Defence stock to BUY? Solar Industries India may rally 30%, says Goldman Sachs

Defence Stock to BUY: Shares of Solar Industries India were in the spotlight again on Monday, ending the day over 3 per cent higher at around Rs 14,526. The stock has been seeing steady interest, largely because of strong demand in the defence and explosives space.

The latest trigger came from Goldman Sachs, which has maintained its “buy” rating on the stock. The brokerage has set a target price of Rs 18,900, suggesting an upside of roughly 30 per cent from current levels. In simple terms, that points to a potential gain of about Rs 4,300 per share if the target is achieved.

Why the brokerage is positive on Solar Industries

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Goldman Sachs believes the company is in a sweet spot right now. One of the key reasons is the rise in explosives prices, which is helping improve realizations.

At the same time, input costs have also moved up. Ammonium nitrate, which is a key raw material, has become more expensive. But the company has managed to pass on this increase to its customers. That means margins are not taking a hit, which is a big positive.

Business mix working in its favour

Solar Industries operates in multiple segments, including industrial explosives, mining services and defence ammunition. Demand across these areas has remained strong.

The company supplies to large clients like Coal India and is also expanding its footprint in defence. Its product range includes detonators, rocket propellants and other high-energy materials used in defence applications.

It is not just a domestic story either. The company has operations in more than 80 countries, which gives it access to global demand as well.

Strong numbers back the story

Apart from the sector tailwinds, the company’s financial track record has also been solid. Over the past five years, profits have grown at a pace of more than 36 per cent annually.

Return ratios are also strong. The company’s return on equity is above 30 per cent, which usually indicates efficient use of capital. Over a longer period, revenue growth has remained steady as well.

Another positive is that the company has been reducing its debt, which adds comfort from a balance sheet perspective.

But valuations are high

That said, the stock is not cheap as indicated by its price-to-earnings ratio at multiple of over 90, which is generally considered expensive by most standards.

Because of this, some caution is still warranted. Even if the business continues to do well, the high valuation leaves less room for error.

What investors should make out of this

Solar Industries outlook is likely to remain strong helped by the defence demand and steady growth in its main business.

But the point to be noted here is that, at current levels, optimism around the stock is more or less priced in. For those investors who are looking to enter the stock, it may be a good idea to wait for some correction instead of chasing the stock at elevated valuations.