Premier Explosive : Riding on Defence capex

Summary

Premier Explosives Ltd pioneers high-energy materials for defense and space, boasting a diverse product line and strategic facilities across India. With a robust order book, record export revenues, and a vision to achieve a Rs. 500 Crore turnover by FY2025-26, it stands poised for substantial growth despite cyclical industry risks.

About the company

Established in 1980, Premier Explosives Ltd (PEL) specializes in the production of high energy materials and related products for the defense, space, mining, and infrastructure sectors. 

The company has a track record in developing and manufacturing solid propellants for various rockets and missiles, including Pinaka, Astra, Akash, LRSAM / MRSAM / QRSAM, Brahmos, Agni, Veda, as well as strap-on motors for satellite launch vehicles. 

PEL's diverse product range has items such as chaff, IR flares, explosive bolts, pyro devices, smoke markers, cable cutters, tear gas grenades, and pyrogen igniters for defense and space applications.

Manufacturing Facility

A pioneer in indigenizing explosives technology, PEL operates seven manufacturing facilities across Telangana, Madhya Pradesh, Maharashtra, and Tamil Nadu.  The company also manages the solid propellant plant of the Advance Systems Laboratory (ASL) at Solid Fuel Complex, Jagdalpur.

Structure of Company

The company holds ownership stakes in two subsidiaries: Premier Wire Products Limited (80%) and PELNEXT Defence Systems (100%). Premier Wire Products Limited specializes in manufacturing Galvanised Iron (GI) wires for detonators, while PELNEXT Defence Systems focuses on ammunition production for the Indian defense sector. Additionally, PEL entered a 50:50 joint venture with the Kalyani Group in April 2015, forming BF Premier Energy Systems Private Limited for defense product manufacturing, which is pending commencement of operations.

Contribution to Indian Space Programme

Premier Explosives stands as the sole qualified Indian company for countermeasures and the exclusive exporter of fully assembled rocket motors. In addition to rocket motors and warheads, Premier has diversified into manufacturing mines and ammunitions. The production of Nipun mines has commenced, with deliveries scheduled from November 2023 onwards. 

Premier has achieved successful development of 40 MM HEAP and HEDP ammunition for UBGL and HBGL under the DCPP program of DRDO. Anticipated production and supplies are expected in the current financial year. The HMX and RDX plants, previously catering to self-consumption and the domestic market, have now expanded to include exports.

Notably, PEL has actively participated in India's Space Program, securing a 10-year GOCO (Government-Owned, Contractor-Operated) contract in January 2019 to operate and maintain the Solid Propellant plant of ISRO at SHAR. Additionally, PEL has successfully tested a trial order for PSOM-XL for ISRO in January 2018, showcasing its capabilities in advanced solid propellant manufacturing processes.

The Katepalley Plant successfully fulfilled an order from Vikram Sarabhai Space Centre (VSSC) for the production of PSOM-XL (solid propellant) intended for the Satellite Launch Vehicle (SLV).

The company collaborates with defense entities to support the indigenization of India's missile programs.

Additionally, PEL contributes to national indigenization initiatives in collaboration with defense and space entities, focusing on various defense and space products.

Product Portfolio

The product portfolio comprises propellants (including pyrogen igniters, case-bonded propellants, freestanding grains, fuel-rich grains, gas generators, and strap-on motors for PSLV), pyros (such as pyro cartridges, pyro actuators, smoke/flash generators), explosives (including bombs, warheads, ammunition, mines, HMX/RDX, and their components), and countermeasures (chaffs and flares). The company is the sole Qualified Indian entity for Countermeasures and the exclusive Indian exporter of fully assembled rocket motors.

Industry Overview

EXPLOSIVES INDUSTRY

The explosives market has materials and chemical compounds capable of exploding, categorized into high explosives for defense and military applications and low explosives for industrial and civilian use. Notable types include C4, HMX, PETN, RDX, Dynamite, ANFO, among others.

The defense and mining sectors significantly influence explosives demand. Increasing government expenditure is anticipated to drive demand, with the global market expected to reach USD 47.88 billion in 2023 (CAGR: 8.6%) and USD 61.83 billion in 2027 (CAGR: 6.6%). Asia Pacific led in 2022, and Western Europe is projected as the fastest-growing region by 20275. Stringent government regulations may limit market growth.

India, a rapidly growing market, consumes approximately 550,000 tonnes of explosives annually, poised to reach USD 159.2 million by 2028. The country is also the world's second-largest coal producer.

Demand drivers include mining operations, construction activities, and the rising need for power. Despite the environmental preference for renewable energy, challenges in scaling solar and wind power lead to continued reliance on coal. Geopolitical tensions affecting natural gas supply enhance the importance of thermal coal power plants for energy security.

INDIAN DEFENCE INDUSTRY

With the second-largest armed forces globally, India plans to spend USD 250 billion by 2025 on modernizing its armed forces. Defence exports reached a record high of nearly Rs. 16,000 Crores in 2022-2023, demonstrating a 23-fold increase. India competes globally in defense exports, particularly in Southeast Asia and Africa.

