Solar Industries Rating ‘hold’; first quarter bore the brunt of the lockdown

Covid-19 impacted Solar Industries’ (SOIL’s) Q1FY21 performance as lockdown and labour availability took a heavy toll on construction activities in the country.

Though offtake from Coal India (CIL) and international operations supported volumes, housing & infra and institutional sales dipped 30-50% y-o-y. Factoring in pick-up in construction & infra activity and significant potential in SOIL’s defence business (which continues to lag due to delay in order inflow), we have revised up FY22e EPS by 4% while maintaining Hold. The revised TP is Rs 1,026 (30x FY22e EPS; Rs 984 earlier).

Q1FY21 key positives: (i) Strong ~Rs 12 bn order book, of which CIL’s share is Rs 7.1 bn; (ii) Despite Covid-19 challenges, growth in the international business bodes well; (iii) SOIL’s performance in June improved y-o-y; (iv) Defence: Recent ban on the import of armours and weapons is expected to boost indigenous manufacturing with SOIL anticipated to gain from tenders for multi-mode Hang Grenade.

Key negatives: (i) Domestic revenue and explosive volumes slipped 33% and 24% y-o-y, respectively; (ii) Lockdown in April and May significantly dented operations; (iii) Revenue from accessories also declined 26% y-o-y to Rs 610 mn.

Exports to rescue; domestic scenario remains bleak: SOIL expects its international business to perform well given the gradual pick-up in demand across Nigeria, Turkey and Tanzania. Despite the challenging situation, the company’s exports and overseas markets improved with 5% y-o-y growth during Q1FY21. However, on the domestic front, significant dip across institutional (down 30% y-o-y), housing & infra (down 49% y-o-y) segments thwarted growth momentum.

Outlook: Growth concerns— Q1FY21 bore the full brunt of lockdown with sales declining ~21% y-o-y. However, growth in exports along with strong order book of Rs 12 bn remain key positives. Going forward, we will keep an eye on demand recovery as the lockdown eases. We maintain Hold.