Strong operating margins, robust demand, compelling valuations

Initiating Coverage

Sector: Metals

Rain Commodities

BSE SENSEX

S&P CNX

16,748

5,038

CMP: INR29

Sitting pretty

TP: INR68

Buy

Strong operating margins, robust demand, compelling valuations



Bloomberg

Equity Shares (m)

52-Week Range

1,6,12 Rel. Perf. (%)

M.Cap. (INR b)

M.Cap. (USD m)

RCOL IN

354.2

42/25

5/6/6

10.3

208



Y/E Dec

2011E

2012E 2013E

53.5

10.7

4.9

13.8

-24.3

69.3

2.1

0.4

0.6

2.9

19.9

17.0

21.0

51.8

10.7

4.9

13.9

0.3

82.0

2.1

0.4

0.5

2.4

16.9

17.0

20.3



Sales (INR b) 54.5

EBITDA (INR b) 13.0

NP (INR b)

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

P/E (x)

P/BV (x)

EV/Sales (x)

6.5

18.3

95.6

56.5

1.6

0.5

0.7

RCOL's carbon business is in a sweet spot between aluminum smelters

and oil refineries



Increasing aluminum production is leading to strong demand for calcined

petroleum coke (CPC)



Difficulty in raw material sourcing is acting as an entry barrier for new

players despite reasonable margins

Strong cash flows to help deleverage balance sheet

Cement margins improving with better market discipline and declining

pace of capacity addition

Recent announcement that RCOL's board will consider buyback proposal

highlights attractive valuation and robust operating cashflows

We initiate coverage with a Buy and a target price of INR68 - 134% upside

EV/EBITDA (x) 2.8

RoE (%)

32.3

RoCE (%)

22.5

RoIC (%)

25.4

CPC business in a sweet spot

RCOL's carbon business is in a sweet spot between aluminum smelters and oil

refineries. Merchant calciners like RCOL are making reasonable conversion margins,

as green petroleum coke (GPC) does not contribute meaningfully to refineries' revenues

and CPC does not contribute substantially to smelters' costs. At the same time, it is

difficult for a new player to enter this business because sourcing raw material is a

challenge.

Operating margins to remain robust

We expect operating margins to remain robust (27.2% in last 14 quarters) due to the

following:



Strong CPC demand driven by growing aluminum production:

Aluminum

smelting, which constitutes 83% of CPC demand has grown at a CAGR of 6% in

the last 10 years. This has resulted in strong demand for CPC, which is used as

consumable carbon anode (0.4/t of Al) in smelting process. The current growth

rate in aluminum production will lead to demand for an additional 5.5mtpa of CPC

by CY15.



Consolidation in CPC industry:

The top-5 calciners account for 50% of the

global capacity (ex China). Major players will continue to focus on profitability and

margins, given their high leverage and industry consolidation.



Strategically located CPC operations:

Three-fourths of RCOL's CPC capacity

is in the US. The country is a net exporter of GPC due to large sweet crude

refining. Three of RCOL's seven CPC facilities in the US are located next to refineries,

giving them easy access to the key input, GPC.



Raw material security through long-term contracts:

RCOL's US operations

are backed by long-term supply agreements with refiners. Its Indian operations

also receive ~25% of their requirement via US relations. RCOL receives over 90%

of its supplies from refiners with whom it has a relationship of more than five years.

Shareholding pattern % (Jun-11)

Others

23.1

Promoters

42.4

Foreign

16.9

Domestic

Inst, 17.6

Stock performance

Rain Commodities

Sensex - Rebased

20 October 2011

Rain Commodities

Strong cash flows to help deleverage balance sheet

We expect RCOL to generate operating cash flows of USD367m over CY11-13. This

along with cash balance of USD80m at the end of CY10 is more than sufficient to take

care of its scheduled debt repayment of USD180m(including 1HCY11) and capex of

USD62m for US WHRB energy projects in the next three years. Net debt to equity ratio

is likely to come down to 0.5x in CY13 from 2x in CY10.

Worst is behind in cement business

After substantial margin contraction in CY10, cement producers are exercising better

market discipline. As the pace of capacity addition slows down in South India, we expect

margin pressure to ease. RCOL's cement margins have improved from INR366/ton in

CY10 to INR1,011/ton in 1HCY11.

Buyback proposal highlights attractive valuation

RCOL recently announced that the board of directors in the meeting to be held on 25th

October 2011 will consider the proposal to buy back the equity shares of the company.

The buyback proposal highlights that the company trades at an attractive valuation and

robust operating cashflows are more than sufficient for its debt repayment.

Valuations compelling; deserves re-rating

We believe that the strong cash flows of the carbon business are sustainable, given

RCOL's robust business model, favorable demand scenario and relative security of inputs.

