Explosive growth ahead– Detailed Report

Solar Industries

Initiating Coverage | Sector: Capital Goods

Solar Industries

BSE Sensex

26,587

S&P CNX

8,014

CMP: INR3,542

TP: INR4,100 (+16%)

Buy

Dynamite! Explosive growth ahead

Structural growth drivers in place across businesses

Stock Info

Bloomberg

Equity Shares (m)

M.Cap. (INR b)/(USD b)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

Avg Val(INRm)/Vol‘000

Free float (%)

SOIL IN

18.1

64.1/1.0

3,890/1,800

7/26/85

17/9

27.1

Domestic demand for explosives is likely to increase meaningfully, with ramp-up

of coal production and pick up in infrastructure activities. As India’s largest

manufacturer of industrial explosives, SOIL will be a key beneficiary.

While visibility in the domestic business is improving, expansion into new

geographies overseas and the fledgling defense business would drive the next

phase of growth.

We expect 18% CAGR in consolidated revenue till FY17, with improving margins.

We initiate coverage, with a Buy rating.

Domestic business: Intensifying mining efforts to aid demand growth

SOIL is the largest manufacturer of industrial explosives and initiating systems in

India, with ~24% share (in volumes). Over FY09-15, explosives volume growth

was constrained at just 3.4%, exactly mirroring the CAGR in coal production. We

believe FY16 will be the turning point (with growth rates of 13.8%), given intense

efforts to improve coal availability through (i) auction / transfer of de-allocated

mines,(ii) attempts by Coal India to double production to 1b tons. We expect

SOIL to witness volume CAGR of 17% during FY15-17, with possibilities of more

meaningful ramp-up going forward.

Financial Snapshot (INR Billion)

Y/E Mar

2015 2016E 2017E

Net Sales

13.5

16.1

19.0

EBITDA

2.5

3.3

4.0

Adj PAT

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

1.1

85.9

22.9

428.7

20.0

19.0

41.2

8.3

1.3

113.6

32.3

519.6

21.9

19.4

31.2

6.8

1.6

136.2

19.9

628.6

21.7

21.2

26.0

5.6

Overseas business: Exploring new geographies

SOIL currently exports explosives to 22 countries and has a dominant market

share of 43%. The size of global explosives industry is ~USD10b, and there exists

headroom to increase exports, given cost competitiveness. As the next logical

step, SOIL set up manufacturing operations in key markets like Zambia, Nigeria

and Turkey, with local partners; these are now being leveraged to export to

nearby countries. We expect revenue CAGR of 20% during FY15-17 in overseas

operations, largely led by commissioning of new manufacturing plants, exports

to nearby countries and expansion into new geographies.

Shareholding Pattern (%)

As on

Promoter

DII

FII

Others

Mar-15 Dec-14 Mar-14

72.9

17.8

1.1

8.2

72.9

18.1

0.8

8.2

72.8

18.1

1.2

8.0

Defense: Take-off stage, with initial orders received

SOIL forayed into the defense segment in FY11, and has positioned itself as a key

supplier of HMX and propellants for the indigenous missile program. For SOIL,

the defense business is now more predictable, given that initial orders for both

the products have already being received. At optimum levels, we expect this

segment to contribute ~INR7b to revenues, with EBITDA margin of ~20%.

Notes:

FII incl. depository receipts

Stock Performance (1-year)

Initiate coverage with Buy rating, Target Price INR4,100 (30x FY17E)

We value SOIL at 30x FY17E EPS (earnings CAGR of 25% over FY15-17) to factor

in the possibility of continued strong growth, with ramp-up in

mining/infrastructure activities in India, increasing penetration overseas and also

an inflexion point in defence revenues. The premium valuations are also justified

given that optimum revenues for defence business stands at ~INR7b (possibly

~FY20), while revenues in FY17E are estimated at just INR1b; this translates into

negligible profits for the business in FY17E versus possible EPS of INR45-50 at

optimum revenue levels of INR7b.

15 June 2015

Solar Industries

Intensifying mining efforts to aid demand growth

FY16 the turning point for sustained growth in explosives demand

Demand for explosives is directly correlated to mining activity. During FY09-15, industry

volume growth was constrained at just 3.4%, exactly mirroring the CAGR in coal

production. Growth rates improved to 7.5% in FY15, supported by 6.7% increase in coal

production. We believe FY16 will be the turning point for explosives demand in India (with

growth rates of 13.8% YoY), given the intense efforts to improve coal availability by 2.5x

till FY20 through (i) auction/transfer of de-allocated mines, and (ii) attempts by Coal India

to double production to 1b tons by FY20. We expect SOIL to witness a robust volume CAGR

of 19% over FY15-17, with possibilities of a more meaningful upside as coal production

gets accelerated.

Revving up domestic mining efforts to support growth

Demand for explosives is directly correlated to mining activity. The mining segment

contributes ~85% of the explosives demand in India. Within mining, coal is the

largest contributor, accounting for ~80% of the mining sector’s explosives usage.

Over FY09-15, volume growth in the explosives industry was constrained at just

3.4%, exactly mirroring the CAGR in coal production. Volume growth rates improved

to 7.5% in FY15, supported by 6.7% increase in coal production and 6% increase in

cement demand. Over FY16-17, we expect explosives demand to grow at 14% CAGR.

Growth could accelerate from FY18, given the efforts to increase domestic coal

production by ~2.5x till FY20 and possibility of an accelerated pick-up in

infrastructure capex. We would be watchful of such trends.

FY16 will be the turning point for explosives demand in India

Coal: Attempt to increase

production 2.5x by FY20

Iron ore: Expect production

to increase from 122m tons

in FY15 to 157m tons in

FY17

Cement demand a function

of increased construction

Intense efforts are underway to increase coal availability by 2.5x till FY20 (FY15

production at 604m tons) through (i) auction / transfer of 204 de-allocated

mines (of which 101 round-1 mines have a production potential of 374m tons

per annum), and (ii) attempts by Coal India to double production to 1b tons by

FY20.

We expect iron ore production to grow from 122m tons in FY15 to 157m tons in

FY17, largely supported by (i) lifting of the mining ban in Goa, (ii) private miners

securing necessary clearances in Karnataka, and (iii) increase in environment

clearance limit of a few private mines in Odisha and re-opening of 18 mines in

Odisha/ 12 mines in Jharkhand, post lease extension. Over the longer term,

auction of 199 leases (across all minerals) will be an important trigger to

increase production.

Increased infrastructure and construction activities will lead to improved

cement demand, again supporting increased limestone mining.

15 June 2015

Solar Industries

Exhibit 1: Production trends (m tons) – improved mining Exhibit 2: Expect 14% CAGR in explosives demand till FY17

efforts / construction activity visible from FY15

versus sluggish growth rates in FY13-14

Coal

800

600

400

200

0.6

-12%

0.5

0.7

33%

0.8

Iron Ore

Cement

Explosives (m tons)

% YoY

1.0

1.1

14%

Source: MOSL, Company

Exhibit 3: Explosives demand in mining sector to grow at 12% per year over FY16-17 versus

muted CAGR of 3% during FY10-14

FY09

Production (m Tons)

Coal

Iron Ore

Cement

493

215

181

FY10

515

219

207

FY11

524

207

229

FY12

535

167

247

FY13

556

137

251

FY14

566

152

256

FY15

604

127

271

FY16E

674

145

290

FY17E

744

157

319

Explosives Required per m ton of ore production (assuming 1% increase in OB ratio pa)

Coal

1,027 1,037 1,048 1,059 1,069 1,080 1,091 1,102

Iron Ore

190

192

194

196

198

200

202

204

Cement

158

159

161

163

164

166

168

169

Explosive Required for Mining (000 Tons)

Coal

506

534

Iron Ore

Cement

Total

576

609

% YoY

5.8%

1,113

206

171

549

626

2.8%

566

639

2.1%

594

663

3.7%

611

684

3.2%

659

743

828

730

821

915

6.7% 12.5% 11.4%

Source: MOSL, Company

Expect SOIL to witness robust volume CAGR of 17% over FY15-17 vs 8% in

FY13-15

We expect SOIL to witness robust volume CAGR of 17% over FY15-17, with

possibilities of a more meaningful upside as coal production gets accelerated. This

compares with the muted volume growth of 8% during FY13-15. During end-FY15,

SOIL made two acquisitions, namely M/s Blastec (India) Pvt Ltd & M/s EmulTek Pvt

Ltd for INR83m. This will increase the licensed capacity of bulk explosives by 55,000

tons and take the total capacity to 270,000 tons. These acquisitions should add

~18,000 tons (14% of FY15 bulk sales), supporting volumes. SOIL’s newly

commissioned facility at Kothagudem (Andhra Pradesh) along with two new facilities

at Barbil (Odisha) and Kota (Rajasthan) will also contribute significantly to the

volume growth in FY16 / FY17.

