Target : INR 225 Upside : 36% KEY DATA Rain Commodities Ltd.finquestgroup.com/wp-content/uploads/2012/08/Rain-IC-14-12-2010.… · the brand Priya Cement in South India. Sector Chemicals-Aluminium

Rain Commodities Ltd.

Shareholding % 4Q 1Q 2Q

Promoters 43.0 42.0 42.0

MF/Banks/Indian FIs 17.0 16.0 16.0

FII/ NRIs/ OCBs 17.0 17.0 18.0

Indian Public 23.0 25.0 24.0

KEY DATA

Market Cap (INR bn) 11.7

Market Cap (USD mn) 259.7

52 WK High / Low 255 / 131

Avg Daily Volume (BSE) 73756

Face Value (INR) 10

BSE Sensex 19692

Nifty 5908

BSE Code 500339

NSE Code RAINCOM

Reuters Code RACL.BO

Bloomberg Code RCOL IN

Performance Chart

CMP : INR 165Rating : BuyTarget : INR 225Upside : 36%

Initiating Coverage

Rain Commodities Ltd. (RCL) is among the world's leading producer of Calcined Petroleum Coke (CPC)with market share of above 10% in the global CPC market. RCL manufactures anode grade CPC andcement through its operations based in India, US and China. It has nine anode grade CPC manufacturingplants with combined capacity of 2.5 mn tpa (seven plants in US-total capacity of 1.9 mn tpa, one plantin India and China with capacity of 0.6 mn tpa and 0.02 mn tpa resp). RCL also has two cement plants inIndia with total capacity of 3.2 mn tpa.

A. CPC businessDemand for aluminium to drive volumes of CPCCPC demand has direct co-relation with the production of aluminium. The global production of aluminiumis expected to increase at CAGR of ~7% to ~49 mn tonnes in 2012E. This will result in global CPCdemand from ~18.4 mn tonnes currently to ~ 24 mn tonnes 2012E. We don't expect any major CPCcapacity addition till 2012E and additional CPC requirement would be fulfilled by merchant CPC producers.We expect RCL's sales volume to increase by 10.8% to 2.1 mn tonnes in CY11E.

Consolidation in the industry to increase bargaining powerOf the global anode grade CPC capacity of ~25 mn tonnes, RCL and Oxbow Carbon together control~20% of total CPC capacity and ~40% of merchant CPC capacity. RCL acquired CII Carbon, LLC andOxbow acquired Great Lakes Carbon Limited in 2007 resulting in higher consolidation in the industry.The smelter and refinery integrated CPC capacities are slowly shutting down due to their non core nature.Hence we expect further consolidation in the CPC industry which will enable merchant refiners like RCLto exhibit better bargaining power driving realizations in future.

GPC linkage an entry barrier for new entrantsAnode grade GPC availability is the critical factor for setting up new CPC capacity as it is produced onlyfrom sweet crude that is processed by few refiners worldwide. Currently, RCL enjoys long term relationshipand contracts with major sweet crude processors. We do no expect any major CPC capacity addition innear future due to constraint in availability of anode grade GPC. We believe stagnant capacity along withincreasing demand to drive realization of anode grade CPC going ahead.

Change in raw material contracts to reduce volatility in earningsTill 2004, RCL procured GPC on spot-FOB basis and entered into year long fixed price contracts withsmelters on CIF basis. However, currently RCL has long term contracts with GPC producers where GPCprice are revised on quarterly basis and CPC prices are revised half yearly. This has led to reduction involatility in EBITDA margins and would lead to stability in margins going ahead.

In H1CY10, RCL was unable to pass on higher GPC prices due to slowdown in CPC demand worldwide.However with increase in demand, CPC prices were revised upwards and this led to increase in EBITDAper tonne to USD 99/tonne in Q3CY10 from USD 54/tonne in H1CY10. Going ahead, we expect pricingpower to continue with USD 92.5/tonne EBITDA in CY11E.

B. Cement businessCement business has been a drag on the overall financials of the company. RCL's cement operations arelocated in South India where the industry has been reeling under excess capacity leading to subduedrealizations. We do not see any significant improvement in realization as more capacity is expected inSouth India till 2012E. On a conservative basis, we estimate revenues from cement business to be at INR8 bn in CY11E.

