Over the last three years, Everest Kanto Cylinders (EKC) has increased its cylinder manufacturing capacity from 706,000 in FY06 to 1mn currently.
With commencement of the new plant at Gandhidham and Kandla, during Q1 FY10, the total manufacturing capacity would increase to 1.5mn cylinders. Acquisition of CPI will add to its product portfolio and complement its jumbo cylinder plant in Gandhidham.
The expansion has been done when the global acceptance of CNG as auto fuel is rapidly gathering momentum.
We expect the global demand to remain strong over the longer term on back of increasing acceptance of economic and environmental benefits of using CNG as auto fuel.
With setting up of plants in China and Dubai, EKC is well poised to serve markets witnessing robust demand growth. Dubai plant has been serving the international markets for nearly three years.
It has been exporting to Pakistan, Iran, CIS countries, Egypt, Colombia, Peru and Bangladesh. China plant, apart from servicing domestic demand there, will be exporting to Middle East countries where significant growth opportunities exist.
Further, the new plant at Kandla SEZ will be focusing on export markets. Acquisition of CPI will provide access to US markets.
Contribution of the CNG segment and jumbo cylinders to the total revenue for EKC is expected to substantially jump from the current levels.
Backed by higher realizations, CNG segment earns higher operating margins when compared to the industrial cylinder segment.
Even jumbo cylinders earn relatively higher gross margins. Start up of jumbo cylinder plant at Gandhidham coupled with CPI sales would lead to total jumbo cylinder volumes of 4,500 in FY10E and 7,500 in FY11E. Fall in steel prices would be further supportive to expansion in margins.
We expect 42.6% CAGR in revenues and 30.9% CAGR in net profit during FY08-FY11E. We believe that current valuation multiples do not capture growth expected in EKC’s profitability. We recommend a BUY with a target price of Rs133.