Solar Industries: Sun shines bright in Q4, and it#39;s not even high noon yet

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Solar Industries’ strategy to diversify into other markets and segments is gradually yielding...

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Solar Industries’ strategy to diversify into other markets and segments is gradually yielding results. The company is confident of achieving higher growth in FY19 as some of its new initiatives like defence, exports and overseas business are set to make a higher contribution.

That apart, the domestic market’s revival, led by mining and infrastructure, particularly road construction, is also expected to help. For FY19, the company’s management has guided a 25 percent growth in sales, which is more than the 21 percent growth seen in FY18.

Solar Industries has built a strong presence in international markets, compensating for slow growth it witnessed in the domestic markets in the past. It recently commissioned its fourth plant across the globe in South Africa, thereby taking its presence to over 50 countries. Exports and overseas business accounted for around 38 percent of the company’s revenues, and grew at a strong 52.67 percent in FY18.

The company has also ventured into key markets like Australia and the United States in recent times. Contribution from these new geographies, along with the increasing scale of production due to higher capacity, are seen boosting growth.

financials

Back home in India, housing and infrastructure, which accounts for 25 percent of Solar Industries’ revenues, grew at 23.22 percent in FY18, negating the de-growth seen in the business with Coal India. Solar Industries is Coal India’s largest supplier and its business with India’s largest coal producer shrunk 10.2 percent year-on-year in FY18. However, the company is hopeful of higher volume growth in the coming months, with Coal India looking for more production. In the March quarter, Coal India’s business sales were up 3.21 percent on year. Incidentally, the coal producer’s share in Solar Industries’ revenue has been reduced from 23 percent in FY17 to 17 percent in FY18.

The other important segment the company operates in is defence. Solar Industries was targeting a sales turnover of around Rs 80 crore from the segment, against which it delivered a turnover of Rs 37 crore in FY18. This was primarily due to the slowdown witnessed in defence procurements. Nevertheless, the company now has firm orders of around Rs 200 crore, and most of them are at an advanced stage of delivery.

Solar Industries’ management is expecting the defence segment to bring in a sales turnover of Rs 200 crore in FY19, which is a significant jump from the FY18 number.

Valuations

Most of the company’s investments in the overseas markets and the defence segment have started paying off decently. With the contribution from these segments improving, the company’s return ratios, which are slightly depressed because of the capital investment, are bound to improve from here on.

At the moment, Solar Industries is at a stage where all its major segments and markets, including the domestic market, the business from Coal India and the defence segment, are poised to witness good traction.

With strong guidance and an expected improvement in return ratios, the stock appears to be quite inviting. At its current market price, it is trading at 31 times it estimated earnings for FY19, and 25 times its estimated earnings for FY20.

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