Everest industries ltd (NSE Code Everestind) - Oct'11 Katalyst Wealth's Alpha Reco

Everest Industries Ltd (NSE Code – EVERESTIND)
Complete building solutions company !!
Alpha/Alpha Plus stock recommendation for the month of Oct’11

www.katalystwealth.com

Content Index

• Everest Industries Ltd – An Introduction :- Slide #3

• Everest Industries Ltd – Business & Industry Overview :- Slide #10

• Everest Industries Ltd – Financials :- Slide #29

• Concerns – Slide #33

• Conclusion – Slide #35


Everest Industries Ltd – An Introduction


Everest Industries – Complete Building solutions company !!

Everest Industries Ltd (EIL) was founded in 1934 and is one of India’s fastest growing building solutions company. EIL
has an exhaustive product portfolio of Ceilings, Walls, Flooring, Cladding, Doors, Roofing and Pre-Engineered Steel
Buildings for the Industrial, Commercial and Residential sectors.

Its manufacturing facilities are located at Bhagwanpur, Nashik, Coimbatore, Kolkata and Kymore. EIL has installed
capacity of 710000 MT in Building products and 30000 MT in Building steel with capacity utilization of 88% and 64%
respectively.

With over 76 years of rich experience, it currently serves to 1,00,000 villages across 600 cites through 31 sales
offices and has a strong distribution network of 6000 retail outlets with more than 1600 qualified and experienced
engineers, designers and technicians spread across the nation. It also exports its products to Europe, Africa,
Australia and Asia.

EIL’s business can broadly be split into 2 verticals, namely, Building Products Division (Roofing, Boards and Panels)
and Pre-engineered Steel buildings.


Everest Industries – Investment Snapshot (As on October 29, 2011)
Recommendation :- BUY
Accumulation Range :- 130-140
Portfolio allocation :- 3%
1st Profit Booking :- Sell 50% at Rs 265
2nd Profit Booking :- Hold remaining for
further updates through Alpha Weekly

Current Market Price – Rs. 156.00

BSE Scrip Code – 508906

NSE Scrip Code – EVERESTIND

Bloomberg Code – EVI IN

Market Cap (INR Crores) – Rs 235 crores

Total Equity Shares [Mn]– 15.09

52 Week High / Low – Rs. 241.50 / Rs. 127.55

Promoter’s Holding – 49.83%


Everest Industries & ACC Ltd – What’s the relation?

Everest Industries Limited, the pioneer of the Asbestos Cement Roofing Sheets (AC roofing Sheet) in India was
incorporated in Mumbai in April 1934 as a Private Ltd. company with two shareholders Turner & Newall P.L.C,
UK.and M/s C.P.Cement Co. Ltd. (which later merged with other companies to form ACC in 1936).

EIL set up their first plant in Kymore - Katni, Madhya Pradesh in 1934 followed by the second in Mulund, Mumbai in
1937, third at Calcutta, West Bengal in 1938 and fourth in Podanur, Coimbatore, and Tamil Nadu in 1953.

• In Sep. 1960 - Asbestos Cement Limited, became a Public Limited Company.
• In Oct. 1983 - Company’s name was changed to Everest Building Products Ltd.
• In Mar. 1989 - T&N sold their stake to Eteroutremer SA Brussels, a wholly owned subsidiary of Eternit Group,
Brussels and the name of the company was changed to Eternit Everest Ltd.
• In Sep. 1995 - Another most modernized plant was set up at Lakhmapur, Nashik, Maharashtra & the plant at
Mulund was closed.
• In Sep. 1997 - “Eternit” was taken over by “Etex Group” of Belgium a $ 2.6 billion business conglomerate, world
leader of Fiber Cement Products.
• In Feb. 2002 - “Etex Group” exited from India. Their stake was acquired by ACC and in July 2002 the name was
changed to M/s Everest Industries Ltd


Everest Industries – Rise from the ashes !!
In 2001 EIL experienced the ever-intense turmoil when the Etex Group of Belgium decided to quit their Indian
operation and leave Eternit Everest (EIL’S earlier name) in a vein and lurch with an uncertain future. The Etex Group
being a European Multinational had to follow the guidelines of the European community regulations. The European
community had imposed ban on usage of Asbestos and products made of it.

