Views are invited on Solar Industries India Ltd. [BSE 532725; NSE- SOLARINDS], a Rs. 1247 cr. marketcap company and a leader in its operational segment. HDFC AMC holds almost 9 % stake in the company with the total institutional holding in the company at 15.37 % with promoters holding 74.60 % (with nil pledge). A CAGR of 79.22 % in topline and 94.5 % in EBITDA over last 8 years even on such higher scale of Rs. 722 cr. is what makes this company worth looking at while a 30 % growth guidance each year till FY14 from the management makes the company hard to ignore for long term investment... Link to Latest Annual Report (2011) is attached for reference .....
Views are invited from fellow members with an aim to understand the company better.
Link to pdf file of this research note -- http://www.scribd.com/doc/61919023
Link to Annual Report (2011) -- http://www.scribd.com/doc/61918834
---------------------------------
Why Solar Industries deserves to be a part of one's core portfolio :
(1) When we analyse any company for its prospect to be a part of our core portfolio, we normally do an assessment of three factors, viz.,
Past ( track-record ),
Present ( growth ),
Future ( Visibility ).
It is very rare that any company scores well (and not only well but infact very well) in all the three aspects and in addition also has :
a reasonably good quality clean management with
high promoter holding ( 74.60 % with nil pledge ) as also
high institutional holding ( 15.37 % ),
is a leader in its Operational Segment and
has always operated at an EBITDA margin of 17 % + in its entire history,
has a RoE of 24.35 % and a RoCE of 25.56 % ,
has given an annual growth guidance of 30 % each year over coming 3 years and
is still available at resonable valuations of just 11.9 FY12e price-to-earning (p/e) multiple and 1.3 times market-cap-to-sales ratio.
(2) Solar Industries India Ltd. ( BSE- 532725 ; NSE SOLARINDS ) is one such company and straightaway we will start with its assessment without discussing further.
(3) CAGR of 79.22 % in Topline over the span of last 8 years is what is achieved by Solar Industries. If we look at just last five financial years, still, it has grown at a CAGR of 40.83 % and that too on a larger scale.
(4) The most significant point to note here is that the CAGR of 40.83 % in topline over last 5 years has been achieved with a corresponding 26 % CAGR in actual volumes of products of the company which is a very healthy sign and signifies expanding marketplace as also increasing market-share of Solar in the segment.
(5) EBITDA has grown at a CAGR of 94.65 % over the span of last 8 fiscal years while if we take into account last 5 fiscal years, EBITDA has grown at a CAGR of 55.82 %.
(5) PAT has grown at a CAGR of 94.99 % over the span of last 8 years and the same has grown at a CAGR of 58.69 % over the span of last 5 years.
(6) Quality of financials is healthy which is evident from the highest tax paid by the company in the industry ( at the rate of 35.5 % at PBT level and 30.36 % at EBITDA level ).
(7) Effective Management of such healthy growth is evident from the gradual reduction of interest payment as % to EBITDA which has come down to 8.56 % (FY11), consistent high RoE and RoCE over last 4 years which stands at 24.35 % and 25.56 % (FY11) respectively as also reasonable balancing of growth and shareholder payback by ploughing back higher amount of cash generated in the initial years and gradual reduction in ploughed back money with simultaneous increase in Dividend payment over last two years. This also depicts the justice done with minority shareholders which is otherwise rare in a high promoter holding (74.6 %) company as promoters could have enjoyed the high dividend payment by sacrificing growth which is not done by the management of Solar as a result of which the company today is on verge of an expoenential growth phase even on such higher scale.
(8) The growth has also continued in Q1FY12 with a 49.9 % YoY rise in topline, 31.7 % YoY growth in EBITDA and 39 % YoY growth in PAT.
(9) The management has consistently achieved growth with a conservative approach towards leverage which is evident from the reasonably healthy cash levels company maintains throughout the business cycle as also 50 % under-utilisation of bank limits granted to the company because of which its instruments command a healthy rating of P1+ and AA- from CRISIL.
(10) Companty has a planned CAPEX of Rs. 200 cr. over next two years including the current year which management is confident of financing purely with internal accruals without much increase in debt as also without any significant equity dilution.
