22 February 2012 4QCY11 Results Update | Sector: Metals

Rain Commodities
BSE SENSEX S&P CNX

18,429 Bloomberg Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b)

5,607 RCOL IN 349.5 42/25 11/20/21 13.3 0.3

CMP: INR38

TP: INR75

Buy

Consolidated

Rain Commodities 4QCY11 consolidated Adj PAT grew 17% YoY to INR 1.8b (v/s est INR1.2b) on higher CPC sales and better operating margins. Net sales grew 25% QoQ to INR16.2b (v/s est INR14.8b) boosted by higher sales tonnage of CPC (up 18% QoQ) and better blended realization (up 2% QoQ) in carbon business (CPC and GPC). Other expenditure was inflated due to forex loss of INR294m on USD denominated working capital loans. EBITDA grew 54% QoQ to INR3,677m on superior performance from carbon business. Calculated carbon blended realization increased 2% QoQ and calculated carbon EBITDA per ton increased 41% QoQ to USD107/ ton. Carbon margins continue to hold on to superior levels and remain immune to aluminium price declines and production cuts. Cement realization was up 1% QoQ but EBITDA per ton declined 22% QoQ to INR682 due to cost pressure on inputs. CY11 gross debt at USD709m (USD625m term debt, USD84m working capital debt) is at the same level as CY10. Cash equivalents stand at USD167m. RCOL raised dividend by~20% to INR1.1/share (CY10 dividend INR0.92/share). It has completed 85% of its proposed buyback of INR350m with maximum price of INR41/share. We are upgrading CY12 EPS estimate by 20% to INR17.1 as carbon business is expected to continue delivering superior margins. Stock valuations are compelling with CY12E P/E of 2x and EV/EBITDA of 3x. Maintain Buy with target price of INR75 (SOTP).

Pavas Pethia (Pavas.Pethia@MotilalOswal.com); Tel: +91 22 3982 5413 Sanjay Jain (SanjayJain@MotilalOswal.com); Tel: +91 22 3982 5412

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Carbon business continues to deliver superior margins; blended carbon realization up 2% QoQ
Net sales grew 25% QoQ to INR16.2b (v/s est INR14.8b) boosted by higher sales tonnage of CPC (up 18% QoQ) and better blended realization (up 2% QoQ) in carbon business (CPC and GPC). Company sold 533kt (up18% QoQ) of CPC and 523kt (down 3% QoQ) of cement in 4QCY11. Blended realization for carbon business increased 2% QoQ to USD429 per ton while cement realization increased 1% QoQ to INR199 per 50kg bag. Calculated carbon EBITDA per ton increased 41% QoQ to USD107. Cement EBITDA/ton declined 22% QoQ to INR682 due to cost pressure on inputs.

85% buyback complete; USD7m high cost debt repaid in 4QCY11

RCOL has completed 85% of its proposed buyback of INR350m with maximum price of INR41/share. CY11 gross debt stands at USD709m including USD84m of working capital loan. The company repaid USD17m of high interest (11.125%) term loan at first call option in 4QCY11. 5% call premium resulted in higher interest and finance charges for the current quarter.

CY12 EPS upgraded 20% as carbon business margins are expected to remain strong
Cement demand scenario in South India continues to remain subdued. RCOL continues to operate its cement capacity at lower levels to support margins. However margins were low at INR682/ton in 4QCY11 due to high input cost. We expect margins to improve slightly from current levels as pace of capacity addition slows down in South India. RCOL carbon realization and margins remains strong and immune to aluminium price decline and production cuts. RCOL benefits from its long-term relationship with GPC suppliers in tight supply market. 3 out of its 7 seven facilities in US are next to oil refineries. As carbon business margins remain resilient we are upgrading CY12 EPS by 20% to INR17.1. Stock valuations are compelling with CY12E P/E of 2x and EV/EBITDA of 3x. Maintain Buy with target price of INR75 (SOTP).
Blended Carbon EBITDA (USD/ton) remains strong Cement margin (INR/ton) declining on cost pressure

Source: Company/MOSL 22 February 2012 2

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Rain Commodities: an investment profile

Company description
Rain Commodities (RCOL) is one of the largest calciners in the world, with a capacity of 2.5mtpa. Its CPC capacity is located in North America (1.89mtpa), India (0.6mtpa) and China (0.02mtpa). It has cogeneration capacity of 125MW. It also has cement operations (3.5mtpa) in South India, which contribute 19% of its overall revenue. will be financially constrained in case of a major downturn in the aluminum industry.

Recent developments
The Board has declared dividend of INR1.1/share i.e. 55% of the face value.

Valuation and view Key investment arguments

Increasing aluminum production is leading to strong demand for calcined petroleum coke (CPC). Difficulty in raw material sourcing acts as an entry barrier. Strong cash flows to help deleverage balance sheet; expect D/E to decline to 0.6x in CY13. Cement scenario in South India to improve as pace of capacity addition slows down. Stock valuations are compelling with CY12E P/E of 2x and EV/EBITDA of 3x. Maintain Buy with target price of INR75 (SOTP).

Sector view
CPC realization remains strong despite concerns of slowdown in Europe. With the current growth rate in aluminium production, additional 5.5mtpa of CPC will be required by CY15, which will continue to safeguard CPC margins. We do not expect any downward pressure on margins in the near future on account of supply-demand mismatch in the industry. Cement demand scenario in South India continues to be subdued. However margins and realizations are expected to improve gradually as pace of capacity addition slows down in South India.

Key investment risks

RCOL derives ~90% of its CPC revenue from sales of carbon anode to aluminum smelters. The aluminum industry is cyclical in nature, with demand-supply governed by a variety of factors, especially the economic wellbeing of the world as a whole. With its current D/E at 1.4x and significant debt service obligations in the next couple of years, RCOL
Comparative valuations
Rain commodities 2.0 2.2 0.6 0.5 0.8 0.7 3.2 3.1 Tata Sponge 4.5 6.0 0.9 0.8 0.4 0.4 1.8 2.1 Adhunik Metaliks 6.8 3.6 0.7 0.6 1.5 1.0 5.7 3.8

EPS: MOSL forecast v/s consensus (INR)

MOSL Forecast 17.1 17.3 Consensus Forecast Variation (%) -

P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x)

FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

CY12 CY13

Target price and recommendation

Current Price (INR) 38 Target Price (INR) 75 Upside (%) 97.4 Reco. Buy

Stock performance (1 year)

Ra i n Commoditi es 42 37 Sens ex - Reba s ed

Rain Commodities follows calendar year reporting. Read FY12/ FY13 as CY11/CY12

Shareholding pattern (%)

Dec-11 Promoter Domestic Inst Foreign Others 22 February 2012 42.9 18.5 15.8 22.8 Sep-11 42.5 18.0 16.4 23.2 Dec-10 42.5 17.0 17.9 22.7

32 27 22 Feb-11 May-11 Aug-11 Nov-11 Feb-12

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Financials and Valuation

22 February 2012

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N O T E S

22 February 2012

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Disclosure of Interest Statement

1. 2. 3. 4. Analyst ownership of the stock Group/Directors ownership of the stock Broking relationship with company covered Investment Banking relationship with company covered

Rain Commodities
No No No No

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