Valuations are compelling; we expect the stock to get re-rated, as the balance sheet

gets deleveraged and direct equity returns in the form of dividends/buy-back are stepped

up. We initiate coverage with a

Buy

recommendation and a target price of INR68. We

value RCOL's carbon operations (CPC, energy and pet coke trading) at an EV of 4x

CY12E EBITDA (Implies EV/ton of USD293/ton) and cement operations at an EV of 5x

CY12E EBITDA (Implies EV/ton of USD65/ton).

CPC comparative valuations

Deals/ Companies

Oxbow - GLC

Rain - CII

PCIC-Oxbow

Goa Carbon

Year

2007

2010

Valuation based

on FY11 numbers

EV/Ton

384.9

328.4

914.1

157.7

EV/EBITDA (x)

9.2

8.0

Favorable supply agrrement and above industry average

operating margins

Low operating margin ~7.9% (FY11) as compared to RCOL's

CPC business operating margin of 24.3% (CY10)

Source: Company/MOSL

Remarks

Comparative Valuations: Midcap

RATING

Monnet Ispat

Godawari

Sarda Energy

Tata Sponge

Neutral

Buy

Neutral

Buy

CMP

MCAP

(INR) (USD M)

484

111

125

302

697

104

FY11

43.7

27.0

19.1

65.8

EPS (INR)

FY12E

FY13E

37.1

49.9

15.4

61.6

13.7

48.1

9.2

18.3

20.2

56.0

55.9

18.8

70.7

19.9

59.4

7.0

13.8

21.1

P/E (x)

FY12E

FY13E

13.0

2.2

8.1

4.9

3.9

6.8

10.5

1.6

2.4

8.6

2.0

6.7

4.3

2.7

5.5

13.8

2.1

2.3

EV/EBITDA (x)

FY12E

FY13E

14.4

3.0

9.3

1.7

5.8

8.8

7.4

2.8

2.5

9.6

3.5

6.6

0.9

4.8

8.0

7.9

2.9

2.3

P/BV (x)

FY12E

FY13E

1.3

0.5

0.8

1.2

0.4

0.5

0.7

Adhunik Metaliks

Buy

144

14.9

Bhushan Steel

Neutral

327

1,554

44.9

Jai Balaji

Buy

137

12.2

Rain Commodities* Buy

208

9.3

Prakash Industries

Buy

145

19.9

CMP=current market price; * CY reporting

* Rain Com. follows calendar year reporting, CY11 and CY12 figures

0.6

0.5

1.0

0.9

0.6

0.5

0.4

0.3

Source: MOSL

are quoted in place of FY12 and FY13 respectively

20 October 2011

Rain Commodities

CPC business in a sweet spot

RCOL's carbon business is in a sweet spot between aluminum smelters and oil

refineries. Merchant calciners like RCOL are making reasonable conversion

margins, as green petroleum coke (GPC) does not contribute meaningfully to

refineries' revenues and calcined petroleum coke (CPC) does not contribute

substantially to smelters' costs. It is difficult for a new player to enter this business

because sourcing raw material is a challenge.

GPC contributes less than

3% to the refiner's overall

revenue; similarly, CPC

contributes 7% of the total

cost of production of

aluminum

Insignificant contribution of GPC/CPC to refineries' revenues/smelters'

costs

GPC contributes less than 3% to the refiner's overall revenue and needs to be extracted

through further processing of residual fuel. Similarly, CPC contributes 7% of the total cost

of production of aluminum. Aluminum smelters are more concerned with the quality of

CPC than its cost, as inferior quality results in higher energy consumption. In order to

adhere to consistent quality and assured supply smelters prefer merchant calciners as

captive production is exposed to varying availability and quality of raw material. Most of

the industry participants including the two largest calciners RCOL and Oxbow are based

on merchant caclining model.

CPC industry participants

Aluminium

Smelter

CPC as percentage of aluminum production cost

10%

Refinery

25%

Merchant

Calciner

66%

Source: MOSL

Source: Company

The supply of CPC is

constrained by limited

availability of key raw

material, GPC

Constrained raw material availability a significant entry barrier

Currently, the supply of CPC is constrained by limited availability of key raw material,

green petroleum coke (GPC). Though it is a conversion business, consolidation in the

industry and bargaining power of CPC producers due to limited supply of CPC ensures

reasonable margins. It is difficult for a new player to enter this business because sourcing

raw material is a challenge.

20 October 2011

Rain Commodities

Operating margins to remain robust

We expect operating margins for RCOL's CPC business to remain robust (27.2%

in last 14 quarters) due to the following: (1) strong CPC demand driven by

growing aluminum production, (2) consolidation in CPC industry, (3) strategically

located CPC operations, and (4) raw material security through long-term

contracts.

