*Everest Kanto Cylinder Q2FY22 Concall Update*
(Nirmal Bang Securities)
# *Additional 4 lac brownfield capacity over and above the earlier announced 2 lac greenfield, paves way for strong growth phase beginning H2FY23*
# *Industry tailwinds remain strong*
*Outlook: Positive*
• Revenue came at Rs. 421 Cr (+26% QoQ, +71% YoY)
• India revenue came at Rs. 303 Cr (+58%), UAE at Rs. 70 Cr (+133%) and US at Rs. 49 Cr (+84%).
• EBITDA Margin came at 26.5% vs QoQ 26.4%, YoY 17.7%. Co was able to pass on increase in RM costs.
• *Co is confident of delivering sustainable margins of 22-24%* (and 27-29% on standalone basis going forward).
• Major growth over last 5 years has come from CNG (auto) and this will continue. Split between CNG (auto) & Industrial is at 60:40. CNG share will keep rising as new capacities are being put up with CNG in mind.
• CNG has higher margins.
• Industrial demand is mainly dependent on fire equipment/systems, medical, space and defense.
• EKC competes with 5-6 cos like Rama Cylinders, JFE, FJM, Euro. *EKC has the largest capacity in India with a 50% market share.*
• Life of a cylinder is 15-20 years.
• Co sources raw material / steel from China and is not facing any constraints.
• Co is planning to repay the promoter loan within a year.
• *Debt reduced from Rs. 203 Cr in March 2021 to Rs. 131 Cr in Sep 2021. Co should be debt free in FY23 and thus interest cost shall decline accordingly.*
*India*
• *Co has proposed a new brownfield expansion of 4,00,000 cylinders* by adding new manufacturing lines within its current locations (Tarapur & Kandla) with investment of Rs. 35 Cr financed completely from internal accruals and to be executed over the next eight months (commercialization by July 2023). *Co expects additional revenue of Rs. 300 Cr from this brownfield expansion.*
• *The above is in addition to the greenfield capacity of 200,000 cylinders that the co is pursuing in parallel. This 2,00,000 cylinders capacity will have potential to generate revenue of Rs. 200 Cr at a new greenfield facility in Gujarat which will cost 45 Cr and will be funded by internal accruals.* The facility will come up in 3 phases of which the first phase will complete in FY24 (will take 18 months).
• Thus current 7,17,000 cylinder capacity will increase to 13,17,000 in coming years.
*Domestic Industry Tailwinds*
• India’s natural gas consumption is targeted to rise over the next decade, from 170 mmscmd to 600 mmscmd.
• The government aims to add 100 districts and 9k CNG stations in coming years to the City Gas Distribution network which should further accelerate the pace of adoption of gas as a fuel. *Thus CNG stations will increase from current 2k to 11k by 2030.*
• Government has launched Hydrogen Energy Mission for generating hydrogen from green power. It is expected that demand for Hydrogen Cylinder will increase once trials are successful.
*UAE*
Co is targeting a growing number of emerging markets such as Egypt, other African countries, and South America.
*Hungary*
• Plans in Hungary are moving forward and co sees local production in EU allowing deeper access to this large market in the coming years.
• Co is working on expansion of 2 lacs cylinders in Hungary. It shall complete in next 18 months (by July 2023).
• Total capex required will be Rs. 134 Cr. EKC will invest Rs. 20 Cr. Govt of Hungary will provide an incentive of EUR 4.8 mn and remaining would be funded via debt.
*US*
• The recent announcements around infrastructure investments shall open new areas of expansion.
• Utilisation was at 40% in the qtr.
Share is trading at P/E of 7.6x TTM EPS