| Solar Industries India Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL AA/Positive/CRISIL A1+' ratings on the bank facilities and commercial paper of Solar Industries India Ltd (SIIL; a part of the Solar group). |
| Analytical Approach |
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For arriving at its ratings, CRISIL has combined the financial and business risk profiles of SIIL, its subsidiary, Economic Explosives Ltd (EEL; rated 'CRISIL AA/Positive/CRISIL A1+'), and other operational subsidiaries, collectively referred to as the Solar group. |
| Key Rating Drivers & Detailed Description |
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Strengths * Strong market position With a market share of 23% in the bulk explosives segment, the group is the largest manufacturer and exporter of bulk and packaged explosives in India. It is also the largest supplier of explosives to Coal India Ltd (CIL) and its subsidiaries. It is one of the few players with a complete product range and capability to develop and supply customised products on demand. Robust market position, reflected in compound annual growth rate of 11% in turnover over the last five fiscals through 2018. The group has also expanded to the overseas market. Within defence ammunition filling, it has gained advantage by setting up high energy explosives, delivery system, ammunition, rocket/missile integration, pyros, igniters and fuses manufacturing facilities * Strong operating efficiencies 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 and a stable operating margin of 20% over the five fiscals through fiscal 2018. Also, all of the group's bulk explosive manufacturing units are located in a 50-60 kilometre radius from major mining regions. * Healthy financial risk profile Gearing is estimated to be moderate at about 0.4 time as on March 31, 2018. Furthermore, cash accrual is expected to remain healthy, backed by strong growth in revenue and profitability, and will be sufficient to meet annual capital expenditure (capex) of Rs 175-250 crore over the medium term. Hence, incremental borrowing would be modest. Interest coverage and net cash accrual to total debt ratios are estimated at 11 times and 0.4 time, respectively, in fiscal 2018. While the group has a current defence order book of Rs 161 crore, ability to obtain necessary clearances, commercialise operations as envisaged, and generate meaningful cash accrual from the defence segment will have a bearing on return on capital employed and will be a key monitorable. Weakness * Considerable, though declining, customer concentration in revenue CIL has monopoly in the coal mining industry, thus all domestic explosives manufacturers depend on it for their sales. The Solar group too has dependence on CIL as it accounts for an estimated 16% of its consolidated sales in fiscal 2018, however, this dependence has come down from 58% of overall sales in fiscal 2007. Over the past six years, the group has diversified sales mix by increasing exports and share of infrastructure and non-CIL related orders. Entry into the defence sector should also enhance revenue diversity. The government's drive to indigenise defence manufacturing will benefit the group, especially as it is one of the two manufacturers for propellants and exclusive manufacturer for high-melting explosives. * Exposure to regulatory risks The explosives industry has high entry barrier as it requires industrial licensing, and 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 (comprises 70% of the group's total raw material cost), has been classified as an explosive. Hence, its production, distribution, sale, and stocking require a licence. Sale of explosives is regulated by Petroleum and Explosives Safety Organisation to prevent misuse of end products. Though the Solar group takes precautions at all stages of the manufacturing process, and is also a member of SAFEX (an international apex body that promotes global best practices on safety standards in the explosives industry), it will remain susceptible to regulatory risks. * Volatility in raw material prices and forex rates Ammonium nitrate prices have been volatile in the international market due to demand-supply gap as the chemical compound is also used to manufacture fertilisers. However, increase in capacity of ammonium nitrate by few domestic players has somewhat reduced volatility in its prices. Risk is also mitigated by price escalation clause in contracts with clients. The group procures ammonium nitrate from Rashtriya Chemicals and Fertilizers Limited ('CRISIL A1+'), Gujarat Narmada Fertiliser Corporation, and Deepak Fertilisers and Petrochemicals Corporation Ltd on monthly contracts and quantity-wise pricing. Around 85% of raw material is procured from the domestic market, while the rest is imported. The group has operations in Nigeria, Zambia, South Africa, and Turkey and is hence exposed to adverse currency fluctuations. In these markets, Solar group has begun borrowing debt in local currency. Majority of the domestic borrowing is in foreign currency, which has been adequately hedged. |
| Outlook: Positive |
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CRISIL believes the Solar group will maintain its established position in the domestic explosives industry and report healthy revenue growth in the overseas and defence businesses, over the medium term. |
| About the Group |
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SIIL and EEL are the largest domestic manufacturers and suppliers of bulk and cartridge explosives, detonators, detonating cords, and components. The group has manufacturing facilities at 25 locations in India, in addition to plants in Nigeria, Zambia, South Africa, and Turkey. In fiscal 2011, the group entered the defence sector to manufacture high energy explosives, delivery system, ammunition filling and pyros fuses. It currently has bulk explosives, packaged explosives, detonators, detonating fuse, and cast boosters capacity of 301,323 tonne per annum (tpa), 125,000 tpa, 190 million units, 75 million units, and 1,500 tonne, respectively. |
| Key Financial Indicators | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
** Interchangeable with Fund Based Facilities |
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
** Interchangeable with Fund Based Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
| For further information contact: | ||||||
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