The boom makers

I am asked to leave my shoes outside the solar industries office. I fleetingly wonder if this is the only listed company in India to enforce such a dictum. Before I ask, I’m told that the belief is that it helps people “cast away impurities and come in with a clean consciousness”. However, the inherent piety of this leaves my mind as I leave the office, the only commercial operation in a residential pocket in Nagpur’s Bharat Nagar, for the Solar factory some 40 minutes outside the city.

After crossing the first security check post at the factory—the world’s biggest single-location manufacturing set-up for cartridge explosives with a capacity of 74,655 tonnes—I pass through a large parking area meant for trucks carrying explosives. I am told that the government and the local police monitor these trucks round the clock, as well as each consignment and its recipient. Each truck has a graphic warning describing the nature of its contents. The warnings follow me all around, as do faint tremors and echoes from a nearby blast site.

At the factory, I’m allowed to keep my shoes, but the security guards make me leave my phone, watch, and all other battery-operated devices at the entrance. They don’t have to tell me the damage a stray spark will cause in a building full of explosives. But they do have to explain something else to me: at the detonating fuse manufacturing unit, I am first made to put my hands on a metal board on the wall outside to check my “body charge”. It seems that the human body produces some electricity, and that needs to be checked before letting me in. I’m found safe, and enter the factory only to step into a pool of water. Too late, I’m told that the floor is never left dry when the unit is operational. Even the doormat is under an inch of water.

Well, getting my feet wet is a small price to pay to gain access to India’s largest manufacturer of industrial explosives, propellants, and initiating systems (detonators and the like). The less adventurous may consider that the Rs 1,126 crore Solar Industries controls 32% of the domestic market (it is twice the size of its nearest competitor, the Indian arm of Australian mining services firm Orica) and nearly 50% of exports, and is something of a backbone of India’s mining and infrastructure sectors.

That makes Solar one of the companies primed to benefit from the much anticipated surge in these sectors under the Narendra Modi government. Already, its clientele is a who’s who of nation-builders, including Coal India (its largest client as well as the country’s largest consumer of industrial explosives), the Tata Group, Border Roads Organisation, Oil and Natural Gas Corporation, and the Steel Authority of India.

It is also a darling of investors: Its initial public offering in 2006 was oversubscribed 14 times in the first two hours. The stock zoomed 171% during last year’s elections and is up 40% year to date (trading at Rs 3,765 as of June 22). “We believe [Solar] possesses a wide moat in the form of a de-risked business model, industry leadership, significant entry barriers, and optimal product mix to benefit the most from a revival in mining and infrastructure activity,” says brokerage ICICI Direct. According to Motilal Oswal Securities, it is poised to maintain a CAGR of 18% till FY17, and the stock could see a further 16% upside.

All this adds up to the company ranking 216 on the inaugural Fortune India Next 500, far ahead of storied names like VIP Industries, Parle Agro, and NIIT.

The success sits lightly on Manish Nuwal, Solar’s executive director and son of founding patriarch Satyanarayan Nuwal, who started his career nearly four decades ago, trading in explosives. His first trade: two boxes of explosives. “We never expected the IPO to do so well, given that this is a completely unknown industry,” Manish says.

But the ultra-sensitive nature of the business—business daily Mint reports that Solar’s trucks have to routinely pass through jungles overrun with Maoist insurgents to reach Coal India’s sites—the torpor in mining under the previous government, and the tiny size of the explosives industry (Rs 3,500 crore) meant that Solar’s feats remained hidden within the analyst circuit. (In fact, analysts seem to be the only community willing to talk about the explosives industry. Most others, including Solar’s competitors, appear paranoid at the suggestion of an interview.)

The breakout moment came in 2011, when Solar managed to win the first licence to manufacture high-melting explosives (HMX), making a bold statement of intent in the defence sector dominated by imports and government-owned firms. HMX is an enormously valuable compound as it goes into every single warhead the military uses. Solar started off making 50 tonnes of HMX, and plans to gradually double capacity. So far, it has supplied small batches to the Terminal Ballistics Research Lab in Chandigarh and the state-owned guided weapons developer Bharat Dynamics in Hyderabad. The Khamaria ordnance factory in Jabalpur has made enquiries for about 10 tonnes.

The other key defence push is in propellants, which faces a huge demand-supply gap. Motilal Oswal estimates that there will be a potential demand for 17,000 to 20,000 pieces of propellant by FY17, while domestic supply is at below 1,500 pieces. Solar’s factory can make 2,500 pieces, which will be ramped up to 10,000 pieces. In a first-of-its-kind deal, it expects to supply propellants for the indigenously developed rocket launcher Pinaka and surface-to-air missile defence system Akash.

The Nuwals are aiming at revenues of Rs 100 crore from defence by 2017, based on reported investments of
Rs 220 crore. But that’s not even scraping the surface: The company could hit a multibillion-dollar bounty if the government manages to deliver on its promise of indigenising the sector—which has a budget endowment of $40 billion (about Rs 2.4 lakh crore)—as part of its Make in India programme, after decades of vacillating on the subject. More significantly, Solar has the chance to become a pioneer in the sector.