Aluminum smelting, which

constitutes 83% of CPC

demand, has grown at a

CAGR of 6% in the last 10

years, driving CPC demand

1. Strong CPC demand driven by growing aluminum production

Aluminum smelting, which constitutes 83% of CPC demand, has grown at a CAGR of

6% in the last 10 years. The growth in aluminum smelting has been led by China, whose

overall share has increased from 12% to 40% during the last decade. This has resulted in

strong demand for CPC, which is used as a consumable carbon anode (0.4t/t of Al) in the

smelting process. After aluminum, the titanium-dioxide industry is the other major consumer

of CPC. It is also consumed as a recarburizer in graphite electrode and other industrial

uses. The current growth rate in aluminum production will result in additional demand of

5.5mtpa of CPC by CY15. China and India, due to their population, industrialization, and

economic growth, would be strong drivers for aluminum demand.

Rising aluminum production fuelling CPC demand

TiO2

Others

CPC by end use

Aluminium

12%

83%

Source: Company

Source: IAI/MOSL

Aluminum production growth led by Asia

2001

2010

16.1

4.7

1.7

1.4

5.2

2.3

2.0

2.2

5.2

3.9

3.8

3.7

4.3

2.3

2.1

3.4

Source: IAI/MOSL

20 October 2011

Rain Commodities

Increasing demand from

smelters has led to

higher realization and

better margins

Increasing demand from smelters has led to higher realization and better margins. CPC

prices and margins lag demand by a couple of months due to semi-annual price resets in

CPC sales contracts. Current prices are set with a view of the next six months' demand.

Though the world economy nosedived in the second half of CY08, realizations continued

to be higher, as prices were negotiated in the first half of CY08. Similarly, despite recovery

in aluminum production in the second half of CY09, price realizations and margins started

to improve from 3QCY10. With current aluminum production touching an all-time high,

we expect better margins and realizations, going forward. We believe that EBITDA margins

of ~USD100/ton (USD80/ton in CY10; USD132/ton in 1HCY11) are sustainable.

Aluminum quarterly production v/s RCOL's CPC realization and EBITDA (USD/ton)

Al Prod. Wolrd - RHS

600

450

300

150

CPC Realization

CPC EBITDA

11.4

10.6

9.7

8.9

8.0

Source: Company/MOSL

The CPC industry is fairly

consolidated, with the top-5

calciners accounting for

50% of the global capacity

(ex China)

2. Consolidation in CPC industry

The CPC industry is fairly consolidated, with the top-5 calciners accounting for 50% of

the global capacity (ex China). The top-2 calciners, RCOL and Oxbow have large debt,

courtesy Rain-CII and Oxbow-GLC leveraged buyouts in 2007. Given the high leverage

and fair amount of consolidation, the large players have been focusing on margins and

profitability which is expected to continue going forward. Merchant calciners like RCOL

are reluctant to increase capacity utilization at the cost of margins. Any increase in utilization

will lead to higher prices of GPC, a scarce commodity, thereby impacting margins.

Top-10 CPC producers (ex China and Russia)

2,495

2,422

1,493

1,076

600

500

498

355

350

300

240

220

Source: Company/MOSL

20 October 2011

Rain Commodities

Major consolidation moves in CPC industry since 2007

Deal

Oxbow acquisition of

Great Lakes Carbon (GLC)

Year

2007

Capacity MTPA

2.12

Remarks

Oxbow acquired GLC by outbidding RCOL. Oxbow paid ~USD385/ton for the GLC

acquisition. RCOL sold its 20% stake in GLC to Oxbow and received termination

fees of ~USD15m from GLC in accordance with the terms of an earlier agreement

between RCOL and GLC.

RCOL acquired CII Carbon, USA at an aggregate purchase price of USD622.3m

(USD328/ton, EV/EBITDA of 9.2x). RCOL has ~INR19b of goodwill on account of CII

Carbon acquisition.

Oxbow acquired 40.82% stake in PCIC for USD920/ton. PCIC enjoys superior operating

margins compared to other calciners. It had assured GPC supply due to the agreement

with Kuwait Petroleum Company (KPC) for 475,000-485,000 tons/year.

Source: Company/MOSL

RCOL acquisition CII Carbon

2007

1.89

Oxbow acquisition of

Petroleum Coke Industry

Corporation (PCIC)

2010

0.35

Three-fourths of RCOL's

2.5mtpa CPC capacity is in

the US, a net exporter of

GPC

3. Strategically located CPC operations

GPC a major input for CPC production is a by-product of sweet crude refining. The US

has large sweet crude refining operations, making it a net exporter of GPC. Apart from

US, China is the only other major region which is long on GPC. US has roughly one-fifth

of the world's refining capacity and accounts for half the GPC production (ex China)

worldwide. Three-fourths of RCOL's 2.5mtpa CPC capacity is in the US. Three of RCOL's

seven CPC facilities in the US are located next to refineries, giving them easy access to

GPC. All its seven facilities are also close to captive river terminals. This enables RCOL

to reduce logistics costs and offset the high maintenance costs of old plants.

