Can comfortably service debt for Rutgers buy: Rain CFO Rao

Moneycontrol Bureau

Rain Commodities has the ability to service the debt for acquiring Belgium-based chemicals firm Rutgers, said T Srinivasa Rao, Chief Financial Officer of Rain, in an interview with CNBC-TV18. “Though we have substantial cash maintained in the group, the market is ignoring that, and still assuming that we are a high-debt company. But from an international point of view, if you look at our debt to EBITDA ratios, the ability to service the debt and any other ratio you compare, we are in a very comfortable position,” said Rao. Rain will be shelling out close to Rs 5000 crore for Rutgers. According to the company’s balance sheet for 2011 (calendar year), it had a debt of close to Rs 3800 crore and cash and bank balances of around Rs 485 crore. Its reserves stood at a little over Rs 2000 crore. In 2007, the company had acquired US-based CII Carbon LLC for USD 595 million. And while the company had to take on sizeable debt to fund the acquisition, it has managed to lower to lower its debt to equity ratio from 10 times to 1 one time over the last five years, according to report in business daily Mint. “While the company went through an amalgamation with a group company in 2008 to shore up its capital base, much of the decrease in leverage has been on the back of growing profit and thereby reserves,” the Mint report says. In CY2011, the company reported an operating profit of Rs 1370 crore on revenues of Rs 5954 crore. For the half year ended June 2012, the company reported an operating profit of Rs 662 crore on revenues of Rs 2850 crore. “Even after this acquisition our consolidated leverage, do not look from a debt to equity point of view, but looking it from a debt to EBITDA point of view we will be around 4x (4 times). We have aims to bring it to 3x (3 times) in about two plus years’ time. In about two years time we wanted to bring it to 3x,” says Rao. Following is the full transcript of the interview of T Srinivasa Rao on CNBC-TV18: Q: Why Rutgers deal makes sense for you from a strategic perspective? A: Rain Commodities is engaged in producing calcined petroleum coke which is used by aluminium smelters. In aluminium smelting carbon anode plays a very critical role. For producing carbon, anodes you need two types of raw materials - one is calcined petroleum coke which we already have and the second is coal tar pitch which is produced by the Rutgers Company. Once we complete this acquisition and integrate it with our business, all our customers will get benefited by getting the raw materials required for producing carbon anodes from a single supplier. Both are not commodities per se, they are technical materials. The specifications will play a very critical role. By sourcing both the materials - PPC and coal tar pitch from a single source, the customers will get enormous amount of benefit, not only from costing point of view, but quality point of view and optimizing the overall cost point of view. Q: Is Rutgers a profitable entity? It had sales of 830 million euro last year. Did it also turn in a profit? A: It is a company held privately. I cannot discuss about the profitability. But certainly in the last several years, they have not incurred losses. It is a profit making company. About 4-4.5 year’s back it had been taken over by a private equity firm called Triton. Triton made substantial improvements to their business. Rutgers’ revenues have increased by about 25 percent in the last four years after Triton took over that company and it is certainly a profit making company. _PAGEBREAK_ Q: Will this deal be concluded with some certainty or are there any hitches which could possibly arise in the conclusion of this deal? A: As of now we do not foresee any issue other than getting the regulatory approvals under the respective countries’ anti-competition regulations. As our products and their products are not substitutes to each other, there is no change in the market share of either of the players. So, it is more of a procedural compliance. But I cannot comment on that because it is more of a regulatory issue. I personally do not see any issue in getting those approvals. Q: The size of the deal is quite large compared to your own market cap. What will it do to the balance sheet of Rain Commodities in terms of the amount of debt that you will have to take on or whether it will lead to some kind of stretch on your balance sheet? A: I do not want to comment about the market cap. It is something determined by the market. But if you look at our enterprise value, it is higher than that. Though we have substantial cash maintained in the group, the market is ignoring that group and it still assumes that we are a high-debt company. From an international point of view if you look at our debt-to-EBITDA ratios, the ability to service the debt and any other ratio you compare, we are in a very comfortable position. Even after this acquisition, our consolidated leverage, not from a debt-to-equity point of view, but from a debt-to-EBITDA point of view, we will be around 4X. We have aims to bring it to 3X in about two plus years’ time. In about two years time we wanted to bring it to 3X.