Solar Industries (SOLEXP) : Detonating To Explosive Growth

Initiating Coverage
January 9, 2015
Rating Matrix
Rating : Buy
Solar Industries (SOLEXP)
Target : | 3342
| 2875
Target Period : 18-24 months Detonating to explosive growth…
Potential Upside : 16%
Solar Industries India (SIIL) is the market leader in the Indian industrial
explosives market with a 27% market share. The company also has the
YoY growth (%) distinction of being the largest exporter of explosives with 50% market
(YoY Growth) FY14 FY15E FY16E FY17E
share. SIIL’s core strength lies in its ability to grow continuously through
Net Sales 0.5 18.8 23.9 18.9
EBITDA 6.8 30.8 26.6 21.0
smart revenue diversification that it has achieved by being the leader in all
Net Profit 1.8 30.6 23.3 22.0 categories of explosives & through geographical expansion via exports &
EPS (Rs) 1.8 30.6 23.3 22.0 overseas manufacturing operations. With a revival in mining operations in
India, the next phase of growth for SIIL will come through strengthening
Valuation summary (Consolidated) of its leadership position, focus on expanding exports & overseas
FY14 FY15E FY16E FY17E operations and foray into the defence segment. We expect revenues &
P/E 43.9 33.6 27.3 22.4 PAT to grow at a CAGR of 20.5% & 25.2% in FY14-17E along with 261 bps
Target P/E 51.1 39.1 31.7 26.0 EBITDA margin expansion & return ratios improving to 20.2%, 20.3%
EV / EBITDA 27.1 20.4 16.0 13.1 (RoE, RoCE), respectively. We initiate coverage on SIIL valuing it at 26x
P/BV 7.9 6.6 5.5 4.5 P/E on FY17E EPS of | 128.6 with a target price of | 3342 & BUY rating.
RoNW 17.9 19.6 20.1 20.2
RoCE 15.9 18.5 19.8 20.3 Well poised to capitalise on opportunity from mining sector
In FY09-14, SIIL achieved a volume CAGR of 2.2x volume CAGR of the
Stock Data overall industry (bulk + cartridge), which was at 5.8%. In the same period,
Stock Data production in coal mining, the largest consumer of explosives, grew at a
Market Capitalization | 5203.2 Crore muted 2.9% CAGR. However, with an expected revival in mining activity
Total Debt (FY14) | 442.8 Crore coupled with the government’s thrust on increased infrastructure
Cash and Investments (FY14) | 147.7 Crore spending, we believe SIIL is well placed to witness a volume CAGR of
EV | 5498.2 Crore 16.9%, 12.5% in bulk, cartridge segment in FY14-17E, respectively. Higher
52 week H/L 3.5
capacity utilisation and product diversification will ensure revenues grow
Equity capital | 18.1 Crore
at a CAGR of 20.5% to | 1657.7 crore and | 1971 crore in FY16E and
Face value | 10
MF Holding (%) 14.9
FY17E, respectively.
FII Holding (%) 0.8 Overseas operations & defence business to provide incremental growth
SIIL’s high margin overseas operation has a notable contribution in the
Comparative return matrix (%) consolidated revenues, with its share increasing from 12.8% in FY11 to
Return % 1M 3M 6M 12M
18.8% in FY14. We expect the share of the overseas operation to increase
Solar Industries 4.1 13.9 32.6 205.2
to 21.6% in FY17E, with its revenues expected to increase at a CAGR of
Premier Explosives 12.9 38.0 91.5 230.0
25.5% to | 459.8 crore in FY17E. Significant revenues from the defence
Keltech Energies (1.5) 48.4 87.7 211.7
Gulf Oil Corp. (7.7) 0.5 1.9 80.8
business from FY16E onwards (6% of consolidated revenues in FY17E)
are expected to provide an uptick in revenue growth.
Price movement Growth story far from over
10,000 3,500 We believe SIIL possesses a wide moat in the form of de-risked business
3,000 model, industry leadership, significant entry barriers and optimal product
8,000
2,500 mix to benefit the most from a revival in mining & infrastructure activity.
6,000 2,000 We initiate coverage on Solar Industries with a target price of | 3342,
4,000 1,500 valuing the company at 26x P/E (implying PEG of 1x over FY14-17E) on
1,000 the FY17E EPS of | 128.6. We have a BUY recommendation on the stock.
2,000
500
0 0 Exhibit 1: Financial Performance (Consolidated)
Nov-13
Jun-12
Feb-12
Oct-12
Jul-13
Feb-13
Mar-14
Aug-14
Jan-15
(Year-end March) FY13 FY14 FY15E FY16E FY17E

Net Sales (| crore) 1,119.7 1,125.7 1,337.6 1,657.7 1,971.0
Price (R.H.S) Nifty (L.H.S) EBITDA (| crore) 190.0 203.0 265.4 336.0 406.6
Net Profit (| crore) 116.3 118.4 154.7 190.8 232.7
EPS (|) 64.3 65.4 85.5 105.4 128.6
Research Analyst P/E (x) 44.7 43.9 33.6 27.3 22.4
Chirag J Shah Price / Book (x) 9.1 7.9 6.6 5.5 4.5
shah.chirag@icicisecurities.com EV/EBITDA (x) 28.5 27.1 20.4 16.0 13.1
RoCE (%) 18.1 15.9 18.5 19.8 20.3
Nishit Zota
nishit.zota@icicisecurities.com RoE (%) 20.3 17.9 19.6 20.1 20.2
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research

Shareholding pattern (%) – Q2FY15 Company background
Shareholder's Category Holding (%)
Solar Industries India (SIIL), founded by Satyanarayan Nuwal, is the
Promoters 72.9
largest manufacturer of industrial explosives & initiating systems in India
Institutional Investors 18.9
with 27% market share in the domestic market and 50% market share in
General Public 8.2 exports market. SIIL has a licensed capacity of 2,16,107 metric tonne (MT)
of bulk explosives and 74,665 MT of cartridge explosives as of H2FY15.
FII & DII holding trend (%) Playing on the economies of scope, the company has established itself as
a major player across the product value chain with a product basket that
20 18.6 18.9 19.0 18.7 18.3 18.1 18.1 17.9 includes bulk explosives, cartridge explosives, detonators, detonating
15 fuse, cast boosters, Pentaerythritol tetranitrate (PETN - raw material for
detonators) and High Melting Explosive (HMX - warhead in missiles).
10
%
Mining industry is a major consumer of explosives accounting for 90% of

5 1.3 1.2 1.1 1.2 1.2 1.2 0.8 0.8 total explosives demand (coal industry consumes 70% of total demand).
0 Coal India (CIL) is the largest consumer of SIIL. The company enjoys a
location advantage, as all its 16 facilities of bulk explosives are located in
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
a 50-60 km radius from major mining regions. SIIL expanded its base to
FII DII
other geographies by setting up manufacturing facilities in partnership
with local trading companies in countries like Zambia, Nigeria and Turkey.
Consolidated revenues in FY14 were at | 1,126 crore, with domestic,

overseas & export segments contributing ~70%, ~20% & ~10%,
respectively. A huge demand-supply gap along with a set of progressive
policies has driven SIIL to enter the defence sector. The company has
already obtained an industrial license for HMX, propellants & new
generation explosives. SIIL has commissioned an HMX plant with
capacity of 50 MT. The HMX business will start generating revenues from
FY15 onwards while its capacity will be gradually raised from 50 MT to
150 MT. The company is also in the process of setting up an initial
propellant capacity of 2500 units where it has a license to manufacture
10,000 units.
Exhibit 2: Solar Industries India milestones
Introduces cast
Starts plants in Waidhan for
boosters & PETN in
production of bulk explosives Manufacturing units in
product portfolio
Zambia, Nigeria & Turkey
Foray into defence

Establishes another
Expands domestic business by setting up
bulk explosive unit in
Starts production of up manufacturing
Chandrapur with 7750 operations to 19
explosives with a license facilities of HMX &
MT capacity locations
capacity of 6000 MT propellant
1984 1996 1998 2000 2001 2002-2005 2006 2007-2014
Commences production of detonators Starts exporting to

Starts exporting & slowly gains
Commences acceptance in international market 25 countries
business as a
trader in
Expansion in
explosives Imports first cartridge Zambia
manufacturing machine from
Initial public offer; gets listed
US
s
Source: Company, ICICIdirect.com Research,
ICICI Securities Ltd | Retail Equity Research Page 2

Exhibit 3: Holding Structure of SIIL’s overseas subsidiaries
Solar Industries India

Ltd
100% 100% 100%
Solar Industriee Solar Overseas

Mozambique Limitada PT Solar Mining Resources
Mauritius Limited
99.99% 99.99%
Solar Overseas Netherlands Solar Overseas

Cooparatie UA Singapore PTE
Ltd
65% 100% 55% 100% 80%
Solar Explochem Solar Explochem Nigachem Nigeria Solar Overseas Solar Mining Services
Zambia Ltd Mauritius Ltd Ltd Netherlands BV Australia PTY Ltd
65% 74.5% 54% 80%

