MOSL: RAIN INDUSTRIES (INITIATING COVERAGE)- Enduring tailwinds-Re-rated, yet attractive
​RAIN INDUSTRIES (INITIATING COVERAGE): Enduring tailwinds; Re-rated, yet attractive
(RINDL IN, Mkt Cap USD1.4b, INR271, TP INR362, 33% Upside, Buy)
Rain Industries (RAIN) is the second largest carbon product supplier to the aluminum industry. Its carbon segment contributes 80% to consolidated EBITDA. Its chemicals segment converts coal tar distillates into resins, modifiers, aromatic chemicals, superplasticizers, etc. It also operates a 3.5mt cement plant in southern India and sells cement under the Priya brand.
- RAIN is riding tailwinds, triggered by supply disruption in China, which are driving margins and volume growth. We expect these tailwinds to last for 2-3 years, enabling EBITDA/PAT CAGR of 24%/50% over CY16-19.
- RAIN has been generating strong FCF and rewarding shareholders with dividends and buybacks. We believe it will continue to do so.
- The stock has been re-rated on change in business dynamics. Yet, our price target of INR362 indicates 33% upside. We initiate coverage with Buy.
Dual benefit of demand growth and supply shock driving CPC prices
Calcine pet coke (CPC) production is hurt in China after the government’s firm action in 2017 to contain pollution. As a result, China has turned a net importer of CPC. Simultaneously, aluminum production is set to grow outside China – many smelters in North America and Europe are restarting. The dual benefit of demand growth and supply shock is driving up global CPC prices.
CT pitch market has stabilized on capacity cuts in key markets
CT pitch (CTP) has been oversupplied for many years in RAIN’s key markets due to declining aluminum production. Consequently, there have been many shutdowns. Koppers, the largest producer of CTP in the world and a key competitor, has closed seven plants in the last 2-3 years. This has resulted in supply correction and improved utilization. The industry is now running at 80-90% utilization and margins have stabilized. As aluminum production starts to recover on expected restart of smelters, demand and margins will expand.
Rain Industries Limited (RIL) is an India-based company, which is engaged in the business of manufacture and sale of carbon products, chemicals and cement. The Company operates through three segments: Carbon Products, Chemicals and Cement. The Carbon Products segment consists of Calcined Petroleum Coke (CPC), Green Petroleum Coke (GPC), Coal Tar Pitch (CTP), Co-generated Energy and other derivatives of Coal Tar distillation. The Chemicals segment includes the downstream operations of Coal Tar distillation and consists of Resins, Modifiers, Super Plasticizers and other specialty products. The Cement segment includes the manufacture and sale of Cement. The Company markets cement under the Priya Cement segment. The Company's Subsidiaries include Rain Coke Limited, Rain Cements Limited, Renuka Cement Limited, Rain Commodities (USA) Inc., Rain CII Carbon LLC, CII Carbon Corp, RUETGERS Canada Inc. and Handy Chemicals (USA) Ltd.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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