Captains Speak

Published: Mar 15, 2022
Updated: Mar 15, 2022

Emerging rocket-based motor maker’

Premier Explosives

“The government’s impetus towards the defence sector is promising because in the latest Union budget they have earmarked Rs 4 lakh crore for the sector, excluding the payment provision for pensions. It is praiseworthy that the government is now more focused towards modernization of the armed forces, for which the capital outlay has been increased,” says TV Chowdary, Managing Director of the company

ISRAEL’S TRUST

Referring to orders from Israel, Mr Chowdary says, “We have had orders for seven different rocket motors from Israel, of which three numbers have already been executed successfully while another four are in the process of completion. We have also received another order for warheads from them which is also progressing well.” Highlighting PEL’s strength, Mr Chowdary says, “Like Israel, we are also interacting with different customers in various countries for the export of rocket motors and we are expecting this to fructify during FY23.”

Headquartered at Hyderabad, PEL is a Rs 260-crore company which was established in 1980 by Dr AN Gupta, a gold medalist in mining engineering, who is currently the non-executive Chairman and the main promoter of the company. Its seven manufacturing facilities are spread across Telangana, Madhya Pradesh, Maharashtra and Tamil Nadu.

The company is into manufacturing of high energy materials. Despite its 42 years of existence, the company is yet to reach a respectable level in terms of revenue and profits. Nevertheless, it possesses a couple of firsts to its credit. PEL is the first to manufacture explosives and detonating fuses with indigenous technology. It has also been the first to produce safer and greener NHN detonators on a commercial scale. Likewise, it is the first company in the private sector to manufacture solid propellants to India’s missile programmes.

Giving a detailed account of PEL’s paradigm shift from being merely a propellant supplier to a full missile integrating company, Mr Chowdary says,”We are not just a propellant manufacturing company, we are now a rocket-based motor manufacturing company and in addition to exports to Israel, we are now also in various DRDO projects wherein some rocket motors would go into missiles. We already have the required licences and production facilities in place. We are working with different organisations whose specialization is in electronics and communication systems in missiles. A lot of MoUs have been entered into and we are expecting good growth from our defence domain.”

LONG PROCESS

Defence procurement is a long-drawn process and it requires a lot more patience by the time a trial order gets converted into a regular order with a compatible volume. PEL is no exception. Hence, while explaining the company’s order cycle from the defence vertical, Mr Chowdary clarifies, “In the case of the Israeli order, we have already completed the process of pre-qualification and trial orders quite successfully. Now, we are expecting them to get converted into bulk orders. Once this starts, the order book is going to swell. Probably, we will be able to announce a better order book in the near future. Orders in the pipeline are good and we will share the news in due course.”

Talking of the newly built Katapelly plant (near Hyderabad), Mr Chowdary says, “The plant, spread over 150 acres, is ready but it will not get into full scale production. Right now, things are at the qualification level. We have several orders also for this manufacturing facility. However, there is a process, we need to follow. But for sure, we should reach almost 60% capacity utilization by the next fiscal year.” Another 100 acres of land is available at the same location for further expansion. The company plans to manufacture solid propellants, HMX/RDX, munition, mines, warheads and bombs in this facility

Providing a further insight of PEL’s strength, Mr Chowdary says, “We are the only propellant manufacturer and supplier of all new missile systems of DRDL, i.e., QRSAM, MGARM and various other programmes, over and above the special variants. TU technology transfer for new missiles at BrahMos are going to be a big business and we are very much there. The company’s current order book is Rs 401 crore, broadly classified into the three verticals — defence 38%, explosives 25% and the balance 37% from services.

PEL is serving all critical and most vital industries which include defence and aerospace, mining and infrastructure. Undoubtedly, there is a huge potential in all the three segments. There is a big competition and operating margin pressure in mining products. However, the company’s change in focus towards the defence and aerospace sector is its most timely and calculated move because the government’s firm decision with regard to indegenisation of defence procurements and favourable offset policy has opened up a plethora of opportunities for good domestic players in the field.

TECH STRENGTH

PEL owns certain licences for products development and manufacturing, which otherwise have a high entry barrier. It is also a participant in defence and space programmes with both indigenous technology and technology transfer. All these factors prove its strong technological capabilities beyond any doubts. However, it is of utmost and paramount importance that the company now accelerates its pace of growth to make up for the last several decades. PEL’s contribution to India’s most ambitious missile programmes like Akash, MRSAM, Agni, BrahMos, LRSAM and Astra itself speaks its highworthiness.

