Saral Gyan Hidden Gem July 2012

UNEXPLORED MULTIBAGGER SMALL CAP STOCKS

EQUITY RESEARCH REPORT

PREMIER EXPLOSIVES LTD

BSE CODE: 526247

Industry: Specialty Chemicals CMP: Rs. 73.80 (22/07/2012)

Market Cap: 599.82 (Millions) Target Price: Rs. 150 Date: July 22, 2012 Time Period: 18 – 24 months

Saral Gyan Capital Services

www.saralgyan.in

An Independent Equity Research Firm

http://www.saralgyan.in/

HIDDEN GEMS – JULY 2012

- 2 - SARAL GYAN CAPITAL SERVICES

TABLE OF CONTENT

S.No Content Page No. 1. Company Background 03 2. Recent Developments 06 3. Financial Performance 07 4. Charts & Graphs 09 5. Peer Group Comparison 11 6. Key Concerns / Risks 11 7. Saral Gyan Recommendation 12 8. Disclaimer 13



1. Company Background

Premier Explosives Limited (PEL) is one of the major companies manufacturing the entire range of explosives and accessories for the civil requirement.

Starting as a Small Scale unit in 1980, it was founded by Mr.A.N.Gupta, a Gold Medallist in Mining Engineering. Its current turnover is about Rs. 600 million per year. The export

earnings of the company are about Rs. 200 million per year.

PEL has the honour of being the first to set up all the manufacturing units with totally in-house technology at a remarkably low capital cost.

PEL's R&D facility is recognised by the Council for Scientific and Industrial Research (CSIR), Government of India, as an established research centre. It is also recognised as a research base for Ph.D. work by Osmania University, Andhra Pradesh.

The Company is manufacturing many diverse products for Defence requirements.

The Company is operating and maintaining a State-of-Art Chemical Manufacturing facility of Indian Space Research Organisation

The Company has two Joint Ventures abroad for manufacture of Explosives & accessories

The Company has ISO 2001 accreditation Most of the products are ‘CE’ certified In the process of implementing 6 Sigma & NABL accreditation

Explosives PEL today has a wide range of products and technologies in the manufacture of Explosives & Accessories. These include Emulsion explosives, Bulk Explosives, Cast Boosters, Detonating Fuse of various core-loads, Plain detonators, Instantaneous Electric Detonators, Electric Delay Detonators, Permitted Detonators, Cord Relays and Amardet NoN Electirc Shock-tube Detonators. PEL has constantly innovated and upgraded its products and technology to offer “state-of-the-art” products to its valued customers both in India and abroad. PEL’s R &D facility is recognized by the Centre for Scientific and Industrial Research (CSIR), Government of India, as an established research centre. The Company has set up a plant at Neyveli for manufacture of Site Mixed Emulsion Explosives with an annual capacity of 3000 MT. Production at the plant started after obtaining necessary statutory permissions.



Defence PEL has been working with the DRDO for over five years to absorb the technology and develop propellants and other products that are being used in the various missile programs. In FY 2007, it started production of pyrogen igniters and Astra missile motors with a small capacity to handle the developmental requirements. In 2008 PEL won the ‘Defence Technology Absorption’ award for 2007 from DRDO for its efficient supply of explosives and solid propellants. The Company had signed an Operation and Maintenance contact with DRDO, SF Complex, Jagdalpur. The contract is for operation and maintenance of Plant & Equipment for a period of 5 years at an annual value of Rs. 30.90 million (with price escalation on annual basis) and was commenced from November 02, 2009. The Company has also obtained an industrial license for the following products, which will cater to the defence applications. Products Licensed Capacity

Propellants 1000 MTPA Pyros 2 Million Numbers

O&M contract with ISRO Early in 2007, it signed a Rs 700 million, 10-year (renewable for another 10 years) contract with Satish Dhawan Space Center, SHAR, Indian Space Research Organization (ISRO) for operation and maintenance of a propellant plant. Apart from giving it a steady revenue stream, this contract helps PEL to consolidate and upgrade its knowhow in the propellant business. Today, propellants for the satellite launch vehicles are handled by the PEL team giving it a tremendous edge in this high end business. High Energy Materials The Company has also developed a few high energy materials with support from High Energy Materials Laboratory, Pune and ECIL, Hyderabad. These are required for defence and space applications along with propellants. The Company has obtained Industrial License for the following products. Products Licensed Capacity

