Rain Industries Initiating Coverage Report By Motilal Oswal

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.

Enduring tailwinds

Re-rated, yet attractive

– 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.

Investing in high IRR organic growth projects RAIN has decided to set up a 370ktpa CPC kiln at a capex of USD65m near Vizag to meet strong growth in demand from Indian smelters. It is also investing USD17m in debottlenecking of petrochemical feedstock distillation by 200kt in Europe. Both projects are scheduled for completion by March 2019 and short payback period of 2-3 years should drive remunerative volume growth.

Value the stock at INR362/share – 33% upside; initiate with Buy After trading at low single digit PE for very long period, RAIN has finally got re-rated on visibility of margin expansion and growth driven by multiple enduring tailwinds and multiple competitive advantages. Although stock has run up sharply, the valuations are still reasonable. We value the stock at INR362/share – 33% upside, based on SOTP (Exhibit 19). We initiate coverage with a Buy.