Petroleum coke production in 2008

USA, 19%

RoW, 16%

UK, 2%

Total Refining Capacity in 2009

ROW, 40%

China, 10%

Mexico, 2%

Canada, 4%

Canada, 2%

Saudi

Arabia, 2%

Italy, 3%

Germany,

Former

USSR, 9%

Japan, 5%

India, 4%

Korea, 3%

Brazil, 3%

India, 4%

Japan, 1%

Russia, 1%

China, 10%

Source: United Nations

USA, 57%

Source: IEA key world statistics

GPC production worldwide

has been unable to match

demand, resulting in a tight

supply market

GPC production worldwide has been unable to match demand, resulting in a tight supply

market. This is mainly due to the shift towards sour crude refining, whose residual petroleum

is unsuitable for GPC production. The shift towards sour crude is on account of increasing

sweet-sour spread and limited availability of sweet crude. About 70% of the world's

remaining oil reserves consist of heavy, high sulfur "sour" crude. Increasing sweet-sour

spread results in better margins in sour crude refining. Sweet-sour spread has been

increasing, especially since 2005, as countries adopted stricter environmental norms, raising

cleaner fuel prices (in this case, sweet crude with low metal and sulfur content). The

spread declined to pre-2005 levels in 2009 due to sudden drop in crude demand in the

backdrop of severe recession. However the spread has been increasing since 2010 except

for brief slump recently on current economic turmoil. The margins so far has been favoring

sour crude refining limiting availability for GPC.

20 October 2011

Rain Commodities

With limited GPC

availability, the industry is

forced to substitute anode

grade coke with NTAC

GPC supply-demand dynamics is not taken into account while deciding on the type of

crude (sweet or sour) to be refined, as GPC contributes less than 3% of total refinery

revenues. With limited GPC availability, the industry is forced to substitute anode grade

coke with non-traditional anode coke (NTAC) to make up for the shortfall. NTAC is

produced by blending high quality (low sulfur and metal) anode coke with inferior petroleum

coke. Up to 20% of blending can be done using NTAC, with reasonable quality of final

aluminum product.

Increasing sweet-sour spread (USD/barrel )

10.0

7.5

5.0

2.5

0.0

Sweet-Sour Bloomberg index spread

Source: Bloomberg

RCOL's US operations are

backed by long-term supply

agreements with refiners

4. Raw material security through long-term contracts

RCOL's US operations are backed by long-term supply agreements with refiners. Its

Indian operations also receive ~25% of their requirement via US relations. RCOL gets

over 90% of its supplies from refiners with whom it has a relationship of more than five

years. It has right of first refusal over Conoco Phillips' worldwide GPC production minus

its internal consumption till 2015. Given its multi-year relationships with refineries, RCOL

is better placed than its competitors in terms of raw material security.

Long-term supply agreements

Major Suppliers

ConocoPhillips Company

Sinopec International

Motiva Enterprise

ExxonMobil Corporation

Kuwait Petroleum Corporation

Pertamina

TCP

Marathon Ashland Petroleum

HUSKY

KOCH

CY 2010 % of Sourcing

Years of relationship

Over 15 years

Over 5 years

Over 35 years

Over 25 years

Over 10 years

Over 15 years

Over 10 years

Over 5 years

Source: Company

20 October 2011

Rain Commodities

Strong cash flows to help deleverage balance sheet

CPC production is likely to remain flat at 1.9m tons in CY11 and CY12 due to

constrained supply of GPC. Despite lack of volume growth, we expect RCOL to

generate operating cash flows of USD367m in the next three years, which is

more than sufficient to take care of its scheduled debt repayment of USD180m

and capex of USD62m for US WHRB energy projects.

RCOL's CPC production is

likely to remain flat at

1.9m tons in CY11 and

CY12 due to constrained

supply of GPC

Production to remain flat in CY11 and CY12

CPC production is likely to remain flat at 1.9m tons in CY11 and CY12 due to constrained

supply of GPC, though RCOL will have some idle capacities. Currently, one kiln at

Moundsville, West Virginia facility is not operational despite sufficient demand due to lack

of GPC. Any volume growth can only be achieved through enhanced raw material

availability. RCOL is trying to source more GPC from China, which is long on green coke.

Recently it entered into one year supply agreement with Sinopec, China to supply ~.2mt of

GPC. If similar breakthroughs can be achieved for larger volume and duration then

production at US operations can be ramped, as supply from China can substitute GPC

sourcing from the US for Indian operations.

Expect operating cash flows of USD367m in next three years

Despite lack of volume growth, we expect RCOL to generate operating cash flows of

USD367m in the next three years. This is more than sufficient to take care of its scheduled

debt repayment of USD180m and capex of USD62m for US WHRB energy project. In

the next three years, we expect deleveraging to continue and debt-equity to decline to

0.5x. This is significantly below the debt-equity of 10x in 2007, immediately after the

acquisition of CII Carbon. Post the refinancing of USD400m debt in November 2010,

RCOL is comfortable in terms of its debt repayment schedule.

