Everest Kanto Management Discussions


FORWARD - LOOKING STATEMENTS

This report contains forward-looking statements identified by words like ‘plans, ‘expects, ‘will, ‘anticipates, believes, ‘intends, ‘projects, ‘estimates or other words of similar meaning. All statements that address expectations or projections about the future, including, but not limited to the Companys strategy for growth, product development, market position, expenditures, and financial results, are forward–looking statements. Since these are based on certain assumptions and expectations of future events, the Company cannot guarantee that these are accurate or will be realised. The Companys actual results, performance or achievements could thus differ materially from those projected in any forward-looking statements. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements, on the basis of any subsequent developments, information or events.

ECONOMIC OVERVIEW

Global Economy

The global economy is experiencing a slowdown in 2022 due to a combination of factors, including the ongoing effects of COVID-19, tightening financial conditions, higher-than-average inflation, and the ongoing Russia and Ukraine war. As a result, the global economy is anticipated to reach its lowest growth rate in 2023, estimated at 2.8%. However, there is an expectation of improvement as the growth rate is projected to experience a modest increase to 3.0% in 2024. In terms of global inflation, a decline is expected, although the pace of decline is predicted to be slower than previously estimated. Inflation is projected to decrease from 8.7% in 2022 to 7.0% in 2023, and further decline to 4.9% in 2024.

Indian Economy

Indias economy is undergoing a formidable recovery, despite the challenges posed by the pandemic-induced disruptions, the Russian-Ukraine conflict, and inflation. This resilient rebound can be attributed to the diverse sectors that are propelling the nation towards a return to pre-pandemic growth levels in FY23. India is poised to become a $7 trillion economy by 2030, driven by rapid financialization, a transition towards clean energy, and the digital revolution. This projection highlights Indias potential to double its economy in just seven years, leveraging factors such as its demographic dividend and robust domestic consumption, which have historically fueled its growth. With an average annual growth rate of 7.5% over the past two decades, Indias growth trajectory appears promising.

India is expected to maintain its position as the worlds fastest-growing large economy, as the International Monetary Fund (IMF) projects a growth rate of 6.1% for India in 2023-24. This positive outlook reflects the resilience and dynamism of Indias economy. Despite certain factors, such as a decrease in consumption and the implementation of tighter monetary policies, which may temporarily impact growth, Indias economic landscape remains promising. Furthermore, the proactive measures undertaken by the government, including the expansion of public digital platforms and initiatives to bolster manufacturing output, are expected to further fuel Indias economic expansion. With a favorable inflation outlook and a strong foundation for growth, Indias future shines bright as it continues to chart a path of remarkable economic success.

Source: Asian Development Outlook 2023; Industry News

INDUSTRY SCENARIO

Domestic Demand

The gas sector holds a significant position among the core industries in India and holds considerable influence over decision-making in various sectors of the economy. As Indias economy continues to grow, there is a corresponding increase in the demand for energy, particularly natural gas. This positive outlook presents attractive investment opportunities within the gas sector.

In the preceding year, the notable surge in CNG prices, driven by various factors, had a significant impact on the demand for CNG cylinders, primarily in the commercial vehicle (CV) segment. The resulting higher prices posed challenges for the CNG industry, leading to a decline in consumption.

However, the recent revision in the domestic gas pricing methodology is anticipated to have a positive effect on gas prices in India. This reduction in prices is expected to benefit several sectors, including the fertiliser industry, City Gas Distribution (CGD) consumers, and the power sector. In response to the price reduction, city gas distribution entities promptly passed on the benefits to consumers in the CNG and PNG segments. Consequently, the adoption of CNG and PNG is projected to gain momentum, fueled by enhanced affordability and cost-effectiveness of gas as a cleaner energy option. This shift towards cleaner energy sources aligns with the countrys efforts to drive an energy transition towards more sustainable and efficient solutions.

According to the ICRA report, CNG is expected to emerge as the second most popular power train in the near to medium term. Its penetration in the passenger vehicle segment is projected to rise to nearly 18% by 2027, a significant increase from the 11% recorded in 2022. These statistics further highlight the growing recognition and acceptance of CNG as a favorable alternative within the automotive industry.

In summary, the gas sectors importance in the Indian economy, combined with the recent developments in pricing methodology and market projections, presents an optimistic outlook for the industrys future. The revised pricing methodology, aimed at striking a balance between consumer affordability and industry viability, is poised to drive increased gas consumption and expedite the countrys transition towards cleaner and more efficient energy sources.

