Explosives maker expects revenue surge on Indian defense orders

[MUMBAI] India's plan to source and manufacture ammunition locally as it modernizes its armed forces is seen as a windfall by dynamite and detonator maker Solar Industries India Ltd.

Solar expects a 45-fold jump in revenue from defense orders over the next three years as the government becomes a larger presence in its customer list. As most of its clients currently are metal makers and miners, the change may also help lessen the impact on the company from the vagaries of commodity cycles. Solar says it's ready to meet the government's needs.

"India has invited bids for eight types of ammunition items in defense ranging from large-caliber gun propellants to tank ammunition and artillery fuses to rockets, and we have the capacity and wherewithal to cater to all," Nilesh Panpaliya, chief financial officer at Solar Industries, said in a phone interview from Nagpur on June 14.

India plans to spend US$250 billion by 2025 on modernizing its armed forces, and last month approved a policy to pick large local companies as strategic partners that will have opportunities to manufacture combat planes, military helicopters, battle tanks and warships. Solar Industries, which will directly bid in some categories and aims to be a secondary supplier in others, expects the benefits to be broad and long-lasting.

"The Indian government has specified that long-term contracts of 10 years will be signed, and that will give private industry a significant support,"Mr Panpaliya said.

Shares of Solar Industries have risen 31 per cent in the past 12 months versus a 17 per cent gain for the benchmark S&P BSE Sensex. Among stocks of other Indian explosives makers, Keltech Energies Ltd has surged 75 per cent and Premier Explosives Ltd 34 per cent in the past year.

Solar expects its sales and profits to grow 22 per cent in the year to March 2018, compared with Bloomberg's estimates of a 16 per cent rise in group net income and 23 per cent increase in revenue. The company sees defense-related sales climbing to about 1 billion rupees this fiscal year versus the 110 million rupees booked in the 12 months ended March 2017.

Defense revenue is then expected to double to about 2 billion rupees next year and reach as much as 5 billion rupees in the financial year to March 2020, Solar says. Military orders are seen surging to account for 11 per cent of the company's total revenue by 2020 from the current contribution of less than 1 per cent, Mr Panpaliya said.

Solar's group net income for the year that ended March 31, 2017 rose 13 per cent to 1.85 billion rupees and revenue increased 9 per cent to 15.8 billion rupees, according to its latest investor presentation.

In addition to the military bump, the company's revenue forecasts also factor in expectations that the government's focus on infrastructure projects such as roads and affordable homes will boost the need for quarry stone, iron ore and cement. Solar, which has factories in nine states across India and four overseas, is the largest supplier of explosives to Coal India Ltd, meeting almost 28 per cent of the mining monopoly's requirement.

Some analysts expect a slower trickle from defense-related spending, anticipating delays by the administration ranging from testing of products to awarding of orders.

BLOOMBERG