PEL is well-qualified and a front-runner in manufacturing of the Bi-Modular Charge System (BMCS), which is the ammunition system used in artillery weapons to ignite the shell and push it out of the gun. Though DRDO has already approved a transfer of key immunition technology to private players in 2017 itself, defence employees had objected to this move. Nevertheless, when it materalises, PEL will be amongst the major beneficiaries, as it has all due approvals, capabilities and facilities in place. Moreover, this would offer higher volumes as well.

On a standalone basis, PEL has clocked a revenue of Rs 138.17 crore from operations in the nine months ended December 2021 vis-à-vis Rs 117.08 crore in the previous year. However, its operating profit has gone up to Rs 17.35 crore against an operating loss of Rs 42 lakh. PAT remained at Rs. 4.44 crore against a loss of Rs. 13.44 crore during the same period. During FY21, for the full year, the company reported a net loss of Rs 10.74 crore on a net revenue of Rs 151.94 crore.

Elaborating on its improved operating profit margin at 12.6% in the current year vis-à-vis -0.4%, Mr Chowdary says, “Actually we have achieved an average of about 11% EBITDA for the first nine months. Similarly, we have also experienced some significant growth in the topline. We expect to maintain EBITDA at 11% and could grow even further.”

CAPEX PLANS

Referring to the company’s capex plans, Mr Chowdary says, “In the current year, we have taken up the capacity expansion of a chaff tube detonator plant and we are going to capitalize the bulk explosives plant located at Godavarikhani. Both would happen at an investment of Rs 10 crore.”

While giving the reply to a question with regard to capex in the next FY23, Mr Chowdary informs that “as such, except the normal capex of Rs 3 crore for purchase of tooling etc., I don’t think we will have any major capex in the next year. However, it could happen if we are allotted land by the Andhra Pradesh government at Sriharikota where we have applied for setting up a new unit. In that case, we might also start building infrastructure over there.”

Speaking on the revenue guidelines for FY23, Mr Chowdary indicates a 20% to 25% growth over the current FY22. With respect to debt and cash flow generation, he adds, “We have very little debt of about Rs 3 crore, which will be repaid in the next four quarters and there is some loan from the promoter which is at 7% interest rate – very nominal, hence we are not expecting any big swing. As regards cash flow, this financial year, we expect about Rs 17 crore to Rs 18 crore of cash generation, which will increase in the next two years. The depreciation of about Rs 10 crore a year charged to the P & L account is like addition to the real profit.”

“Interestingly, Mr Girdharilal / Dilipkumar Lakhi and family, an ace investor, are gradually increasing their shareholding in the company through an open market purchase. As per the latest available data, they are the single largest public shareholder with 13.07% holding.

“We are the only propellant manufacturer and supplier of all new missile systems of DRDL, i.e., QRSAM, MGARM and various other programmes, over and above the special variants. TU technology transfer for new missiles at BrahMos are going to be a big business and we are very much there.”

“Like Israel, we are also interacting with different customers in various countries for the export of rocket motors and we are expecting this to fructify during FY23.”

The company has equity capital of Rs 10.75 crore (face value Rs 10) and book value of Rs 172 per share. Dr Gupta’s family holds a 41.33% stake as the promoters. Amongst the major public shareholding of 58.67%, two mutual funds hold 3.46%, ace investor Atim Kabra 3.16%, NRIs 4.32% and 24.66% is spread among 9,313 individuals.

Interestingly, Mr Girdharilal / Dilipkumar Lakhi and family, an another ace investor, are gradually increasing their shareholding in the company through an open market purchase. As per the latest available data, they are the single largest public shareholder with 13.07% holding. At its current market price of Rs 324, the company is valued at Rs 348.37 crore.

Of late, every policy decision for the defence sector being taken by the government clearly reveals and indicates that eventually they are determined to reduce the country’s dependence on import of defence goods and services by a slew of measures including a big push to the private sector’s participation, without any compromise on technology and quality. On the other hand, they have paved a way to increase exports. These twin objectives have opened up tremendous new opportunities to a number of good companies from the public and private sectors in the field. PEL is certainly one of them.