Everest Kanto Cylinders Ltd. - A long runway ahead!

Everest Kanto Cylinders Ltd. (EKC) is India’s largest manufacturer of high pressure gas cylinders with a market share in excess of 50%. It manufacturers all types of cylinders – CNG, Industrial, Jumbo & Composite - & has a capacity of One million cylinders annually with fungible production lines of more than 200 SKU’s across different ranges. It has global scale plants in located in India, UAE & the USA.

With the Govt.'s thrust on cleaner fuel to help mitigate environmental concerns, CNG is being aggressively promoted by rapidly expanding its network in different states. The current CNG infrastructure is present only in a few states including Delhi & Maharashtra. This is likely to increase to about 10 states in the foreseeable future, before ultimately covering the entire country. With proven & accepted CNG technology, once the CNG infrastructure is in pace, the demand growth for cylinders is more than likely to explode. Leading gas infrastructure Co.’s are laying out aggressive expansion of CNG pumps & OEMs are expanding its offerings of CNG fueled vehicles to its customers. EKC is currently operating at 90% capacity in India & to meet this demand, it is going in for a brown field expansion at both its plants in Tarapur & Kandla at a capex of 35 crs that will enable the Co. to increase capacity by about 40% (400,000 cylinders).

EKC has been actively reducing debt over the last many quarters after divesting its subsidiaries in China & Thailand. It hopes to become debt free by next year. Its subsidiaries running plants in Dubai & the US are also showing decent growth & are already contributing to the numbers. The Co. is planning to set up a plant in Hungry to cater to the burgeoning European demand.

The business is in a sweet spot, as is visible in the numbers over the last few quarters. For the half year ended September ’21, the consolidated Sales have come in at 756 crs with PAT of about 139 crs, after providing for taxes of 60 crs (@30%). EKC should comfortably do profits of about 280 crs for the full year. The current price of about Rs. 150, makes the market cap under 1700 crs making valuations rather attractive. EKC is extremely efficient in utilising its resources. What makes the story even more compelling are the return ratios. For the full year 21-22, its RoCE is likely to be in excess of 40%! Clearly it’s a story waiting to be re-discovered!

September Qtr

Investor Presentation post Q2

Concerns: It’s a story waiting to be re-discovered. Therein lies a concern. Most investors are aware of EKC & it is not an unknown Co. with a somewhat chequered past. This perhaps also explains the current valuations. Companies too learn from experience! Ultimately, the numbers will determine the market cap.

On June 14, 2018 a news item appeared on CNBC TV18 quoting “Lenders move towards conducting forensic audit into books of Everest Kanto after allegations of fraud/siphoning of fund levelled by Ex-CFO, whistle-blower”.

Queried by the exchange, EKC responded that it had not received any communication from any lender with respect to forensic audit. It is relevant to note that more than three years have passed since the news item & the Co. has been in recovery mode in this period with no action taken by any regulatory authorities like SEBI or the stock exchanges.

Annual Report for 20-21

10 year numbers (Taken from Screener.in), for those statistically interested.

Consolidated Figures in Rs. Crores / View Standalone

GEOGRAPHICAL SEGMENTS

Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Mar 2019 Mar 2020 Mar 2021 TTM
Sales + 650 779 677 543 491 472 506 564 539 702 761 949 1,288
Expenses + 591 639 605 571 510 466 500 512 463 623 667 784 999
Operating Profit 59 141 72 -28 -19 6 6 52 76 79 93 165 288
OPM % 9% 18% 11% -5% -4% 1% 1% 9% 14% 11% 12% 17% 22%
Other Income 60 9 8 16 7 25 -2 107 21 0 1 45 49
Interest 14 11 21 41 58 60 55 47 36 38 38 28 17
Depreciation 57 64 67 70 68 71 72 34 32 30 43 35 35
Profit before tax 48 75 -8 -123 -138 -98 -123 78 28 12 12 146 285
Tax % 13% 6% 155% -7% -0% 1% -1% 0% 16% -405% 83% 38%
Net Profit 42 71 4 -132 -138 -98 -124 78 23 59 3 90 195
EPS in Rs 4.10 6.58 0.40 -12.30 -12.89 -9.12 -11.06 6.98 2.08 5.23 0.27 8.02 17.38
Dividend Payout % 29% 23% 62% -2% 0% 0% 0% 0% 0% 0% 0% 4%

Disc: Invested

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Hello @RajeevJ ,

Thank you for the write up.

Few questions,

  1. Revenue was stagnant during 2013 - 2018. Any insight on that ?
  2. When the new 400,000 capacity will be online ? I could find info about 200, 00 capacity expansion which will be online earliest by 18 months as per management
  3. Will EV or Piped gas have any impact on future prospect of EKC ?

