Investors with a long-term perspective can hold on to the stock of Everest Kanto Cylinders (EKC), a major player in the manufacture of seamless steel gas cylinders. Despite the fact that the stock has appreciated considerably after its debut listing last year, we believe there is room for growth in the long term. The market for compressed natural gas (CNG) vehicles is set to expand, and EKC will be among the front-runners to benefit from this trend. Its presence in Dubai and China and capacity additions give fillip to the company's growth prospects. The stock trades at about at about 15 times the expected per-share earnings for FY-2008. Corrections, if any, may be used as good entry opportunities for fresh exposures.
Investment Rationale
The demand for CNG vehicles is expected to grow given the firm oil prices, lower running cost and rising environmental concerns. The Supreme Court's decision mandating the use of CNG as auto fuel for heavy vehicles in New Delhi has created a demand for such cylinders by both OEMs (original equipment manufacturers) and retrofitters (conversion agents). The court has also mandated that vehicles in 28 highly polluted cities switch to CNG. With a market share of more than 80 per cent, EKC stands to benefit the most from this shift. The CNG segment, thus, would prove to be a major revenue driver. However, non-availability of proper CNG infrastructure in cities may prove a major drawback.
EKC also manufactures industrial, medical and beverage cylinders. The industrial segment is likely to witness steady growth driven by an upsurge in industrial capex.
The use of piped gas in the residential and industrial segments, if and when it takes off, could contain the growth in these segments. However, this is unlikely to be of concern in the medium term.
Export initiatives
The CNG segment is the fastest growing market both in India and abroad. EKC's manufacturing plant in Dubai caters to demand from Malaysia, Thailand, several Gulf countries and CIS (Commonwealth of Independent States) nations, besides Pakistan (EKC has a market share of about 65 per cent in Pakistan). It has also set up a manufacturing plant in China through a 100 per cent subsidiary. The Chinese market is likely to be the growth driver, given that the country is witnessing a boom in CNG vehicles.
Further, EKC's effort to consciously target gas-rich nations is likely pay off, as the number of players in the export market is limited.
Financials
For the quarter ended September, EKC recorded a 74 per cent increase in net sales on a year-on-year basis. Its net profit grew 46 per cent despite an increase in expenditure. This was mainly due to better realisations for its products, reflecting the pricing power that EKC enjoys over its peers. Moreover, a rising demand vis-à-vis limited supply scenario also augurs well for the company.
Concerns
Specialised seamless tubes, a major raw material for EKC, is difficult to source as only a few suppliers in the world produce it in large volumes. Cylinder manufacturers, in comparison to the oil-rig applications, do not enjoy much bargaining power with the suppliers. Thus any rise in steel prices is likely to be passed on to them. Hence, EKC's capability in sourcing raw materials appears crucial.
In addition to this, any fade out in the market appeal for CNG will pose a risk to the revenue stream of the company. Delays in expansion plans, slowdown in the growth of economy or a fall in oil prices are other risks to our recommendation.