Wednesday, July 22, 2009


Performance under high pressure

We continue to view EKC as a structural story with short-term challenges owing to the situation in Iran and domestic gas supply disruptions. The company remains confident of robust growth in 2HFY10 on the back of improved gas availability. The second half of FY09 was a weak period for EKC’s standalone operations, leading to increased inventory at the end of the year. We expect the inventory situation to improve once demand starts picking up in 3QFY10. The product mix continues to improve, with the low-margin industrial business now forming only 10% of the total revenues.

MD&A highlights the big opportunity in the domestic business: Natural gas currently forms only 8% of India’s total energy mix, as against the global average of 24%. Gas supply is expected to increase from 119.98mmscmd currently to 197.09mmscmd in FY11. Demand for CNG is expected to treble at 7% of total gas demand in the next five years. CNG is currently available at only 1% of India 35,000 retail fuel outlets. With the government’s plans to launch city gas distribution
in over 200 cities, demand for CNG vehicles is likely to surge, which in turn would lead to demand for cylinders.

Healthy operating cash flows despite worsening of inventory situation: The Company’s inventory situation worsened in FY09. The company ended the year with almost 10 months of inventory, including finished-goods inventory of 30 days and WIP inventory of 64 days—an indication of the weak demand in 4QFY09. Raw-material inventory also increased by 10 days, as weak demand for CNG cylinders in 4Q precluded inventory reduction. In spite of an incremental investment of Rs2,039m into inventory funding, the company registered positive operating cashflow of Rs1,201m.

Lower-margin industrial business now forms only 10% of overall revenues: The share of the low-margin industrial cylinders business in EKC’s revenues has dropped to 10% after the CPI acquisition. Jumbo cylinders form only 0.3% of EKC’s volume sales, but their high realisations mean they account for 18% of overall revenues. UAE operations now contribute ~60% of the company’s profit. Given the tax incentives at that plant, EKC’s tax rate has dropped from 19% in
FY08 to 10% in FY09.

To see full report: EKC