Solar Industries India bags order Rs. 14.7bn from Coal India amid power crisis and coal shortage in the country

The country-wide coal shortage from the power industry has served as a boon for Solar Industries India. Looking at the current scenario, the sudden increase in coal demand and power generation, the company anticipates a stronger future outlook, beyond what they expected in 1QFY22.

The company won a Rs. 14.7bn order from its largest customer, Coal India. It is assumed that Coal India is increasing its inventory. The order is expected to be completed over the span of next 2 years and generating more than double revenue. Coal India is turning to domestic players as coal imported from foreign players is subjected to higher global coal and freight prices. This, in turn, affects the power plants revenue and productivity and serves as a positive notion for Solar Industries India.

The company in the past generated an average revenue of Rs. 3.2 bn (1% CAGR from FY2016-2020) over the past 5 years from CIL. From the recent order, the company expects to generate sales worth Rs. 8bn in FY22, Rs 10Bn in FY23 and Rs. 11.4bn in FY24. Apart from this, the rising price of ammonium nitrate (increased by 20%) also factors in for the revenue growth of the company as it generally passes the cost onto the customers. The sales growth is presumed to stand at 24%, EBITDA at 24% and EPS at 28% for FY24. The expected RoE in FY22 stands at 25.3% and in FY23 at 27.4%

Taking these two factors into consideration, the management firmly believes a ~15% price growth during FY22 which may revise upwards. The target price may be revised to ~Rs. 3342 with a ~20% growth in price and 40% revenue growth from Coal India in FY23. However, these assumptions do not take correction into consideration which may lead to some cut in the earnings. The stock is already 35% in the last one month. It is trading at 12-month forward PE of ~36x (+1 SD) and has the potential to trade at +2 SD on the basis of robust business growth potential.

On the whole, the revenue CAGR is expected to register at 34% and the earnings at 47%. These valuations are backed by higher entry barriers, healthy growth, domestic scale up s (pick-up in mining activities and revival in housing and construction sectors), exports and expansion in global markets, defense scale up (commencement of MMHG shipments and a healthy order pipeline) and margin prospects.