Gas-powered growth

We expect industrial cylinders to show strong growth over the next few years, backed by strong growth in the Indian manufacturing sector, which is expected to show double-digit growth rates. Government initiatives in projecting India as a medical tourism hub and higher investments in health care would also drive demand for industrial cylinders used to store oxygen.

The Indian government also plans to provide sops for food-processing units so as to boost the agricultural sector, which would again provide momentum to growth in industrial cylinders.

Compressed natural gas (CNG) is believed to be the cleanest burning fossil fuel, compared to petrol, diesel and even liquefied petroleum gas. We expect demand for CNG cylinders to show robust growth not only due to environmental issues and cost-effectiveness but also to the increase in natural gas availability throughout the world. We expect many cities in India to be covered by CNG refuelling stations due to increase in the availability of gas, which in turn would lead to increase in demand for CNG cylinders.

We see a gradually shifting trend in regard to the building of fresh capacities in high-growth emerging markets like China and India on the back of strong industrial growth in these markets, availability of technology and cost-competitiveness. We expect companies like Everest Kranto Cylinder and Nitin Fire to benefit from this trend.

Everest Kranto Cylinder: EKC is all set to more than triple its current production capacity from 8,06,000 cylinders to more than 28 lakh cylinders in the next four or five years, with capacity additions planned in China, Gandhidham and at the Kandla special economic zone (SEZ). The company has all the requisite approvals in place to sell its products in 16 countries.

We believe that these capacity expansions are planned at the right time to benefit from the increasing concern over pollution and cost of crude. We expect its net sales and bottom line between 2006-7 and 2009-10 to have 45.9% and 56.8% CAGR respectively. EKC is trading at a 21.8 times and 14.9 times its 2008-9 and 2009-10 earnings. We rate the stock a market performer, with a price target of Rs 390.

Nitin Fire Protection Industries: NFPIL is setting up the CNG cylinder plant at the Visakhapatnam SEZ, a tax-free zone. We expect its effective tax rate to come down drastically over the next few years, which would help expand its margins and improve its competitiveness. We expect the top line to have a 64% CAGR between 2006-7 and 2009-10 and the bottom line to have an 89.8% CAGR. The stock trades at 13.1 times and 10 times its 2008-9 and 2009-10 earnings. We recommend Buy with price target of Rs 735.