Buy Rain Commodities; target Rs 76: Motilal Oswal

Motilal Oswal is bullish on Rain Commodities and has recommended buy rating on the stock with a target price of Rs 76 in its research report dated March 11, 2013.

In January 2013, Rain Commodities Ltd (RCOL) completed the acquisition of Europe-based coal tar distiller Rutgers for a gross enterprise value of Euro702m. We believe the acquisition will add significant value to RCOL's business due to the following reasons:

• Post acquisition, RCOL's product diversification to improve; no product will contribute more than 37% to revenues.
• Potential synergies on complimentary nature of CPC and CT pitch. Rutgers business operating performance has been robust despite challenging business environment. EBITDA posted a CAGR of 14% over CY09-12.
• Severstal JV to result in additional supply of coal tar to European operations. This will take care of ~28% of European operations' coal tar needs, thus mitigating the effect of declining European supplies.
• Acquisition to result in EPS accretion of 13% and 16% in CY13E and CY14E respectively.
• RCOL has demonstrated the ability to sustain large acquisitions; CII acquisition added significant value.
• RCOL saw a net debt reduction of USD305m in the last five years; USD400m of equity value generation went unnoticed.
• Net debt/EBITDA at comfortable levels of 3.5x; major debt repayment to start only in 2018.
• RCOL trades at 3.8x CY14E EV/EBITDA. Valuation multiple are much below its peers; US listing will further rerate the stock.

In January 2013, Rain CII Carbon LLC, a 100% step down subsidiary of RCOL, completed Rutgers' acquisition for a gross enterprise value of Euro702m through its 100% subsidiary Rain CTP Inc (RCTP). Rutgers is the leading coal tar distiller in Europe and the second largest coal tar distiller in the world. It has three coal tar distillation sites, along with six downstream (refining) facilities. Rutgers is a diversified play; No industry accounts for more than 17%: of revenues: It is a more diversified player compared to RCOL in the carbon business market, with end products' usage varying across sectors such as aluminum, textiles, papers, industrial chemicals, rubber, construction etc. No industry accounts for more than 17% of its revenues. Aluminum smelters and chemical industry are the largest contributors to revenues, with a share of 17% each. Severstal JV to safeguard against dwindling European coal tar supply: Rutgers' 75% distillation capacity is in Europe, where coal tar supply has been declining due to closure of several steel plants. European region pig iron production has declined at a CAGR of 3% over 2007-12. As the current environment for steel producers continues to remain bleak in Europe, coal tar supply is not going to improve, going forward. Sourcing from other regions is also limited due to certain transportation constraints. Rutgers has mitigated its supply side risk through the Severstal JV. Apart from securing supply for the upcoming 300ktpa Cherepovets, Russia JV, it will get additional 180kt (~28% of its European requirement) of supply for its European operations. The Severstal JV is ideally located close to Severstal's 11mtpa steel plant. Rutgers has already started getting coal tar from Severstal for its European operations. Rutgers acquisition to lead to EPS accretion of 13% and 16% in FY14E and FY15E respectively: The acquisition values Rutgers at 5.6x EV/adj EBITDA (taking into account Euro92m of cash with Rutgers). It also agreed to Euro27m of contingent payment based on certain profitability metrics of Rutgers and operating performance of Severstal JV. The acquisition is EPS accretive due to lower cost of debt compared to expected returns from investments. Post acquisition, RCOL's consolidated earnings are expected to be higher by 13% and 16% for FY14E and FY15E, compared to pre-acquisition earnings. Valuation multiple much below its peers; US listing will further rerate the stock: Post acquisition, RCOL will have USD2.2b in sales, USD340m of EBITDA and USD1.2b in debt. It will have a better diversified revenue base both geographically and product wise. We believe that RCOL is highly undervalued as the current market cap remains miniscule at USD250m. US listing of RCC would lead to rerating: RCOL plans to list its US subsidiary RCC which has control over US 1.9mt of CPC operations and the newly-acquired Rutgers business. Its peers such as Koppers already trade at 5.7x CY14E EV/EBITDA, a significant premium to RCOL's current multiple of 3.8x. On successful listing, the US subsidiary alone will have a value of INR64/share, even after 20% of holding company discount. SOTP will increase 45% to INR110/share. Buy the stock for a target price of Rs 76," says Motilal Oswal research eport. Institutional holding more than 40% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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