Everest Kanto Cylinder Ltd’s (EKC) Q3FY11 results were inline with our expectation as net sales grew by 16.6% YoY to Rs2.0bn, driven by Dubai operation. OPM expanded by 619bps to 18.7% on the back of lower raw material cost. Coupled with higher other income and lower interest cost, the company reported adj net profit of Rs209mn (PINCe Rs191mn) against adj loss of Rs24mn in Q3FY10.

Dubai operations driving growth: Dubai operation registered robust growth of 2.3x YoY in revenues more than offsetting the degrowth of ~20% in Indian and USA operations. PBIT margins for Dubai increased to 39.0% against
6.7% YoY. Capacity utilisation for Dubai is ~109% and volumes for 9month period is up 60% YoY

Other geography remain a concern: China and US facilities are still away from the breakeven and are making loss at PBIT level. Apprehensions pertaining to Indian operations continue as revenues declined by 20% YoY with a disappointing PBIT margins of 5.7%.

Outlook: Dubai facility is expected to deliver robust results going forward. However, major concern remains with sluggish offtake by Indian OEMs. With delays in development of CNG infrastructure in the country, conversion from Petrol/Diesel to CNG in secondary market is also not picking up. Margins from Indian operation is expected to remain under pressure in near term. Post commissioning of Kandla unit (Q1FY12), where plate will be used as raw material, EKC should be in a position to expand its market share. Business from USA and China facilities are also expected to remain under pressure for some more quarters due to lower offtake.

VALUATIONS AND RECOMMENDATION We lower our earnings estimates for FY11 and FY12 by 12% and 25% respectively on the back of depressed performance in Indian market. At the CMP of Rs79, EKC trades at a P/E of 16.8x & 10.6x and EV/EBITDA of 9.3x & 6.1x for FY11E & FY12E respectively. We maintain our ‘HOLD’ recommendation with a reduced target price of Rs90 (12x FY12 estimates).