PREMIER EXPLOSIVES LTD.

The Indian Explosives Industry is amongst the top 5 in the world. Around 70% of the entire output of the industry is consumed by the coal mining industry which primarily consists of Coal India Ltd. & its subsidiaries. The Indian explosives industry is fragmented with around 45 units and around 15 major manufacturers. Premier Explosives is the 6^th largest manufacturer of explosives with around 5% market share. PEL caters to all mining sectors like Iron Ore, Limestone, etc.

Premier Explosives Ltd. was incorporated in 1980 and started off with manufacturing Slurry Explosives and during the 90’s started manufacturing the complete range of explosives & accessories like detonators, bulk explosives, detonating cords and blasting accessories. The company diversified into Mushroom Farming in 1997. In FY07, the company ventured into Space & Defence. The co. divested its Mushroom Division in FY08 for a consideration of around 20Cr. Since then the company is focussing & expanding into the Space & Defence sectors. PEL is the only private sector entity manufacturing solid propellants & other specialized products for the defence sector.  

Presently, PEL has 4 main divisions :

i.       Bulk Explosives

ii.     Detonators & Accessories

iii.    Special Products Division – Solid Propellants

iv.    Service Contracts – ‘Operation & Maintenance’ Contracts.

1.)         BULK EXPLOSIVES :

The explosive industry is fragmented while the main customer is a monolithic (Coal India). This has created over supply situation and price undercutting whereby CIL extracts the best prices through reverse auctions.

   

The other listed players from this space are Keltech Energies Ltd. & Solar Industries India Ltd.

The ‘Industrial Explosive’ division of PEL did sales of Rs.42Cr. in FY12 on volumes of around 15,000 tonnes. The Installed Capacity of this division is 38,000 TPA. Hence, the Capacity Utilization is barely 40%. Coal India, Singareni Collieries & Neyveli Lignite, NMDC are the main customers.  

Recently, the co. has bagged an order to supply 12,000 tonnes to CIL. Therefore, during FY13, the co. should achieve volumes of 25,000 tonnes translating into sales of approx. Rs.70Cr. from this division. This alone can increase the total sales of the co. by 25% in FY13 vs Rs.110Cr in FY12. At peak capacity this division alone can do sales of around Rs.100Cr. That can only happen if the coal mining output of the country increases.   


The co. should be able to maintain 15% operating margins as the management refuses to bid for those tenders where a threshold margin of 15% is not assured.

The co. has 3 plants & 2 silos under this division. PEL is setting up a new silo to cater to the cement industry in Nalgonda which is expected to be commissioned by September 2012.

PEL is also setting up a cartridge explosive plant with an Investment of Rs.5Cr. which is expected to come on stream by August end. This plant is expected to generate additional revenues of Rs.12Cr. in FY13 & Rs.25Cr. in FY14.                                                                                                                                         

2.) DETONATORS – The detonator industry is also facing an oversupply situation. PEL sells Detonators through its Dealers to industrial customers. The Installed Capacity of PEL in this segment is 100 million numbers where as it produced only 65 million nos. during FY12, earning revenues of Rs. 37.5Cr. At peak capacity the Detonators division can generate revenues of more than Rs.55Cr.

3.) SERVICES DIVISION : O&M – A major breakthrough was achieved in FY07 when PEL entered into an ‘Operation & Maintenance’ contract with ISRO. ISRO also manufacturers propellants for captive use. Under an ‘O&M’ contract, PEL operates ISRO's facilities. ISRO provides the Raw Material & purchases the output. PEL's employees operate the factories under the supervision of ISRO employees. More than margins, O&M is a significant technology transfer as PEL is learning to run complex facilities and than setting up such units on its own. Such contacts are called GOCO (Government Owned, Company Operated). These contacts have annual price escalation clause which leads to steady increase in revenues.

Presently, PEL is doing O&M work for ISRO at Sriharikota and DRDO at Jagdalpur & Pune. PEL has deployed 550 of its employees to man these locations.

The “Services” Division generated revenues of Rs.14Cr. in FY12.  

The company is constantly looking out to expand this division and any announcement in this regard can be a major catalyst for rerating.    

4.) SPECIAL PRODUCTS DIVISION – Since FY07, PEL is also manufacturing solid propellants & other specialized parts for DRDO. PEL is the only private sector entity in India manufacturing solid propellants & other specialized products for the defence sector. On 13^th March 2012, the co. commissioned its expanded capacity of Solid Propellants by investing close to Rs.9Cr.

Solid Propellant manufacturing is a Sunrise Industry in India.

PEL has done work for Agni 3 & Akash missile projects.

Defence Off sets is also a big opportunity for PEL.

PEL had purchased 200 acre land some 10 kms from its existing SPD plant at Peddakandukur (PKD) for around Rs.3.5Cr. The total envisaged capex in this project is around Rs. 20Cr.

The management believes that the defence & space business will exceed the Bulk Explosive & Detonator business within the next 5 years.

CONCERNS :

1.)The company wrote off investments worth around Rs.13Cr. during FY09 & FY10. These investments were made in FY07 in JV’s in Turkey & Georgia. The management claims that’s the foreign partner duped it. It is possible that the management duped the shareholders as this a very convenient way of siphoning off funds by Indian promoters. After all who is going to Georgia to check out the details! PEL is fighting a case against its Turkish partner & is expecting a write back.  

2.)Stagnating Mining Output growth due to regulatory roadblocks like land acquisition & forest & environment clearance issues.

3.)Deferment of govt. orders (DRDO & ISRO) due to freeze in bureaucratic decision making.

4.)PEL has given corporate guarantee to an associate co., “Premier Wire Products Ltd.” worth Rs.1.72Cr.  

PROMOTER :

Dr. Amar Nath Gupta (ANG) is the CMD of PEL. He is a first generation entrepreneur. He is a Gold Medallist from Mining Geological and Metallurgical Institute of India. He is a Member of Society of Explosives Engineers, U.S.A. and was Chairman of Explosives Development Council constituted by Government of India and Chairman of Explosives Manufacturers Association of India.

Dr. ANG believes in profitable growth. The co. could have achieved sales of around Rs.300 - 400Cr. had it been ready to sacrifice margins at the altar of sales growth. The co. only considers projects where it expects to recoup its investment in 4 years.

PEL has not diluted equity since 1997.

Promoter Shareholding :

FY08 – 35.81%

FY09 – 38.29%

FY10 – 39.06%

FY11 – 41.05%

FY12 – 41.88%

June 2012 – 42.81%

VALUATION :

CMP = Rs.69/-

MCap = Rs.56Cr.

Debt = 0

EV = Rs.56Cr.

TTM :

Net Sales = Rs.110Cr.

EBITDA = Rs.18.5Cr.

PAT = Rs.12.5Cr.

Networth = Rs.48Cr.

P/BV = 1.16x

PE = 4.48x

RoE = 29%

DPS = Rs.2.5/-

Dividend Yield = 3.62%

CAGR : FY08-12 :

Sales – 17.32%

EBITDA – 32.5%

PAT - 56.5%

Networth – 19.5%

Debt = ( - 52%)

Total Assets – 3.93%

FY13E :

Sales = Rs.140Cr.

EBITDA = Rs.22Cr.

PAT = Rs.15Cr.

PE = 3.73x

P/BV = 0.9x

RoE = 28%

DPS = Rs.3/-

DIv. Yield = 4.35%

PORTFOLIO WEIGHTAGE = 3%