Citi India Conference 2008: Day 1 Takeaways
Conference takeaways — Everest Kanto spoke with investors at the Citi India
Investor Conference 2008. Here are some of the highlights of that presentation.
Robust industry outlook reiterated — Management stated that the growth outlook for CNG cylinders remains extremely robust, especially in the Middle
East and South East Asia. CNG vehicle population is expected to grow by
~800K vehicles/yr in Iran, ~250K/yr in Pakistan, and ~200K/yr (combined) in
other countries such as Thailand, Malaysia, Philippines, Indonesia, etc. The
Indian market also looks set for rapid growth with increased gas supplies from
recent discoveries resulting in ~46 cities under the CNG net over the next few
years (~10 currently). The Indian CNG vehicle population is estimated to
increase to ~1m by 2011 (~0.4m currently). In China, the number of CNG
stations is expected to increase to 1846 by 2010 from 260 currently,
contributing to rapid growth there.
Expansion plans on track — The China plant, with an initial capacity of 215K cyl/yr + a line for jumbo cylinders, is expected to go into commercial
production this month (trial production already commenced). The billet
piercing plant at Gandhidham (200K industrial cyl/yr) and the jumbo cylinder
plant at Gandhidham (5K cyl/yr) are expected to be commissioned by 3QFY09.
Construction work for the greenfield plant at Kandla SEZ (300K CNG cyl/yr) is
in progress and the plant is likely to be operational by 4QFY09.
manufacturing facilities of CP Industries (CPI), USA for a total of US$64m.
The deal is expected to be completed by Apr-08 subject to court and other
regulatory approvals. CPI manufactures large seamless vessels for the
transportation and storage of pressurized gases. The products are compliant
with various agencies and bodies such as ASME (American Society of
Mechanical Engineers), US Dept of Transportation, US govt., NASA,
Transport Canada, China govt., and ISO (recognized by all members of the
EU). Based on 2007 sales, CPI had a global market share of 43% in the
large vessel segment (total industry sales of c.US$93m).
…along with strong customer base, robust operating performance – CPI's key
customers include US and international companies such as Weldship,
Praxair, Chesterfield, BOC Air Products, Air Liquide, and JB Kelley, amongst
others. CPI has 118 employees, one manufacturing facility in US, and one
representative office in Beijing. In CY07, it had sales of US$41m (80% in
US) and EBITDA of US$9.3m (23% margin) at a (sub-optimal) capacity
utilization of 65-70%. Operating margins have increased from 15% to 23%
over the last few years driven by a better sales mix and product price hikes;
management stated that CPI has a dominant position in the industry,
enabling it to pass on input cost increases to their customers.
Everest Kanto Cylinder (EKC) is the largest domestic manufacturer of high
pressure gas cylinders used for the storage of industrial gases and CNG. While
the first manufacturing facility (at Aurangabad) was set up in collaboration with
Kanto Koatsu Yoki of Japan in 1978, subsequent facilities have been built
using in-house technology. The company currently has four manufacturing
plants — in Aurangabad, Tarapur, Gandhidham, and Dubai — that have a total
production capacity of 806,000 cylinders per year. An aggressive expansion
plan, including a greenfield plant in China, expansion of the Gandhidham
facility, and a new plant in an SEZ, would increase EKC's capacity to 2.3m
cylinders over the next 4-5 years.
We rate the stock as Buy / Medium Risk (1M) with a target price of Rs437. We
believe EKC is uniquely positioned to capture the significant growth potential of
the market for high pressure gas cylinders, driven largely by increasing CNG
penetration both domestically and abroad. Increased production from new and
existing plants amidst the current tightness in the cylinder market would see
the company deliver EPS CAGR of 47% for FY07-10, on our estimates. While
the CNG segment in India is still at a relatively nascent stage, cost economics,
improving refueling infrastructure and visibility of gas supplies should mean an
accelerating trajectory for city gas distribution and consequently CNG
penetration, thereby boosting demand for CNG cylinders. Coupled with the
robust global outlook for natural gas-powered vehicles and a sanguine IPlinked
growth outlook for industrial cylinders, we expect EKC's production to
increase ~3x over FY07-10E.
Our 12-month target price for EKC of Rs 437 is based on 22x Sep09E earnings,
representing a discount to fair-value multiples of 23-30x for its manufacturing /
engineering peers in India. We base our target multiple on mid-FY09E earnings
because we believe it better captures the contribution from China, full
utilization of Dubai, and part contribution from the newly announced
expansions. We prefer comparing EKC with capital goods companies that
manufacture industrial goods that have a similar growth profile. However, given
the difference in the nature of the business and the higher order book visibility
of these companies, we believe EKC should trade at a discount to its peers.
EKC is also a leveraged play on the alternative energy/CNG theme and one of
the most leveraged plays to the expanding city gas distribution market in India.
Our target P/E is well supported by an EPS CAGR of 47% for FY07-10E.
We assign a Medium Risk rating to EKC shares, rather than the High Risk
rating as per our quantitative risk-rating system, given the strong visibility of
growth on increasing CNG penetration. Key downside risks to our target price
include: 1) Exposure to a single supplier – EKC's reliance on Tenaris for most
of its raw materiasl makes it vulnerable to the latter's pricing power. 2) China –
a hitherto unexplored market, with the risk that EKC's entry there could incur
teething troubles. 3) Competition – low physical barriers to entry have led to
some players entering the market in the recent past, which might adversely
impact EKC's pricing power. 4) Project risk – EKC is implementing significant
expansion plans that are subject to time and cost over-runs. 5) Crude prices –
significantly lower crude prices could adversely impact CNG's strong
economics and consequently slow CNG penetration.