“We have shown our prowess to the world in the complex nuclear and space sector, but even today over 70% of our defence needs are met by imports,” says Amber Dubey, partner and India head of aerospace and defence at consultancy KPMG. “The establishment in India kept the private sector at bay, due to insecurity or a trust deficit or both. By doing so, we have lost out on the bulk of engineering talent that joins the private sector
every year.”

In contrast, Dubey points out that the U.S., which has the most technically advanced military in the world, depends significantly on its private sector. “The apex agency responsible for defence research in the U.S.—DARPA —has no labs of its own and engages only in strategic thinking and programme monitoring. Leading defence companies, universities, labs, and individuals compete for DARPA contracts to create futuristic technologies. The Modi government should consider borrowing good ideas from the U.S. model”, he adds.

Manish, a chartered accountant by training, confirms that while mining—which consumes 90% of all explosives in India—will continue to be the cash cow along with infrastructure, it’s the defence play that will shape Solar Industries 2.0. It’s an ambition loaded with risk, given that there is already a debate about whether the government’s reform promises are fizzling. But the Nuwals don’t mind risk. “Our philosophy is to jumpstart after a bit of ground work,” says Manish. “We do not believe in overanalysing and obsessing over the pluses and minuses. Sometimes it is important to just take the plunge.”

The plunge into hmx is a classic example of the just-do-it doctrine. Solar needed three tonnes of the compound for its shock tube (a kind of detonator) plant, and the bureaucracy and logistics to procure it from Sweden took eight months. “My only thought was that if there’s any kind of disturbance, or, god forbid, a war, this supply will stop, and so will our plant,” says Manish. “So we decided to learn more about the business of HMX and hire experts. We approached the Defence Research and Development Organisation, as it is the only one with the technology. But they refused to transfer the technology.” (DRDO did not immediately respond to my queries.) Undeterred, Solar started to build from scratch, leading to India’s first HMX plant.

Solar’s origin story echoes the same pluck. The son of a patwari (a government official who keeps land records), Satyanarayan, 63, left his hometown Bhilwara in Rajasthan in search of better opportunities and landed up at Ballarshah in Maharashtra’s Chandrapur district in 1978. He first tried his hand at the ink business. “But I found that it had too many constraints, and quick growth was impossible,” he says.

He dumped the business without wasting time, and found renewed inspiration in Chandrapur’s famous, endemic asset class: coal. “I realised that the explosives niche was there for the taking. I had some idea about the business because people from my extended family in Bhilwara were involved with well-digging, where industrial explosives were extensively used,” he says.

Fortuitously, Satyanarayan discovered a magazine, a place where explosives are stored, in Chandrapur. “The owner was an old man and wanted to sell the magazine, but I had no money and requested him to rent it to me. He agreed to give it to me for Rs 1,000 a month, but I did not have even that much. He thought me to be honest and trusted me to pay the rent quarterly,” he says. He procured the first two boxes of explosives through some “friendly connections”.

It was a time of shortage and the licence raj, and for years, Satyanarayan had to be content with trading in explosives manufactured by other companies. “But in the ’90s, I realised that if I wanted to make it big, being a distributor or consignment agent won’t do. I had to think big. Manufacturing was a natural progression,” and Solar Industries was incorporated in 1995.

Satyanarayan set up his first factory as a small-scale unit, which had an investment limit of Rs 1 crore. The turning point came when he bid for a contract from Coal India. “In 1997-98, we actually won a contract. But back then, no matter who the lowest bidder was, most of the contracts went to the three top players, and whatever was left came to guys like us,” he says. Even though Coal India’s consumption at the time was about 80,000 tonnes, Nuwal only saw orders of 1,000 tonnes or less. He hunkered down, and finally, in the third year of bidding, clinched an order for 20,000 tonnes: then a record order in the history of Coal India.

Today, Solar spans all segments of explosives—bulk, cartridges, detonators, detonating fuse, and now HMX and propellants. Barring ammonium nitrate, the company also manufactures all the raw material it needs, including pentaerythritol tetranitrate, sodium nitrate, calcium nitrate, zinc nitrate, and stypnic acid. It has 16 bulk plants strategically located within 50 km to 60 km of mines. (Bulk explosives are carried to the blast site on trucks, where certain other ingredients are added to make them blast-ready.)

This makes it ideally placed to ride the expected lift-off in the coal industry: The growth of the coal sector has been an abysmal 3% to 4%, but estimates suggest that it might jump to 13%, with Coal India likely to raise production to 1 billion tonnes by 2020. The reallocation of coal mines is a clear sign of improvement.

