Research Report on Cng Industry in Pakistan by hxa11663

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									                                                                                                                               Industrial Goods

CMP Rs. 129                                                       Everest Kanto Cylinder Limited
June 18, 2010                                                     Company Overview
BSE Code                                               532684
BSE ID                                                    EKC
                                                                  Everest Kanto is the largest CNG and industrial cylinder manufacturer in India.
High/Low 1Y (Rs.)                                     222 / 108   With more than three decades of expertise, the company has significant
Avg. vol (3m)                                          420,927    presence in South Asia and Middle East. With increasing cost of conventional
Market Cap (Rs Cr)                                      1,304     fuel, better gas distribution facilities and the government’s initiative in
Net IB Debt (Rs Cr)                                       437     making CNG usage mandatory as an alternative fuel, the demand for CNG
Enterprise value(Rs Cr)                                 1,741     vehicles is growing; EKC is well placed to benefit from such developments in
                                                                  India and abroad.
Shareholding %                            Dec-09       Mar-10
                                                                  Key Business Highlights
Promoters                                  59.78         59.82
MFs/ Fis/ Banks                             2.35          2.20    Leader in CNG cylinder market in India, good presence in Pakistan and Iran
FIIs                                        0.07          0.10    With nearly 80 per cent market share, EKC is the market leader in the CNG
Public & Others                             37.8         37.88    cylinder market in India. Moreover, it enjoys a market share of nearly 40 per
                                                                  cent in the overall cylinder market in Pakistan. OEMs in Iran contribute nearly
Stock Chart ( Relative to Sensex)                                 90 per cent of EKC’s Iran revenues.
                                                                  Capacity expansion to pilot growth
  125.0                                                           EKC has a current capacity of producing 1,012,000 cylinders annually,
  100.0                                                           including a capacity of producing 6,000 jumbo cylinders, which makes it one
                                                                  of the leading high pressure gas cylinder manufacturers in the world. EKC’s
                                                                  new plant in Kandla SEZ will bring on stream 300,000 CNG cylinders from
   50.0                                                           2QFY11. The plant is aimed at venturing into the market for light weight CNG
       18-Jun-09            18-Dec-09            18-Jun-10        cylinders mainly required by OEMs in Europe and Asia. As growth of
                      EKC               Sensex                    CNG/NGVs worldwide is poised to reach 50 million by 2020 from current
                                                                  level of 11.3 million, EKC’s expansion strategy augurs well to the anticipated
Stock Perfm.(%)                  1M          6M            1Yr    surge in demand.
Absolute                       (8.4)        (8.5)        (31.3)   Plants located at SEZs benefit from duty exemptions
Rel. to Sensex                (15.5)       (13.6)        (54.5)
                                                                  EKC’s plants at Kandla and China (Tianjin) being located in SEZs, are exempt
                                                                  from paying taxes and duties in the respective locations. EKC’s China plants
Financials (Rs.Cr)             FY08        FY09          FY10
Revenue                        531          861           657
                                                                  avail a 100 per cent income tax benefit for the first two years, followed by 50
y-o-y                         24.9%       62.1%         -23.7%
                                                                  per cent benefits for the subsequent three years of operations. Moreover,
EBITDA                         160          270            63     the Gandhidham plant (which produces 31.5 per cent of total cylinder
y-o-y                         30.1%       31.4%           9.6%    output) enjoys a five-year excise exemption and ten year sales tax
PAT                            104          138            42     exemption. The fiscal incentives enable EKC to achieve better margins.
EPS (Dil.)                     10.5        13.6            4.1    Cheaper raw materials will improve performance
y-o-y                         35.1%       29.0%         -69.9%
                                                                  Currently EKC uses seamless tubes as raw material which is imported from
EBITDA Margin                 30.1%       31.4%           9.6%
                                                                  Tenaris of Italy (~65 per cent of total raw material purchases). The company
PAT Margin                    20.3%       16.7%           2.0%
                                                                  is in the process of using alternate manufacturing processes which will use
D/E(x)                         0.50        1.00           0.81
P/E(x)                         12.2x        9.5x         31.4x
                                                                  Billets (costs 15-20 per cent lesser) and steel plates (provides light weight to
EV/EBITDA(x)                   10.9x        6.4x         27.6x
                                                                  cylinders) in order to reduce higher dependency on imports and reduce cost
ROCE                          19.3%       16.2%           0.5%    of raw materials.
ROE                           21.7%       22.2%           6.7%    Key Risks
Financial Year ends at March 31                                          High dependency on single source for raw materials
Qtry Fin             06/09      09/09       12/09        03/10
                                                                         Competition from domestic players may restrict pricing power
Revenue               154         146        170          187
PAT                    17           (5)          2          29
                                                                         Higher commodity prices may put margin pressure
EPS                    1.7        (0.5)       0.2          2.8    Valuations
                                                                  The stock is currently trading at a P/E multiple of 31.4x on its FY10 EPS of Rs.
All figures in Rs. crores except for per share data               4.1 and 27.6x EV/EBITDA multiple based on FY10 EBITDA of Rs.63 crores.
                                                                                            Everest Kanto Cylinder Limited