During FY09-15, SOIL’s market share in the domestic explosives market increased

from 16% to ~24% and we expect the same to improve during FY17, led by

commissioning of new bulk plants and also supported by a dominating presence in

cartridges.

15 June 2015

Solar Industries

Exhibit 4: SOIL market share in explosives to increase (%)

Exhibit 5: Expect SOIL’s volume growth at 17% in FY15-17E

Tons

% YoY

Source: MOSL, Company

Increased urgency to ramp up coal production

While Coal India’s 1b ton

target by FY20 looks

ambitious, our detailed

mine-wise analysis suggests

~10% CAGR in production

over FY15-20 to ~780m tons

The government’s urgency towards addressing fuel availability challenges has been

impressive, though initial gains in terms of incremental production will be realized

with a time lag of 18-24 months. Domestic coal production in FY15 stood at 604m

tons, while (1) coal mine auction (round-1, 101 coal blocks) is likely to improve

availability by 374m tons per annum, and (2) Coal India has been indicated a target

of 1b tons production by FY20 (near doubling from current levels). Supporting

initiatives in terms of addressing evacuation bottlenecks and expediting

environment and forest clearances have also witnessed initial progress. Still,

execution remains the key and we would be watchful of the trends.

Coal mine auction: Expect availability to power sector to increase

~200mtons from round-1 blocks

The Supreme Court (SC) judgment de-allocated 204 coal blocks. For operating

mines, bidding was largely completed in February 2015 (annual production of ~43m

tons) and another ~132m tons per annum of production capacity was allocated to

the State sector (including CPSUs, etc).

Classification of blocks and sequencing of auctioning:

The comprehensive list of

204 coal blocks is the schedule I list. The ordinance has classified:

42 operating coal blocks (geological resources of 3.7b tons) under schedule II,

32 blocks at advanced stage of commissioning, with most clearances in place

(geological resources of 4.7b tons) are grouped under schedule III, and

27 blocks have been transferred from schedule I to III.

Based on the clearance granted for schedule II and III blocks, the total production

potential stands at ~374m tons, comprising of: 82m tons from 42 operating coal

blocks, 125m tons from 32 near-commissioning blocks, and ~166m tons from 27

blocks shifted from schedule I to III.

Please refer our

Utilities/Metals sector

report dated 11 Dec 2014

15 June 2015

Solar Industries

Exhibit 6: Summary of coal mine producing capacity (mtpa) in Exhibit 7: Coal mine capacity bifurcation on allotment and

round-1 auction

auctioning basis

Schedule II (no.of blocks)

323 (63)

262

15 (4)

Schedule III (no. of blocks)

35 (34)

374 (101)

292

Allotment

51%

(23 blocks)

Auction

49%

(62 blocks)

Source: MOSL, Ministry of Coal

Coal India targets production of 1b tons by FY20

Coal India has been indicated a gross target to produce 1b tons of coal by FY20,

which entails near doubling of the current production levels. The expected growth is

to be supported by (i) brownfield as well as greenfield projects, (ii) completion of

‘New Railway Infrastructure Projects’, including completion of three critical railway

lines,(iii) faster environment and forestry clearances, (iv) completion of

rehabilitation &resettlement and speedier land acquisition, (v) improvement in law

& order situation, and (vi) technology improvement in mining and related

infrastructure.

The government press release on the subject stated that of the 1b tons target, 908m

tons are expected from identified projects. Also, Mahanadi Coalfields and South

Eastern Coalfields are likely to produce 250m tons and 240m tons, respectively by

FY20, and will be the largest contributors to the production increase.

Exhibit 8: Coal India production to grow by 10% CAGR over FY15-20E

Production (m ton)

Please refer our Coal India

report dated 11 May 2015

Source: MOSL, Company

Please refer to Annexure 1 for detailed analysis on Coal India’s volume growth

15 June 2015

Solar Industries

#3# Streamlining MOEF clearances to expedite capacity augmentation

Ministry of Environment

and Forests (MOEF) has

taken various measures to

expedite clearances for

power and mining projects

Exhibit 9: Several steps taken to streamline MOEF clearances to boost coal production

Web portal system

Online system for providing environment (from June 2014) and forest clearances (July 2014)

Will allow monitoring on the entire process and adhering to the timeline of every step

Delinking from wildlife impact assessment

Delinking of forest clearances from wildlife impact assessments

Relaxed norms for forest clearances

Reduced forest cover requirements for compensatory afforestation from 50% to 33%

More powers to Regional Empowered Committees to process forest clearances at regional levels

Granted authority to states to approve forest clearance up to 100 acres versus12.5 acres earlier

Forest Survey of India to launch new forest database; make it easier to base decisions on scientific data

Boost mining / coal production

Mining projects that have received environment clearance (EC)earlier need not apply for fresh EC while

renewing the mining lease

Group clearances for adjacent mines, rather than individual projects

94 clusters have been identified for Coal India; there would be only one public hearing for the

identified cluster, instead of examining one mine at a time

Source: MOSL, Company

15 June 2015

Solar Industries

Well positioned; diversified product portfolio

Leadership position in a highly regulated market

Explosives market is highly consolidated, with top-6 companies accounting for 74% share.

SOIL is the largest manufacturer of industrial explosives and initiating systems in India,

with ~24% market share (FY15) in volume terms. Over the years, the company has

expanded into all segments of explosives and also backward integrated into manufacturing

raw materials. These strategic initiatives have supported market share gains, and have

solidified the leadership position in a highly regulated market.

Manufacturing, trading and selling of explosives is a highly regulated industry, given

the various approvals and licenses required, which acts as a key entry barrier.

Another important success factor in bulk explosives is proximity to the customer.

The market is highly consolidated, with top-6 companies accounting for 74% share.

SOIL is the largest manufacturer of industrial explosives and initiating systems in

India, with ~24% market share (in volumes). Over the years, the company has

expanded into all segments of explosives including bulk, cartridges, detonators,

detonating fuse, HMX, and propellants. It has also backward integrated into

manufacturing raw materials like PentaerythritolTetranitrate (PETN – used in

detonators), sodium nitrate, calcium nitrate, zinc nitrate, and stypnic acid. With a

network of 16 bulk plants located within a radius of 50-60km of key mining regions,

SOIL is strategically positioned.