Solar
Ilci Patlayici Maddeler PATSAN Patlayici Explochem
Solar Nitrochemicals Ltd Sanayi Ve Ticaret Maddeler Sanayi Ve (Ghana)
Anonim Sirketi Ticaret Ltd
Exhibit 4: Key overseas markets

Investment Rationale
Explosives industry: Beneficiary of revival in end-user demand growth
The fortunes of the explosives industry are closely linked to the
metal/mineral extraction industry. More than 75% of explosives produced
globally are consumed in mining operations. In India, mining accounts for
more than 90% of the total consumption of explosives. The coal industry
consumes more than 70% of total demand. Given that explosives
comprise a substantial share (18-20% in coal mining) of the raw material
consumed in mining, it is important to understand the quantum of
demand for explosives in mining.
Exhibit 5: Explosive requirement per unit of mineral & final product
Mineral Ore mined [million (mn) tonne] Explosives required (tonne) Final product Ore quantity needed Explosives reqd/mn tonne of final product
Coal 1 1080 - - -
Iron ore 1 200 Steel 1.7 340
Limestone 1 166 Cement 1.4 240
The explosives industry in India has kept pace with the mining industry,
thus pegging the market size for industrial explosives in India at | 3500
crore in FY14 from | 2100 crore in FY09. The vigorous volume CAGR of
10.7% in FY09-14 in the market for explosives can be mainly attributed to
the increasing demand in the mining & infrastructure space.
Exhibit 6: Demand forecast for explosives based on commodity demand
Unit FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Commodity
Coal mn tonne 490 515 533 540 556 566 604 624 659
Iron ore mn tonne 213 213 219 167 136 152 120 130 150
Cement mn tonne 187 207 216 230 248 256 282 305 328
Explosive required for mining
Coal tonne 529200 555660 575208 583200 600923 610891 652428 674244 712152
Iron ore tonne 42600 42600 43800 33458 27160 30412 24000 26000 30000
Cement tonne 44866 49591 51835 55318 59575 61341 67721 73308 78806
Total tonne 616666 647851 670843 671976 687658 702645 744149 773552 820958
Total explosive demand tonne 685184 719835 745381 746640 764064 780716 826832 859502 912175
Source: ICICIdirect.com Research
Coal production levels remained stagnant over the years, with production
growing at a meagre 2.9% CAGR from 490 mn tonnes in FY09 to 565.6
Burgeoning demand from India’s power sector (capacity mn tonnes in FY14. In the same period, share of coal mining in explosives
expected to rise significantly from 253 GW in September consumed by the mining sector increased from 85.8% in FY09 to 86.9%
2014 to 288 GW in 2017), huge untapped coal reserves
(125.9 billion tonnes) and a conducive regulatory
in FY14. Going ahead, burgeoning demand from India’s power sector
environment for the coal sector are expected to boost coal (capacity expected to rise significantly from 253 GW in September 2014 to
production volumes to 659.4 mn tonnes in FY17E 288 GW in 2017), huge untapped coal reserves (125.9 billion tonnes) and
a conducive regulatory environment for the coal sector are expected to
boost coal production volumes to 659.4 mn tonnes in FY17E. In the same
period (FY14-17E), explosives demand from the coal sector is expected to
go up from 6,10,891 tonnes in FY14 to 7,12,512 tonnes in FY17E.
In the long term, de-allocation of coal block by the Supreme Court in 2014
and subsequent e-auctioning by the Central Government are expected to
Target of 1000 mn tonnes set by the Coal & Power
clear the logjam and expedite coal mining. Coupled with this, the 300 km
Ministry for CIL by FY19 can lead to an incremental
demand of 5,80,500 tonnes for explosives from CIL alone rail line being laid by CIL will sort out excavation bottlenecks and increase
domestic supply by ~300 million (mn) tonne, further boosting the growth
opportunity for the explosive industry. Another crucial catalyst for growth
of the explosives industry is the stiff target of 1000 mn tonnes set by the
Coal & Power Ministry for CIL by FY19. This target implies coal production
volume will record 17.2% CAGR in FY14-19E, thus leading to an
incremental demand of 5,80,500 tonnes for explosives from CIL alone.

Exhibit 7: Coal production to grow at 5.3% CAGR in FY14-17E
700 659
604 624
600 556 566
533 540
515
490
500
(Mn tonne)
400
CAGR of 5.3%
300
CAGR of 2.9%
200
100
0
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
The second most important segment for the explosives market is the
construction sector. The sector that attracted investment of | 12.5 trillion
With a number of mines in Karnataka and Goa receiving
in FY09-14, is expected to witness 1.5x growth in investment (| 19 trillion)
clearances, iron ore production is expected to revive from
FY15E onwards, growing at a CAGR of 11.8% in FY15-17E in the next five years. This will generate strong steel demand in India. It
to 150 mn tonnes in FY17E. Explosives demand from iron will also generate demand for iron ore (an important raw material for
ore mining is expected to be 30,000 tonnes in FY17E making steel), whose production has contracted over the last few years
due to regulatory issues. From the highs of 213 mn tonnes in FY09,
production has fallen to 152.1 mn tonnes in FY14. In the same period of
FY09-14E, the share of iron ore mining in the explosives demand pie has
declined from 6.9% in FY09 to 4.3% in FY14. The iron ore production is
expected to bottom out in FY15E to 120 mn tonnes. However, with a
number of mines in Karnataka and Goa receiving clearances, iron ore
production is expected to revive FY15E onwards, growing at a CAGR of
11.8% in FY15-17E to 150 mn tonnes in FY17E. Non-CIL + institutional
(mostly steel sector) contribute ~18% of SIIL’s sales and explosives
demand. Explosives demand from iron ore mining is expected to be at
30,000 tonnes in FY17E.
Exhibit 8: Iron ore production to grow at 11.8% CAGR in FY15-17E
250
213 213 219
200
167
152 150
150 136 130
(Mn tonne)
120
100
50
0

Another sector that would be the beneficiary of a pick-up in investment
activity in construction space is the cement sector. The capacity utilisation
of the cement industry has bottomed out at ~69% in FY14. Low capacity
addition and demand recovery driven by increased investments in
Total cement production in India is expected to grow from
255.6 mn tonnes in FY14 to 328.4 mn tonnes in FY17E, infrastructure sector are expected to push utilisation levels to 78% in
implying a CAGR of 8.7%.The growth in cement production FY17E. Total cement production in India is expected to grow from 255.6
is expected to drive explosives demand from 61,341 mn tonnes in FY14 to 328.4 mn tonnes in FY17E, implying a CAGR of
tonnes in FY14 to 78,806 tonnes in FY17E
8.7%. The explosives find their application in mining of limestone, which
is a key raw material for manufacturing of cement. The growth in cement
production is expected to drive explosives demand from 61,341 tonnes in
FY14 to 78,806 tonnes in FY17E.
Exhibit 9: Cement production to grow at 7% CAGR in FY14-17E
350 328
305
300 282
248 256
250 230
207 216
187
(Mn tonne)
200
150
100
50
0

SIIL well positioned to play resource boom
Exhibit 10: Porter’s five forces analysis for Indian explosives industry (SIIL stands out as it has relatively de-risked business model)
However, SIIL has a diversified revenue base with

Bargaining power of buyers
CIL's contribution to SIL's revenues at 30%
(high)
Consuming industry dominated
by coal industry (70+%). CIL is a
monopsonist with 80% market
share in coal industry
Bargaining power of sellers Industry rivalry Threat of new entrants

(low) (moderate) (low)
-Price of ammonium nitrate (key raw -Highly concentrated market -Many approvals required
material) linked to import parity prices -Product differentiation is low -Location proximity to mines an
-There is domestic availability of -Locational proximity to mines an advantage
ammonium nitrate advantage
However, SIIL is the market leader with 27% market share. Company
enjoys benefit of backward integration for almost all raw materials (except All bulk explosive units of SIIL located at
ammonium nitrate). Lastly, SIIL has a wide product range being the market Threat of substitute products 50-60 km radius from major mining
leader in each product (low) regions.
- No direct substitute available
SIIL possesses wide moat in form of high entry barriers & backward integration
The explosive industry is governed by a stringent regulatory environment
resulting in high entry barriers that mute the threat of new entrants. A
slew of approvals and licenses are needed in different life cycle stages like
manufacturing, storing, marketing and consumption of explosives.
Exhibit 11: Key licenses & approvals for industrial explosives

Industrial license from DIPP (Department of Industrial Policy & Promotion)
Due to high entry barriers, there is a high concentration of Clearance from Home Ministry
the top 6 players, controlling 74% of the market, which has Clearance from Intelligence Bureau regarding antecedant of promoter & location's safety
30 manufacturers. Further, the top two players, viz. SIIL No objection certificate (NoC) from District Magistrate after clearance by police, PWD & Gram Panchayat
and Orica, cumulatively command 43% of the overall
Manufacturing license issued by CCE (Chief Controller of Explosives)
market
Directorate General of Mines Safety's permission is necessary for underground use of explosives
As a consequence of high entry barriers, there is a high concentration of

the top 6 players, controlling 74% of the market, which has 30
manufacturers. Further, the top two players, viz. SIIL and Orica
cumulatively command 43% of the overall market. This entry barrier
benefits the industry, as a whole, as existing incumbents of the explosive
industry are expected to grow due to mining growth without any threat of
new players.