(11) With the planned CAPEX, management is confident of achieveing 30 % annual growth in topline with improving EBITDA margins each year over next three years including FY12.
(12) Now, let's assess Solar Industries' operational segment, its positioning in its operational segment as also future plans based on which management is confident of 30 % growth each year over coming 3 years.....Solar Industries operates in Explosives Industry which is dominated (domestic) by Orica (MNC), Gulf Oil, Indian Explosives and IBP in addition to Solar.
(13) Solar Industries dominates the market at No.1 position with an approximate overall share of 22 % in domestic market. If we look more deeply into the sub-segments of main operational segment, then, Solar is No.1 in Cartridge Explosives, Detonating Fuse and Cast Booster and No.2 in Bulk Explosives and Detonators.
(14) Company has always remained ahead of its peers by proactive and efficient strategy execution like backward integration into raw material manufacture (except AN) and bulk purchase and trading of main raw material AN (Ammonium Nitrate) which has given it a high operational efficiency and highest EBITDA margins in the industry (only Orica which is MNC player in India enjoys such high EBITDA margins).
(15) The operational segment enjoys high entry barriers like industrial license requirement, clearance requirement from Home Ministry and IB, etc. because of which there is least chance of much competition emerging in the segment. As far as growth and expansion of the market segment goes, it has a very bright prospect as each of the commodity like Cement, Steel as also Power indirectly require explosives. To elaborate, 1 MnT Cement requires 1.45 MnT Limestone while 1 MnT Limestone requires 166 MT Explosives; similarly, 1 MnT Steel requires 1.70 MnT Iron Ore while 1 MnT Iron Ore requires 200 MT Explosives; to add, Per Unit Thermal Power requires 0.74 Kgs Coal while 1.00 MnT Coal requires 1080 MT of Explosives. Hence, since domestic demand for Steel, Cement, Power and Coal is not expected to slowdown significantly in foreseeable future, demand for Explosives is set to show a growing trend in near future and exponential growth thereafter.
(16) Coal sector is atpresent the largest consumer of Explosives domestically with 70 % of that consumed by Coal India. Solar Industries is the largest supplier of explosives to Coal India and already 2011-12 tender of Coal India is through in which Solar has garnered a 8-10 % growth over last year. The contract is immune to price fluctuations in raw material with a quarterly cost-escalation clause.
(17) Derisked business model as well as proactive management quality is evident from the fact that Coal India which contrbuted more than 40 % to Solar Industries' revenue 5 years before is today, as of FY11, contributing only 24.79 %.
(18) The most significant point to take note of in the business strategy of Solar over last two years is its expansion into global marketplace and its robust growth there. Exports, which were insignificant before 3 years are today, as of FY11, contributing 13.53 %.
(19) The growth in exports is likely to strengthen considerably in FY12 and FY13 as the current exports are on back of only one plant of the company being operational in Zambia (capacity 10000 MT). Already in Q1FY12, another plant in Nigeria with similar capacity has become operational and is undergoing stabilisation and is expected to start production in Q2FY12. Construction on third plant at Turkey has commenced in the month of April 2011 and this plant in expected to start production in Q4FY12.
(20) FY13 will be the blockbuster year as far as exports of the company are concerned and coming 3 years are expected to see an exponential jump in exports of Solar.
(21) On the domestic front, company is planning to almost double the present capacity of each of its existing product in coming two years to cater to the rising demand of mining and infrastructure sectors.
(22) Solar Industries also possesses a kind of Hidden Treasure in the form of its interest in two Coal Blocks, one located at Madanpur and another located at Bhatgaon. Madanpur Coal Block in which company has a 20 % interest is classified as 'No-Go' area and a new application is made with MOFE for clearance of the same. As far as Bhatgaon Coal Block is concerned in which company has a 24.5 % share, all the formalities including Public Hearing is complete and Rehabilitation & Resettlement has been accepted. The company has already submitted revised mine closure plan and final clearance from MOFE is expected shortly after which land acquisition and development work will commence. The production from Bhatgaon block is expected to commence from FY14.
(23) In our valuation matrix we have not incorporated any upside arising out of any of the Coal Blocks that company has interest in and have only valued upsides from the core business of the company.
