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). The demand for explosives is directly linked to the growth in mining and infrastructure sector. Demand for explosives is more in Coal mining, Infrastructure development and Metal mining. Mining industry is expected to grow in the core segments like coal, iron ore, and limestone. Coal mining remains the largest application for Explosives worldwide accounting for almost 70% of total explosive consumption. Quarrying and metal mining accounts for almost 10% and the balance 20% is accounted for by infrastructure, construction and other miscellaneous uses. Over 70% of the coal output in India is being consumed for power generation and it is believed to be growing at 4.5%. Production of Coal was 405mn ton in 2005-06 compared to 382mn ton in 2004-05 an increase of 6%. The Government has plans to increase production from 405mn to 621mn ton by 2011-12.. Plans are afoot to deblock 20 bn ton coal reserves for power projects. This should lead to an increase in demand for explosives. India offers good infrastructure opportunities and there are many upcoming ambitious plans for expansion and modernization. India has 3.3 million kilometers of road network, which is one of the largest in the world. Explosives are indirectly used for Roads which occupy an important position in transportation as they carry nearly 65% of freight and 87% of passenger traffic. In India traffic on roads is growing at a rate of 7-10% per annum while the vehicle population growth for the past few years has been 12% p.a.

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. Solar Explosives Limited a part of Solar Group started manufacturing Slurry Explosives in the year 1996-97. It also manufactures Detonators and Detonator components through Economic Explosives Limited and Solar Components Private Limited. The Group started manufacturing Bulk Explosives through wholly owned subsidiary Solar Capitals Limited in the year 2000. With a Licensed Capacity of 1.75 lac tonne Explosives, 140 Million numbers of Detonators and 20 Million Meters of Detonating Cord, it is one of the largest suppliers of Packaged Explosives in India. Solar Explosives is also one of the largest suppliers to Coal India Limited (CIL) which alone accounts for major consumption of the domestic Explosive industry?s output i.e. 70% of total country's demand. It consumes around 4 lakh tons of explosives produced annually. Sales to CIL constitute almost 45-48% of total revenue of Solar explosives. The company also supplies to companies like Steel Authority of India Limited, Singareni Collieries Co. Limited, Hindustan Zinc Limited, Cement Industry, Border Roads Organization, various National Hydro- Electric Projects and various other companies in the infrastructure and construction sector. Solar explosives also export their products to South East Asia, Gulf and African countries. Solar explosive is now the market leader with a market share of 25% compared to 15% of Indian Explosive Ltd and 9% of Gulf Oil Corp. The company had a turnover of Rs 169cr (consolidated) for the year 2005-06 with NPM of 11%. The company's exports were of Rs 8cr in 2005-06 against Rs4.6cr in 2004-05 with a significant increase of 74%. Solar has received an order of 61300 MT of Bulk explosives and 10265 MT of Permitted explosives for 2006-07 from CIL. The total order is approximately valued at Rs 148 cr. There has been a change in the process of ordering by CIL and that has lead to much higher business from CIL. Earlier orders were shared amongst all vendors but its now L1 and given the economic size and spread out presense Solar has managed to bag larger orders.

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.    Revenues (Cr) 1st Qtr 4th Qtr 1st Qtr   FULL       200506 200603 200606   2007 E 2006 2005 Net Sales 20.24 23.94 27.20   194.23 149.37 116.89 %Change y-o-y   -4% 34%   30% 28%   %Change q-o-q -19% 19% 14%                         OPM% 10% 10% 12%   20% 23% 20% Operating profit 2.09 2.50 3.29   38.85 33.78 23.32 %Change y-o-y   32% 57%   115% 145%   %Change q-o-q 10% 5% 32%                         NPM% 12% 8% 11%   10% 11% 9% Adjusted PAT 2.44 2.01 3.06   19.29 17.09 10.90 %Change y-o-y   38% 25%   13% 57%   %Change q-o-q 67% 19% 52%                         Equity 3.49 17.32 17.32   17.32 17.32 3.49 Face Value 10.00 10.00 10.00   10.00 10.00 10.00 EPS 6.99 1.16 1.77   11.14 9.87 31.23 Annualised EPS 27.97 4.64 7.07         Trailing EPS   11.23 6.01         Price     140.00   140.00 140.00   P/E     19.81   13 14