By quitting the Indian operation the Etex would have come out of Asbestos Business completely. Thus Etex Group
was given the deadline by Belgian Government to be out of Asbestos business by 1st January 2002.

The pioneer and the price premium company was up for sale. The news spread led to obvious aggression from the
competition which took full advantage of the situation by not merely capturing the Everest Market to their fold, but
also pretended as potential buyers and visited all the plants, locations and collected the all the marketing data for
their use and benefit.

At the time of Etex exit, the situation was worst possible. The future of the Company was uncertain and in deep
turmoil.

ACC Take over

ACC right from the inception had 26 % stake in EIL. This was increased to 76% in February, 2002 by acquiring /
buying out Etex Group Share Holding.

Thus, EIL became the subsidiary of ACC and Mr. M.L. Gupta, Resident Director cum corporate advisor ACC, took over
as Managing Director, replacing Mr. A.K. Batra.


Everest Industries – Key Investment highlights
Improving demand scenario: The government is targeting a sustained economic growth of over 8% this year. This
growth would include a 4% growth in the agricultural sector, 10.30% in industrial, 11% in construction and 9.60% in
the services sector. EIL operates in these key sectors and will benefit from the anticipated thrust by the government.
The demand for EIL Building Products is strong in rural, commercial and industrial sectors.

Demand for pre-engineered buildings (PEB) and ready-to-use building products is growing swiftly for faster
construction and efficient project management. Manufacturing industries like automobile, power, textiles,
engineering goods and services like logistics, warehousing and infrastructure are large users of PEBs and their rapid
growth has a positive impact on Everest Industries Ltd. Improved economic scenario and revival in industrial
activities shows great potential for PEB industry in India.

Government Initiatives: Increased expenditure on rural and infrastructure development with an aim to provide
adequate shelter to the rural poor, the Government of India, has introduced programs like Indira Awas Yojna,
Golden Jubilee Rural Housing Finance Scheme, Pradhan Mantri Adarsh Gram Yojna, Productive Housing in Rural
Area and Rural Housing Fund etc, are rapidly expanding the demand for building products. Government thrust on
developing backward areas will lead to an increase in construction of schools, housing and hospitals which is the
positive note for the Everest Industries Ltd in the rural roofing sector.

Brand Everest: EIL is a pioneer in roofing segment with 76 years of experience and offers a wide range of solutions
for various building and housing construction needs. Over the years, its strategic investments in technology will
allow it to continually introduce innovative products in the market. EIL enjoys approx. 14% market share of the AC
roofing industry in India.


Everest Industries – Key Investment highlights
EIL entered into the Pre Engineered Steel Buildings (PEB) business segment in July 2008 by providing pre-fabricated
steel products and erection services for much larger, complex structures including factories, warehouses,
supermarkets, offices and much more. In the recent past it has done work for companies like Ericsson, Walmart,
Mcnally Bharat, Baxter, Vodafone and Jain Irrigation to mention a few.

Pan India presence: EIL has the most extensive distribution network in the building solution provider industry with
nearly 6000 sales points spread across the country and servicing over 1,00,000 towns and villages. In near future,
company is planning to add few more retail outlets to tap the incremental growth in the demand of building
products. To support the wide network and high demand for its products from the various parts of the country,
company has developed its 5 manufacturing facilities located at different parts of the country.

Capacity expansion: EIL has decided to set up a Fibre Cement Roofing plant in Balasore, Orissa with a capacity of
100,000 MT at a capex of Rs. 50 cr. This plant is expected to commercialize by Dec 11. With this the total installed
capacity of the building products will increase to 810000 tonnes which will further help EIL to ramp up production
and meet the rising demand in the future.

Robust growth and turnaround in Steel Building Division: Since the commercialization of Steel building division in
FY09 this segment has shown a robust growth in top line by growing at a CAGR of 33% backed by incessant flow of
orders to the company. The order book at the end of FY11 stood at Rs. 140 crores thus lending a strong visibility to
the revenue flow. This division recorded an operating profit of Rs. 5.86 crore in FY11 compared to a loss of Rs. 8.16
crore in FY10. The turnaround helped company improve its margins and EPS in FY11. Going forward we believe this
segment to grow at a rapid pace and be a major business for the company.


