So, according to the biggest EV Passenger vehicle player, CNG cars are going to be equal to the sales of EV cars. If the No. 1(Maruti) and No. 3 (Tata) PV players are focusing as much in CNG, then the question of EV adoption being more than CNG adoption really doesn’t stand.
So, seems like CNG SUVs adoption will be low. And from what I have read, SUV sale are going higher as a proportion of total sales. This seems to be an anti-thesis for EKC.
The Co. came out with Q3 numbers with Sales continuing to grow at a brisk pace, not only correspondingly where it grew 87% but even sequentially, over Q2 by 10%. The margins however, have been impacted in Q3 due to higher raw material prices. The operating margins on a consolidated basis is down to 21% from 27% in the previous qtr.
The Co. should end the current year with an EPS of about 25 at the current run rate. At current market price, it is available at a single digit multiple. Valuations are surely attractive for Co. with operating margins of 21%. The OP margins for the full year are going to be much higher as 21% is more a blip. It’s not that the Everest stock is quoting at a multiple of 30 & a fall in margins may de-rate the valuations!
The expanded capacity should start contributing from next year, which is only a month & a half away. The story does look rather attractive at current valuations
India biz margins compressing so much was a big surprise for me.So far the company has had no issue in passing on RM inflation since they hold the lion’s share of the domestic market.I gather that EKC started supplying large volumes to one big OEM and initially margins were low.However,this has corrected from January.So most likely Q4 margins should be back to the 26-30% range.
Very good chance that we’ll see the company post an EBITDA north of 500 cr next FY.
Disc.: Invested.Views are biased.
ROCE already hitting 31%+. Series of capex going live and in the inititial commentary management has talked about passing on the RM hikes to the customers:-
Must read presentation:- https://everestkanto.com/wp-content/uploads/2022/02/EKC-Q3-FY22-Results-Presentation.pdf
Disc:- Not SEBI registered.
Can you please tell us something about the past. Between 2013 and 2016 the company was struggling to break even at EBITDA level, now makes 20% plus. What has changed? 2012 - 2020 company was struggling. What changed in 2021
Please look at standalone numbers, that’s the India business. There’s a sharp increase in business. It’s all coming from CNG usage growth. Both PVs and CVs are increadingly running on CNG. CNG pumps are being set up targeting almost 100% population coverage in the country. Diesel seems to be phasing out. There’s strong demand for CNG cylinders from gas infra companies setting up pumps as well as vehicle manufacturers.
Company’s concall was held yesterday. KTAs:
→ Continue to see strong demand across industrial and auto sector.
→ Barring Maruti all major OEMs are clients. Maruti already has 2 vendors,couldn’t break through.
→ Growth depends on pace of infra addition. If the government sticks to it’s plans,growth will keep accelerating. Company is open for even more capex if demand is there.
→ Promoter loan is being charged at 9%. Company will pay this debt down soon,no need to refinance. Will be LT debt free within 8-12 months,some WC loans will stay on B/S.
→ No risk from composite cylinders.The products have a niche application and are 25-30%+ more expensive than steel cylinders.However,if market matures for this EKC doesn’t mind entering.
→ Q2 was “special” for margins. Company is doing everything it can to recover margins and has repriced old contracts,Q4 will be better than Q3.
→ Mundra land has enough area for addition beyond the stated greenfield capex.The capex number given earlier didn’t include this land cost(why?)
→ Capacity addition of ~10% over next 1-2 qtrs so expect a 500 cr type run rate. 15% revenue growth in Fy23. Company is focusing on enhancing RoCE and EBITDA at all times. Already at 30% RoCE which will rise further. See no downside to realisations.
I see a lot of confusion post the call,mainly on margins and revenue growth.For anyone who’s been tracking EKC since a while would know that Mr. Khurana isn’t very good with numbers.When asked about medical cylinders contribution,he didn’t know the answer.Similarly,almost an year ago there were lot of questions raised on capacity constraints since the brownfield addn was 2 years away Mr. Khurana gave a similar 15% guidance saying valued added products will help eke out more.However,company suddenly went to 285 cr qtrly run rate from 240-ish without any capacity additions! So I won’t be surprised if a similar situation happens in Fy23 as well.On margins when asked if he sticks to his 22-24% consol guidance,Mr. Khurana said they expect to do better than that which brings us back to 25-26%.At the same time he says “Q2 was special” so 26% won’t repeat? (even Q1 was 26% EBITDA!)
