Solar Industries Ltd

Stock Opportunities Untested - but worth a good look
21

Its great Mr. Sivasubramania that you work in this industry, especially open cast mining area… I think you can provide many valuable inputs on the sector…BTW where geographically you are located and what is your area of operation ?

Now, rgdg. the current price of Solar, my 12 yearscareer in financial markets has taught me one thing " for buying a good company there is never a bad time while for selling a bad company there is never a good time ".

Yes… the valuation at whichone isbuying does matter but for that one needs to go deep into the business and likely future developments to assess the correct valuation… Already in my reply before to someone else I have provided the detailed Justification of current valuation of Solar… While looking at Solar what many are doing is that they are looking at Standalone numbers and so I request all to look at Consolidated numbers while assesing Solar as the main driver for Solar in short-to-medium term is overseas business (which is there is subsidiaries) while medium-to-long term driver is the domestic business (increasing coal production in India which is inevitable coupled with growth in Cement, Steel, Power and fresh impetus to Infra will benefit Solar hugely).

Rgds.

22

http://www.businessworld.in/businessworld/businessworld/content/Great-Coal-Rush.html

For information of all

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yearscareer _ for time _ whichone isbuying

I am an employee in open cast Mining company. It is true that this company has been doing good business in mining companies.

The above detail data are very informative and worth to take a note.

Every thing is very interesting except the current price of the company !!!

I am employed in Singrauli area (Madhya Pradesh) where there are pleanty of coal blocks. Now, Reliance power, Essar, JP & Hindalco have been alloted coal blocks. Future prospects of solar is very bright. Their management is also very very good. " for buying a good company there is never a bad time while for selling a bad company there is never a good time ". - I agree with you 100%.

I do not think there will be correction. Probably Rs.750 may be a reasonable price (current price). I think most of the shares are with long term share holders.

Fatal accidents of mine are normal feature of any mine and managers are quite capable to manage. So do not pay much attention to it.I justpointed out that it is a great news for a common man.

With regards

24

Yogender Bisht, an esteemed member of valuepickr family, raised one important query regarding financials of Solar Industries and I replied to him as candidly as I can… Yogender and I both felt the need to share this conversation on valuepickr forum so that other members also get to know of all the facts…Reproduced below is the entire conversation…

I am grateful to Yogender for bringing this up and this has necessitated formulating a kind of Self Grading/Rating System for each company I cover based on many critical aspects like management quality, transparency, operational segment, financial parameters, etc… Such Grading System will allow members to look at grades/rating achieved by each company on repective aspects so that members can look at each aspect’s grade and question them… This will do away with any sort of mistaken ommision on my part in my research note as, although I prepare detailed research note on each company I cover, there may be some aspects which might have slipped out of memory and so have not found their way in the note… As soon as I am done with my grading system, I will first rate all the 3 companies presently under my active coverage, viz., PI Ind., Jubilant Ind. and Solar Ind. and put it on valuepickr.

Yogender Wrote :

Other income for last three years have been significant (Rs 25 Cr plus ). In last two years most of it is interest income and interest on bank deposits. In FY09 a big chunk of it was Income from sales tax deferment (Should that be treated as revenue??).

This other income is significant if you compare it to PAT ( Rs 75 Cr in FY11).

Maximum cash balance in last 3 years has been Rs 94 Cr. Total investments ( Long term and short term) in FY11 was Rs 12.25 Cr.

So where is this interest income of Rs 20 Cr plus (biggest chunk of other income) in last two years coming from?

__

My Reply :

This same question cropped up in my mind when I was analysing Solar… I will answer it in two parts… 1st management’s take on it and then my candid take on it…

Management’s Version :

Co. has done entire investments in two coal blocks in subsidiaries via an agreement which provides that the investments will be as a loan and co. will earn interest on it…As at FY11, around 97.07 cr. investments are done in coal blocks… Bulk of the interst income was from these subsidiaries.

CFO was busy explaining stadalone other income (OI) numbers and when he was quizzed rgdg. consolidated OI numbers wherein interest income further jumps, he was clueless…

My Candid Take & Remarks :

Frankly speaking, I was not atall satisfied with the management’s version and doubt the pure logic that Co. is charging more than market rates to the investments done in coal ventures… Its a marwari promoter group and such rampant loan diversions and high interests income is common…

On business front there is least doubt that company enjoys a leadership position and strategy of future growth is excellent (I have cross-checked on this front)… However, on transparancy front, Solar can get only 2)5…and there will be a risk of hanging sword on that front in this company…

Feel free to get back to me in case of any other query…

Rgds.

25

The income from interest in FY 11 and FY 10 is Rs. 16 crs and Rs. 21 crs respectively. The balance in interest bearing fixed deposit as at end of FY 11 and FY 10 is Rs. 40 crs and Rs. 74 crs respectively. So part of the interest income is from this source.

In the stand alone accounts, other advances is Rs. 97 crs out of which Rs. 82 crs is to subsidiary companies. Balance Rs. 15 crs seems to be given to some other parties .

Hence, int figure for FY 11 may be arrived as follows: -

From FD @7%- Rs. 2.8 crs

From subsidiary companies @ 12% Rs. 9.84 crs

From other on @ 12% Rs. 1.8 crs.

Roughly accounts for Rs. 14.45 crs but since it is calculated on year end figures very natural that actual figure is little higher than the above.

However, couldn’t make out as to why in the consolidated accounts the other advances has gone up from Rs. 97 crs to Rs. 147 crores.

