Defence, overseas markets to boost incremental growth for Solar Industries

Margins too should move up as the proportion of these segments improves in the revenue mix

The stock of Solar Industries hit an all-time high of Rs 4,535.95 hit on January 3 on the expectations that new orders from the defence segment, and an uptick in overseas business will boost incremental growth and improve margins over the next couple of years. The company, which is the market leader in industrial explosives with a share of 25 per cent, has seen the highest earnings per share upgrades for the 2023-24 financial year (FY24) over the last three months, according to Macquarie Research.

The near-term trigger for the stock is the decision by the defence ministry for 24 capital acquisition proposals, worth over Rs 84,000 crore, spread across the three wings of the defence forces and the Coast Guard. ICICI Securities expects the company to benefit the most from the development, on the back of orders for long-range guided bombs (explosives) and the execution of these orders are expected to be expedited.

The company, according to BOB Capital Markets, has an exclusive transfer of technology for the Pinaka rocket -- BrahMos propellant -- which it expects will sustain order flows for the next five to seven years. Other projects within this space it is working on are high mobility long range precision rocket systems, and counter drone systems, say analysts at the brokerage. The company expects contribution from the defence segment to increase from 6 per cent in the second half of FY23 to about 10-15 per cent over the next three years.

The current order book from the defence segment is pegged at about Rs 900 crore and given the order pipeline, brokerages expect the segment to post annual growth of 50 per cent plus over the next three years.

While defence is likely to contribute to a bulk of the incremental growth, the core segment of industrial explosives as well as overseas sales too are expected to grow at a healthy rate. Centrum Broking Research expects the company, which is one of its top picks in the capital goods space, to post an annual revenue growth of 27 per cent over FY22-25.

This is on the back of rising capital expenditure in India and a thrust on production from both Coal India and other mining players. Making further in-roads into new geographies as operations in Australia, Ghana and Tanzania have stabilised is another trigger. The company is looking at scaling up its manufacturing presence outside the domestic market to 10 from the current 6. Overseas markets and exports are expected to account for 38-40 per cent of sales.

While profitability has been strong with margins in the 19-21 per cent band over the last several years, higher proportion of the more profitable overseas markets and defence segment could lead to a further expansion of this metric.

Most brokerages have pegged the target price of the stock at Rs 4,700, and above, which translates into over 15 per cent return from the current levels. Given the company's prospects and the share price correction in the past three weeks, investors may want to consider the stock, trading at 40 times its FY24 earnings estimates, on dips.