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Solar Industries - Improves operational performance - ICICI Securities

Posted On: 2020-11-18 02:18:09 (Time Zone: Arizona, USA)

Solar Industries' (SOIL) delivered a beat on standalone as well as consolidated revenue and EBITDA estimates for Q2FY21. EBITDA margins were ~200bps higher than expected in standalone as well as overseas operations. Standalone gross margins continue to expand (up 300bps QoQ in Q2FY21) following a 400bps expansion witnessed in Q1FY21. Standalone revenues are up 6% YoY despite a muted housing and infra segment growth. Large part of the operational beat can be explained by 32% YoY increase in overseas and export operations (catering to overseas). Two contracts in the current quarter - i) multimodal hand grenade (Rs4.1bn) and ii) with Singareni collieries (SCCL) worth Rs4.5bn - helped replenish the defence and mining orderbooks respectively. Upgrade to HOLD from REDUCE with a revised target price of Rs1,006 (previously: Rs 924/share).

- Standalone revenues take support of exports, margins continue to surprise. Gross margins at 41% were at 5-6-year high. This is despite no significant tailwind from the trade and infra segments, the traditional margin contributors. Higher exports would have driven margin trends in the standalone segment. Buildup in trade receivables (Rs550mn) and working capital investment in H1FY21 (Rs840mn) comes as a negative surprise.

- Overseas business turnaround aided topline/margins. Consolidated revenues increased 16% YoY. This has been helped by 35% YoY growth in subsidiary revenues. We would continue to highlight the significant triggers towards profitability improvement that overseas operations exercise. What stands out from FY20 annual report analysis is PAT loss of ~Rs800mn in South Africa and Australia combined. Excluding these two locations, overseas business PAT was almost flat YoY at Rs1.3bn. Despite business turbulence in Turkey (further impacted by currency depreciation), the turnaround across new locations amidst global business tailwinds augurs well for SOIL profitability. The translation losses continue to get recorded as a part of Other Comprehensive Income (OCI) - Rs 167mn of OCI losses were seen in Q2FY21. Also, despite improvement in revenue and profitability, the operations continues to draw working capital support.

- Multimodal hand grenade order helped defence orderbook. The defence orderbook expanded to Rs7bn from Rs3bn QoQ. Defence revenues are also seen to be getting back into growth trajectory with ~Rs804mn of execution in H1FY21. Higher defence execution can lead to margins exceeding our expectations. SOIL has been highlighting: i) successful test of Pinaka rockets (integrated by SOIL) by Indian Army, and ii) prospective order inflow form multimodal hand grenade.

- Upgrades to HOLD from Reduce. As we factor-in higher margin possibility from overseas business, the key execution challenge for the company will be to offset the weakness in coal (structural) and trade and infra (GoI budget-driven) segments. We value SOIL at 26x FY22E P/E.

Shares of SOLAR INDUSTRIES INDIA LTD. was last trading in BSE at Rs.978.05 as compared to the previous close of Rs. 1003.1. The total number of shares traded during the day was 1486 in over 282 trades.

The stock hit an intraday high of Rs. 1005.75 and intraday low of 978.05. The net turnover during the day was Rs. 1472672.

Source: Equity Bulls

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