Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities of Economic Explosives Limited (EEL; part of the Solar group).

 

The ratings continue to reflect the Solar group’s robust market position in the domestic and overseas markets in the explosives and detonators industry, sound operating efficiency and healthy financial risk profile. These strengths are partially offset by susceptibility to regulatory changes and volatility in foreign exchange (forex) rates.

 

Revenue of the group grew by 57% to Rs 3,954 crore in fiscal 2022. This was driven by realisation growth (domestic realisations stood at Rs 71,404/tonne in the half year ended September 30, 2022, compared to Rs 33,479/tonne in the pre-pandemic fiscal 2021) owing to increasing raw material prices, primarily ammonium nitrate. In the first six months of fiscal 2023, a 15% volume growth has further supported the strong growth rate, with net sales of Rs 3,182 crore, a 97% year-on-year growth over the corresponding period of fiscal 2022. Increasing sales from Coal India Ltd (CIL; ‘CRISIL AAA/Stable/CRISIL A1+’) and a growing portfolio of products catering to defence and infrastructure segments, combined with the rising international presence may lead to another ~50% sales growth in fiscal 2023. This is evident in the increase in the order book, to Rs 4,008 crore as on September 30, 2022, from Rs 2,982 crore as on March 31, 2022.

 

In terms of operating profitability, the group is able to pass on rising input costs to customers. The operating margin was 18.9% in fiscal 2022 and is projected at 18-20% over the medium term.

 

Liquidity will remain strong, driven by cash accrual of over Rs 500 crore per annum against annual capital expenditure (capex) of Rs 350-400 crore. Further, net gearing is expected at ~0.5 time aided by prudent funding of capex.

 

CRISIL Ratings takes note of the ongoing legal proceedings regarding vacation of office of the executive director, Mr Kailash Chandra Nuwal. The group filed an appeal with the Supreme Court against the impugned order passed by National Company Law Appellate Tribunal (NCLAT) on January 22, 2022. The litigation is ongoing with the appeal proceedings in the Supreme Court and has not impacted business of the Solar group as per the management. Nonetheless, CRISIL Ratings will continue to monitor the proceedings and any impact on operations will be a key monitorable.

Analytical Approach

The ratings on EEL factor in the expected support from the parent, Solar Industries India Limited (SIIL) ('CRISIL AA+/Stable/CRISIL A1+'), owing to its strategic importance, 100% ownership and common management.

Key Rating Drivers & Detailed Description

Strengths:

Robust market position

With a market share of around 24% in the explosives industry, the group is one of the largest manufacturers and exporters of explosives and initiating systems in India. Its unit in Nagpur, Maharashtra is the world’s largest single-location cartridge plant. It is one of the few players with complete product range and capability to develop and supply customised products. In addition to witnessing healthy growth in the domestic market, it has expanded significantly in the overseas market over the past few years. It is the largest supplier of explosives to Coal India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’). The group entered the defence business in 2010 and gained competitive advantage by setting up high-energy explosives, delivery systems, ammunition, rocket/missile integration, pyros, igniters and fuse manufacturing facilities. Limited shelf life of explosives, continuous consumption by the armed forces, Make in India focus and typical long-term defence contracts provide steady medium-term revenue visibility.

 

Backed by orders of Rs 4,008 crore as on September 30, 2022, in the domestic market and continued growth in the international market over the medium term, the group will maintain its robust position.

 

Sound operating efficiency with significant backward integration

Majority of raw materials (apart from ammonium nitrate) such as detonator components, emulsifiers, sodium nitrate and calcium nitrate are manufactured internally, leading to cost savings, quality control and stable operating margin of 18-20% over the five fiscals through 2022. Also, all the bulk explosive manufacturing units are located in 50-60 kilometre radius from the major mining regions. The group has the ability to pass on fluctuations in raw material prices to customers through a price escalation clause in the contracts.

 

Strong financial risk profile

Tangible networth was Rs 1,955 crore and gearing 0.54 time as on March 31, 2022. Debt protection metrics were comfortable, reflected in interest coverage ratio of 15.09 times and net cash accrual to total debt ratio of 0.48 time in fiscal 2022, against 12.59 times and 0.42 time, respectively, in fiscal 2021.

