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EVEREST KANTO CYLINDER LTD (EKC)
PRICE: RS.88 RECOMMENDATION: BUY
TARGET PRICE: RS.103 FY12E P/E: 12.2X
We recently met with the management of Everest Kanto Ltd. Presented
below are key points.
q Kandla SEZ plant to start commercial production in April-May 2011. Capacity
to increase by 300000 cylinders.
q Good long term potential on account of increasing gas availability, various
CGD projects and de-regulation of petrol prices. Expecting first order
from Maruti's CNG fitted vehicles in the next two months.
q Due to 24% upside potential from current levels we continue to recommend
BUY on EKC with revised price target of Rs.103 (Rs.111 earlier). Promoter
stake has been increasing through market purchases.
Key points
n On the demand side, the company is yet to see visible improvement in demand
for CNG cylinders despite the firming up of retail petrol prices in recent months.
The demand is driven by industrial cylinders and Jumbo cylinders.
n The US operations have been bleeding due to lower throughput (1277 cylinders
in FY10 on installed capacity of 3000 cylinders) from the plant and high value inventory.
In recent months, the US subsidiary (CP Holdings) has shown improvement
in its order backlog aided by an order win of USD 25 mn. With higher
output, the company expects to improve the profitability of the US operations.
n The Aurangabad plant with a capacity of 110000 cylinders is being phased out.
The plant load would be transferred to the Gandhidham plant, which is modern
and has enough room for increasing output. The company is in the process of
completing the 200000 cylinders plant at Gandhidham based on billet piercing
technology.
n The management highlighted that billet piercing technology is more efficient in
making industrial cylinders (material saving of approximately 15%). While the
material saving is partly offset by higher costs on process heating, the management
indicated the other advantage is in terms of local sourcing. This will also
obviate the need to maintain large inventory. Currently, the company is sourcing
material primarily from Tenaris and couple of Chinese vendors. Due to operational
factors, the company buys these tubes on a bulk basis and hence has to
maintain nearly 4-5 months of inventory. This strategy had misfired in FY09-10,
wherein the company had been saddled with excess high cost inventory.
n The company is in the final stages of completing the Kandla SEZ plant (based on
steel plated). This plant has a capacity of 300000 cylinders. The plant is expected
to get fully stabilized by the H2 of FY12 and ramp-up should happen in FY13.
The company targets to sell just over 100000 cylinders in FY12 from Kandla.
n Iran market is doing well and this augers well for the profitability as this market
enjoys premium realizations compared to other markets. The Dubai plant which
mainly serves the Iran market continues to be fully utilized.
n The domestic market for CNG cylinders continues to be stagnant and has so far
failed to achieve its potential despite visible cost advantages (payback of 9
months for drive of 50 km/day). The management noted that availability of CNG
filling stations is a constraint for interstate driving. Users are also wary about
safety issues. Apart from this, long queues at refilling stations are a deterrent.
The management indicated that the Pakistan CNG cylinder market is much bigger
despite its car market being a fraction of that of India.
n The company's CNG cylinders are already approved by Maruti Suzuki. EKC expects
to get its first order from Maruti in the next two months.
n We project the company to have sold 773000 cylinders in FY11. For the current
fiscal, the company expects to sell around 1.0 mn cylinders aided by capacity additions
at Kandla and Gandhidham.
n The company does not have any serious plans on capital expenditure and expects
to spend around Rs 200-300 mn towards routine plant upgradation.
n The company has a borrowing of Rs 3.5 bn which is at an average cost of 3.3%
being Libor-linked ECB. So far as repayment schedule is concerned, the company
has to repay Rs 600 mn and Rs 2.5 bn in FY12 and FY13 respectively.
Valuation & Recommendation
n At the current price of Rs.88, EKC is trading at 1.2x book value, 12.2x earnings
and 6.3x cash earnings based on FY12E.
n We remain positive on the medium to long term growth prospects of the company
primarily on account of expected huge demand of CNG cylinders for the
automobiles in India on account of increasing gas availability, various CGD
projects and de-regulation of petrol prices.
n Due to 24% upside potential from the current levels we continue to recommend
BUY on EKC with revised DCF based price target of Rs.103 (Rs 111 earlier).
n Promoters have been increasing stake through market purchases though the increase
in stake is not very significant.
