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EVEREST KANTO CYLINDERS LTD (EKC)
PRICE: RS.55 RECOMMENDATION: REDUCE
TARGET PRICE: RS.62 CONS. FY13E P/E: 12.2X
EKC has reported poor set of Q2FY12 results. The indian operations reported
a sharp decline in revenues. US and China operations report reduction in
losses. We have revised our FY12 numbers and also introduced FY13
estimates. 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 5.8% in FY13. In
view of this, we move our rating from Accumulate earlier to Reduce with a
revised target price of Rs 62.
n Revenue from Indian operations declined 29% yoy due to slowdown in demand
for CNG kits and increasing competition from new players.
n EKC reported EBIDTA of Rs.308 mn in Q2FY12 vs Rs 400 mn in Q2 FY11. The
margin decline has been led by sharply lower profitability at Indian operations.
The Chinese and US units have been able to reduce their losses in the quarter.
n EBITDA margins stood at 17.9% vs 19.7% in Q2 FY12. Earlier, the company was
optimistic of maintaining the operating margins at 22%.
n The interest cost is down marginally to Rs.18.6 mn as the company has repaid
some high cost loans. However, the total consolidated debt of the company has
increased from Rs.3.6 bn in June 2011 to Rs.4.2 bn in Sep 2011. 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. In all probability, the company
would refinance the FCCB with another loan. This would result in sharp rise in
interest costs.
n At the end of every quarter, the company revalues the principal amount outstanding
in FCCB based on the closing forex rate. For Q2 FY12, the company has
taken a hit of Rs 234 mn towards forex fluctuation loss on FCCB borrowings.
n Capex of Rs 400 mn in FY12, which may increase depending upon whether the
company plans to go for capacity addition in Dubai.
n During the quarter, the management highlighted payment issues for supplies to
the Pakistan and Iran geography.
Key points
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.
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.
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 has started commercial production
at this plant which is based on billet piercing technology.
The Kandla SEZ plant has started trial production (based on steel plated). This plant
has a capacity of 200000 CNG cylinders (to be increased to 300000 gradually). 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.
Valuation & Recommendation
n At the current price, EKC is trading 7.3x and 12.2x earnings on FY12 and FY13
earnings respectively.
n Return ratios remain low with ROE at 10.2% and 5.8% in FY12 and FY13 respectively.
n Due to modest upside from the current levels we downgrade stock to REDUCE
(Earlier Recommendation was Accumulate) with revised DCF based price target
of Rs.62 (Rs 106 earlier).
n The downgrade is on the back of poor near-term earnings and low return ratios.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EVEREST KANTO CYLINDERS LTD (EKC)
PRICE: RS.55 RECOMMENDATION: REDUCE
TARGET PRICE: RS.62 CONS. FY13E P/E: 12.2X
EKC has reported poor set of Q2FY12 results. The indian operations reported
a sharp decline in revenues. US and China operations report reduction in
losses. We have revised our FY12 numbers and also introduced FY13
estimates. 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 5.8% in FY13. In
view of this, we move our rating from Accumulate earlier to Reduce with a
revised target price of Rs 62.
n Revenue from Indian operations declined 29% yoy due to slowdown in demand
for CNG kits and increasing competition from new players.
n EKC reported EBIDTA of Rs.308 mn in Q2FY12 vs Rs 400 mn in Q2 FY11. The
margin decline has been led by sharply lower profitability at Indian operations.
The Chinese and US units have been able to reduce their losses in the quarter.
n EBITDA margins stood at 17.9% vs 19.7% in Q2 FY12. Earlier, the company was
optimistic of maintaining the operating margins at 22%.
n The interest cost is down marginally to Rs.18.6 mn as the company has repaid
some high cost loans. However, the total consolidated debt of the company has
increased from Rs.3.6 bn in June 2011 to Rs.4.2 bn in Sep 2011. 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. In all probability, the company
would refinance the FCCB with another loan. This would result in sharp rise in
interest costs.
n At the end of every quarter, the company revalues the principal amount outstanding
in FCCB based on the closing forex rate. For Q2 FY12, the company has
taken a hit of Rs 234 mn towards forex fluctuation loss on FCCB borrowings.
n Capex of Rs 400 mn in FY12, which may increase depending upon whether the
company plans to go for capacity addition in Dubai.
n During the quarter, the management highlighted payment issues for supplies to
the Pakistan and Iran geography.
Key points
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.
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.
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 has started commercial production
at this plant which is based on billet piercing technology.
The Kandla SEZ plant has started trial production (based on steel plated). This plant
has a capacity of 200000 CNG cylinders (to be increased to 300000 gradually). 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.
Valuation & Recommendation
n At the current price, EKC is trading 7.3x and 12.2x earnings on FY12 and FY13
earnings respectively.
n Return ratios remain low with ROE at 10.2% and 5.8% in FY12 and FY13 respectively.
n Due to modest upside from the current levels we downgrade stock to REDUCE
(Earlier Recommendation was Accumulate) with revised DCF based price target
of Rs.62 (Rs 106 earlier).
n The downgrade is on the back of poor near-term earnings and low return ratios.
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