Rain Industries: Strong pricing for carbon products aids earnings outlook

Net sales were up 32 percent in Q4 CY17 result wherein lower volumes (-3 percent YoY, -6 percent QoQ) were more than offset by the higher realisations. Lower volumes were mainly on account of delayed shipments for the carbon products which are expected to recover in the current quarter. Higher profitability for the carbon products wherein EBITDA per ton surged by 125 percent YoY led to group EBITDA margin expansion of 361 bps YoY.

In case of other businesses, chemical business (16 percent of FY17 sales) witnessed lower volumes sequentially due to decline in chemical trading business as the company is reducing the share of low margin trading operations. However, strong demand for resins from adhesives business helped increase in revenue on QoQ basis.

Cement business was impacted by lower realisation (-13 percent YoY) offsetting volume increase of about 8 percent.

Net profit improved sequentially due to lower tax rate of about 21 percent (vs. 40 percent earlier).

Among the exceptional items, Rs 83 crore benefit from the deferred tax reversal (the USA and Belgium tax rate changes) was largely offset by the prepayment charges on debt.

China supply side reform continues to be key structural factor behind surge in CPC prices. CPC pricing is aided by curtailment of Chinese Aluminum and CPC production (reflected in lowered Chinese exports) and improving global demand for aluminum coupled with higher capacity utilisation/restarts in existing aluminum plants in North America.

Refinancing benefits

Company has undertaken refinancing of senior secured notes in Jan’18, leading to effective interest rate of 5.3 percent (vs. earlier 7.6 percent) which is expected to save about USD 25-30 million per annum.

Additionally, post refinancing, major debt repayments are scheduled to start January 2025 giving headroom to fund capex projects.

Financial projections

Taking account of the carbon products profitability trend, interest rate saving due to refinancing and lower effective tax rates, we have made few changes in our projections. We expect an EBITDA CAGR of 19 percent for next two years on the back of additional volumes from new capacity (~16 percent of existing capacity) and sustenance in price realizations backed by end market dynamics. Stock is currently trading at a multiple of 8.2x CY19e earnings, which in light of current consolidation provides decent opportunity for accumulation, in our view.