ValuationAt the CMP of INR 165, RCL is trading at PE of 2.5x and EV/EBITDA of 3.2x its CY11E earnings. Globalconsolidation in the CPC industry and revival in demand due to improvement in global economy makesRCL best placed to take advantage of the increasing realizations of CPC. We believe RCL is available at asteep discount to its fair valuations. We value the company at 3.6x CY11E EV/EBITDA and arrive at atarget price of INR 225. At target price of INR 225, RCL is available at CY11E PE and EV/EBITDA of 3.4xand 3.6x respectively.

December 14, 2010

For Private Circulation OnlyFINQUEST research also available on BLOOMBERG FSPL <GO> and REUTERS.

Financials C09 C10E C11E(INR Mn.)

Net sales 36,338 36,744 41,290

EBITDA 8,980 7,451 9,909

EPS 62.7 42.3 66.8

PE (x) 2.6 3.9 2.5

Sameer VedakAnalystTel. : 4000 [email protected]

Chintan MewarVice President - ResearchTel. : 4000 [email protected]

For Private Circulation OnlyDecember 14, 2010 2

PARTICULARS (INR mn) C08 C09 C10E C11E

Valuation RatiosP/E 2.9 2.6 3.9 2.5EV/EBITDA 4.0 4.3 4.9 3.2P/BV 1.4 1.0 0.8 0.6Dividend yield (%) 2.3% 3.9% 3.0% 3.0%

Per share data (INR)EPS (diluted) 57.0 62.7 42.3 66.8Cash EPS (diluted) 72.0 80.0 59.9 84.6BVPS 118.6 170.9 207.4 268.3DPS 3.8 6.4 5.0 5.0

P&L (INR mn)Net sales 44,547.2 36,338.2 36,744.2 41,289.9Operating expenses 32,836.2 27,358.6 29,293.1 31,380.5EBITDA 11,711.0 8,979.6 7,451.1 9,909.3PBIT 10,650.8 7,753.1 6,207.8 8,647.5Interest expense 4,234.3 2,259.7 1,935.8 1,784.3PBT (post exceptional items) 6,213.3 6,147.7 4,472.1 7,063.3Tax 2,175.7 1,714.4 1,475.8 2,330.9PAT 4,037.6 4,438.6 2,997.9 4,734.0

Growth rates (%)Net Sales 179.7% -18.4% 1.1% 12.4%EBITDA 329.9% -23.3% -17.0% 33.0%EBIT 395.3% -27.2% -19.9% 39.3%PAT 420.5% 9.9% -32.5% 57.9%

Balance sheet (INR mn)Net worth 8,398.2 12,104.1 14,687.6 19,007.2Total debt 37,691.9 30,312.1 29,250.0 25,650.0Minority Interest - 20.8 20.8 20.8Deferred tax liability 2,441.3 2,260.2 2,260.2 2,260.2Total liabilities 48,531.4 44,697.2 46,218.6 46,938.2Net fixed assets 35,811.0 34,158.6 33,078.6 32,186.8Capital WIP & investments 817.8 540.5 657.2 557.2Cash & cash equivalents 2,359.2 3,056.9 4,550.8 5,900.2Net current assets (net of cash) 9,543.4 6,941.2 7,932.0 8,294.0Total assets 48,531.4 44,697.2 46,218.6 46,938.2

Cash flow (INR mn)PAT 4,037.6 4,438.6 2,997.9 4,734.0Depreciation 1,060.2 1,226.5 1,243.3 1,261.8Others 9,049.9 (3,059.9) 990.8 362.0Operating cash flow 796.5 7,809.6 3,250.4 5,633.8Capital expenses (7,025.3) 839.8 (280.0) (270.0)Investing cash flow (7,025.3) 801.1 (280.0) (270.0)Debt raised/(repaid) 7,709.5 (7,379.8) (1,062.1) (3,600.0)Dividend paid 311.8 533.3 414.4 414.4Financing cash flow 7,785.0 (7,913.1) (1,476.5) (4,014.4)Opening cash balance 803.0 2,359.2 3,056.9 4,550.8Closing cash balance 2,359.2 3,056.9 4,550.8 5,900.2

