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Business News/ Market / Mark-to-market/  Explosives makers ride on hopes of mining recovery, defence orders
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Explosives makers ride on hopes of mining recovery, defence orders

Domestic miningfrom which explosives suppliers derive most of their revenuesmay be yet to revive, but their shares have already rallied

The optimism is driven by the belief that ongoing government measures to revive domestic coal production will increase demand for explosives in the second half of the fiscal year. Photo: MintPremium
The optimism is driven by the belief that ongoing government measures to revive domestic coal production will increase demand for explosives in the second half of the fiscal year. Photo: Mint

The rally in the shares of explosives makers reflects the mood in Indian equity markets. Domestic mining—from which the companies derive most of their revenues—may be yet to revive, but the shares of explosives suppliers have already rallied.

The stocks of Solar Industries India Ltd and Premier Explosives Ltd have more than doubled in the last year. The gains precede the sales recovery. In the recently concluded September quarter, stand-alone net sales of both the companies grew at an uninspiring 2-4%. Slow coal production weighed on demand and prices of the detonators, Premier Explosives said in a presentation.

The coal industry is the biggest user of explosives.

Still, investors are not fazed by subdued sales. The optimism is driven by the belief that ongoing government measures to revive domestic coal production will increase demand for explosives in the second half of the fiscal year. But that argument holds little water as the sale process of the coal blocks, whose allotments were cancelled by the Supreme Court, is expected to begin in February. While that is a good two months away, allocation and re-starting of mines can spill over to the next fiscal.

The government’s pressure on Coal India Ltd to produce more may lead to greater purchases. Coal India is the single biggest customer for explosive companies. Compared with 3.7% growth in the previous fiscal year, production at the company grew 7.5% in April-November this year. The increasing production points to an improving business environment. But a sustainable pick-up in sales can happen only when new capacities get added. According to a PTI report, the mines from which production is pending at Coal India may begin production from next fiscal onwards.

Another reason why the explosives makers caught investors’ fancy is the government’s thrust on indigenization of defence products. Of the two, Premier Explosives already derives a significant amount of revenues—more than one-fifth—from defence products and services. Solar Industries has obtained the licence to make HMX (explosive used in warheads) and propellants for the defence sector. While the defence opportunity is enormous, the companies are yet to see the kind of breakthrough orders many were expecting.

In fact, in the recently concluded September quarter, postponement of delivery of propellants and delay in orders for tear gas grenades had affected the defence products business of Premier Explosives. The orders may eventually come.

What investors need to keep in mind is that defence business, like all government contracts, can be lumpy. Also, even though the defence business looks promising, it has to be seen how these companies will cope with competition, especially considering that the government is also encouraging foreign firms to invest in domestic defence ventures.

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Published: 09 Dec 2014, 07:52 PM IST
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