Solar Industries (one of our earlier stockletter picks) has posted average third quarter results. Sales were sluggish because of slower exports and new ammonium nitrate regulations. We had recommended the stock on 19 August 2011 at Rs736.55 for our Antelope and Lion stockletters and exited at Rs964.4, up by 31% in 16 months

We had recommended Solar Industries in our stockletters (this is a subscription-based service) on 19 August 2011. The company reported a sluggish 22% year-on-year (y-o-y) increase in net sales to Rs218.17 crore for the December 2012 quarter when compared to Rs179.25 crore for the corresponding quarter last year. The company’s bottomline rose 42% despite sluggish sales, to Rs16 crore, partly because of its low base. The company cited challenging global environment, which meant exports were under some pressure, and non-availability of vessels to transport and change rules with respect to ammonium nitrate.
 

Both net sales and operating profit have grown by double-digits in the last five quarters. Net sales of the company grew at 22% which was above its three-quarter y-o-y average growth rate of 21%. Operating profit grew 41% y-o-y when compared to its three-quarter y-o-y average of 44%, still impressive in an otherwise challenging market. This was helped by increase bulk explosive realizations. Having said this, its valuation seems to be slightly expensive, with market capitalisation quoting at 17 times its operating profit while return on net worth is 29%.
 

The company is involved in two segments: explosives and trading. In the explosives segment, bulk explosives grew 54.7% y-o-y which was helped by 37.6% growth in volumes and 12.5% increase in realisation. Cartridge sales, also part of the explosive segment, grew 10% which was helped by 1.9% volume growth and 7.6% rise in realizations. Revenues from detonators declined 12% y-o-y due to drop in both volumes and realizations, while detonating fuse fell by a whopping 73% most due to lower volumes.
 

On the other hand, trading sales declined 57% y-o-y due to change in rules, as exporting ammonium nitrate will require special license for not only manufacturing but also conversion, exporting, etc.
 

During the quarter, the company began work on its explosive plant in Zambia, which has a total capacity of 10,000 metric tones (MT) and expects the 5,000 tonne catridge facility to be completed by June 2013. Further, it also expects revenues from Nigerian plant to start pouring in from 2014.
 

We had recommended this company at Rs737. However, our formula based on a combination of price and valuation prompted us to suggest an exit, at a 31% gain at Rs 964. The current price is Rs1067.
 

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