High CNG use to fuel Everest Kanto

Everest Kanto Cylinder, the leader in manufacturing of high-pressure cylinders, to benefit from increasing adoption of compressed natural gas (CNG) as a fuel globally. 

Business: Everest Kanto engages in development, production and sale of industrial and CNG cylinders in India and overseas.

It provides high-pressure gas cylinders for compressed industrial gases. The firm offers seamless steel CNG cylinders for three-wheelers and four-wheelers apart from manufacturing cylinders for medical, beverages and fire-fighting applications.

It offers jumbo cylinders and other allied products that include cylinder valves, valve protection guards and caps, trolleys, cylinder cascades and quads for the storage and transportation of high-pressure gases. The company has three manufacturing plants in India at Aurangabad, Tarapur and Gandhidham and special economic zone unit in Kandla. It also has plants in Dubai and China along with two wholly owned step-down subsidiaries in the US and Hungary. The company has total installed capacity to produce 10.7 lakh cylinders at the moment with capacity utilisation of around 80%. It derived close to 46% revenues from the Indian plants, while contribution to sales from plants in Dubai, China and US/Hungary stood at 38%, 6% and 10%, respectively during fiscal 2011. The firm exports to over 20 nations across South Asia, Southeast Asia, Middle East, Africa, South America and the Commonwealth of Independent States (CIS) countries.
Investment rationale: The use of CNG is growing rapidly among the commercial and passenger vehicle manufacturers and owners because of its cost advantage. Also, being a clean and efficient fuel, the regulatory bodies around the world are increasingly pushing to develop the infrastructure for transportation of natural gas. In India, though the infrastructure is not growing fast enough currently, the Petroleum & Natural Gas Regulatory Board plans to increase city gas network from around 35 cities at present to 200 cities by 2015. This would lead to steady increase in demand for CNG cylinders by automotive manufacturers and retrofitters. 

The company has been increasing its installed capacity over the years and has undertaken expansion at new and existing facilities. Its greenfield plant at Kandla SEZ which has started trial production in last quarter would add capacity of 2 lakh CNG cylinders.

The plant would cater to exports to Europe and other markets once the approvals are received.

Also at its Dubai plant, Everest Kanto is planning to spend $10 million to increase capacities 25% to meet demand from Middle East. The company’s billet piercing plant is expected to be operational by the third quarter of this fiscal and would help to reduce the costs marginally and dependence for seamless tubes, key raw material required for making the cylinders.     

The company currently has decent order book position at its Dubai and US plants with revenues visibility for 3-6 months and 12 months, respectively, at these locations. The US operations have started to show improvement and this unit is expected to turn positive by end of fiscal.

Concerns: The raw material costs constitute around 50% of revenues and any adverse movement in prices or supply of major raw materials would impact its margins. The increasing competition in CNG cylinder manufacturing in China and India may impact its margins even though it enjoys 60% of domestic market share. Everest Kanto, which imports raw materials and exports products, also faces currency fluctuation risks.

Valuations: The company’s revenues are expected to grow at a compounded annual growth rate of 19% over FY11-13 led by a steady demand in its key markets and higher capacities. The net profits are expected to grow at over 30% led by higher operational efficiencies and a turnaround in its US operations. At current market price of `76.20, the stock is trading at 8.32 times its expected earnings per share for FY12 and 6.60 times its expected FY13 earnings. Investors with medium to long term perspective may consider the stock on declines.

Disclaimer: The writer does not hold any share in the company