Exhibit 10: SOIL has a dominant market share in industrial

explosives in India (%)

Others, 29

Premier

Explosives,

Orica, 16%

Keltech

Energies, 5

Gulf

% Oil, 10%

IBP

(IOC), 11%

SOIL, 24%

Exhibit 11: SOIL’s volume market share has increased

meaningfully over the last six years

Source: MOSL, Company

Source: PESO, MOSL

15 June 2015

Solar Industries

Exhibit 12: SOIL has a dominating share in most segments of the explosives market

Units

Indian Explosives market

- Bulk

Tons

- Cartridge

Tons

- Detonator

m Units

- Detonator Fuse

m Units

SOIL Volumes

- Bulk

- Cartridge

- Detonator

- Detonator Fuse

SOIL Market Share (%)

- Bulk

- Cartridge

- Detonator

- Detonator Fuse

FY09

343,018

254,808

610

334

FY10

389,826

225,615

698

391

FY11

359,943

183,534

724

285

FY12

483,828

238,193

971

371

FY13

495,946

267,275

992

634

FY14

521,419

269,999

1,032

428

Tons

m Units

55,000

41,211

16.1%

16.0%

16.2%

11.6%

8.1%

57,857

55,488

103

18.4%

14.8%

24.6%

14.8%

7.5%

79,980

47,695

108

23.5%

22.2%

26.0%

14.9%

20.7%

94,962

63,200

118

114,326

75,356

141

106,988

68,776

130

21.9%

24.9%

22.2%

19.6%

23.1%

20.5%

26.5%

28.2%

25.5%

12.2%

14.2%

12.6%

18.1%

7.4%

12.1%

Source: MOSL, Company, PESO

Exhibit 13: SOIL’s licensed capacity in India

Bulk Explosives

Cartridge Explosives

Detonators

Detonating Fuse

Cast Boosters

PETN

HMX

Propellants

Units

Capacity Details

Tons

219,240 At 16 locations in 8 states, near to mines (50-60kms)

Tons

74,655 Largest manufacturing facility in world at single location

m Units

190 Manufacturing at Chakdoh (Mah) and Sawanga (Mah)

m Metres

Manufacturing at Chakdoh (Mah)

tons

1,500 Manufacturing at Chakdoh (Mah)

tons

1,650 Manufacturing at Chakdoh (Mah)

tons

Manufacturing at Chakdoh (Mah)

Nos

2,500 Manufacturing at Chakdoh (Mah)

Source: MOSL, Company

Exhibit 14: Revenue composition (INR M)

Coal India

SCCL

Institutional & trade

Exports

Nigeria

Turkey

Zambia

AN High seas

Others

Total

FY11

1,792

467

2,519

748

709

145

753

7,229

FY12

2,661

725

3,612

658

743

197

692

1,030

10,317

FY13

3,334

866

4,476

896

1,074

166

614

598

110

12,133

FY14

FY15

3,793

4,377

243

1,090

4,389

5,036

1,199

607

1,488

1,543

484

781

356

1,037

125

101

12,164

14,572

Source: MOSL, Company

Competition restricted by need for several licenses and approvals

Manufacturing an industrial explosive is strictly regulated - a number of approvals

and licenses are required. Also, the manufacturing, marketing, transportation and

consumption are governed by various directives. These regulations act as a strong

entry barrier for any new entrant.

15 June 2015

Solar Industries

Industrial explosives: Key licenses and approvals required

Industrial license from Department of Industrial Policy and Promotion,

Government of India.

Clearance from Home Ministry.

Clearance from Intelligence Bureau regarding the location’s safety and Directors

antecedant.

NoC from District Magistrate after clearance by Police, PWD and Gram

Panchayat.

License from Chief Controller of Explosives, Government of India.

Directorate General of Mines Safety’s permission is necessary for underground

gassy mines.

In all, there are 48 firms

that have valid licenses to

manufacture various types

of explosives needed for

civil/defense purposes

Exhibit 15: Total number of approved manufacturers for selling explosives

Product

Nitrate mixture

Detonating fuse

Cast Booster

Detonators

Safety fuse

Micro Cord

No of approved manufacturers / suppliers

Source: MOSL, Industry

Exhibit 16: Installed capacity and year-wise utilization of explosive manufacturing plants in India

Product

Gun Powder

Cartridges

Site mixed

Booster & PETN

Safety fuse

Detonating fuse

Detonators

Units Installed capacity

Tons

1,596

Tons

580,387

Tons

1,350,385

Tons

16,419

M Metres

268

M Metres

576

M Nos

974

FY09

908

254,808

343,019

3,206

132

334

610

FY10

828

225,615

389,826

4,449

123

391

698

FY11

689

183,534

359,944

2,574

285

724

FY12

FY13

FY14

711

578

549

238,193

267,275

269,999

483,828

495,946

521,419

5,063

5,657

6,186

371

634

428

971

992

1032

Source: MOSL, Industry

Proximity to mines an important entry barrier

SOIL has 20 bulk explosive plants in mineral-rich states like Maharashtra, Jharkhand,

Chhattisgarh, Odisha, etc. One of the key success factors in bulk explosives is

proximity to mines, as the mixture is pumped into the bulk delivery system (pump

trucks) and sensitizers are added at the mine site just before charging into hole.

Logistics costs and delivery time are critical and also important entry barriers.

Exhibit 17: SOIL has a network of 20 bulk plants spread across strategic locations

States

Maharashtra

Chattisgarh

Jharkhand

Orissa

Andhra

Rajasthan

Nos

Key Clients

WCL, SCCL

NCL, Reliance Power (Sasan)

SECL. Jindal Power, Sharda Energy, Lafarge, Adani

Tisco, CCL, BCCL

MCL, Tisco

SCCL

Hind Zinc, Jindal Saw

ECL

Source: MOSL, Company

15 June 2015

Solar Industries

Control over raw material sourcing and backward integration

The key raw material for manufacturing industrial explosives is ammonium nitrate

(AN), contributing to ~70% of the consumption. SOIL procures most of the AN

domestically from Rashtriya Chemicals and Fertilizers, Gujarat Narmada Fertilizer

Corporation and Deepak Fertilizers. Balance raw material required like PETN, sodium

nitrate, calcium nitrate, zinc nitrate, and stypnic acid are manufactured in-house.

This enables SOIL to enjoy healthier margins than competitors.

15 June 2015

Solar Industries

Overseas business: Exploring new geographies

SOIL has a dominant 43% market share in explosive exports

SOIL currently exports explosives to 22 countries and has a dominant market share of 43%

in explosive exports from India. Size of the global explosives industry is estimated at

~USD10b and there exists meaningful headroom to increase exports, given the Indian cost

competitiveness. As the next logical step, the company set up manufacturing operations in

key markets like Zambia, Nigeria and Turkey, with local partners. These manufacturing

bases are now being leveraged to export to nearby countries. We expect revenue CAGR of

20% during FY15-17 in overseas operations, largely led by commissioning of new

manufacturing plants in Zambia and Turkey, exports to nearby countries and expansion

into new geographies.

Exports: SOIL has dominant 43% market share

Explosives exports from India were INR2.8b in FY14, having grown at a CAGR of 16%

since FY09. The size of the global explosives industry is estimated at ~USD10b, and

there exists meaningful headroom to increase exports, given the Indian cost

competitiveness. SOIL commenced explosives exports in FY04 to various countries in

Africa, South East Asia and Middle East. Currently, it supplies to 22 countries and

enjoys a dominant market share of 43% in exports. SOIL’s export revenue was

INR1.2b in FY14, and declined to INR607m in FY15, particularly due to headwinds to

global mining capex. During FY16, the management expects exports to reach a

normative run-rate.

