Rain Industries: US sanctions on Rusal may not affect volumes, pricing supportive

The United States’ recent sanction on Russian oligarch Oleg Deripaska, owner of leading aluminium manufacturing company Rusal, and recent pricing trends in carbon products, which is used in the aluminium industry, has led us to revisit our investment rationale for Rain Industries ahead of its quarterly result.

The US sanctions prohibit US citizens from undertaking business with Rusal, which produces about 7% of the world’s aluminium. The US Treasury Department further states that non-US citizens could face sanctions if they facilitate transactions for the firm. These sanctions have already impacted Rusal's sales operations.

Rusal's aluminium production which gets diverted from US shore can land up in any other territory, say China, but given the implications of the sanction there may not be many takers. This has resulted in aluminium prices rising due to this sudden supply crunch. It may be also be a cause for worry for Rusal's raw material (Coal Tar Pitch, Calcined Petroleum Coke) suppliers.

Rain industries’ Russian exposure is through a joint venture (65% stake) with PAO Severstal for Coal Tar Pitch (CTP). From here, the company supplies CTP to West Asia, North America and Russia.

While its JV with Severstal provides a ready supply of coal tar, the current turmoil at Rusal suggest there could be some volume disruption for CTP from this plant in the near-term. We currently don’t know, if and how much CTP Rain supplies to Rusal.

However, the good news is that there remains a tight supply demand balance for both CTP and CPC. This is why the company was debottlenecking its CTP capacity to the tune of about 200 kT in Europe (Germany and Belgium). The same is expected to complete by the CY18-end.

The company is already running an optimum capacity and hence any disruption in volume offtake from its Russian client can possibly be accommodated in other territories.

Prevailing price inputs from market and takeaways from the quarterly result of Goa Carbon suggest that carbon products (both CPC and CTP) may report 11-12% QoQ pricing growth. Combine that with our volume growth expectation of 11% QoQ, we forecasts a 23% QoQ growth in sales of Rain Industries’ carbon products in Q1 CY18.

Source: CRU; Unit: USD/ton

Encouraged by recent pricing trends, supply demand tightness in carbon products (China’s supply-side reform) and Rain’s capacity expansion plan, we revised our projections for CY19 upwards. It is noteworthy that other than the expansion plan for CTP, the company is also increasing CPC capacity at its Vizag SEZ (370 kT). The same is expected to be commissioned by Q1 CY19. The stock trades at 8.9x CY18e earnings and remains our preferred play in the carbon materials space.