EKC, with a widespread
                            Business Description
global         presence,    Incorporated in June, 1978, Everest Kanto Cylinder Limted (EKC) manufactures a wide
manufactures and sells      range of cylinders used for industrial & medical applications, fire fighting equipments,
cylinders catering to a     beverage industry, accumulator shells, aerospace, scientific research, CNG-NGV cylinders
wide range of industries    for automobiles etc. Its key product categories include:

                                     •    High Pressure Seamless Industrial Cylinders
                                     •    High Pressure Seamless CNG Cylinders
                                     •    High Pressure Seamless CNG Cylinders Cascades

                             EKC’s key products and user segments
                             Category            Application
                             Auto application    CNG vehicles
                             Industrial          Inert Gas, gases for Metal, Steel, Fabrication, Divers, Mountaineers
                             Healthcare              Respiratory aid in hospitals, MRI's, Bath therapy, Cryosurgery
                             Beverages               Food freezing, Beverage Industry, Bottling Process.
                             Fire Fighting           Fire Fighting equipments in all Industrial and domestic applications
                             Cascades                Transportation and Storage of CNG and Industrial gases
                            Source: Company

                            EKC supplies its CNG cylinders to OEMs and retrofitters, while industrial cylinders are sold
EKC has a market share      directly to the end users. The company sells its CNG cylinders to various OEMs and
of nearly 80 per cent in    retrofitters in India, China, Iran, Bangladesh, Indonesia and other CIS countries. The
the OEM market in           OEMs account for nearly 60 per cent of CNG sales in India while the rest is contributed by
India, similarly it has a   retrofitters. EKC ‘s share in overall cylinder market in Pakistan was about 40 per cent in
strong presence in          2007-08. In Iran, the company’s sales constituted 90 per cent of cylinder sales to OEMs in
Bangladesh and Iran
                            FY10. In the industrial segment, the company has a strong presence in the US after its
                            acquisition of CPI.

                            Corporate Structure

                            EKC has two wholly owned subsidiares, viz., EKC International FZE in Dubai, UAE and EKC
EKC      acquired   CP
                            Industries (Tianjin) Co. Ltd. in People’s Republic of China and two step down wholly
Industries of USA, a
                            owned subsidiary companies, viz. EKC Hungary Kft in Hungary and CP Industries Holdings,
world         renowned
company in Industrial       Inc. in USA. CPI is closely associated with the US Navy for manufacturing of high-pressure
cylinder segment            seamless flasks. These flasks, manufactured in accordance with Military Standard MIL-F-
                            22606C, are utilized in critical shipboard systems.

Through acquisition of      In April 2009, EKC acquired a majority stake (72.65 per cent) in Calcutta Compressions &
CC&L, EKC will gradually    Liquefaction Engineering Private Limited (CC&L), a Kolkata based company . CC&L has a
foray       into      gas   subsisting agreement with Oil & Natural Gas Corporation Limited (ONGC) for purchase of
distribution business
                            Coal Bed Methane Gas from ONGC’s gas fields located in Jharkhand.

                                                                                          Everest Kanto Cylinder Limited

                            Revenue Composition
Gradual shift towards
value-added products        The company organizes its sales into one segment i.e. Cylinders, segments revenue in
such as CNG cylinders,      terms of products is not available. However, as disclosed by the company, the company is
cascades and jumbo          gradually shifting its product mix towards high value-added products such as CNG
cylinders.                  cylinders, cascades and jumbo cylinders.

                             EKC’s product-wise revenue distribution

                                                                 Total FY10 revenue
                                                                 (Rs. 649.7 Crores)

                                                                                                Jumbo cylinders and
                                     CNG Cylinders               Industrial Cylinders
                               (Contributes nearly 65-70%    (Contributes nearly 15-20%
                                                                                             (Contributes nearly 15-20%
                                    to total revenue)             to total revenue)
                                                                                                  to total revenue)

                            Source: Company

                            Geographic segment
India and UAE markets
contribute 73 per cent to   In terms of geographical segments India and UAE contribute nearly 73 per cent of total
total revenue in FY10       revenue in FY10 which came down from 80 per cent in FY09 mainly due to a sharp
                            decline in revenue from Iran. The geographical reach of these segments are very wide
                            which provides it the highest revenue visibility. Business in China has recently kicked off
                                                                                                                      Everest Kanto Cylinder Limited

                       as the company commissioned its plant in China in May 2008, with a manufacturing
                       capacity of 210,000 cylinders. Hungary and USA have started contributing to the top-line
                       since FY09.