Exhibit 19: SOIL’s export trend; decline in FY15 is due to

headwinds to global mining capex

Exports (INR M)

167%

722

612

-15%

Australia, 1

China, 13%

FY09

FY10

FY11

FY12

FY13

FY14

748

22%

896

658

-12%

36%

34%

607

-49%

% YoY

1,199

Exhibit 18: Global industrial explosives market (USD10b)

West

India, 5%

East

Europe, 5%

Russia, 5%

Africa, 7%

SE Asia, 7%

LatAm, 12%

North

America, 25

FY15

Source: MOSL, Company

Exhibit 20: Explosives exports / imports from India; SOIL has dominant market share

Exports

Imports

SOIL Market Share

Units

INR b

FY09

1.3

0.3

55%

FY10

1.6

0.6

39%

FY11

1.8

0.4

41%

FY12

2.2

0.4

30%

FY13

FY14

2.0

2.8

0.5

0.9

44%

43%

Source: MOSL, Company

Expanding overseas presence by setting up manufacturing operations

As the next logical step to exports, SOIL set up manufacturing operations in key

markets with large demand potential. It ventured into overseas geographies in FY11

(in Zambia) by partnering with local trading companies to have the required

licenses, post which it has been setting up explosives manufacturing capacities.

15 June 2015

Solar Industries

Currently, SOIL has manufacturing operations in three countries: Zambia, Nigeria

and Turkey. Recently, it commenced sales to nearby countries like Tanzania and

Mozambique, leveraging the manufacturing base in these regions.

Zambia

is ranked as the world’s sixth largest producer of copper, generating

4.4% of the western world’s production. Also, the country is land locked and

shares borders with eight countries, including Zimbabwe, Tanzania, Namibia,

Botswana, Angolaand Malawi.

Mining production in

Turkey

in 2013 was sizable at USD12.8b. Also, there exist

large unexplored reserves.

Nigeria,

SOIL’s local partner, Nigachem Nigeria controlled the explosives

market, with a share of over 80%.

Exhibit 21: SOIL’s overseas operations

Zambia

Nigeria

Turkey

Stake %

65%

55%

75%

Product

Bulk

Cartridge

Bulk

Cartridge

ANFO

Bulk

Cartridge

Detonators

Capacity (Tons)

10,000

5,000

2,000

5,000

40,000

Expansion (Tons)

10,000

2,500

5,000

6m Units

Source: MOSL, Company

Exhibit 22: Financial performance of overseas operations (INR m)

FY11

Revenues

Zambia

Nigeria

Turkey

Total

Net Profit

Zambia

Nigeria

Turkey

Total

148

718

962

FY12

692

743

197

1,631

FY13

614

1,074

166

1,854

FY14

356

1,488

484

2,328

109

130

146

(2)

229

(4)

186

247

(1)

238

256

Source: Annual Reports

15 June 2015

Solar Industries

Exhibit 23: Africa –richly endowed with mineral resources

Source: Report ‘Mining in Africa towards 2020’ by KPMG

44% revenue increase in FY15, led by new manufacturing facilities for

cartridge explosives

Towards the end of FY14, SOIL commissioned its 5k-ton cartridge explosives

plant and detonators assembly plant at Zambia. This has opened up possibilities

to export to nearby countries, including Tanzania. The geography and product

diversification has enabled the company to offset the sharp decline in bulk

volume sales in Zambia, with the drop in copper prices.

Even in Turkey, SOIL commissioned a cartridge explosive plant (5,000 tons),

ANFO plant (40,000 tons) and detonators plant (6m units) in FY14, leading to

increased volumes during FY15. Also, SOIL is working on a 2.5k-ton expansion of

bulk explosives facility, to be commissioned in early FY16.

In Nigeria, SOIL’s local partner, Nigachem Nigeria was the dominant

manufacturer of explosives in the country, with a market share of 80%+. Over

the past few quarters, there have been few new licenses granted, impacting the

opportunity pie and margins.

We expect revenues from overseas operations to improve from INR3.4b in FY15

to INR4.2b in FY16, and INR4.7b in FY17– 18% CAGR over FY15-17. This is largely

led by commissioning of new facilities in Zambia and Turkey, exports to nearby

countries and expansion into new geographies.

15 June 2015

Solar Industries

Exhibit 24: Growth rates in overseas operations to be led by

tapping new geographies (INR m)

Overseas

% YoY

4,403

3,361

1,854

14%

FY11

FY12

FY13

FY14

FY15

FY16E

2,328

26%

44%

31%

11%

FY17E

-10%

4,873

Exhibit 25: Currency headwinds in most countries have

impacted reported financials (% YoY)

30%

20%

10%

NGN/$

TRY/$

ZMK/$

70%

1,631

962

Source: MOSL, Company

Source: PESO

15 June 2015

Solar Industries

Defense: Initial orders received

Should drive next phase of growth

SOIL forayed into the defense segment in FY11, and has positioned itself as a key supplier

of HMX and propellants for the indigenous missile program. For SOIL, the defense business

is now more predictable, given that both the Pinaka rocket and Akash missiles have been

already inducted and initial trial orders are being received by SOIL. At optimum levels, we

expect this segment to contribute ~INR7b to revenues, with EBITDA margin of ~20%.

SOIL forayed into the defense segment in FY11 by leveraging on its expertise of

handling hazardous chemicals and economies of scale. India has an ambitious

ongoing indigenous missile development program, and SOIL will be a key player

supplying HMX and propellants. There has been significant mismatch between

supply and demand of these products due to which government entities have

explored private vendors. Of the initially targeted INR2.2b to set up production

capacity of 50 tons of HMX and 10,000 propellants, SOIL has already incurred capex

of INR1.8b to commission capacity for 50 tons of HMX and 2,500 propellants. The

company intends to spend INR500m in capex in FY16, to increase the HMX capacity

to 100 tons and propellants to 10,000 nos.

HMX:

SOIL is the only Indian company manufacturing HMX and the country has

been importing its entire requirements till date. It commissioned a capacity of

50 tons, which will be gradually expanded to 100 tons. SOIL has already supplied

a small order quantity to Terminal Ballistics Research Laboratory (TBRL),

Chandigarh and Bharat Dynamics Limited. The company has also received

enquiries for HMX from ordnance factory, Khamaria, for approximately 10 tons.

Propellants:

Propellants are used in all missiles, and SOIL will initially focus on

the Pinaka rockets and Akash missiles. There is significant demand-supply

mismatch, with demand potential of 17k-20k pieces by FY17, and current

domestic manufacturing at sub-1,500 pieces. SOIL has set up a manufacturing

facility with a capacity of 2,500 pieces, which will be eventually ramped up to

10k pieces. SOIL has participated in limited tenders floated by Ordnance Factory,

Chanda for supply of 500 pieces of Pinaka, and another tender for supply of 300

pieces for Akash missiles. The management recently stated that the Pinaka

order has been delayed and is now likely to be executed in FY17E.

Possible revenues of INR7b at optimum capacity utilization

The management expects INR500m revenues from defense in FY16 (from the

initial orders expected), increasing to INR1b in FY17. At optimum capacity

utilization levels (over the next 3-4 years), we estimate possible revenues at

INR7b. At average realization of INR10m/ton, HMX can contribute INR1b-1.2b.At

an average of INR0.6m-0.7m/piece, propellants can contribute INR6b-6.5b.

We expect defense revenues to improve from INR500m in FY16 to INR1b in

FY17; optimum levels should be achieved in FY19/20.

15 June 2015

Solar Industries

Exhibit 26: Defense capacity (tons)

Propellants

HMX

Capex Cumulative (INR B)

FY15

2,500

1.8

FY17E

FY19E

10,000

100

2.2

2.4

Source: MOSL, Company

Please refer our detailed

report “India Defence”

in January 2015

Indian defense: At a pivotal point

In pursuance of its declared policy of encouraging the indigenous defense

industry, the government has taken a series of vital decisions: (i) Several critical

projects moved to ‘Buy and Make’ (Indian) category,(ii) Few large projects

reserved exclusively for private sector,(iii) Defense licensing process

streamlined. Over the last twelve months, the Defense Acquisition Council has

cleared proposals for INR2.3t and the pace has been impressive.

