Orica gets a double benefit: rising demand for these digital products and services but also improved profitability because these technology businesses operate with much higher margins than the group’s core explosives business.
breathing space
Increasing technology sales and improving margins partially help explain the 40 per cent rise in Orica’s share price over the past 12 months, but the big swing factor has been surging demand for explosives in a world where supply chain disruptions have been heightened by the war in Ukraine ; Russia was previously one of the world’s biggest exporters of ammonia and ammonium nitrate, the key ingredients in explosives.
Gandhi has done a good job passing through rampant inflationary pressures – including rising energy costs, raw material costs, labor costs and freight costs – by positioning Orica as a reliable supplier with prices to match.
On Wednesday, he reaffirmed guidance for the 2021-22 financial year, with margin improvement to be driven by volume growth in line with gross domestic product growth, cost reductions and higher prices.
But Gandhi’s supersized capital raising is designed to give him a bit of breathing space.
By raising an extra $282 million for working capital and balance sheet capacity, he will have more financial flexibility to navigate the inflation he is battling with higher input costs; the ongoing supply chain constraints that have necessitated finding new sources of ammonia and ammonium nitrate, sometimes under shorter payment terms; and the geopolitical threats to supply, which have required higher inventory holdings to counter supply risks.
“There’s a lot of stuff going on in the industry that we cannot control, so I am being a bit cautious here. It has nothing to do with the underlying business. The underlying business is very healthy,” Gandhi says.
Execution risk should be relatively low on the Axis deal. Gandhi plans to integrate the business into Orica but preserve Axis’ autonomy, with some of Orica’s existing orebody intelligence businesses to be run by the Axis team, which Gandhi says reflects the size and experience of the acquisition.
The deal was struck on a multiple of 11.8 times earnings before interest, taxes, depreciation and amortization; Orica trades on 32 times.