                       Break up FY09 Revenue                         Geography-wise performance (Revenue & Growth)

                                 USA &                                      1000                                      51.6%
                                Hungary                                                             24.5%                                            50.0%
                                  21%                                             800

                                                                       Rs in Crores

                                                                                                                                                              Growth (%)
                                                                                  600               24.3%                                            10.0%
                                                            India                 400                                                    -0.8%
                         5%                                  49%                                                                        -56.4%       -30.0%

                         UAE                                                              0                                                          -70.0%
                         25%                                                                        FY08              FY09              FY10
                                                                                                      USA & Hungary                China
                                                                                                      UAE                          India
                                                                                                      India -YoY growth            UAE -YoY growth

                       Source: Company

In FY 10 revenue       In FY10, revenue in India declined marginally; however, UAE witnessed a decline of 56.4
from India and UAE     per cent, mainly due to lack of orders from Iran. Revenue in China doubled from Rs.
declined         and
                       16.74 crores in FY09 to Rs. 33.91 crores in FY10.
doubled in China

                       Manufacturing facilities
                       EKC’s manufacturing plants are spread across four countries including India. In India its
                       plants are located in Aurangabad, Tarapur and Gandhidham. In India, it caters to the
                       entire requirement of CNG and industrial cylinders from these plants. A part of its
                       supplies to Iran and Pakistan are also fed from its Indian plants.

                                                                    Installed capacity                                    Production        Utilization (%)
                        Plant             Product
                        Location          range     Industrial      CNG                       Jumbo           Total          2008-09       FY10      FY09
                        Aurangabad        21-Jan    110,000                           -              -      110,000           94,414       86%       106%
                        Tarapur           21-280     80,000         80,000                           -      160,000           179,570      112%      112%
                        Dubai             21-280            -       196,000                          -      196,000           154,685      79%       114%
                                          1-280 &
                        Gandhidham        above     140,000         200,000                    2000         342,000           216,428      63%        52%
                                          1-280 &
                        China             above                     200,000                   1,000         201,000           41,216       21%        29%
                        USA               Jumbo             -                         -       3,000          3,000             1,202       40%        51%
                        Total                       330,000         676,000                   6,000         1,012,000
                       Source: Company

                       Currently all the plants use seamless tubes as raw material which is sourced from Tenaris
Change    in   raw     of Italy and, other vendors located in Japan and China. However, its Gandhidham plant
material to reduce     will change its raw material from seamless tubes to steel billets as commercial
                       production at its billet piercing plant commences from 1QFY11. The usage of steel billets
                       makes raw material cost cheaper by around 15-20 per cent as compared to seamless
                       tubes. Moreover, the shift will help EKC reduce its dependency on Tenaris. Furthermore,
                       the company has been expanding its CNG cylinder capacity, and is in the process of
                                                                                     Everest Kanto Cylinder Limited

                         setting up a plant in the Kandla SEZ, with an initial capacity of 300,000 cylinders. The
                         capacity can be expanded further upto 500, 000 annually. The company expects the SEZ
                         plant to be functional by 2QFY11. The output from the plant is expected to enhace the
                         bottom line as the company will gain tax benefits due its location within the SEZ.

                         The plant in China is located in the SEZ of Tianjin which provides two distinct benefits in
                         terms of lower raw material prices (lower by nearly 15 per cent) and 100 per cent tax
                         benefit for the initial two years of operation.

                         Growth Drivers
                                Growth in CNG vehicles will drive demand for CNG cylinders: Acceptability of
Growth in CNG vehicles           CNG vehicles is on the rise as fuel prices continue to be dearer and, running cost
will drive demand for            of CNG vehicles is lower by nearly 50 per cent when compared to a vehicle
CNG cylinders                    running on conventional fuel. Although India is ranked fifth in terms of Natural
                                 Gas Vehicle (NGV) count, the vehicle penetration in India is far behind many
                                 Asian countries. According to Petroleum & Natural Gas Regulatory Board
                                 (PNGRB), India is set to see 3.3 millions NGVs by 2015 from the current level of
                                 800,000 vehicles. Improved infrastructure for transportation of natural gas,
                                 growth in refilling stations and the government’s focus on promoting CNG for a
                                 clean environment, along with greater acceptability by end users are key drivers
                                 for growth of CNG vehicles in India. A conservative estimate by PNGRB suggests
                                 that around Rs. 760 billion to Rs. 840 billion will be invested in petroleum and
                                 natural gas infrastructure in the next five years in India.
                                Government initiatives, growth in gas infrastructure in China drives demand for
                                 CNG cylinders in China: Chinese government’s initiative to make CNG mandatory
                                 as per Clean Vehicle Act 1999 compelled many auto manufacturers to develop
                                 and market CNG vehicles. By the end of 2009, the NGV population in the Clean
                                 Vehicle Promotion Cities of China increased to 392,532 units in more than 80
                                 cities. The total number of natural gas filling stations was 1,339 as per October
                                 2009, a more than three fold increase from 400 stations of 2008.
                                Strong presence in Iran’s CNG segment: 90 per cent of EKC’s sales in Iran come
Strong growth in Iran            from OEMs. According to NGV Communications Group, NGV vehicles in Iran
driven      by  better           which accounts for nearly 16 per cent of total NGVs in the world, has multiplied
infrastructure                   by more than 5.5 times from 315,000 in 2007 to 1,734,431 at the end of 2009.
                                 Iran is expected to invest more than USD 3 billion in order to substitute natural
                                 gas for gasoline as transportation fuel which will result in an average of more
                                 than 6.3 mcm/day of natural gas consumption by vehicles.
                                Growth of IIP shows demand from the Industrial sector is up: IIP index has
                                 shown consistent double-digit growth since November 2009. Government
                                 investment in infrastructure sector coupled with private sector participation can
                                 generate growth opportunities for the industrial cylinder segment domestically.
                                Robust reputation with OEMs improves acceptability in the retrofitting
                                 segment as well: Being the market leader in the CNG cylinder segment the
                                 company has a strong presence in the retrofitting segment as well.
                                Close tie up with leading automobile players: EKC caters to the entire
                                 requirement of CNG cylinders of all the major automobile companies in India.
                                 Increased production driven by higher demand for CNG vehicles is one of the key
                                 growth drivers for EKC.