Profitability / Solvency ratios (%)EBITDA margin 26.3% 24.7% 20.3% 24.0%ROCE 15.8% 12.7% 9.5% 13.0%ROE 48.1% 36.7% 20.4% 24.9%Net debt to equity (x) 4.2 2.3 1.7 1.0Interest coverage ratio 2.5 3.4 3.2 4.8

Company Description

Rain Commodities Ltd. (RCL) is among thelargest CPC producer in the world. RCL hasseven CPC manufacturing plants in USA withcombined capacity of 1.9 mn tpa and onemanufacturing plant in Vishakhapatnam withmanufacturing capacity of 0.6 mn tpa. RCL alsohas cement manufacturing capacity in AP withcapacity of 3.2 mn tpa and sells its cement underthe brand Priya Cement in South India.www.priyacement.com

Sector

Chemicals-Aluminium

Key Management Personnel

N. Jaganmohan ReddyManaging Director

T. Srinivas RaoVP - Finance

S. Venkat Ramana ReddyCompany Secretary

PRICE PERFORMANCE (%)

3 M 6 M 12 M

Absolute 3.8 15.3 13.5

Relative 1.7 (8.3) 36.7

Valuation Thesis

We value the company at 3.6x CY11E EV/EBITDA and arrive at a target price of INR 225.At target price of INR 225, RCL is available atCY11E PE and EV/EBITDA of 3.4x and 3.6xrespectively.

Financial Summary


A. CPC Business

CPC is manufactured from anode grade Green Petroleum Coke (GPC). GPC is the residual product

obtained after processing of sweet crude oil (oil with lower amount of impurities). CPC is obtained by

calcination process whereby the anode grade GPC is heated in a controlled environment to remove

moisture and other impurities like sulphur. The calcination process improves physical properties of

the coke making it ideal for use in aluminium industry as electrode.

Due to improved conductivity obtained in calcination process, CPC is extensively used in industries

like aluminium, titanium dioxide, steel etc. Almost, 88-90% of the CPC produced globally is consumed

in the aluminium industry.

Figure 1: Consumption pattern of anode grade CPC (by volume)

Source: Company, FQ Research

a) Turnaround in aluminum industry - a key trigger for volume growth

The demand for CPC is directly dependent on production of aluminium. Global recession led to

reduction of aluminium demand in the year 2009. However with revival in the global economy, the

demand increased in 2010. We believe the aluminium consumption to grow by ~9% till FY12E

mainly driven by increased aluminium consumption in the developing countries. We expect

automobiles (~26% of global consumption by volume) and construction (~22% of global aluminium

consumption by volume) to drive aluminium consumption.

Figure 2: Demand supply scenario of aluminium (mn tonnes)

Source: www.alshli.com, company


The increase in consumption of aluminium has outpaced increase in production leading to decline in

global inventory of aluminium. While global demand for aluminium is expected to increase by CAGR

of ~9% till 2012E, global production is expected to grow by ~7% CAGR. Rising demand for aluminium

had led to better realization for the aluminium producers. In the scenario of increasing demand,

smelters have envisaged capacity addition of 4.9 mn tonnes in India and Middle East alone by 2012E.

Additional capacity of 4.9 mn tonnes is expected to generate additional CPC requirement of ~2 mn

tonnes.

Figure 3: Aluminium capacity addition in India and Middle East (tonnes)

Smelter CY2009 CY2013E Increase

Vedanta, India 390,000 2,050,000 1,660,000

Hindalco, India 618,000 1,746,000 1,128,000

EMAL, UAE - 750,000 750,000

Qatalam, Qatar - 585,000 585,000

Sohar, Oman 175,000 700,000 525,000

Ma'aden, Saudi - 370,000 370,000

Nalco, India 345,000 460,000 115,000

Dubal, UAE 920,000 952,000 32,000


As an empirical co relation, ~400 kg of CPC is consumed for every tonne of aluminium produced. It

translates into demand of ~25 mn tonnes of CPC by 2013E to meet the requirement of existing

aluminium capacity (increase by CAGR of ~7%). This coupled with demand for new facilities creates

a demand potential of above 27 mn tonnes of CPC by 2013E.