Change in target price
We have arrived at a target price of Rs 103 based on DCF. At the target price, the
stock will be priced at 14.2x FY12 earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EVEREST KANTO CYLINDER LTD (EKC)
PRICE: RS.88 RECOMMENDATION: BUY
TARGET PRICE: RS.103 FY12E P/E: 12.2X
We recently met with the management of Everest Kanto Ltd. Presented
below are key points.
q Kandla SEZ plant to start commercial production in April-May 2011. Capacity
to increase by 300000 cylinders.
q Good long term potential on account of increasing gas availability, various
CGD projects and de-regulation of petrol prices. Expecting first order
from Maruti's CNG fitted vehicles in the next two months.
q Due to 24% upside potential from current levels we continue to recommend
BUY on EKC with revised price target of Rs.103 (Rs.111 earlier). Promoter
stake has been increasing through market purchases.
Key points
n On the demand side, the company is yet to see visible improvement in demand
for CNG cylinders despite the firming up of retail petrol prices in recent months.
The demand is driven by industrial cylinders and Jumbo cylinders.
n The US operations have been bleeding due to lower throughput (1277 cylinders
in FY10 on installed capacity of 3000 cylinders) from the plant and high value inventory.
In recent months, the US subsidiary (CP Holdings) has shown improvement
in its order backlog aided by an order win of USD 25 mn. With higher
output, the company expects to improve the profitability of the US operations.
n The Aurangabad plant with a capacity of 110000 cylinders is being phased out.
The plant load would be transferred to the Gandhidham plant, which is modern
and has enough room for increasing output. The company is in the process of
completing the 200000 cylinders plant at Gandhidham based on billet piercing
technology.
n The management highlighted that billet piercing technology is more efficient in
making industrial cylinders (material saving of approximately 15%). While the
material saving is partly offset by higher costs on process heating, the management
indicated the other advantage is in terms of local sourcing. This will also
obviate the need to maintain large inventory. Currently, the company is sourcing
material primarily from Tenaris and couple of Chinese vendors. Due to operational
factors, the company buys these tubes on a bulk basis and hence has to
maintain nearly 4-5 months of inventory. This strategy had misfired in FY09-10,
wherein the company had been saddled with excess high cost inventory.
n The company is in the final stages of completing the Kandla SEZ plant (based on
steel plated). This plant has a capacity of 300000 cylinders. The plant is expected
to get fully stabilized by the H2 of FY12 and ramp-up should happen in FY13.
The company targets to sell just over 100000 cylinders in FY12 from Kandla.
n Iran market is doing well and this augers well for the profitability as this market
enjoys premium realizations compared to other markets. The Dubai plant which
mainly serves the Iran market continues to be fully utilized.
n The domestic market for CNG cylinders continues to be stagnant and has so far
failed to achieve its potential despite visible cost advantages (payback of 9
months for drive of 50 km/day). The management noted that availability of CNG
filling stations is a constraint for interstate driving. Users are also wary about
safety issues. Apart from this, long queues at refilling stations are a deterrent.
The management indicated that the Pakistan CNG cylinder market is much bigger
despite its car market being a fraction of that of India.
n The company's CNG cylinders are already approved by Maruti Suzuki. EKC expects
to get its first order from Maruti in the next two months.
n We project the company to have sold 773000 cylinders in FY11. For the current
fiscal, the company expects to sell around 1.0 mn cylinders aided by capacity additions
at Kandla and Gandhidham.
n The company does not have any serious plans on capital expenditure and expects
to spend around Rs 200-300 mn towards routine plant upgradation.
n The company has a borrowing of Rs 3.5 bn which is at an average cost of 3.3%
being Libor-linked ECB. So far as repayment schedule is concerned, the company
has to repay Rs 600 mn and Rs 2.5 bn in FY12 and FY13 respectively.
Valuation & Recommendation
n At the current price of Rs.88, EKC is trading at 1.2x book value, 12.2x earnings
and 6.3x cash earnings based on FY12E.
n We remain positive on the medium to long term growth prospects of the company
primarily on account of expected huge demand of CNG cylinders for the
automobiles in India on account of increasing gas availability, various CGD
projects and de-regulation of petrol prices.
n Due to 24% upside potential from the current levels we continue to recommend
BUY on EKC with revised DCF based price target of Rs.103 (Rs 111 earlier).
n Promoters have been increasing stake through market purchases though the increase
in stake is not very significant.
Change in target price
We have arrived at a target price of Rs 103 based on DCF. At the target price, the
stock will be priced at 14.2x FY12 earnings.
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