                                                                                    Everest Kanto Cylinder Limited

                         New Business Initiatives
CNG facility at Kandla         New facility in Kandla SEZ for CNG cylinders: EKC’s new set up in Kandla SEZ is
SEZ to explore export           expected to meet export potential from US and European countries. The plant
opportunities                   will use steel plates as raw material, which results in lightweight of cylinders.
                               Billet piercing plant at Gandhidham : EKC’s billet piercing plant at Gandhidham
                                which will be operational from 1QFY11 is aimed at reducing the import
                                dependency of raw material requirement, reduction of overall raw material cost
                                and squeezing the inventory cycle. As seamless tubes are imported from various
                                locations such as Italy, Japan and China, the prices are subject to many variables.
                                The company maintains a raw material inventory for 3-4 months whereas prices
                                are fixed 3 months in advance. Thus, the newly implemented billet piercing
                                technology is expected to improve the company’s performance.
                               Acquisition of CC&L to help in forward integration: EKC acquired CC&L which is
                                expected to receive gas from the Jaria fields of ONGC and, accordingly distribute
                                gas in the region. The move is expected to help the company establish a dynamic
                                CNG distribution network with its existing jumbo cylinders for industrial and auto
                                use. The venture is in its nascent stage and the company is yet to disclose its
                                concrete plans related to this acquisition.

                         Key Risks
                               High dependency on single source for raw material: EKC sources nearly 65 per
                                cent of its raw material requirement from Tenaris. High dependency on a single
Increasing competition          source puts the company at the risk of the latter’s pricing power.
to    restrict pricing         Competition from domestic players may restrict pricing power: There are a
advantage                       couple of relatively smaller players viz. Rama Cylinders, Maruti Koatsu and
                                Bharat Pumps and Compressors which compete with EKC in the CNG cylinder
                                business. Among these, Rama Cylinder is in the process of setting up a plant in
                                Kandla SEZ with a capacity of 3 lakh cylinders per annum. Thus, growing industry
                                competition will reduce EKC’s pricing power going forward.
                               Higher commodity prices may put margin pressure: Raw material cost forms a
                                significant part of total manufacturing expenses. As the commodity cycle is on an
                                upward trend, this may put some pressure on the margins.

                                                                                                              Everest Kanto Cylinder Limited


                             Revenue declined in FY10 after consistent growth during FY07-FY09
Decline            in        Consolidated revenue declined 23.7 per cent year on year (yoy) from Rs. 860.9 crores in
realizations lead to
                             FY09 to Rs. 657.1 crores in FY10. Sales decline was due to fall in realizations (19.3 per
decline in revenue
                             cent), as volume declined marginally by 0.6 percent in FY10 to 687,213 from 728,446 in

                              EKC’s product-wise revenue distribution
                                                              1000.0                                 861                         120.0%
                                Total sales (Rs. in Crores)

                                                               800.0   80.5%                                          657        80.0%

                                                                                                                                          Growth (%)
                                                               600.0                  531
                                                                        425                         62.1%                        40.0%
                                                                                     24.9%                                       0.0%
                                                                 0.0                                                             -40.0%
                                                                       FY07            FY08         FY09             FY10
                                                                               Total sales                  Growth

                             Source: Company Financials, ICRA Online Research

                             The company expects the revenue in FY11 to regain the levels of FY09, which was nearly
                             Rs.860 crores. Revenue in FY11 is expected to be driven by robust sales from Dubai
                             operations (driven by sales in Iran, Bangladesh and Pakistan) and higher CNG sales in
                             India and jumbo cylinder sales in China.

                             Margins declined recently on high cost of raw material
EKC’s enjoyed high           EKC enjoyed high EBITDA margins (in the range of 27-31 per cent) during FY07-FY09 due
EBITDA             margins   to high sales growth, better realization and cost advantages (particularly for Dubai
historically, in the range   operations due to low cost of transportation to its target markets viz. Iran and Pakistan).
of 27-31 per cent            Sales grew at a CAGR of 41.9 per cent during FY07-FY09 while EBITDA grew at 54 per cent
                             during the period.

