Solar Industries stock is under the radar of analysts and brokerage firms.
The company's growing capabilities in the defence sector appear to have made it an attractive long-term bet even though the stock may see some correction in the short term because of its stellar run this year.
The stock has surged more than 65 percent so far in the year, as of December 7 closing at ₹4,007.45 on BSE. In the same period, the equity benchmark Sensex has risen 7 percent.
The company is a globally recognised industrial explosives manufacturer and has set up one of the world’s most integrated facilities for ammunition. Brokerages find the stock in a sweet spot because of the company's bright prospects and capabilities in defence.
Brokerage firm ICICI Securities has upgraded the stock to a 'buy' from a 'hold' and raised the target price to ₹4,760 from ₹4,225, citing Solar Industries (Solar) is at an interesting juncture, in our view, given brightening prospects and its upcoming capabilities in defence.
"Solar’s exposure in consumable-type defence products provides an opportunity for regular orders. The capability to integrate rockets and missiles under a single roof gives the company an edge over ordnance factories. Moreover, opportunities in the cash-rich business of explosives and initiating systems are likely to grow," said ICICI Securities.
ICICI believes Solar has sufficient capacity, expertise and land bank to increase revenue contribution from the high-margin defence business.
The brokerage firm highlighted that the company’s centre of excellence (CoE) facility for lifecycle assessment is one of its kind in Asia and is likely to hone further Solar’s capabilities in assuring the quality of both raw materials and finished products.
"We see Solar on a high-growth trajectory on the twin planks of (1) volume uptick in the commercial explosives business, and (2) increasing share of the high-margin defence explosives business," ICICI Securities said.
The brokerage firm sees Solar maintaining a healthy EBITDA margin of 18-20 percent in FY23E. Owing to the focus on exports and defence, it expects earnings per share (EPS) CAGR of 47 percent through FY24E.
"We value the stock at 45 times FY24E EPS resulting in a target price of ₹4,760," said ICICI Securities.
Another brokerage firm Nuvama Wealth Management (formerly Edelweiss Securities) has a 'hold' call on the stock with a target price of ₹4,306, citing higher profit growth in FY23 driven by a price increase that may moderate in FY24.
The brokerage firm believes Solar’s defence business offers upside potential to the stock and it values its defence part at ₹928.
"We value defence separately assigning a 20 times EV/EBITDA (20 percent premium to defence peer set) to FY27E EBITDA and discounting it back at 12 percent with a contribution of ₹928 per share. For the rest of the business, we maintain 35 times PE and a target price of ₹4,306 based on Q3FY24E earnings," said Nuvama.
Nuvama highlighted that over the last three-five years, Solar witnessed a significant ramp-up in its defence product offering and capabilities.
The brokerage firm believes defence offers large-scale opportunities for Solar given the government’s focus on defence and ‘Make in India’ and the company can be a strong beneficiary on the back of its first-mover advantage in explosives and missile integration.
The brokerage firm expects growth momentum to sustain in all segments such as domestic, exports and defence in FY23. However, delays in defence business orders and execution along with falling realisation driven by a drop in raw material prices are the key risks to earnings.
In the short term, investors can book some profit in the stock and avoid fresh buying as technical indicators are not favouring the stock for the near term.
Jigar S. Patel, Senior Manager - Equity Research, Anand Rathi Share and Stock Brokers pointed out that for the last two months, this stock has been sideways between ₹3,800-4,200. At present, it appears ₹4,100-4,200 is a stiff resistance zone.
"On the daily scale, it has nearly made a triple top. MACD is displaying negative divergence along with daily RSI making lower highs and lower lows which is hinting weakness in coming sessions. One can book profit in between ₹4,100-4,200 zone (if tested again). Avoid fresh buying, as of now wait and watch," said Patel.
According to a MintGenie poll, an average of 5 analysts have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.