Everest Kanto Cylinders Ltd. 4QFY11 & FY11 Results Update

EKCL's FY11 results were ahead of consensus estimates (company beat its earnings guidance of Rs 5.4 by 16%), its revenue increased by 19 % YoY due to higher turnover from Dubai subsidiary owing to robust demand scenario, EBITDA margins increased sharply to 17.6% for FY11 from 9.6% in FY10 due to superior performance from the Dubai subsidiary (running at 120% capacity utilization), reduction in Raw material cost (due to removal of previously held high cost inventory).

Consequently, the reported PAT was also higher at Rs 702 mn with a YoY margin increase of 700 bps at 9.0%. PAT margins increased due to two primary reasons:

• Reduction in interest cost outgo as company's Net Debt decreased from Rs 4.4bn in FY10 to Rs 3.2bn in FY11, thereby also improving Balance Sheet quality.

• Reduction in Tax provisions; despite Indian subsidiary providing for full taxes, higher contribution from Dubai and losses made at US & China Subsidiaries kept the cumulative Tax outgo low.

Segmental Performance:

Dubai plant displayed superlative performance on both revenue as well as margin terms, while Indian plant remained flattish on sales term but improved PAT margins by 400 bps YoY owing to better capacity utilizations. Though China & US plant still remain a drag, management has indicated that they will turn around in FY12 as demand has picked up in US & they have $ 30mn worth orders (Jumbo Cylinders) which will keep there US plants occupied for next 7-8 months. In China, capacity utilization is expected to improve (FY11 capacity utilization at 34%)
with increasing demand in the country as well as opening up of office in Thailand to cater to local demand. Management expects output to grow by 50% from China in FY12 over FY11.

The growth in India was led by better off-take in CNG cylinders (up 40.9% YoY) led by revival in demand form OEM's (EKC now has 80% market share of OEM's against 65% in last year). For the full year FY11, the consolidated volumes grew 27.5% YoY to 876, 000 cylinders mainly driven by India (up 21% YoY) to 572,000 cylinders and UAE (up 49.2% YoY) to 234,000 cylinders. The Dubai Plant is expected to continue its superlative performance; management is also increasing its capacity by 50% in FY12 with a cap-ex of $ 20mn (to be funded by internal accrual & debt). The increased capacity will start adding to revenue from 4QFY12 onwards and is expected to boost the annual volume growth of Dubai plant by
25% in FY12E.

Other Highlights:

Average realization/Cylinder have been better since Q2FY11, still due to decline in same in Q1FY11, the FY11 annual average realization/Cylinder came in lower at Rs 8800 against Rs 9453 in FY10. Though, a positive sign was that EBITDA/Cylinder has constantly been in a decent range, EBITDA/Cylinder for FY11 stood at Rs 1574 which is almost twice of that in FY10.Also, concerns with respect to high inventory have been allayed with sharp reduction in inventory days to 142 in FY11 from 231 in FY10.

Management Guidance:

Management has given guidance of more then 20% EBITDA margins for FY12E & increases it further ahead in FY13E. They steered clear of any upfront guidance's on sales front, though they gave individual plant based guidance's:

• China plant is expected to grow by 50% in volume terms and management expects to break even there in FY12E.

• US plant is also expected to break even in FY12E

• Indian plant is expected to grow by 15 % for this year and increase momentum in FY13E, Billet based plants are expected to be operational in Q1FY12E & plates based plants will be operational from Q3FY12E, this will increase EBIT margins in Indian margins from Q3FY12 onwards as raw material cost will decrease further.

• Dubai plant is increasing its capacity by 50%, same is expected to kick-in in the last quarter of FY12, and it is also expected to grow sales volume by 25% this year with sustained margins.

Putting together all the above guidance's, EKCL is expected to grow by more then 20% in both margin as well sales volume terms. Though realization may be down in Q1FY12E due to lower raw material cost, but improvement in the same in rest three quarters will give sales growth of around 15-20%. Due to better operating parameters earnings growth will beat sales growth by 300-400 bps.

Valuation & Viewpoint:

Owing to improved demand scenario in Industrial Cylinder (growing at 15% per year in India) & CNG cylinders (due to increasing OEM's interest &
rising conventional fuel costs), improving off-take of Jumbo Cylinders in US & China, visible sales growth in Dubai Plant with sustained margins, improving balance sheets quality due to decreasing debt & inventory days, and constantly improving plant capacity utilizations & hence margins, EKC looks well set to achieve its growth targets. Although a earnings growth of 18-24% is on the cards for next two years, decreased RoE's
& ROCE's (due to ongoing expansion in plants) might not allow the stock to garner its historical premium of more then 20X PE multiples.
Consensus FY12 & FY13 EPS target for EKCL are Rs 8.3 & 10, at CMP of Rs 90, the stock is trading at 13.6X its FY11 EPS, 10.8X its FY12E consensus EPS & 9X its FY13E consensus EPS. We think that on the conservative side, even ascribing a PE multiple of 11X FY13E
EPS of 10, stock looks attractive at current valuations.