Premier Explosives

Stock Opportunities
1

Hi All,

I've participated in other threads but this is going to be my first thread on a new stock research:

The stock is Premier Explosives. It has four business divisions:

1)Civil applications - Mining & Non Mining (Mining -Detonator, cartridge explosives, detonator fuse, Non Mining - Cloud harvesting, Riot Control devices)

2) Defence & Space (Propellant, Pyros, Explosives, rocket motors)

3) Business divisions â Service contract

4) Wind Energy (very small)

Defence and explosive contribute 90% of the revenues.

Revenues (INR mn) FY10 FY11 FY12 FY13 FY14
Explosives 738.8 731.4 849.7 805 1026
Defence 52.4 89.9 89.1 136.1 267.9
Services 97.2 117.6 129.2 141.7 146.5
Windpower 0.5 4.9 5.4 5.5 6.7
Total 888.9 943.8 1073.5 1088.4 1447.1

Growth in business Divisions:

Revenues Q4FY14 Q4FY13 YoY % Q3FY14 QoQ%
Explosives 279.4 269.1 3.80% 225.6 23.80%
Defence 97.5 51.1 90.80% 62.3 56.50%
Services 34.2 37.9 -9.70% 43.9 -22.10%
Wind 0.5 0.4 20.00% 0.7 -23.70%
Total 411.6 358.5 14.80% 332.5 23.80%


Mcap- 142 Cr

  1. PEL is the only Indian private entity in the niche market of Solid propellants for defence use
  2. PEL has been manufacturer-partner in various missile programs with: Advanced Systems Laboratory, DRDO | Bharat Dynamics Ltd | Research Centre Imarat for various missile such as Akash, Astra and several Surface-to-Air Missiles
  3. Defence allocation this budget is- Rs2,03,672 crore

Positives for this company
  1. Govt opened the sector for private players
  2. Missile program is till in testing phase, missiles are still to be inducted in the army (in testing phase, required missiles are less but when they will be inducted in army number will be huge), this company makespropellant, rocket motorsfor the missiles
  3. Govt has made mandatory for foreign players to source 30% material from Indian companies, so even even foreign companies set up their business in India this company will be benfited
  4. Company has the first mover advantage
  5. Defence is a high margin business (mentioned by them in AR) and for thiscompanyit is growing at a rate of 38% CAGR for past 3 years. Last year growth was 90%
  6. Defence indeginisation- 12thFive-year plan: To increase domestic procurement from 30% to 75%- Raise FDI limit â currently at 26%
Please have a look at this ppt for more details
There was an accident in their plant last year, because of that all their detonators got exploded and they incurred losses. This is the reason for the plunge in profitability in FY2013.
The company can be included in the watchlist atleast as the potential looks huge.
Views are invited:)
Posting some of the ratios below
Particulars Mar2013 Mar2012 Mar2011 Mar2010 Mar2009
Operational & Financial Ratios
Earnings Per Share (Rs) 6.57 14.69 12.33 7.32 3.52
CEPS(Rs) 9.21 16.99 14.50 9.13 5.01
DPS(Rs) 2.50 2.50 2.00 2.00 1.50
Book NAV/Share(Rs) 59.62 55.98 44.20 34.20 29.22
Tax Rate(%) 28.20 28.04 33.45 54.23 53.27
Margin Ratios
Core EBITDA Margin(%) 6.71 13.34 14.66 22.82 18.67
EBIT Margin(%) 7.76 15.18 16.03 15.29 11.57
Pre Tax Margin(%) 6.20 14.22 14.67 13.68 7.95
PAT Margin (%) 4.45 10.24 9.76 6.26 3.71
Cash Profit Margin (%) 6.24 11.84 11.48 7.81 5.28
Performance Ratios
ROA(%) 6.36 14.83 14.13 10.65 5.05
ROE(%) 11.37 29.34 31.45 23.07 12.43
ROCE(%) 16.74 39.32 42.66 41.34 23.76
Asset Turnover(x) 1.43 1.45 1.45 1.70 1.36
Sales/Fixed Asset(x) 2.44 2.67 2.64 2.87 2.67
Working Capital/Sales(x) 11.07 10.12 13.46 7.92 5.87
Efficiency Ratios
Fixed Capital/Sales(x) 0.41 0.37 0.38 0.35 0.37
Receivable days 50.14 48.29 44.95 36.95 64.07
Inventory Days 43.51 33.20 35.79 34.62 34.40
Payable days 23.49 19.18 34.18 54.33 66.63
Valuation Parameters
PER(x) 8.05 4.90 5.25 15.23 5.31
PCE(x) 5.74 4.24 4.47 12.20 3.73
Price/Book(x) 0.89 1.29 1.46 3.26 0.64
Yield(%) 4.73 3.47 3.09 1.80 8.02
EV/Net Sales(x) 0.49 0.54 0.56 1.10 0.32
EV/Core EBITDA(x) 4.52 3.06 2.94 4.18 1.44
EV/EBIT(x) 5.74 3.32 3.25 6.74 2.50
EV/CE(x) 0.59 0.75 0.65 1.66 0.42
M Cap / Sales 0.39 0.54 0.55 1.02 0.22
Growth Ratio
Net Sales Growth(%) 1.00 13.86 7.02 27.60 21.65
Core EBITDA Growth(%) -38.33 5.31 -22.16 51.09 80.82
EBIT Growth(%) -47.40 7.65 13.33 62.90 -21.88
PAT Growth(%) -55.29 19.23 68.52 107.76 -50.92
EPS Growth(%) -55.29 19.21 68.48 107.73 -50.93
Financial Stability Ratios
Total Debt/Equity(x) 0.26 0.10 0.11 0.34 0.39
Current Ratio(x) 1.36 1.49 1.19 1.70 1.80
Quick Ratio(x) 0.80 0.99 0.95 1.08 1.35
Interest Cover(x) 4.96 15.88 11.73 9.47 3.19
Total Debt/Mcap(x) 0.30 0.08 0.08 0.10 0.61
2 Likes
2