Defense indigenization is a decadal opportunity for private players, which we

believe will be able to target USD15b-20b of contracts of an estimated USD150b

to be awarded over the next five years. Still, the benefits will take time to be

reflected in the financials, as actual project awards will be a long drawn process.

Exhibit 27: Indian defense – ‘Make in India’ is a strong resolve; several steps in the offing,

with key government decisions

Source: MOSL, Company, Company

15 June 2015

Solar Industries

Initiate coverage with Buy rating

SOTP valuation of INR4,100 implies 16% upside

We value SOIL at 30x FY17E EPS (earnings CAGR of 25% over FY15-17) to factor in the

possibility of continued strong growth, with ramp-up in mining / infrastructure activities

in India, increasing penetration overseas and also an inflexion point in defence revenues.

The premium valuations are also justified given that optimum revenues for defence

business stand at ~INR7b (possibly ~FY20), while revenues in FY17E are estimated at just

INR1b; this translates into negligible profits for the business in FY17E versus possible EPS

of INR45-50 at optimum revenue levels of INR7b.

Expect consolidated revenue CAGR of 18% till FY17

We expect consolidated revenue to increase from INR13.5b in FY15 to INR19b in

FY17, a CAGR of 18%. This would be led by (i) 18% CAGR in domestic production

(including exports), (ii) 20% CAGR in overseas revenues (from manufacturing

facilities in Zambia, Nigeria and Turkey, penetration into more geographies), and (iii)

INR1b of defense revenues in FY17. During FY06-14, SOIL reported revenue CAGR of

17% on the back of increased market share from 16% to 22% in the domestic

explosives market and setting up overseas manufacturing facilities.

EBITDA margins to improve to 20.9% in FY17E vs 18.8% in FY15

We expect consolidated EBITDA margins to improve to 20.9% in FY17 (vs 18.8% in

FY15), supported by improved margins in domestic explosives / defense and also

product mix change towards cartridges in overseas business. Over FY09-15, SOIL has

witnessed margin expansion from 14.3% to 18.8%, largely on the back of operating

leverage and increased contribution of overseas business.

RoE impacted by investments of INR1.8b in defense; set to improve

SOIL’s RoE declined from 29% in FY12 to 21.6% in FY15, largely impacted by

investments of INR1.8b towards setting up the manufacturing plant for defense. We

expect RoE to improve to 24% in FY16 / FY17 and RoE to reach near the previous

high of 26-27% in FY19/20 as the defense business starts operating at optimum

revenue levels.

15 June 2015

Solar Industries

Initiate with Buy rating, target price of INR4,100

Demand for explosives is directly correlated to mining activity. Coal mining

accounts for ~70% of the explosive usage in India. During FY09-14, industry

volume growth was constrained at just 3.4%, exactly mirroring the CAGR in coal

production. Growth rate improved to 7.5% in FY15, supported by 6.7% increase

in coal production. We believe FY16 will be the turning point for explosives

demand in India (with growth rates of 13.8% YoY), given the intense efforts to

improve coal availability by 2.5x till FY20 through (i) auction/transfer of de-

allocated mines, and (ii) attempts by Coal India to double production to 1b tons

by FY20. We expect SOIL to witness a robust volume CAGR of 17% over FY15-17,

with possibilities of a more meaningful upside as coal production accelerates.

Overseas business also presents interesting growth possibilities. SOIL is set to

penetrate several unexplored regions in Africa, East Europe and Central Asia. It

has set up manufacturing facilities in Zambia, Nigeria and Turkey, and the

business model has seen initial successes.

Defense also presents interesting possibilities, and given the scale economies /

early mover advantage, SOIL is in a sweet spot to capitalize on the strong

government resolve to indigenize production. Reported earnings till FY17E do

not adequately capture the potential upside, as we model revenues of INR1b

versus optimum levels of INR7b in FY19/20, given the initial ramp-up period.

Given the higher depreciation, the profit contribution of the business in FY17

would be negligible. We estimate that at optimum revenue levels of INR7b in

FY19/20, the business can report EPS of INR45-50.

We value SOIL at 30x FY17E EPS (earnings CAGR of 25% over FY15-17) to factor

in the possibility of continued strong growth, with ramp-up in mining /

infrastructure activities in India, increasing penetration overseas and also an

inflexion point in defence revenues. The premium valuations are also justified

given that optimum revenues for defence business stands at ~INR7b (possibly

~FY20), while revenues in FY17E are estimated at just INR1b; this translates into

negligible profits for the business in FY17E versus possible EPS of INR45-50 at

optimum revenue levels of INR7b. The defense business for SOIL is now more

predictable, given that both Pinaka and Akash have been already inducted and

initial trial orders are being received.

Buy.

Key triggers

Pick-up in mining / infrastructure activities

Increased order intake and execution from defense

Success in tapping nearby countries for overseas business

Key risks

Continued sluggishness in domestic mining and infrastructure activities.

Lower commodity prices globally have impacted the visibility of mining efforts,

particularly in high cost regions. Continued uncertainty can impact overseas

revenues.

Explosives industry is prone to accidents and also regulatory risks.

15 June 2015

Solar Industries

Exhibit 28: Operating metrics

FY09

Cartridge

Revenues (INR M)

Volume (tons)

Rln per MT

Bulk

Revenues (INR M)

Volume (tons)

Rln per MT

Detonators

Revenues (INR M)

Volume (m pieces)

Rln per piece

Detonating Fuse

Revenues (INR M)

Volume (m mtrs)

Rln per Mtrs

Defense

Other operating income and income from scrap

Trading activity

Overseas revenues

Consolidated Revenues

Domestic Revenues (Excl Trading /Def, Incl Exports)

% YoY

EBIDTA Margins

Standalone

Subsidiaries

FY10

FY11

FY12

FY13

3,941

75,356

52,298

FY14

3,970

68,776

57,725

FY15

4,686

84,898

55,192

FY16E

FY17E

1,722 2,117 2,065 3,053

41,211 55,488 47,695 63,200

41,778 38,150 43,302 48,307

4,500

5,279

90,000 103,500

50,000 51,000

1,559 1,520 2,018 2,822

3,832

3,703

4,976

6,115

7,173

55,000 57,857 79,980 94,962 114,326 106,988 136,716 175,000 201,250

28,349 26,276 25,226 29,717 33,518 34,613 36,399 34,943 35,642

941

1,034

103

1,095

108

1,428

118

1,490

141

1,554

130

1,269

126

1,413

130

1,612

143

160

798

5,180

4,382

156

1,033

5,901

4,827

10.1%

15.4%

8.9%

53.4%

262

377

287

118

599

1,864

12,131

9,550

24.3%

16.3%

11.2%

35.9%

361

161

2,329

12,166

9,589

0.4%

17.9%

13.6%

35.1%

229

3,353

14,568

11,160

16.4%

330

500

4,403

17,321

12,858

15.2%

381

1,000

4,873

20,384

15,444

20.1%

753

997

950 1,630

7,238 10,307

5,440

12.7%

18.0%

12.9%

36.7%

7,680

41.2%

17.7%

11.8%

35.1%

14.3%

8.7%

49.8%

18.8%

20.3%

20.9%

15.3%

16.1%

29.2%

32.6%

33.6%

Source: MOSL, Company

15 June 2015

Solar Industries

Company background

SOIL is India’s leading explosives manufacturer, having a licensed capacity of 290k

tons of bulk and cartridge explosives across 20 manufacturing locations within India.

It also has manufacturing units across Nigeria and Zambia to cater to African

markets. Its Turkey plant caters to growth opportunities from CIS nations.

After establishing itself in manufacturing of explosives for civilian purposes, SOIL has

also diversified into manufacturing of propellants used across defense applications.