26

My Q2FY12 Estimate for Solar Industries (Consolidated) :

Total Revenues = INR 198-210 cr. (Q2FY11 - 150.47 cr.)

EBITDA = INR 33â35.8 cr. (Q2FY11 - 23.09 cr.)

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**

My : **

33â35.8

Q2FY12 Results of Solar Inds. have come and they are in line of estimates :

Total Revenues = INR206.8 cr.

EBITDA = INR 37.35 cr.

EPS for the qrtr. - 11.86

Prima-facie View :

The results are in line of estimates while EBITDA is ahead of expectations… Trading income is down which is a positive sign… Company is an undisputed leader in explosives segment and has high prospect given coal short-supply… However, at the current rate of Rs. 820 + fresh purchase is not advisable given the current uncertain domestic environment and other better more lucrative options available…

Rgds.

28

Dear Mahesh

How do you view Q3 results for Solar Industries?

http://www.solarexplosives.com/images/Q3_results.xls

Do you think if we can buy at current level after Q3 results?

Regards

Vikram

29

[ http://www.solarexplosives.com/images/Q3_results.xls

Hi Vikram,

The results of Solar Ind. are on expected lines but I will not advise adding at current valuations.

Rgds.

](http://www.solarexplosives.com/images/Q3_results.xls)

30

Another recent initiation note from Edelweiss.

http://breport.myiris.com/ES1/SOLEXPLO_20120606.pdf

Have been looking at this stock for a while but think valuations are rich at 13.2x FY13. The recent CCI fine (Apr 2012) has also had little impact on the stock price.

I also don’t like the business diversification into coal blocks (one of their coal blocks is under review from the dept of forestry), apart from the corporate governance issues raised above by Mahesh and Yogender.

Mahesh (and others) - a few questions:

  1. Regarding defense propellants, do you have any idea how the contracts are structured - is it an annual tender or contract-wise bidding where they can pick and choose pricing ? Typical govt contracts get a 5-10% net margin at best but is a stable source of revenues. However the lower margin should dilute the P/E multiple, especially as they are looking at c20% revenues from this stream by FY14.

  2. Do you have any idea of their raw material cost breakdown (% that is ammonium nitrate) ? I’m trying to get an explicit breakdown of their cost structure but the recent Urea price hike (10%) should have a follow-on effect on domestic ammonium nitrate prices and, hence, margins.

31

Maheshji,

Would this development have a significant impact on Solar Industries in the long run?

http://articles.economictimes.indiatimes.com/2012-07-06/news/32566289_1_ammonium-nitrate-bulk-explosives-cil

Coal India plans to take over Indian Oil’s explosives division

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Hi Janakiraman,

Please find my replies in bold :

  1. Regarding defense propellants, do you have any idea how the contracts are structured - is it an annual tender or contract-wise bidding where they can pick and choose pricing ? Typical govt contracts get a 5-10% net margin at best but is a stable source of revenues. However the lower margin should dilute the P/E multiple, especially as they are looking at c20% revenues from this stream by FY14.

**
**

Ans.- No specific idea on structuring of Solar contracts, but, there are two aspects to this–first, normally, such defense contracts are for particular quantities of the product rather than annual wherein tenders are invited from private players…second, since DRDO is going to assist Solar in this project, there might be some form of commitment and there might not be any other private supplier then Solar atleast in initial stage…

  1. Do you have any idea of their raw material cost breakdown (% that is ammonium nitrate) ? I’m trying to get an explicit breakdown of their cost structure but the recent Urea price hike (10%) should have a follow-on effect on domestic ammonium nitrate prices and, hence, margins.

Ans.- AN should be almost 80 % of the total raw material cost as its the prime raw material in explosives.

33

http://articles.economictimes.indiatimes.com/2012-07-06/news/32566289_1_ammonium-nitrate-bulk-explosives-cil Link: http://articles.economictimes.indiatimes.com/2012-07-06/news/32566289_1_ammonium-nitrate-bulk-explosives-cil

Hi Nadakarni,

**
**

Yes… this is a significant development for Solar since CIL constitutes 25 % of its FY12 sales, however, it has judiciously reduced its dependence on CIL over last many years and it might do so further till complete integration of acquired co. takes place with CIL… in any case, its going to hurt to a lesser extent Solar and to a larger extent smaller explosive cos. in the long run.

**
**

Rgds.

34

Solar industries looking for PE funding; size and timing unknown (to be considered in the Jul 30 board meeting). Also not known if this is promoter dilution or new capital.

35

4.3% stake being sold to Oman India Investments via. pref allotment at 930/sh. The promoter’s stake is now down to 72%.

36

Maheshji,

Solar looks like has factored in all the negatives esp promoter stake sale and the impact of the coal block issue. Is it appropriate to add some more now?

37

It’s been one often best wealth creator run by a young energetic CA entrepreneur who owns nearly 73% stake . HDFC MF owns 10% stake.

I have missed the stock due to classic case of price anchoring.

Anybody tracking the stock in view of upcoming huge Indian defence opportunity?

38

@ Vivek - I hold it since smtym. Haven’t tracked the fundamentals off late but there is Edelweiss had come up with a report on it recently couple of months back. The report is in public domain and you can google it. They are pretty bullish on this and its a decent report. Looks a good story for next 2-3 yrs at least if things pan out well for it.

The stock though seems to be trying to breakout after a period of consolidation. Looks ripe for an upmove.

Cheers,

HR!!!

39

Mahesh Sir,

Just out of curiosity, do you still hold the company’s stock?

40

Ravenrage…just hold a negligible quantity for tracking purpose.

Rgds.