Declining debt to equity ratio (x)

We expect RCOL to generate

operating cash flows of

USD367m in the next three

years, more than sufficient to

take care of its scheduled

debt repayment

10.0

4.2

2.3

2.0

1.3

0.8

0.5

Source: Company/MOSL

20 October 2011

Rain Commodities

Scheduled repayments

Period

USD million

6M ending December 2011 11

2012

2013

122

2014

Later Years

480

Current debt profile (USD million)

Term debt profile as on June 30, 2011

Senior Bank Debt

External Commercial Borrowings

Senior Secured Notes

High Yield Fixed rate

Junior Subordinated notes

Other Debt

Sales tax deferment

Total Gross Debt

Debt

139

400

651

Profile

Libor+350bp

Libor+300bp

8.00%

11.13%

10%

10.66%

6.61%

Source: Company/MOSL

Comfortable in terms of debt repayment schedule post recent debt

refinancing

RCOL raised USD400m through 8% Senior Secured Notes (due in 2018) in November

2010. It used part of the amount raised to retire USD219m 11.125% Senior Secured

Notes (due in 2015), with redemption premium and transaction fees amounting to

USD35m. It also repaid ~USD105m low cost debt (LIBOR+353) as a precondition by

lenders to issue new bonds. Taking redemption premium, transaction fees and current

LIBOR into account, the company did not benefit financially from the refinancing

(annual savings of USD2.4m against USD35m paid for redemption and fees). The

major benefit from the refinancing was longer tenor debt (due in 2018 against 2015 for

earlier notes) being issued on non-recourse basis (not on parent's books).

20 October 2011

Rain Commodities

Worst is behind in cement business

After substantial margin contraction in CY10, cement producers are exercising

better market discipline. As the pace of capacity addition slows down in South

India, we expect margin pressure to ease. RCOL's cement margins have

improved from INR366/ton in CY10 to INR1,011/ton in 1HCY11.

Pricing discipline leading to margin recovery

According to our cement analyst, "Cement demand is muted, especially in South India.

However, experiences of cash losses have made the industry participants rational in their

pricing approach. We believe that the worst pricing scenario is behind us. We expect

prices to remain volatile, driven by seasonality and production behavior. However, we do

not expect prices to correct as much as in 1HFY11. The pace of capacity addition in

South India will slow down, as only 10-12mt of new capacity will commence operations

over the next 18 months (v/s 30mt commissioning operations in the last 18 months). Current

pricing discipline adopted by most of the producers is allowing for better margins and as

the pace of capacity addition slows, margins and utilization should improve".

Cement prices improving in South on market discipline (INR/50kg)

330

290

250

210

170

Source: MOSL

We believe that the worst

is over for RCOL's

cement business

Expect gradual recovery in pricing and utilization

While we do not expect a sharp improvement in demand-supply equilibrium, we believe

that the worst is over for RCOL's cement business. Current pricing discipline has resulted

in lower utilization but with higher margins. This coupled with start of commercial operations

of fly ash and packing plant should support margins, going forward. However, we have

assumed lower margins than 1HCY11 for the rest of the year (INR893/ton for 6MCY11

and INR893/ton for CY12, against INR1,011/ton in 1HCY11 and INR341/ton in CY10) to

account for coal price hike, seasonality and further capacity addition. We expect gradual

recovery in pricing and utilization from CY12.

20 October 2011

Rain Commodities

Valuations compelling; deserves re-rating

We believe that the strong cash flows of the carbon business are sustainable,

given RCOL's robust business model, favorable demand scenario and relative

security of inputs. Valuations are compelling; we expect the stock to get re-

rated, as the balance sheet gets deleveraged and direct equity returns in the

form of dividends/buy-back are stepped up. Recent announcement by the

company that the board will consider buy-back once again implies compelling

valuations and strong operating cash flows. We initiate coverage with a Buy

recommendation and a target price of INR68. We value RCOL's carbon operations

(CPC, energy and pet coke trading) at an EV of 4x CY12E EBITDA (USD293/ton)

and cement operations at an EV of 5x CY12E EBITDA (USD65/ton).

RCOL will get re-rated, as

the balance sheet gets

deleveraged and direct

equity returns are

stepped up

Significant improvement in business prospects

We believe that the strong cash flows from the carbon business are sustainable, given

RCOL's robust business model, favorable demand scenario and relative security of inputs.

The cement business is also witnessing a turnaround with better market discipline. Overall

operating environment for both the carbon and cement businesses has improved

substantially. Lack of growth, uncertain demand scenario due to recession and high leverage

had led to a de-rating. However, we now expect stock to get re-rated, as the balance

sheet gets deleveraged and direct equity returns (dividends/buy-back) are stepped up.

