chinese manufacturers).

Financials

Solar Industries India's key products/revenue egments include Explosives (Industrial) which contributed Rs 1610.23 crore to sales value (96.81 per cent of total sales) and Other Operating Revenue which contributed Rs 52.99 crore to sales value (3.18 per cent of total sales)for the year ending March 31, 2019.

For the quarter ended December 31, 2019, the company has reported consolidated sales of Rs 561.10 crore, up 10.77 per cent from last quarter sales of Rs 506.56 crore and down -14.08 per cent from last year same quarter sales of Rs 653.04 crore. The company has reported net profit after tax of Rs 65.05 crore in the latest quarter.