Strong roadmap lifts this ‘explosive’ stock but high valuations might spoil the party

• Solar Industries is a market leader in the Indian industrial explosives market with around 25% market share.
• The company expects annual volume growth at 15-20% on the back of order wins from Coal India and more.
• Its short term upside potential may be limited due to a sharp run up in the stock saw in last month.
  

Capital goods company Solar Industries is poised for high growth – thanks to its robust growth prospects due to a rise in construction activity, its exports and defence play. The company which makes industrial explosives has captured a quarter of the Indian market share, with more to come.

“Solar Industries is a market leader in the Indian industrial explosives market which is marked by high entry barriers. Solar Industries, on the back of demonstrated track record of project execution is well positioned to leverage the structural growth story in industrial explosives in India,” said a research report by Aditya Birla Capital.

Good track record with levers ahead

The Nagpur-based company has also demonstrated a good yet steady earnings and revenue growth of 66% over FY21-23 — aided by both strong sales volumes as well as higher realisations due to firm raw material prices.

It has a strong margin profile of 19-21% over the last eight years due to price variation clauses in bulk explosives, adds Centrum Broking which has identified the company as a high conviction stock.

“Margin to improve in future due to improving revenue mix with growing share of defence segment,” Centrum said. Moreso, raw material prices have dropped 35% YoY in the first quarter.

The company has guided an annual volume growth of 15-20%, and the EBITDA margin expected to be in the range of 20%-22%. EBITDA is earnings before interest tax depreciation and amortisation.

The company for whom Coal India is a key buyer, has also forayed into large global mining markets like South Africa, Australia and Indonesia – adding to the upside its revenues can provide.

“The company has also forayed into certain offshore markets like Nigeria, Zambia, Turkey, South Africa and Australia to name a few, which offer strong growth potential and a revenue contribution of over 25% from offshore regions,” Aditya Birla Capital says.

Too hot to buy?

While there is a revenue upside for the company, the stock is currently too expensive for an entry — even as there is long term growth potential. It is currently trading at ₹4,920 which is above the target price of ₹4,700 based on 40x of FY25 earnings, as per Centrum Broking.

The stock has given 47% returns in the last one year — but has run up by 28% in the last month due to large order wins. Yet, analysts believe that this run might only affect its short-term gains since long term potential is intact.

“We remain optimistic about the company’s ability to deliver sustained earnings growth driven by volumes and mix improvement over the long term, however, believe high valuations are likely to impede upside potential in stock price in the short term,” said Aditya Birla Capital.

The downside risks for the stock include slowdown in mining and construction activities which can hamper demand. Added to that, its high revenue of around 40% from international markets, delay or inability in managing sharp currency fluctuations can impact its margins.