Holds good growth potential
Increased investments in coal and metal mining, roads and other infrastructure projects will boost demand for explosives
Solar Explosives (SEL) and its three 100% subsidiaries are among the largest manufacturers and suppliers of explosives and explosives accessories in India covering an entire range of products such as bulk and cartridge explosives, detonators, detonating cords, pentaerythritol tetranitrate (PETN) and cast boosters. It has six manufacturing facilities located in and around Nagpur.
The promoters of SEL, Satyanarayan Nandlal Nuwal and his associates, were one of the largest dealers of industrial explosives before setting up this company.
SEL has a licensed capacity of 1,75,000 tonnes of explosives, which include bulk and cartridge explosives, 140 million detonators, 20 million meters of detonating cord, 250 tonnes of PETN and 60 tonnes of cast boosters. The current capacity utilisation is around 24%, which is supposed to be the best in the industry as there are huge costs involved in the transportation of explosives. Transportation can be carried out easily within 35-40-km radius of the manufacturing unit.
SEL’s major clientele includes Coal India and its subsidiaries, Sail, Hindustan Zinc, and Singareni Collieries. It also supplies to national hydroelectric projects, the cement, infrastructure and construction sectors, and border road organisations. Its products are exported to Indonesia, Malaysia, Sri Lanka, Oman, Jordan, Syria, Lebanon, Ethiopia, Kenya, Tanzania and Nigeria.
SEL intends to set up support and transfer plants for bulk explosives, mostly in the eastern parts of the country to cater to coal and iron ore mines in that region. The project (costing Rs 76.38 crore) is to be set up in two phases. Phase I will include the setting up of bulk support plants at Asansol, Talchar and Ramgarh and transfer plants at Dhanbad, Bokaro, Jharsuguda and Manindragarh.
Phase I will also involve setting up manufacturing units of bulk and cartridge explosives and a magazine (storage) facility in Nigeria.
Phase II envisages setting up of Bulk Support Plants at Ramagundam, and Transfer plants at Manuguru, Barbil, North Karanpura and Rajmahal.
The expansion will allow SEL to capture the immense growth opportunities in the mining sector in the eastern parts of India, where most of the coal mines and big steel players are located.
The industrial explosives industry earns around 60% of its revenue in the last two quarters of the financial year as, in the first half, mining operations halt in the rainy season and there are more chances of machinery breakdown in the summer. Around 65% of the market is controlled by five players and the rest by other small players.
Strengths
- SEL enjoys around 13% market share in the industrial explosives market, which is second only to the largest players, Indian Explosives, with a market share of around 18%.
- Backward integration is one of the key strengths of SEL. The company has in-house manufacturing facility for emulsifiers, sodium nitrate, and calcium nitrate, which acts as a protection against raw material price fluctuations.
- SEL is a one-stop shop for industrial explosives as it not only provides the entire range of products but also has the capability to develop special tailor-made products as per customer’s requirement.
- Increased investments in coal and metal mining, roads and other infrastructure projects will boost demand for explosives, going forward.
Weaknesses
- SEL is dependent on the growth of other industries, specially mining and infrastructure. Any slowdown in these industries due to bureaucracy and delay in decision-making on the part of government can hamper the demand for the products of the company.
Valuation:
*SEL has set a price band of Rs. 170 to Rs. 190, which translates into a PE of 13x to 14x annualised EPS (Rs 13.2) for the half-year ended (consolidated) September 2005 on post-issue equity. However, the second half is generally better, so actual EPS can be higher than the annualised one and, accordingly, P/E can become more reasonable.
Keltech Energies and Premier Explosives are the two prominent listed companies operating in a business similar to that of SEL. These companies are presently trading at TTM PE multiples of 7.6 and 21.2, respectively, on their annualised EPS. However, the operating profit margin and business model of SEL is better.