Everest Industries – Business & Industry Overview
• Revenue Streams
• Margins to stabilize around 6% NPM by FY 2014
• Building Products division
1. Capacity build up and utilization
2. Volume driven business
3. Roofing Industry overview
4. Boards and Panels industry overview
5. Asbestos and misconceptions
• Pre-engineered Steel buildings division
1. Strong order book
2. Lack of pricing power
3. Industry overview
• Marketing & Distribution network
• Shareholding Pattern
• Directors Profile


Revenue Streams

Everest Industries Ltd

Pre-engineered Buildings
Building Products Division (Installed Capacity –
30000 tonnes)

Roofing sheets Boards and Panels
(Installed Capacity – (Installed Capacity –
5,76,000 MT) 1,34,000 MT)


Everest – Revenue streams
• EIL’s business can broadly be split into 2 verticals,
namely, Building Products Division (Roofing, Boards and
Panels) and Steel buildings. Everest is the flagship brand
under which all products are sold with sub brands.

• While Building Products division has been the core
business of the company, EIL entered into the Pre
Engineered Steel Buildings (PEB) business segment in
July 2008.

• The company expects Steel buildings segment to add to
the next leg of growth of the company.


Margins to stabilize around 6% by FY 2014

• In the above, we have • We believe that profit
excluded the other income. margins of the company will
Over the years, the company improve over the ensuing
has been selling small tracts years on account of better
of unused land and the utilization of resources,
same distorts the net profit turnaround in Pre-
figures of the company. engineered building
segment and cost
• Over the last 4-5 years, the effectiveness.
company has been able to
improve its margins • The Net profit margins may
gradually. improve by 80-90 bps to 6%
by FY 14.


Complete Building solutions


Building products division
Roofing – This includes asbestos roofing (this is the main business of the company, it is manufactured at all 5
facilities of EIL), non-asbestos roofing (EIL entered this segment through a tie up with Saint Gobain in order to offer
the whole range of products, non-asbestos roofing is about 75% more costly than asbestos roofing), metal roofing
(manufactured at Bhagwanpur) and polycarbonate roofing (trading operations).

In FY09, EIL increased its roofing capacity at the Bhagwanpur plant. The total capacity increased from 4,55,000
tonnes to 7,10,000 tonnes. Essentially, each of the five facilities has one line for the production of asbestos sheets
except for Coimbatore, which has two lines.

Presence across five facilities in India provides EIL with a logistics advantage, as asbestos sheets are bulky and
difficult to transport over long distances. Further closeness to the retail markets is one pre requisite for the industry.
Spread of manufacturing locations along with 6000 retail points spread across the country provides an advantage to
EIL.

Boards and Panels – EIL also manufactures various boards and panels that find application in housing, false ceiling,
partitioning, interiors etc. EIL is the second largest player in the false ceiling segment, the first being India Gypsum.
The boards include cement boards (manufactured at Nashik (2 lines) and Bhagwanpur (1 line) with a total capacity
of about 1.34 lakh tonnes per annum).

Close to 50% of the production is exported to countries like Sri Lanka, Africa, Europe while the rest is sold in the
domestic market. The solid wall panels (used for internal partitions) are also manufactured at Nashik and
Bhagwanpur, with one line at each location and a capacity of about 200,000 panels per plant per annum (total
capacity of ~400,000 panels p.a.)


Building Products – Efficient capacity build up and utilization

• The Building products division has seen a consistent increase in volumes over the years.

• While for FY 11 the capacity utilization was 88%, we believe the company may soon have to resort to expansion
in order to make sure that growth is not hampered on account of supply-side constraints.

• For the same, Everest has decided to set up a Fibre Cement Roofing plant in Balasore, Orissa with a capacity of
100,000 MT at a capex of Rs. 50 cr. This plant is expected to commercialize by Dec 11.


Building Products – Volume driven business
• Over the last 6 years, the Building products
division of the company has registered a growth
of 16% on annualized basis, while during the
same period the overall industry grew at around
9-10%.

• For the initial 3 years, the company could not
pass on increase in raw material prices and the
margins plummeted (refer previous page).