Exhibit 12: SIIL - Market leader
Company Market Share (%)
Solar Industries 27
Orica 16
IBP (IOCL) 11
Gulf Oil 10
Premier Explosives 5
Keltech Energies 5
Total 74
Coupled with this structural entry barrier, SIIL possesses a strategic entry
barrier in the form of location proximity to the mines. For bulk explosives,
distance is an important parameter, as it has to be the least between a
seller and a buyer. All bulk explosive units of the company are located at
a 50-60 km radius from the major mining regions.
Exhibit 13: Location of SIIL’s manufacturing plants in India
State No of Plants Clients Served
Maharashtra (Chakdoh,Nimji,Sawanga, Warur) 4 Western Coalfield Ltd., SCCL
MP (Waidhan 1, Waidhan 2) 2 Northern Coalfield Ltd., Reliance Power (Sasan)
Chattisgarh (Korba,Manendragarh) 2 South Eastern Coalfield Ltd, Jindal Power, Sharda Energy,Lafarge, Parsak (Adani group)
Jharkand (Dhanbad, Ramgarh Cant) 2 Tisco,Central Coalfield Ltd., Bharat Coking Coalfield
Odisha (Jharsuguda,Talchar) 2 Mahanadi Coalfield Ltd., Tisco
AP (Ramagundam, Kothagudem) 2 SCCL
Rajasthan (Bhilwara) 1 Hindustan Zinc, Jindal Saw
West Bengal (Asansol) 1 Eastern Coalfield Ltd.
The main raw material for industrial explosives is ammonium nitrate (AN),
which accounts for ~70% of the raw material consumed. SIIL procures
SIIL enjoys the benefit of backward integration for all raw
materials except ammonium nitrate. This benefit enables this key raw material domestically from Rashtriya Chemicals & Fertilisers
the company to enjoy healthier margins compared to the (RCF), Gujarat Narmada Fertiliser Corporation (GNFC) and Deepak
rest of the industry Fertilizers based on monthly contracts and quantity wise pricing. After the
implementation of the Ammonium Nitrate Rules 2012 under Explosives
Act, which requires the approval of the Chief Controller of Explosives for
import of AN, 90% of the required AN is sourced domestically and 10%
through imports. SIIL enjoys the benefit of backward integration for the
rest of the raw material required like PETN, sodium nitrate, zinc nitrate,
calcium nitrate, sodium percolate, etc. This benefit enables the company
to enjoy healthier margins compared to the rest of the industry.

Exhibit 14: EBIT margin profile of explosives segment of industry players (standalone)
18
16 16.2 15.7
15.4
14 13.8
12 12.3 12.1 12.4
10.7
10 9.8 10.0
9.0
(%)
8 7.6 6.8
6 6.0 5.5
4 3.5
2 1.5 2.2
0 0.5
-0.6
-2 FY10 FY11 FY12 FY13 FY14
Solar Industries Gulf Oil Corp. Premier Explosives Keltech Energies
Strategic expansion + product diversification = Pole position in concentrated

industry
SIIL, a late entrant in the Indian explosive industry, today has a licensed
capacity of 2,16,107 metric tonne (MT) of bulk explosives and 74,665 MT
of cartridge explosives, making the company the leader in the sector
(27% market share in domestic market and 50% market share in exports
of industrial explosives in value terms). SIIL has achieved this feat by
recognising that its future competitiveness depends on quickly expanding
its capacity at strategic locations and diversifying to meet the growing
resource demand. The company has not only scaled up its capacity since
inception but has also developed a well diversified portfolio of products.
Exhibit 15: Well diversified product portfolio
Products
Bulk Explosives Cartridge Explosives Detonators Detonating Fuse

Segments
68955 tonnes 133 million nos 59 million metre

Volumes 106988 tonnes
End-use Underground & small open cast

Large open caste mines To initiate explosives To initiate explosives
mines, infra projects
Volume CAGR: 14.7% Volume CAGR: 9.2% Volume CAGR: 12.8% Volume CAGR: 18.4%
Revenue(FY14) :|380.3 crore Revenue(FY14):|400.8 crore Revenue(FY14):|174.1 crore Revenue(FY14):|44.6 crore
Performance Topline Contribution: 30.6% Topline Contribution: 32.3% Topline Contribution: 14% Topline Contribution: 3.6%
Rev CAGR (FY09-14) : 21.6% Rev CAGR (FY09-14) : 15.6% Rev CAGR (FY09-14) : 15.9% Rev CAGR (FY09-14) : 23%

Exhibit 16: Domestic capacity of SIIL
Product Licensed Capacity
Bulk explosives 219,240 MT
Cartridge explosives 74,655 MT
Detonators 190 Mn. Units
Detonating Fuse 75 Mn. Meters
Cast Boosters 1,500 MT
PETN 1,650 MT
HMX 50 MT
Composite Propellants 2500 MT
Exhibit 17: Volume CAGR of bulk & cartridge segment
20
16 14.7
13.6
12 9.2
8.7
(%)
7.3 6.6
8 5.4
4 1.2
0
Industry SIL Industry SIL
Bulk Cartridge
FY09-14 FY14-17E
Bulk volumes expected to grow at 16.9% CAGR over FY14-17E

In the bulk segment, SIIL has witnessed a rapid and strategic build-up in
capacity, starting from a modest capacity of 6,000 MT at a single location
of Waidhan (Madhya Pradesh) in 2000, to the current capacity of 219,240
MT spread across 16 locations in India. SIIL’s volumes in the bulk
segment have grown from 53,912 MT in FY09 to 1,06,988 MT in FY14,
implying a CAGR of 14.7%. In the same period (FY09-14), industry
volumes in the bulk segment have grown at a CAGR of 8.7% from
3,43,019 MT to 5,21,419 MT.
Bulk explosives volumes declined from 1,14,330 MT in FY13 to 1,06,988

Historically, SIIL has achieved superior volume growth MT in FY14, as SIIL lost business in Singareni Collieries due to non-
compared to the industry. SIIL’s volumes in the bulk
remunerative pricing and the unachievable performance criteria set by
segment grew at a CAGR of 14.7% in FY09-14, when
industry volumes in the bulk segment grew at 8.7% CAGR Singareni Collieries. However, Singareni Collieries floated a tender with
revised norms for FY15 and FY16 in which SIIL has received maximum
order quantity. Additionally, SIIL has already commissioned a new bulk
explosive facility at Kothagudem (Andhra Pradesh), which will add
~10,000 MT to the utilised capacity. Two new proposed facilities at Barbil
(Odisha) and Kota (Rajasthan) in H1FY16 are expected to add another
~15,000 MT to the utilised capacity. This additional capacity will
contribute significantly to volume growth.
In FY09-14, when India’s coal production was stagnant and grew at a

CAGR of just 2.9%, the bulk segment of the industry grew at a healthy
CAGR of 8.7%. Going ahead, domestic coal production is expected to
grow at a CAGR of 5.2% from 565.6 MT in FY14 to 659.4 MT in FY17E.
Given the context of better growth rates in coal production, we have
pencilled in a conservative CAGR of 7.3% for the industry, where bulk
explosive volumes are expected to increase to 6,45,000 MT by FY17.
Historically, SIIL has achieved superior volume growth compared to the

industry. We expect the same trend to continue. Hence, we expect SIIL’s
bulk volumes to grow at a CAGR of 16.9% to 170881 MT in FY17E.
Exhibit 18: Industry volumes (bulk segment) expected to grow at 7.3% CAGR over FY14-17E
700000 645000
598000
600000 554000
521419
483838 495946
500000
389825
400000 343019 359943
(MT)
300000
200000
100000
0
Location proximity and strategic expansion have led SIIL’s

Although SIIL was a late entrant in the bulk segment, location proximity
market share to increase from 16% in FY09 to 21% in FY14 and strategic expansion have been key to SIIL’s market prominence,
whose market share in the bulk explosive segment has increased from
16% in FY09 to 21% in FY14. Going ahead, we expect the market share in
the bulk segment at 26.5% by FY17E, on the back of capacity expansion
and higher utilisation.
Exhibit 19: SIIL volumes (bulk segment) expected to grow at 16.9% CAGR over FY14-17E
175000 170881 30.0

155347
150000 23.4 26.0 26.5
23.1 25.0
22.2 19.6 20.5 129455
125000 114330 20.0
106988
100000 15.7 14.8 94962
(MT)
79880 15.0
(%)
75000 53912 57857
10.0
50000
25000 5.0
0 0.0
Bulk (Solar) Market Share
Cartridge volumes expected to grow at 12.5% CAGR over FY14-17E

The cartridge segment is not too far behind in its contribution towards
SIIL’s growth story. Volumes in the cartridge segment have grown from
44,312 MT in FY09 to 68,955 MT at a CAGR of 9.2%, whereas in the same
period, the industry grew a meagre 1.2% from 2,54,808 MT to 2,69,999
MT, clearly indicating that SIIL ate into other player’s market share.
The estimated investment of | 19 trillion in the construction sector in

FY14-19E is expected to be a potent demand booster for steel, cement
and power production. An increase in the production of coal, iron ore and
other minerals will augur well for accelerated cartridge demand. Riding on
these demand boosters, we expect industry volumes in the cartridge
segment to grow at a CAGR of 5.4% to 3,16,000 MT in FY17E. In the same
period (FY14-17E), we expect SIIL’s cartridge volumes to grow at a CAGR
of 12.5% to 98,123 MT.