Buyback proposal highlights attractive valuation

RCOL recently announced that the board of directors in the meeting to be held on 25th

October 2011 will consider the proposal to buy back the equity shares of the company.

The buy back proposal highlights that the company trades at an attractive valuation and

robust operating cashflows are more than sufficient for its debt repayment.

Buy with a target price of INR68 - 134% upside

The stock trades at 2.1x CY12E EPS, 0.4x CY12E BV, and at an EV of 2.9x CY12E

EBITDA. We believe that current valuations are compelling. We value RCOL's carbon

operations (CPC, energy and pet coke trading) at an EV of 4x CY12E EBITDA (Implies

EV/ton of USD293/ton) and cement operations at an EV of 5x CY12E EBITDA (Implies

EV/ton of USD65/ton). Buy with a target price of INR68 - 134% upside.

Robust operating cashflows

are more than sufficient for

its debt repayment

CPC comparative valuations

Deals/ Companies

Oxbow - GLC

Rain - CII

PCIC-Oxbow

Goa Carbon

Year

2007

2010

Valuation based

on FY11 numbers

EV/Ton

384.9

328.4

914.1

157.7

EV/EBITDA (x)

9.2

8.0

Favorable supply agrrement and above industry average

operating margins

Low operating margin ~ 7.9% (FY11) as compared to RCOL's

CPC business operating margin of 24.3% (CY10)

Source: Company/MOSL

Remarks

20 October 2011

Rain Commodities

Key risks

Overdependence on aluminum industry

RCOL derives ~90% of its CPC revenues 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 debt-

equity at 1.6x and significant debt service obligations in the next couple of years, RCOL

will be financially constrained in case of a major downturn in the aluminum industry.

External sourcing of key raw material

GPC is the main component and primary cost in CPC manufacturing. It is a by-product of

oil refining and is not produced with a view to meet the requirements of aluminum or

titanium dioxide manufacturers. With continuous shift towards sour crude refining, external

sourcing of GPC could pose a serious threat to its operations. However, owing to its long-

term relationships with suppliers, RCOL has not witnessed any major raw material shortfall

so far.

Substitutes/replacements

Current aluminum smelting is known for large greenhouse emissions and high energy

consumption. Considerable research has been done to explore alternative production

processes that could lower energy consumption and greenhouse emissions. Until now,

there is no known economically feasible substitute for carbon anode. There has been

some progress on inert anode technology, but IEA reports that the ultimate technical

feasibility of inert anodes is not yet proven, despite 25 years of research. More fundamental

research on the materials is needed and anode rate of less than five millimeters per year

has to be attained. The following table provides an overview of the technological status of

inert anodes for the aluminum industry.

Technological status: Inert anodes

Inert Anodes

Technology Stage

2003-15

R&D

2015-2030

2030-50

Demonstration

Commercial

Source: IEA Technology perspectives, 2008

Although there is always the threat of technological advances in the smelting process, the

transition to new technology will be gradual.

20 October 2011

Rain Commodities

Company description

Rain Commodities (RCOL) is one of the largest calciners in the world, with a capacity of

2.5mtpa contributing to 81% (CPC, Power and Pet. Coke) of revenue courtesy LBO of

CII (USA) in 2007. It has its CPC capacity located in North America (1.89mtpa), India

(0.6mtpa) and China (0.02mtpa). It has cogeneration capacity of 125 MW in energy

(Power and Steam). It also has cement operations (3.5mtpa) in South India attributing to

balance 19% revenues. It has recently restructured its operations into separate CPC and

Cement operations with aim to list entire CPC business in US to unlock value at appropriate

time.

RCOL: CY10 revenue break-up

Pet Coke

Cement

19%

CPC (Including

Energy)

78%

Source: Company/MOSL

RCOL: Growth timeline

1998



Began calcining operations in Visakhapatnam with a capacity of 0.3 MTPA

2005

2006



Doubles CPC capacity



Acquires 20% stake in Great Lakes Carbon

2007



Divest GLC stake in favour of Oxbow Corporation after losing out in a biddingwar.



Acquires CII Carbon USA with CPC capacity of 1.895 MTPA in leveraged Buy Out

2008



Completed Brownfiled Cement Expansion of 1.5MTPA. Total cement capacity

increased to 3.16 MTPA



Entered Chinese CPC industry with acquistion of small CPC plant with capacity of

2009

20,000 TPA



Startey fly ash handling and cement packing unit in Bellary, Karnataka. Improved fly

2011

ash blend ratio to increase cement capacity to 3.5 MTPA

2012-13



Setting up two waste heat recovery plant with 70MW capacity in USA.