Figure 4: Demand scenario of anode grade CPC (mn tonnes)



b) Consolidation in the industry to improve bargaining power

Global CPC capacity currently stands at ~ 25 mn tonnes. RCL with capacity of 2.5 mn tpa currently

holds 10% of global CPC capacity. The global CPC industry is in consolidation phase since 2007.

RCL has CPC plant in India with capacity of 0.6 mn tpa. In 2007, RCL acquired CII Carbon, LLC;

world's second largest manufacturer of CPC for USD 619 mn. CII carbon has seven plants in USA

with total manufacturing capacity of 1.9 mn tonnes. This acquisition made RCL, largest producer of

CPC in the world. Also, Oxbow Carbon acquired Great Lakes Carbon (then largest producer of CPC)

in 2007, making it second largest producer of CPC in the world. RCL later acquired 0.02 mn tpa

capacity in China. We believe this is a strategic move as a) rising demand for aluminium in China will

drive volumes for CPC in China b) gives RCL exposure to Chinese market experience, which would

be useful if any bigger investment opportunity arises c) gives RCL access to vertical shaft technology

used in China.

Figure 5: RCL CPC capacity

Location Country Capacity (tpa)

Vishakapatnam India 600,000

Chalmette USA 230,000

Gramercy USA 230,000

Norco USA 230,000

Purvis USA 70,000

Moundsville USA 420,000

Lake Charles USA 400,000

Robinson USA 315,000

Zhenjiang China 20,000

Total 2,515,000


Recently Oxbow carbon bought 40% stake in Middle East based PCIC (capacity of 0.35 mn tonnes)

for USD 111.6 mn. Currently RCL and Oxbow carbon control ~20% of world's total calcination

capacity and ~40% of merchant calcination capacity. We believe, the industry to consolidate further

with major CPC producers acquiring CPC facilities in countries like China and from integrated CPC

facilities in refineries and smelters.

On replacement value basis, RCL's CPC business is currently available at USD 215/tonne. This is at

steep discount to current acquisition done by Oxbow Carbon (~USD 900/tonne). Even at USD 215/

tonne, RCL is available at ~37% discount to the replacement cost of CII Carbon, USA that was acquired

for USD 325/tonne in 2007.

Figure 6: RCL available at steep discount to international valuations

Acquired/Sold by Year Target Co Transaction EV/tonne

(USD/tonne)

RCL 2007 CII Carbon, LLC Buy 325

Oxbow carbon 2007 Great lakes carbon Buy 389

RCL 2009 PCIC Sold 400

RCL 2009 Zhenjiang Xin Tian Tansu Co. Ltd. Buy 100

Oxbow carbon 2010 PCIC Buy 900

Current RCL valuation* 215

*We reduced EV of cement business at USD 55/tonne

Source:FQ Research


We believe consolidation in CPC industry would enable merchant CPC producers like RCL to exhibit

better bargaining power with its customers enabling higher realizations going ahead. On a conservative

basis, we have considered average CPC realization of USD 318/tonne and USD 350/tonne in CY10E

and CY11E respectively.

C) Global CPC capacities shifting towards merchant refiners

The global CPC capacity of ~25 mn tonnes can be segregated into three categories;

a) Smelter integrated: Aluminium smelters having backward integrated to produce their anode grade

CPC for captive consumption e.g. ALCOA, ALCAN, AIBA.

b) Refinery integrated: Crude processing refineries that are forward integrated produce anode grade

CPC from anode grade GPC e.g. BP, Conoco Phillips.

c) Merchant producers: Producers like RCL who procure anode grade GPC from refineries and

converts it to anode grade CPC for aluminium smelters.

Figure 7: Global CPC capacity by producers (by volume)


The major constraint for the aluminium smelters is availability of good quality anode grade GPC overa long period. Anode grade GPC is typically produced from a specific grade of crude that is low insulphur content (also known as sweet crude). As there are limited suppliers of anode grade GPC andmost of them already in long term purchase contracts with major merchant producers, it becomesdifficult for smelters to tie up for anode grade GPC supply. As a result, the smelters are gradually in theprocess to hive off their calcination process to merchant producers and then enter into long term CPCcontracts with them.