Exhibit 20: Industry volumes (cartridge segment) expected to grow at 5.4% CAGR over FY14-17E
350000 316000
301000
287000
300000 267275 269999
254808
238193
250000 225615
200000 183533
(MT)
150000
100000
50000
0
SIIL’s superior growth in the cartridge segment, relative to

SIIL’s superior growth in the cartridge segment, relative to the industry
the industry growth, translated into a gain in market share growth, translated into a gain in market share for SIIL from 17% in FY09 to
for SIIL from 17% in FY09 to 26% in FY14 26% in FY14. Given that the superior growth in the cartridge segment is
expected to continue, the market share may correspondingly increase to
31.1% in FY17E.
Exhibit 21: SIIL’s volumes (cartridge segment) expected to grow at 12.5% CAGR over FY14-17E
120000 31.1 35.0

30.2
100000 28.3 29.3 98123 30.0
27.7
27.4 25.5 84125 90855 25.0
80000 24.6 75761
66071 68955
20.0
(MT)
60000 17.4 55488
(%)
50206 15.0
44312
40000
10.0
20000 5.0
0 0.0
Cartridge (Solar) Market Share
Detonator, detonating fuse to grow at 8.2%, 10.1% CAGR, respectively, in FY14-17E

Apart from being the market leader in the bulk explosives & cartridges
explosives segment, which cumulatively contributes 63% of SIIL’s
consolidated revenues, SIIL also holds the pole position in the segment of
initiating systems (detonators & detonating fuse) that contribute 17.6% of
the company’s consolidated revenues. SIIL’s detonator volumes have
grown at a CAGR of 12.8% from 73 million units in FY09 to 133 million in
FY14 while the detonating fuse has grown at a CAGR of 18.4% from 26
million metre in FY09 to 59 million metre. By FY17, we estimate detonator
volumes will grow at a CAGR of 6.7% to 162 million units while the
detonating fuse will grow at a CAGR of 6.9% to 72.6 million metre.

Exhibit 22: Industry volumes (detonator) expected to grow at 2% CAGR Exhibit 23: SIIL volumes (detonator) expected to grow at 8.2% CAGR in
in FY14-17E FY14-17E
1200 1095 180 169 18

992 1032 1053 1074 147
971 15 15
1000 150 15 15123 141 14133 128
13 12 14
120 12103 108 13 12
(Mn nos)
800 698 724
(%)
610 90 73 9
(Mn nos.)
600 60 6
400 30 3
0 0
200
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
0
Detonators (Solar) Market Share
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research
Exhibit 24: Industry volumes (detonator fuse) expected to grow at 8% Exhibit 25: SIIL volumes (detonator fuse) expected to grow at 10.1%
CAGR in FY14-17E CAGR in FY14-17E
700 649 90 25
79
600 539 75 21 67 69 20
499 59 18 59 60
462 60
(Mn metre)
500 428 49 15 15
391 371 14 13 14
(Mn metre)
(%)
400 45 30
334 26 10
285 30 8 8 8
300
15 5
200
0 0
100
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
0
Detonating Fuse (Solar) Market Share

Prudent diversification: key to stability of revenues
SIIL has successfully diversified its revenue base by catering to newer
customers in the domestic market, enhancing exports and venturing into
overseas geographies. Diversification has aided the company to grow
even in periods of tepid demand.
Exhibit 26: Revenue diversification
Diversification
Customers Geography
Exports Overseas
Mitigation of concentration risk through balanced customer portfolio

Coal India (CIL) accounts for a major portion of consumption of the
domestic explosive industry’s output, which gives it significant bargaining
power. For pricing, CIL uses a vendor rating system that incorporates
evaluation parameters such as manufacturing infrastructure, random tests
of products, distribution systems and delivery performance in the
previous year, to be qualified for price bid.
Given that CIL effectively acts as a price setter for most non-traded
Although CIL’s contribution to SIIL’s consolidated revenue explosives and its pricing mechanism plays a significant role in the
has declined from 58% in FY07 to 33% in FY14, SIIL
explosive industry’s health, SIIL has smartly diversified its revenue base in
remains the largest supplier of explosives to CIL, meeting
27.5% of CIL’s requirement in FY14 recent years by increasing the share of institutional players, export &
overseas. CIL’s contribution to SIIL’s consolidated revenue has declined
from 58% in FY07 to 33% in FY14. The company has reduced its
concentration on CIL but at the same time retained its leadership position
by spreading its markets to other segments. SIIL is still the largest
supplier of explosives to CIL, meeting 27.5% of CIL’s requirement in FY14.

Exhibit 27: Customer revenue trend - CIL’s share in SIIL’s topline has declined
70
58
60
50 45 47
40
36 35 35 37
40 31 35 33 35
(%)
30 26 27 28
30 25 22 22
23
20 15 18
14 10 10
6 8 7 10 6 7 7 6
10 3 2
0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Coal India SCCL Inst. & Trade Export & Overseas A.N. Trading & others
Expanding footprint through exports & overseas operations

SIIL started exporting explosives & accessories to various African, South-
East Asian and Middle-East countries in FY04. Acceptance in the
international market got translated to repeat business from international
customers, despite intense competition from other global players. Today,
SIIL exports to over 22 countries with a market share in explosive exports
of 50%. Cartridges and initiating systems have helped SIIL strengthen its
position in the export market. SIIL’s export revenues have grown at 10.7%
CAGR from | 72.2 crore in FY09 to | 119.9 crore in FY14. Given that
India’s explosive export account for just ~$40 million in a global
explosive market size of $10 billion and as India is a cost-efficient
manufacturer, there is huge potential in export of explosives & initiating
systems. In FY14, exports comprised 10% of SIIL’s consolidated
revenues.
Exhibit 28: Exports grow at 10.7% CAGR in period FY09-14
India’s explosive export account for just ~$40 million in a 140

global explosive market size of $10 billion and as India is a 120
cost-efficient manufacturer, there is huge potential in 120
export of explosives & initiating systems
100 90
72 75
80 66
| crore
61
60
40
20
0
FY09 FY10 FY11 FY12 FY13 FY14

Exhibit 29: Global industrial explosives market
Global Market - $10 bn
South East Asia Australia Indian Exports - $40 mn
India 7% 13%
5%
China
16%
North America
25%
Russia
5%
Africa
7% Latin America
Western Europe 12%
Eastern Europe
5%
5%
The company set up a strong dealer network and marketing tie-ups with
institutional buyers in the countries to which it exported. In line with its
broad strategy to expand business overseas, the next step for SIIL after
exports was to set up manufacturing facilities in markets with untapped
demand. The company ventured into newer geographies by partnering
with local companies to acquire licenses. SIIL started its first overseas
manufacturing unit in Zambia in FY11, by manufacturing bulk explosives
under the 65% subsidiary Solar Explochem Zambia Ltd. Going ahead, SIIL
expanded its overseas business by setting up manufacturing capacities in
Nigeria through a 55% stake in Nigachem Nigeria in FY11 and in Turkey
through a 74.5% stake in the company Ilci Patlayici Maddeler Sanayi Ve
Ticaret Anonim Sirketi in FY13.
Exhibit 30: SIIL’s overseas operations

Country SIL's stake (%) Product Licensed Capcity Expansion
Zambia 65 Bulk 10,000 MT 10,000 MT
Cartridge 5,000 MT
Nigeria 55 Bulk 2,000 MT
Cartridge 5,000 MT
Turkey 74.5 Bulk 2500 MT
ANFO 40,000 MT
Cartridge 5,000 MT
Detonators 6 mn nos
SIIL’s choice of geographic locations for its overseas operations has been
strategic because:
• All three countries are growing economies
• Zambia is a mineral rich land-locked nation (Africa’s leading
copper producer); tax benefits to mining related industry
• Nigeria’s explosive market is dominated by a single player
Nigachem Nigeria Ltd (SIIL’s local partner in Nigeria). The
company’s previous experience as a distributor of explosives in
Nigeria augured well for setting up capacity
• Turkey’s explosive market is equivalent to India’s in terms of size

