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Business News/ Market / Mark-to-market/  Premier Explosives gains after approvals, despite headwinds
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Premier Explosives gains after approvals, despite headwinds

After getting the licence, the company will start planning for the production facilities

Premier Explosives told analysts last month that if a collaboration is required, it would try to get it, get the approval from the chief controller of explosives and get the inspection done by the pollution control board.Premium
Premier Explosives told analysts last month that if a collaboration is required, it would try to get it, get the approval from the chief controller of explosives and get the inspection done by the pollution control board.

The Premier Explosives Ltd stock has gained 13% after the company said it received approvals to make certain types of explosives and other products in the defence sector. This is the fourth such approval the company has got this fiscal year.

But the approvals will take time to translate into revenues. The entire process, from planning to production, takes a long time. After getting the licence, the company will start planning for the production facilities. If required, it will try and get a partner who can assist it in bringing out the product. At the end, the company will need to obtain another set of clearances, taking the total time taken for execution to almost a year. Premier Explosives told analysts last month that if a collaboration is required, it would try to get it, get the approval from the chief controller of explosives and get the inspection done by the pollution control board. After the facilities get the required approvals, the company will then have to scout for orders.

This is not to undermine the potential value the licences can add to Premier Explosives. A single licence can bring orders worth millions of rupees. But till that time, the company’s financial performance will continue be determined by the existing businesses—defence and explosives—which are facing headwinds.

The detonators business, which comes under the explosives segment and generates a quarter of the company’s revenue, is suffering from oversupply and low prices. Demand is weak as tendering activity is yet to gather pace in the mining and infrastructure sectors. With the monsoon off to a good start (which could result in production losses at the customers’ level), analysts expect prices to remain weak, at least till September. The defence business, on the other hand, is weighed down by slow orders. Despite the government’s push for indigenization of defence equipment, suppliers are yet to see a substantial improvement in ordering activity.

This is one reason why Premier Explosives’ revenue from the defence products and services businesses fell 2% in the last fiscal year. De Arul Kaarthick, an analyst at Karvy Stock Broking Ltd, says: “Off-take from defence segment is impacted by lower off-take by user agencies specifically propellants for Akash missiles and teargas grenades for police forces."

Overall, the defence sector may be offering tremendous opportunities for the companies in the private sector. But slow and sporadic ordering by the government agencies means that revenues can be lumpy. While the current stock valuation captures the optimism—the stock is up 86% in the last year—investors would be better off waiting for the order inflows. “We do not see exuberance turning into order book build up. Recent licences received by the company allows for build of capacity for manufacturing nevertheless ordering activity remains farther temporally," De Arul Kaarthick said.

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Published: 24 Jun 2015, 08:42 AM IST
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