(24) In another significant development which is expected to boost already high profits margins of Solar further going forward, in Q1FY12, companty has got 'Mega Project' status from the Government for its CAPEX at Nagpur. This status will entitle it to many tax benefits and management conservatively expects this development to add ~Rs. 10 cr. at PBT level in FY12 itself.
At current market price of Rs. 721, Solar Industries is available at a P/E of just 11.9 its FY12e earnings and at a mcap-to-sales of just 1.3 FY12e sales and at a P/E of just 9.6 and a mcap-to-sales of just 0.9 on FY13e numbers. A company with :
a RoE of 24.35 % ,
which has consistently demonstrated high growth rates with healthy EBITDA margins over last many years,
has just started scratching off huge international market by setting up manufacturing plants overseas without burdening balance sheet or any form of equity dilution,
has also forward integrated by investment into coal blocks and,
is also having a high promoter as well as institutional holding (combined comes to 89.97 %) and a low floating stock,
should actually command a scarcity premium and the whiff of the smallest positive trigger could start-off a rerating process for this company.
Past Financials of Solar Industries
( alongwith key expenses as % of sales/ebitda/pat to assess earnings quality as also Last 5 Years RoE & RoCE to assess management quality )
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
(Fig. in ` cr.)
Revenue
722.85
590.19
530.37
321.04
237.65
169.46
135.29
98.51
EBITDA
148.47
111.99
95.73
71.01
39.16
36.7
24.27
17.32
PAT
75.59
58.59
44.13
36.11
19.21
22.16
14.99
8.79
Dividend Declared
80 %
70 %
45 %
30 %
15 %
15 %
NA
NA
Div.Payout Ratio as % of PAT
18.31 %
20.68 %
17.65 %
14.34 %
13.48 %
11.68 %
NA
NA
Taxes Paid
(% of EBITDA)
45.09
(30.36 %)
32.19
(28.74 %)
21.89
(22.86 %)
18.81
(26.48 %)
8.66
(22.11 %)
8.02
(21.85 %)
4.01
(16.52 %)
NA
Interest Paid
(% of EBITDA)
12.75
(8.58 %)
13.35
(11.92 %)
23.48
(24.52 %)
10.55
(14.85 %)
7.16
(18.28 %)
3.3
(8.99 %)
2.38
(9.8 %)
NA
RoNW
(RoE)
24.35 %
22.43 %
20.24 %
19.61 %
11.75 %
NA
NA
NA
RoCE
25.56 %
24.36 %
22.14 %
21.68 %
13.19 %
NA
NA
NA
Views are invited from fellow members with an aim to understand the company better.
Link to pdf file of this research note -- http://www.scribd.com/doc/61919023
Link to Annual Report (2011) -- http://www.scribd.com/doc/61918834
---------------------------------
Why Solar Industries deserves to be a part of one's core portfolio :
(1) When we analyse any company for its prospect to be a part of our core portfolio, we normally do an assessment of three factors, viz.,
Past ( track-record ),
Present ( growth ),
Future ( Visibility ).
It is very rare that any company scores well (and not only well but infact very well) in all the three aspects and in addition also has :
a reasonably good quality clean management with
high promoter holding ( 74.60 % with nil pledge ) as also
high institutional holding ( 15.37 % ),
is a leader in its Operational Segment and
has always operated at an EBITDA margin of 17 % + in its entire history,
has a RoE of 24.35 % and a RoCE of 25.56 % ,
has given an annual growth guidance of 30 % each year over coming 3 years and
is still available at resonable valuations of just 11.9 FY12e price-to-earning (p/e) multiple and 1.3 times market-cap-to-sales ratio.
(2) Solar Industries India Ltd. ( BSE- 532725 ; NSE SOLARINDS ) is one such company and straightaway we will start with its assessment without discussing further.
(3) CAGR of 79.22 % in Topline over the span of last 8 years is what is achieved by Solar Industries. If we look at just last five financial years, still, it has grown at a CAGR of 40.83 % and that too on a larger scale.
(4) The most significant point to note here is that the CAGR of 40.83 % in topline over last 5 years has been achieved with a corresponding 26 % CAGR in actual volumes of products of the company which is a very healthy sign and signifies expanding marketplace as also increasing market-share of Solar in the segment.
(5) EBITDA has grown at a CAGR of 94.65 % over the span of last 8 fiscal years while if we take into account last 5 fiscal years, EBITDA has grown at a CAGR of 55.82 %.
