CRISIL maintains fundamental grade of 3/5 to Everest Kanto

Everest Kanto Cylinder Ltd (Everest Kanto) Q3FY12 performance was disappointing, with a 27% y-o-y decline in revenues and significant margin contraction. Offtake of cylinders in its India market was impacted by the slower-than-expected traction in orders for CNG cylinders from OEMs due to policy logjam surrounding the number of cities to be covered under City Gas Distribution. The ongoing political turmoil in Iran (the key market for its Dubai operations) stalled orders from key clients which affected sales. Consequently, the share of Dubai in overall revenues declined to 19% from 39% in Q3FY11. While top-line received some support from the US and China markets, operations in both countries continued to be loss making. Our fundamental view on the company is currently under review. We will lower our earnings estimates post interaction with the management. For now, we maintain our fundamental grade of 3/5.

Q3FY12 result analysis
• Revenues declined by 27% y-o-y to Rs 1,451 mn. Revenues from India declined 26% y-o-y to Rs 600 mn and from Dubai by 64% y-o-y to Rs 282 mn. The decline was partially offset by US revenue increasing by 40% y-o-y to Rs 395 mn and that from China by 15% to Rs 176 mn.

• EBITDA declined 59% to Rs 154 mn due to lower sales and lower operating profitability (due to higher costs). EBITDA margin declined 844 bps to 10.6% from 19% in Q3FY11. At the EBIT level, we were expecting the China and US divisions to be loss-making; but the Indian operations too posted losses, contrary to our expectations.

• The company was in the red with net loss of Rs 221 mn. Apart from lower operating profitability, the loss was compounded by the restating of the company’s FCCB of US$35mn due to rupee depreciation (the FCCBs were issued in FY08; due for redemption in FY13). Adjusted for this, the company recorded a profit of Rs 46 mn.

Valuation: Current market price has strong upside
We continue to use the discounted cash flow method to value Everest Kanto. Our fair value is currently under review.

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