Premier Explosives – A Unique Opportunity in Defense & Space Sector

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This post has been written by Ajay Krishnan for FinMedium Research Desk.

Table of Contents

  • About the Company
  • Product Portfolio and Market Share
  • Recent Events and News
  • Business Performance
  • Emerging Trends
  • Opportunities
  • Risks
  • The Way Ahead

About the Company – Premier Explosives

Premier Explosives is engaged in the manufacture of high energy materials and allied products for the defense, space, mining, and infrastructure industries.

The company has been developing and manufacturing solid propellants for rockets like Pinaka, tactical missiles like Astra, Akash, LRSAM / MRSAM / QRSAM, Brahmos and strategic missiles like Agni.

Premier Explosives Ltd (PEL) is also a supplier for strap-on motors of satellite launchers for Indian Space Research Organization (ISRO), making them a strategic player in the space industry.

The extended capabilities of the company include products such as chaff, IR flares for the Indian Airforce and explosive bolts, pyro devices, smoke markers, cable cutters, tear gas grenades and many other products including pyrogen igniters for defence and space applications.

Premier Explosives Ltd is an important player in the defence industry

The company is the pioneer in indigenizing the technology for manufacture of explosives and accessories.

Premier Explosives Ltd is also the first private company in India to enter the specialized rocket propellant industry. They also export to various countries in the Middle East (especially Turkey) and Asia Pacific.

Incorporated in 1980, PEL is primarily engaged in manufacture and sale of industrial explosives in India to established players like Northern Coalfields Limited (subsidiary of Coal India Limited), Singareni Collieries Company Limited and Neyveli Lignite Corporation Limited.

It was also the first-ever Indian company to manufacture explosives and detonators indigenously, and has a robust R&D programme.

Further, Premier Explosives Ltd is also engaged in design, development and manufacture of solid propellants for Indian Armed Forces, in addition to operation and maintenance (O&M) services of solid propellant plants at the Sriharikota Centre of Indian Space Research Organization (ISRO) and Solid Fuel Complex at Jagdalpur under the umbrella of Defence Research and Development Organisation (DRDO).

Some of the major clients of the company are:

Major Clients of Premier Explosives

The company has a ‘Vision 2022’ plan which comprises of the following:

  • Continue the leadership in High Energy Materials for defense and space
  • Develop low cost processes and techniques for production of industrial explosives
  • Develop capacity for missile integration
  • Meet the full requirements of ISRO’s strap-on motors
  • Enter export market for defense products and high energy components

Explosives Industry Overview

The fortunes of the explosives industry where Premier Explosives is a major player is closely linked to the metal/mineral extraction industry. More than 75% of explosives produced globally are consumed in mining operations.

In India, mining accounts for more than 90% of the total consumption of explosives. The coal industry consumes more than 70% of total demand.

Given that explosives comprise a substantial share (18-20% in coal mining) of the raw material consumed in mining, it is important to understand the quantum of demand for explosives in mining.

Production of explosives went up by 33% to 32014 tonnes from previous year of 24066 tones and production of detonators increased to 46.28 million pieces from 42.20 million pieces a year ago.

Indian explosives industry, estimated to be INR 40 billion per annum, is considered among the top 5 in the world. Coal requirements for the power sector are projected to reach to about 1070 MT by 2022. Out of this, domestic coal supply is projected to increase to 756 MT.

Coal Industry is a major source of revenue for Premier Explosives
Coal industry is a major source of revenue for Premier Explosives

Industry has been showing a mixed trend with dynamics of changing mining activity levels, technological advancements, use of electric & shock tube detonators etc.

Product Portfolio and Market Share of Premier Explosives

Premier Explosive’s product portfolio is mainly sub-categorized under High Energy Materials as Explosives, Detonators/Propellants, and Services. A break-up for the same is given below:

Product-wise break up of Premier Explosives Ltd | Source: Tijori

Premier Explosives has two major product business lines:

Defence Products

  • Solid Propellants: Premier Explosives Ltd has been manufacturing solid propellants from 2003. Since then Premier has been adding facilities to manufacture solid propellants at Peddakandukuru in Nalgonda district of Telangana. The company has been catering to the needs of tactical missiles like Astra, Akash, LRSAM and rockets like Pinaka.
  • Specialty Products: Premier Explosives also produces Explosive Bolts, Pyro Actuators, Smoke Markers, Cable Cutters and many other products including chaffs and IR flares for the defence sector.