HNS 10 MTPA HNF 10 MTPA CL - 20 10 MTPA



Wind Energy The Company has commissioned 800 KW Wind Energy Generator (Enercon make) at Kozhumankondan village, Palani Taluk, Dindigul District, Tamilnadu on September 29, 2009. These investments are being made with a view to take advantage of the tax incentives available and generate decent post-tax returns on the surplus funds. Associate Companies The Company held shares to the extent of 60% in Premier Wire Products Ltd at the time of setting up of the unit for the purpose of disposing it in near future. The Company disinvested its shares in Premier Wire Products Ltd on June 30, 2009. Consequent to such disposal, the Company's investment in the Company is 48% and Premier Wire Products Ltd ceased to be a subsidiary on June 30, 2009 . In February 2009, PWP had commenced commercial production of galvanized iron wires, which are a key input for the Detonators. PEL had been having problems sourcing quality wires and had therefore decided to set up this facility. The total investment in PWPL was around Rs. 50 million. Joint Ventures In February 2007, PEL had formed two JVs - Premier Synthas, Turkey and Premier Georgia, Georgia for the manufacture of explosives and accessories. These were considered attractive markets with substantially higher margins. However, the slowdown in 2008 and the problems with partners in these JVs have adversely affected the prospects of both the joint ventures. As a result, the Company has had to make substantial write-offs. In FY 2009, PEL had written off an amount of Rs. 54 million in the value of equity investments and the amounts outstanding from these joint ventures.



2. Recent Developments Premier Explosive to set up joint venture company, May 26, 2012 The board of Premier Explosives in its meeting on 23 May 2012 has considered and approved a proposal to set up a joint venture company (JV) in Zambia, for manufacturing bulk explosives and accessories and for related business operations Premier Explosives inaugurates solid propellant expansion project, Dec 27, 2011

Premier Explosives has inaugurated solid propellant expansion project on December 22, 2011, by Chief Controller, R&D (Missiles and Strategic Systems) of DRDO.

The company will entail an investment of Rs 10 crore and the project has been added to its existing manufacturing unit at Peddakandukuru in Nalgonda district of Andhra Pradesh. It will cater to the needs of tactical missiles like the Nag, Astra, Akash, and Pinaka.

Premier is producing solid propellants since 2003 and the new project will focus on solid propellants for tactical missiles, which will help the nation in reaching self-reliance in respect of defence supplies. The company has already supplied critical components like the smoke less composition which helps an aircraft’s detection after the launch of the missile for the Astra missile.

Premier Explosives (PEL) is one of the major companies manufacturing the entire range of explosives and accessories for the civil requirement. PEL is the first manufacturer in India to deploy totally indigenous technology. PEL today has the widest range of products and technologies in the manufacture of Explosives & Accessories



3. Financial Performance Premier Explosives net profit rises 28.10% in the June 2012 quarter Premier Explosives net profit rose 28.10% to Rs 26.9 million in the quarter ended June 2012 as against Rs 21 million during the previous quarter ended June 2011. Sales rose 6.84% to Rs 254.6 million in the quarter ended June 2012 as against Rs 238.3 million during the previous quarter ended June 2011. Premier Explosives net profit rises 36.16% in the March 2012 quarter Premier Explosives net profit rose 36.16% to Rs 41.8 million in the quarter ended March 2012 as against Rs 30.7 million during the previous quarter ended March 2011. Sales rose 16.34% to Rs 319.7 million in the quarter ended March 2012 as against Rs 274.8 million during the previous quarter ended March 2011. For the Audited full year, net profit rose 19.16% to Rs 119.4 million in the year ended March 2012 as against Rs 100.2 million during the previous year ended March 2011. Sales rose 13.74% to Rs 1073.5 million in the year ended March 2012 as against Rs 943.8 million during the previous year ended March 2011



Current & Expected Earnings: Quarterly Ended Profit & Loss Account

Expected Earnings for 2nd and 3rd Qtr FY 2012-13: Even during slowdown in mining sector, PEL has posted robust growth in FY 2011-12. First quarter results of FY 12-13 are in line with our expectations. We expect that company will maintain growth of 25% during this year. Promoters have increased their holding by almost 1% in last quarter shows confidence of management to deliver better numbers in coming quarters.

Particulars (Rs in Millions)