• Since FY 2008, the realization per unit of
Building products has improved at a rate of 9%
annualized, thus supporting the profit margins.


Building products – Roofing Industry overview

• The fibre cement industry • There are 17 players and
in India has a capacity in Everest has a 14% market
excess of 5 million MT. share, evenly spread across
the nation

Roofing – Rural prosperity, sound agricultural policies and liquidity give long term strength to the roofing market.
There are estimated 25 crore buildings in India. Of these, 46% are considered to have pucca roofs. The rest 54% are
made of thatch (temporary kuchcha roofing) and clay tiles. Amongst pucca buildings, less than half have RCC slabs.
Majority are made with ready-to-use roofing products which include Fibre Cement Roofing and metal roofing. A
kuccha roof owner has aspirations, seeks security and desires to graduate to a pucca roof.

The cost of a pucca roof using Fibre Cement Roofing is 1/3rd the cost of an RCC ceiling slab. The market for Fibre
Cement Roofing today is estimated to be Rs 3,500 crores and for metal roofing Rs 3,600 crores.

The demand for Fibre Cement Roofing during FY 2011 was lower than the normal growth rate trend on account of
erratic monsoon, delays in housing starts and CAPEX decisions. This year FY 2012 has seen an increase in
agricultural production, good crop prices and a buoyant rural economy, which is likely to boost volume growth, to
maintain the past trend of CAGR 14%.


Building products – Boards & Panels Industry overview

Boards & Panels – In the backdrop of rising concerns for green house gas emissions and depleting fossil fuels, the
concept of green buildings is gaining momentum in India. Trade acceptance for Fibre Cement Boards as a substitute
for plywood and gypsum boards is growing.

Increasingly, Fibre Cement Boards and panels are being recommended by architects, interior decorators and
contractors due to energy efficient parameters, high strength, dimensional stability and resistance against termite
and moisture.

The Indian boards industry is highly fragmented. Today, at Rs 5000 crores, the wood based product industry
dominates the market.

The usage of other kind of boards in India is yet at a very nascent stage - Fibre Cement Boards (Rs 225 crores),
Gypsum Boards (Rs 530 crores) and Calcium Silicate (Rs 50 crores). However, it is growing rapidly with new
product variants being introduced.

There are four major players in the Fibre Cement Boards industry, and Everest is a major player.


Asbestos and misconceptions

A writ petition was filed in the Honorable Supreme Court under Article 32 of the Constitution of India in 2004 by
Kalyaneshwari (a registered society) to immediately ban all use of asbestos in any manner whatsoever due to
harmful effect of asbestos.

In its landmark judgment, the Honorable Supreme Court observed:

1. There is no law enacted so far which requires banning of any activity in regard to asbestos at any stage of
mining, manufacturing or production. Any such activity wherever being carried out, is in accordance with
specified parameters.

2. Every factory engaged in the manufacturing of asbestos based products obtains clearance under the existing
Environment Policy and activities are carried out in accordance with the law without endangering the lives of
people.

3. The court observed that this was instituted at the behest of rival industrial group which was interested in
banning of the manufacturing of asbestos based product. A definite attempt was made to secure a ban on
these activities with the ultimate intention of increasing the cast and ductile iron products market. Thus, it was
litigation initiated with ulterior motive of causing industrial imbalance and financial loss to the asbestos
product industry.

The court also dismissed the petition and imposed penalties on the petitioner.


Pre-engineered steel buildings division

Steel Building Division: Steel Buildings – EIL entered into the Pre Engineered Steel Buildings (PEB) business segment
in FY09 by providing pre-fabricated steel products and erection services for much larger, complex structures
including factories, warehouses, supermarkets, offices and much more.

In the recent past it has done work for companies like Ericsson, Walmart, Mcnally Bharat, Baxter, Vodafone and Jain
Irrigation to mention a few.

EIL expects this new segment to add to the next leg of growth of the company. This segment contributed about 22%
to FY11 net sales. The plant is set up at Bhagwanpur (Uttarakhand) with a capacity of about 30,000 tonnes p.a.


Steel buildings – Strong order book

• Since the start of the Pre-engineered Steel buildings division, the installed capacity stands at 30000 tons per
annum.

