>Nitin Fire Protection (KARVY)

We recently met Mr. Rahul Shah, Director of Nitin Fire Protection (NFPIL) and he indicated towards disappointing 4QFY09 and difficult FY10E for the fire protection and safety business. However the company was bullish on the domestic CNG business.

In the fire protection and security business, the demand has been negatively impacted due to slowdown in construction activity - both commercial and residential. Of the various contracts awarded to the company, Nitin Fire has not been able to execute few of them because of the client's decision to slowdown or hold that particular project. Accordingly that would lead to difficult 4QFY09 for the company.

In the CNG cylinder space, in FY10E the company is looking to focus more on domestic market. Pakistan is major market for CNG cylinder business, but the current relationship with Pakistan is expected to hamper the export activities from India. Also, the company believes that CNG
cylinder business in India would grow at a robust pace thereby providing them the opportunity to supply their products in the domestic market. Since the company's plant is situated in SEZ, domestic sales would attract full income tax rate as against income tax exemption enjoyed by the
company on export sales. We expect capacity utilization of 20% and 40% for FY09E and FY10E respectively at the company's 500,000 cylinder capacity plant at Vizag (Andhra Pradesh). In the industrial cylinder segment due to slowdown in the industrial activity, we expect the company to sell ~73000 cylinders in FY10E, which is 20% lower than our FY09E estimated sales volume of ~91000 cylinders.

Due to the above mentioned reasons, we are lowering our sales estimates from Rs2,758mn to Rs2,380mn for FY09E and from Rs3,265mn to Rs2,910mn for FY10E. For FY09E, we are lowering our EBITDA margin estimates from 19.2% to 17.7% primarily on account of MTM losses expected during 4QFY09 due to depreciating rupee. For FY10E, we are increasing our EBITDA margin estimates from 21.5% to 22.2% on account of fall in commodity prices and due to higher contribution of CNG cylinder in the overall business mix. We are lowering our net profit estimates from Rs397mn to Rs323mn for FY09E and from Rs502mn to Rs429 mn for FY10E. For FY10E, due to expected higher domestic sales from the SEZ unit, we have increased our effective tax rate from 24% to 29%.

We expect the company's earnings to grow by 32% during FY10E primarily on back of better capacity utilization of the company's Vizag plant. However due to slowdown in the construction activity and corporate capex plans; we expect the company's fire protection and industrial cylinder segment would be hampered in FY10E. On back of lowering of our EPS estimates and lowering of PE multiple to reflect the current market valuation, we are reducing our price target by 33% to Rs160 and change our recommendation from BUY to Outperformer.

To see full report: NITIN FIRE PROTECTION