Exhibit 31: Annual GDP growth of Zambia, Nigeria & Turkey
12
10
9.2 8.8
8 6.9 7.8
7.6 6.8 7.3
6 6 6.4
4.9 5.4
4 4.3 4
(%)
2 2.1
0
-2 2009 2010 2011 2012 2013
-4
-4.8
-6
Zambia Nigeria Turkey
Source: World Bank, ICICIdirect.com Research
Exhibit 32: Revenues & profit from overseas operations

Zambia Nigeria Turkey
FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14
Revenues 14.8 69.2 61.4 35.6 71.8 74.3 107.4 148.8 9.6 19.7 16.6 48.4
PBT 1.8 14.6 5.5 -1.1 16.0 12.4 26.7 36.2 0.2 -0.2 -0.1 1.3
PAT 1.8 14.6 5.3 -0.4 10.9 8.5 18.6 24.7 0.2 -0.2 -0.1 1.3
As seen in Exhibit 31, the Nigeria and Turkey operations are running
smoothly, as can be inferred from their earnings growth. However,
Zambia’s financials have been volatile, with revenues dropping from
| 61.4 crore in FY13 to | 35.6 crore in FY14 while profitability of | 5.3
Zambia’s financials have been volatile, with revenues
crore turned into losses of | 0.4 crore in FY14. This can mainly be
dropping from | 61.4 crore in FY13 to | 35.6 crore in FY14
while profitability of | 5.3 crore turned into losses of | 0.4 attributed to the tumbling prices of copper. Falling copper prices coupled
crore in FY14 with the high cost base of the Zambian mining industry has put mining
players under pressure. Mining players, in a bid to reduce their operating
cost, have attempted to lay off employees. This has brought them into a
face-off with the government, which has threatened to revoke their
mining licenses. Lower mining output has impacted explosives sales.
Exhibit 33: Falling global copper prices Exhibit 34: Zambia’s copper production
10000 1000
9200 900
830
8400
(Mn tonne)
($/MT)
800
7600 698 686 690
700 668
6800
600 534
6000
500
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
2008 2009 2010 2011 2012 2013
Source: Bloomberg, ICICIdirect.com Research Source: U.S. Geological Survey, ICICIdirect.com Research
SIIL tried to mitigate this risk by diversifying its product basket in Zambia
and setting up a cartridge facility in FY14. We expect to see a pick-up in
revenue of the Zambian subsidiary with a revival of global copper prices.

In FY11-14, revenues from overseas operations recorded growth at 34%
CAGR. Going ahead, SIIL is in the process of enhancing the bulk capacity
in Zambia and Turkey by 10,000 MT and 2,500 MT, respectively. The
company will also explore opportunities in other African countries like
Tanzania and Mozambique. Owing to the company's focus on expansion
in overseas operations, we estimate the overseas revenues will grow
from | 232.9 crore in FY14 to | 459.8 crore in FY17E at a CAGR of 25.5%.
Given that the overseas business yields EBITDA margins in excess of 20%
(higher than domestic operations), we expect a gradual improvement in
EBITDA margins at the consolidated level.
Defence business: Important trigger for next wave of growth

A demand-supply mismatch, huge potential in terms of increased defence
outlay and economies of scale prompted SIIL to foray into the defence
space in FY12. The company plans to tap the opportunity in the defence
sector by supplying propellants and HMX explosives (warheads) to Bharat
Dynamics (BDL) and ordnance factories for use in missile systems.
Currently, India imports almost all its entire requirement of HMX.
SIIL had an initial capex plan of | 220 crore for setting up a production
capacity of 50 tonne per annum of HMX and 10,000 propellants. The
company has already invested | 156 crore in the defence space, which
was utilised to set up a capacity of 2500 propellant and 50 TPA of HMX.
Going ahead, the company has capex plans of ~| 90 crore to increase the
propellant capacity from 2,500 units to 10,000 units and HMX capacity
from 50 TPA to 100 TPA.
The company has participated in tenders for HMX, which are expected to
yield revenues of | 5 crore in Q4FY15. The additional HMX capacity of 50
TPA is expected to be commissioned in FY16E. Given that SIIL will be the
only player in India to supply HMX, we have assumed a higher capacity
utilisation of 80% and 100% for FY16E and FY17E, respectively. Assuming
realisation of | 1 crore per tonne of HMX, we have estimated the HMX
production will generate revenues of | 40 crore and | 100 crore in FY16E
and FY17E, respectively.
SIIL has also participated in the limited tender floated for 500 units of
Pinaka missile and 700 units of Akash missile. The company has guided
that Pinaka missile order will be executed in FY16 while the execution of
the Akash missile order will be spread across FY16 and FY17. Assuming a
realisation of | 6 lakh per propellant for Pinaka and | 7 lakh per propellant
for Akash, we estimate the Pinaka and Akash missile orders will generate
revenues of | 30 crore and | 49 crore, respectively.

Exhibit 35: Return profile of defence business for expected order book
Unit FY15E FY16E FY17E
Production
HMX tonne 5 40 100
Propellant (Akash) nos. 0 300 400
Propellant (Pinaka) nos. 0 500 0
Realization
HMX | crore 1 1 1
Propellant (Akash) | crore 0.07 0.07 0.07
Propellant (Pinaka) | crore 0.06 0.06 0.06
Revenue
HMX | crore 5 40 100
Propellant (Akash) | crore 0 21 28
Propellant (Pinaka) | crore 0 30 0
Total | crore 5 91 128
EBITDA
Margin % 20 20 20
EBITDA | crore 1 18 26
Depreciation | crore 0.04 0.73 1.02
EBIT | crore 1.0 17.5 24.6
Capital employed | crore 245 245 245
ROCE % 0.4 7.1 10.0
As seen in exhibit 35, we expect defence revenues to jump from | 5 crore

in FY15E to | 128 crore in FY17E. Although the company has guided for a
25-30% EBITDA margin for the defence business, we have assumed a
conservative EBITDA margin of 20% for the initial years of operation. The
RoCE of 7-10% for FY16-17E may appear below par due to lower
utilisation levels. However, once the additional capacity gets
commissioned and the business stabilises, we expect higher utilisation
levels to drive significant jump in the profitability, margins and return
ratios.

Financials
Revenue growth of 20.5% CAGR in FY14-17E to be driven by all segments
We expect consolidated revenues to increase from | 1,133 crore in FY14
to | 1,980.9 crore in FY17E at a CAGR of 20.5%, mainly on the back of
stable domestic growth, expanding overseas operations and a
burgeoning defence business (largely FY16E onwards). Over FY09-14,
SIIL registered consolidated revenue CAGR of 18.4% on the back of
growing market share in India from ~23% in FY09 to ~27% in FY14.
Revenues from overseas operation commenced from FY11, which scaled
Over FY09-14, SIIL registered consolidated revenue CAGR up from | 95 crore in FY11 to | 232.9 crore in FY14 at a CAGR of 34.8%.
of 18.4% on the back of growing market share in India from
~23% in FY09 to ~27% in FY14
Exhibit 36: Revenues to grow at 20.5% CAGR in FY14-17E
2500
1980.9
2000
1665.9
1500 1343.7
(| crore)
1121.8 1133.0
1000
500
0
FY13 FY14 FY15E FY16E FY17E
Going ahead, we expect revenues from domestic operations to grow at a

CAGR of 15.2% from | 1,008.5 crore in FY14 to | 1,543 crore in FY17E.
Growth in domestic revenues is expected to be driven at 21.6% CAGR in
bulk explosive revenues for FY14-17E. The cartridge, detonator and
detonator fuse revenues are expected to grow at a CAGR of 13.4%, 8.1%
and 7.6%, respectively, for the same period. Overseas operations are
expected to continue the growth momentum, with overseas revenues
expected to grow from | 232.9 crore in FY14 to | 459.8 crore at 25.5%
CAGR in FY14-17E. Defence business revenues are expected to grow
rapidly from | 5 crore in FY15E to | 128 crore in FY17E, contributing a
meaningful 6% in FY17E consolidated revenues.
Exhibit 37: Domestic revenue break-up (including exports) Exhibit 38: Consolidated revenue break-up
683.5
700 100 0.3 5.1 6.0
582.5 583.8 15.3 18.8
600 517.9 20.4 20.5 21.6
80
500 408.8 472.5
467.6
400.8
400 384.9 60
(| crore)
380.3
(%)
300 220.1 40 84.7 81.2 79.2

174.1 164.6 191.4 74.4 72.4
200 150.5
59.9 44.6 35.3 41.4 55.5 20
100 30.1 8.7
0 0
FY13 FY14 FY15E FY16E FY17E FY13 FY14 FY15E FY16E FY17E
Bulk Cartridge Detonator Detonator Fuse Trading Domestic Overseas Defense

