For Rain Inds, it Pours When There’s Deficit of Pet Coke, Coal Tar

Eases wor­ries; im­prov­ing earn­ings may mean bet­ter val­u­a­tion

The Economic Times - - Smart - Mar­ket In­tel­li­gence

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.

VAL­U­A­TION GAME

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

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