                             EBITDA margin declined sharply to 9.6 per cent during FY10 mainly due to high cost of
Mark down of high cost       raw materials. Raw material cost as a percentage of sales increased nearly from 51 per
inventory      dragged       cent in FY08 to 64 per cent in FY10 mainly due to rise in input cost and mark down of
margins down in FY10         inventory to realizable value. As per estimates by the management, FY10 EBITDA was
                             impacted by an amount of Rs. 18-19 crores due to inventory mark down. Management
                             states that this is a one-time exercise and will not impact the margins in the future.

                                                                                                                                  Everest Kanto Cylinder Limited

                            Margin trends
                                             300                                                 30.1%              31.4%
                                                                             26.8%                                                                            30.0%


                             Rs. in crores

                                                                             22.6%                                  23.4%                                     20.0%

                                                                                                                  270                     9.6%
                                                                                               160                                                            10.0%
                                                                                96                   138                 201             63      6
                                                               0                                                                                              0.0%
                                                                             FY07                 FY08              FY09                  FY10
                                                                                EBITDA            EBIT       EBITDA Margin               EBIT Margin

Blended realizations per   Source: Company Financials, ICRA Online Research
cylinder declined from
Rs. 12,396 in FY09 to      Blended realization per cylinder declined 23.7 per cent from Rs. 12,396 in FY09 to Rs.
Rs. 9,456                  9,453 in FY10 due to sales decline in Iran where the prices are higher by ~25-30 per cent

                           as compared to other markets. In FY10, realization from sales of CNG cylinders and
                           Industrial cylinders in India stood at Rs 11,000 per cylinder and Rs 4,000 per cylinder,
                           respectively. For China, the realization from jumbo cylinders stood at USD 12,000 while in
                           USA it was between USD 17,000 to 20,000. For Dubai realization per cylinder was at Rs.
                           10,500 per cylinder.

                            Realization and EBITDA / Cylinder
Drastic drop in                                                    16000.0
EBITDA per cylinder
                                             Rs per Cylinder

                                                                   12000.0                                                               9,453
                                                                    4000.0                   2,442
                                                                                         FY08                     FY09                     FY10
                                                                                     Blended realisation                 EBITDA Per Cylinder

                           Source: Company

                           Input cost
                           EKC uses seamless tubes as raw material in all of its plants.
                            Cost of goods sold
                            Particulars                                                                        FY07              FY08                 FY09             FY10
                            Raw material consumed                                                             263.4             278.3                482.9            428.3
                            Less: Stocks adjustments                                                          (28.9)             (6.5)               (91.6)           (10.5)
                            Total raw material cost                                                           234.5             271.8                391.3            417.8
                            Growth                                                                                             15.9%                 44.0%              6.8%

                            % to sales                                    55.2%                                                51.2%                 45.5%            63.6%
                           Source: Company Financials, ICRA Online Research

                                                                                                                Everest Kanto Cylinder Limited

                          Change in depreciation policy and impact
A gain of Rs 29.4
                          The company changed its depreciation policy from Written Down Value (WDV) to
crores on account of
change in depreciation
                          Straight Line Method (SLM), as a result of which the company booked a gain of Rs. 29.4
method                    crores, due to writing back of depreciation charges in the prior period.

                          Return Ratios
                          Among the return ratios, ROE and ROCE has fallen due to fall in profitability.
                           Trends of Return ratios
                                        30.0%               25.8%
                                        25.0%                                     21.7%                  22.2%
                                        20.0%            23.7%

                                        15.0%                                  19.3%
                                                                                                        16.2%                   6.7%
                                                            FY07                  FY08                   FY09                  FY10
                                                                                   ROE           ROCE

                          Source: ICRA Online Research

                           ROE Break up
                                       2.5                                                      2.33                                   25.0%
                                                                          20.3%                                      2.06
                                       2.0          16.9%                                                                              20.0%
                                                                        1.73                           16.7%

                                                                                                                                               Net Margins
                                       1.5                                                                                             15.0%

                                       1.0                                                                                             10.0%
                                                                               0.64                    0.59                 0.51
                                       0.5                                                                                             5.0%
                                       0.0                                                                                             0.0%
                                                     FY07                  FY08                   FY09                  FY10
                                                Total Assets / Total Equity (LHS)         Asset Turnover (LHS)        Net margin (RHS)

                          Source: ICRA Online Research

                          Competitor Analysis
                          EKC is the market leader of the CNG cylinder market in India. However, due to high
                          demand of CNG cylinders driven by higher growth in CNG vehicles and improved gas
Increasing demand of      infrastructure many players have forayed into the space. Among the key domestic
cylinders has led to an   players, Rama Cylinders controls around 15 per cent market share in the domestic CNG
increasing competition    cylinder market, next to EKC.