AR 2014

http://www.pelgel.com/Premier%20AR_2013-14.pdf

3

Good work Nitin, this looks worth exploring.

Did they get insurance payment after the accident?

Is Solar Industries in same segment…they seem to have better margins.

4

Dolly Khanna recently started buying this stock.

5

Yes they got the money from the insurance guys, mentioned in annual report. :slight_smile:

6

We should look this stock from defense sector point of view. Management clearly says that explosives business is very competitive and they would like to increase the share of defense going forward, and that is visible from the business division contribution (look at the presentation).

They also supply explosives to defence here they have little competition it seems, also they made the most powerful explosive CL-20

Pune Based DRDO Lab Makes Most Powerful Conventional Explosive

http://www.pib.nic.in/newsite/erelease.aspx?relid=67872

Management team consists of top guys from DRDO, and govt Labs. Marketing head is also a retd general of army.

7

Hi, Sorry for this blunt post, but the last time i looked at this company in early 2013 there were some concerns with promoters , i dont recall the details of it, if anyone can also explore or check the promoter background, it will do good as everything else looks good. I will in meantime search through to see what was the problem.

It was something related to mining grants.

8

Yes this company is focusing from Explosives to Defense.

It is visible in % sharing in sales too.

Revenue % ShareQ4FY14 % ShareQ4FY13 YoY% % ShareQ3FY14 QoQ%
Explosive 67.9 75.0 -9.5 67.84 0.0
Defense 23.7 14.2 66.2 18.8 26.4

With new gov focusing on domestic co in defense, prospect for PEL looks better in high margin Defense products.

Kunal

Disc : Still not invested

9

What is the reason for a sharp increase in contingent liabilities, in the previous two quarters? Is it a lawsuit or is it due to warranty issues of the products? If this kind of increase continues, it will affect the net profit in future heavily.

Disc : Not invested
Balance sheet
(Rs crore)
Mar ' 14 Mar ' 13 Mar ' 12 Mar ' 11 Mar ' 10
Sources of funds
Owner's fund
Equity share capital 8.36 8.13 8.13 8.13 8.12
Share application money 0.77 - - - -
Preference share capital - - - - -
Reserves & surplus 48.10 40.33 37.37 27.79 19.66
Loan funds
Secured loans 5.85 5.52 1.17 1.10 6.03
Unsecured loans 4.39 5.33 2.42 2.94 2.64
Total 67.47 59.31 49.09 39.96 36.46
Uses of funds
Fixed assets
Gross block 57.66 51.84 46.01 41.25 36.35
Less : revaluation reserve - - - - 0.34
Less : accumulated depreciation 16.51 14.27 12.90 11.72 10.90
Net block 41.15 37.57 33.11 29.53 25.12
Capital work-in-progress 1.66 0.92 1.20 2.22 3.76
Investments 5.20 5.20 0.45 0.45 1.48
Net current assets
Current assets, loans & advances 59.32 46.22 43.32 35.22 29.50
Less : current liabilities & provisions 39.86 30.59 28.99 27.46 23.39
Total net current assets 19.46 15.62 14.33 7.76 6.11
Miscellaneous expenses not written - - - - -
Total 67.47 59.31 49.09 39.96 36.46
Notes:
Book value of unquoted investments 5.20 5.88 1.13 0.45 1.48
Market value of quoted investments - - - - -
Contingent liabilities 38.08 28.26 6.69 5.84 4.24
Number of equity sharesoutstanding (Lacs) 83.59 81.18 81.28 81.28 81.28
10

At the first look the stock looks attractive. The mgmt has a decent track record. The board seems qualified but the stock is not quoting cheap. The roce is not good. Ok with increase in defence allocation the margins will increase but by how much Also the promoters had issued warrants to themselves.