Apart from state-owned entities like Coal India, ONGC, SAIL, Border Roads

Organization, NHPC, and other government regulated mining/exploration agencies,

SOIL’s customers include Vedanta Group, Aditya Birla Group, and Tata Steel,

Reliance, JSPL, etc which are among the largest entities from India engaged in

mining.

SOIL’s subsidiary, Economic Explosives also has pre-qualifications to bid for contracts

for supplying explosives to several state-owned entities engaged in mining. The

benefit of two entities having mandatory pre-qualifications with state-owned

entities is increased chances of winning. Typically, contracts for supplying explosives

are awarded to a cluster of seven entities at the price quoted by the lowest bidder.

SOIL also has operations in Africa and Turkey. Its manufacturing plant in Zambia has

an installed capacity to manufacture 10,000 tons of bulk explosives. Typically, SOIL

launches the first round of business expansion in a new geography by appointing

traders, who work as business associates. They are responsible for marketing and

sales, and for dealing with regulatory authorities. SOIL’s role in African and CIS

operations is restricted to manufacturing, administration and financial control over

its overseas subsidiaries.

Currently, SOIL exports to 22 countries and plans to increase this number to 50

countries. In defense, SOIL has mandatory pre-qualifications to supply propellants

and HMX for Akash and Pinaka missiles. Currently, it has the capacity to

manufacture 2,500 propellants, which it intends to increase to 10,000.

Exhibit 29: Cartridge explosives manufactured by SOIL

15 June 2015

Solar Industries

Exhibit 30: Detonating cords manufactured by SOIL

Exhibit 31: Detonating fuses manufactured by SOIL

Source: MOSL, Company

Exhibit 32: Cast boosters manufactured by SOIL

Source: MOSL, Company

Exhibit 33: SOIL milestones

2007-14

2002-05

•

Established another bulk explosive

unit in Chandrapur with 7,750 MT

2000

1996

Started production of

explosives with a license

capacity of 6,000 MT

Started plants in

Waidhan for

production of bulk

explosives

capacity

•

Introduced Cast boosters and PETN in

the product portfolio

•

Expands domestic operations

to 20 locations

•

Starts exporting to 22 countries

•

Manufacturing units in Zambia,

Nigeria & Turkey

•

Expansion in Zambia

•

Started exporting and slowly gained

acceptance in International market

•

Sets up manufacturing facilities

of HMX & Propellant

1984

Commenced business

as an Trader in

Explosives

1998

Commenced production

of Detonators

2001

Imported first Cartridge

manufacturing machine

from USA

2006

Initial public offer; gets

listed

Source: Industry, MOSL

15 June 2015

Solar Industries

Exhibit 34: SOIL’s manufacturing footprint in India

Plant location

Chakdoh

Chandrapur

Jharsuguda

Umrer

Ramgarh

Dhanbad

Barughuttu

Waidhan

Korba

Manendragarh

Talcher

Jharsuguda

Bhilwara

Kota

Asansol

Karimnagar

Kothagudem

Barbil

State

Maharashtra

Jharkhand

Madhya Pradesh

Chhattisgarh

Orissa

Rajasthan

West Bengal

Andhra Pradesh

Telangana

Orissa

Source: MOSL, Company

Exhibit 35: Holding structure of SOIL

Source: Company, MOSL

15 June 2015

Solar Industries

Annexure 1: Coal India Volumes at inflection point

Evacuation is key; MCL, SECL & CCL main drivers

Please refer our Coal India

report dated 11 May 2015

While COAL’s 1b ton target by FY20 looks ambitious, our detailed major mine-wise

analysis suggests ~10% CAGR in production over FY15-20 to ~780m tons.

Evacuation is the key impediment to growth. Given environment clearance (EC) for

~830m tons and ~38 years of reserve life, we believe ramping up will not be a major

issue.

Three critical rail lines would support ~300m tons of evacuation; hence, the progress

there remains critical. While the government is targeting to complete two of these

lines by 2016, we are not as optimistic. Ministry activity around line development is,

however, encouraging.

We expect phase-1 of Tori-Shivpuri (North Karnapura) and Jarsuguda-Barpalli (IB

valley) projects to be commissioned during FY17. This will boost production growth to

12-13% in FY18 and FY19.

Production capacity not a constraint

COAL’s production witnessed a CAGR of just 1.7% over FY10-14 versus 5.9% over

FY06-10. Clearance-related matters, land-related issues and evacuation have been

the key impediments to opening new projects, thereby limiting production

capabilities. However, we note that production capacity is actually not a big issue for

COAL, which has extractable reserves of 18.9b tons and total resources of 63.7b

tons. Based on FY15 production of 495m tons, the mine life is 38years.

Exhibit 36:

COAL’s production life is 38 years on reserve number (m tons)

Resources

Reserves

Coal Field Proved Indicated Inferred

Total Proved Probable

SECL

7,766

893

1,128

9,787

2,323

1,238

MCL

11,588

2,028

- 13,616

3,874

3,700

NCL

3,284

196

3,480

1,878

WCL

4,024

1,355

5,474

427

741

CCL

9,876

1,743

18 11,637

966

2,276

BCCL

5,868

1,039

117

7,024

315

183

ECL

8,592

2,162

1,599 12,352

763

115

NEC

308

334

Total

51,306

9,431

2,967 63,704 10,595

8,268

*Reserves (excl resource) dividend by FY15 production

FY15

Mine

Total

Prodn Life (yrs)*

3,561

128

7,574

121

1,891

1,168

3,242

499

878

18,863

495

Source: MOSL, Company

Current mining capacity is

30% higher than FY15

Our analysis indicates that despite a slump in production, the capacity has continued

to increase. Some of the large coal blocks identified for ramp-up in production

include

Magadh-Amrapalli

mines

(rated

capacity:

32m

tons),

Siarmal/Garjanbahal/Talabira mines (70m tons), Gopalji/Bharatpur (50m tons) and

Basundhara/Kusmunda mine (65m tons). COAL has environment clearance for

~830m tons and consent to operate of ~630m production across its coalfields as of

March 2015. Thus, the capacity is 30% higher than its FY15 production of 495m tons.

15 June 2015

Solar Industries

Exhibit 37: COAL has consent to operate for 630m tons, while EC is available for 830m tons

Subsidiary

ECL

BCCL

CCL

NCL

WCL

SECL

MCL

NEC

Coal

No of.

Mines

104

429

PR Cap.

(mt)

101

119

179

629

EC Cap.

Prod. FY15

(mt)

112

152

128

197

121

828

494

Source: MOSL, Company

Evacuation bottlenecks

result in inventory build-up,

e-auction helps in

liquidation of inventory

Evacuation bottleneck is the primary reason for COAL’s lower volumes, in our view.

While production grew 7.2% YoY (or by 33m tons) in FY15, dispatch growth was just

3.8% YoY (18m tons). Dispatches were equal to or higher than production till FY10,

which has never been the case over FY10-15 (except for FY13); this has increased

inventory build-up at COAL. Inventory accretion over FY07-15 was 14m tons. In the

past, COAL had announced schemes to offer coal to consumers on “as is where is”

basis, with evacuation being the consumers’ responsibility. This is further reinforced

by a recent government move to remove restriction on e-auctions in 2HFY15.

Despite government attempts to allot higher coal under fuel supply agreements

(FSA), mainly to power, the actual lifting was lower; this led to build-up of inventory.

As a large part of coal under e-auction moves through road, the ban was lifted to

liquidate inventory.

Exhibit 38: Inventory accretion/depletion YoY (m tons)

Disp Gr (mt)

62.0

42.3

46.3

46.6

Prodn Gr (mt)

69.1

71.9

61.2

50.9

55.8

Inventory (m tons)

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Source: MOSL, Company

Dispatches through rail, which witnessed a CAGR of 5% over FY06-15, remained

muted in FY14/15. Volumes through merry-go-round (MGR) also remained flat over

FY10-15. Of the incremental volumes over FY06-15, the share of roads was ~40%

and railways’ share was 57%. The construction of connecting lines to large mine has

been sizably delayed, limiting volume growth.