                                                                                                         Everest Kanto Cylinder Limited

                          Capacity of EKC and other domestic players
                                                   1,200   1,012

                                Capacity in '000
                                                     600                  500
                                                     400                                         300
Capacity of EKC is                                     0
double that of closest                                     EKC      Nitin Fire Prot.     Rama Cylinders Lizer Cylinders
domestic competitor

                         Peer group comparison
                                                            Year                       Revenue     Margin        EPS             EV/EBIT
                          Particulars                       End    CMP   M Cap          (FY10)     (FY10)      (FY10)     P/E      DA
                          EKC                     Mar-10           129   1,304            650       0.9%         4.1     31.4x    27.6x
                           Nitin Fire Protection  Mar-10      385       485        316                 18.2%   34.92     11.0x    7.8x
                          Source: Company reports, BSE, Capitaline, ICRA Online Research
                         (Market cap and Revenue in Rs. Crores)

                         EKC to offer 60 lakhs of new equity shares to Reliance capital
                         On June 19, 2010, EKC passed a resolution through which it proposed to allot upto 60
                         lakhs of new equity shares of face value Rs. 2 at a cash premium of Rs.133 per share. Out
                         of the total offer, upto 40 lakhs shares will be offered for subscription on preferential
                         basis to Reliance Growth Fund and upto 20 lakhs of new equity shares will be offered for
                         subscription to Reliance Regular Savings Fund - Equity Option.

                                                                                                                    Everest Kanto Cylinder Limited

CNG and NGV main           Industry Overview
drivers for cylinder       Cylinders provide a storage facility for compressed natural gas, liquefied natral gas and
demand                     other gases for used in industrial applications, health care and food and beverages
                           industry. Among the key demand drivers of high pressure cylinders, CNG and NGV are
                           the most prominet ones. While Oil prices surge, CNG as an alternative, will continue to
                           drive demand for high pressure cylinders. According to Asian NGV Communications, the
                           global composite cylinder market for NGVs is projected to reach USD 368.8 millioin by
                           the end of 2015. The growth of cylinders is mainly driven by sales in NGV vehilcles.

                           Key players in the high pressure cylinder industry
EKC amongst select few     There are around 30 manufactureres of high pressure cylinders spread across regions
cylinder manufacturers
                           such as Europe, North and South America, and Asia, producing CNG/NGV cylinders.
capable of producing
more than 100,000 CNG
                           However, among the 30 companies, only nine to ten companies are capable of producing
unit tanks per year        more than 100,000 CNG unit tanks per year. Of these nine to ten companies, at least four
                           are Asian firms from India/UAE (Everest Kanto Cylinders), China and two Korean

                            Global cylinder manufacturers
                                                                1,200                                                        1,000           1,012
                                Capacity in '000 nos per year

                                                                1,000                                       800     800
                                                                  800                      600
                                                                  600            500


                                                                                                                               BTIC, China


                           Source: Company

                           Globally, it is estimated that about 5.94 million CNG cylinders were produced in the
                           recent past (in 2007 when 1.9 million NGVs were added). Of these, only 1.7 million units
                           were produced by 20 companies while 4.24 millions were manufactured by the ten
                           biggest CNG cylinder producers.

                           Growth in NGVs drives demand for high pressure cylinders globally
                           As per Asia NGV Communications, currently there are more than 11.3 million NGVs in the
CNG      run    vehicles
                           world, mostly powered by CNG. Out of the total population, the Asian region (key
expected to grow to 50
million by 2020            markets for EKC) accounts for more than 50 per cent of the CNG vehicle population. The
                           growth rate of CNG vehicles in the Asian region has been more than 30 per cent over
                           FY06. As per IANGV, the population of CNG run vehicles is expected to go upto a level of
                           50 million by 2020. Thus, CNG and specialty gas vessels are expected to provide the
                           impetus for growth, to cylinder manufacturers such as EKC.

                                                                                                                     Everest Kanto Cylinder Limited

                            NGV population worldwide (2003-2008) and Growth Rate
                                                             10.0                                                              9.5      60.0%

                              NGV Population (in millions)
                                                                    40.9%                                           7.5
                                                                                                            5.6                         40.0%

                                                                                                                                                Growth %
                                                              6.0                             4.7
                                                              4.0     3.3                                          33.6%
                                                              2.0                           21.7%       20.5%
                                                              0.0                                                                       0.0%
                                                                     2003      2004           2005          2006   2007        2008
                                                                            NGV Popul a ti on                         YoY growth

900,000 NGVs per year
                           Looking at the growth of NGV adoption in 2003-2008, the number of vehicles added to
added during 2003-06
                           the world fleet amounted to about 900,000 NGVs per year during 2003-2006 with an
                           exception in 2004, when only 596,000 new NGVs were added. In fact, during the last two
                           years, almost 1.9 million more NGVs were introduced to the existing fleet.

