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Weekly Insights #11- Sometimes Visibility/Triggers Comes Later; Solar Industries Case Study

In investing, whether to buy a stock or not and how much to buy is a result of conviction. And conviction comes from understanding the triggers of growth & having a visibility on them.

However, there are situations wherein at the initial stages of a stock’s trend, clarity & visibility of growth triggers is missing. And as an investor one wonders why the stock is going higher.

Then at some later point, the growth triggers emerge (explaining the stock’s price trend). But even at this stage, a lot of times the visibility on these growth triggers sustaining is missing.

But then again, these growth triggers somehow just sustain themselves and the trend just builds up. And during this entire period, the investor who is sitting on the sidelines is just watching is awe how things played out eventually.

Let me explain this with a case study-

- One of the screening tools we use is to look at stocks making new highs. Back in early 2021, Solar Industries came up on our screen.

- When we looked at fundamentals to understand what is making the stock move higher, we could not find any material growth trigger that will help with the growth and neither was the stock trading cheap, so as to result in a valuation re-rating led price move (stock at that time was trading at relatively premium valuations of 40x+ earnings).

On the other hand, there were certain negatives with the business being drive by government & related entities as customers.

And thus, it was a pass for us at that stage.

- Then Q4FY21 results came out and the company reported a strong growth of 45%. And that is when we got an initial idea of the growth trigger at play for Solar Industries.

And this growth trigger was the rise in prices of company’s key raw material of Ammonium Nitrate. Solar’s business works in a way wherein Solar’s finished good prices move in tandem with Ammonium Nitrate and it largely earns a certain X% margins over raw material prices and thus at higher Ammonium Nitrate prices, it earns higher revenues & profits on absolute basis.

The challenge here again was on the sustainability of this sharp rise in the prices of Ammonium Nitrate and thus on the future growth of Solar Industries, because the entire growth trigger was based on anticipating the price of a commodity over next 1-2 years.

But not only did ammonium nitrate’s price sustained at initial high levels, it increased considerably over next 2-years.

(ammonia prices as a proxy for ammonium nitrate)

- And this led to a very high growth for Solar Industries as its realization more than doubled over last 2-years.

- This growth in realization was further supported by improved volume growth as energy shortages led to increased demand for coal & coal mining- which is one of the primary areas wherein Solar’s explosives are used.

- And on the back of this sustained strong growth, the stock price of Solar Industries has tripled from the early 2021 levels when we saw it making new highs.

Whole thought behind this post was to explain that as investors we will always face such situations wherein it is very difficult to make sense of what is leading to a stock’s price movement and/or how sustainable the growth triggers are. And that one might end up sitting on the sidelines while the stock continues to go higher.

Only way to play such setups would be to take a leap of faith early in the hopes that things will play out. But for every such opportunity wherein things end up working, there would be multiple opportunities wherein things do not play out.

And so, as an investor one has to be content with the fact that there will always be opportunities that you will pass on for some reasons and that ends up doing well.

That’s it for this week, new insight coming up next week. So stayed tuned!


Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.

“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”

“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”

“The securities quoted are for illustration only and are not recommendatory”

Stock specific investment disclosure:

Solar Industries- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

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1 Comment

Rajat Banerjee
Apr 23, 2023

Sometimes it looks like "Market" is intelligent. Efficient Market hypothesis seems to be played out in Solar Industry case.

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