• After the initial hiccups, the division is gaining pace. We estimate capacity utilization to improve from 64% in FY11
to 96% by FY14E. Company has a healthy order book of Rs. 140 crore (17500 tons) and with notable clients like
Bharti Walmart, Godrej Agrovet, Om Logistics, Vectra Advance Engineering etc augurs positive development for
the company and one can expect a strong top line growth in coming years.


Steel buildings – Lack of pricing power
• Steel buildings division of the company has been
growing at a robust rate, though on a small base.

• There’s lack of pricing power as most PEB contracts
are fixed price contracts and thus volatility in steel
prices over the contract period poses a risk.

• We expect steel building division to register a top
line of Rs. 250 crore and Rs. 281 crore in FY13 (E)
and FY14 (E) respectively, and revenue contribution
of Steel building segment will improve to 28% by
FY14 (E) from 17% in FY09.


Pre Engineered buildings – Industry Overview
The growth in Pre-engineered building industry was over 20% in FY 2011. Today, more Architects and Structural
Consultants are recommending Pre-engineered buildings for their projects. The main benefits are as follows:

• Erection of a strong long-lasting building with minimal on-site work and accelerated speed of construction as
compared to conventional structures.
• A Pre-engineered building is at least 50% faster than a conventional building.

Growth Drivers

Infrastructure projects such as airports, cargo hubs, schools, metro rails (such as DMRC, Bangalore Metro, Chennai
Metro), Indian Railways, power plants and power plants equipment manufacturers are increasingly using these
buildings. Traditional industrial sectors like pharma, automobile engineering, FMCG industry are also increasing
capacity. These high-growth segments will boost the demand for Pre-engineered buildings in coming years.

The growth in warehousing and cold storage industry has a positive impact on PEB industry. Warehousing accounts
for 20% of the Indian logistics industry and has grown at a rate of 35%. India spends 15%-20% of its GDP on logistics.
This is much higher as compared with an average of 8%-10% in other developing countries with better
infrastructure. Public and private sector companies are now investing in better logistics support to reduce costs.
This will generate further demand for Pre-engineered buildings.

The PEB sector is growing at 20% due to strong demand from industrial and infrastructure sectors and from
traditional users of RCC/structural steel buildings who are now converting to modern technologies like PEB. The
emergence of new segments, logistics industry and Power plants will add to the demand of PEBs


Pre Engineered buildings – Industry Overview
There are over ten organized PEB
manufacturers in India, of which the top 5
constitute 70% of the market. Demand
grew by 20% in FY 2011 and is expected to
accelerate in the coming years.

Current industry capacity is 1.5 million MT
which has rapidly expanded from 1 million
MT in 2009 in anticipation of the growing
demand.

Everest Industries Operations

Everest supplied 21,000 MT of Pre-
engineered steel buildings and
components during FY 2011.

The steel building segment of Everest Industries grew by 29.30% and delivered an EBIT of Rs 5.86 crores as
compared with last year’s loss of Rs 8.16 crores. The division achieved a turnover of Rs 161.23 crores as compared
with Rs 124.69 crores last year.

Everest’s market share in this segment is about 5%. During the year 2011-12, Everest Steel Buildings will hand over
its 500th PEB building.


Strong Marketing and Distribution Network
One of the only few players to have a national presence, amidst many local companies


Shareholding pattern

• Over the last few quarters there’s a slight decrease in Promoter holding. However the same is on account of
increase in Total No. of Shares on conversion of Employee stock options.

• As at Sep’10, the Promoters held 7,520,470 shares and they hold the same quantity as at Sep’11.

• A few prominent investors with more than 1% stake in the company are Mr. Hitesh Ramji Javeri and Mr. Ramesh
Damani. Both of them are well known in the investment circles for their ability to identify undervalued stocks at
an early stage.


Directors Profile

• Mr. Manish Sanghi -ED (Marketing ) IIM graduate, has triggered many of the marketing initiatives for Everest such
as induction of qualified professionals Engineers/ MBA’s only, launching Sales Incentive Schemes for the stockist
and sales team to boost the moral.

