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Result Update

May 28, 2010


Rating matrix
Rating : Buy Everest Kanto Cylinders (EVEKAN)
Target : Rs 145
Target Period : 12 months Rs 131
Potential Upside : 13%
WHAT’S CHANGED…
Financial Estimates PRICE TARGET ............................................................. Changed from Rs 110 to Rs 145
Rs Crore FY09 FY10 FY11E FY12E EPS (FY11E) ................................................................. Changed from Rs. 9.1 to Rs. 9.6
Net Sales 856.6 649.7 803.7 888.5
EPS (FY12E) .......................................................................................................Rs 13.20
EBITDA 256.2 63.1 240.3 282.7
Net Profit 144.1 12.8 96.6 133.4
RATING..................................................................................................From Sell to Buy
EPS (Rs) 13.6 1.3 9.6 13.2

Valuation summary
Higher input cost drags margin…
FY09 FY10 FY11E FY12E Everest Kanto Ltd, India’s largest CNG and industrial cylinder maker,
P/E 9.6 103.1 13.7 9.9 reported its Q4FY10 results that were in line with our expectations. The
Target P/E 8.1 86.6 11.5 8.3 company’s net sales for the quarter stood at Rs 182.3 crore exhibiting
EV / EBITDA 7.4 31.2 8.1 6.6 de-growth of 7.5% over the corresponding period last year. Due to
Price to Book Value 2.1 2.1 1.8 1.5 increasing pressure on volumes, higher raw material costs and
RoNW(%) 23.3 2.0 13.2 15.5 accounting of inventory at higher cost during the quarter the EBITDA
RoCE (%) 17.3 5.0 20.6 19.6 and EBITDA margin was adversely impacted and saw a loss of Rs 10.6
crore and 0.1% during the quarter. The net profit was merely Rs 0.3
Stock data crore against Rs 27.8 crore in Q4FY09. However, the company managed
Stock Data
to pay off a loan of around Rs 37 crore during the quarter.
Market Capitalization 1,323.1
Total Debt (FY09) 622.1 ƒ Highlights of the quarter
Cash and Investments (FY09) 41.6
Everest Kanto acquired its first order from China worth $2 million against
EV 1,905.9
the supply 120 jumbo cylinders to a beverage company. The company
52 week H/L 238.1 / 107.8
has a manufacturing capacity of 2,00,000 CNG cylinders and 3,000 jumbo
Equity capital 20.2
cylinders in China.
Face value 2.0
MF Holding (%) 2.3
FII Holding (%) 19.6
Valuation
At the current price of Rs 131, the stock is trading at 13.7x its FY11E EPS
Price movement (Stock vs. Nifty) of Rs 9.6 and 9.9x its FY12E EPS of Rs 13.2. With crude prices steadily
recovering to around $74 per barrel, we believe the company would
5400 witness a revival in the demand for CNG cylinders and be able to tap new
220.0
4500 markets through its Chinese facility. Moreover, with orders flowing in
180.0 3600 from international markets like China, Pakistan and Iran, we expect the
140.0 2700 sales volumes of the company to rise and expect a simultaneous increase
1800 in the realisation in the coming quarters. We are maintaining a BUY on
100.0 900 the stock with a target price of Rs 145.
60.0 0
Exhibit 1: Performance Highlight
Apr-09

Jul-09

Nov-09
May-09

Sep-09

Jan-10

Apr-10
Mar-10

(Rs Crore) Q4FY10 Q4FY10E Q4FY09 Q3FY10 YoY(%) QoQ(%)


Net Sales 182.3 181.8 196.1 169.4 -7.0 7.7
EKC(L.H.S.) Nifty(R.H.S.)
EBITDA margin (%) -0.1 29.0 23.2 13.1 -2330bps -1318bps
Depreciation -1.6 12.2 20.5 20.0 -107.8 -108.0
Analyst’s name Interest 1.9 13.2 5.4 2.7 -64.7 -30.3
Sanjay Manyal Other Income 4.3 4.5 1.2 1.1 262.7 307.6
sanjay.manyal@icicisecurities.com Reported PAT 0.3 25.2 27.8 1.4 -98.8 -76.1
Parineeta Poddar EPS (Rs) 0.0 2.5 2.8 0.1 NA -76.1
parineeta.poddar@icicisecurities.com Source: Company, ICICIdirect.com Research

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Everest Kanto Cylinders (EVEKAN)

Result analysis

Accounting changes in depreciation


The company changed its method of accounting for depreciation on fixed
assets from the current quarter and shifted to the Straight Line Method
from the current Written Down Value (WDV) method. Consequently,
depreciation has been recalculated from the date the assets were put to
use. Hence, a sum of Rs 19.9 crore has been credited in the company’s
profit and loss account.
Volumes to support
The consolidated sales volume of the company in FY10 was 6.87 lakh
cylinders with sales of industrial and CNG cylinders being 2.69 lakh and
4.18 lakh, respectively. The sales in India for industrial cylinders were 2.67
lakh while CNG was 2.06 lakh. In Dubai alone the company sold 1.56 lakh
CNG cylinders while in China and the US it sold 0.56 lakh and 0.2 lakh,
respectively. We believe the volumes will rise to more than 8 lakh units in
the coming fiscal with sales from jumbo cylinders to be the value raiser.

Realisations expected to improve


Realisations from the different verticals for 2010 were lower at Rs 22,000
per tonne. However, with the surge in demand we believe they would rise
to Rs 26,000 per tonne this year. The realisation from sales of CNG
cylinders in India for the current year was Rs 11,000 per cylinder and Rs
4,000 per cylinder from industrial use. For China, the realisation from
jumbo cylinders stood at $12000. Dubai yielded a realisation of around Rs
10,500 per cylinder. Margins in the current year experienced a setback
due to higher inventory cost and decline in sales prices. However, we
expect it to improve in FY11.