(5) PAT has grown at a CAGR of 94.99 % over the span of last 8 years and the same has grown at a CAGR of 58.69 % over the span of last 5 years.
(6) Quality of financials is healthy which is evident from the highest tax paid by the company in the industry ( at the rate of 35.5 % at PBT level and 30.36 % at EBITDA level ).
(7) Effective Management of such healthy growth is evident from the gradual reduction of interest payment as % to EBITDA which has come down to 8.56 % (FY11), consistent high RoE and RoCE over last 4 years which stands at 24.35 % and 25.56 % (FY11) respectively as also reasonable balancing of growth and shareholder payback by ploughing back higher amount of cash generated in the initial years and gradual reduction in ploughed back money with simultaneous increase in Dividend payment over last two years. This also depicts the justice done with minority shareholders which is otherwise rare in a high promoter holding (74.6 %) company as promoters could have enjoyed the high dividend payment by sacrificing growth which is not done by the management of Solar as a result of which the company today is on verge of an expoenential growth phase even on such higher scale.
(8) The growth has also continued in Q1FY12 with a 49.9 % YoY rise in topline, 31.7 % YoY growth in EBITDA and 39 % YoY growth in PAT.
(9) The management has consistently achieved growth with a conservative approach towards leverage which is evident from the reasonably healthy cash levels company maintains throughout the business cycle as also 50 % under-utilisation of bank limits granted to the company because of which its instruments command a healthy rating of P1+ and AA- from CRISIL.
(10) Companty has a planned CAPEX of Rs. 200 cr. over next two years including the current year which management is confident of financing purely with internal accruals without much increase in debt as also without any significant equity dilution.
(11) With the planned CAPEX, management is confident of achieveing 30 % annual growth in topline with improving EBITDA margins each year over next three years including FY12.
(12) Now, let's assess Solar Industries' operational segment, its positioning in its operational segment as also future plans based on which management is confident of 30 % growth each year over coming 3 years.....Solar Industries operates in Explosives Industry which is dominated (domestic) by Orica (MNC), Gulf Oil, Indian Explosives and IBP in addition to Solar.
(13) Solar Industries dominates the market at No.1 position with an approximate overall share of 22 % in domestic market. If we look more deeply into the sub-segments of main operational segment, then, Solar is No.1 in Cartridge Explosives, Detonating Fuse and Cast Booster and No.2 in Bulk Explosives and Detonators.
(14) Company has always remained ahead of its peers by proactive and efficient strategy execution like backward integration into raw material manufacture (except AN) and bulk purchase and trading of main raw material AN (Ammonium Nitrate) which has given it a high operational efficiency and highest EBITDA margins in the industry (only Orica which is MNC player in India enjoys such high EBITDA margins).
(15) The operational segment enjoys high entry barriers like industrial license requirement, clearance requirement from Home Ministry and IB, etc. because of which there is least chance of much competition emerging in the segment. As far as growth and expansion of the market segment goes, it has a very bright prospect as each of the commodity like Cement, Steel as also Power indirectly require explosives. To elaborate, 1 MnT Cement requires 1.45 MnT Limestone while 1 MnT Limestone requires 166 MT Explosives; similarly, 1 MnT Steel requires 1.70 MnT Iron Ore while 1 MnT Iron Ore requires 200 MT Explosives; to add, Per Unit Thermal Power requires 0.74 Kgs Coal while 1.00 MnT Coal requires 1080 MT of Explosives. Hence, since domestic demand for Steel, Cement, Power and Coal is not expected to slowdown significantly in foreseeable future, demand for Explosives is set to show a growing trend in near future and exponential growth thereafter.
(16) Coal sector is atpresent the largest consumer of Explosives domestically with 70 % of that consumed by Coal India. Solar Industries is the largest supplier of explosives to Coal India and already 2011-12 tender of Coal India is through in which Solar has garnered a 8-10 % growth over last year. The contract is immune to price fluctuations in raw material with a quarterly cost-escalation clause.
(17) Derisked business model as well as proactive management quality is evident from the fact that Coal India which contrbuted more than 40 % to Solar Industries' revenue 5 years before is today, as of FY11, contributing only 24.79 %.