Thanks
Amit

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I have been following EKC since some qtrs now.One thing that stands out is that the management is pretty evasive about certain things.As an example note how the company has never formally addressed the blanket ban on it’s oxygen cylinders by the government.Neither in any press release nor in their ppt.But whenever the mgt is asked about it they say they are close to getting unbanned or in talks with the concerned authorities.Why not address this in the beginning address in the concall? The ban happened in end-April/early May and yet there is no formal ownership of it by the company.Even if there is no malice involved,such actions don’t reflect well on the company.Similarly,the company’s recent JV in Hungary was not explained well.From what I gather,Europeans prefer to buy cylinders made in Europe rather than from other countries thus the JV.Again the management has not addressed this anywhere.For a company that has a bad track record with foreign acqs this aspect is very important.Yet the biggest googly for me was the recent brownfield capex announcement.Company is going to add 4 lk cylinders to it’s capacity at a cost of 38 cr. in a period of 8 months. Contrast this with the earlier announcement of a greenfield capex at 45 cr. cost for 2 lk cylinders but a period of 24 months! Which company in it’s right mind goes for a greenfield capex when so much land is available already for a brownfield? This has again never been cleared by the management.Was land not available for use earlier? Have they got some clearances now that they hadn’t earlier?

Coming to the company,it seems like a tale of two cities.The India business is a superb quality biz.Company has 50% mkt share,good pricing power and makes great margins.They have great clientele and industry macro is great.The other piece is the subsidiaries which have been the major spoilsport over the last many years.The recent delta in earnings is largely contributed by subsidiaries in UAE turning around. USA too,can do well from here.But these subsidiaries don’t seem to have the kind of revenue visibility as the India piece.Thus,it’s possible that the earnings will stay volatile on a consol basis.Though going by the mgt commentary it does seem that atleast for a few quarters the consol nos. will also be healthy.

Inspite of all these things,this is still one of those stocks where you scratch your head at the valuations.For a company that is going to do 350 cr. kind of EBITDA in fy22 how is it available at an EV of 2000 cr? That too after there is a clear roadmap for new capacity addition.The India biz alone could be doing 2000 cr.+ revenues and an EBITDA in excess of 500 cr in a few years.Key monitorable remains how transparent the management can be and whether they can be more generous with their strong cash flows.For Fy21,dividend payout was a paltry 3%.

Disc.: Invested.Views are biased.

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Some really interesting points that I came across in the investor presentation.

  1. Overall debt has been bought down from 376 Cr in 2018 to 131 cr in H1 fY22. Net debt/ equity is about 0.1 now.

  2. Their 3 main division i.e India , UAE , USA/ Hungary are all posting their their Highest revenue, EBIDTA and Gross margin over the last 5 years.

  3. They have successfully managed to get out of most of their (bad ) JV’s in other countries and also used the money from the sale of unititlised land to retire debt.

  4. Clear Market leader posiiton in India with a market share of 50% + with significant entry barriers to the business.

  5. They are in a an industry with a lot of tailwinds owing to the push from the government for increased use of natural gas. They will be the primary benefactors . The market size of natural gas is poised to expand by 400 % in the next 5-6 years.

  6. Bownfield capex at a minimal cost to increase capacity by almost 40%.

I think the current numbers are an effect of the efforts put in by the management over the last 6-7 years in restructuring the business . Looks quite cheap on a valuation basis as they are the market leaders in their industry however the overhang of the mistakes of the past decade may still affect the minds of investors.

Disc : Invested

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Dear Shashank.
Keep the below notes also in your mind to make better decision.

All CNG cylinder & cascades in future will be of Composite Type 3 or 4 cylinders. CNG Composite type 3 &4 cylinders are 70% less weight and more advanced compared to CNG steel cylinders.

MGL recently issued tender for Type 3 & 4 composite cascades. If MGL is satified with quality and performance, they will continue with Composite only in future.

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I would like to comment on views of Sagar Saxena, though little late.
Yes, I agree with your concern on blanket ban on oxygen cylinder. Company should come out suo moto on its response. This will increase investor faith.
Yes, company is still suffering from mistakes in overseas operation and that is the main reason for cheap valuation. If company takes investor friendly measures, it will be rerated.
But I beg to differ on your views on expansion plan. We know that green field expansion always takes time and always costlier to brown field expansion. If they were thinking of expansion in some other location, land availability at present site is irrelevant. So, this brown field expansion is better to take advantage of present favourable situation.

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Based on one tender, it would be incorrect to extrapolate the move into a whole market transition. There has been aggressive commentary on the same lines coming from composite cylinder manufacturers over several years.

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Everest Kanto is doing 2008 stock price breakout. Stock had 10 UC in last 10 sessions. Any clue whats happening?

Many growth triggers coming in: Corporate governance improving, CNG demand opportunity, Capacity expansion, etc.

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Do check what the stock did from late April to December 2021,hit a high of 162 then halved briefly before resuming upwards…all this while markets were fairly buoyant.Another way to look at it can be that the return from late April is ~50%.Nothing extraordinary if looked at that way,earnings have been superb to say the least and markets were late to discount.

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Making process and some info about EKC

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The Everest Kanto stock has been on a tear this last month or so having gone up about 60%. The investing community is just beginning to come to terms with its potential to grow over the coming 8-10 quarters. The current run rate of an EPS of Rs. 6 per quarter will in all likelihood go to about Rs. 10 per quarter after the 40% capacity increase that should come on stream by the end of current fiscal together with operating leverage & with the subsidiaries also chipping in with better numbers. A rough extrapolation of its earnings next year should give an idea about the future potential & how undervalued the stock continues to be.

