The demand for CNG cylinders in India is 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.
The Supreme Court has also mandated the public transport system of the 28 cities to be converted to CNG to reduce emissions over next few years. Also with the recent gas finds of Reliance and GSPC we expect good amount of gas to be available for the automobiles.
The Indian economy, which is domestic demand driven and stimulus package announced by the government, is likely to lead to growth in the domestic demand for CNG cylinders in FY10E.
We believe that the availability of CNG is a prerequisite for increasing penetration of CNG vehicles in India.
With the commencement of gas supplies from Reliance’s KG basin from April 2009, there will be large scale expansion of CGD projects in various cities. NFPIL, being the second largest CNG cylinder manufacturer in India after EKC, is expected to be beneficiary of rise in demand for CNG cylinders.
In the long term, we expect huge demand of CNG cylinders for all segments of automobiles like cars, trucks, buses and even two wheelers. Thus there is lot of visibility and confidence in the CNG cylinders business going forward.
Considering increased CNG cylinder sales we have revised FY10E earning estimates for NFPIL. In FY10E, we now expect the company to sell 175000 cylinders (up 34.6%), net sales of Rs3 billion (up 9.8%), EBIDTA margins of 22.1% (up 60 bps) and PAT of Rs441 million (up 16.6%).
Accordingly we expect NFPIL to report higher EPS of Rs35.0 and CEPS of Rs40.2 in FY10E as against our earlier estimate of Rs30 and Rs35.2 respectively.
We have valued NFPIL on DCF method of valuation with 13.6% WACC and 3.0% terminal growth rate. Thus the price target is revised to Rs300 as against Rs225 earlier.
At Rs236, it trades at 1.7x book value, 6.7x earnings and 5.9x cash earnings based on FY10E. We are positive on the long term growth prospects of the company primarily due to expected surge in domestic demand for CNG cylinders.
Due to 27% upside potential form current levels we upgrade the stock of NFPIL to BUY with revised price target of Rs300.