                           Domestically also there are a few players in the high pressure seamless gas cylinder
                           industry. EKC is the most dominant player with nearly 80 per cent of the market share.
                           The others being Nitin Fire protecion Industries Limited, Rama Cylinders Private Limited,
                           Maruti Koatsu Cylinders Private Limited and Bharat Pump and Compressors Limited.

                           Demand drivers for the cylinder Industry in the key markets for EKC

                           Growth of CNG vehicles drives growth of CNG cylinders
                           Present gas vehicle population of almost 800,000 in India is slated to increase to a level
                           of about 1.5 Million vehicles over the next 3 years. Improved gas infrastructure, high
                           growth in refilling stations and government initiatives gives impetus to growth.

 CNG priced 50-60 per      Rising price of conventional fuel drives CNG vehicle sales
 cent    lower      than   With a recovery in global markets underway, and a resultant increase in price of petrol
 conventional fuels        and diesel, the advantage of CNG is highlighted, which is priced nearly 50-60 per cent
                           lower than conventional fuels. Also, passenger car manufacturers are themselves
                           beginning to promote the CNG option by extending their warranty to new vehicles fitted
                           with the CNG kit. This is further boosted by the government regulation of compulsorily
                           using CNG as the regular fuel.

                                                                                       Everest Kanto Cylinder Limited

Summary Financials
Profit & Loss Statement
 Particulars (Rs crores)                      FY06              FY07        FY08          FY09              FY10
 Net Sales                                    235.5             425.1      528.7          856.6            649.7
 Other op. Revenue                              0.0                0.0         2.3           4.4               7.4
 Total Revenue                                235.5             425.1       531.1         860.9             657.1
 Growth (%)                                                    80.5%       24.9%         62.1%            -23.7%
 Cost of Good Sold                          (130.3)           (234.5)     (271.8)       (391.3)           (417.8)
 Gross Profit                                 105.2             190.5       259.3         469.6             239.3
 Growth (%)                                                    81.2%       36.1%         81.1%            -49.0%
 Employee Costs                                (8.9)           (17.4)      (21.7)        (66.1)            (77.8)
 Other Expenditure                            (37.4)           (59.1)      (77.8)       (133.0)            (98.4)
 EBITDA                                         58.9            114.0       159.9         270.5              63.0
 Growth (%)                                                    93.3%       40.2%         69.2%            -76.7%
 Depreciation                                  (9.8)           (17.8)      (21.5)        (69.3)            (56.9)
 EBIT                                          49.1              96.3       138.4         201.2                6.2
 Growth (%)                                                    95.5%       43.8%         45.4%            -96.9%
 Net Interest expense                          (3.8)             (4.9)       (7.1)       (27.2)            (11.4)
 Other Income(expense)                           2.2               4.0         0.8       (14.3)              23.5
 Profit before Tax                             47.6              95.3       132.0         159.7              18.3
 Growth (%)                                                   109.7%       38.5%         21.0%            -88.5%
 Income Tax                                   (14.1)           (23.6)      (24.3)        (15.6)              (5.5)
 Profit after Tax                               33.5             71.8       107.8         144.1              12.8
 Growth (%)                                                   114.2%       50.2%         33.7%            -91.1%
 Extra Ordinary Items                             0                  0         0.0           0.0               0.0
 Others                                           0                  0       (3.5)         (6.6)             28.7
 Net Profit                                    33.5              71.8       104.3         137.5              41.5
 Rep. Basic EPS *                              4.87              7.80       10.54         13.60                4.1
 Rep. Diluted EPS *                            4.87              7.80       10.54         13.60                4.1
 DPS                                            3.5                1.2         1.2           1.2               1.2
 Equity Capital                                17.6              19.5        20.2          20.2              20.2
 Face value                                    10.0               2.0            2.0        2.0               2.0

Ratio Analysis
 Particulars (Rs crores)                      FY06              FY07        FY08          FY09              FY10
 Gross Margin (%)                            44.7%             44.8%       48.8%         54.5%            36.4%
 EBITDA Margin (%)                           25.0%             26.8%       30.1%         31.4%             9.6%
 EBIT Margin (%)                             20.8%             22.6%       26.1%         23.4%             0.9%
 Net Profit Margin (%)                       14.2%             16.9%       20.3%         16.7%             2.0%
 EPS *                                         4.87              7.80      10.54          13.60             4.10
 BVPS *                                       17.12             30.98      47.42          61.26            61.39
 P/E (x)                                       26.4              16.5       12.2            9.5             31.4
 P/BV (x)                                       7.5               4.2        2.7            2.1              2.1
 EV/ EBITDA (x)                                29.6              15.3       10.9            6.4             27.6
 EV/ Sales (x)                                  7.4               4.1        3.3            2.0              2.7
 ROCE (%)                                    25.8%             25.8%       19.3%         16.2%              0.5%
 RONW (%)                                    22.2%             23.7%       21.7%         22.2%              6.7%
 Solvency Ratio
 Deb/ Equity Ratio (x)                         0.26              0.23           0.50       1.00              0.81
 Interest Cover (x)                            13.0              19.7           19.5        7.4               0.5
 Turnover Ratio
 Inventory T/o Days                             117               121           265        356               357
 Debtors T/o Days                                42                36            50         40                53
 Creditors T/o Days                              69                42            71        100               120
 Other Ratios
 Dividend Payout (%)                           35%               60%         60%           60%              60%
 Dividend Yield (%)                          0.54%             0.93%       0.93%         0.93%            0.93%
 * Adjusted for Stock Split of Rs 10 to Rs 2 FV in Aug 2007

