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EVEREST KANTO CYLINDERS LTD (EKC)
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.42 CONS. FY13E P/E: 11.6X
EKC has reported poor set of Q3FY12 results. The indian operations reported
a sharp decline in revenues. Profitability deteriorated across all the markets.
We have revised our FY12 and FY13 numbers. We forecast steep decline
FY13 earnings due to higher interest burden as the company would have to
refinance its FCCB. This would take a toll of its earnings and return ratios
with ROE dropping to 4.7% in FY13. Recent appreciation in INR vs USD
should provide some relief to the company. In view of this, we have revised
our target price to Rs 42 and maintain Accumulate, thereby recommending
investors need to utilize declines to buy into the stock
n Revenue from Indian operations declined 26% yoy due to slowdown in demand
for CNG kits and increasing competition from new players (the company has lost
market share).
n In the domestic market, the company caters to the auto CNG (OEM and aftermarket)
and industrial cylinder market. There has been softening in demand for
Auto CNG due to factors like delays in rollout of the CGD network in cities and
increase in price of CNG in Ahmedabad.
n The geopolitical crisis in Iran has adversely impacted the payment security as
banks have been averse to dealing with the country. Consequently, EKC had to
curtail its production at its Dubai manufacturing unit by 64% yoy in Q3FY12.
n EKC reported EBIDTA of Rs.153 mn in Q3FY12 vs Rs 378 mn in Q3 FY11. The
margin decline has been led by sharply lower profitability across most major
markets.
n EBITDA margins stood at 10.7% in Q3 FY12 vs 19.0% in Q3 FY11. The decline
in margins has been due to poor market conditions and the company's inability
to pass on the increased cost to the consumers. Since the company imports its
entire material requirement, the 11% decline in INR vs USD had pushed up the
material cost.
n Overall margins were also affected due to lower profitability at the Dubai unit,
which serves the Iran and Pakistan market.
n The interest cost is up to 36% yoy Rs.25 mn due to increase in working capital
borrowings. The cost of debt is 3.5% (borrowing cost is getting masked due to
FCCB). The company has FCCB outstanding USD 35 mn convertible at Rs 271
per share and redeemable at 142% of the principal amount in Oct 2012. The
company plans to relay the FCCB through a combination of internal accruals and
foreign borrowings.
n At the end of Q3, the INR depreciated by 11% vs the USD thereby resulting in
MTM hit of Rs 268 mn mainly towards translation loss on foreign borrowings.
Business Outlook
n Unless the geopolitical situation in Iran eases, the profitability of the company
would continue to be affected.
n Even in the domestic market, unless there is activity on rollout of the CGD network
and improvement in gas-filling infrastructure, the market growth for CNG
cylinders would continue to grow at sub-optimal rate.
n Competition from smaller players continues to remain strong. Brand loyalty is not
high as even smaller players manage to secure ISI certification and are offering
competitive prices.
Forex Risk - Rupee appreciation in the quarter may lead to gain
on forex fluctuation in Q4FY12
n In the current quarter, the INR is up ~ 7% against the USD, which if sustained,
should result in forex fluctuation gain in the quarter.
n EKC primarily imports its raw material (tubes) from suppliers in South America
and China. These imports are also denominated in USD. Thus, the INR appreciation
in Q4FY12 should also ease raw material cost pressure on the company.
Earnings Revision
In view of the poor set of numbers for Q3 FY12, we are reducing FY12 and FY13
earnings estimates. In FY13, we are taking full impact of FCCB loan refinance. As a
result, the interest cost is seen shooting up significantly. Consequently, we forecast
earnings to drop to Rs 3.3 per share.
Valuation & Recommendation
n At the current price of Rs.38, EKC is trading at 0.5x book value, 11.6x earnings
and 3.7x cash earnings based on FY13E.
n In view of the lower than expected earnings, we are revising our estimates for
the company. Accordingly, our revised target price works out to Rs 42. (earlier
Rs.50)
n Given the modest upside, low return ratios and high level of borrowings, we
maintain ACCUMULATE on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EVEREST KANTO CYLINDERS LTD (EKC)
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.42 CONS. FY13E P/E: 11.6X
EKC has reported poor set of Q3FY12 results. The indian operations reported
a sharp decline in revenues. Profitability deteriorated across all the markets.
