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Saturday, October 07, 2006
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Solar Explosives
| The explosive Industry is set for a boom and there will be demand from Private sector too! |
| The Explosives industry is important to extract minerals, break rock and make roads. The infrastructure of the developed world couldn't have built without the help of Explosives. In the 1860s, Alfred Nobel invented dynamite and the blasting cap required to make dynamite explodes and this saw the beginning of Industrial Revolution began. With the use of dynamite mines could be dug deeper and more quickly. Explosives are a vital part of every construction project and in the mining of every mineral i.e. coal, iron ore, copper, bauxite, or any other. In India, manufacture of Explosives started in the year 1958 by M/s. ICI (India) Limited, Gomia, Bihar (now Jharkhand). |
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| Solar explosive is the market leader with CIL deciding fortunes for now ! |
| The present market for industrial explosives including Accessories is estimated at Rs.1300cr comprising of Bulk Slurry emulsion of Rs.740 cr, Cartridge of Rs.260 cr and Accessories of Rs.300 cr. Indian Explosives Limited, Solar Group and Gulf Oil Corporation Limited are the major players. Currently, there are 63 Explosive manufacturers in the country. Of these 31 manufacturers are presently active in Cartridge Explosives, 24 companies manufacture Bulk Explosives, 10 companies manufacture Detonators and 18 companies manufacture Detonating Fuse. The industry?s combined capacity for Bulk Explosives and Cartridge Explosives is 14 lac ton, almost 878mn Detonators are manufactured p.a. and the total capacity for Detonating Fuse is 439mn meters. |
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| Best placed to capture the potential..however near term performance likely to be a dampener |
| The explosive industry is a licensed industry where you have to procure license for producing, transportation and can sell to sell only to those company having a license. The industry has major entry barriers as new players have to wait to get getting the license for the manufacture of explosives. Interesting thing to note is that liquid explosives cannot be transported over long distances and hence manufacturing has to be nearer to place of use. Also the specialised vehicles needed for transport restricts the capacity. Most of the production is in the December and the March quarter as construction and mining activity is restricted during the monsoon season. Shelf life is low at about 6 months so manufacturing also picks up post September only. Specialised knowledge on the kind of explosive and the right combination needed for kind of rocks gives Solar the exta edge. Demand for Explosives is also expected to come from the hydro electric projects which would require excavations and huge capacity addition in thermal power is expected to push the demand for coal even further. The government's plan to deblock 20bn ton coal reserves for the private sector is the big trigger. With the increasing mining activity and infrastructure plans for roads the Explosives industry is set for better times. Solar recently raised Rs 76 cr in its IPO in March this year at a price of Rs 190 per share. The IPO was was to raise money for setting up 13 support and transfer plants, mostly in eastern parts of the country, as part of its expansion plan. These include 4 new manufacturing units at Himachal Pradesh and Jharkhand.The proposed new plants near the coal mining sites would fill this gap in the growing demand for the explosives. The company is in the process of setting up a factory in Nigeria to carter its clients based in Africa and Gulf countries. Solar explosives is working to supply to the Defence sector with the DRDO but thats likely to take some more time. It has developed a dust suppressor which makes working conditions easier after the blast thus leading to higher worker efficiencies. The macro business scenario remains extremely exciting. However for now the worry is from the falling margins from the new supplies to Coal India Ltd. The higher volumes from Coal India will somewhat compensate but operating margins will be hit. The next big trigger is the awarding of the coal blocks to the private sector. The initial mining uses up most of the explosive. To add to this margins from the private sector are expected to be higher. The business is good with strong barriers to entry and Solar has the edge with its high marketshare and explosive experts. The stock trades at Rs 140 which is a valuation of 14 times trailing earnings for FY 06. A P/E of 14 for FY 07 makes is attractive.. though near term poor performance on margins will weigh on stock performance. For those willing to invest, accumulating this for long term is not a bad idea. We will however keep watch. |
Q2FY07 Earnings Preview
# We also expect the information technology (IT) companies to report a strong earnings growth on the back of a robust volume growth and the depreciation of the rupee vis-à-vis the dollar.
# We expect the earnings of the Sensex companies to grow by a strong 22.6% year on year (yoy) led by a strong growth in the above-mentioned sectors.
#The implied growth for H2FY2007 works out 21% yoy. Further upmove in the Sensex could come only from further upgrades in the Sensex' earnings.
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Auto Earnings Preview
*Q2FY2007 has been a good quarter for the automobile sector despite being a lean season due to the monsoons and the Shradh Paksha. Though the floods and heavy rains in some parts of the country affected automobile sales, the two wheeler segment (except the market leader Hero Honda) has grown well; the commercial vehicle segment has also grown albeit at a lower rate as compared to Q1FY2007 and ditto for the passenger car segment. Bajaj Auto's sales grew by 27%, while Hero Honda reported a marginal rise of 1.3% in its motorcycle sales. Maruti's car sales grew by 12%, M&M's tractor sales were up by 29.7%and Tata Motors' commercial vehicle sales (including exports) grew by 39%.
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Earnings Upgrade required
* In our last Market Outlook report dated August 02, 2006, we had said that going ahead there would be two key positive triggers for the Indian equity market, viz a pause in the rate hikes by the US Federal Reserve (Fed) and better-than-expected earnings for Q1FY2007.
*The two triggers have played out as per our expectations and at the current level of 12,404 the Sensex has swiftly discounted both these positives, leaving very marginal upside.
* The Fed futures are indicating that any rate cut by the Fed can come in the first quarter of CY2007 at the earliest. This leaves us exposed to global economic risks in the interim six months.
* Corporate earnings haven't seen any significant upgrades over the last few months. Any upside from hereon would depend on the upgrades in the index' earnings driven by the better-than-expected Q2FY2007 earnings, especially in the banking and oil sectors.
*However, upgrades in the Sensex' earnings will have to be significant—in the range of 10%—to bring the market's valuations back to attractive levels. The Sensex is currently trading at 16.1x its one-year forward earnings, which is towards the higher end of the band in which it has usually traded, ie 12-16x.
* We continue to prefer domestic demand-driven stories like automobiles, banking, capital goods and cement.
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Banking Earnings Preview
Key points
- We expect Indian public sector banks (PSBs) excluding State Bank of India (SBI), to report a healthy year-on-year (y-o-y) growth of 20% in their net interest income (NII) and a strong growth of 32.5% in their earnings for Q2FY2007. SBI, an exception, is likely to report a decline in its earnings due to high loan recoveries in the same quarter last year.
- The private sector banks are likely to continue their strong performance, as their earnings are likely to grow at 27.4% year on year (yoy) for the same period.
- We expect the loan book of the PSBs to grow at a healthy rate of 18-20% and that of the private sector banks at 40-50%.
- The net interest margins (NIMs) are expected to remain stable as most of the banks have raised their prime lending rates over the last two quarters. The same should help them to mitigate the loss of income on account off non-payment of interest on cash reserve ratio (CRR) balances with the Reserve Bank of India.
- The strong performance at the operating level is likely to be aided by the declining 10-year government bond yield, which should help the PSBs to reduce their mark-to-market losses to nil or a negligible level.
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