Figure 8: Global consolidation in CPC capacities

2005 2009



Also for the refineries, pet coke accounts for ~8-10% of the refinery output by volume and ~1-3% byvalue. Thus, the refiners are more inclined towards disposal of pet coke than setting up facility forproducing CPC. Besides that major constraint in putting up facility for anode grade CPC is a) consistentsupply of sweet crude for refining that will produce anode grade GPC b) better margins in processingsour crude (crude with higher impurities like sulphur, moisture, etc). Hence, there has not been anymajor capacity addition in calcination plant for producing anode grade CPC in the refineries. Therefineries on the other hand rely more on merchant producers like RCL who ensure regular offtake ofanode grade GPC.

We believe the gradual shift of CPC capacities from aluminium smelters and crude refiners to benefitmerchant producers like RCL.

d) Availability of GPC an entry barrierThe biggest entry barrier for new entrants in CPC manufacturing business is the availability of anodegrade GPC. Anode grade CPC is manufactured from anode grade GPC that is obtained from specialgrade crude known as 'sweet crude'. Most of the refineries refine sour crude that produces fuel gradepet. Though fuel grade pet coke trades at discount of ~30-35% to anode grade coke, refineries areinclined towards processing of sour crude due to better economics in favor of processing sour curde.Also availability of sweet crude is a constraint and refineries process sweet crude depending upon itsavailability. Hence, the refineries enter into long term contracts with merchant calciners like RCL for

offtake of pet coke produced in the refineries.

Figure 9: Anode grade GPC deficit to widen by 2012E


Type of contracts

Evergreen contracts: RCL fulfills ~60-65% of its GPC requirement through long term contracts where

the GPC prices are revised quarterly. RCL shares a cordial relationship for last 15-20 years with the

GPC producers and we expect RCL to continue with the contracts going ahead.

Of the above procurement of ~60-65%, RCL has entered into a contract with Conoco Philips, where

it has right of first refusal. RCL procures ~30-35% of its GPC requirement through this contract.

Contract for Conoco Phillips is for 10 years and is set to expire in 2015.

For its India operations, RCL procures GPC through spot market mainly from refineries in North

America, China, Middle East, Indonesia and Malaysia.


Raw material pricing contracts

RCL procures anode grade GPC in contracts that are subject to revision of prices every quarterly. The

finished goods (CPC) is priced every half yearly. Thus the gross margin plays a vital role in EBITDA

margins of the company. The EBITDA margins of RCL were subdued in H1CY10 mainly on account

of a) reduced offtake of CPC due to slowdown in aluminium demand b) increase in GPC prices and

RCL was not able to pass on the prices in H1CY10. However, the prices of CPC were revised in early

part of H2CY10 leading to improvement in EBITDA margins by 930 bps QoQ to 23.4% in Q3CY10

from 14.1% in Q2CY10. The next revision of CPC contracts is due in early CY11E. On a conservative

basis, we have assumed RCL to maintain EBITDA margin of USD 92.5/tonne in CY11E in CPC business.

We have assumed spread of USD 209/tonne in CPC and GPC prices in CY11E. We believe increase

in EBITDA margin in CPC business to recover overall EBITDA margin of the company to 24.0% in

CY11E from drop in CY10E.

Figure 10: CPC gross margin to improve going ahead


Restricted capacity of anode grade GPC and long term contracts already in place with existing merchant

calciners act as major constraints for newer players to set up calcining capacity. Therefore, we do not

expect any major capacity addition in the future and would result into further consolidation in the

industry making aluminium producers more dependent on merchant calciners like RCL.

Figure 11: RCL's GPC procurement for Indian operations (by volume)



B. Cement business to drag revenues in CY11E

Cement contributed to ~25% of RCL's consolidated revenues in CY09. The company has two

manufacturing plants located in Andhra Pradesh with total capacity of 3.2 mn tonnes. The cement

business had been a drag on the overall earnings of the company.

Figure 12 : Cement segment earnings were under pressure in CY10


During 9MCY10, cement segment revenues were flat YoY. Decrease in realization led to significant

decline in EBIT margins by ~2200 bps YoY. Going ahead, we do not see any positive surprise from

the cement business in CY11E. We expect volumes to be under pressure in CY11E due to surplus

capacity. However, we have considered marginal increase of 5% in average realization leading

moderate increase in sales from the segment.