(18) The most significant point to take note of in the business strategy of Solar over last two years is its expansion into global marketplace and its robust growth there. Exports, which were insignificant before 3 years are today, as of FY11, contributing 13.53 %.
(19) The growth in exports is likely to strengthen considerably in FY12 and FY13 as the current exports are on back of only one plant of the company being operational in Zambia (capacity 10000 MT). Already in Q1FY12, another plant in Nigeria with similar capacity has become operational and is undergoing stabilisation and is expected to start production in Q2FY12. Construction on third plant at Turkey has commenced in the month of April 2011 and this plant in expected to start production in Q4FY12.
(20) FY13 will be the blockbuster year as far as exports of the company are concerned and coming 3 years are expected to see an exponential jump in exports of Solar.
(21) On the domestic front, company is planning to almost double the present capacity of each of its existing product in coming two years to cater to the rising demand of mining and infrastructure sectors.
(22) Solar Industries also possesses a kind of Hidden Treasure in the form of its interest in two Coal Blocks, one located at Madanpur and another located at Bhatgaon. Madanpur Coal Block in which company has a 20 % interest is classified as 'No-Go' area and a new application is made with MOFE for clearance of the same. As far as Bhatgaon Coal Block is concerned in which company has a 24.5 % share, all the formalities including Public Hearing is complete and Rehabilitation & Resettlement has been accepted. The company has already submitted revised mine closure plan and final clearance from MOFE is expected shortly after which land acquisition and development work will commence. The production from Bhatgaon block is expected to commence from FY14.
(23) In our valuation matrix we have not incorporated any upside arising out of any of the Coal Blocks that company has interest in and have only valued upsides from the core business of the company.
(24) In another significant development which is expected to boost already high profits margins of Solar further going forward, in Q1FY12, companty has got 'Mega Project' status from the Government for its CAPEX at Nagpur. This status will entitle it to many tax benefits and management conservatively expects this development to add ~Rs. 10 cr. at PBT level in FY12 itself.
At current market price of Rs. 721, Solar Industries is available at a P/E of just 11.9 its FY12e earnings and at a mcap-to-sales of just 1.3 FY12e sales and at a P/E of just 9.6 and a mcap-to-sales of just 0.9 on FY13e numbers. A company with :
a RoE of 24.35 % ,
which has consistently demonstrated high growth rates with healthy EBITDA margins over last many years,
has just started scratching off huge international market by setting up manufacturing plants overseas without burdening balance sheet or any form of equity dilution,
has also forward integrated by investment into coal blocks and,
is also having a high promoter as well as institutional holding (combined comes to 89.97 %) and a low floating stock,
should actually command a scarcity premium and the whiff of the smallest positive trigger could start-off a rerating process for this company.
Past Financials of Solar Industries
( alongwith key expenses as % of sales/ebitda/pat to assess earnings quality as also Last 5 Years RoE & RoCE to assess management quality )
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
(Fig. in ` cr.)
Revenue
722.85
590.19
530.37
321.04
237.65
169.46
135.29
98.51
EBITDA
148.47
111.99
95.73
71.01
39.16
36.7
24.27
17.32
PAT
75.59
58.59
44.13
36.11
19.21
22.16
14.99
8.79
Dividend Declared
80 %
70 %
45 %
30 %
15 %
15 %
NA
NA
Div.Payout Ratio as % of PAT
18.31 %
20.68 %
17.65 %
14.34 %
13.48 %
11.68 %
NA
NA
Taxes Paid
(% of EBITDA)
45.09
(30.36 %)
32.19
(28.74 %)
21.89
(22.86 %)
18.81
(26.48 %)
8.66
(22.11 %)
8.02
(21.85 %)
4.01
(16.52 %)
NA
Interest Paid
(% of EBITDA)
12.75
(8.58 %)
13.35
(11.92 %)
23.48
(24.52 %)
10.55
(14.85 %)
7.16
(18.28 %)
3.3
(8.99 %)
2.38
(9.8 %)
NA
RoNW
(RoE)
24.35 %
22.43 %
20.24 %
19.61 %
11.75 %
NA
NA
NA
RoCE
25.56 %
24.36 %
22.14 %
21.68 %
13.19 %
NA
NA
NA