15 June 2015

Solar Industries

Exhibit 39: Evacuation through railways, MGR remain muted (m tons)

Mode

Rail

Gr (% YoY)

Share (%)

MGR

Gr (% YoY)

Share (%)

Road

Gr (% YoY)

Share (%)

Others*

Gr (% YoY)

Share (%)

Total

FY06

166

50%

24%

22%

333

FY07

181

52%

-2%

23%

22%

350

FY08

189

50%

22%

18%

24%

375

FY09

192

48%

21%

113

24%

28%

-1%

401

FY10

210

10%

51%

21%

106

-7%

25%

-4%

415

FY11

216

51%

-3%

20%

112

27%

-7%

423

FY12

229

53%

-5%

18%

113

26%

-4%

433

FY13

251

10%

54%

12%

19%

116

25%

-5%

466

FY14

FY15 CAGR, %

259

255

4.9%

-2%

55%

52%

1.2%

19%

18%

113

132

6.7%

-2%

17%

24%

27%

-1.4%

-1%

471

488

4.4%

Source: MOSL, Company

Easing of evacuation will drive dispatches

The Indian Railways has identified 31 projects to ramp up domestic coal production;

of these, three are critical. Among the subsidiaries, CCL is likely to benefit the most

with 12 evacuation projects. The critical projects are Tori-Shivpur-Kathautia (T-S-K;

93km in Jharkhand), Jharsuguda-Barpalli-Sardega (J-B-S; 53km in Odisha), and

Bhupdevpur-Korichapar-Dharamjaigarh (B-K-D; 180km in Chhattisgarh); these

projects have the potential to evacuate ~300m tons of coal per year. These projects

remain integral to COAL’s target to reach production of 1b tons by 2020. The

progress on these lines has been rather slow and the T-S section is expected by June

2017, while the J-S line is expected by June 2016.

Exhibit 40: Timeline for key railway line projects

As at

Feb-15

Tori-Shivpur-Kathautia

Jharsuguda-Sardega

Bhupdeopur-Baroud

Piparwar (Siding)

Koderma-Hazaribagh

Hazaribagh-Barkakhana

Barkakhana-Ranchi

Oct-13

Sep-14

Dec-15

Jun-17

Jun-16

As at

Feb-14

Jun-16

Sep-16

Jun-14

Oct-13

Sep-14

Dec-15

Source: MOSL, Company

Remarks

Revised TDC too looks difficult

Milestone-based progress indicates delays; however, state government focus is

positive

TDC not specified; even Stage I clearance is pending

No TDC; project facing severe law and order issues

Not commissioned yet

- do -

We believe that phase-1

(single line) of T-S and J-B-S

will be ready by the end of

FY17, which will accelerate

volume growth in FY18-19

Admittedly, past progress on the lines has been anemic. This is evident from the fact

that the clearance process for the Shivpuri-Kathotia (S-K) section is yet to begin; the

Tori-Shivpuri (T-S) section has received 55% of land, but in patches. We note that

52m tons of production is linked to the T-S-K corridor for CCL till FY20. Progress on

the J-B-S section is better, and the Ministry of Coal (MoC) is pushing the state

government to expedite the B-D-K section. We believe phase-1 (single line) of T-S

and J-B-S will be ready by the end of FY17, accelerating volume growth in FY18-19.

15 June 2015

Solar Industries

Exhibit 41: Lackluster progress on critical rail lines

Project

Coal field

Coal

eva.

(mt)

TDC Milestones/Remarks

Issues (Feb 2015)

Issues (Feb 2014)

Tori-Shivpur

-Kathautia

44km long at capex of

INR15.8b

North

Karanpura

CCL (JH)

TDC subject to land

availability by Sep

2014.

Relaxation of night-

Jun-17

time restriction

received.

Stage-II FC received in

June 2013.

Physical possession of 55% of

land. Land is small and non-

continuous. Frequent change

in ownership. Contracts

threatening legal actions

- Delay in actual land availability

free of all clerances.

- Security provision

- Release of forest (197Ha) and

govt. (109Ha) land

Shivpur

-Kathautia

Jharsuguda-

Sardega

52km long at capex of

INR16b

Bhupdeopur-

Baroud

Piparwar (Siding)

30km at INR900m

Ashoka (Siding)

13km at INR1.3b

Koderma –Hazaribagh

67km at INR3b

Hazaribagh –

Barkakhana

57km

Barkakhana-Ranchi

65kms

Critical

North

Karanpura

CCL (JH)

IB Valley

MCL (OD)

Mand-

Raigarh

SECL (CH)

CCL (JH)

Jun-16 Stage-II FC received

- Identification of land pending

- Require 1300 acres of land - Identification of land pending

- Target three yrs after land - Stage-I to be filed

availability

- Private land acquisition

- Stage-II by July 14

- Tree felling and sight

- Forest land and tree cutting by

clearance

Nov 2014

- Shifting of power

- Power line shift by Aug 2014

transmission lines

- Stage-I FC to be filed

- Land by Sep 2014

- Land to be handed over

- FC by Sep 2014

- Target 2-3 years

- Law and order problem

12-15

Jun-15

Oct-13

- Important for coal

Sep-14 evacuation from

Hazaribagh-Banadag

siding

Dec-15

CCL (JH)

Source: MOSL, Company

Volumes to grow at a robust 10% CAGR

Though the MoC’s target of

1b ton looks ambitious, we

believe it is possible to

achieve 10% CAGR in

deliveries over five years to

780m tons by FY20

The MoC has set an ambitious target for COAL to double its production by 2020. The

target for FY20 is worked out at 931m tons. The increase in production will largely

be from three key subsidiaries—MCL, SECL and CCL. Together, these subsidiaries are

likely to contribute 337m tons of the total increase of 433m tons—a contribution of

78%. Among these subsidiaries, the key delta is targeted from CCL (85m tons) over

FY15-20 on FY15 production base of 55m tons. Doubling of production is targeted at

MCL and SECL (~120m tons each).

We have analyzed mine-wise contribution for each of the three subsidiaries and

conclude that while the 1b ton production target appears ambitious, volume growth

is likely to be robust. We forecast volumes of 780m tons by FY20—a CAGR of 10%

versus 2.8% over FY10-15. The major mines from the three subsidiaries would

account for ~280m tons; of this, EC is available for 182m tons, while FC is not

available. Land availability remains sparse and 4-5 ongoing projects have sizable land

requirement. We have assumed incremental production from these mines based on

15 June 2015

Solar Industries

a discount approach at 140m tons or 50% of target. We are confident about our

volume estimate, while continued push by the Central government remains the key

to achieving the targets/higher production.

Exhibit 42: Key mines that would contribute ~300m tons over FY15-20 (m tons)

Mine

Gopalprasad

Siarmal

Garjanbahal

Talabira

Gopalji

Bharatpur

Ananta

Kulda

Kaniha

Hingula

Gevra

Kusmunda

Pelma

Coal field

Talcher

Korba

Subsidiary Rated

MCL

SECL

CCL

12.0

20.0

15.0

30.0

Cap.

15.0

40.0

10.0

20.0

30.0

20.0

15.0

10.0

15.0

Prod.

Guidance

FY17E FY20E

15.0

10.0

7.0

19.0 20.0

14.5 20.0

12.3 15.0

10.0 14.0

8.8 12.0

45.0

27.0

5.0

0.0

7.0

5.0

0.0

14.0

70.0

50.0

10.0

15.0

6.0

12.0

20.0

12.5

15.0

30.0

MOSL Est

FY17E

14.3

13.3

9.2

10.0

8.8

39.6

23.8

1.3

0.0

4.0

1.3

0.0

11.5

FC Land avai. Evacuation

Jharsuguda Barpali rail line

68% Angul Kalinga Connectivity

Talcher Station 3rd line

38%

87%

57% Double siding

As per current EC, evacuation

only by Rail

As per current EC, evacuation

only by Rail

1812Ha

Bhupdeopur-Raigarh-Mand line

req.

