>PREMIER EXPLOSIVES LIMITED (HDFC SECURITIES)

At the current price of Rs.71.65, Premier Explosives Ltd (PEL) is available at 6.08x FY10 (E) EPS. We think that the stock has the potential to trade at 7 - 8x FY10 (E) EPS of Rs 11.77 in the next 2-3 quarters.

Company Background
Premier Explosives Limited (PEL) is one of the major companies manufacturing the entire range of explosives and accessories mainly for mining activities.

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. 690 million (FY09). The export earnings of PEL are about Rs. 38 million (FY09).

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

PEL has a wide range of products and technologies in the manufacture of Explosives & Accessories. These include Emulsion and Slurry explosives, LD cartridge explosives, Bulk Explosives, Small-dia non-permitted explosives, Permitted explosives, Cast Boosters, Pillow-packs for secondary blasting; 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.

Apart from providing regular support services to customers, PEL also undertakes complete drilling & blasting contracts in collaboration with associates having resources of drilling and excavation equipment & manpower.

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

Triggers

Growth in the mining sector to boost the demand for explosives in the country
PEL produces explosives that are mainly used by the mining companies in their businesses. Future projects of explosive companies depend on the performance and the outlook of the mining industry as a major chunk of the business for PEL comes from the mining sector. The mining activity in India is growing at a rapid pace. There is a huge growth in the power and infrastructure industries in the country, which has increased the need for more coal. Coal availability in the country is reducing thereby indicating the need for more coal mining in the country. Coal mining forms more than 70% of the total mining in the country. As growth surges in these sectors the demand for explosives will continue to rise and help PEL in growing its topline substantially going forward.

Capacity expansion in metals, power and cement industries, which are among the major users of coal, is expected to heighten coal mining operations. The Government of India is trying to boost the power generation in the country and is therefore coming out with lots of policies in order to increase the overall power generation in the country. This initiative would in turn increase the demand for coal, leading to larger requirement of explosives in the country. India would require an additional 70,000- 75,000 MW of power during the 12th Five Year Plan (2012-17). Most of this additional power would come from hydro and thermal power. Incremental thermal power capacity is likely to be 45,000 MW, which would drive the coal consumption.

India is among the top 10 countries globally in terms of iron ore, coal, and bauxite resources. The mining opportunity in India is huge and a lot of miners are tapping this opportunity as lack of availability of coal and iron ore as compared to their growing demand increases the need for mining. The investment in infrastructure in the 11th plan is expected to be over US $ 500
billion, which is 2.3 times the amount spent in the 10th 5-year plan. As per the plan estimates, total investment in infrastructure as a percentage of GDP is expected to increase to 9.22% by FY12 from 6.7% in FY09. As per PEL, the commercial explosive market is growing @ 10% y-o-y, while PEL is growing a faster-than-industry growth rate. The major investments are in power, roads, mining and other infrastructure segments. Coal production, which was 487 Million MT in 2008-09, is expected to increase to 684 million MT in 2011-12. These factors will drive the demand for explosives. PEL has a decent market share of about 6% in the country and since it is one amongst the organized sector, PEL has enough potential to tap this opportunity and grow its topline over the coming couple of years.

Over the years the coal production in India has consistently risen with slight reductions in between. The total coal production during April 2006 was 31.53 million tones, which by March 2009 shot up to 55.7 million tones. The mining and quarrying IIP figures have also risen steadily over the past 3 years indicating that going forward there is ample scope for rise in the demand of explosives as both the above activities generate high demand for explosives.

To see full report: PEL