Everest Kanto - Strong 2Q: Clear Signs of Improvement :: Citi

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Everest Kanto Cylinder (EKCL.BO)
Strong 2Q: Boosted by One-offs, but Clear Signs of Improvement
 Strong show, boosted by large order, forex — EKC reported robust 2Q PAT of
Rs24.7m (loss of Rs115m in 1Q), well ahead of estimates. While a large part of
the beat is explained by forex gains of Rs99m, operationally, the company
managed to stage a comeback with strong revenue and margin growth. In
addition, sequentially lower interest costs (pay down of debt) and higher other
income (cash raised from preferential allotment) also boosted the bottom line.
Revenues were higher than the previous six quarters, though partly boosted by the
completion of a large jumbo cylinder order in India, which will not recur.
 India, Dubai shine… — EKC witnessed substantial improvement in both India and
Dubai. While India was boosted by completion of a one-time order for jumbo
cylinders (contributed cRs250m to revenues), demand for industrial cylinders also
showed significant strength. CNG cylinder volumes in India (~40% of total),
however, stayed lackluster, remaining a cause for concern. QoQ improvement in
Dubai profitability was driven primarily by higher realizations in Iran.
 …Though China, US continue to disappoint — Despite sequentially higher
revenues, China and the US remained a drag, once again leading to losses at the
EBIT level. Despite a healthy order backlog, US sales remained below
expectations. While China sales recovered, primarily driven by exports (largely to
Middle East), utilizations remained below break-even levels.
 Improving environment, large order drive margins — EKC reported margins of
19.7% (ex-forex gains), substantially higher than the 9-10% margins seen in the
last few quarters. The large jumbo cylinder order that was executed in 2Q was a
big driver of this, though even excluding its impact, we estimate substantially
improved margins of ~17%, driven by improvement in Dubai and the nearcomplete
drawdown of high cost inventory. A sustained improvement in volumes
and profitability would be key to drive stock performance.