Bhupdeopur-Raigarh-Mand line

FY20E Avail.

7.5

5.0

7.5

2.5

1.8

15.0

16.0

11.3

14.0

12.0

61.6

44.0

2.5

3.8

1.5

3.0

5.3

5.0

3.1

3.8

20.0

Mand

Raigarh

Mand

RAI

Raigarh

Mand

Chhal

Raigarh

Mand

Madannagar

Raigarh

Amrapali

Magadh

Sanghamitra

Pachra

Ashoka

No 239Ha req.Tori-Shivpur-Kathutia rail line

No 568Ha req.Tori-Shivpur-Kathutia rail line

Tori-Shivpur-Kathutia rail line

No 70Ha req.

Source: MOSL, Company

Brownfield mines can aid volume growth of ~110m tons

We note that brownfield expansion/mines can aid volumes of ~110m tons at the

three subsidiaries. Greenfield project’s contribution to production growth is pegged

at ~82m tons. This provides further confidence in COAL’s volume growth ramp-up.

We believe production growth can surprise positively, but for timely commissioning

of rail lines. This is because mines in IB valley are particularly easy, with lower strip

ratio. For CCL too, the Magadh-Amrapalli mines already have EC of 30m+ tons and

production ramp-up is stuck due to evacuation infrastructure.

15 June 2015

Solar Industries

Exhibit 43: MCL production ramp-up – COAL est.

121

250

206

Exhibit 44: MCL production ramp-up – MOSL est.

Prod. FY15 - mt

Prod. FY20 - mt

Prod. FY15 - mt

Prod. FY20 - mt

Source: MOSL, Ministry of Coal

Exhibit 45: SECL production ramp-up – COAL est.

128

250

Exhibit 46: SECL production ramp-up – MOSL est.

128

197

Prod. FY15 - mt

Prod. FY20 - mt

Prod. FY15 - mt

Prod. FY20 - mt

Source: MOSL, Ministry of Coal

Exhibit 47: CCL production ramp-up – COAL est.

137

Exhibit 48: CCL production ramp-up – MOSL est.

Prod. FY15 - mt

Prod. FY20 - mt

Prod. FY15 - mt

Prod. FY20 - mt

Source: MOSL, Ministry of Coal

15 June 2015

Solar Industries

Financials and valuations

Income Statement

Y/E March

Total Revenues

Change (%)

Raw Materials

Staff Cost

Other Expenses

EBITDA

% of Total Revenues

Other Income

Depreciation

Interest

Exceptional Items

PBT

Tax

Rate (%)

Adjusted PAT

Minority Interest

Reported PAT

Change (%)

Adj. Stand Alone PAT

Change (%)

2010

5,574

14.3

3,278

218

1,218

860

15.4

260

134

908

322

35.5

586

32.7

313

24.0

2011

6,809

22.1

3,724

313

1,543

1,228

18.0

252

123

1,281

451

35.2

756

29.0

503

60.9

2012

9,676

42.1

5,608

442

1,915

1,710

17.7

236

128

236

1,540

425

27.6

1,047

102

1,012

33.9

603

19.8

2013

11,218

15.9

6,501

556

2,329

1,833

16.3

142

170

183

100

1,522

257

16.9

1,243

101

1,163

14.9

738

22.5

2014

11,330

1.0

5,908

673

2,719

2,030

17.9

112

219

179

100

1,644

349

21.2

1,264

111

1,184

1.8

818

10.9

2015

13,519

7,687

798

2,494

2,540

315

179

100

2,026

463

1,554

1,474

1,059

(INR Million)

2016E

16,125

8,976

925

2,954

3,270

104

336

213

2,824

634

2,056

135

2,056

1,344

2017E

18,963

10,552

1,027

3,423

3,962

114

377

274

3,425

786

2,465

173

2,465

1,645

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Minority Intetest

Loans

Deferred Tax Liability

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Goodwill

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Current Liab. & Prov.

Creditors & other current liab.

Net Current Assets

Misc Expenses

Application of Funds

E: MOSL Estimates

2010

173

2,479

2,652

1,077

142

3,872

1,513

366

1,148

208

104

3,901

380

898

940

1,684

1,530

2,371

3,872

2011

173

2,987

3,160

275

1,616

169

5,220

2,396

442

1,954

292

123

4,209

592

944

596

2,077

1,197

3,013

5,413

2012

173

3,873

4,046

378

2,964

196

7,584

3,398

570

2,828

503

113

5,501

1,286

1,393

630

2,192

1,256

4,245

7,737

2013

181

5,546

5,727

405

3,721

207

10,060

4,408

740

3,668

606

489

6,260

1,361

1,559

922

2,417

1,020

5,240

10,060

2014

181

6,435

6,616

381

4,837

270

12,103

5,796

959

4,838

810

252

7,554

1,528

1,853

1,330

2,842

1,422

6,132

12,103

2015

181

7,578

7,759

471

3,465

444

12,139

6,922

1,273

5,649

810

374

7,059

1,649

1,913

373

3,125

1,753

5,306

12,139

(INR Million)

2016E

181

9,223

9,404

606

5,200

444

15,653

8,060

1,610

6,451

781

101

9,852

2,210

2,146

1,608

3,888

1,532

8,320

15,653

2017E

181

11,195

11,376

779

4,850

444

17,449

9,010

1,986

7,024

781

101

11,481

2,502

2,808

2,015

4,157

1,939

9,542

17,449

15 June 2015

Solar Industries

Financials and valuations

Ratios

Y/E March

Basic (INR)

Adj EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

2010

33.8

38.4

153.1

7.0

24.2

2011

43.6

48.1

182.4

8.0

21.4

2012

60.4

65.8

233.6

10.0

19.4

2013

68.7

73.6

316.4

11.0

18.7

2014

69.9

77.5

365.6

11.5

19.3

2015

85.9

98.8

428.7

13.5

19.0

2016E

113.6

132.2

519.6

18.9

20.0

2017E

136.2

157.0

628.6

22.6

20.0

21.5

19.4

15.1

2.7

4.1

0.8

41.2

35.8

26.5

5.0

8.3

0.4

31.2

26.8

20.7

4.2

6.8

0.5

26.0

22.6

16.9

3.5

5.6

0.6

22.1

26.9

23.9

26.9

25.0

24.0

20.3

17.9

15.9

19.0

21.9

19.4

21.7

21.2

100

1.4

1.3

1.1

0.9

1.1

1.0

1.1

0.1

0.3

0.6

0.5

0.4

0.2

Cash Flow Statement

Y/E March

PBT before EO Items

Add : Depreciation

Interest

Less : Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

(Inc)/Dec in FA

Invest. in liquid assets

CF from Investments

(Inc)/Dec in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

2013

1,522

170

183

-257

-858

760

-1,112

277

-835

749

-183

-199

367

291

630

922

2014

1,644

219

179

-349

-484

1,209

-1,593

-1,529

1,116

-179

-208

729

409

922

1,330

2015

2,026

315

179

-463

-131

1,925

-1,125

-1,087

-1,372

-179

-245

-1,795

-957

1,330

373

2016E

2,824

336

213

-634

-1,779

962

-1,110

273

-837

1,735

-213

-411

1,111

1,236

373

1,609

(INR Million)

2017E

3,425

377

274

-786

-815

2,474

-950

-350

-274

-493

-1,117

407

1,609

2,015

15 June 2015

Solar Industries

NOTES

15 June 2015

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