Nitin Fire's recent capacity expansion will help it to take advantage of robust global demand for CNG cylinders.
Nitin Fire Protection Industries (NFPI), a leading player in the fire security and protection systems, has grown at a healthy pace thanks to rising industry demand in India and in overseas markets. However, its recent foray into manufacture of seamless cylinders will propel growth rates further.
The company’s revenues are now expected to grow at over 70 per cent per annum over the next two years, primarily due to robust industry demand driven by growing demand for CNG (compressed natural gas) as an alternative fuel. This demand will be met with the help of new capacities commissioned in April 2008.
Nitin Fire’s business can be divided into two different segments, primarily fire protection and security products, which account for about 70 per cent of total revenue and the rest accounted by CNG and industrial cylinders.
The company carries its fire protection business through its subsidiaries operating in different segments like security, fire protection to intelligent building management systems. These products are primarily sold to industrial clients for different applications including fire protection, fire detection alarm, building automation and security.
In this segment, while its competitors include listed players such as Zicom and Honeywell Automation, the company’s standing can be gauged from the list of clients. NFPI has supplied equipment to many well known companies such as Reliance Industries, RPL, ONGC, Maruti, ICICI Bank and Tata Power among others.
Export markets
The company has also taken several steps to increase its presence in some of the largest and growing overseas markets such as Middle East and Europe.
The company has tied-ups with leading players in the fire alarm and security systems business, like Air Sense Technology, UK. It has already received several approvals for its products for sale in the European and other markets.
To strengthen its position in Middle East, the company formed a 100 per cent subsidiary, Nitin Ventures, which will participate in emerging opportunities in these markets. Nitin Ventures has recently acquired a 40 per cent stake in a Dubai based leading fire protection company, New Age Company.
Overall, Nitin Fire’s fire protection and security division is expected to grow at about 15-20 per cent on the back of demand in the domestic and robust growth in UAE market. The increasing need for fire protection and security systems in almost all the segments (residential, commercial and industrial) augur well and will drive growth in future as well.
Fuel for growth
Even as the fire protection business continues to grow at a healthy pace, the company’s foray into the industrial and CNG cylinders space will propel growth rates in the coming years. With the new capacities now operational, the cylinder business which was about 30 per cent of total revenues in FY08 should see its share rise to 50-55 per cent in FY09 and 65-67 per cent in FY10.
With rising crude oil prices, operational costs for running automobiles is turning out to be an increasingly costly affair; higher prices of the fuels such as petrol and diesel is denting consumers’ pockets. High prices apart, rising concerns over global climate change is also leading to the search for less polluting fuels. This has led many countries to promote CNG as an alternative cost effective fuel.
“The cost of CNG as a fuel compared with the petrol is about 50 per cent lower in India. While in other countries it is much lower making CNG as a better choice,” says Rahul Shah, Executive Director, Nitin Fire Protection Industries. Average
Sizable opportunity
Considering its advantages, today more and more vehicles in India and globally are run on CNG and many more are being converted to use CNG, especially in Asian countries.
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The company believes that the demand for the CNG is growing globally, which is also a reason for the company’s focus on export markets like Pakistan, Malaysia, Bangladesh, China and so on.
“Pakistan converts about 1,000 vehicles a day (ready to use natural gas) compared to 100 vehicles a day converted by India. India is gradually gaining and is considered to be a big market for natural gas,” says Rahul Shah.
The fact that the country’s largest car maker (Maruti), too, is investing towards developing vehicles that will use CNG as fuel, is an indication of things to come.
Globally, if the current scenario remains (high crude oil prices) the trend is expected to continue and demand for CNG cylinders is expected to grow at 18-19 per cent annually.
Expansion benefits
Nitin Fire would be the key beneficiary of this growth. The company has recently commissioned a facility to produce 500,000 cylinders per annum, making it the second largest high pressure seamless CNG cylinder manufacturer in India, after Everest Kanto Cylinders.
This facility is located in an SEZ and would be used for exports (70 per cent of production), while the remaining will be sold in the domestic market. Since, the new facility has started in April 2008 the benefits will gradually accrue over the FY09 and FY10.
Considering a 35 per cent capacity utilisation in FY09, the revenue expansion gains works out to Rs 108.5 crore based on the current realisations of Rs 6,200 per unit. Likewise, for FY10, the revenue works out to Rs 195 crore at 60 per cent utilisation.
| EXPANSION GAINS | ||
| CNG Cylinders | FY09E | FY10E |
| Total capacity (unit) | 500000 | 500000 |
| Utilisation (%) | 35 | 60 |
| Production (units) | 175000 | 300000 |
| Realisations (@ unit) | 6200 | 6500 |
| Sales (Rs cr) | 108.5 | 195.0 |
| Operating margins (%) | 25 | 26 |
| Operating income (Rs cr) | 27.1 | 50.7 |
This is a significant increase in revenue compared to its total revenues of Rs 132.4 crore in FY08. On the demand front, the company already has an order book of Rs 80 crore. In the long run as the demand grows, the company can enhance its capacities up to 700,000 (approved capacity) units per year.
Investment rationale
Nitin Fire’s business prospects look good in light of the changing perception towards fire protection and security systems, from a luxury to a necessity. Likewise, the need for alternative fuels that are cost efficient and environment friendly (like CNG) is positive for its CNG cylinder business.
| FINANCIALS | |||
| Rs crore | FY08 | FY09E | FY10E |
| Sales | 132.4 | 275.0 | 394.5 |
| Growth (%) |
-- | 107.7 | 43.5 |
| Revenue mix (x) | |||
| Fire systems | 70.0 | 44.0 | 33.0 |
| Cylinders | 30.0 | 56.0 | 67.0 |
| EBITDA (%) | 19.2 | 21.0 | 23.0 |
| Net profit | 19.4 | 40.4 | 63.1 |
| Growth (%) |
-- | 108.4 | 56.1 |
| EPS (Rs) | 16.7 | 34.8 | 54.4 |
| PE (X) | 18.8 | 9.0 | 5.8 |
The company’s initiatives to grow in these businesses along with healthy growth opportunities in these segments will ensure that Nitin Fire grows at a fast clip. Considering these facts, the stock, at Rs 314, currently trades at a PE of just 5.8 times its estimated FY10 earnings and, can deliver 30 per cent returns in the next one year.