We have revised our FY12 and FY13 numbers. We forecast steep decline
FY13 earnings due to higher interest burden as the company would have to
refinance its FCCB. This would take a toll of its earnings and return ratios
with ROE dropping to 4.7% in FY13. Recent appreciation in INR vs USD
should provide some relief to the company. In view of this, we have revised
our target price to Rs 42 and maintain Accumulate, thereby recommending
investors need to utilize declines to buy into the stock
n Revenue from Indian operations declined 26% yoy due to slowdown in demand
for CNG kits and increasing competition from new players (the company has lost
market share).
n In the domestic market, the company caters to the auto CNG (OEM and aftermarket)
and industrial cylinder market. There has been softening in demand for
Auto CNG due to factors like delays in rollout of the CGD network in cities and
increase in price of CNG in Ahmedabad.
n The geopolitical crisis in Iran has adversely impacted the payment security as
banks have been averse to dealing with the country. Consequently, EKC had to
curtail its production at its Dubai manufacturing unit by 64% yoy in Q3FY12.
n EKC reported EBIDTA of Rs.153 mn in Q3FY12 vs Rs 378 mn in Q3 FY11. The
margin decline has been led by sharply lower profitability across most major
markets.
n EBITDA margins stood at 10.7% in Q3 FY12 vs 19.0% in Q3 FY11. The decline
in margins has been due to poor market conditions and the company's inability
to pass on the increased cost to the consumers. Since the company imports its
entire material requirement, the 11% decline in INR vs USD had pushed up the
material cost.
n Overall margins were also affected due to lower profitability at the Dubai unit,
which serves the Iran and Pakistan market.
n The interest cost is up to 36% yoy Rs.25 mn due to increase in working capital
borrowings. The cost of debt is 3.5% (borrowing cost is getting masked due to
FCCB). The company has FCCB outstanding USD 35 mn convertible at Rs 271
per share and redeemable at 142% of the principal amount in Oct 2012. The
company plans to relay the FCCB through a combination of internal accruals and
foreign borrowings.
n At the end of Q3, the INR depreciated by 11% vs the USD thereby resulting in
MTM hit of Rs 268 mn mainly towards translation loss on foreign borrowings.
Business Outlook
n Unless the geopolitical situation in Iran eases, the profitability of the company
would continue to be affected.
n Even in the domestic market, unless there is activity on rollout of the CGD network
and improvement in gas-filling infrastructure, the market growth for CNG
cylinders would continue to grow at sub-optimal rate.
n Competition from smaller players continues to remain strong. Brand loyalty is not
high as even smaller players manage to secure ISI certification and are offering
competitive prices.
Forex Risk - Rupee appreciation in the quarter may lead to gain
on forex fluctuation in Q4FY12
n In the current quarter, the INR is up ~ 7% against the USD, which if sustained,
should result in forex fluctuation gain in the quarter.
n EKC primarily imports its raw material (tubes) from suppliers in South America
and China. These imports are also denominated in USD. Thus, the INR appreciation
in Q4FY12 should also ease raw material cost pressure on the company.
Earnings Revision
In view of the poor set of numbers for Q3 FY12, we are reducing FY12 and FY13
earnings estimates. In FY13, we are taking full impact of FCCB loan refinance. As a
result, the interest cost is seen shooting up significantly. Consequently, we forecast
earnings to drop to Rs 3.3 per share.
Valuation & Recommendation
n At the current price of Rs.38, EKC is trading at 0.5x book value, 11.6x earnings
and 3.7x cash earnings based on FY13E.
n In view of the lower than expected earnings, we are revising our estimates for
the company. Accordingly, our revised target price works out to Rs 42. (earlier
Rs.50)
n Given the modest upside, low return ratios and high level of borrowings, we
maintain ACCUMULATE on the stock.
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