Commercial Explosives

  • Premier Short Delay Detonators: It consists of an aluminium shell filled with desired quantity of PETN as base charge and a mixture of NHN as primary charge.
  • Amardet Short Delay Detonators: Specially designed for initiation of cap-sensitive explosives / booster in underground metal mines. The product is non-electric.
  • Premier cord:  A reliable, flexible, waterproof detonating fuse with high tensile strength and abrasion resistance. It is an ideal means of transmitting detonation from a detonator to an explosive charge.
  • Premier Electric Instantaneous Detonators: Designed for safe and reliable initiation of cap-sensitive explosives and primers.
  • Coal Electric Detonators: For use in underground coal mines in gassy and coal dust atmosphere for blasting coal after it is under cut, mid cut or overcuts.
  • Coal Delay Detonators:  Consist of a copper / zinc-copper coated steel shell filled with desired quantity of PETN as base charge and a mixture of NHN as primary charge.

As we can see, Premier Explosives Ltd has a rich portfolio of products for various applications in the explosives industry.

Most of their products are used in the mining industry (especially coal) with a few exports. Even after setting up such a great product line, Premier Explosives Ltd still controls only 5% of the market share. This break-up is given below:

Market Share – Commercial Explosives

Being a unique company, with very specialized products it is expected that Premier Explosives Ltd will remain a niche player in the short term.

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However, with new export orders coming in, we see room for growth in the medium term. Add to that the company’s strong financials, Premier Explosives Ltd can afford to grow without any high capex requirements as of 2020.

High competition in the industry is expected to endure for the medium term, but at the same time approvals to enter the explosives business are hard to get; giving Premier Explosives Ltd a very valuable moat against new competition.

Recent Events and News

Premier Explosives Ltd has recently received an industrial license from Department for Promotion of Industry and Internal Trade under Arms Act, 1959 for the manufacture of all types of Warheads and Electronic & Mechanical Fuses.

The proposed annual capacity for blasts warhead is 2500 units, fragmentation warhead is 5000 units, shaped charge warhead is 2500 units. Electronic Fuses is 4 lakh units and Mechanical Fuses is 6 lakhs units.

These are very important ranges of explosives required in the defence industry, and their numbers are expected to go up depending on the geopolitical situation across our borders.

This is a significant development for the company; it will enable Premier Explosives Ltd to enter into new business areas in defense explosives. The production of these products would be done at the new Katepally facility.

In the commercial explosive segment, the company has recently received an order worth around INR 83 Crores for supply of SMS/SME explosives and accessories.

With government impetus on reducing import dependency on coal in ensuing years and allowing private sector participation in commercial mining space provides a significant opportunity for growth in the segment.

Premier Explosives Ltd currently has INR 510 crores on its orderbook of which it aims to deliver 200 crores in the next one year (source: Con call Sep 30,2020). The breakup of this order book is as follows:

Order book history of Premier Explosives

Premier Explosives Ltd has also announced that the capex budget for 2021 will stand at around INR 70 crores. This needs to be taken seriously, as the company already has a net debt position of INR 57 crores.

In a letter dated 04 Nov 2020, the company informed the Securities and Exchanges Board of India that HDFC Mutual Fund has decreased their shareholding in the company from 7.85% to 4.63% (a decrease of almost 41%).

Business Performance of Premier Explosives

The business performance highlights of the company for the past five years is given below:

Business Performance of Premier Explosives

(Source: Annual Report 2020)

The operating performance of the company had already witnessed considerable reduction in FY2020 with degrowth in revenue of 35% on account of subdued mining activity and intense competition in the commercial explosives segment.

The loss of one of its major customers (Northern Coal Fields) and lower order execution in the defence segment also added to the challenges.

