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Edelweiss
Solar Industries (Buy)
CMP: ₹1,033.45
Target: ₹1,244
Solar Industries India is an explosives manufacturing company. The company manufactures, supplies and exports industrial explosives and initiating systems.
Key positives: 1) Net sales jumped 40 per cent y-o-y on the back of 50 per cent, 42 per cent and 36 per cent growth in the Coal India, exports & overseas, and housing/infra businesses, respectively; 2) Management maintained >25 per cent y-o-y FY19 revenue growth guidance; 3) Though margins have reduced, management expects them to improve as the benefit of price hike and softening raw material prices kicks in.
Key negatives: 1) Higher raw material cost, ₹8 crore in forex loss, ₹7.5 crore of ECL provisions and increased costs in South Africa dragged margins 380 bps y-o-y to 18.6 per cent; 2) Defence revenue guidance cut to ₹170 crore (from ₹200 crore) for FY19 and ₹400 crore (from ₹500 crore) for FY20.
We estimate Solar Industries will clock a PAT CAGR of 28 per cent over FY18–21E with superior RoE/RoCE and FCF. Significant capex in defence implies huge scope for growth while creating strong entry barriers.
We maintain ‘buy’ with a target price of ₹1,244 (30x FY20E EPS). The stock is trading at 34.5x FY19E and 23.7x FY20E EPS.
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