India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Healthy order backlog for the US operations should translate in curtailment
of losses.
To expand Dubai capacity owing to strong demand from Iran and Pakistan.
The company's FCCB is up for redemption in Oct 2012. The outgo on
maturity would be of the order of USD 50 mn (Rs 2.2 bn). We believe the
company may have to refinance the FCCB given that, free cash flow may
aggregate close to Rs 1.4-1.5 bn over FY12-13. Thus interest outgo may
increase in FY13.
Downgrade the stock to Accumulate due to moderate upside of 11%.
We recently met the management of EKC (Mr Vipin Chandok has
recently joined as the CFO). Following are the key takeaways :
n The company expects healthy business environment for the company's products
business. The main drivers continue to be sustained pace of CNG conversions
and demand for industrial cylinders.
n While CNG usage has been popular in neighbouring countries of Pakistan and
Iran, the same is yet to happen in India. The main issue is availability of fuel and
refilling stations.
n Close to 15% of the demand for CNG cylinders come from OEMs while the rest
is accounted by the retrofits. Even in the OEM's bulk of the demand is from CNG
Buses. Without Maruti Suzuki, among its OEM list, a sizeable chunk of car market
is left out for EKC. However, EKC is taking measures to address this issue.
n Demand from Iran and Pakistan continues to be robust (Volumes up 46% in
FY11) and its Dubai plant is operating at full load to service these market. The
plant operated at a capacity utilization of 116% in FY11. Given this, the company
has plans for capacity expansion at Dubai. It has taken board approval for
it and expects the proposed expansion to increase capacity by 40-50%.
n In the US geography (through 100% subsidiary CP Holdings), the company's operations
were bleeding due to lower capacity utilization. While volumes were
marginally down in FY11, the same is expected to be better in FY12 as the company
has an order book of USD 25 mn, equivalent to 16 months of FY11 revenue.
n The company is in the process of completing the 200000 cylinders plant at
Gandhidham based on billet piercing technology. 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.
Moreover, the material suppliers do not allow for any credit period. Hence the
inventory takes a significant share of the working capital.
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.
Financial Outlook
n On a consolidated volume of 8.8 lacs cylinders in FY11, we project a growth of
17% in volume terms to 1.03 mn cylinders. This translates into a revenue growth
of 19% in FY12.
n We expect margins to expand due to curtailment in losses at its Chinese and US
subsidiaries. The US subsidiary has reported significant reduction in loss in Q4
FY11. The improving trend in profitability is likely to continue as higher output in
FY12 (aided by improved order backlog) kicks in operating leverage benefits
(employee costs are 37% of sales vs 7% for India).
n Interest costs should remain under control since borrowing excluding FCCB has
declined by Rs 1.3 bn in FY11.
n Capex is likely to remain in the range of Rs 800-900 mn including Rs 550 mn for
expansion at Dubai plant.
n The company has FCCB outstanding of USD 35 mn convertible at Rs 271 per
share and maturing October 2012. Given that conversion appears unlikely, the
company will have to redeem the bonds which on maturity amount to USD 50
mn (Rs 2.2 bn). We project free cash flow of Rs 470 mn in FY12. Thus in all likelihood
the company may have to go in for refinancing the loan. However, this
has the potential of significantly raising interest expenses in FY13.
n Tax rate is likely to remain between 15-20% since the company's Dubai operations
enjoy zero tax status and its operations at China may continue to remain in
red. Thus, we project 27% growth in earnings in FY12.
Valuation & Recommendation
n At the current price of Rs.93, EKC is trading at 1.2x book value, 11.2x earnings
and 6.0x 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 11% upside potential from the current levels we downgrade the stock to
Accumulate with unchanged DCF based price target of Rs.103.
n Promoters have been increasing stake through market purchases though the increase
in stake is not very significant.
No comments:
Post a Comment