CRISIL maintains Everest Kanto`s fair value to Rs 53

Everest Kanto manufactures high-pressure seamless CNG and industrial cylinders. Challenges such as expanded cylinder capacity in India amidst sluggish demand, sanctions on Iran (a key market for Dubai operations) and competitive pressures in China have put the company in a tight spot. However, we expect the situation to improve given CNG’s competitive advantage as a cheaper fuel and increase in the number of gas stations, especially in India and the USA. Hence, we maintain our fundamental grade of 3/5 but remain cautious in the short term.

Surrounded by challenges...
Everest Kanto is bracing itself up amidst sluggish demand along with international challenges in its key market--Iran. a) Volumes from India have dropped by 9% in FY12 due to slower coverage of cities under City Gas Distribution (CGD). With two new facilities in Kandla (operating on the steel plate deep drawing process), and Gandhidham (operating on the billet piercing process), the demand-supply dynamics will worsen. b) Historically, sales from Dubai were mainly to Iran, which is currently witnessing sanctions-led political instability leading to nil sales to that region from Q2FY12 onwards. c) Chinese operations continue to be lossmaking due to sluggish growth. Also, Everest Kanto is saddled with high inventory days, which exposes it to price volatility and interest charges on working capital.

... However, CNG cylinder demand will improve from hereon
We believe the long-term growth prospects of CNG usage are intact given the advantages of lower running cost and clean fuel. We expect improvement in CNG infrastructure in India and also global demand for CNG to drive the demand for CNG cylinders. Being a market leader, we expect Everest Kanto to capitalise on demand growth. Further, with the US government’s thrust on infrastructure and the recovery in industrial activity (due to relatively low shale gas prices), the company’s US operations are expected to improve from FY12 onwards.

Revenues to grow at a two-year CAGR of 8%, EBITDA margin to remain at 15-16%
We expect revenues to grow at a two-year CAGR of 8% to Rs 7.9 bn in FY14. EBITDA margin is expected to improve to 16% in FY14 due to a pick-up in demand. PAT is expected to increase to Rs 326 mn in FY14 from a loss of Rs 149 mn in FY12. High working capital requirement, flat operating margin and low utilisation levels will keep the return ratio abysmally low for the next two years. Given manageable gearing levels, we expect FCCB redemption to be refinanced through ECB/bank loans.

Valuations the current market price has strong upside
CRISIL Research continues to use the discounted cash flow method to value Everest Kanto and maintains the fair value of Rs 53 per share. The fair value translates to a valuation grade of 5/5, indicating strong upside from the current market price.

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