Investors with a medium-term perspective can consider booking profits on at least a part of their holdings in the stock of Everest Kanto Cylinders (EKC), a leading player in the manufacture of seamless steel gas cylinders. At current market price, the stock trades about 24 times its likely FY08 earnings per share. While we remain optimistic on the growth prospects given the company's market presence and increasing capacities, the positives already appear to be factored into the current stock price. Besides, given EKC's recent announcement of a Rs 240-crore expenditure for further expansion (likely to be funded through equity-linked instruments), equity dilution also remains a risk to immediate earnings.
Given the robust demand scenario for CNG cylinders, EKC is set to benefit from the increase in capacities through both greenfield and brownfield expansion. Contribution from exports is also slated to increase given EKC's presence in Dubai and China. While the Dubai plant is expected to commence production from the current quarter itself, the China plant is likely to start production from the third quarter of FY08 only. However, since the full impact of the expansion is likely to be derived from FY09 only, earnings expansion in the current fiscal year may not be at levels impounded by the stock's valuation.
For the financial year 2007, EKC registered an 80 per cent growth in net sales and 114 per cent increase in earnings on a consolidated basis. While margins improved on the back of higher realisations and utilisation, the latest quarter saw a decline in margins in the Indian operations due to a change in the sales mix. Any domestic acquisition for capacity expansion, rise in oil prices or a change in regulations by the Union Government expediting the roll-out of CNG-run vehicles are likely to remain the primary risks to our recommendation.