• The experience & expertise of MR. M.L. Gupta, a veteran of Cement Industry enriched with 33 years old
association with ACC has helped to a great extent for the consistent quality of cement supplies as a major raw
material.


Everest Industries Ltd – Financials


Everest – Annual Performance
• Over the last 4 years, the net
operating sales of the
company have grown at a
rate of 24% annualized.

• Since 2009, the sales have
buoyed by the introduction of
the Pre-engineered buildings
division.

• Over the same period, the
EBITDA (exclusive of other
income) has registered a
growth of 25.4% on
annualized basis.

• Though input costs have
increased tremendously, the
economies of scale has
helped the company maintain
EBITDA margins at 9% +.

• We expect profit margins to
improve further once
inflation subsides.

Everest – Sustainable Cash Flows
• Everest has had a series of
good cash flows with just
one year being negative on
cash flows from operations.

• For the last 5 years, the cash
flows from operations have
averaged at Rs 19.26 crore
while the net profit
(exclusive of other income)
has averaged at Rs 17 crore.

• Interest expense has come
down sharply over the last 2
years on account of
repayment of both short and
long term borrowings.

• We consider taxes paid as an important metric and for Everest the effective tax rate has consistently been 26-27%
(tax rate on profits accrued from sale of land is lower than tax rate on business income and thus blended tax rate
of 26-27%). The same lends immense comfort regarding the accounting practices of the company.


Everest – Balance Sheet

• Everest has a strong balance
sheet with net debt to equity
at 0.58, down from 1.25 at the
end of FY 2009.

• As can be observed, Everest
has Freehold land worth Rs
14.53 crore at book value. The
actual value of the same could
be a lot higher considering
Everest is more than 50 years
old company.

• One of the few concerns is the
high contingent liabilities. The
company has many pending
tax litigations against it and
thus high contingent liabilities.


Concerns


Concerns
• Increase in raw material prices: The main raw materials for fibre cement products are cement, pulp, fly ash and
imported fibres. Any hike in prices of cement or fibre may have adverse impact on the margin of the company.
Steel is the major raw material of PEB segment, hence volatility in global steel prices will also affect margin
accordingly.

• Delay in projects: Prospects of Pre – engineered steel building industry is largely dependent on the economy and
industrial activities. Any slowdown in capex cycle may have adverse impact on the order book of the company,
which may bring down the utilization of the plant and thus margins will come under pressure.

• High competition: In India there are 17 players in roofing industry and EIL has a 14% market share evenly spread
across the nation. There are lots of new capacities entering into the market to take advantage of growing
demand, hence excess supply may bring down the pricing power currently being enjoyed by recognized players.

• Government spending and monsoon effect: Rural schemes like NREGs, Indira Awas Yojna, Rajiv Awas Yojna etc.
play a vital role for the business of Everest Industries. Any change or decrease in spending by the government on
these schemes could reduce the purchasing power of rural people. A poor monsoon could also have adverse
effect on the demand for roofing in rural India.

• Seasonality factor: Since EIL’s building product business is largely driven by sales in rural India it is seasonal in
nature (impacted by Kharif and Rabi crop cycles) and hence the March and June quarters are generally better
than the rest of the year. However, entry into the steel building segment should help to smoothen sales to a
certain extent.


Conclusion


Price chart

• While the longer term up-trend is intact, the stock ‘s been in a correction mode since Nov’10.

• Over the last few months, the stock has found strong support at around Rs 135. So, both technically and
from the point of view of valuations (5 time FY 12 earnings), Rs 130-140 is a good range for starting with
investments in Everest Industries.


Katalyst Wealth – Alpha Portfolio

Katalyst Wealth Alpha Portfolio service is focused on helping individual investors/institutions
beat market returns by a wide margin without taking large risks through in-depth research,
analysis and follow up on the stock.

For more information on Everest Industries Ltd, discuss with Ekansh Mittal

Mail Id : ekansh@katalystwealth.com Mobile: +91-9818866676


Katalyst Wealth
Registered & Corporate office:

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Lajpat Nagar – IV, New Delhi – 110024

Ph.: 011-41730606
Mob: +91-9818866676
Email: info@katalystwealth.com


Everest industries ltd (NSE Code Everestind) - Oct'11 Katalyst Wealth's Alpha Reco

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