CNG – Opportunity play for investors

A little know 12 year old company, Nitin Fire Protection Industries, got listed today on the stock exchanges. The issue price was Rs. 190 valuing the company at a PE multiple of 24. Most analysts had at that time termed the price to be high but considering the listing gains, they were proved wrong. The stock touched a high of Rs. 517 on NSE, a whopping 172% gain over the issue price, easily giving the best listing gains in recent time IPOs. Those who are not aware of the company, may consider it to be in the business of fire protection business, but the main business is the cylinders business which constitute 80% of total sales.

The high-pressure seamless cylinders primarily cater to the industrial, medical, fire-fighting and beverages segments. However the real play would be in the CNG space, as it is being increasingly marketed as an alternative eco-friendly fuel. The demand for CNG vehicles is expected to grow given the firm oil prices, lower running cost and rising environmental concerns. The Supreme Court’s decision mandating the use of CNG as auto fuel for heavy vehicles in New Delhi and to further enhance it into 28 highly polluted cities has created a demand for such cylinders by both original equipment manufacturers and conversion agents.

Globally, an estimated 6 million vehicles run on natural gas which is expected to grow to 50 million by 2020. The major export markets are Argentina, Brazil Pakistan, Iran and China. India could account for around 15% of the global natural gas market. Demand for CNG cylinders has been growing at over 40% for the last three years. There is a huge mismatch in the demand-supply of CNG cylinders, which augurs well for the existing players.

Everest Kanto Cylinder is the only other listed player in the business of manufacturing cylinders, having a market share of more than 80%. On completion of expansion programs, Everest Kanto will become the second largest in the world next to Faber Industries, Italy. Other unlisted players include Rama Cylinders, Maruti Koatsu and Bharat Pumps and Compressors. EKC supplies cylinders to BOC India, Inox, Tata Motors, Bajaj Auto and Ashok Leyland, and to gas distribution companies like Mahanagar Gas in Mumbai, Indraprastha Gas in New Delhi and Bhagyanagar Gas in Hyderabad. Given the first mover advantage and achieving economies of scale, EKC stands to benefit the most in this growing market.

The advent of CNG has opened new avenues for the industry. The upsurge in industrial activity, use of piped gas in residential and industrial segments, and increasing CNG-enabled vehicles are the key drivers, thus boosting demand for CNG cylinders.

Since there are very few players in this segment, companies are likely to be price maker rather than price taker. However, given low entry barriers, new players may enter this segment increasing competition. Other factors which may affect these companies adversely are the rise in prices of seamless tubes major raw-material for cylinders, lack of bargaining power with the suppliers, changes in government regulations, slowdown in the economy and fall in oil prices.

However, CNG penetration in India is set for strong growth, driven by cost economics, increasing gas supplies, environmental benefits and improving distribution infrastructure, and the demand for CNG cylinders is likely to rise due to the Supreme Court ruling, improving valuations of cylinder manufacturing companies.