FIRST SIGN OF TURNAROUND Everest Kanto Cylinder Ltd (EKC) delivered encouraging Q2FY11 result post disappointment from last six quarters. Net sales grew by 40.4% YoY to Rs2.0bn with OPM expansion of
851bps to 19.7%. Coupled with forex gain of Rs99mn, the company reported net profit of Rs247mn (adj net profit Rs180mn) against loss of Rs55mn (adjusted was Rs46mn).
India and Dubai operations driving growth: Indian operation registered robust growth of +26% YoY in revenues with margins of 14.5% against 3.0%. However, there was a one time order of Rs250mn for jumbo cylinders which are non-recurring. Sales from Dubai facility doubled YoY to 112k cylinder in H1FY11. China and USA remain a concern:
Volumes from both China and US facilities dropped by ~50% YoY resulting in ~32% de-growth in topline and negative contribution at PBIT levels. Outlook : EKC is done away with most of the high cost inventory and has commissioned Gandhidham unit that will manufacture cylinders using billets. Post commissioning of Kandla unit (end of FY11), where plate will be used as raw material, EKC should be in a position to expand its market share. Growth is expected to continue from Dubai and Indian operations. Concerns: Impact of economic slow down is still prevalent in the USA where EKC manufactures high-end jumbo cylinders. Crude prices drifting ~USD75/bbl is resulting in countries delaying their programme to shift to CNG from conventional fuels. Hence we believe, profitability is still some quarters away from the Chinese facility.
We maintain our earnings estimates for FY11 and FY12. We consider Q2FY11 results as the first sign of turnaround however, the next couple of quarters should define the future in terms of margins and growth. At the CMP of Rs131, EKC trades at a P/E of 24.5x & 13.2x and EV/EBITDA of 12.7x & 7.9x for FY11E & FY12E estimates respectively. We maintain our ‘HOLD’ recommendation with an increased target price of Rs139 rolling forward to PER of
14x FY12 estimates