Everest Kanto

Investors with a long-term perspective can consider accumulating the stock of Everest Kanto Cylinder (EKC), on declines linked to the broad markets. Attractive valuations apart, revenue potential from the commencement of the KG Basin gas supply and the company’s planned entry into city gas distribution in Kolkata underscore our recommendation.

While the stock price had corrected significantly in the last couple of months on concerns that falling crude oil prices and slackening demand in the auto sector could curb demand for its CNG cylinders, such concerns appear factored into the stock’s rock-bottom valuations. At the current market price of Rs 103, the stock trades at about 6 times its estimated FY10 per share earnings, using very conservative growth estimates. However, there is no denying that EKC will face the heat from the economic downturn — the company already has had order cancellations due to the slowdown in commercial vehicle sales. But the demand for CNG cylinders over the long term would still receive support from its being a cost-effective option; countries are likely to continue to invest in ensuring their energy security over the next few years.

Despite the slowdown in commercial vehicle sales, the company has received orders from Tata Motors and Ashok Leyland for buses in Delhi, corroborating the potential of CNG as fuel. In the near term, the availability of surplus gas supply for transportation from the KG Basin holds the key to the company’s prospects. While EKC is yet to strike a formal deal, that it has over 80 per cent share of the domestic market puts it in a strong position to tap this business opportunity. This will also help the company improve its product mix, as gas transportation will entail the use of industrial as well as high-margin jumbo cylinders. EKC had earlier announced its planned entry into city gas distribution in Kolkata by way of a joint venture with a local company with gas distribution rights, and this also presents a diversification opportunity.

For the quarter-ended December 2008, while EKC’s sales continued to expand strongly (99 per cent growth year-on-year), much of this was driven by the company’s UAE and US operations. Net profits grew 30 per cent, on the back of operating profit margins of about 28 per cent. Driven by the decline in demand from India and China, the company has deferred the second phase of its expansion for its Chinese operations. While changing product mix may help it sustain margins at current levels, earnings may continue to lag topline growth, due to the higher depreciation and interest burden. Earnings registered a growth of 30 per cent year-on-year; it, however, fell 11 per cent sequentially.