Source: Company/MOSL

20 October 2011

Rain Commodities

RCOL: World wide operations

Source: Company/MOSL

CPC operations

RCOL has facilities spread across USA, India and China. Three of the US CPC facilities

are strategically located adjacent to oil refinery. At one of these locations, it also supplies

steam to the refinery. It also owns three vessel loading terminals at the Chalmette, Gramercy

and Lake Charles facilities. Its Visakhapatnam facility enjoys logistical benefits, as it is a

port city. RCOL's China facility is a strategic move to get a foothold in one of largest

markets of CPC.

RCOL: CPC production facilities

Facility

Moundsville, West Virginia

Lake Charles, Louisiana

Robinson, Illinois

Chalmette, Louisiana

Gramercy, Louisiana

Norco, Louisiana

Purvis, Mississippi

Visakhapatnam, India

ZXTTCL, China

Annual Capacity

420,000

400,000

315,000

230,000

70,000

600,000

20,000

Commission Date

1957

1979

1958

1968

1972

1965

1959

1998

Co-generation Ability

Yes

Number of kilns

Source: Company/MOSL

20 October 2011

Rain Commodities

RCOL production facilities (Vizag Plant)

Rotary Kiln I

Rotary Kiln II

Conveyor Belt

Waste Heat Recovery Plant

Control Room

Storage Facility

20 October 2011

Rain Commodities

RCOL: Major CPC customers

Customer

Concentration

for CPC

business

CVG Venalum

Alcan

Alouette

BHP Billiton

Dubal

Hydro

Nalco

Century

Dupont

Percentage

of CY09

Sales

RCOL is planning to set up two more waste heat recovery plants in existing CPC plants in

the US in a phased manner at Lake Charles-Louisiana and Robinson-Illinois, with an

aggregate capacity of 70MW. The projected capex for these two projects together is

~USD125m. Execution work for the Lake Charles plant has already started and is likely

to be completed by December 2012.

RCOL derives more than 90% of its CPC revenues from sale of anode grade CPC to

aluminum producers. Its customers are located throughout the world. In particular, the

Group derives a significant portion of revenues from North America, South America,

Middle East, South Africa, India and Europe.

Cement operations

RCOL has a fly ash handling and cement packing unit at Bellary. It has a contract with

Karnataka Power Corporation Limited (KPCL) for exclusive supply up to 0.4m ton per

annum of fly ash to RCOL till 2021. Improved fly ash blend ratio has resulted in increase

in the total production capacity from 3.1m tons to 3.5m tons of cement per annum. It sells

mainly to retail customers in Andhra Pradesh, Karnataka and Tamil Nadu under the brand

name, Priya Cement.

RCOL has recently invested ~INR120.5m to acquire Birla Cement and Industries, which

controls limestone mining leases in the state of Andhra Pradesh. Birla Cement and Industries

has now become a wholly-owned subsidiary of the company.

Noranda Aluminum

Total

Source: Company/MOSL

RCOL group cement capacity

Facility

Annual

Capacity

(mtpa)

1.0

2.2

Nalgonda, India

Kurnool, India

20 October 2011

Rain Commodities

Corporate restructuring: separating carbon and cement

operations

Before the CII Carbon acquisition in 2007, the group's cement and calcining operations

were under two different companies - Rain Commodities and Rain Calcining, respectively.

Both these companies were merged to leverage the combined balance sheet for the CII

Carbon acquisition. Now, the company has again undergone restructuring to separate

carbon and cement operations under different subsidiaries.

The cement operations, which were part of the parent company (RCOL), have been

moved to Rain Cements Limited (formerly Rain CII Carbon India Limited), a 100%

subsidiary. The Indian CPC business has been moved to Rain CII (Vizag) Limited (RCCVL),

step down 100% subsidiary of Rain Commodities USA Limited (RCUSA). There is still

12.2% crossholding of Rain Cements Limited in RCCVL. Its US CPC business, Rain CII

Carbon LLC, also became part of RCUSA through the step down subsidiary.

The restructuring exercise was carried out so as to have freedom to look out for strategic

investment in both CPC and cement operations, as well as to pursue organic and inorganic

growth, separately. Shareholders continue to hold same control over various businesses

after restructuring.

Current group structure

RCOL

100%

RCUSA

61% of Pet. coke trading (RGS)

100%

Rain Cements

3.5 MTPA Cement

CPC Holdings

12.2%

87.8%

RCC (Vizag)

0.6 MTPA CPC, 50MW Power

100%

RCC LLC

1.895 MTPA CPC, 75MW Power and Steam

100%

ZXTTC China

0.02 MTPA CPC

Source: Company/MOSL

20 October 2011

Rain Commodities

Financials and valuation

Income Statement (Consolidated)

Y/E December

Net sales

Change (%)

Total Expenses

EBITDA

% of Net Sales

Depn. & Amortization

EBIT

Net Interest

Other income

PBT before EO

EO income

PBT after EO

Tax

Rate (%)

Reported PAT

Minority interests

Adjusted PAT

Change (%)