Higher proportion of overseas & defence business to boost margins
The consolidated EBITDA is expected to increase from | 203 crore in
The margin expansion from 14.3% in FY09 to 17.9% in FY14 FY14 to | 406.6 crore in FY17E at a CAGR of 26.1% while EBITDA margins
can be attributed to a high degree of operating leverage
and increasing revenue share of higher margin yielding are expected to expand 261 bps from 17.9% in FY14 to 20.5% in FY17E.
overseas business from 12.8% in FY11 to 18.8% in FY14 The margin expansion from 14.3% in FY09 to 17.9% in FY14 can be
attributed to a high degree of operating leverage and increasing revenue
share of higher margin yielding overseas business from 12.8% in FY11 to
18.8% in FY14. Going ahead, we expect the growth trajectory in EBITDA
and margin expansion to come through a further increase in revenue
share of the overseas business from 18.8% in FY14 to 21.6% in FY17E as
well as commencement of the high margin defence business (margins in
excess of 20%). The contribution of the defence business in the revenue
share is expected to increase from 0.3% in FY15E to 6% in FY17E.
Exhibit 39: Consolidated EBITDA to grow at 26.1% CAGR over FY14-17E
500 25.0
406.6
400 336.0 23.0
300 265.4 20.2 21.0

(| crore)
20.5
203.0 19.8
(%)
200 190.0 17.9 19.0
16.9
100 17.0
0 15.0
EBITDA EBITDA margin
Consolidated PAT to grow at 25.2% CAGR in FY14-17E

We expect consolidated PAT to grow at a CAGR of 25.2% from | 118.4
crore in FY14 to | 232.7 crore in FY17E. Historically, growth in net profit
has tracked revenue growth as degree of combined leverage has always
been more than 1. In FY09-14, when revenues grew at 18.4% CAGR, net
profit grew at 21.8% CAGR. As we expect the degree of combined
leverage to continue to be higher than 1 for FY14-17E, the growth in
profitability may continue to be higher than revenue growth. PAT margins
are also expected to improve from 10.5% in FY14 to 11.7% in FY17E.
Exhibit 40: Consolidated PAT to grow 25.2% CAGR in FY14-17E
250 232.7 12.0
190.8 11.7
200 11.5 11.5
11.5
154.7
150 11.0
(| crore)
116.3 118.4
(%)
100 10.5 10.5

10.4
50 10.0
0 9.5
PAT PAT Margin

RoE, RoCE set to improve to 20.2%, 20.3%, respectively, by FY17E
In the last few years, the RoE, RoCE have declined from 22.1%, 21% in
FY10 to 17.9%, 15.9%, respectively, in FY14. This was on the back of the
company incurring a capex to increase the licensed capacity for domestic
operations, its expansion in overseas subsidiaries and foray in the
defence business. However, going ahead, we expect RoE, RoCE to
resurrect back to 20.2%, 20.3%, respectively, on the back of expansion in
The return ratios are set to improve on the back of
expansion in margins & improvement in asset turnover due
margins & improvement in asset turnover due to higher capacity
to higher capacity utilisation in bulk operations utilisation in bulk operations (current capacity utilisation for bulk
explosives is 49%).
Exhibit 41: RoE, RoCE trend
25
22 20.3
20.3 19.6 20.1
19 17.9 19.8 20.2
18.1 18.5
(%)
16 15.9
13
10
ROE ROCE
Cash flows set to improve; CFO/EBITDA at 0.5x; D/E to reduce to 0.5x

The company is expected to generate strong cash flows with cash flow
from operations (CFO) increasing from | 123.1 crore in FY14 to | 218.4
crore in FY17E. Strong CFO will ensure repayment of working capital
loans and smooth execution of the annual capex of | 100 crore p.a.
guided by the company for the next three years. The FCF that is expected
to turn positive on the back of strong CFO may grow to | 118.4 crore in
FY17E. The CFO/EBITDA, a measure of quality of earnings, is also
expected to stabilise at ~0.5x by FY17E. The D/E is expected to reduce
from 0.7x in FY14 to 0.5x in FY17E.
Exhibit 42: CFO, EBITDA, CFO/EBITDA trend Exhibit 43: Free cash flow, free cash flow yield
450 1.0 150 133.8 3.0

118.4
400 0.9 2.5 2.5
0.8 2.3
350 100 2.0
300 64.5
0.6 0.6 1.5
(| crore)
(| crore)
250 0.5 1.2

50 1.0
(%)
0.5 0.5
(x)
200
0.4 0.5
150
100 0 0.0
0.2
FY13 -0.4 FY14E
190.0
123.1
203.0
233.8
265.4
164.5
336.0
218.4
406.6
FY15E FY16E FY17E -0.5

92.9
50
(19.0) -0.7
0 0.0 -50 -1.0
(37.4)
FY13 FY14E FY15E FY16E FY17E
FCFF FCFF yield
CFO EBITDA CFO/EBITDA

Exhibit 44: Trend in debt & debt/equity
600 581.4 0.8

0.7 0.7
550 515.4
0.6 0.6 0.6
500 0.5 0.5
0.5
(| crore)
442.8 445.4
450 0.4
(x)
0.3
400
344.5 0.2
350
0.1
300 0.0
Debt Debt/Equity

Risks & Concerns
Lower volume growth due to slowdown in mining & infrastructure
Coal mining & infrastructure currently account for 51% of SIIL’s revenues.
Given that the bulk and cartridge segment contribute 63% Non-CIL institutional clients (mostly metal & steel sector) account for 18%
of consolidated revenues, slowdown in mining, power and
of SIIL’s revenue. Any slowdown in mining, power & infrastructure sectors
infrastructure can adversely impact the company’s
profitability can affect SIIL’s volume growth negatively. However, in FY09-14, when
mining & infrastructure activity was muted, revenue diversification and an
increasing market share enabled SIIL to witness volume growth of 14.7%,
and 9.2% CAGR in bulk and cartridge explosives, respectively. Given that
the bulk and cartridge segment contribute 63% of consolidated revenues,
we have calculated the sensitivity of FY16E and FY17E EPS to the volume
growth in the bulk & cartridge segment.
Exhibit 45: Sensitivity of FY16E EPS to volume growth

Bulk volumes growth (%)
106.85469 -10 10 20 30 40
-8 90.2 96.8 100.2 103.5 106.8
0 92.8 99.5 102.8 106.1 109.4
Cartridge volume growth (%) 8 95.5 102.1 105.4 108.7 112.1
16 98.1 104.7 108.0 111.4 114.7
24 100.7 107.3 110.7 114.0 117.3
Exhibit 46: Sensitivity of FY17E EPS to volume growth (assuming base case for FY16E)
Bulk volume growth(%)
130.38957 -10 0 10 20 30
-8 113.9 118.2 122.5 126.9 131.2
0 116.9 121.2 125.5 129.9 134.2
Cartridge volume growth (%) 8 119.9 124.2 128.6 132.9 137.2
16 122.9 127.2 131.6 135.9 140.2
24 125.9 130.3 134.6 138.9 143.3
We have estimated the consolidated EPS of | 105.4 and | 128.6 for FY16E
Every 10% change in FY17E volume growth will result in and FY17E, respectively (base case). As can be seen in exhibit 50, every
| 4.3 change in FY17E EPS while an 8% change in FY17E
10% point change in FY16E bulk volume growth will result in | 3.4 change
cartridge volume growth will result in a | 3 change in
FY17E EPS in FY16 EPS whereas an 8% point change in FY16E cartridge volume
growth will result in | 2.6 change in FY16E EPS. Similarly, every 10%
change in FY17E volume growth will result in | 4.3 change in FY17E EPS
while an 8% change in FY17E cartridge volume growth will result in a | 3
change in FY17E EPS.
Slowdown in overseas subsidiaries’ growth
Overseas subsidiaries (Zambia, Nigeria and Turkey) contributed 18.8% of
SIIL’s consolidated revenues in FY14 while the share is expected to
increase to 21.7% in FY17E. The Zambian subsidiary runs the risk of
volatility in earnings due to dampened copper prices. SIIL’s Nigerian
operations also face a risk given that concerns regarding the Nigerian
economy are rising with falling crude prices. Crude oil accounts for ~75%
Overseas subsidiaries (Zambia, Nigeria and Turkey) of the government revenues and ~90% of exports for Nigeria. This
contributed 18.8% of SIIL’s consolidated revenues in FY14
while the share is expected to increase to 21.7% in FY17E
African country is also prone to insurgencies, with the latest being Boko
Haram, a militant movement based in Northern Nigeria. These factors
could impact the stability of operations in Nigeria, which contributed
63.9% of the consolidated revenues in FY14. SIIL has always tried to
mitigate such political & operational risk by partnering with local
companies for its foreign operations. We draw some comfort from the
fact that SIIL has been associated with Nigachem Nigeria since 2005
(previously as a dealer).