The profitability was also adversely impacted during the year with operating margin and net margin of -3.3% (PY 9.7%) and -6.1% (PY 4.5%), primarily on account of lower revenues, higher overhead expenses and employee costs and write offs undertaken.

Further, Premier Explosive Ltd’s revenue and profitability during Q1 FY2021 are also adversely impacted due to disruption in operations caused by Covid-19 outbreak and the containment measures adopted by the Government.

While the company has healthy orderbook of Rs. 510 crores as on October 31, 2020 including a large export order in defence segment to Turkey (which is still languishing due to lack of clarity from the Turkish govt), the pace of recovery in performance in near term remains uncertain given the impact of pandemic, with both new order flow and existing order execution expected to be impacted.

The O&M (Operations and Maintenance) of the Sriharikota Launch Facility of ISRO has been consistently undertaken by Premier Explosives Ltd for the past 10 years.

This is a good source of annuity revenue which also helps in maintaining the working capital requirements.

Although the company debt levels had increased during March 2020 due to higher working capital requirements, the ratings continue to positively factor in Premier Explosives Ltd’s comfortable capital structure with a net gearing of 0.3 times.

The company enjoys a set marquee clientele comprising of Singareni Collieries Company Limited (SCCL), Bharat Dynamics Limited (BDL) and Indian Space Research Organisation (ISRO) to name a few, with repeat orders from most customers.

Premier Explosives Ltd is one of the only two private players supplying explosives for defence sector. However, PEL’s customer concentration is high with top five customers contributing to majority of the revenues during FY2020.

There has been an increased focus on the defence segment which is likely to improve the margins in the medium to long term. However, due to most government projects being decided by L1 tenders, pressure on price and competition is expected to go up in the short to medium term.

This could also impede the margins of the company going forward. Unless, the accounts receivable issue is not resolved at the earliest and the fulfilment of orders take place in a timely manner, the margins will continue to be affected.

Emerging Trends

Defence sector

(a) “Aatma Nirbhar” initiatives and revision of Defence Procurement Procedure:

India has the second largest armed forces and the fifth largest defence budget in the world. Aiming to achieve self-reliance in defence production, recently the government has increased the FDI limit in defence manufacturing under automatic route from 49% to 74%.

Supporting the “Make in India” initiative, in April ‘20, the Ministry of Defence has revised Defence Procurement Procedure mainly to facilitate greater participation of Indian Industry and develop robust defence industrial base.

This is expected to give companies like Premier Explosives Ltd a fillip to perform better amidst favorable conditions.

(b) India bans import of 101 defence items to boost self-reliance:  

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In August 2020, Government of India has banned import of 101 defence items. Expected to boost up domestic defence industry, the ban-list includes missiles, ammunition and other items for which Premier Explosives Ltd has built up competence and capacities.

(c) Separate budget for procuring only Indian made defence items:

In May 2020, Finance Minister announced that emphasis will be on procuring locally made products and said separate budgetary provisions for procuring only Indian made defence items.

(d) DRDO’s push for new technologies:

In January 2020, DRDO opened 5 new labs in India, to focus on each of the futuristic technologies: Artificial Intelligence, Quantum technologies, Cognitive technologies, Asymmetric technologies and smart materials.

This is paving way for putting India on the world map of technological warfare. PEL has been partnering with DRDO in high energy materials and can be part of such new programmes in coming years.

Commercial Explosives Sector

(a) Production of coal in India:

Production of coal in the country during 2019-20 was 729.10 MT, almost on par with 728.72 MT in 2018-19.

Several initiatives are being taken by Ministry of Coal for supply of domestic coal to reduce import dependency.

In May 2020, the central government decided to bring the import of ‘coal for blending purpose’ by domestic coal-based power plants to zero in FY 2020-21. This is expected to ramp up production by Indian coal miners and to generate demand for explosives.

As PEL has a sizeable clientele in the coal mining sector, these trends are hugely favourable going forward in improving the order book and margins.

(b) Auction of coal mines for commercial extraction by the private sector:

On June 18, 2020, the Government launched auction of 41 coal mines for commercial mining with the theme “Unleashing Coal: New Hopes for Aatma Nirbhar Bharat”, for India’s self-reliance in coal mining through structural reforms in the coal sector.

