Rain industries: Robust end market prospects remain key catalyst; emerging risks to be watched

Anubhav Sahu Moneycontrol research

Rain Industries posted a robust Q2 with the key highlights being higher sales for calcined petroleum coke (CPC) and improved profitability of advanced carbon materials. While a strong end market remains a key catalyst for the company’s earnings growth, lurking risk in terms of lower availability of green petcoke (GPC) in the medium term needs to be closely watched.

Volume growth mixed: Sequential jump in CPC
Source: Company

Net sales were up 44 percent year-on-year (YoY) in Q2 CY18 led by higher volume (12 percent YoY, 22 percent quarter-on-quarter) and CPC realisation. Shipments of CPC were delayed in the previous quarter due to pricing-related (pass-through of higher import duty) issues, so the quarter under review benefitted from inventory gain. Coal tar pitch (CTP) volumes declined 5 percent sequentially after increasing 10 percent in the previous quarter.

Earnings before interest, tax, depreciation and amortisation (EBITDA) margin declined sequentially on account of lower profitability for carbon and cement divisions, partially offset by improved EBITDA/tonne (15 percent QoQ) for the advanced carbon materials (ACM) division.

Product volume trend
Source: Company

Capacity addition in resins The management’s focus is gradually shifting to additional growth levers: advanced carbon materials (18 percent of EBITDA). Recently, it hired a business head with 30 years' experience from BASF. As announced in Q1 CY18, its 30,000 tonne capacity (Castrop-Rauxel, Germany) expansion for water-white resins (Dicyclopentadiene) is on track by Q3 CY19.

As far as other capacity expansion plans are concerned, coal tar distillation facility (Belgium) is on track and is expected to be commissioned by CY18-end. Similarly, the calcination plant (37,000 tonne) in Visakhapatnam is expected to be operational by Q3 CY19.

Slow restart of aluminium capacity in the US Restart of aluminium capacity in the US remains a key near term driver of CPC volume growth.  The restarts so far have been slower-than-expected due to technical constraints and lack of skilled labour.

Has petcoke inventory till September The Supreme Court recently ordered a ban on import and use of petcoke as fuel, exempting only a few industries. The management is hopeful that the CPC industry would get an exemption as petcoke usage is less polluting and is used only as feedstock (not as a fuel which is a more polluting usage). In the interim, it has sufficient inventory till September.

Lurking threat of MARPOL; Rain Industries better placed Production of calcinable-grade GPC is expected to grow at a moderate level (2.1 percent compounded annual growth rate over CY17-21). The lower growth is mainly a function of worldwide trend, wherein refineries are shifting towards processing more sour crude, which results in production of lower quality GPC.