Exhibit 47: Sensitivity of EPS to overseas revenue CAGR
Overseas Revenue CAGR (FY15-17E)
EPS (|) -5 10 25 30 35
FY16E 96.4 100.9 105.4 106.8 108.3
FY17E 110.9 118.3 128.6 132.1 136.3
Volatile raw material prices

The price of the key raw material, ammonium nitrate, can exhibit volatility,
which can have an adverse impact on the profitability of SIIL. Prices of
ammonium nitrate are largely linked to natural gas prices. However, sales
of AN, except spot sales, have price escalation clauses, thus insulating the
company from raw material price volatility.
Exhibit 48: Sensitivity of EPS to raw material (as percentage of net sales)
Raw material (% of Net Sales)
EPS (|) 49.7 51.7 53.7 55.7 57.7
FY16E 130.7 118.1 105.4 92.8 80.1
Regulatory risk
The explosives industry is stringently regulated, where various approvals
are required for manufacturing, transportation, storage ad marketing. Any
kind of adverse decision from concerned authorities may impact SIIL’s
core operations.
Accident prone industry
SIIL’s business is prone to accidents given the nature of products
manufactured and raw material handled. In the explosives industry, 18
accidents were reported under the Explosives Act in FY14. Any such
incidents may hamper SIIL’s operations and, thus, its profitability.
Currency fluctuation
Currency volatility may impact export/overseas revenues and,
consequently, margins. Given the current fall in crude priceds have led to
strong depreciation of oil producing nations like Nigeria which can impact
margins of consolidated entity.

Valuation
SIIL possesses a wide moat in the form of a de-risked business model,
industry leadership, significant entry barriers and an optimal product mix
to benefit the most from a revival in mining & infrastructure activity. Even
in the export & overseas business, we believe SIIL has just scratched the
surface of growth, with many more un-penetrated markets yet to be
explored. A foray in new business segments like defence will further
solidify SIIL’s business model at a time when the government’s
prerogative is to indigenise defence manufacturing, which will allow SIIL
to scale the defence business at a faster pace. Even during times of
moderate/muted business environment, SIIL had witnessed robust
revenue CAGR of 18.4%, over FY09-14, backed by a strong 12.4% volume
CAGR (bulk + cartridge) coupled with capacity expansion and market
share gains. This speaks volumes for the pedigree of the management
SIIL is a rare combination of excellent growth track record, and business model that has evolved over time and reiterates our
proactive management, conservative leverage approach, confidence in the company to capture the upcoming opportunity with a
expanding margins & return ratios along with 25%+ revival in industrial activity. Hence, SIIL is a rare combination of excellent
growth guidance from management for the next three
growth track record, proactive management, conservative leverage
years.
approach, expanding margins & return ratios along with 25%+ growth
guidance from management for the next three years.
Going ahead, the Coal & Power Ministry have set CIL a stiff target to
achieve 1000 mn tonnes of coal production till FY19E. This implies 17.2%
production volume CAGR over FY14-19E. This, in turn, will create an
incremental demand of ~7,71,008 tonnes of explosives, implying a rise of
~99% over the same period. Being the largest player, SIIL is well set to
capitalise on the forthcoming opportunity given the kind of product mix,
existing capacities and future capex plans it commands.
We expect revenues, EBITDA and PAT to grow at a CAGR of 20.5%,

26.1% and 25.2%, respectively, over FY14-17E. Consistency in revenue,
PAT growth, disciplined capex programmes (leverage of 0.7x) and logical
overseas and new segment diversification have already led to a re-rating
of the P/E multiples of the stock. The YTD rally of 205% in the stock price
has made the forward multiples look rich at 22x F17E EPS given the
markets are pricing in 8-10% growth for the industry over FY16E-17E.
However, SIIL, on an average, has produced industry beating growth
rates owing to the factors discussed above. Also, as the leader of the
industry, SIIL deserves premium valuations. The crucial catalyst for a
further re-rating depends on the execution of the 1000 mn tonne target of
coal production by FY19E. Hence, in case the stiff coal production target
sees the light of the day, then the Street would be undermining the
earnings growth for the industry and SIIL, in particular. However, to
capture the emerging growth opportunities in the explosives and defence
business, we would base our valuations on the basis of PEG ratio. We are
pencilling in 25.2% PAT CAGR over FY14-17E for SIIL and ascribing a PEG
multiple of 1x, implying a target P/E of 26x. Hence, we arrive at a fair
value of | 3342 and initiate coverage with a BUY rating.

Trading multiples
Exhibit 49: Two year forward P/E
3500
3000
2500
2000
(|)
1500
1000
500
Jan-14
Apr-14
Jul-14
Oct-14
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Price 23x 19x 16x 12x 10x 8x 7x
Source: Reuters, ICICIdirect.com Research
Sensitivity Analysis
We have constructed a bull and bear-case scenario analysis around our
revenue CAGR estimates of SII to better assess the risk reward outcomes.
Bull case scenario…
In the bull case, we expect consolidated revenues to grow to | 2174.4
crore at a CAGR of 24.3% over FY14-17E. Domestic explosives revenues
are expected to grow at a CAGR of 18.6% (vs. 15.2% in the base case).
We expect the overseas business to grow at CAGR of 29% (vs. 25.5% in
base case). We expect defence revenues to touch | 200 crore in FY17E
(against our estimate of | 128 crore). The PAT is expected to grow at a
CAGR of 29.8% over FY14-17E (vs. 25.2% in the base case). For the bull
case, we ascribe 1.0x PEG over FY14-17E earning CAGR to arrive at a
target multiple of 30x and derive a target price of | 4299 providing a
robust upside potential of 49.5%.
Bear case scenario…
In the bear case, we have assumed a volume CAGR of 10% for all
segments in explosives (bulk, cartridge, detonator & detonating fuse).
Accordingly, we expect consolidated revenues of SIIL to grow to | 1721.6
crore at a CAGR of 15% over FY14E-17E. Domestic explosives revenues
are expected to grow at a CAGR of 10.7%. We expect the overseas
business to grow slowly at CAGR of 15.2%. We maintain the base case
assumptions for the defence business. The PAT is expected to grow at a
CAGR of 18.8% over FY14-17. For the bear case, we ascribe 1.0x PEG
over FY14-17E earning CAGR to arrive at a target multiple of 19x and
derive a target price of | 2084, implying a downside of 27.5%.
Exhibit 50: Bull-base-bear sensitivity
Base Case Bull Case Bear Case
Revenue (FY17E) 1980.9 2174.4 1721.6
Revenue CAGR (FY14-17E) 20.5 24.3 15.0
EBITDA Margin (FY17E) 20.5 20.5 20.5
FY17E EPS 128.6 143.3 109.7
Fwd P/E FY17 (x) 22.4 20.1 26.2
PEG Ratio (x) 1 1 1
PAT CAGR (FY14-17E) 25.2 29.8 18.8
Target P/E (x) 26 30 19
Target Price 3342 4299 2084

Exhibit 51: Peer comparison (Financials)
Company Mcap Revenues EBITDA EBITDA Margin (%) PAT ROE ROCE
(| crore) FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14
Domestic
Solar Industries 5203 976 1122 1133 175 190 203 18.0 16.9 17.9 101.2 116.3 118.4 25.0 20.3 17.9 22.4 18.1 15.9
Premier Explosives 266 108 109 145 18 10 17 16.2 9.0 11.8 11.9 5.3 9.2 29.3 11.4 17.4 30.1 13.2 19.3
Keltech Energies 78 178 155 154 10 10 12 5.6 6.2 8.1 5.0 4.3 5.9 10.4 8.2 19.1 10.7 9.5 17.8
Gulf Oil Corp Ltd 762 1236 1265 1301 68 23 41 5.5 1.8 3.2 48.2 50.2 67.7 6.4 4.7 6.1 7.9 -5.4 5.1
International
Orica Ltd 34340 36157 38675 38175 6341 6706 6472 17.5 17.3 17.0 2182.2 3328.2 3384.3 12.3 16.9 14.8 16.4 20.4 19.1
Incitec Pivot Ltd 28998 18966 19119 18828 3962 3658 4148 20.9 19.1 22.0 2766.7 2062.1 1388.0 13.2 8.9 5.7 20.8 7.1 10.0
Source: Bloomberg, ICICIdirect.com Research
Exhibit 52: Peer comparison (Valuation)

Company Mcap (| crore) P/E EV/EBITDA Mcap/Sales
FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
Solar Industries India Ltd 5203 33.6 27.3 22.4 20.4 16.0 13.1 3.9 3.1 2.6
Orica Ltd 34340 11.4 10.7 9.9 7.5 7.1 6.8 0.9 1.0 1.0
Incitec Pivot Ltd 28998 14.9 13.7 11.0 9.1 8.5 6.9 2.0 1.9 1.7
Source: Bloomberg, ICICIdirect.com Research