Gasification of the Indian economy

Target to increase share of natural gas in energy mix from 6.7% to 15% by 2030.

Approximately US $ 100 billion investment potential in Indian oil & Gas Sector.

Gas Sector is among eight core industries in India.

Oil & Gas sector accounts for around 35% of our energy mix.

3rd Largest total primary energy consumption in the world.

Energy Demand growth projected at a CAGR of 2.5% during 2019-2040 Approved.

CGD rollout: Potential to cover 53% of countrys area and 70% of population.

Opportunities in Natural Gas Sector:

CNG Usage Trends

By the year 2030, India is projected to have more than 17700 compressed Natural Gas (CNG) stations, marking a five-fold increase within a decade, and ensuring comprehensive coverage across the country. The demand for this alternative fuel is expected to increase as automakers boost production and introduce a greater number of vehicle models equipped with CNG kits, given the cost-effectiveness of CNG vehicles compared to those running on gasoline or diesel.

Trend in CNG fueling stations across the country

Increasing environmental consciousness also plays a significant role in driving the adoption of CNG. Many Indian cities currently exceed recognized air pollution standards, prompting various initiatives to establish eco-friendly transportation systems. One such measure is the car scrap page policy, which seeks to retire older, more polluting vehicles from the roads, incentivizing the purchase of new vehicles. Additionally, the conversion of city and state transportation bus fleets, as well as other mass transit vehicles, to CNG fuels, is expected to gain popularity nationwide as part of ongoing programs promoting cleaner fuels.

The City Gas Distribution (CGD) industry demonstrates greater affordability compared to the power and fertilizer sectors, making it resilient to higher gas costs. Natural gas has proven to be more cost-effective than competing fuels for most customer segments within the CGD space. With the expansion of gas networks into new cities, the cost advantage of Compressed Natural Gas (CNG), and the increasing adoption of Piped Natural Gas (PNG) in residential, industrial, and commercial sectors, the demand for natural gas in the CGD sector is expected to grow steadily.

The gradual development of the CGD sector will be driven by the rising awareness of environmental concerns, particularly in the automobile and industrial sectors where natural gas usage is seen as a substitute for coal. The use of natural gas is expected to increase to address environmental issues.

Source: Ministry of Petroleum & Natural Gas; ICRA Research

Industrial Usage Trends

With Indias renewed emphasis on expanding domestic manufacturing, the outlook for industrial demand appears promising in the coming years. Within this framework, there is expected to be an expansion in the demand for various gases that power a wide range of industrial activities, aligning with the countrys objective of achieving a 15% gas contribution in the fuel mix by 2030.

The market for industrial gases in India, encompassing oxygen, hydrogen, nitrogen, and carbon dioxide, is projected to witness a compound annual growth rate. This growth will be fueled by increasing demand from sectors such as metals and steel, automobiles, refineries, and chemicals, as well as the emergence of new gas-related applications in the country. Additionally, the healthcare and food and beverage industries, among others, are expected to contribute to the growth of the industrial gases market in India.

Supply to Medical Establishments

Medical gas supply systems play a crucial role in hospitals and healthcare facilities by establishing an ecosystem of specialized gases and gas mixtures. These include essential gases like oxygen, medical air, nitrous oxide, nitrogen, carbon dioxide, medical vacuum, and anesthetic gases. The utilization of these gases extends across various areas within healthcare facilities, including general wards, operating theatres, intensive care units, recovery rooms, and other major treatment rooms.

As medical facilities expand, both in urban and rural areas, there has been a steady increase in the demand for medical gases, cylinders, and related equipment from both the public and private sectors. This growth reflects the ongoing need to meet the rising healthcare demands of the population and underscores the importance of ensuring adequate and reliable supplies of medical gases in healthcare settings.

Aerospace and Defense:

The Aerospace & Defense industry on a global scale has witnessed significant growth driven by increased production of commercial aircraft and higher defense expenditures. In the aerospace sector, the demand is centered around next-generation, fuel-efficient aircraft, leading to a continuous rise in order backlogs. Gases play a vital role in this industry, extensively utilized for various applications such as welding, cutting, heating, laser operations, thermal spray coating, and heat treatment processes.

In the defense sector, heightened global tensions and geopolitical risks have resulted in increased spending. This is further augmented by the growing need to replace fossil fuels with alternative fuels for the operation of aircraft, combat ships, vehicles, and supporting equipment. The industry is actively exploring and adopting alternative fuel solutions to meet these requirements.

