Dominant player in the high-pressure cylinders market: Everest Kanto Cylinders (EKCL) is by far the largest player in the Indian gas cylinders market. With aggressive expansion plans in Dubai and China, EKCL is poised to be a dominant player in the world market as well.
Excellent play on global CNG opportunity: There are two demand drivers for high-pressure cylinders: (1) steady-state growth in industrial gas applications, and (2) hyper growth in CNG use, especially in emerging economies like China and India. EKCL is the largest cylinder company in India; it has plans to add capacity of 1.5m cylinders in China over the next five years. We believe EKCL offers an excellent play on the global CNG opportunity.
Timely investments to sustain de-risked growth: EKCL plans to invest US$125m over the next five years. These investments are not just in manufacturing capacity (additional 2m cylinders), but also in new products (jumbo cylinders) and alternative technologies (cylinders from billets and plates). At the end of this investment plan, we believe EKCL will emerge not only profitable, but also scaleable and de-risked.
40% EPS CAGR to FY10E; target price Rs279; Buy: We believe there is high earnings visibility for EKCL. Based on gradual ramp up of new capacities, we estimate revenue CAGR of 43% and PAT CAGR of 42% through FY10E. EPS CAGR is slightly lower at 40% due to 5% equity dilution. We believe EKCL's de-risked growth merits premium valuation. At 20x FY09E, our target price of Rs279 offers 23% upside from current levels. We recommend Buy.
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