Financial Summary (Consolidated)
Exhibit 53: Profit and Loss (| crore)
Net Sales 1,119.7 1,125.7 1,337.6 1,657.7 1,971.0
Other Operating Income 2.1 7.3 6.1 8.3 9.9
Total Operating Income 1,121.8 1,133.0 1,343.7 1,665.9 1,980.9
Total Revenue 1,141.8 1,144.1 1,354.5 1,677.9 1,992.9
- - - - - -
Raw Material Expenses 650.1 590.8 727.7 890.7 1,057.2
Employee Expenses 55.6 67.3 73.7 82.9 98.6
Other Expenses 226.2 271.9 276.9 356.4 418.5
- - - - - -
- - - - - -
EBITDA 190.0 203.0 265.4 336.0 406.6
Interest 30.9 17.9 20.4 38.4 43.9
Other Income 20.0 11.2 10.8 12.0 12.0
PBDT 179.1 196.3 255.7 309.6 374.7
Depreciation 17.0 21.9 27.9 33.2 37.5
PBT 152.2 164.4 222.8 276.5 337.2
Total Tax 25.7 34.9 55.4 69.1 84.3
PAT before MI 126.4 129.5 167.4 207.4 252.9
Minority Interest 10.1 11.1 12.7 16.6 20.2
PAT 116.3 118.4 154.7 190.8 232.7
Exhibit 54: Balance Sheet (| crore)

Liabilities - - - - -
Equity Capital 18.1 18.1 18.1 18.1 18.1
Reserve and Surplus 554.6 643.5 770.5 931.7 1,132.6
Total Shareholders funds 572.7 661.6 788.6 949.8 1,150.7
Secured Loan 325.0 340.6 343.2 378.2 411.2
Unsecured Loan 19.5 102.2 102.2 137.2 170.2
Deferred Tax Liability 20.7 27.0 27.0 27.0 27.0
Minority Interest 40.5 38.1 50.8 67.4 87.6
Liability side total 978.5 1,169.5 1,311.8 1,559.5 1,846.7
Assets - - - - -
Total Gross Block 442.5 582.5 723.5 823.5 923.5
Less Total Accumulated Depreciation 70.0 91.6 119.6 152.7 190.2
Net Block 372.5 490.9 604.0 670.8 733.4
Total CWIP 60.6 81.0 40.0 40.0 40.0
Total Fixed Assets 433.1 571.9 644.0 710.8 773.4
Other Investments 9.5 10.5 11.5 12.5 13.5
Liquid Investments 39.4 14.7 14.7 14.7 14.7
Inventory 136.1 152.8 164.9 204.4 243.0
Debtors 155.9 185.3 197.9 245.2 291.6
Loans and Advances 144.8 142.5 133.8 165.8 197.1
Other Current Assets 96.9 141.7 133.8 165.8 197.1
Cash 92.2 133.0 233.0 315.1 443.0
Total Current Assets 626.0 755.4 863.3 1,096.3 1,371.8
Creditors 108.7 169.1 201.6 249.8 297.0
Provisions 20.8 13.9 20.2 25.0 29.7
Total Current Liabilities 129.5 183.0 221.7 274.8 326.7
Net Current Assets 496.5 572.3 641.6 821.5 1,045.1
Assets side total 978.5 1,169.5 1,311.8 1,559.5 1,846.7

Exhibit 55: Cash flow statement (| crore)
Profit after Tax 116.3 118.4 154.7 190.8 232.7
Depreciation 17.0 21.9 27.9 33.2 37.5
Cash Flow before working capital changes 164.1 158.1 203.1 262.3 314.1
- - - - - -
Net Increase in Current Assets (46.7) (88.6) (8.0) (150.8) (147.7)
Net Increase in Current Liabilities (24.6) 53.5 38.7 53.0 51.9
Net cash flow from operating activities 92.9 123.1 233.8 164.5 218.4
- - - - - -
(Purchase)/Sale of Fixed Assets (112.1) (160.7) (100.0) (100.0) (100.0)
Net Cash flow from Investing Activities (145.9) (133.1) (88.3) (84.4) (80.8)
- - - - - -
Inc / (Dec) in Equity Capital 0.8 - - - -
Inc / (Dec) in Loan Funds 58.1 15.5 2.6 35.0 33.0
Inc / (Dec) in Loan Funds 3.2 82.7 - 35.0 33.0
Net Cash flow from Financing Activities 82.3 50.8 (45.4) 2.0 (9.7)
- - - - - -
Net Cash flow 29.3 40.8 100.0 82.1 127.9
Cash and Cash Equivalent at the beginning 62.9 92.2 133.0 233.0 315.1
Closing Cash/ Cash Equivalent 92.2 133.0 233.0 315.1 443.0
Ratios
Exhibit 56: Ratio Analysis
Per Share Data
EPS 64.3 65.4 85.5 105.4 128.6
Cash EPS 73.6 77.5 100.9 123.7 149.3
BV 316.4 365.5 435.8 524.8 635.8
Operating profit per share 105.0 112.1 146.6 185.7 224.7
Operating Ratios
EBITDA / Total Operating Income 16.9 17.9 19.8 20.2 20.5
PAT / Total Operating Income 10.4 10.5 11.5 11.5 11.7
Return Ratios
RoE 20.3 17.9 19.6 20.1 20.2
RoCE 18.1 15.9 18.5 19.8 20.3
RoIC 22.0 19.3 23.2 25.5 27.4
Valuation Ratios
EV / EBITDA 28.5 27.1 20.4 16.0 13.1
P/E 44.7 43.9 33.6 27.3 22.4
EV / Net Sales 4.8 4.9 4.0 3.3 2.7
Sales / Equity 2.0 1.7 1.7 1.7 1.7
Market Cap / Sales 4.6 4.6 3.9 3.1 2.6
Price to Book Value 9.1 7.9 6.6 5.5 4.5
Turnover Ratios
Asset turnover 1.3 1.0 1.1 1.2 1.2
Debtors Turnover Ratio 7.2 6.1 6.8 6.8 6.8
Creditors Turnover Ratio 10.3 6.7 6.6 6.6 6.6
Solvency Ratios
Debt / Equity 0.6 0.7 0.6 0.5 0.5
Current Ratio 4.8 4.1 3.9 4.0 4.2
Quick Ratio 3.8 3.3 3.2 3.2 3.5

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No. 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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Solar Industries (SOLEXP) : Detonating To Explosive Growth

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Solar Industries (SOLEXP) : Detonating To Explosive Growth

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Initiating Coverage

(Year-end March) FY13 FY14 FY15E FY16E FY17E

ICICI Securities Ltd | Retail Equity Research

Mining industry is a major consumer of explosives accounting for 90% of

Consolidated revenues in FY14 were at | 1,126 crore, with domestic,

Exhibit 2: Solar Industries India milestones

Foray into defence

1984 1996 1998 2000 2001 2002-2005 2006 2007-2014

Commences production of detonators Starts exporting to

ICICI Securities Ltd | Retail Equity Research Page 2

Solar Industries India

100% 100% 100%

Solar Industriee Solar Overseas

Solar Overseas Netherlands Solar Overseas

65% 100% 55% 100% 80%

65% 74.5% 54% 80%

Source: Company, ICICIdirect.com Research

Exhibit 4: Key overseas markets

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 3

ICICI Securities Ltd | Retail Equity Research Page 4

Source: Company, ICICIdirect.com Research

Exhibit 8: Iron ore production to grow at 11.8% CAGR in FY15-17E

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 5

Exhibit 9: Cement production to grow at 7% CAGR in FY14-17E

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 6

However, SIIL has a diversified revenue base with

Bargaining power of sellers Industry rivalry Threat of new entrants

Source: Company, ICICIdirect.com Research

Exhibit 11: Key licenses & approvals for industrial explosives

As a consequence of high entry barriers, there is a high concentration of

ICICI Securities Ltd | Retail Equity Research Page 7

ICICI Securities Ltd | Retail Equity Research Page 8

Solar Industries Gulf Oil Corp. Premier Explosives Keltech Energies

Source: Company, ICICIdirect.com Research

Strategic expansion + product diversification = Pole position in concentrated

Exhibit 15: Well diversified product portfolio

Bulk Explosives Cartridge Explosives Detonators Detonating Fuse

68955 tonnes 133 million nos 59 million metre

End-use Underground & small open cast

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 9

Exhibit 17: Volume CAGR of bulk & cartridge segment

Source: Company, ICICIdirect.com Research

Bulk volumes expected to grow at 16.9% CAGR over FY14-17E

Bulk explosives volumes declined from 1,14,330 MT in FY13 to 1,06,988

In FY09-14, when India’s coal production was stagnant and grew at a

ICICI Securities Ltd | Retail Equity Research Page 10

Source: Company, ICICIdirect.com Research

Location proximity and strategic expansion have led SIIL’s

175000 170881 30.0

Bulk (Solar) Market Share

Source: Company, ICICIdirect.com Research

Cartridge volumes expected to grow at 12.5% CAGR over FY14-17E

The estimated investment of | 19 trillion in the construction sector in

ICICI Securities Ltd | Retail Equity Research Page 11

Source: Company, ICICIdirect.com Research

SIIL’s superior growth in the cartridge segment, relative to

120000 31.1 35.0

60000 17.4 55488