Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable' rating on the non convertible debentures and long-term bank facilities of Solar Industries India Limited (SIIL; part of the Solar group).

 

CRISIL Ratings has withdrawn its rating on the Rs 50 crore commercial paper facility at the company’s request and independent confirmation of no facility outstanding. The withdrawal is in line with the CRISIL Ratings withdrawal policy.

 

Also, CRISIL Ratings has withdrawn its rating on non-convertible debentures (NCDs) of Rs 10 crore as the same is not planned to be issued as per the company’s request (Rs 35 crore NCD issued, against rated Rs 45 crore proposed NCD). The withdrawal is in line with the CRISIL Ratings policy. CRISIL Ratings has withdrawn its rating on NCDs of Rs 10 crore (of the original issued Rs 60 crore NCD) as this is partially redeemed as per schedule.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 rating continues to reflect the company’s robust 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 declined by 12% to Rs 6,075 crore in fiscal 2024 driven by realisation growth owing to declining raw material prices (primarily ammonium nitrate), which had increased substantially in the recent past. Volume growth continued to be healthy at 20%. Healthy sales to Coal India Ltd (CIL; ‘CRISIL AAA/Stable/CRISIL A1+’) and a growing portfolio of products catering to the defence and infrastructure sectors, combined with rising international presence, led to growth. Order book increased to Rs 5,192 crore as on March 31, 2024, from Rs 4,802 crore as on December 31, 2023.

 

Declining raw material cost and higher share of the defence vertical led to strong operating margin of 23.1% in fiscal 2024, which is expected at above 21% over the medium term.

 

Liquidity will remain strong, driven by cash accrual of Rs 900-1,000 crore per annum against annual capital expenditure (capex) of Rs 800 crore. Furthermore, net gearing is expected at less than 0.5 time on the back of 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 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. Nonetheless, CRISIL Ratings will continue to monitor these developments and their 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 step-down 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, the group has expanded significantly in the overseas market over the past few years. It is the largest supplier of explosives to CIL. 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.

 

The group will maintain its robust market position, backed by orders worth Rs 5,192 crore as on March 31, 2024, in the domestic market and continued growth in the international market.

 

Sound operating efficiency with significant backward integration

Majority of the 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. The operating margin increased to ~23.1% as the share of defence increased and raw material prices declined. Also, all bulk explosive manufacturing units are located in 50-60 km from the major mining regions. The group has the ability to pass on fluctuations in raw material prices to customers through price escalation clauses in contracts.

 

Strong financial risk profile

Tangible networth was Rs 3,353 crore and gearing 0.33 time as on March 31, 2024. Debt protection metrics were comfortable, as reflected in interest coverage ratio of 13.2 times and net cash accrual to total debt ratio of 0.84 time in fiscal 2024, against 15.04 times and 0.75 time, respectively, in fiscal 2023.

 

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 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 exposed 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 2024, the group incurred translation loss of Rs 168 crore because of exchange differences and Rs 112 crore because of hyperinflation. 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 US dollars 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 Rs 900-1000 crore per annum in fiscal 2025, will comfortably cover annual debt obligation of ~Rs 330 crore. Cash and equivalent and short-term investments stood at Rs 475 crore as on March 31, 2024. Expected capex of Rs 800 crore in fiscal 2025 will be funded through debt and surplus cash accrual. Unutilised bank limit will be sufficient to meet the 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 for pursuing growth opportunities.

Outlook: Stable

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

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes the ESG profile 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 greenhouse gas (GHG) emissions. The sector’s social impact is characterised by health hazards leading to higher focus on employee safety and well-being and the impact on local community, given the nature of operations.

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

 

Key ESG highlights:

• SIIL’s total scope 1 and 2 emissions were ~17 tonne of CO2E per crore of revenue in fiscal 2024 (compared with ~14 tonne of CO2E in fiscal 2023). Going forward, the company is focusing on improving efficiency in operations and use of new technologies to minimise energy consumption and reduce GHG.
• Lost-time injury frequency rate (LTIFR) stood at 0.44 time for employees and 0.91 time for workers in fiscal 2024, compared with nil for workforce in fiscal 2023. Further, it reported one employee and eight worker fatalities in fiscal 2024.
• SIIL focuses on health and safety management. This includes conducting job safety analysis and Hazard Identification and Risk Assessment to identify and address potential hazards.
• SIIL has a grievance redressal mechanism to receive and address customer complaints.
• Its governance structure is characterised by 50% of its board comprising independent directors, one-woman board directors, split in position of managing director (MD) and chairperson, dedicated investor grievance redressal system and extensive financial 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 increase in revenue with increasing geographic diversity and stable operating profitability at 18-20%
• Sustenance of financial risk profile

 

Downward Factors

• Weaker-than-expected operating performance, with decline in operating margin to 15-16% at the group level on a sustained basis
• Significant moderation of capital structure and debt protection metrics owing to sizeable, debt-funded capex or acquisition or stretched working capital cycle
• 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