Rain Commodities (Rs. 142.00) (Code : 500339)
Andhra based Rain group is headed by Mr N Jagan Mohan Reddy having interests in cement and CPC. Earlier, the group had 2 listed entities-Rain Commodities, the holding company for the 1.5mn tonne cement business, and Rain Calcining(RCL),comprising 0.6mn tonnes of CPC capacity. Post a scheme of arrangement, RCL was merged with RCom by way of a share swap, wherein 2 shares of RCom were issued for every 7 shaers of RCL. Main features: A. Transfer of cementbusiness from Rain Industries to RCom B. Amalgamation of RCL with RCom C. Transfer of CPC and power business from RCom to Rain Industries (100% subsidiary of RCom) Thus cement asset is now held under RCom-the holding company. CPC asset is held under Rain Industries. Group, thru 100% subsidiaries of Rain Industries and RCom USA, has acquired 100% stake in the Texas based 1.9mn tonne CII Carbon, CII Carbon, until acquisition, was 2nd largest producer of CPC in the world. Post acquisition, RCOM is the largest CPC producer in the world with a capacity of 2.49 mn tonnes. Company is further erxpanding its CPC capacity by 0.6 mn tonnes by early 2010.
1. Expansion of cement capacities to 3.16mn tonnes has already been completed in previous quarter. Pithead mines at both units with reserves sufficient to carry out operations for next 70 years at expanded capacity. Potential to add 4 million TPA of cement capacity at existing locations at capital cost of USD 50/MT.
2. CII Carbon LLC : A. Has 48 years of experience and track record in industry leadership B. Production facilities across N America-Louisiana (4), Mississippi1), W Virginia(1), Illinois(1) C. Access to waterways-Mississippi river terminal, Calcasieu river terminal and Ohio river terminal D 62.5% Sales made to international customer having strong relationship with all Global Aluminium majors E. 95% Sales pursuant to multi-year contracts (quantity fixed but not price) F. 77% Raw materials procured fom suppliers having relationship of over 10 years
3. CPC-Changing Business Model :- A. Limited supply (or no increase in supply) of Anode Grade GPC B. No new CPC capacities are announced or expected C. Consolidation in the industry 4. Rain now enjoys 13% share of Global CPC capacity and 22% market share of Western World production 5. Unmatched access to GPC suppliers and CPC customers across the globe Slowdown in aluminium industry : In last 12 months, aluminium prices have crashed. It has led to correction in prices of CPC also. However GPC prices have also corrected sharply and Rain still commands comfortable profit margins. Recently, Company has signed agreement with Karnataka Power to get Fly Ash which will enable it to enhance production of blended cement.
VALUATIONS : Stock is trading at :- 1. 2.42 x CY08 EPS 2. 2.48 xCY09E EPS Such valuation are very compelling considering the following; A. Company has emerged the largest prodcuer of CPC in the world. B. Big entry barriers due to limited availability of GPC. C. Metal Industry is likely to rebound in 2010. Once it happens CPC producers may report sharp jump in profits. Recently, promoters had converted their warrants into equity @ Rs 200 per share. In 2007, share price had gone upto Rs. 300/-. However, share price crashed due to aggressive selling by some FIIs although Citi group has increased stake in the company. Reliance Mutual and UTI also hold significant stake in Rain. We feel that current valuations do not fully capture potential of the company. Even if scrip had P.E. Ratio of 5, share price should be Rs. 285/-. However, in current market conditions such a sharp rise in share price may not be possible. We put our price target of Rs. 210/- in 6 months. Investors can also hold this scrip for 3 years in which case appreciation can be 200%.
Source: Internet (SmartInvestment) Hemant K. Gupta (Mumbai)
