Stepping on the gas

IPO REVIEW

Everest Kanto is dominant in the industrial cylinder business but the industry is plagued with overcapacity.

Everest Kanto Cylinders (EKC), one of the few big manufacturers of high pressure seamless gas cylinders, is tapping the market with a Rs 90 crore issue to fund its new project at Gandhidham in Gujarat. With a near monopoly and a good client base, the company boasts of a six-month order book.

But there is an overcapacity in the domestic market already, which means that the company has to focus on exports for further growth. Also the company's dependence on a single supplier for its key raw material and an export business primarily focused on Pakistan and Iran pose additional risks.

EKC's cylinders are used in various industries apart from storage cylinder cascades with fittings and accessories for compressed natural gas (CNG) and other industrial uses.

It is a market leader in the industry with competitors that include Maruti Koatsu Cylinders and Bharat pumps and Compressors Ltd. There isn't any fear of cut-throat competition for now as EKC leads its competitors by a fair margin both in terms of existing capacities and utilisation.

In 2003-04, for instance, EKC had a production capacity (in India) of 2,70,000 cylinders with a utilization rate of 62 per cent against its competitor Maruti Koatsu's capacity of 90,000 cylinders with a far lower utilization rate of 37 per cent. In fiscal 2005, EKC's utilisation level was much higher at 87 per cent.

The company has a good customer base which includes Mahanagar Gas, Indraprastha Gas, and BOC. The other encouraging factor is that compressed natural gas (CNG) is a relatively new business for the company and is fast growing compared with the conventional industrial segment.

Also industry sources add that demand for CNG cylinders from neighbouring Pakistan and Bangladesh would mean more business opportunity for EKC. It has recently set up a plant in Dubai to cater to these markets.

The proposed facility at Gandhidham has its own advantages. The project is set up at a site keeping in view the proximity to Kandla and Mundra ports of Gujarat, which makes it convenient for importing raw material and exporting finished goods. Further the company is likely to get excise and sales tax incentive from the Centre and state government of Gujarat under various schemes.

EKC's venture into the manufacture of gas cylinders dates back to early 1978. Established in collaboration with a leading Japanese cylinder manufacturing company, it went into manufacturing small sized seamless cylinders of water capacity - 1 to 21 litres. In 1986, EKC established facilities for manufacturing large sized cylinders of higher water capacities - 21 to 80 litres.

Today it manufactures a range of high pressure gas cylinders with higher water capacity of about 280 litres, and which can withstand an extreme working pressure of 400 Bar. The company's plant in Dubai (UAE) went into commercial production during 2003-04.

The company has kept a price band of Rs 140-Rs 160 for its issue, a premium of Rs 130-Rs 150 on the face value of Rs 10. Bulk of the proceeds is to be invested in the new facility.

This will nearly double its annual capacity. With the addition of the new capacities which are expected to add 2,40,000 cylinders by December 2005 and another 1,00,000 by the end of FY06, the total capacity of cylinders is expected to jump to more than 7,00,000 lakh cylinders. The total domestic demand is projected to be around 4,00,000 cylinders during the same period.

This means much of the capacities will have to be channelised for exports. Director Puneet Khurana is upbeat on the overall demand both overseas and domestic put together. However, tapping the international markets would be difficult given the competition.

Besides, tapping new geographies may be tough given that every country has its own safety norms for cylinders. Currently, the company exports predominantly to countries such as Iran and Pakistan. The eco-political climate in these countries makes this business somewhat risky.

Analysts point out that the company's sales and profit figures dipped in 2003-04 as one of its major client Indraprastha Gas did not give a repeat order. Sales fell to Rs 73.79 crore from Rs 88.82 crore, while the profits took a hit from Rs 4.28 crore to Rs 2.23 crore. This demonstrate the company's dependency on few clients and that if repeat orders do not come through, it can upset financials quite a bit. 
 

FINANCIALS
(In Rs crore)	FY05	FY04	% change
Net sales	132.40	73.78	79.45
Other income	3.59	3.77	-4.77
Operating profit	28.79	8.83	226.04
OPM (%)	21.74	11.96	978bps
Net profit	14.27	2.22	541.92
NPM (%)	10.78	3.01	776bps

EKC is dependent upon a single producer the Tenaris group through its various plants for procuring seamless steel tube, its key raw material. Hence any change in terms and conditions by the supplier may also adversely impact operations.

Besides, the company can also be impacted by large scale fluctuation in steel and oil prices. Though the company has performed well in FY05 it was on a lower base in FY04 owing to the fall in revenues in FY04. There is no other major player in this industry and, hence, comparison is restricted.

On the basis of earnings in FY05 and pre-issue equity, the P/E multiple works out to 11.77-13.45x. Considering that there is a supply overhang in the domestic market and export markets are tough to crack, the company may find it tough to show steady growth.

Issue opens: November 22, 2005
Issues closes: November 25, 2005