Premier Explosives Ltd
Current Market Price:Rs.42.05,
Book Value: Rs.20.55,
EPS: Rs.4.83, P/E: 8.83,
Dividend: 15%, Face Value: Rs.10.
Performance: Market Out-performer:
Introduction:
Premier Explosives Limited (PEL) is Rs.600 million plus company and is one of the three major manufacturers of the entire range of Explosives and Accessories in India.
It was established in 1980 and was the first manufacturer in India to deploy totally indigenous technology.
PEL has constantly innovated and upgraded its products and technology to offer "state-of-the-art’ products to its valued customers both in India and abroad. PEL’s R&D facility is recognized by the Center for Scientific and Industrial Research (CSIR), Government of India, as an established research center. A wide distribution network comprising of Magazines, Consignment Agents, Dealers and Handling Agents, located across the country, ensure ready stock and prompt delivery to customers even in remote locations. There is a team of highly experienced and qualified sales engineers to provide full support on applications, safety and handling of explosives and accessories to customers. This is backed by a team of expert mining/blasting engineers at the Technical Services group located at headquarters.
Apart from providing regular support services to customers, PEL also undertakes complete drilling & blasting contracts in collaboration with associates having resources of drilling and excavation equipment & manpower.
Share holding pattern:
The promoters hold 35.18 % while the public holds 64.82%. Promoter Groups includes Shares pledged to M/s UCO Bank and Canbank Factors Ltd as security for obtaining working capital loan for the Company. Among the Public Shareholding, Financial Institutions/Banks hold 0.39%. Also one Mr. Atim Kabra, a major shareholder of the company has increased his holding from 4.95 % to 5.18 %, according to a recently issued statement by the Bombay Stock Exchange.
Financials:
For FY-05-06 the Net sales of the company came out to be Rs.68.4 Cr against Rs.58.8 Cr for the same period previous year. The net profit also zoomed to Rs.3.07 Cr as against Rs.2.49 Cr for the same period previous year. It generated an EPS of Rs.3.78 against Rs.3.1 in the same period previous year. For Q3-2006-07, Premier Explosive reported a comparatively good set of numbers. Its net profit increased to Rs 0.794 Cr against Rs.508 Cr in the same period previous year. But the Net Sales dropped marginally to Rs.15.93 Cr from 16.93 Cr during that period. The March, 2007 quarter results are expected to be significantly high due to some positive initiatives taken by it and also due to the fact that the last quarter results are generally good for the company. The company will come out with audited results for FY06-07, either in 1st or in the 2nd week of June, 2007. Before that the company might come up with un-audited results in the last week of this month.
Investment Rationale:
• The company very recently started trial production in two of its Overseas- Joint-Venture plants at Georgia and Turkey. It also got some trial orders from some overseas companies and if they are satisfied with its products, then a flurry of orders could flow from them. The two directors of the company inaugurated the commencing of trial production in those overseas plants. The blastz has been successfully carried with the companies’ products and the commercial production is expected to start within 2-3 months time-frame.
These two plants are a part of the ambitious joint venture program which the company was talking of throughout the last year (FY-2005-06) & in early part of this fiscal; and which also figured prominently in their last annual report (FY-05-06). The company is looking to substantially ramp up its top and bottom-lines from these joint ventures. The company has established overseas joint ventures to take advantage of better margins prevailing there.
More such JVs are thought of in close-circle-brain-storming-sessions and another one could come up very soon for manufacture of explosives and accessories. In the domestic front the company has started production in its Special Products Division, in September, 2006, which caters to the defense sector. The company is thus expecting good contribution from overseas joint ventures and from the new-found domestic initiatives.
• The company has a couple of months back, signed a long term contract with Satish Dhawan Space Centre, Sriharikota (SHAR), Indian Space Research Organisation (ISRO), Sriharikota A.P. The contract is for operation and maintenance of Second Propellant Plant (SPP) project at SHAR. The annual value of contract is about Rs.7 Cr and the tenor of contract is 10 years, renewable for another 10 years on satisfactory performance. The total value of contract would be around Rs.70 crores for first 10 years. This is in addition to the other orders the company is executing at present. This is the new type
of business the company has ventured into and is a part of the ongoing revamping operations taken by the company. Lot of orders are in the pipelineand the order book of the company is full for the whole year.
• In the domestic market the company has a significant presence and gets regular orders from Coal India Ltd and other mining companies. Very recently, it received a small order of value Rs.1.1 Cr from DRDO. More such domestic orders, big and small, are expected to flow in the days to come. Another bundle of Rs.5--Rs.6 Cr order, could be announced soon by the company in the next 3-4 months time frame.
• For FY-2006-07, the company could post a topline of around Rs.80 Cr. For March, 2007 quarter, the company could post a bottomline of around Rs.4 Cr, which is very encouraging considering, that there is a huge competition in the domestic market. This could generate an EPS of Rs.5 plus for the March, 2007 quarter, taking the total EPS to around Rs.8-Rs.9 for FY-2006-07. In the following quarters also with the new initiatives in place, the company's bottomline and toplines are expected to increase dramatically. This could in turn give a significant boost to the share price of the company. Already a well known and established brokerage house has recommended this scrip, with a
good price target.