Strategic steps since 1962, along with policies like Atmanirbhar Bharat, have boosted India's defense capabilities. The government's planned expenditure of USD 130 billion by FY2025 aims to modernize armed forces, fostering a favorable environment for domestic manufacturing.

India's defense budget in 2023 stood at USD 56.8 billion, expected to reach USD 67.5 billion in FY2024 and USD 89 billion in FY2028. Defence acquisition budget is projected to increase from USD 19.7 billion in 2023 to USD 27.4 billion by 2028.

Policies like Defence Production and Export Promotion Policy, favorable FDI climate, and import embargo contribute to India's successful defense growth story. India aims to achieve a defense production target of USD 25 billion and an export target of USD 5 billion by 2025.

Mining and infrastructure sectors in India, focusing on cost-effective innovations and compliance with safety and environmental regulations, are crucial drivers for the explosives industry.

India's commitment to domestic defense procurement is expected to increase indigenisation levels from 35-40% to 70-75%, with a planned Defense Capital Acquisitions of Rs. 15 lakh crores over the next decade. In 2023-24, 75% of the capital procurement budget is allocated to the domestic industry. Premier is well-positioned to benefit from this industry scenario, experiencing favorable business growth.

Promoters 

Dr. A-.N. Gupta, Dr. (Mrs.) Kailash Gupta, A. N. Gupta (HUF)

Management
The company's leadership is comprised of experienced professionals, including T V Chowdary, MD, a Chemical Engineer with over 35 years of experience, Dr. A. N. Gupta, Non-Executive Chairman, and Y. Durga Prasad Rao, Director of Operations. With a skilled workforce of 825 and approximately 100 engineers/scientists, PEL is positioned as a key player in the industry.

Financials

In last 10 years, company sales fluctuated from 108 Cr to 266 Crs. Last year, company recorded sales of 202 Crs. Sales and Operating Margins are quite fluctuating. Even operating margins became negative in Covid. 

Order Book

Premier Explosives has a strong order book of approximately Rs. 1,054 Crores, representing a growth of 75% YoY.

The company's current order book is Rs. 1,054.38 Crores, with the higher-margin defense segment comprising the majority at Rs. 884 Crores, accounting for approximately 81% of the total order book. The explosive segment stands at Rs. 51 Crores, while the operational maintenance service segment is at Rs. 119 Crores.

Quarterly Results

Premier Explosives achieved a record export revenue of Rs. 29.4 Crores in Q2 FY2024.

Sales increased by 28% YoY, where as with operating leverage operating margins improved and PAT increased by 378% YoY.

The company achieved the highest ever EBITDA margins of 28% in Q2 FY2024.

Interest expenses increased but company is planning to deliver 500 Cr sales by FY25-26, which shows company can deliver the profitability much stronger since this shows growth of 2.5x from the last FY23 Turnover.

PAT is also at all time high in this quarter, with this trajectory company can deliver strong profitability such huge order book.

Guidance & Capex

The company is targeting a turnover of Rs. 500 Crores by FY2025-FY2026.

The company anticipates a capex requirement of around Rs. 10 Crores for FY2024 and FY2025.

Risks

>Heavy reliance on the cyclical mining and infrastructure industries for a significant portion of its revenue.

>Sales is highly dependent on the government defense projects which are lumpy and capital intensive as receivable from the government are stretched to 6-9 months.

>The current P/E multiple of 66.7 largely reflects the anticipated exponential growth in revenue and profits from the government as the defense sector expands. However, if any of these expectations fail to materialize, the multiple could contract.

>PEL has not generated free cash flow in the last 10 years.

>PEL heavily relies on the cyclical mining and infrastructure industries for a significant portion of its revenue. The company is vulnerable to economic slowdowns and subdued mining/infra activities during prolonged monsoons. Additionally, the defense segment faces risks due to the long gestation period for order execution. 

>According to the management, receivables in the commercial explosives segment are typically paid within 2-3 months, whereas in the defense segment, payment cycles range from 6-9 months. The defense segment contributes nearly one-third of the total revenue. Additionally, the company has experienced elevated inventory days in the past two years, leading to a prolonged working capital cycle.

Valuation

The company is currently trading at a P/E multiple of 66.7 and an EV/EBITDA multiple of 29.4, which appears to be high. This valuation seems bit expensive for a business, but with increased sales and improving EBITDA that can be somewhere .

Analysis

Since Company is having order book which represent the heavy upside and increasing defence exports, company like PEL has opportunity to encash the same and deliver the 500 Cr worth of sales and profitability. We also need to look for the government order going forward and the free cash flow, that will write the future trajectory. Company is doing capex that will lead to huge revenue accretion. since india is focussing on defence idigesation and companies like Premier explosives will benefits a lot. Company serve very specific need of defence companies, This will allow them to connect with more companies. Their aerospace products will also growing faster. Since ISRO is known for cheap rockets and companies with approvals form ISRO will benefit as humans exploring more and more space. The company is into business of futuristic technology and that's