As the market cap increases (currently about 2700 crs), it is only a matter of time before the institutions begin to show interest given that the growth story here is no rocket science with not too many variables!

Indeed, a long runway ahead!

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Sir in your opinion what PE does EKC deserves for a mkt leader with 50% share in a segment growing v fast tks to non polluting nature of CNG & its cost competitiveness vs diesel & petrol now being recognized world wide.

Heard Egypt has made new car registration compulsory only if the fuel is CNG as Egypt has abundant gas production & other African nations follow Egypt.gas . it shud lead to better capacity utilization at Dubai plant of EKC.

Any concerns on Chinese RM sourcing & rising LNG n gas prices world over as India imports most of its gas from qutar as LNG.? indian gas prodn going up by 25% as RIL produces from KG basin & hopefully ONGC also produces soon from same basin. CBM gas prodn going up & more importantly being transported as PM Gas urja pipeline increases its reach all over india. Long pending prodn of urea started from Matrix fertiliser plant at Durgapur as gas line connectivity cam enabling Essar to transports CBM from its Raniganj fields.

is any steel co in India not able to produce RM for EKC & other seamless cylinders makers ? if possible it will lead to better inventory n freight savings?

DISCL - INVESTD recently

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Taken from @subi_sa on twitter

q2 concall notes of EKC

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In my view, other proxy to Cng is Kirloskar Pneumatic which trades at 30x multiple. That is in compressors though, gives you a rough idea about the mutlple this co can get.

Disc: invested and managing risk through sizing

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Key O2 cylinder provider blacklisted for supply failure - The Economic Times (indiatimes.com)

Few month old news but looks like EKC couldn’t full fill the order because of supply chain disruption & assuming it was not because of ill intent.

Why sudden revenue growth in FY21 and FY22? Is it because of huge demand for Oxygen cylinders?

I scanned through concall, investor presentations but didn’t find product wise revenue breakup.

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Key take away from the recent media interaction :-

Industry Insights

  1. In last 2 years, CNG station expanded from 2000 to 3000, As per the mgmt, growth is visible and said target can be achieved of 10K stations in next 5-6 years.

  2. Recently concluded 11th distribution round, there are 228 GAs authorised by the regulator across 27 States and Union Territories covering around 53 per cent of the country’s geographical area and 70 per cent of its population. The CNG pumps are set up by the CGD entities also along the National Highways. As of March 2021, India had a total of 78.65 lakh piped natural gas connections and 3,094 compressed natural gas stations on a provisional basis.

  3. 30-32% vehicle (PV + CV) contributed to CNG growth in light of diesel price hike. Aftermarket sales are not being considered here in the estimation.

  4. Hydrogen gas industry will take time to bake in at-least 5-6 years.

Company growth levers

  1. Industrial segmental growth is around 15 %. Company’s entire focus remains to be in Auto sector where fast growth is being witnessed. Indication of capacity expansion(brownfield) to support OEM’s demand.

  2. Company is seen to very aggressive in reducing its debt from 203 CR to 140 CR in just 6 months. Expectation of reducing it completely by next year.

  3. Company did not experience any supply chain disruption even during COVID, to import the raw materials from China

  4. Weakening demand of oxigen cylinder, mgmt is not expecting any burgeoning demand here despite of surge in covid cases.

  5. Margin is expected to be in same range-bound as per the previous qtr

Interview Link :- आगे कैसे रहेगी Everest kanto की ग्रोथ,देखिए Puneet Khurana के साथ। Swadesh Exclusive।Puneet khurana - YouTube

@Worldlywiseinvestors @RajeevJ sir

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Just a question, if the company is planning to focus entirely on Auto Sector, then after a few years EV can create a big disturbance for future growth?

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if gas economy takes over liquid , some one plz help me to understand how kanto is getting benefitted out of it, if gas becomes omnipresent it will flow in pipe line in future rather than cylinder, in auto sector car will comes with a inbuilt gas tank there, as China is leading in Gas economy than India then we can have a more import threat, so where is the moat of the company, experts plz explain in details , thanks in advance

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I will try to answer to the best of my ability according to my understanding. The gas comes in a pipeline to a CNG station and then it is compressed and then goes into a cascade( number of cylinders storing the gas) and then onto the dispensers. You will also have stations in villages and remote locations where the pipeline cannot reach. In that case the gas would be carried in mobile cascades, which would be filled up at the mother station.So with the increase in the number of stations and the increase in CNG vehicles, demand for the cylinders would rise.
What i can understand is that there is a huge demand for CNG vehicles of Maruti, the CNG ertiga model has a waiting list of 1 year. Iam sure Maruti does not make the cylinders.Someone should confirm if EKC supplies to them. However demand for CNG cylinders will see a huge rise.
Since auto sector is seeing fast changing technologies, one cannot predict for the very long term and the market will take cognizance of it very quickly.Just have a look at how the market looks at Exide and Amarraja. However for next few years CNG is going to rule, i feel.
@RajeevJ in the presentation cannot see automobile customers, do you have a list

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