C. Energy business - to benefit in long term

Currently RCL has three power generation plant in US and a 49 MW electricity generation plant in its

Vishakapatnam plant to generate power from waste flue gases. Of the 49 MW generated for the waste

gases, RCL consumes 5MW for its CPC operations and 22 MW is utilized in the cement segment. The

balance 22 MW is sold to industrial consumers in AP at the prices determined by the state electricity

regulator. Recently, RCL has been permitted to sale 50% of its surplus power as Merchant Power to

power trading companies.

RCL also plans to set up two new waste heat recovery plants of combined capacity 70 MW in its US

operations. The total estimated project cost is ~ USD 125 mn. One plant is expected to be operational

in CY12E and the other is expected to be operational in CY13E. RCL expects to generate combined

operational profit of USD 22 mn for the plants. However, we have not considered any revenues for

the plant in our estimates.

We believe earnings from the energy business would lead to expansion of EBITDA margins as the

power is generated from the waste gases with no additional cost.

Changing revenue mix towards CPC business to lead to margin expansion

CPC and cement business contributed ~69% and 25% of RCL revenues in CY2009 respectively. We

believe CPC business to grow at a rate of 13.2% in CY11E on account of a) higher demand of CPC b)

better realizations. However, we do not see bright outlook for the cement sector and expect earnings

to be under pressure in CY11E. This will drive share of CPC segment in total revenues to increase by

900 bps to 79% in CY11E.


Figure 13: Revenue mix changing towards CPC business

CY2009 CY2011E


The EBITDA margin and PAT margin is expected to be 20.3% (drop by 440 bps) and 8.2% (drop by

405 bps) in CY10E respectively. This was mainly because of a) slack in demand CPC and increase in

GPC prices in first half of CY10E b) subdued performance of cement segment. However with revival

in CPC demand, RCL has been able to increase CPC prices in later half of CY10E.

Figure 14: EBITDA contribution from CPC business to increase going ahead

CY2009 CY2011E


With increased share of CPC in total revenues (higher margin business as compared to cement), we

believe the EBITDA margins to improve to CY09 levels of 24.0% from expected lows of 20.0% in

CY10E. We also expect PAT margins to improve to ~11.5% in CY11E from ~8.2% in CY10E.

Figure 15: Improving profitability



Corporate restructuring - a potential trigger in happening

Currently RCL owns and operates two cement plants in AP with total manufacturing capacity of 3.2mn tonnes per annum. The cement business as an entity also operates a) Rain carbon CII (India)limited - CPC manufacturing facility in India b) Rain CII carbon LLC, USA - CPC manufacturingfacility in USA c) Rain Global Services LLC, USA - Pet coke marketing company.

RCL's cement business is mostly focused in Southern India, where demand is mostly driven by infraand housing spends in that part of the country, where as CPC business is governed by global demandin aluminium industry. RCL has proposed to create two separate verticals for Cement and CPC business.We believe segregation of business into different verticals would benefit RCL by a) facilitating RCL toinduct financial and strategic investor in cement business that may result in value unlocking in cementbusiness going ahead b) enabling CPC business to actively scout for opportunities in China, Middle

East c) enabling the US holding company to raise funds for organic or inorganic expansion.

Figure 16: Existing corporate structure

Source: Company

Figure 17: Proposed corporate structure

Source: Company

Debt restructuring and reduction in debt to improve return ratios

RCL's consolidated debt as on Sep 2010 stood at USD 603 mn. RCL went through a debt restructuring

process and raised USD 400 mn bonds. The capital raised would be used for restructuring the high

yield bonds (interest rate of 11.25%) with lower interest rate bonds (interest rate of 8%). We believe

the restructuring exercise will reduce interest expense of RCL going ahead. We expect RCL's interest

burden to reduce from INR 2.3 bn in CY09 to INR 1.8 bn in CY11E. The company has envisaged debt

repayment of USD 29 mn in Q4CY10 and USD 31 mn in CY11E. We believe reduction in debt will

improve RCL's ROE and ROCE to 28% and 13% respectively in CY11E.


