Pressure in core business makes diversification success an imperative for explosive makers
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Shares of industrial explosive manufacturers have uniformly done well in the past year despite several of them reporting a subdued performance for the last fiscal year (2017 or FY17).
Shares of GOCL Corp. Ltd, Solar Industries India Ltd and Keltech Energies Ltd, whose revenues expanded in single digits in FY17, have gained in the range of 46-147% over the last year. Premier Explosives Ltd, which reported 24% growth in revenues, is up about 35%.
Of course, valuations and other factors would have influenced the recent performances of the stocks. But investors looking for a rational view would do well to track their new initiatives. The core industrial explosives business, which primarily caters to the coal mining sector in the country (Coal India Ltd is the largest customer), is facing intense competition.
An analysis of Coal India’s bulk tenders by IndiaNivesh Securities Ltd shows that bid prices declined around one-fourth from peak realizations between FY13 and FY17.
“While some part of these declines could be explained by falling ammonium nitrate prices, there was also increasing competition among the players especially the top six,” IndiaNivesh said in a note.
So much so that Keltech Energies, which derives most of its revenue from its explosives division, warned about growth this fiscal year. “During the current financial year 2017-18, on account of stiff competition, the explosives division is expected to be under pressure,” the company said in its latest annual report.
Some companies felt the impact of high competition and pressure on realizations in the June quarter as well. The stand-alone performance of Solar Industries, for instance, remained subdued in the June quarter.
With competition remaining high, industry operating at sub-optimal utilization levels and the possibility of Coal India continuing to award a significant portion of the explosives contracts to Indian Oil Corp. Ltd’s unit, IndiaNivesh fears the industry’s realizations will remain under pressure, weighing on profitability. The best way to reduce this risk is to diversify the revenue streams through geographical and product portfolio expansion.
Companies are already doing this. Solar Industries is geographically well diversified, while Premier Explosives has gained a foothold in the defence business. As Keltech Energies points out in its annual report, the company plans to consolidate its growth in the new segment of emulsion explosives, while GOCL Corp. is in other businesses as well.
But barring Solar Industries and Premier Explosives, revenues from the diversification efforts of other companies are yet to emerge as a reliable hedge against the domestic industrial explosives business.
Even for Solar Industries and Premier Explosives one has to see how profitably they can scale up the diversification initiatives. Success on the new initiatives will provide more fundamental support to these stocks in the long run.