CITI, 4 March 2008
Everest Kanto Cylinder
Buy: Announces Acquisition of US Assets; Appears Positive
Buy/Medium Risk 1M
Price (04 Mar 08) Rs288.05 Target price Rs437.00
Expected share price return 51.7%
World leader in large, seamless cylinders
Profitable business; ~24% operating margin
Debt-free transaction; prima facie positive
Valuation
Our 12-month target price for EKC of Rs437 is based on 22x Sep09E earnings, representing a discount to fair-value multiples of 23-30x for its manufacturing / engineering peers in India. We base our target multiple on mid-FY09E earnings because we believe it better captures the contribution from China, full utilization of Dubai, and part contribution from the newly announced expansions. We prefer comparing EKC with capital goods companies that manufacture industrial goods that have a similar growth profile. However, given the difference in the nature of the business and the higher order book visibility of these companies, we believe EKC should trade at a discount to its peers. EKC is also a leveraged play on the alternative energy/CNG theme and one of the most leveraged plays to the expanding city gas distribution market in India. Our target P/E is well supported by an EPS CAGR of 47% for FY07-10E.
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