2009

36,435

-20.1

27,359

9,076

24.9

1,227

7,850

2,260

5,634

513

6,147

1,714

27.9

4,433

-5.2

4,068

-9.3

2010

37,557

3.1

30,056

7,501

20.0

1,157

6,344

1,896

179

4,627

-1,249

3,378

951

28.2

2,427

19.5

3,305

-18.8

2011E

54,467

45.0

41,484

12,983

23.8

1,146

11,838

2,139

189

9,888

3,341

33.8

6,547

6,465

95.6

2012E

53,535

-1.7

42,821

10,714

20.0

1,221

9,493

2,078

244

7,660

2,721

35.5

4,938

4,891

-24.3

(INR Million)

2013E

51,845

-3.2

41,176

10,669

20.6

1,303

9,366

1,916

228

7,678

2,726

35.5

4,952

4,905

0.3

Balance Sheet

Y/E December

Share Capital

Reserves

Share holders funds

Loans

Secured

Unsecured

Defferred tax liability (net)

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventories

Sundry Debtors

Cash and Bank

Loans and Advances

Curr. Liability & Prov.

Sundry Creditors

Other Liabilities & Prov.

Net Current Assets

Application of Funds

E: MOSL Estimates

2009

708

11,396

12,104

30,312

17,859

12,453

2,260

44,697

37,453

3,294

34,159

233

307

13,777

4,771

4,479

3,057

1,470

3,779

2,661

1,118

9,998

44,697

2010

708

13,225

13,934

31,781

29,341

2,440

2,173

47,947

36,692

4,308

32,384

561

19,391

7,452

5,616

3,639

2,684

4,404

3,526

878

14,987

47,947

2011E

708

19,311

20,019

30,298

27,858

2,440

2,173

52,631

36,812

5,454

31,358

1,391

25,483

11,341

6,858

4,600

2,684

5,617

4,739

878

19,866

52,631

2012E

708

23,822

24,530

29,082

26,642

2,440

2,173

55,974

36,812

6,675

30,137

2,361

28,995

11,147

6,741

8,424

2,684

5,536

4,658

878

23,460

55,974

(INR Million)

2013E

708

28,347

29,056

23,617

21,177

2,440

2,173

55,081

39,562

7,978

31,584

561

28,309

10,795

6,528

8,302

2,684

5,389

4,510

878

22,920

55,081

20 October 2011

Rain Commodities

Financials and valuation

Ratios

Y/E December

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

EBITDA Margins

Net Profit Margins

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Debtor (Days)

Inventory (Days)

Creditors (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Debt/Equity

3.6

3.5

2.3

4.4

3.3

2.0

4.5

5.5

1.3

5.2

4.6

0.8

5.3

4.9

0.5

1.0

0.8

1.0

0.8

1.5

1.0

1.5

1.0

1.3

0.9

24.9

11.2

33.6

17.6

19.1

20.0

8.8

23.7

13.2

14.5

23.8

11.9

32.3

22.5

25.4

20.0

9.1

19.9

17.0

21.0

20.6

9.5

16.9

17.0

20.3

2009

11.5

15.0

34.2

0.7

6.9

2010

9.3

12.6

39.3

0.9

15.7

2011E

18.3

21.5

56.5

1.0

5.8

2012E

13.8

17.3

69.3

1.0

7.7

(INR Million)

2013E

13.9

17.5

82.0

1.0

7.7

2.5

1.9

0.8

1.0

4.1

2.6

3.1

2.3

0.7

1.0

5.1

3.2

1.6

1.3

0.5

0.7

2.8

3.4

2.1

1.7

0.4

0.6

2.9

3.4

2.1

1.7

0.4

0.5

2.4

3.4

Cash Flows Statement

Y/E December

Pre-tax profit

Depreciation

(Inc)/Dec in Wkg. Cap.

Tax paid

Other operating activities

CF from Op. Activity

(Inc)/Dec in FA + CWIP

(Pur)/Sale of Investments

CF from Inv. Activity

Debt raised/(repaid)

Dividend (incl. tax)

CF from Fin. Activity

(Inc)/Dec in Cash

Add: opening Balance

Closing Balance

E: MOSL Estimates

2009

6,147

1,129

2,724

-1,693

-376

7,931

849

-39

811

-7,511

-307

-7,817

924

2,359

3,057

2010

3,378

1,014

-4,407

-753

-438

-1,207

434

291

725

1,469

-380

1,089

608

3,057

3,639

2011E

9,888

1,146

-3,918

-3,341

3,775

-951

-1,483

-380

-1,863

962

3,639

4,600

2012E

7,660

1,221

230

-2,721

6,390

-970

-1,216

-380

-1,596

3,824

4,600

8,424

(INR Million)

2013E

7,678

1,303

418

-2,726

6,673

-950

-5,465

-380

-5,845

-122

8,424

8,302

20 October 2011

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Rain Commodities

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