Exhibit 2: Volume and realisation in FY10


Volume (in units) Realisation (in Rs per cylinder)
India - CNG 2,06,000 11400.0
India - Industrial 2,67,000 4000.0
Dubai - CNG 1,56,000 10500.0
China - CNG 56,000
USA - Jumbo* 2,200 12000.0
*Realisation is in dollar per cylinder
Source: Company, ICICIdirect.com Research

US plant may drag margin


The company has two plants in India operating at 100% capacity and one
plant operating at 70%. The plant in Dubai is operating at more than
100%. The US plant, however, operates at only around 40% capacity due
to sales in the region being under pressure on the back of a shortage of
orders from its domestic market. Due to lower inventory and manageable
employee cost in the US, the facility should not be too big a drag on the
company’s bottomline in the coming quarters. However, it still remains an
area of concern.

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Everest Kanto Cylinders (EVEKAN)

Revising estimates
In spite of inflow of orders from China, the losses from the US facility
would be a concern and the marginal impact of CNG price increase may
affect the topline, going forward. Hence, we have revised our estimates
with the revenue being impacted. However, the margins have been
maintained due to the control in raw material prices. According to the
order book of the company, it is believed to be sold out over the next two
quarters.

Exhibit 3: Revising estimates

Particulars FY11E FY12E


Old New % Change New
Revenue 881.7 803.7 (8.8) 888.5
EBITDA 234.9 240.3 2.3 282.7
EBITDA Margin (%) 26.6 29.9 326 bps 31.8
PAT 92.0 96.6 5.0 133.4
EPS 9.1 9.6 5.0 13.2
Source: Company, ICICIdirect.com Research

Exhibit 4: EBITDA margin trend


40.0

35.0 33.9 33.1


30.0 29.3
25.0
23.2 22.1
20.0

15.0
12.2 13.1
10.0

5.0

0.0 -0.1
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10
-5.0

Source: Company, ICICIdirect.com Research

Segmental performance
The overall sales of the company during the year witnessed a downfall.
However, the revenue from China doubled to Rs 33.9 crore against Rs
16.8 crore in FY09. US and Hungary sales were under pressure and
declined marginally by 8%. Compared to domestic sales, they were in line
with that of the previous year.

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Everest Kanto Cylinders (EVEKAN)

Valuation
At the current price of Rs 131, the stock is trading at 13.7x its FY11E EPS
of Rs 9.6 and 9.9x its FY12E EPS of Rs 13.2. With crude prices steadily
recovering to around $74 per barrel we believe the company would
witness a revival in the demand for CNG cylinders and would be able to
tap new markets through its Chinese facility. Moreover, with the orders
flowing in from international markets like China, Pakistan and Iran, we
expect the sales volumes for the company to rise and expect a
simultaneous increase in realisation in the coming quarters. We are
maintaining a BUY on the stock with a target price of Rs 145.

Exhibit 5: Valuation Matrix


Sales (Rs Sales Gr
crore) (%) EPS (Rs) EPS Gr (%) PE (x) EV/E (x) RoNW (%) RoCE (%)
FY10 649.7 -24.2 1.3 90.7 105.5 31.7 2.0 5.0
FY11E 803.7 23.7 9.6 -652.6 14.0 8.3 13.2 17.3
FY12E 888.5 10.6 13.2 -38.2 10.1 6.7 15.5 19.6
Source: Company, ICICIdirect.com Research

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Everest Kanto Cylinders (EVEKAN)

Exhibit 6: Coverage Universe


Sales (Rs
Praj Industries crore) EPS (Rs) PE (x) EV/E (x) RoNW (%) RoCE (%)
Idirect Code PRAIN CMP 79.3 FY09 771.9 7.1 13.3 10.2 32.7 39.0
Target 98.4 FY10E 699.2 7.2 13.0 10.8 27.5 33.0
MCap 1611.8 Upside 24.1% FY11E 793.0 8.2 11.4 8.9 26.4 32.8

Sales (Rs
Everest Kanto Cyliders crore) EPS (Rs) PE (x) EV/E (x) RoNW (%) RoCE (%)
Idirect Code EVEKAN CMP 131 FY10 649.7 1.3 103.1 31.2 2.0 5.0
Target 145 FY11E 803.7 9.6 13.7 8.1 13.2 17.3
MCap 1323.1 Upside 10.9% FY12E 888.5 13.2 9.9 6.6 15.5 19.6
Sales (Rs
Nitco Tiles crore) EPS (Rs) PE (x) EV/E (x) RoNW (%) RoCE (%)
Idirect Code NITTIL CMP 43 FY10 403.0 -2.7 -17.0 8.1 -1.6 -3.5
Target 40 FY11E 492.4 1.8 25.0 7.9 1.1 -0.4
MCap 148.2 Upside -7.0% FY12E 551.2 8.7 4.9 4.0 5.1 3.8

Sales (Rs
Nitin Fire Protection crore) EPS (Rs) PE (x) EV/E (x) RoNW (%) RoCE (%)
Idirect Code NITFIR CMP 396.1 FY10 315.5 34.9 11.3 7.9 23.7 20.8
Target 406 FY11E 363.6 40.9 9.7 7.3 21.9 20.1
MCap 470.1 Upside 2.5% FY12E 418.7 47.0 8.4 6.0 20.2 20.3

Source: Company, ICICIdirect.com Research

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Everest Kanto Cylinders (EVEKAN)

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;


Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,


ICICI Securities Limited,
7th Floor, Akruti Centre Point,
MIDC Main Road, Marol Naka,
Andheri (East)
Mumbai – 400 093

research@icicidirect.com

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