The show has just begun
We recently hosted the management of Solar Industries (SOIL) for an interaction with investors. Key points: 1) Defence and exports & overseas segments could shepherd growth over the next five years; 2) EBITDA margin may sustain at ~27% over the next few years; 3) capex intensity could significantly rise in next five years; 4) favourable macro environment in ammunitions may be a significant tailwind; and 5) focus on indigenisation remains intact. We believe the recent stock price correction provides a good entry point in SOIL. Going forward, growth is likely to be driven by high-margin segments, and SOIL could go further up in value chain to platforms from materials. Retain BUY with an unchanged TP of INR 13,720 on 60x FY27E EPS.
The landscape has widened
In our view, it is a wrong notion that Pinaka is the ultimate glory for SOIL. The company has recently executed MoU with the Government of Maharashtra for setting up an Anchor Mega Defence & Aerospace project in Nagpur at an investment of INR 127bn. We believe the revenue potential of such a project could be INR 250bn p.a., placing SOIL as one of the top players in defence ecosystem in India. Furthermore, the company is moving up the defence value chain from materials to platforms, integrating its capabilities developed over the years. We believe this will open significant export opportunities for the company, besides enhancing its presence in domestic defence ecosystem. Additionally, the reliance on ToT from DRDO and strong track record of inhouse R&D have resulted in SOIL developing products with a significantly higher level of indigenised content.
Next five years are likely to be busy
Recently, the company has changed the name of its fully owned subsidiary engaged in defence business from ‘Economic Explosives Limited’ to ‘Solar Defence and Aerospace Limited’ showing its sharpened focus on defence and aerospace. In our view, the capex over the next five years is likely to be INR 130-150bn in both defence and non-defence (exports & overseas) domains. This may be funded mainly through internal accruals. Besides, the company is expected to be in net cash position by end-FY25, hence, there is sufficient headroom in its balance sheet to take incremental debt.
Outlook: Shifting gears
Rather than estimating the margin of SOIL based on explosives and ammonium nitrate spread, it is prudent to value the company based on future growth verticals- defence and aerospace. Based on its current orderbook, initiatives being taken by the company and potential in the ecosystem, we reckon, defence revenue could grow over 4x from FY25 level over the next five years. Also, SOIL has plans to make the value chain robust by backward integration, forward integration and developing new products in nondefence domain. As per our analysis, EBITDA CAGR (FY22-FY27E) is likely to be 33% and margins are expected to hover above 27% as the proportion of defence and exports & overseas increases. Also, we see a long runway for 25% plus growth in EBITDA as the benefits of capex fructify in future. Maintain BUY on SOIL with an unchanged TP of INR 13,720 on 60x FY27E EPS.
Solar Industries ICICI Securities
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