For Rain Inds, it Pours When There’s Deficit of Pet Coke, Coal Tar
Eases worries; improving earnings may mean better valuation
ET Intelligence Group: Rain Industries, a leading player in calcined pet coke (CPC) and coal tar pitch (CTP), will benefit from the deficit of the two. It has shown earnings improvement in the last two quarters and could see a sharp jump in earnings in 2017. CPC and CTP are used in the aluminium industry. CRU, a Londonbased leading metal consultant, has warned that the aluminium industry may see a sharp rise in the production cost due to deficit of pet coke. Other consultants say that the supply will be insufficient to meet smelter demand from around 2017.
China’s amended Air Pollution and Control Law, introduced last year, has resulted in tightening the supply of anode grade pet-coke for the aluminium industry. CTP too, is in short supply as the largest producer Koppers has shut down some of its plants. According to dealers, CTP and CPC prices are up 15-20% in the last two months. The by-products of CTP manufacturing process — benzene, toluene, and phthalic anhydride too, are getting costly.
The company has production facilities in USA, Russia and India. Around 75% of its revenue is from these two products and the remaining is from cement (10%) and chemicals (15%). With improving demand for CPC and CTP, Rain’s combined profit for June and September quarter was ₹ 280 crore as against ₹ 84 crore loss in the preceding six months. It will announce its fourth quarter numbers this week.
Analysts expect the company to report ₹ 600-650 crore of profit in 2017. It has taken several cost cutting measures, which will start showing in numbers from this year. EBIDTA margin is expected at 15.5% versus over 20% in the past.
Also, the company’s interest outgo will fall with debt repayment and refinancing. Net debt at the end of June was ₹ 6,400 crore. With improving earnings, high debt should not be a concern. Rain CII Carbon, its US subsidiary’s 2021 bond, which had fallen to $64 in June 2016 now trades at $103. Its debt is five times EBIDTA, which is expected to fall to three by 2017-end.
At CMP of ₹ 84.3, the stock trades at less than four times FY18E earnings comparedwith13foritspeerHimadri Speciality. With improving earnings, Rain may report better valuation. HIGHS & LOWS