From Hum-Tum to TTMM (Tu-Tera-Main-Mera)—the developments on the Ukraine-Russia warfront have been tragic and fast-paced. Ukraine aspired to be included in NATO and relied on its western allies to retaliate to any potential aggression from Russia.
No sane nation will support an aggressor in a war but walking the tightrope of self-interest and righteousness isn’t easy for any nation. As a result, despite getting help and sympathy from across the world, Ukrainians have been fighting out their own battle.
On the other hand, a common man in Russia must also be feeling as helpless and perhaps outcast.
Within days of Russia’s invasion of Ukraine, Germany has decided to shore up its military preparedness and its defence spending is expected to cross 2% of its GDP. On the other hand, Japan has been increasing its defence budgets to record highs to counter any potential Chinese and North Korean threat.
But India, being a neutral country witnessing the ongoing crisis in Europe, seems to have refrained from labeling anyone as an aggressor on topics concerning border disputes and sovereignty. We as a country already have multiple issues to deal with.
India has been in a Catch-22 situation, indeed. It can’t upset Russia—it’s the only dependable ally with whom India’s defence ties run deep. Nor it can afford to invite the wrath of the west, which might play a pivotal role in future defence co-operations.
That said, Ukraine’s situation today is a clarion call for countries like India to become self-reliant in defence. Fortunately, India has not only recognized this need in time but has also taken necessary steps.
On this backdrop, our technical expert had discussed Premier Explosives on our Youtube Channel as a momentum stock idea on March 06, 2022. He cited a strong breakout formation which might take the stock past its January 2018 highs of 536, thereby leaving an upside potential of over 50% from its recommended price.
If you happen to consider investing in this stock based on our video recommendation, we urge you to read all the disclosures carefully and strictly follow the indicative stop-losses and profit-triggers.
On November 08, 2020 we had published an article on Solar Industries—one of India’s leading explosive manufacturing companies. You might wonder why we are writing again on a much smaller explosive manufacturer, almost one and half years later.
The answer lies in the segments these companies cater to. Solar Industries largely meets the explosives demand of the commercial sector. Defence accounted for only 7% of Solar Industries’ revenue in 9MFY22. On the other hand, defence revenue contributed 55% to the total revenue of Premier Explosives in 9MFY22.
Premier Explosives uses indigenous technology to manufacture high energy materials and accessories for defence, space and commercial sectors, including infrastructure and mining. The company’s full-scale manufacturing capabilities include propellants, pyros, explosives and countermeasures.
The government has been emphasizing domestic production of and self-reliance in Defence. India has a defence budget of Rs 3.85 lakh crore for FY23, excluding pensions.
Of this, Rs 1.5 lakh crore will be spent on defence capex in the next fiscal. As the finance minister mentioned in the Budget speech this year, 68% of the capital procurements will be met through domestic sourcing. Companies such as Premier Explosives are expected to be beneficiaries of this trend.
As on December 31, 2021, Premier Explosive’s order book was Rs 401 crore of which 38% of orders are from the defence sector.
Although the order book size of the company might appear small in absolute terms, it is already a preferred supplier and a critical partner in India’s National Missiles Programme.
If you judge the potential of the company going by just the top-line and bottom-line, you are likely to miss the big picture.
At an inflection point?
Premier Explosives at present has been getting more defence orders from programmes that are in a developmental phase. Once the orders progress to the production phase; the order value might shoot up exponentially, as the management has pointed out repeatedly during its concalls.
The company has come a long way from being just an industrial explosives manufacturer to a strategic player in the defence sector.
It now aims to develop capabilities for missile integration. It’s been participating in some of the key technological transfer programmes and already owns licenses required to develop and manufacture products having high entry barriers.
The list of missiles where Premier Explosives is a supplier includes the likes of BrahMos, Pralay and Akash. And it also has a presence in some missiles which are at various stages of development and production—for instance Astra, Astra-II, MRSAM, LRSAM, QRSAM and NGARM to name a few.
Premier Explosives is the only Indian company to supply countermeasures such as chaffs and flares to Indian defence forces. The company has been expanding its product portfolio. The list of its products under development is impressive and includes 70mm rockets, air-glide bombs, pyrogen igniters amongst others.
The company completed its Greenfield expansion at Katepally in Q4FY21 which is in the testing phase at present. It is hopeful of utilizing nearly 60% of the capacity of this facility over the next one year.
The management has guided for a 20%-25% revenue growth in FY23. The company has been rationalizing manpower costs and recently concluded a VRS scheme.
On the back of the Ukraine-Russia war, smaller nations are likely to up their defence preparedness which might help Indian defence suppliers scout opportunities in the export markets. Moreover, the import substitution drive and domestic manufacturing programme of the Indian government is likely to offer further tailwinds.
Now it remains crucial to see how much this translates into bottom line growth for companies such as Premier Explosives which are aspiring to enter a new growth phase.
You may also like to read: 5G: Will it transform India’s manufacturing landscape?
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