The related party transactions are not much but the company has associate companies in related fields. Precision wires, Godavari explosives.

Also I feel if the company had some JV with some reputed international player it would be a good start as it gives access to better technology and helps fighting competition

At present price I don’t know how much safety margin is there

11

@Prabeesh thanks for bringing that point, I’ll also do some research on this.

@nikhil I checked their annual report, it is mentioned that contingent liabilities are “On account of guarantees issued by the bankson behalf of the company”. Don’t know how to interpret it, may be seniors can help us to understand it.

@manish I agree stock doesn’t look cheap but RoCE is good except FY13 (look at FY12,11,10), I quoted the reason why it is less in FY13 as their was an accident in one of their plants and all the detonators got blasted.

Yes that would be a good thing if they can have a JV with an MNC but looking at their innovation capabilities they are doing a good job like they themselves developed solid propellant and CL 20 explosives without any help from an MNC.

They can be a good acquisition target for an MNC.

Disc: Not invested

12

Yes, it would be really helpful if the seniors throw some light on that issue.

13

Not a Senior Member but have reasonable credit experience. My understanding On Point 2), In case of government or other contract, the buyer ask seller to provide financial/performance guarantee from Banks. In case, the seller is not able to fulfil his commitment, the buyer has recourse to the bank of seller and such contingent liability crystailise (Financial guarantee). In case of performance guarantee, in case the seller is not able to deliver on time or service quality is not upto expectation then the performance guarantee is invoked by the buyer. This are normal transaction. The best is to compare is over a period of time with sales and also whether no extra charge (from management discussion and financial) then shall not be major concern.

2 Likes
14

What is your opinion about this particular situation, Dhiraj?

15

Thanks Dhiraj for the input, i took contigent liabilities and compared it with the sales. Also I took the % of defense contribution in total sales.

There is an increase in contingent liabilities with the increase of defense contribution but that is not in a proportional manner. In explosives division their clients are NMDC & Coal India, they also might be having these agreement with premier explosives, I believe. (All figures in Rs Crores)

Mar ' 14 Mar ' 13 Mar ' 12 Mar ' 11 Mar ' 10
Contingent liabilities 38.08 28.26 6.69 5.84 4.24
Sales 145.4 109.4 116.66 101.87 94.95
Defense Sales 26.8 13.61 8.91 8.99 5.24
Cont Liab % of sales 26% 26% 6% 6% 4%
Defense Contribution 18% 12% 8% 9% 6%
16

Is Premier Explosives a buy at this level (262) post the current result?

17

Initiated a posion today for tracking purpose. Bought it as they got license of making rocket,missilet,bullets.ammunition etc. But factory setup would require some time. they have also created a joint venture company with bharat forge. Hope to see them winning some defense order.

18

inviting you all guys for some serious discussion on this stock. Premier got a big moat in terms of entry barriers by having licenses which are exclusive. In concall, Mr. Gupta emphasised that they are the first choice for any foreign company to collaborate. They have built their defense portfolio by being continuously making effort since 2003.
Regarding capex, Mr. Gupta said they will chalk out in June quarter. With debt equity ratio at a comfortable 0.2 it should be less problem.
Inviting more views.

1 Like
19

Premier Explosives Ltd has informed BSE that the Company has received on July 07, 2015, Industrial License vide License dated the July 01, 2015, from the Department of Industrial Policy and Promotion (DIPP), for the following Products and Location:

  1. Military fuses of all types including filling and assembling.

  2. Munition 20 mm and above including filling and assembling.

  3. War heads of all types including filling and assembling.

At Peddakandukur, Yadagirigutta Mandal, District-Nalgonda, in the State of Telangana.

Hmm it can atleast make one of the products(They have got license for so many products in last three months).the oppurtunity size is very high.
Risk
1)Factory has to be opened succesfully (They need to take some debt)
2)High quality machinery needed Hope managment doesnot comprise on that
3)Should get/win defense orders
4)Products should get accepted by defense and should get repeat orders

If premier can come above the risk mentioned above… I dont think it would be a micro cap company. It should atleast become small to mid cap company
Disclousure : Invested .Planning to add more on dips. So views might be biased. Please do your own due digilance

20

at the pace which they are bagging license it seems the brighter days are yet not here completely! though recently it has blown up bit as market identified this script… let see further,more Capex could be more beneficial