The total geological reserves of coal estimated in these mines are 17 billion tonnes. These initiatives provide increased opportunities for supply of explosives.

(c) Developments at the new Katepally plant:

There are many important experimental projects going on at the Katepally plant which are of strategic importance. They are:

  • Propellant casting for ISRO satellite launcher.
  • Prototypes of propellants for Brahmos missiles are under development with transfer of technology from DRDO.
  • Recently transfer of technology has been initiated with DRDO for Pralay missile propellant and trial runs are about to start.
  • After receiving all necessary licenses, trial runs have been going on for manufacture of RDX/HMX.

We see that there is an exciting future trend with respect to both defence and commercial explosives sector for PEL. Due to the focus on self-reliance, it is quite likely that established companies like PEL will have clear prime-mover advantage in many of these projects.

The challenges remain due to the long and uncertain tendering processes, intense price competition to become L1 and cumbersome licensing exercises.

Opportunities

This unique company presents many opportunities to the discerning investor.

Due to the niche segment the company is in, it enjoys a considerable economic moat – mainly due to the difficult approvals process and also to entry barriers for new players.

  • The company has been present in the commercial explosives business for about four decades and is one of the well-known players in the space. PEL continues to have marquee clients in the mining, cement and infrastructure industries.

Further, PEL is one among the only two private players supplying chemicals/explosives for the defence sector and stands to benefit from its technological expertise in that space (as can be see through recent order wins).

  • The company has a healthy order book position of INR 510 crore as on October 31, 2020. Further, majority of this order book (about 85%) is skewed towards the margin accretive defence segment. As a result, PEL’s margins are estimated to improve from the current levels in the medium to long-term.
  • PEL has recently received an industrial license from Department for Promotion of Industry and Internal Trade under Arms Act,1959 for the manufacture of all types of Warheads and Electronic & Mechanical Fuses.
  • The proposed annual capacity for blast warheads is 2500 units, fragmentation warheads is 5000 units, shaped charge warhead is 2500 units. Electronic fuses are 4 lakh units and Mechanical Fuses is 6 lakh units.

This is a significant development for the company; as it will enable Premier Explosives Ltd to enter into new business areas in defence explosives.

  • In the commercial explosive segment, PEL recently received an order worth around Rs.83 Crores for supply of SMS/SME explosives and accessories. With government impetus on reducing import dependency on coal in ensuing years and allowing private sector participation in commercial mining space provides a significant opportunity for growth in the segment.

The opportunity in PEL is unique due to the nature of the business segment and also the thrust of the government in the defence sector.

Explosives sector also stands a lot to gain with the privatization of coal blocks that is expected to be finalized in the coming year.

We expect the business opportunity to get even bigger as the restrictions on travel and freight are removed and export orders get fulfilled.

The company is expecting a top line business consolidation to happen by 2022, and looking at revenue northwards of INR 400 crore in the medium term.

(Source : Con Call Transcripts Sep 30, 2020)

Risks

As much as Premier Explosives Ltd is a unique company with a strategic national purpose, we also have to take into account the challenges faced by them – in the recent past and also for the foreseeable future.

Subdued recent financial performance

The company had witnessed healthy growth in revenues during FY2016-18 supported by adequate growth in both defence and commercial explosives segments. However, Premier Explosives had witnessed decline in revenues by 8% and 35% during FY2019 and FY2020, driven by decline across segments.

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The decline was on account of intense competition, subdued mining activity on account of prolonged monsoons and slowdown in the economy, whereas long gestation period for order execution and completion of major orders, resulted in moderation in the defence segment.

The profit margin was also adversely impacted during the year with OPM and NPM of -3.3% (PY 9.7%) and -6.1% (PY 4.5%) due to decline in scale, higher operating overheads and employee expenses and write offs undertaken.

Further, Premier Explosives Ltd’s revenue and margins during Q1 FY2021 are expected to be adversely impacted on account of the Covid-19 pandemic and disruption caused by containment measures.

Despite healthy order book, the financial performance in near term is expected to be constrained due to the pandemic, with both order execution of existing orders as well as new order flow to be impacted.

