Stock Views on Everest Kanto Cylinder, Amtek Auto, Arvind Mills

CITIGROUP on Everest Kanto Cylinder

CITIGROUP remains positive on Everest Kanto Cylinder (EKC) and has recommended a ‘buy’ rating with a price target of Rs 365 due to its highest leverage to the strong growth that city gas in India is likely to witness over the next few years. EKC is the largest domestic manufacturer of high-pressure gas cylinders used for storage of industrial gases and CNG. EKC’s Q1 FY09 net profit of Rs 35 crore was up 57% year-on-year y-o-y) and well above expectations. The 12-month target price of Rs 365 is based on 19x September ’09E consolidated earnings. Key risks include: 1. Exposure to a single supplier; 2. China — a hitherto unexplored market; 3. Competition — low physical barriers to entry have led to some players entering the market in the recent past; 4. Project risk — EKC is implementing significant expansion plans that are subject to time and cost overruns; 5. CPI — integration and execution risks related to the acquisition of CP Industries; 6. Crude prices.

EDELWEISS on Amtek Auto

EDELWEISS has maintained its ‘accumulate’ rating on Amtek Auto and awaits clear signs of margin improvement. The company has been facing resistance to price revisions from its customers. Over the past three years, the standalone capex was Rs 1,500 crore. The company plans to consolidate its operations now, with incremental capex of only Rs 200 crore over the next two years. This is expected to aid improvement in return ratios, going forward. In addition, the company is looking at inorganic growth opportunities abroad to cement its position in the European and American auto markets. This project is valued at Rs 300 crore, of which, Amtek Auto’s equity contribution will be Rs 75 crore. The joint venture is likely to start operations Q4 FY10E onwards, and is expected to improve the company’s margins, going forward. The merger of group companies and subsidiaries is on track, and is likely to be completed by the end of March ’09. Further, the company is likely to house all its overseas subsidiaries in a Netherlands based holding company to streamline the group structure.

MORGAN Stanley on Arvind Mills

MORGAN Stanley has downgraded Arvind to ‘equal-weight’ and reduced the target price to Rs 34 from Rs 85. It believes that multiple macro headwinds are likely to force Arvind into a loss-making company in FY09. A slowdown in end consumer (US and EU) demand for its denim fabrics business is likely to delay the potential recovery in the denim cycle. A sharp rise in input costs such as cotton, power, fuel and chemicals is likely to impact margins. Huge debt and related financing costs are likely to impact net profit. The company’s forward cover for the dollar at Rs 40 for FY09 is likely to cap the potential benefit due to the current depreciation in the rupee. Although the company is adopting stringent cost-control measures, these may not be sufficient to help it earn a profit in FY09. In the current market environment, investors will be unwilling to pay value for its real estate and joint ventures, which can only be monetised in FY12. The positive catalysts are quick monetisation of its large real estate properties and cost control-driven margin expansion.