Rain Industries Research Report By IDBI Capital (May 2017)

Summary

– Rain Industries reported slightly better than expected Q1CY17 results with EBITDA growth of 150.0% yoy to Rs 4,619 mn driven by strong performance from Carbon Products segment.

– Carbon Products segment EBITDA grew 80.9% YoY and 19.0% QoQ to Rs 3,746 mn.

– However, Chemicals and Cement division EBITDA were lower than our esimates.

– Adj. net profit stood at Rs 1,317 mn vs. loss of 581 mn in Q1CY16. Adjustments to Q1CY17 mainly includes exceptional item of Rs 670 mn related to debt refinancing.

– The company announced two new projects – setting up a Packing Material plant (capex – Rs320 mn) and setting up a hydrogenated hydrocarbon resins plant in Netherlands (capex – Rs980 mn).

– We raise our CY17-18E estimates and target price; Maintain Buy. Result Highlights and Investment Rationale

– Strong growth in Carbon Products continues: During Q1CY17, Carbon Products segment EBITDA remained strong with 19.0% QoQ growth despite 18.1% fall in CPC volumes indicating sequential improvement in EBITDA/tonne for the Carbon products segment. CTP volumes remained flat QoQ to 0.14 mn tonnes.

– EBITDA beat our expectations despite weak Cement profitability: Despite weak profitability from Cement segment (EBITDA down 47.9% on lower volumes and higher input costs), Rain’s EBITDA was 11.3% higher than our estimates. Even Chemicals segment EBITDA increased 27.1% yoy to Rs544mn although it was down 39.5% QoQ and was lower than our forecast.

– Adj. net profit growth strong: Adj. net profit stood at Rs1,317 mn vs. loss of Rs581 mn in Q1CY16. Adjustments to Q1CY17 net profit mainly includes exceptional item of Rs670 mn related to debt refinancing.

– Net debt higher QoQ: Net debt increased to $951 mn compared to $927 mn in Dec 16 which was a negative surprise. During March 2017, the Company’s wholly owned step-down subsidiary in USA completed issue of 7.25% Senior Secured Notes for $550 mn to partly replace high –cost (8.25%) debt.

– Raise CY17-18 estimates on improved outlook: CPC and CTP demand has continued to improve in the last three months which is also evident from Carbon Products margin improvement in Q1CY17. Considering rising demand (especially from China), we raise our CY17-18 Carbon Products margin estimates resulting in increased EBITDA by 5.7%/6.8% for CY17/CY18, respectively. However, we also raise our interest and depreciation expenses assumptions to account for changes in accounting reported by the company.

– Raise target price; Maintain Buy: Rain’s consolidation and restructuring efforts (over CY13-15) and improvement in demand for its Carbon Product segment has resulted in strong operating and financial performance in the last four quarters. We believe rising demand for CPC and CTP are likely to drive strong improvement in profitability and improve the credit profile of Rain. We expect further margin improvement in during 2QCY17 and 3QCY17 (seasonally strong quarters). We raise our target price from Rs103 to Rs139 and maintain our BUY rating.