Figure 18: Consol debt to reduce till 2013E Figure 19: Improving return ratios

Source: FQ Research Source: FQ Research

Sensitivity analysis

Figure 20: EPS sensitivity to EBITDA/tonne Figure 21: EPS sensitivity to EBITDA/tonne

of CPC business of Cement business

Volume Consolidated EPS (INR) Volume Consolidated EPS (INR)(mn tonnes) EBITDA/tonne (USD/tonne) (mn tonnes) EBITDA/tonne (INR/tonne)

87.5 90.0 92.5 95.0 97.0 400.0 425.0 450.0 475.0 500.0

1.9 54.6 56.6 58.6 60.6 62.6 2.4 64.6 65.1 65.7 66.3 66.8

2.0 58.5 60.6 62.7 64.8 66.9 2.6 65.1 65.7 66.3 66.9 67.5

2.1 62.4 64.6 66.8 69.1 71.3 2.7 65.6 66.2 66.8 67.5 68.1

2.2 66.3 68.6 71.0 73.3 75.6 2.8 66.1 66.7 67.4 68.1 68.7

2.4 70.2 72.6 75.1 77.5 80.0 3.0 66.6 67.3 68.0 68.7 69.4


For every USD 2.5/tonne increase in EBITDA of CPC business leads to increase in EPS by 3.3% and

vice versa.

For every INR 25/tonne increase in EBITDA of cement business leads to increase in EPS by 1.0% and

vice versa.

Valuation

At the CMP of INR 165, RCL is trading at PE of 2.5x and EV/EBITDA of 3.2x its CY11E earnings.

Global consolidation in the CPC industry and revival in demand due to revival in economy makes

RCL best placed to take advantage of the increasing realizations CPC. We believe RCL is available at

a steep discount to its fair valuations. RCL has been trading at an average one year forward PE of 3.5x

in the past. We value the company at 3.6x CY11E EV/EBITDA and arrive at a target price of INR 225.

At target price of INR 225, RCL is available at CY11E PE and EV/EBITDA of 3.4x and 3.6x respectively.

Figure 22: One year forward PE band Figure 23: One year forward EV/EBIDTA band



Key risk

1. As ~75% of the revenues of the company are dollar denominated, any appreciation of rupee in

terms of dollar would result in translation loss (losses while converting dollar revenue to rupee).

2. The fortune of the company is dependent on production of aluminium. Any decline in aluminium

production would lead to decline in company's earnings.

About the company

RCL, promoted by Mr Jaganmohan Reddy is among the largest CPC producer in the world. RCL has

seven CPC manufacturing plants in USA with combined capacity of 1.9 mn tpa and one manufacturing

plant in Vishakhapatnam with manufacturing capacity of 0.6 mn tpa. RCL also has cement

manufacturing capacity in AP with capacity of 3.2 mn tpa and sells its cement under the brand Priya

Cement in South India. RCL also generates power at its captive power plants (waste heat recovery

plants) in India and US. Part of the electricity produced is used for captive consumption and part is

sold in the market which reduces operating cost and generates additional source of revenue.

Corporate History

Rain commodities was incorporated in 1974 and was into cement business and operated two cement

plants in AP with combined capacity of 1.7 mn tpa. Rain Calcining Limited started in 1989 with CPC

manufacturing plant of 240,000 mtpa capacity in Vishakapatnam and power generating capacity of

49MW. The calcining capacity was increased to 600,000 MT in CY08, through addition of another

line and de bottlenecking of existing facilities.

In CY2006 and CY2007, through a major corporate restructuring exercise, Rain Industries Limited,

which was cement business, was transferred to Rain Commodities Limited and Rain Calcining Limited

was amalgamated with Rain commodities limited. The CPC and energy business that was transferred

from Rain Commodities was transferred to Rain Industries and was renamed Rain CII Carbon (India) Ltd.

In 2007, Rain acquired world's second largest CPC manufacturer CII Carbon LLC, US with capacity of

1.9 mn tpa for an acquisition cost of USD 619 mn.


