Rain Commodities (Rs 114 )– Check this Cement gem.

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   Rain Commodities (Rs 114 )–  Check this Cement gem.

Rain Commodities Ltd. (CMP Rs.114 )  Previously known as Priyadarshani Cement RCOL has an installed capacity to produce 1.40 mn ton of cement. As with other cement plants this capacity can be over utilized by 10 % to produce up to 1.55 million tonnes of cement..  The company derives more then 50% of its revenue from cement sales in Andhra Pradesh alone while the balance portion is sold in the adjoining states of southern India.
South India is the largest cement consumption and dispatch region in India.  The cement consumption of south India region was 29% of overall Indian cement consumption in FY2006. 

The upswing in interest rate cycle during the second half of the 90’s affected all the over leveraged companies of India Inc. Rain commodities was no exception. The company ran into losses with mounting debt and decreasing cement demand. 

In April 2005, Rain commodities company allotted 50,00,000 Equity Warrants to both Citigroup and the  promoters. These warrants were to be converted into equity shares after 18 months.  Citigroup also invested Rs. 115 crores in the debentures of Rain Industries.  

Market price

114

No. of shares 

2.31 crores

Market Capitalization (prior to conversion of warrants)

Rs 263.34 crores

Sales (FY 07)E

Rs 410 crores

EPS( FY 07)E [post warrant conversion]

Rs 28.00

PE

4.07

Installed Capacity

1.4 million tonnes

Global Valuations

US $100 per ton per anum

Indian Valuations

USD $ 175 per ton per anum

Enterprise value at Global Valuations

Rs 646 crores (Rs 201 per share)

Enterprise value at Indian Valuations

Rs 1131 crores (Rs 352 per share)

The conversion of warrants shall increase the equity to Rs 32.11 crores. This expanded equity has been computed to evaluate the enterprise value. The EPS and sales figure are average brokerage estimates. During the last quarter of previous year the company’s interest cost was Rs 5.44 crores against an interest outgo of Rs 30 crores for the nine month previous to this quarter. The increase in profits are being attributed to 

  Ø       Better sales realization 
Ø       Control of costs due to reduction in interest, savings on energy and implementation of VAT. 

Citigroup will hold close to 14% stake in the company and that should rerate the PE upwards from the present level of 4.21 times Fy 07.
Recently, company paid USD 123 million to acquire 20.22% stake in Great Lake Carbon of U.S.A.  Great Lakes is the biggest producer of CPC in the world having 23% of the global market.  CPC is required in industries such as aluminum, steel, titanium dioxide, and other carbon consuming industries Rain calcining a group company is the fifth largest producer of CPC in the world. 
Research Firm Motilal Oswal believes that merging the two entities, Rain Calcining with RCOL is very much possible. This merger will create synergies of operations, reduction in administrative costs and more importantly a higher EPS. 

Market grapevine has it that RCOL is likely to increase its cement capacity to 4.5 million ton by 2008. 

Recommendation: Valuations of Rain Commodities are very cheap both on the PE basis and also on the EV  per ton basis. While the large caps are trading at PE’s of 18 and above Rain Commodities trades at a PE of below 5 times Fy 07 earnings. As with all turnarounds the company appears to be at an inflexion point and needs to be bought at the present level and added on declines. The scrip should double in about 12 to 18 months..

Edited by basant - 12/Aug/2006 at 9:35pm