Recent entrants might be alien to this concept but EKC is always a rocky ride.Stock went from 77 to 162 in a few weeks last year and then crashed 50% to 80-82,only to end the year near 250.Let’s see what Q4 has in store.In the short term stock might meander within the current range.
Since there is lot of controversy around future margins attaching the audio transcript.
listen from 21:20-50,mgt clearly says >22-24% EBITDA.
Disc.: Invested.Views are biased.
Edit: @RajeevJ pointed out that the 53 cr land cost wasn’t mentioned in the call and I have made the correction.Apologies for the confusion from my end.However,point remains that excluding land cost from the stated greenfield expense reflects badly on the company.
Is EKC expensive or cheap? Tried answering this question with 2 scenarios. One assuming 50 crore runrate from Q4 and the other assuming 40 crore run rate.
Everest Math
He’s guiding for additional 15%-20% topline growth, give his run rate is 464 crores types a Quarter.
With Phase 1 of brownfield that just came online. Incrementally he will do 50 crores of sales a Quarter (200 crores annually)
Phase 2 comes online in Q2 FY23. That can generate 100 crores of additional.
He will be closing the year with 1735 crores of sales (assuming 50 crore starts adding next Q)
Next FY
Q1 he does:- 514 crores (assuming 50 Cr bump up)
Q2 he does:- 540 crore types
Q3:- 540 crores types
Q4 again:- 540 crores types.
Rev Goes to 2134 crores
Ebitda Margin guidance is 22-24%
At 22% he does 470 crore Ebitda
At 24% he does 512 crores.
Sandbagged Math* given these are ok-ok companies
Everest Math
He’s guiding for additional 15%-20% topline growth, give his run rate is 464 crores types a Quarter.
With Phase 1 of brownfield that just came online. Incrementally he will do 40 crores of sales a Quarter (160 crores annually)
Phase 2 comes online in Q2 FY23. That can generate 100 crores of additional.
He will be closing the year with 1725 crores of sales (assuming 40 crore starts adding next Q)
Next FY
Q1 he does:- 504 crores (assuming 40 Cr bump up)
Q2 he does:- 530 crore types
Q3:- 530 crores types
Q4 again:- 530 crores types.
Rev Goes to 2094 crores
Ebitda Margin guidance is 22%
At 22% he does 460 crore Ebitda.
Disc:- uncomfortable with lack of numeracy from MDs side. Don’t think it will get a higher multiple than 7-9x ebitda. Pruned my stake substantially post the call, Return per stress per unit counts much more at the end. Can’t track a co, where MD doesn’t know the numbers every call.
I agree, quality of management that comes across on calls plus Corporate Governance pointers will probably ensure EKC doesn’t get significantly re-rated in the short-medium term. In terms of CG, the failure to mention 50Cr+ cost of land acquisition for the greenfield expansion before this call was an unpleasant surprise. In addition, the 9% interest rate promoter loan still continues. On the concall, MD can be heard getting questions answered from the CFO and then just them. Probably just a sign of inexperience which will improve with time but still, not a great look for prospective investors I am guessing.
My projections for FY23:
Annual revenue : 1950-1975 Cr (475Cr per qtr on current capacity plus 75Cr from Phase II capacity that comes online from Q2)
EBITDA : 410 Cr (21%)
PAT : 250 Cr (Tax rate 30%; Interest + Depreciation - 50 Cr annually)
EPS: 22.3
In spite of 2 people on the call asking it, MD wasn’t able to clearly clarify whether 464Cr revenue of Q3 was peak revenue considering Phase I expanded capacity or was there some spare to go. For that reason, I have considered 475Cr as quarterly run-rate before Phase II. Phase II will probably contribute 50-75Cr next FY and 100Cr from FY24. Given uncertainty on Management numbers, 20-21% EBITDA is probably a safer assumption. At a 22.3 EPS, I think the company will get a PE multiple between 12-15x, which translates to a price band of 270-335 per share. (Long term median PE multiple of company is 13.7; 5 year median PE is 9.4; 3 year median PE is 9.6 and 1 year median PE is 15.8)
I found this → Key O2 cylinder provider blacklisted for supply failure - The Economic Times (indiatimes.com)
It looks like during a peak demand time, they diverted some supply to other players for higher costs, and perhaps did not supply as per govt. contract. It says as much in the article. The management is justifying delay in supply on input side disruptions.
