Solar Explosives

SOLAR EXPLOSIVES (SEL), the Nagpur-based industrial explosives manufacturer, recently secured a threeyear contract from Coal India starting December 1, ’08. The peculiar features of this new contract are beneficial to SEL’s growth, which derives over half of its annual turnover from Coal India.

For the first time, Coal India has awarded a contract with a price variation clause, under which, the prices of explosives will be revised quarterly, based on changes in important raw material prices such as ammonium nitrate and diesel, which will help SEL safeguard its operating margins. Moreover, the three-year duration of the contract ensures an assured revenue stream for the company, compared to the earlier uncertainties related to the annual tendering process. With this contract, SEL will cater to nearly 18% of Coal India’s explosives requirements annually, which is higher than around 12% earlier.

BUSINESS:

SEL is India’s largest explosives manufacturer with over 20% market share. Its current capacity stands at 80,000 tonnes of cartridge explosives, 94,450 tonnes of bulk explosives and 140 million detonators. The company has set up 12 plants at strategic locations across the country to cater to the needs of coal miners.

SEL has invested in two coal mining projects in Chhattisgarh through forward integration. It picked up 74% stake in Navbharat Coalfields which has coal reserves of 36 million tonnes (mt), and 24% in a joint venture (JV) with Chhattisgarh Mineral Development Corporation (CMDC), which has 80 mt of coal reserves.

The company has set up a JV in Nigeria for its explosives plant, which will commence operations by March ’09. It will also set up another plant in Africa in the first half of ’09 through the JV route. The company had raised sufficient cash through its initial public offer (IPO) in ’06 for both these plants. In the September ’08 quarter, SEL started trading in ammonium nitrate due to lack of domestic availability. It imports ammonium nitrate in bulk and supplies to smaller explosives manufacturers after meeting its requirements. However, the low margin nature of its trading activity has put additional pressure on margins.

GROWTH PLANS:

SEL is making efforts to increase its exports business, which earns better margins. The company exported products worth nearly Rs 40 crore in H1 FY09, against Rs 24 crore in entire FY08. The rising proportion of exports in its total revenue is likely to boost the company’s margins, going forward. The production of explosives from SEL’s Nigerian plant will begin by March ’09. Since Nigeria currently imports industrial explosives at high cost, this venture will be able to earn a better margin. Coal production from Navbharat Coalfields is expected from September ’09, which will be sold in the open market, while the JV with CMDC will commence operations in ’11.

FINANCIALS:

SEL has witnessed a compound annual growth 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 rose at a higher pace of 64.2% to Rs 36 crore during the same period. Besides trading activities, high raw material costs also put pressure on SEL’s operating margins in the September ’08 quarter due to the fixed price contract with Coal India.

VALUATIONS:

The company is currently trading at P/E multiple of 11.8 based on its consolidated PAT for the 12-month period ended September ’08. SEL has outperformed the broader market during the economic turmoil over the past one year. The scrip has lost only 38% of its value over the past one year, against a 53% decline in the Sensex.