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Monday, September 22, 2008

EVEREST KANTO Cylinders (EKC) - Good long term investment

Everest Kanto Cylinders will be a key beneficiary of the increasing popularity of CNG as a transport fuel both in India and abroad. Long-term mid cap investors can consider the stock for investment

EVEREST KANTO Cylinders (EKC) is India’s largest producer of highpressure seamless cylinders for industrial and automotive applications. With increasing usage of compressed natural gas (CNG) globally as a transport fuel, the demand for seamless cylinders is rising rapidly. Considering EKC’s leading position in the industry and aggressive expansion plans, it is set to emerge as a key beneficiary of this boom. Long-term investors can consider this stock.

BUSINESS:
EKC has five manufacturing facilities located across India, Dubai and China, with a total installed capacity of 0.8 million cylinders per annum (cpa). The company caters to the demand for high-pressure cylinders and CNG cascades in India, as well as Iran, Pakistan, Bangladesh, Thailand, Malaysia, Egypt and CIS countries.

Also Read: Everest Kanto Cylinders : Multibagger to have (Our recommendation when stock was at Rs. 260; Now at 290)

EKC’s Chinese unit commissioned production at its 2,00,000-cpa plant in March ’08. The company, which is expected to achieve 100% capacity utilisation by the year end, is likely to get the regulatory approval to sell its products in China by the end of October. In April ’08, EKC acquired US-based CP Industries for $66 million, which is a world leader in high-pressure jumbo cylinders for storing and transporting industrial gases. This acquisition supplemented EKC’s product portfolio, while providing it the necessary knowhow to produce similar cylinders for the Indian market.

GROWTH DRIVERS:
EKC is setting up a 2,00,000-cpa facility at Gandhidham in Gujarat to manufacture industrial cylinders from billets, as well as another plant to manufacture large-sized jumbo cylinders. Both these projects are expected to be commissioned by December ’08. The company is also
setting up a 3,00,000-cpa plant in the Kandla SEZ in Gujarat, which will be commissioned by June ’09. EKC plans to increase its capacity in China five-fold to 1 million cpa in three years, taking its total cylinder capacity (industrial and CNG) to 2.3 million cpa by FY12 from 0.8 million cpa. Historically, the lack of infrastructure for storing, transporting and dispensing CNG has come in the way of its becoming a popular transport fuel. But the scene is changing rapidly, thanks to the spurt in crude oil prices. Globally, a number of countries are shifting to CNG as a transport fuel, which is cheaper and cleaner, compared to petrol and diesel. India, which has CNG available only in a few cities at present, has chalked out plans to launch city gas distribution (CGD) projects in over 230 cities.

Gail — India’s largest transporter of natural gas — now has a subsidiary to focus on its CGD business and has set up CNG stations along all major highways. At the same time, the availability of natural gas in India is set to double in the next three years. As more natural gas becomes available and CNG infrastructure improves across the country, the demand for CNG vehicles will also rise multifold, which, in turn, will boost demand for CNG cylinders. A similar scenario is unfolding across various other countries. As per the International Association of Natural Gas Vehicles, the number of natural gas vehicles (NGVs) globally has witnessed a CAGR of 30% in the past five years to reach 8.5 million vehicles at present, and is expected to see a CAGR of 20% till ’20 to 65 million vehicles.

FINANCIALS:
EKC’s net profit has seen a CAGR of 90% over the past five years to reach Rs 104 crore in FY08. In the same period, its net sales have recorded a CAGR of 43%. The company’s operating margins have risen consistently over the past five years to touch 30% in the 12-month period ended June ’08. Since EKC has been in an expansion mode, its return on capital employed (RoCE) has halved in the past three years to 18.5%. Operating cash flows have stayed negative in the past two years due to an increase in inventory and debtors. Inventory was high as EKC stocked up on raw materials, expecting their prices to rise. High debtors on balance sheet result from high sales during March due to depreciation benefits available to buyers.
VALUATIONS:
At CMP of Rs 290.6, the scrip is trading at 24.8 times EPS for trailing 12 months. Going forward, we expect the company to post a net profit of Rs 183 crore for FY09 on sales of Rs 872 crore. Thus, based on the estimated EPS for FY09 the P/E works out to 16.3.
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