• The operating profit margins are of 35% plus, in the defense business. Out of Rs.80 Cr turnover, which the company is expected to garner during last fiscal (FY-2006-07), defense hereto, comprises of only, 15-20%; but due to high margins, the company is making huge profits from these transactions. The most positive part of the defense deals is the guarantee of payment and timely payment. The company in future is looking to increase their presence in a more vigorous way in the defense sector; besides, focusing in the normal business which gives continues flow of orders every month. The bottom line of the company has improved dramatically during the last few months after the production started in the Special Products Division. This division is
operating at optimum capacity and is doing excellently well, much to the satisfaction of the customers.
• The Scrip of the Company currently trades at P/E of 8.83. Based on successful order execution of defense products (missile propellant and pyrogens), good performance of the company’s Special Products Division and overseas Joint Ventures, the expected EPS for FY-006-07 could be around Rs.8-Rs.9. This figure could dramatically change once the commercial production starts in the two overseas divisions, in Turkey and Georgia. The
Capacity of the company’s special products division which is catering to the defense needs could be increased in the coming days, depending upon the volume of the orders the company is able to generate in future.
• It is heartening to note that The Federation of Andhra Pradesh Chambers of Commerce & Industry (FAPCCI) presented an award of "Best Technology Development in R & D" for development of ultra safe green detonator to this company in the last fiscal. The company has also received an appreciation award from Andhra Pradesh Pollution Control Board (APPCB), regional office, Nalgonda for best greenery maintenance at detonators division, Peddakandukur. The company in the last fiscal has succeeded in
manufacturing some highly sophisticated products like electronic detonators, ultra safe green detonators etc, with its indigenous technology—this is a major milestone in the annals of the history of the company.
• India's infrastructure-spend so far has been woefully inadequate. In FY03 it was $21b, just about 3.5% of GDP as compared to $150b for China or 10.6% of GDP. In FY05, this figure increased to $24b but still low at 3.5% of GDP.
However, all this is posed for change. Based on the current trend, by 2010, the government is expected to increase infrastructure spend from approximately 3.5% of GDP to $100b/annum or about 8% of GDP to help India achieve and sustain 8%-9% GDP growth. This would mean infrastructure spending will achieve 18% CAGR growth. This will result in huge awarding of contracts to infrastructure and engineering companies, per annum. In his last budget the FM has enhanced budgetary support for NHDP significantly. He also announced an accelerated road development program for the NE region at an estimated cost of Rs.46.18b. Construction spending on urban infrastructure in the Tenth Plan itself is expected to be around Rs.827b on the back of expected growth in Indian industry & economy, increasing urbanization and household growth. Due to this the use of company's products will increase in the days to come since the Cement, Engineering and Mining companies are the principal users of company's products.
• The Indian explosive industry is one of the few highly developed ones in theworld. The total consumption of explosives in India is amongst the first five inthe world. The total market had been increasing steadily due to infrastructuredevelopment. The company is trying to capitalize on this front and hopes toget a favorable result for its efforts. In addition to qualified and wellmotivated Marketing and Service personnel, Premier Explosives Limited alsohas at its disposal, 92 Explosive Magazines exclusively storing its productsand a fleet of about 100 dedicated Explosive Vans for effecting timely deliveries.
• Government of India has declared a policy of opening up defense sector forprivate industry. This offers a great opportunity, to the company which is amajor player in this field. Also in the last budget, the government has increased the defense allocation; this is very positive for the explosive industry, especially private ones. Moreover, the fall in metal prices and a significant boost to the coal sector, by allotting mines to the private players, will give good impetus to the company, as company derives significant revenues from the Coal sector.
• Off late, the company has sold the Mushroom Division, to M/s. Inventaa Chemicals Ltd for a consideration of Rs.17.50 Cr plus value of stocks, work -in-progress and finished goods at the close of business hours on April 01, 2007. The proceeds of the sale of the said division, will be used to clear some old debts and also in expansion of the company. This will also help the company to focus on its core strength, i.e. explosives in a better way & reduce the interest payment to financial institutions in the following quarters, in a significant way; besides giving a more focused approach to the lucrative
defense deals.
• It has also been found that one Mr.Atim Kabra, has very recently increased his holdings in the company from 4.95% to 5.18%. This is a positive sign and points to a significant growth of the company in the days ahead.
• The Indian explosive industry is fragmented with over 45 units having high production capacity trying to compete with each other. As expected the prices of most of products had been static and at the marginal levels. Increasing competition and over capacity in the industry is factor of concern. But the company is trying to counter it by overseas ventures in countries where margins are better and introducing new cost effective methods of production for the domestic markets. Also, the new found defense sector business will help it to give good boost to its revenue and profits. Moreover, the new line of Maintenance business which the company started off late, will also give good fill-up to both its top and bottom lines. Besides this the company is thinking of increasing its R & D spending in the coming fiscals, including this fiscal.
Recently, an accident occurred at explosive manufacturing factory at Sinnar, Nashik district, Maharashtra on May 05, 2007. This factory belongs to Premier Explochem Ltd. The Company has a minority holding of around 30% of paidup equity of Premier Explochem Ltd. Hence this will not have a major impact on the company’s fundamentals.
Considering all these factors, the Scrip of the Company, seems to be highly undervalued at the current price of Rs.42.05 and hence has a major chance of appreciating, at least 100%-150 % in the next 8 to 18 months time frame. If the company is able to capitalize on, the lucrative defense deals in a more aggressive way, the returns could be much higher.