Solar's ₹13,000 crore deal changes entire sales mix

Solar Industries' acquisition of South African firm Omnia Holdings for Rs 13,000 crore is expected to significantly alter its revenue composition. According to Jefferies, the deal will lower defence sector's projected contribution to 22-25% by FY30 from the initial estimate of 35-40%. Agriculture, mainly fertiliser production, will make up around 24% of consolidated revenue by FY30 after the acquisition, while explosives will account for approximately 52%.

Mining business, which complements Solar Industries' existing operations, could expand into markets like Canada, Australia, and the US. The acquisition might also enhance Solar Industries' control over ammonium nitrate, a critical raw material currently sourced externally. However, this could come at a cost, as the merger might see a 4-6% drop in earnings per share for FY28 and FY29, with the impact moderating to around 1% by FY30.

Jefferies' projections differ from management's, which anticipates the deal to be EPS-accretive by 0-3% without considering significant synergy benefits. The transaction might temporarily elevate Solar Industries' leverage, with net debt-to-equity rising to 1.2 times in FY28, declining to 0.8 times in FY29, and 0.5 times in FY30.

Despite temporary EPS dilution and higher leverage, Jefferies remains optimistic about Solar Industries, retaining a Buy rating and a target price of Rs 28,160. The brokerage expects a CAGR of over 30% in EPS and a return on equity exceeding 25%.