High working capital intensity

Premier Explosives Ltd’s operations are working capital intensive. PEL’s receivables in the commercial explosives segment are paid within 1-2 months while those in defence segment are paid anywhere between 3-6 months (can be even longer).

During FY2020, Premier Explosive Ltd’s defence segment contributed to over 35% of the total sales, where the payment from government entities were delayed in most occasions.

The working capital intensity had reduced to 26.4% as on March 31, 2019 (36.3% as on March 31, 2018) owing to reduced debtors (from 128 days to 95 days) and higher creditors.

However, the working capital intensity had increased during FY2020 owing to increased debtors (from 95 days to 106 days) along with higher inventory levels (from 60 days to 113 days) during March-end due to issues in dispatching the finished orders on the back of Covid-19 lockdown situation.

Commercial Explosives Segment

The customer concentration of the company remains high with top five customers contributing majority of the revenues during FY2020.

Further, the commercial explosives space remains highly competitive because of the fragmented industry structure, commoditised nature of the products in the trade segment and tender-based order procurement with Government entities.

From H2 FY2020, PEL has lost its major customer, Northern Coal Fields, which contributed to almost 25% of its revenues during FY2019. This is a very serious aspect to take note of, as the margins in the explosives segment will further be depressed due to this.

In a letter dated 04 Nov 2020, the company informed the Securities and Exchanges Board of India that HDFC Mutual Fund has decreased their shareholding in the company from 7.85% to 4.63% (a decrease of almost 41%).

Most credit rating agencies have also given a negative outlook on Premier Explosives Ltd due to its recent performance issues.

Liquidity of the company seems to be stable at the moment; but the decision to opt for a prolonged moratorium with HDFC Bank does not bode too well.

Also Watch: Premier Explosives Business Analysis

The Road Ahead

Premier Explosives Ltd is poised to expand its existing operations with the opening of the new greenfield facility at Katepally in Telangana. This facility will focus on:

  • Augmenting capacities and add new products to meet increasing demand for defence products
  • Enabling the company to manufacture solid propellant for larger-sized rockets
  • Production of PSOM-XL (Solid Propellant) for small satellite launch vehicles from Vikram Sarabhai Space Center (order already received).
  • Production of RDX and HMX derivatives for the order from Elmas Savunma Sanayii Ve Havacilik Ticaret Limited in Turkey

Premier Explosives has also recently got approval to supply fuel stages of the PSOM-XL motor for the Polar Satellite Launch Vehicle (PSLV) for ISRO. This is significant due to the entry barriers and the cost factor of such a specialised part of machinery for a strategic project of this importance.

The cost of a PSLV launch is approximately INR 130 crores; so, a very important part like the fuel stage will contribute significantly to this end cost. With ISRO planning to expand its number of launches per year, this will go a long way in sustaining the margins of PEL.

Premier Explosives Ltd is also aiming to increase their exports to South East Asia and Africa beginning from 2022. The company is already exporting to Israel, Greece, Turkey and Philippines.

This would help the company to balance its revenues on a national and international basis giving a higher margin of safety.

Govt of India has given impetus to infrastructure by committing an investment of INR 100 lakh crores ($1.3 trillion) in the next decade. This would mean high demand for quarry stone, iron ore and cement – all of which would need commercial explosives to mine them.

This is a good future opportunity.

Premier Explosives Ltd has been able to secure 14 licenses in the defence segment from DIPP in the last 3 years, which is not an easy task.

Defence segment has a very high entry barrier, and this bears well for the company in achieving a remarkable moat to drive business.

The company must ensure to keep its working margin requirements to a minimum and focus on smarter production processes.

Currently, Premier Explosives has a work culture that mirrors more of a PSU and this can affect its profitability, especially in a lean year like FY2020.

It would augur well for the company to focus more on R&D in the defense segment and increasing their capability to develop more cutting-edge technology in the defense segment.

This would automatically result in interest from foreign countries; especially the ones who are wary about prices.

This post has been written by Ajay Krishnan for FinMedium Research Desk.

Cover Image: ET

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