Profit and Loss StatementParticulars (INR mn) C08 C09 C10E C11E

Net sales 44,547 36,338 36,744 41,290% chg 179.7 (18.4) 1.1 12.4Total expenditure 32,836 27,359 29,293 31,381Operating profit 11,711 8,980 7,451 9,909(% of net sales) 26.3 24.7 20.3 24.0Other income 483 141 200 200Depreciation & amortisation 1,060 1,226 1,243 1,262Interest 4,234 2,260 1,936 1,784PBT 6,900 5,634 4,472 7,063(% of net sales) 15.5 15.5 12.2 17.1Exceptional items (686) 514 - -PBT post exceptional items 6,213 6,148 4,472 7,063Tax 2,176 1,714 1,476 2,331(% of PBT) 31.5 30.4 33.0 33.0PAT 4,038 4,433 2,996 4,732Minority interest - (5) (2) (2)PAT (Reported) 4,038 4,439 2,998 4,734

RatiosParticulars C08 C09 C10E C11E

Valuation Ratio (x)P/E 2.9 2.6 3.9 2.5P/E (Diluted cash EPS) 2.3 2.1 2.8 1.9P/BV 1.4 1.0 0.8 0.6EV / Sales 1.1 1.1 1.0 0.8EV / EBITDA 4.0 4.3 4.9 3.2MCap/Sales 0.3 0.3 0.3 0.3

Leverage Ratio (x)Net debt-Equity 4.2 2.3 1.7 1.0Interest Coverage -on EBIT 2.5 3.4 3.2 4.8

Per Share Data (INR)Diluted EPS 57.0 62.7 42.3 66.8Diluted cash EPS 72.0 80.0 59.9 84.6DPS 3.8 6.4 5.0 5.0Book value 118.6 170.9 207.4 268.3

Returns %ROE 48.1 36.7 20.4 24.9ROCE 15.8 12.7 9.5 13.0Dividend payout (%) 6.6 10.3 11.8 7.5

Du-Pont AnalysisOperating margin (EBIT/Sales) (%) 23.9 21.3 16.9 20.9Interest burden (PBT/EBIT) (%) 58.3 79.3 72.0 81.7Tax burden (PAT/PBT) (%) 65.0 72.1 67.0 67.0Asset turnover (Sales/assets) (x) 1.2 1.1 1.1 1.3

Margin Ratios(%)EBITDA margin 26.3 24.7 20.3 24.0PBT margin 15.5 15.5 12.2 17.1PAT margin 9.1 12.2 8.2 11.5

Growth Ratios (%)Net Sales -18.4 1.1 12.4EBITDA -23.3 -17.0 33.0EBIT -27.2 -19.9 39.3PAT 9.9 -32.5 57.9

Operating CycleDebtors days 39 45 45 45Inventory days 69 48 55 55Creditors days 36 27 30 30

Balance SheetParticulars (INR mn) C08 C09 C10E C11E

SOURCES OF FUNDS

Equity share capital 708 708 708 708

Reserves & surplus 7,690 11,396 13,979 18,299

Shareholders funds 8,398 12,104 14,688 19,007

Total loans 37,692 30,312 29,250 25,650

Minority Interest - 21 21 21

Defered tax liability 2,441 2,260 2,260 2,260

Total Liabilities 48,531 44,697 46,219 46,938

APPLICATION OF FUNDS

Gross block 37,977 37,453 37,616 37,986

Less: acc. depreciation 2,166 3,294 4,538 5,799

Net block 35,811 34,159 33,079 32,187

Capital work-in-progress 549 233 350 250

Investments 269 307 307 307

Current assets 17,091 13,777 16,088 18,683

Current liabilities 5,189 3,779 3,605 4,489

Net current assets 11,903 9,998 12,483 14,194

Total Assets 48,531 44,697 46,219 46,938

Cash Flow Statement

Particulars (INR mn) C08 C09 C10E C11E

PAT 4,038 4,439 2,998 4,734

Depreciation 1,060 1,226 1,243 1,262

Chg in working capital 6,676 (2,602) 991 362

Other current assets 2,374 (458) - -

CF from operations 797 7,810 3,250 5,634

Capital expenses (7,025) 840 (280) (270)

Chg in investments/others - (39) - -

CF from investing (7,025) 801 (280) (270)

Free cash flow (6,229) 8,649 2,970 5,364

Debt raised/(repaid) 7,709 (7,380) (1,062) (3,600)

Dividend(Incl tax) 312 533 414 414

CF from financing 7,785 (7,913) (1,476) (4,014)

Net change in cash 1,556 698 1,494 1,349

Opening cash balance 803 2,359 3,057 4,551

Closing cash balance 2,359 3,057 4,551 5,900

Standalone Financials


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