Asian Markets Securities is bullish on Everest Kanto Cylinder and has recommended a strong buy on the stock with 12 month target price of Rs 1400.

Asian Markets Securities report on Everest Kanto Cylinder:
 
We initiate coverage on Everest Kanto Cylinder with a ‘BUY’ call. EKC is the largest producer of high pressure gas cylinders in India & is likely to benefit largely from the ensuing CNG boom both in India & from exports markets.

Financial Performance
Over 5 years period through 2002-2007, EKC’s sales & PAT grew at healthy rate of 45% & 84% CAGR respectively. For FY2007, the company posted consolidated revenue of Rs 425 crore & PAT of Rs 71.75 crore, translating in to EPS of Rs 36.76. Exports sales account for 59% of the total sales.

Strong Order Book
The Company's present order book is around Rs 380 crore (equal to FY2007 revenues) for the manufacture of CNG and Industrial Gas Cylinders.

Expansion Plans
EKC is doubling the capacity at its Dubai plant & setting up a 200000 cylinders manufacturing plant in China. Besides it has also lined up USD 60 million expansion at Gandhidham. Post expansion, the total capacity will more than double to 1466000 cylinders by FY 2009.

Concerns
High prices of raw material & growing competition may impact the margins. If demand does not pick up at the expected rate or there is a slows down/deferment of demand for want of gas or non-existence of CNG infrastructure, there could be threat of excessive capacity build up in the wake of expansion by many players. Delay in project execution could impact EKC’s growth prospects.

CNG has tremendous growth potential
Increase in use of gas in automobiles is the key driver for EKC’s products. The world demand growth for CNG vehicles is estimated to grow at about 20% CAGR. Most of this growth will be in the emerging markets. The demand for CNG cylinders in Asian region is expected to increase at an average annual rate of about 26% during 2006-14.

Scope for Better Valuation
Based on the massive expansion plans & strong earnings visibility, we believe, EKC to achieve 48% CAGR on topline & 44% CAGR on bottom line during FY2007-09. Our EPS target for FY2008 & FY2009 is at Rs 47.54 & Rs 70.18 respectively. At Rs 961.45, the stock trades 20.22x & 13.70x on PER basis & 10.79 & 7.82 on EV / EBIDTA basis respectively for FY2008 & FY2009. Valuing 20x FY2009 earnings, we set one year price target of Rs 1400 on the stock & rate EKC as ‘STRONG BUY’.