Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL AA+/Stable' rating to Rs.45 crore non-convertible debenture (NCD) of Solar Industries India Ltd (SIIL; a part of the Solar group) and reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the other debt instrument and bank loan facilities.

 

CRISIL Ratings has withdrawn its rating on NCD of Rs 20 crore (of the Rs 60 crore NCD) as this is partially redeemed as per schedule. This has been confirmed by the trustee. The withdrawal is in line with the CRISIL Ratings policy.

 

The ratings continue to reflect the group’s robust position in the domestic and overseas markets in the explosives and initiating systems 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 grew 75% to Rs 6,930 crore in fiscal 2023, driven by realisation growth (domestic realisations stood at Rs 70,360 per tonne in fiscal 2023 against Rs 50,417 per tonne in fiscal 2022) owing to increasing raw material prices (primarily ammonium nitrate) and healthy volume growth of 13%. Healthy sales to Coal India Ltd (CIL; ‘CRISIL AAA/Stable/CRISIL A1+’) and a growing portfolio of products catering to the defence and infrastructure segments, combined with rising international presence, also led to the growth. Order book increased to Rs 4,802 crore as on December 31, 2023, from Rs 2,678 crore as on March 31, 2023.

 

Ability to pass on rising input costs to customers led to a strong operating margin of 20.0% in fiscal 2023, which is expected to be 18-21% over the medium term.

 

In the first nine months of fiscal 2024, SIIL reported net sales of Rs 4,459 crore and operating profit of Rs 1,016 crore. The revenue is expected to decline this fiscal owing to declining realisations linked to decreasing raw material prices.

 

Liquidity will remain strong, driven by cash accrual of over Rs 800-900 crore per annum against annual capital expenditure (capex) of Rs 700-750 crore. Furthermore, net gearing is expected at less than ~0.5 time on the back of prudent funding of the 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 the National Company Law Appellate Tribunal on January 22, 2022. The litigation is ongoing with the appeal proceedings in the Supreme Court and has not impacted the business of the Solar group as per the management. Also, in the annual general meeting of SIIL held in June 2023, special resolutions did not get approved (as seen in the last three fiscals). As per the management, this is not expected to have any significant impact on the operations. Nonetheless, CRISIL Ratings will continue to monitor these developments and its impact on operations.

Analytical Approach

CRISIL Ratings has combined the financial and business risk profiles of SIIL, its subsidiary, Economic Explosives Ltd (‘CRISIL AA+/Stable/CRISIL A1+’), and other subsidiaries and stepdown subsidiaries. This is because all these entities, collectively referred to as the Solar group, have common management and significant business and financial linkages.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Robust market position: With 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 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 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 CIL. The group entered into 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, the Make in India focus and typical long-term defence contracts provide steady medium-term revenue visibility.

 

The group will maintain its robust market position, backed by orders worth Rs 4,802 crore as on December 31, 2023, in the domestic market and continued growth in the international market.

 

• 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 18-21% over the five fiscals through 2023. 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 2,689 crore and gearing 0.43 time as on March 31, 2023. Debt protection metrics were comfortable, as reflected in interest coverage ratio of 15.04 times and net cash accrual to total debt ratio of 0.75 time in fiscal 2023, against 15.09 times and 0.48 time, respectively, in fiscal 2022.

 

Weaknesses:

• Exposure to regulatory risks: The explosives industry has a high entry barrier; players require industrial licensing and various clearances from the 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 2023, the group incurred translation loss of Rs 80 crore 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 800-900 crore per annum in fiscal 2024, will comfortably cover annual debt obligation of ~Rs 350 crore. Cash and equivalent stood at around Rs 260 crore as on March 31, 2023. Expected capex of Rs 750 crore in fiscal 2024 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

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

 

Environmental social and governance (ESG) profile

The ESG profile of the group supports its credit risk profile.

 

The explosives (chemical) sector has a significant impact on the environment owing to high water consumption and waste generation and also greenhouse gas emission. The sector’s social impact is characterised by health hazards, leading to higher focus on employee safety and wellbeing and the impact on local community given the nature of its operations.

 

The group has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights

• The company has undertaken focused efforts towards reduction in emission and energy intensity by way of process re-engineering and innovation, and use of electric vehicles and renewable sources of energy such as biomass.
• It has undertaken initiatives to achieve zero liquid discharge, use of treated ETP water for gardening purposes and handling of sewage effluents in the sewage treatment plant. Compared to fiscal 2022, water intensity has reduced by 9% in fiscal 2023.
• SIIL focuses on health and safety management. It is conducting HIRA and HAZOP studies to identify the risks related to operations. To prevent the potential hazards, SIIL monitors near miss incidents, and unsafe acts and conditions. Internal, external audits and mock drills are conducted to check the effectiveness of the implemented measures.
• SIIL has a grievance redressal mechanism to receive and address customer complaints.
• The company has adequate governance structure, with 50% of its board comprising independent directors, presence of investor grievance redressal mechanism, whistle-blower policy and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Continued commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Rating Sensitivity Factors

Upward factors

• Significant scale-up in operations with increasing geographic diversity, while maintaining profitability at current levels of 18-20%.
• Sustenance of financial risk profile.

 

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.
• Any regulatory change significantly impacting operations.

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

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Economic Explosives Ltd	100%	Wholly owned subsidiary
Solar Defence Ltd (Note i)	100%	Wholly owned subsidiary
Solar Defence Systems Ltd (Note i)	100%	Wholly owned subsidiary
Emul Tek Pvt Ltd	100%	Wholly owned subsidiary
Solar Avionics Ltd (Note i)	100%	Wholly owned subsidiary
Solar Explochem Ltd (Note I and iv)	100%	Wholly owned subsidiary
Solar Overseas Mauritius Ltd	100%	Wholly owned subsidiary
Solar Mining Services Pty Limited, South Africa	87.58%	Step-down subsidiary
Nigachem Nigeria Limited	55%	Step-down subsidiary
Solar Overseas Netherlands B.V.	100%	Step-down subsidiary
Solar Explochem Zambia Limited	65%	Step-down subsidiary
Solar Patlayici Maddeler Sanayi Ve Ticaret Anonim Sirketi	100%	Step-down subsidiary
P.T. Solar Mining Services	100%	Step-down subsidiary
PATSAN Patlayici Maddeler Sanayi Ve Ticaret Anonim Sirketi (Note - ii)	53%	Step-down subsidiary
Solar Nitro Ghana Limited	90%	Step-down subsidiary
Solar Madencilik Hizmetleri A.S	100%	Step-down subsidiary
Solar Overseas Netherlands Cooperative U.A	99.99%	Step-down subsidiary
Solar Overseas Singapore Pte Ltd	100%	Step-down subsidiary
Solar Industries Africa Limited	100%	Step-down subsidiary
Solar Nitro Zimbabwe (Private) Limited	100%	Step-down subsidiary
Solar Nitro chemicals Limited	65%	Step-down subsidiary
Solar Mining Services Pty Ltd, Australia	100%	Step-down subsidiary
Solar Mining Services Cote d’Ivoire Limited SARL (Note- i)	100%	Step-down subsidiary
Solar Venture Company Limited	55%	Step-down subsidiary
Solar Mining Services Burkina Faso SARL	100%	Step-down subsidiary
Solar Mining Services Albania	100%	Step-down subsidiary
Solar Nitro SARL (note i and iii)

Note i: The entity has not commenced operations

Note ii: The entity is under liquidation

Note iii: The entity was incorporated on December 05, 2022

Note iv: The entity was incorporated on April 29, 2022