Solar Explosives (SEL) is a Nagpur-based manufacturer of industrial explosives, which are mainly used for mining and infrastructure projects. SEL, which is the market leader in India, is likely to benefit from growth in the country's mining sector and several new infrastructure projects. In light of SEL's expansion plans and forward integration into the coal mining business, long-term investors can consider this stock.
BUSINESS: Established in 1996 with a capacity of 6,000 tonnes cartridge explosives, SEL has become one of the leaders in the domestic explosives industry and a major exporter. Its current capacity stands at 80,000 tonnes cartridge explosives, 94,450 tonnes bulk explosives and 140 million detonators. SEL controls nearly 20% of India's explosives market, currently valued at $400 million. The company has successfully commissioned 12 bulk plants at various locations supported by one plant each for manufacturing cartridges, detonators and detonator components. It has a bulk explosives plant in the vicinity of every subsidiary company of Coal India, as well as in Singareni Collieries. The company has now started operations with Tata Steel in Jharkhand. Last year, SEL acquired 74% stake in Navbharat Coalfields, which owns a mining lease on a coal block in Chhattisgarh with reserves of 36 million tonnes (mt). Recently, it obtained permission to pick up 24% stake in a joint venture with Chhattisgarh Mineral Development Corporation (CMDC) for development, mining and marketing of coal with estimated reserves of 80 mt at Shankarpur in Chhattisgarh. The commercial operations at these mining projects are expected to start in FY10.
GROWTH DRIVERS: India's mining and infrastructure industries are growing rapidly and the pace of growth is not likely to slacken in the near future. To meet the power generation targets set in the 11th Five-Year Plan, India will need huge amounts of additional coal. This will increase the country's coal output to 684 mt per annum (mtpa) from around 450 mtpa currently. The Planning Commission estimates that 17,000 megawatts (mw) hydel power capacity will come up in the 11th Plan period, which will involve heavy excavation work, adding to the demand for explosives. During the same period, the domestic production of steel is expected to increase from around 55 mt currently to 80 mt. The same applies to most other metals and minerals. These initiatives will boost the demand for explosives, which is likely to grow at around 10% every year for the next 4-5 years. SEL has already expanded its capacities in India to cater to the growing domestic market and it also exports its products. It is now spending around Rs 23 crore to set up a bulk explosives plant in Nigeria to be commissioned by March '09, supported by another plant in Africa by June '09. These plants will cater to the African demand for explosives, which are currently imported at high prices. This will enable the company to earn higher margins.
FINANCIALS : SEL's sales have grown at a cumulative annual rate (CAGR) of 51.7% over the past five years to reach Rs 281 crore in FY08. Its PBDIT grew 61.2% to Rs 71 crore, while net profit expanded at an even higher pace of 64.2% to reach Rs 36 crore during the same period. The company's return on capital employed (RoCE) improved to 22% in the year ended March '08 after averaging around 16% in the past five years. SEL's current debt-equity ratio is comfortably placed at 0.6 with no long-term debt. Since SEL is in a growth phase, it is a low dividendpaying company. Although it has consistently paid dividends in the past five years, the dividend payout has remained below 15% of its net profit. Considering the dividend for FY08, SEL's dividend yield works out to around 0.7%.
VALUATIONS: At the current market price of Rs 409, the scrip trades at 18 times its profit for the past 12 months. Going forward, we expect the company to report a profit of Rs 50 crore in FY09 and Rs 72 crore in FY10. Thus, the current price is 14.2 times its estimated FY09 earnings and 9.8 times its estimated FY10 earnings. Among its competitors, Keltech Energies and Premier Explosives, which are smaller companies, are trading at P/E multiples of around 7.5 each. Gulf Oil, which is trading at a P/E of around 16.5, and has an explosives business comparable to that of SEL, derives over 65% of its turnover from lubricants and other businesses. Although SEL appears to be fairly valued at present, its leadership position, expansion plans and entry into coal mining justify the same. The company is likely to generate healthy returns for longterm investors.