Fire Safety Equipment and Fire Suppression Systems

The increasing demand for advanced fire safety systems is likely to be fueled by various industries, including manufacturing, utilities, petrochemicals, mining, oil and gas exploration, energy and power, automotive, and construction. This growth is driven by the implementation of stringent regulations worldwide, which mandate higher safety standards at industrial, residential, and commercial premises. As a result, there is a growing emphasis on the adoption of advanced fire safety measures to prevent and mitigate fire-related risks.

EKCS BUSINESS FRAMEWORK

Everest Kanto Containers Limited (EKC), established in 1978, is a clean energy solutions company and a leading global manufacturer of seamless steel gas cylinders with over 20 million industrial gas and CNG cylinders currently in service.

EKC operates two manufacturing facilities in India located at Tarapur (Maharashtra) and Kandla SEZ (Gujarat) and two international facilities at Jebel Ali Free Zone in Dubai and Pittsburgh (PA), USA, with an aggregate capacity of over 1.5 million cylinders annually.

EKCs product range of industrial, CNG and jumbo cylinders are used for high-pressure storage of gases such as oxygen, hydrogen, nitrogen, argon, helium, air, etc and find applications in a wide variety of industries such as manufacturing, fire equipment/suppression systems, medical establishments, aerospace/defense, and automobiles apart from some specialized usage areas. The Company has a ~150-strong client base in these vertical segments including Tata Motors, Bajaj Auto, Hyundai, Toyota, BOC India, Praxair, Mahanagar Gas and Adani Gas.

Given its strong position in the Indian domestic market, where it enjoys a substantial market share, and wide acceptance across several key international markets built over the last four decades, EKC is poised to benefit from the increasing usage of gases in industrial production and automobile sectors based on both economic and environmental considerations.

Anticipated growth in the demand for gas cylinders stems from their expanding utilization in both traditional and emerging non-traditional applications. EKC has strategically established a comprehensive framework of capabilities, supported by versatile manufacturing assets, enabling us to cater to various facets of demand in both the Indian market and several high-potential usage markets. With over four decades of industry experience, our company has earned the trust and confidence of the industry, particularly in a product where quality, safety, and reliability are paramount considerations for cultivating preferred supplier relationships.

GLOBAL OPERATIONS

Dubai

EKC International FZE, a subsidiary of the Company in Dubai, deals with CNG cylinders, industrial cylinders, cascades, multiple element gas containers specialized fire suppression systems and fire detection/alarm systems. Its target markets include the Middle East, South America, Eastern and Western Europe. Further, the subsidiary has received PESO (Petroleum & Explosive Safety Organization) Approval that now enables it to supply cylinders world-wide, including exports to India. With the expansion in demand from multinational companies operating in the fire-fighting and allied fields in the Indian market, there is a need for supplying them gas cylinders approved to international standards and cleared by the Chief Controller of Explosives (CCOE) for imports to India. The approval of the Dubai plant opens another market opportunity for EKC to service global companies that have operations in India, without the need to maintain additional inventory, while keeping quality associated with the EKC brand intact.

USA

In the U.S., EKCs operates through CP Industries Holdings Inc, which is a world leader in innovation, producing large, seamless pressure vessels. The product portfolio includes ground storage and mobile transportation for industrial gases and alternative fuels, on board cylinders for passenger and commercial vehicles, flasks for the U.S. Government shipboard systems, specialty vessels for foreign military, vessels for oil and gas exploration and cylinders for other specialty applications. CPI also markets DOT-approved industrial cylinders sourced from India and Dubai.

Europe

Over the years, the Company has successfully expanded its presence in European markets via its subsidiary, EKC FZE, which caters to the Indian and Dubai plants and also sources products from the U.S. facility. The subsidiary has played a crucial role in composite cylinder product development for the US plant by leveraging its in-house expertise. Notably, the Company has gained access to key markets such as Italy, Germany, France and Hungary.

STRENGTHS

Continued Dominance in the Indian Market

Since its establishment in 1978, EKC has emerged as a notable player in India, specializing in high-pressure seamless cylinders. The Companys early entry into the market has provided it with a significant competitive advantage, allowing it to secure the largest market share across all sectors. This success can be attributed to EKCs longstanding relationships with customers, bolstered by its status as the countrys largest producer and its efficient supply chain for raw materials.