                                                               Everest Kanto Cylinder Limited

Balance Sheet
 Particulars (Rs crores)        FY06       FY07       FY08        FY09              FY10
 Sources of Funds
 Equity Capital                  17.6      19.5       20.2        20.2              20.2
 Reserves                       133.3     282.9      459.4       599.4             600.7
 Shareholders Fund              150.9     302.4      479.6       619.6             620.9
 Long Term Debt                  39.5      70.2      238.6       622.1             501.5
 Deferred Tax Liability, Net      1.4       0.0        4.5        (0.6)             10.9
 Minority Interest                0.0       0.0        0.0          0.0              0.2
 Total                          191.8     372.6      722.7      1241.1            1133.6
 Application of Funds
 Net Fixed Assets                93.5     114.4      154.3        532.4            706.8
 Capital Work-in-Progress         0.5      34.4      130.9        198.3              NA
 Investments                     13.2      13.4       12.2          2.3              4.5
 Current Assets
 Inventory                       42.3     115.1      284.6        488.5            339.1
 Sundry Debtors                  27.5      57.5       90.8         98.0             92.8
 Loans& Advances                 49.5      91.7       93.3         86.0              NA
 Cash & Bank Balance             29.0      47.1       64.7         39.3             59.9
 Other Current Assets             0.0       0.0        0.0          1.6             74.6
 Total Current Assets           148.3     311.3      533.4        713.4            566.5
 Current Liabilities
 Sundry Creditors                25.0      30.2       77.4       139.8               NA
 Provisions                      33.0      62.3       15.3        20.5               NA
 Other Current Liabilities        5.7       8.3       15.5        45.2               NA
 Total Current Liabilities       63.6     100.8      108.2       205.4             144.1
 Net Current Assets              84.6     210.5      425.2       508.0             422.3
 Misc. Exp not W/Off              0.0       0.0        0.0         0.0               0.0
 Total                          191.8     372.6      722.7      1241.1            1133.6

Cash Flow
 Particulars (Rs crores)        FY06      FY07        FY08        FY09             FY10
 CF from Operating Activities
 Profit Before Tax                32.4      95.3      132.1       159.7              18.3
 Depreciation                      9.8      17.8       21.5        69.3              56.9
 Direct Taxes paid              (22.1)    (24.3)     (23.9)      (25.8)               8.6
 Forex gain                        0.0       0.0         0.0       44.3            (26.1)
 Interest, net                     2.5       2.8         2.9       23.8              10.2
 Others                           13.0     (0.3)       (2.0)       (1.6)           (17.5)
 Change in Working Cap          (10.7)   (112.8)    (173.4)     (140.6)            142.1
 CF- Operating Activities         24.9    (21.4)     (42.8)       129.0            192.5
 CF from Investing Activities
 Change in Fixed Assets         (60.3)    (69.8)    (162.1)     (275.4)            (55.3)
 Change in Investments, net     (10.7)     (0.2)        2.6        11.1             (2.2)
 Acquisition of companies          0.0       0.0        0.0     (279.1)             (2.4)
 Others                            0.6       2.1     (16.7)        39.2               5.3
 CF- Investment Activities      (70.4)    (67.8)    (176.2)     (504.3)            (54.7)
 CF from Financing Activities
 Increase in Equity              84.4      92.0       88.7          0.0               0.0
 Issue of debentures, net          0.0     (3.0)     134.5          0.0               0.0
 Changes in Minority Interest      0.0       0.0        0.0         0.0               0.3
 Changes in Borrowings           10.7      32.2         0.0        28.0            (94.3)
 Dividend Paid                   (1.7)     (6.2)      (9.8)      (12.1)            (12.1)
 Others                            0.0       0.0        0.0         0.0            (17.4)
 CF- Financing Activities        70.8     109.1      232.8       305.9            (123.5)
 Chg. In currency fluctuation      0.0     (1.8)        3.9        42.6               6.7
 Net Change in Cash              25.3      18.1        17.7      (26.8)             21.0
 Opening Cash & Bank Bal          3.6      29.0        47.1        64.7             37.9
 Closing Cash & Bank Bal         29.0      47.1        64.7        37.9             58.9

                                                                                                                           Everest Kanto Cylinder Limited

Contact Details:
Manish Kedia
ICRA Online Limited, Phone: +91-22-67816163, Email:

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