Solar’s next gambit, aside from the defence foray: flexing its manufacturing muscle overseas. At the moment India’s explosives exports are only $40 million (the global market is worth about $10 billion, led by the U.S.), but the advantage of being a cost-effective producer provides headroom for growth. Solar started exporting in 2004, and export revenues have grown at a CAGR of 10% from Rs 72.2 crore in FY09 to Rs 119.9 crore in FY14. It exports to 22 countries and has picked up majority stakes in joint-venture factories in Zambia, Nigeria, and Turkey. A fourth unit, in South Africa, will be ready within this fiscal.

To my blunt question if the company wants to grab a piece of the supply chain in Africa’s busy war economy, Manish responds with a resounding no. However, he clarifies that Solar is ready to chip in if the government wants to export India’s indigenous missile systems. He claims there have been “enquiries from friendly nations through the defence ministry”, but nothing concrete has come out of them.

Back at the factory, I am taken to inspect a small rectangular box of Superpower 90, a cartridge explosive and Solar’s highest-selling product. It looks innocuous, rather like a breakfast sausage, but when lit, one box can blow up everything within a 25 km radius. Given the hazards, the production units need to be surrounded with reinforced walls and there is a thick layer of soil on every roof, like a bunker. Workers navigate the shop floor in the faint natural light filtering in through the windows, which are mandatory and their number regulated.

The list of regulations is exhausting. There’s a cap on the quantity of explosives that can be manufactured in one unit, and the number of people who can work there. No two products can be manufactured in the same unit or transported together. As a result, explosives manufacturing is spread across vast tracts of land, an expensive asset. Storing explosives is also a painful task as there are specified area limits for the magazine. Stacks cannot be more than five boxes tall, and each magazine can only store a specified quantity.

The business also needs a raft of licences, including an industrial licence from the chief controller of explosives, clearance from the Home Ministry, clearance from the Intelligence Bureau that establishes the safety of the factory location, a no-objection certificate from the district magistrate after clearance from the local police, the Public Works Department, and Gram Panchayat and, for good measure, clearance from the Directorate General of Mines Safety for underground use of explosives.

In several off-record conversations, industry insiders tell me it is impossible to negotiate this maze of approvals and achieve any kind of scale without friends in high places. “There’s a need to liaison in any government-regulated business,” is all Satyanarayan will concede, stonewalling this line of questioning.

That said, policy and political risks remain the biggest threat to Solar’s growth. Mint says that despite the government’s push for indigenisation, “suppliers are yet to see a substantial improvement in ordering activity”. Days before we went to press, it was widely reported that the Modi government awarded a record 56 defence-manufacturing permits to private companies in the past year, compared with 47 permits issued by the previous regime over three years. “It points to the fact that the government is encouraging industry to come forward,” says Rahul Gangal, partner at consultancy Roland Berger (India). “The challenge, however, lies in making sure that a significant number of these initiatives mature and grow to an efficient size.” (Gangal adds: “It is also critical to note that the number of applicants can be higher due to a bandwagon effect, and it becomes imperative to separate serious businesses from entities, which may have taken a licence either for valuation leverage or without a thought-out business plan.”)

If the tailwind does catch on, it’d be a boost to competition. Secunderabad-based Premier Explosives recently received an industrial licence from the Department of Industrial Policy and Promotion for producing flexible linear-shaped charges, explosive-reactive armour, and single-base propellants. It also holds the licence to manufacture a barrage of ammunition. However, the company is still a fledgling, with a turnover of Rs 145 crore in FY14.

The heightened focus on exports exposes Solar to the risk of falling commodity prices globally. Even though prices have improved from their lows last year, there is still a long way to recovery. And if the U.S. Fed hikes interest rates in the next meet, there’s a chance of prices dipping again. Solar’s FY14 annual report mentions that Zambia’s mining industry, the mainstay of that economy, was under pressure, resulting in lower production and sales of Solar’s explosives. The problem was aggravated by labour issues, as mining companies sought to lay off employees.

As such, firmness in the domestic market will be critical for Solar. India has already surpassed Japan to become the third-largest oil importer. It is now one of the most important markets for West Asian oil. If the government’s infra push fructifies, it will provide some stability to prices.

But Satyanarayan refuses to be drawn into crystal-ball gazing. “I am constantly bewildered by how much we have grown,” he says. “Our job is only to keep spotting the best opportunities.”

The only time he appears to be thrown is when I ask him about succession and professionalisation, the bugbears of many family businesses. People in the know say Nuwal Sr. is the man with the vision, though he is at pains to assure me that he is actively grooming his son for future leadership. However, with the business expanding into new geographies, the company will need to attract talent from outside: an onerous task given the industry’s obscure image. “Earlier, no matter how much you paid, getting talented people was difficult. It has become easier now that the company is a certain size and has forayed into defence. But, yes, this is still a challenge,” Satyanarayan admits.

He doesn’t linger on that sombre note, though. “I am a follower of the goddess Gayatri, whose mantra is dedicated to the sun god,” he tells me, sitting in his small, sparse, computerless office. “I named the company Solar after the super-generative force of the sun.” Its destiny is to shine.