However, Its very murky, because, there could be pissed off bureaucrats who did not get their cut or the company saw a profit opportunity and acted un-ethically.
This has already been addressed in my earlier post
and been discussed on multiple forums elsewhere,stock fell 50% post the news.Please read all posts on the thread before posting old news.
This seems to be case of playing sector tailwinds where mgmt doesn’t have much role except ensuring operations are run smoothly, whether this gets re rated is a function of broader market perception and momentum.
Few things that are visible
Summary - End of day it is heads we win handsomely ( growth + rerating 2 to 4X), Tails we get no re rating and get a 1.5X type in course of FY23 based on growth - all scenarios with numbers summarized here
Charts
Steep run up from 100 to 290 from Nov onwards and now some healthy correction in a flag pattern, breakout here should resume upwards journey- which is usually a volatile one
Invested (lower allocation per risk appetite, with stop loss in this case)
Agree mostly with what you have said. Only thing is, competition and new capacities are both coming and coming fast. Confidence Petroleum is very aggressively making moves in CNG cylinders - it first took over a small facility, then announced its own capex and now 2 days ago has taken 50% stake in Maruti Koatsu (Erstwhile #3 or #4 player in CNG cylinder space). Its partnership with GAIL for CNG gas pumps in Bangalore is also there.
I think there’s enough demand in the near term to keep both companies happy. Once demand starts to saturate, prompt exit will be needed as margins will start eroding.
Like you said, with smart Management moves, this story could have re-rated faster.
Since the controversy around Mr. Khurana’s words continues,attaching a past concall:
20 min mark “You are already utilizing all of your 7 lk cylinders and new capacity is 2 years away.How will volume growth come?”
“…Debottlenecking…15% volume growth possible…”
24:25 “what’s your growth expectation for next year?”
“15-20% we can take”
Company clearly ended up doing a lot more even adjusted for bump-up from subsidiaries.Q2 itself India revs jumped from 232 cr in q4 to 303 cr.,a solid 30% growth which couldn’t have been led by pricing improvement alone.Throughout the call one can hear constant consultation from “Mr. Sanjeev” so it’s clear that the MD is not at home with the numbers of the company.
In the recently concluded call,the point of sourcing from Maharashtra Seamless came up.This will help improve inventory levels and cash flows big time.Any other management would’ve stressed a lot more on this and how they are “strategically” improving the WC of the company.EKC didn’t and we may not have even known about it if @Vivek_6954 hadn’t asked.And this is a structural change if it materialises!
The short point is Mr. Khurana is pretty weak at communicating the key strengths of the company unless asked specifically.This has been an old trend and probably gives a duller impression to the investor community.I personally remain confident that the company can surprise on both revenues and bottomline in the coming years.A lot will depend on Infra addition by the govt and how gas prices move.Let’s see what the company delivers,I am a very biased investor here.
i had done some shuttle butt, go to oxygen plant , owner said to me EKC had light quality , ramanand had better quality and durable also, but recently he is telling me that , chinese comapany selling so much lower price and their supply start so much better , no wants buy indian cylinder.
second anti thesis on CNG car cylinder, RTO is banned private CNG fitter, if someone do cng fitting in his car, insurance claim not pass, so old vehilce we will miss IMO, pls delete if irelevant.
Any idea when will this irritating 5% limit n ASM LIST be changed/ removed for EKC ? leads to lot of manipulation.
With most auto OEMs making CNG CVs and PVs, the retrofit market is likely to decline in a few years…
With so much scrutiny of the conference call, I hope the mgt. in its wisdom does not decide not to have one in the future. In any case about 99% of the listed companies don’t have a con call & still manage to perform well on the bourses if their numbers justify it. I guess as when reading the Annual Report, the answer lies somewhat in reading between the lines. Similarly, for me the take away from the con call was that growth is set to continue over the next several qtrs.
December qtr continued the process of increased sequential Sales as has been the case for several qtrs. now. The margins have taken a hit but continue to be very healthy & will in all likelihood improve going forward. The stock has seen decent price up move (doubled over six months), despite the recent correction, so a lot of share holders will be booking profits at every rise as is perhaps happening at the moment. I see the valuations getting better over the next 3-4 qtrs so staying invested will in all probability be handsomely rewarded. Of course it will not be linear & is likely to see sharp corrections periodically.
