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Solar Industries - Navigating a weak external environment - ICICI Securities

Posted On: 2020-08-03 08:42:52

We downgrade Solar Industries India (SOIL) to REDUCE from HOLD with an unchanged target price of Rs883/share. Rich valuations, rather than business concerns, trigger our downgrade. Q4FY20 consolidated EBITDA and PAT came in lower than expected. Topline was in-line; however, margins disappointed due to gross margin compression of 100bps QoQ, higher fixed overheads despite decline in standalone revenue (down 20% YoY), and higher-than-expected translation losses in subsidiary operations. Net debt has increased from Rs5.6bn (ND/EBITDA of 1.12x) to Rs6.5bn (ND/EBITDA of 1.5x) YoY - mainly in overseas operations. There has been a change in directorship with Mr. Kailash Nuwal (one of the promoters owning ~28% in SOIL) being relieved as Vice Chairman and Executive Director effective Nov 7, 2019, due to non-disclosures, involving related-party transactions. Strength of FY21 topline & margin guidance surprises.

- Standalone margin compression in Q4FY20 reflects higher fixed overheads; gross margin compressed by 100bps QoQ. Employee costs and other expenses increased 3% YoY and 6% YoY for FY20, respectively, while topline declined 9% YoY. Similar trends were seen in Q4FY20 as well with 20% YoY decline in revenues, a mere 100bps decline in gross margins, but 1.4% YoY increase in employee costs and 2.3% YoY increase in other expenses. This has led to EBITDA compression of ~556bps YoY. Business mix change i.e lower infra and housing sales would have also led to some margin compression YoY -- mix of infra and housing in revenues fell from 35% to 30% YoY. Infra and housing (cartridge) mix increased from 23% to 30% QoQ, which implies margin compression from fixed costs.

- FY20 defence topline fell ~29% YoY as execution cycle extended. Lockdown in Q4FY20-end further impacted deliveries. The orderbook is largely flat QoQ at Rs3.6bn and is 3x sales on FY20. Further, the management has noted that price negotiation in MMHG RFP is complete and SOIL is anticipating orders soon. The strength of margin guidance, given a weak FY21 outlook, is partly because of improved defence execution.

- Strength of guidance surprises. Apart from defence, overseas and export business has declined 8.5% YoY. The topline trajectory of overseas business has deviated from the originally anticipated topline of Rs9.5bn by FY20. Management's intent to get business back into the originally-anticipated trajectory and the levers for the same are very much present i.e i) expansion into new geographies and ii) using labour cost arbitrage to its benefit by exporting accessories from India. Defence and overseas lead to strong FY21 guidance.

- Change in directorship, due to lack of disclosures involving related-party transactions. (Link). The release highlights non-disclosure of shareholding and directorship in AG technologies, by Mr. Kailash Nuwal while facilitating a rental agreement between SOIL and AG Technologies, leading to him being relieved of directorship and vice chairmanship of SOIL effective from Nov 7, 2019.

Shares of SOLAR INDUSTRIES INDIA LTD. was last trading in BSE at Rs.988.75 as compared to the previous close of Rs. 1014.95. The total number of shares traded during the day was 1584 in over 236 trades.

The stock hit an intraday high of Rs. 1013.3 and intraday low of 970.6. The net turnover during the day was Rs. 1582309.

Source: Equity Bulls

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