 

Weaknesses:

Exposure to regulatory risks

The explosives industry has high entry barriers; players require industrial licensing and various clearances from government, Chief Controller of Explosives and Directorate General of Mines Safety. Furthermore, as per the Ammonium Nitrate Rules, 2012, ammonium nitrate (key raw material; accounts for 65% of the total raw material cost) is classified as an explosive. Hence, its production, distribution, sale and stocking require a licence. Sale of explosives is regulated by the Petroleum and Explosives Safety Organisation and the Joint Chief Controller of Explosives to prevent misuse of end products. Though the group takes precautions at all stages of the manufacturing process and is a member of SAFEX (an international apex body that promotes global best practices on safety standards in the explosives industry), it remains susceptible to regulatory risks.

 

Susceptibility to volatility in forex rates

Partial import of raw material and operations in Nigeria, Ghana, Zambia, South Africa and Turkey expose the group to adverse currency fluctuations. In fiscal 2022, the group incurred translation loss of Rs 46 crore in the third quarter because of currency devaluation. To safeguard against volatility in forex rates, it has begun borrowing debt in local currency in the overseas markets, which reduces forex risk considerably. Also, it has started billing in USD in some markets. It hedges all imports and keeps exports open. However, on account of overseas presence, forex risk will persist.

Liquidity: Strong

Cash accrual, expected at over Rs 550 crore per annum in fiscals 2023 and 2024, will comfortably cover yearly debt obligation of Rs 150-200 crore. Cash and equivalent stood at around Rs 142 crore as on September 30, 2022. Expected capex of Rs 350-400 crore per annum will be funded through a mix of debt and surplus cash accrual. Unutilised bank limit will be sufficient to meet incremental working capital requirement. The group has a policy of paying 30% of profit after tax (PAT) as dividend but is expected to conserve cash over the medium term in light of growth opportunities.

Outlook: Stable

CRISIL Ratings believes the Solar group will maintain its robust market position in the domestic explosives industry and witness healthy revenue growth in the overseas and defence businesses over the medium term. Also, the financial risk profile will remain strong.

Rating Sensitivity Factors

Upward Factors

• Significant scale up in operations of the group with increasing geographic diversity while maintaining profitability at current levels of 18-20%
• Sustenance of financial risk profile of the group
• Improvement in the credit rating of SIIL

 

Downward Factors

• Weaker-than-expected operating performance, with operating margin falling below 15-16% for the group, on a sustained basis
• Significant moderation of capital structure and debt protection metrics owing to sizeable, debt-funded capex or acquisition or working capital requirement
• Lower-than-expected contribution from the defence business
• Disruption in operations because of untoward incidents
• Moderation in the long-term rating of SIIL or change in stance of support by the parent, in the event of any exigency

About the Group

The Solar group is one of the largest domestic manufacturers of bulk and cartridge explosives, detonators, detonating cords and components. It has manufacturing facilities in 29 locations in India, and plants in Nigeria, Zambia, Ghana, South Africa, Turkey and Tanzania (with Indonesia, Thailand and Australia coming up). In fiscal 2010, the group entered the defence sector to manufacture high-energy explosives, delivery systems, ammunition filling and pyros fuses.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	50	NA	CRISIL AA+/Stable
NA	Cash Credit^	NA	NA	NA	50	NA	CRISIL AA+/Stable
NA	Cash Credit%	NA	NA	NA	45	NA	CRISIL AA+/Stable
NA	Letter of Credit and Bank Guarantee	NA	NA	NA	85.6	NA	CRISIL A1+
NA	Letter of credit and bank guarantee#	NA	NA	NA	67	NA	CRISIL A1+
NA	Term Loan	NA	NA	Dec-2024	137	NA	CRISIL AA+/Stable
NA	Term Loan**	NA	NA	Oct-2026	21.88	NA	CRISIL AA+/Stable
NA	Proposed Term Loan	NA	NA	NA	0.02	NA	CRISIL AA+/Stable

*Interchangeable with other fund based facilities

^Interchangeability to non-fund based facility

%Interchangeable with other fund-based facilities and non-fund based facility

#Interchangeable with other non-fund based facilities

**ECLGS loan