The stock of Everest Kanto Cylinder, an industrial and CNG cylinder manufacturer, has seen some action after Merrill Lynch (on September 25) bought 6,50,000 million shares of the company at Rs 34 each. This comes at a time when valuations too look attractive at less than 0.5 times its book value and four-times its enterprise value (EV) to operating profit (Ebitda) FY14 estimates.
However, investors need to tread with caution as there are concerns as well. Analysts say these include redemption of its foreign currency convertible bonds (FCCBs), subdued demand in its key markets like India, China, UAE and the US, piling inventories and pressure on profitability.
Everest Kanto’s $35-million FCCBs are due for redemption on the October 10. And since the conversion price (Rs 271) is significantly higher compared to the current price of Rs 35.40, there is high probability of redemption, leading to an outflow of Rs 270 crore (includes redemption premium).
While Everest’s debt to equity ratio at 0.6 times in FY12 indicates scope for accommodating fresh borrowings, the real challenge is the servicing the debt (interest costs). In FY13, analysts are expecting the company’s sales turnover at Rs 620 crore and earnings before interest of Rs 4 crore. In this scenario, it will not be enough to cover the interest cost of Rs 28 crore (assuming fresh borrowing of Rs 270 crore) estimated by analysts, thereby leading to losses. This could possibly make it difficult to raise funds for refinancing its FCCBs.
In this backdrop, it is important the company’s liquidity position improves, which is possible if the business environment improves. Everest Kanto has manufacturing units in India, the US, UAE and China, with a total capacity of 1.3 million cylinders per annum. The company has been hit on account of slowdown. Indian operations, which accounts for over 40 per cent of revenue, is hit due to slower rollout of city gas distribution consequent to lack of domestic gas availability coupled with slow industrial demand.
Its second largest market, UAE, too has been hit due to geopolitical issues in Iran. In the June quarter, UAE region’s sales were lower by 66 per cent compared to the corresponding period last year. Sales in the US and Chinese markets are relatively stable, but the pressure is seen due to competition and lower demand hurting utilisation levels.
In fact, plant utilisation levels are very low across markets at just 16 per cent in China, 50 per cent in Dubai and 25 per cent in India. This has led to erosion in margins and other return ratios, increase in working capital, piling up of inventories and pressure on operating cash flows. While analysts are hopeful that FY14 onwards should be better in terms of demand and utilisations leading to some of these concerns easing, they don’t see any significant improvement in the near-term.
“The return ratios are expected to remain muted in the short to medium term. We have cut our earnings estimates for FY13 and FY14. However, we are positive about the long-term prospects of the CNG market due to the product’s inherent advantage,” said CRISIL Independent Equity Research’s analyst, in a recent note.