Well-Established Manufacturing Infrastructure

With multi-location production facilities across India, Dubai and USA, EKC has established itself as a global player in the industry. The cylinders manufactured by EKC have earned a global reputation for high standards of quality and comply with the most stringent specifications laid down by international bodies and local authorities. EKC manufactures cylinders conforming to Indian Standards such as IS 7285 (Part 1), IS 7285 (Part 2) and IS 15490 and international standards such as ISO: 11439, ISO: 9809-1, NZS: 5454, ISO: 4705D, EN: 1964, ISO: 11120, ECE R-110.

Experienced Management

EKCs core management team includes several eminent people with deep domain knowledge and understanding of business intricacies. The existing team has been associated with the

Company for decades, contributing substantially to its current position of leadership.

Renowned Worldwide

EKC Group exports to over 25 countries globally including countries in Southeast Asia, Middle East, USA, Europe, South America and Commonwealth of Independent States. Stringent quality standards and value-driven production norms underlie the Companys world-class products, global competitiveness, and superior logistical capabilities.

Extensive Product Variety and High Capacity

EKC, along with its subsidiaries, has set up global scale capacities aggregating to more than two million cylinders annually with products ranging from 1 litre to 3,000 litres capacity. Its wide and versatile range includes Industrial Gas Cylinders, CNG Cylinders, CNG Cylinder Cascades, Jumbo Cylinders, Jumbo Skids and Composite Cylinders.

Diverse Network of Established Connections

EKC has demonstrated the unique ability and flexibility to meet customer specifications in line with international standards. This is backed by an ecosystem of deep trust across suppliers, gas distributors, OEMs and regulatory authorities including the Chief Controller of Explosives, Bureau of India.

Commitment to Advancing Technological Innovations

EKC has always been the first mover in imbibing the latest emerging trends in cylinder manufacturing technologies such as powder coating painting booths and ultra-high productive machines and expects to maintain its commitment to improvements in all aspects of its production processes.

CHALLENGES, RISKS AND CONCERNS

Rise in Input Expenses

To maintain continuous manufacturing, EKC successfully manages all of its critical raw material suppliers. Additionally, it has expanded its local and international supplier network to ensure seamless access to essential raw materials. Unpredictable price changes for raw materials like seamless steel tubes, which can happen for a number of reasons, might hamper profitability and, in the short term, reduce demand. The marketing division routinely reviews the cost of raw materials to lower this risk.

Heightened Competitive Environment

The Company enjoys #1 position in the market and has been a preferred partner for buyers of high-pressure gas cylinders, including both public and private customers. Even though the Company has a strong market position, it does face competition from domestic as well as imported products.

New Product Development

With technological development, the possibility of newer product developments can emerge potentially serving as substitutes for the Companys products. However, it is important to note that such nascent technologies often come with substantial acquisition and maintenance costs.

Currency Exchange Rate Variation

Foreign currency exchange rates fluctuate on an on-going basis due to the constantly shifting political and economic conditions. Since seamless steel tubes, a key raw material, are primarily imported and priced in foreign currencies, this could have a considerable influence on the companys profitability. The companys treasury unit keeps a close eye on currency exchange rates and actively weighs the cost of hedging net exposures against its internal risk management policy.

Electric Vehicles

Despite the significant emphasis on Electric Vehicles (EVs), widespread implementation still faces obstacles, primarily due to the lack of operational charging infrastructure, hindering seamless integration. Moreover, the current downsides of EVs, such as higher costs, reliance on the power sources environmental impact, limited charging infrastructure, longer refueling times, and the need for rare metals in batteries, underscore the need for further development and improvements.

Litigation Risks

Given the scale and geographic spread of the Companys operations, litigation risks can arise from commercial disputes, employment related matters etc. Growing business stature of the Company may even lead to frivolous litigation that is without any legal merit, which is an inherent risk faced by all business entities. In addition to incurring legal costs and distracting the management, any litigation garners negative media attention and increases reputation risk. Adverse rulings can result in substantive damages.

Environmental Risks

Due its reliance on natural resources, the Companys business operations are subject to local environmental laws, especially at its manufacturing sites. The cost and compliance that is associated with such regulations can directly impact the Companys daily operations. As a responsible organisation, the Company follows all mandated guidelines and laws and adhere to norms with respect to the environment.

FINANCIAL VIS-A-VIS OPERATIONAL PERFORMANCE

The discussions in this section relate to the consolidated, Rupee-denominated financial results pertaining to the year ended March 31, 2023. The financial statements of the Company and its subsidiaries (collectively referred to as ‘EKC or ‘the Company) are prepared in accordance with the Indian

Accounting Standards (referred to as ‘Ind AS) prescribed under section 133 of the Companies Act, 2013, read with the Companies (Indian Accounting Standards) Rules, as amended from time to time. Significant accounting policies used in the preparation of the financial statements are disclosed in the notes to the consolidated financial statements.

