Solar Industries: Is it exploding its way to success?

Defence segment offers opportunities for growth and margin expansion

Over the past 10 years, Solar has developed several defence products - high energy materials (HMX, RDX, TNT & compounds), composite propellants for Pinaka, Akash, Brahmos, etc., explosive filling of ammunitions, mines, multimode grenades and warheads, fuses, pyros and ignitors and rocket/missile integration.

Most of these products are fast-moving ammunition requiring periodic replenishment. This would enable the company to book revenue at a faster pace compared to peers in the defence space.

In Aug '22, the Defence Acquisition Committee (DAC) cleared Solar to compete in bids to manufacture two versions of the Pinaka rockets. Company is the first in the private sector to qualify for manufacturing the rockets. Solar would participate in upcoming Pinaka tenders and hopes that its commercialisation will commence from FY24.

Solar’s presence in the following sectors

Solar Industries is at an interesting phase, given brightening prospects and its upcoming capabilities in defence.

1) Solar’s exposure in consumable-type defence products provides opportunity for regular orders.

2) Capability in integrating rockets and missiles under a single roof, gives the company an edge over ordnance factories

3) Opportunities in the cash rich business of explosives and initiating systems are likely to grow. The company has sufficient capacity, expertise, and land bank to increase revenue contribution from the high-margin defence business. Company’s Centre of Excellence (CoE) facility for life cycle assessment is one of its kind in Asia and is likely to further hone Solar’s capabilities in assuring quality of both raw materials and finished products.

Overall, Solar on a high-growth trajectory on the twin planks of -

1) Growth in the commercial explosives business, and

2) Increasing share of the high-margin defence explosives business. Factoring-in the impressive growth in defence order book, healthy margins and EPS potential for 47% CAGR (FY22-FY24E).

Future-ready for defence and space sectors

Defence segment comprised a mere 7% of Solar’s revenue in Q2FY23 (FY22: 6.3%). However, the company has developed capabilities in the defence segment and is well positioned to cater to future orders.

Solar has submitted proposals to manufacture two high-mobility long-range precision rocket systems, Maheshwarastra-1 (range of 150 km) and Maheshwarastra-2 (range of 250 km), under the Make II category of the Make in India initiative. Besides, Solar has developed a counter-drone system called Bhargavastra, which can destroy up to 16 drones in seven seconds and deploy 64 missiles through the system. Company has already tested this mechanism and can develop its own capabilities at making counterdrones in the next two years.

Partnership to accelerate growth

In Mar '22, the company developed loitering munitions and successfully tested it in high altitude conditions in Ladakh in association with Z Motion Autonomous System (ZMotion). All three newly developed loitering munitions – LM0, LM1 and Hexacopter – were successfully tested.

In 2019, Solar invested in Skyroot Aerospace, which became the first Indian private company to demonstrate the capability to build a homegrown rocket engine. The mission, codenamed Prarambh (the beginning), is the Indian private sector’s first entry into the lucrative space launch market.

Company is also doing due diligence for a possible investment in RECL to expand its product portfolio of high-end applications.

Industrial explosives segment – Important segment for the company to bolster the growth

In industrial explosives, Solar continues to maintain its pole position in the domestic market. The factory in Chakdoh is the largest single-site explosives manufacturing base in the world. The plant is self-sufficient in producing all the chemicals in the intermediate supply chain such as PETN and TNT.

For instance, in the second quarter when domestic business is relatively weak due to monsoons, the export and overseas business lends stability to volume. In the third quarter, when year-end holidays in the Western world impacted exports and overseas volume, a ramp-up at Coal India (CIL) and other mining companies helped maintain stable volumes. In the fourth quarter, domestic infrastructure spending is at peak, hence volumes from this segment are robust.

Centre of Excellence for life cycle assessment - An understated glory As a result of its focus on R&D, Solar has developed a number of products such as electronic detonators, three-layer shock tube, new bulk products (viz. Blastek 90 and Superflag) or alternate formulations for permitted P-3 and P-5 explosives besides developments in high-energy materials for various defence items.

Company is preparing well for defence and space. Company is well-placed to reap the benefits of likely orders in the defence sector. Company has the facility to integrate propulsion, detonating units and warheads for Pinaka rockets. Their State-of-the-Art CoE for life cycle assessment of explosives and propellants.

Company is working towards commercialising drones and loitering munitions. Latest successful testing of Vikram S affirms Solar’s successful foray in the space sector. On the export front, Solar is comfortably placed with ammunition orders worth Rs 3 bn and potential orders for rockets and missiles from overseas. Company’s product expertise fits well into the India government’s indigenisation initiative and thrust on exports.

Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar

Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related investment-related decision.