Everest Kanto Cylinder (EKC) is the largest domestic manufacturer of high pressure gas cylinders used for the storage of industrial gases and compressed natural gas (CNG). High pressure gas cylinders are used to store medical gases, CNG for vehicles, and fire fighting gases. The cylinders have usage in welding, beverage, defense and space applications. EKC also designs, fabricates, manifolds and tests CNG cylinder cascades for the storage and transportation of CNG. As margin and growth prospects are much higher in the CNG segment (compared with other segments), the company is now fully focused on capitalising on the opportunity in this segment.
EKC currently has four manufacturing plants, one each in Aurangabad, Tarapur, Gandhidham, and Dubai. The total production capacity is 806,000 cylinders per year. An aggressive expansion plan, including a greenfield plant in China, expansion of the Gandhidham (Gujarat) facility, and a new plant in an special economic zone (SEZ), would increase EKC’s capacity to 2.3 million cylinders over the next four-five years.
With existing capacity running close to 100%, EKC has added new capacities at strategic locations, targeting high growth/high realisation domestic as well as international markets (Dubai to serve the Middle East and Pakistan and China for China).
EKC started production at its China facility in May 2008. Phase I of the China facility will have an installed capacity of 2,00,000 cylinders per annum. The facility will be used mainly to produce CNG cylinders. Currently, China is laying an east-west coast connective pipeline. Also, the CNG stations will get increased from the present 300 stations to 4,000 stations by 2012. The company has plans to raise the installed capacity in China to 10 lakh cylinders in various phases in the next three years.
EKC acquired for US $66.3million the assets of CPI Industries in the US in April 2008. CPI is a major global manufacturer of large, seamless, high-pressure cylinders (jumbo cylinders of 2,000 litres and higher capacity) for storage and transportation of pressurised gases with a capacity of 6,000 cylinders per annum. The management is confident that CPI Industries will also add to its top line as well as bottom line.
EKC has diversified its sourcing strategy by using alternate manufacturing processes (using billets instead of tubes), thus reducing supplier risk (biggest supplier Tenaris will account for about 50% of materials compared with more than 90% a year ago).
City gas distribution and mandatory conversion of public vehicles is currently a focus area for the Central government, indicating a potential high-growth opportunity. The Union government has indicated 28 cities for this conversion. So far, only Delhi has fully implemented the mandate. The overhang on this segment remains in the form of lack of gas availability as well as in-place distribution infrastructure. Improvement is expected on both of these fronts. Reliance Industries is likely to start the supply of gas from the KG Basin from September 2008.
With crude oil recording sharp rises, various countries are promoting use of gas as a fuel, wherever available. Iran, with surplus gas reserves, is promoting CNG as a fuel. Overall, EKC expects demand of around 15 lakh CNG cylinders by 2012 from Iran, one of the major customers of the company. So, the company is fast building up capacities to grasp the opportunity.
We expect EKC to register EPS of Rs 16.1 in FY 2009. The share price trades at Rs 259. P/E works out to just 16.
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