Sep 2011

Dec 2011

Mar 2012

Jun 2012

Sep 2012 E

Dec 2012 E

Audited / UnAudited UA UA UA UA UA UA

Net Sales 233.38 291.84 319.66 254.57 276.85 323.79

Total Expenditure 200.1 241.42 264.43 209.3 229.41 264.44

PBIDT (Excl OI) 33.28 50.42 55.23 45.27 47.44 59.35

Other Income 4.59 4.69 5.85 2.08 2.45 3.08

Operating Profit 37.87 55.11 61.08 47.35 49.89 62.43

Interest 1.72 2.27 2.39 3.25 3.97 3.05

Exceptional Items 1.72 -0.34 -0.41 -0.41 0 0

PBDT 37.87 52.5 58.28 43.69 45.92 59.38

Depreciation 4.68 4.62 4.66 5.04 5.10 4.95

Profit Before Tax 33.19 47.88 53.62 38.65 40.82 55.43

Tax 9.32 15.08 11.84 11.77 12.41 12.61

Provisions & contingencies 0 0 0 0 0 0

Profit After Tax 23.87 32.8 41.78 26.88 28.41 42.82

Extraordinary Items 0 0 0 0 0 0

Prior Period Expenses 0 0 0 0 0 0

Other Adjustments 0 0 0 0 0 0

Net Profit 23.87 32.8 41.78 26.88 28.41 42.82

Equity Capital 81.27 81.27 81.27 81.27 81.27 81.27

Face Value (IN RS) 10 10 10 10 10 10

Reserves

Calculated EPS 2.94 4.04 5.14 3.31 3.49 5.27

Calculated EPS (Annualised) 11.75 16.14 20.56 13.23 13.98 21.08

No of Public Share Holdings 4766078 4724078 4724078 4648484 4648484 4648484

% of Public Share Holding 58.64 58.12 58.12 57.19 57.19 57.19



4. Charts & Graphs i) Share holding Pattern: Promoters share holding is 42.81%, increased by 1.6% in last one year. In last 2 years, promoters increased their holding by 3.5% from 39.3% to 42.8%. FII exposure is nil where as DII exposure is negligible at 0.01%.

ii) Share Price Moving Average: Premier Explosives Ltd is currently trading near to its 200 day price moving average. Stock has support at 64-66 Rs levels and offer good entry point for medium to long term investors.



iii) Performance Chart: Company has shown consistent growth in sales and profits year after year.

iv) Comparative Graph: Premier Explosives Ltd has given negative returns of -3.5% compared to Sensex negative returns of -4.5% in last one year.



5. Peer Group Comparison

PEER GROUP Premier

Explosives Keltech Energies

Noble Explochem

Solar Industries

CMP 73.80 219.00 1.93 928.45

52 W H/L 92.00/45.10 289.00/155.60 2.72/1.10 948.00/667.00

Market Cap 597.78 219.00 37.11 16084.30

Results (in Million) Jun-12 Jun-12 Mar-12 Jun-12

Sales 254.57 413.89 0.00 2257.30

PAT 26.88 12.87 -7.01 193.89

Equity 81.27 10.00 204.10 173.24

EPS 15.42 56.84 -0.52 35.15

P/E 4.56 3.85 0.00 26.46

6. Key Concerns / Risks The demand for explosives is cyclical in nature; lower during extreme weather

conditions, particularly monsoon periods. Hence, the company cannot expect steady and smooth demand for its products throughout the year.

Historically the margins from the explosives business have remained low. The improvement in the margins during the last few quarters has been on account of increase in the selling prices and reduction in RM costs and excise duty. This equation may change in the future, adversely affecting the profit margins.

Extreme care and prudence required for the explosives industry. Materials have to be constantly guarded against rainfall and fire.

Information on the defence related business is guarded closely and therefore it is difficult to gauge the visibility of revenues from this segment. Defence and space related businesses may scale up slower than expected.



7. Saral Gyan Recommendation

Future prospects of explosive companies depend on the demand from mining industry, especially coal mining, which accounts for nearly 70% of the overall demand. The government has huge plans for the power sector and this is going to drive major investments in coal mining operations in the coming years. Apart from the power sector, major excavation work required in hydel projects and huge investments in the road sector will also drive growth in this business.

With increasing demand of coal production to meet the growing needs of the

power sector, we believe that the PEL explosive business can maintain a growth rate of 25-30% per annum over the next few years.

PEL is expected to maintain its profit margins as the contribution from the defence and space segment will increase. PEL revenue from defence and space segments is relatively small but there is enormous potential for this business to scale up significantly.

Company is almost debt free. It will be able to meet its capex needs from internal accruals for business expansion.

As per our estimates, PEL can deliver bottom line of 140 million for full financial year 2012 – 13, annualized EPS of Rs. 18 with forward P/E ratio of 4.0 X for FY 2012-13, which makes stock an attractive and safe bet at current market price.

Company has paid regular interim dividends to share holders, dividend payout is

increased from 150% to 250% in last 3 years.

On equity of Rs. 81.27 million the estimated annualized EPS for FY 12-13 works out to Rs. 18 and the Book Value per share is Rs. 59.28. At a CMP of Rs. 73.8, stock price to book value is 1.24 and with dividend yield of 3.5%, downside risk in stock at CMP is limited.

PEL is available at a market capitalization of Rs. 60 crores. Considering the valuations and the growth potential of the company, especially in the defence and space segments, PEL is a good long term investment opportunity.

Saral Gyan Team recommends “BUY” for Premier Explosives Ltd. for a target of Rs. 150 over a period of 18-24 months.

Buying Strategy:

50% at current market price of 73.80 50% at price range of 65-68 (If stock price falls during market correction)



8. Disclaimer Important Notice: Saral Gyan Capital Services is an Independent Equity Research Company. Disclosure: The author of this article does not hold shares in the recommended company. © SARAL GYAN CAPITAL SERVICES

This document prepared by our research analysts does not constitute an offer or solicitation for

the purchase or sale of any financial instrument or as an official confirmation of any transaction.

The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as

such. Saral Gyan Capital Services (www.saralgyan.in) or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error

in the information contained in this report. This document is provide for assistance only and is

not intended to be and must not alone be taken as the basis for an investment decision.

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Saral Gyan Hidden Gem July 2012