We recently met with the management of NFPIL and have taken note of the slowdown in the fire protection business and also slower then expected growth in the CNG cylinders manufacturing business.
However, we are positive about the long-term growth prospects of the company.
Nitin cylinder, 100% subsidiary of NFPIL, is manufacturing CNG cylinders at Vizag since April 2008. The plant has the capacity to produce 500,000 CNG cylinders per annum of various diameters.
It is aimed at both industrial users as well as automobiles with the majority being meant for automobiles.
The demand for CNG cylinders in India is also picking up due to increasing focus on reducing the environmental pollution and also due to the fact that even after reduction in global oil prices, CNG is still ~55% cheaper then petrol.
In January 2008 NFPIL had acquired 40% stake in a Dubai based fire protection Company ’New Age Company’ LLC (NACL), a company engaged in fire protection system, fire detection system, emergency lighting system and water mist fire protection system for 15 million Dirham (Rs162.9 million).
The current order book of the company is around Rs175 million. Majority of the orders are of the industrial projects that are supported by the government and thus there is visibility for its revenues.
However, looking at the severe slowdown in the construction activity in the Middle East we expect the financials of the company to be under pressure.
Outlook and valuation
We have revised the earnings estimates for FY09E to account for the current economic slowdown impacting its fire protection and CNG cylinders business.
For FY09E we now expect NFPIL to report lower revenues of Rs2.4 billion (down 12.1%). We now expect the Vizag plant to produce 95,000 cylinders in FY09E (down 28%) with average realizations of Rs6,000 per cylinder.
We expect NFPIL to report consolidated EBIDTA margin of 21.1% in FY09E (no change), PAT of Rs328 million in FY09E (down 16%).
Accordingly, we expect the company to report lower EPS of Rs.26.0 as against our earlier estimate of Rs.31.0 for FY09E (down 16.0%).
We have valued NFPIL on DCF method of valuation with 13.6% WACC and 3% terminal growth rate. Thus the price target is revised to Rs225 per share as against Rs275 earlier.