Rain Ind: Adverse impact on Q3 CY18 sales volume already in price; accumulate

Rain Industries has been facing a few business challenges in recent times, the prominent being the impact of an import ban on petroleum coke in the interim period. The review decision by the Supreme Court, which led to the lifting of the ban, might provide some relief. It also suggests that future additional raw material requirements for expansion projects are still to be addressed.

Ongoing calcined pet coke (CPC) pricing and volume trends suggest a subdued Q4 CY18 as well. However, CY19 should witness a gradual volume recovery as the company realigns shipment schedules, compiling with regulatory requirements in India and improved aluminium outlook for the US business.

Read: SC petcoke verdict removes major hurdle

Reorganisation in Germany and a strategic project in advanced materials should be earnings accretive in the medium term.

Net sales declined 8 percent year-on-year (YoY) in Q3 CY18 on lower volumes (down 16 percent YoY and 15 percent quarter-on-quarter) in the carbon segment (65 percent of sales). But the same was partially offset by improved volumes in the advance materials segment (2 percent YoY, 5 percent QoQ). While the decline in CPC volumes was due to delay in shipments and petcoke ban by the Supreme Court during Q3, coal tar pitch (CTP) volumes fell due to technical issues at the client end. In case of advance materials, surge in sales volumes (37 percent) of petro chemical intermediates was noticeable.

Realisations improved for the carbon (36 percent) and advance materials (15 percent) on account of the 8-9 percent currency impact. However, due to lower volumes for the carbon segment and higher raw material cost there was a 16.7 percent decline in EBITDA compared to Q3 CY18.

Source: Company

As expected by the management, the CPC industry received an exemption from the apex court on usage of petcoke as feedstock (but not as a fuel, which is a more polluting) by the industry. This exemption permitted CPC annual imports of 1.4 million tonne by the calcining industry.

However, the apex court’s permission meets the current production requirement of the calcination industry, but doesn’t take into account its future expansion plans. The company is hopeful of securing required permissions in future for expansion of its Visakhapatnam facility. Since this plant is part of a Special Economic Zone (SEZ), it inherits some benefits while procuring raw materials.

Therefore, the company has gone ahead with completion of the plant, which was earlier expected to be commissioned by Q3 CY19. The management said there is a possibility of delay by 2-3 months.

As far as other capacity expansion plans are concerned, its coal tar distillation facility (Belgium) is on track and expected to be commissioned by CY18-end. It is also on track towards a 30 kilo tonne capacity (Castrop-Rauxel, Germany) expansion plan for water-white resins (Dicyclopentadiene) by Q3 CY19. The company doesn’t intend to raise any new term loans in near future and the next debt repayment is scheduled for CY25.

The company is undergoing reorganisation of its European operations and closing some operations. It is also pursuing a strategic project in the advance materials segment. On account of these initiatives, it has incurred a cost of $3 million last quarter and a similar cost would be incurred in the current quarter. The company expects an annual cost saving of $4 million from the middle of CY19 onwards.

In the near term, margin and volumes are expected to remain lower as the calcination industry is not permitted to import CPC. This has been permitted to the aluminium industry though. Because of this, the company is not able to import CPC from its US plant, blend it and re-export it. While technically the company can sell CPC to its clients directly from its US plant, lack of blending opportunity means margin would be impacted. It has set aside designated capacity in US operations for exporting it to India, but the same remains non-functional. Hence, volumes are also expected to remain lower in the immediate future.

Slow restart of aluminium capacity in the US, petcoke ban in Q3 CY18, and client facing issues at its CTP business had moderated immediate volume offtake in the carbon segment. CPC volumes are expected to normalise gradually and in the near term depends on SC allowing CPC imports for blending its Indian operations. At the same time, CPC realisations are expected to remain soft in the near term due to higher exports from China to Rest of the World, excluding the US.

We expect growth in CY19 to be led by volume improvement in carbon segment and pricing gains in the advance material segment. Revival in volume growth for CPC and availability of new capacity in case of CTP should add around 7-9 percent volume growth in the carbon segment. Blended EBITDA margin should stabilise around 18 percent in CY19 from 20 percent in CY17.

Taking this in to account, the stock is currently trading at an inexpensive multiple of 5.1 times CY19 estimated earnings, which in light of the strong aluminium end market outlook provides an opportunity to accumulate in our view.

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