Rain Industries shares hit a life-time high of Rs 286, rising 9.2 percent intraday Thursday after research house Motilal Oswal has initiated coverage on the stock with a buy rating, citing likely strong earnings growth and reasonable valuations.
The brokerage firm set a target price for the stock at Rs 362 per share, implying a potential upside of 33 percent from Wednesday’s closing price.
“Although the stock has got re-rated, valuations still appear attractive. We value the stock at Rs 362 based on 6.5x EV/EBITDA of CY19, and initiate coverage with a Buy rating,” Motilal Oswal said in its report.
After trading at low single digit PE for very long period, Rain has finally got re-rated on visibility of margin expansion and growth driven by multiple enduring tailwinds and multiple competitive advantages, it added.
Rain is globally the second largest producer of calcine pet coke (CPC) and coal tar pitch (CTP), which are used in aluminum smelting.
The research house feels the dual benefit of demand growth and supply shock is driving up global CPC prices.
CPC production is hurt in China after the government’s firm action in 2017 to contain pollution. As a result, China has turned a net importer of CPC. Simultaneously, aluminum production is set to grow outside China – many smelters in North America and Europe are restarting.
Motilal Oswal expects these tailwinds to last for 2-3 years, enabling EBITDA/PAT CAGR of 24/50 percent over CY16-19. It expects volume to grow at a compound annual growth rate of 4 percent in CY16-19.
Motilal Oswal said coal tar pitch market has stabilised on capacity cuts in key markets where Rain operates.
Coal tar pitch has been oversupplied for many years in Rain’s key markets due to declining aluminum production. Consequently, there have been many shutdowns. Koppers, the largest producer of CTP in the world and a key competitor, has closed seven plants in the last 2-3 years. This has resulted in supply correction and improved utilisation.
The industry is now running at 80-90 percent utilisation and margins have stabilised. As aluminum production starts to recover on expected restart of smelters, demand and margins will expand, the research house feels.
Rain Industries, the second largest carbon product supplier to the aluminum industry, has decided to set up a 370ktpa CPC kiln at a capex of USD 65 million near Vizag to meet strong growth in demand from Indian smelters. It is also investing USD 17 million in debottlenecking of petrochemical feedstock distillation by 200kt in Europe.
Both projects are scheduled for completion by March 2019 and short payback period of 2-3 years should drive remunerative volume growth, Motilal Oswal believes.
Rain’s carbon segment contributes 80 percent to consolidated EBITDA. Its chemicals segment converts coal tar distillates into resins, modifiers, aromatic chemicals, superplasticizers, etc. It also operates a 3.5mt cement plant in southern India and sells cement under the Priya brand.
The company has been generating strong free cash flow and rewarding shareholders with dividends and buybacks. “We believe it will continue to do so,” Motilal Oswal said.
At 10:33 hours IST, the stock price was quoting at Rs 278.25, up Rs 16.30, or 6.22 percent on the BSE.