FY2023 has presented its fair share of challenges for EKC, particularly in the CNG cylinder industry. Additionally, the negative impact on our performance was intensified by a decline in the high-margin commercial vehicle CNG segment. However, we continued to witness a steady contribution from the industrial segment, which partially offset the decline and supported our performance.

On a standalone basis, FY23 revenues stood at 789.7 crores, and EBITDA at 107.6 crores, with a margin of 13.6%. PAT stood at 72.1 crores. On a consolidated basis, revenues stood at

1,274.5 crores. EBITDA stood at 161.1 crores, with a margin of 12.6%, and PAT stood at 76.0 crores. Revenue from CNG segment stood at 619.9 crores, contributing to 48.4% of revenue, followed by Industrial business at 336.8 crores, contributing 26.7%, and Jumbo cylinders at 249.9 crores, contributing 19.8% of total revenue.

Throughout the year, our profitability was significantly impacted by multiple factors, including a decline in revenues and the escalating costs of raw materials and other expenses. These challenges created a difficult operating environment, placing downward pressure on our financial performance. Despite this, we have strengthened its balance sheet position. Through prudent financial management, we have taken proactive measures to enhance our financial stability and resilience. By fortifying our balance sheet, we have positioned ourselves to navigate the evolving market conditions more effectively. During the year, the Company successfully operational zed the second phase of the Brownfield facility, resulting in a capacity increase of 100,000 cylinders and raising our total rated capacity in India to approximately 1.2 million cylinders annually. Our strategic focus now lies in optimizing the utilization of our overall capacity through efficient production planning and inventory management, allowing us to meet the up tick in demand anticipated in the coming year.

The following table gives an overview of the Consolidated Financial Results of the Company

( In Crores) FY23 FY22
Income from Continuing Business 1,274.5 1,698.8
Operation
Earnings before interest, tax, 161.1 392.0
depreciation and amortization
(before other income)
Profit Before Tax (PBT) 115.9 359.9
Profit after Tax from continuing operation 75.9 264.5

Dividend

For FY 2022-23, the Board of Directors recommended a dividend of 0.70 per share. For details on dividend distribution policy, please refer to the investors section of the Companys website at www.everestkanto.com.

Outlook

Although there has been an unexpected decrease in the demand for CNG cylinders during the year, we maintain our confidence in the long-term potential of the industry. The Central Government remains dedicated to achieving net-zero emissions and has established a target of increasing the share of Natural Gas in the primary energy mix to 15% by 2030. Consequently, there is a significant focus on developing the CNG infrastructure. Despite the challenges we have faced, the company remains optimistic about the potential for CNG cylinders in India. The governments commitment to increasing the utilization of eco-friendly natural gas, coupled with fiscal incentives and infrastructure development, creates a favourable environment for CNG vehicles. Additionally, the government has recently approved the recommendations of the Kirit Parikh panel on natural gas pricing, which includes the imposition of gas price caps. These reforms have resulted in a decrease in CNG prices across the country. This development further strengthens the outlook for the future utilization of CNG in the nation and enhances the attractiveness of CNG as a viable and affordable fuel option. The continuous expansion of the CNG distribution network across the country complements these reforms and supports the growth prospects of the CNG vehicle market.

Internal Control System

The Company has an Internal Audit System commensurate with its size and nature of business operations. At the start of every financial year, the Audit Committee finalizes scope of work with the Internal Auditor wherein key and other areas are identified for verification for onward submission of their report to the Audit Committee of the Board. The Internal Auditor submits report on quarterly basis. EKC has also implemented adequate internal controls towards achieving efficiency of operations, management of resources, accuracy and promptness of financial reporting and compliance with the applicable laws, rules and regulations.

Human Resources and Industrial Relations

The Company recognizes importance of manpower in overall business growth of the Company; hence it provides substantial thrust on the human resources of the Company. The Company undertakes various HR initiatives to enhance productivity of the employees thereby leading to integration of their personal and Companys goal. Training and Development of the employees forms an integral part of the Companys policy towards achieving its objectives. The Company has resilient talent management framework facilitating in identifying and nurturing employees with long term potential to take up critical leadership roles. The objective of this meticulous and consistent effort is to build a strong future-fit talent pool that is empowered to take the organization into a new orbit of growth and sustainability, keeping in view the career aspirations. The Company has XX employees as on March 31, 2023.