By Prakash P

India Ratings and Research (Ind-Ra) has revised Rain Industries Limited’s (Rain) Outlook to Stable from Positive while affirming the Long-Term Issuer Rating at ‘IND A’. The instrument-wise rating action is given below:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

External commercial borrowings

-

-

March 2022

USD30 (reduced from USD50)

IND A/Stable

Affirmed; Outlook revised to Stable from Positive

Term loan

-

-

October 2021

USD20

IND A/Stable

Assigned

Analytical Approach: The ratings factor in Rain’s moderate operational and legal linkages with its key subsidiaries. The company has only 4.4% of the total consolidated debt at standalone level and has historically relied on timely cash flow support from its US subsidiary Rain Commodities (USA) Inc (Rain Commodities) to service its debt obligations.

Rain’s credit profile is also supported by adequate financial flexibility as the principal holding company of the Rain group. However, the ratings are constrained by the company’s lack of operations at a standalone level, which would keep it dependent on timely and adequate cash flow support from its subsidiaries. Also, any increase in debt at a standalone level without any back-to-back cash flow support arrangement from its operational subsidiaries would be a key rating monitorable.  

The Outlook revision reflects moderation in Rain’s EBITDA margins, leading to an increase in its consolidated net leverage (net debt/EBITDA) to 3.6x in 2018 (2017: 2.9x). While Ind-Ra has taken a standalone approach while arriving at the ratings, any weakness in the credit profile of Rain’s key subsidiaries would reduce financial flexibility of the group and hence, negatively impact the ratings.

KEY RATING DRIVERS

Strong Investment Portfolio: Rain is the holding company of all the carbon, advanced materials and cement business of the group. Rain has 100% ownership of Rain Carbon Inc, which operates the calcined pet coke (CPC) business of the group in North America and India. Rain is the second-largest producer of CPC globally and has a leadership position in India. It also has 100% ownership in Germany-based Rutgers through its US subsidiary, which is the global leader in the manufacture of coal tar pitch (CTP) and also has the advanced material division. The company also own Rain Cements Ltd (RCL; ‘IND A’/Stable), which has 4 million tonnes (mt) of cement manufacturing capacity in South India.

Reliance on Group Entities for Debt Servicing:
Rain’s standalone debt of USD50 million (consolidated debt: USD1,132 million) is guaranteed by Rain CII Carbon Vizag Ltd (Carbon subsidiary, ‘IND A+’/Stable) and RCL. Rain received dividend of INR846 million in 2018 (2017: INR394 million) majorly from Rain Commodities for servicing its standalone debt and dividend payment to its shareholders. All the operating entities in the group have strong credit profile and their funding arrangements are independent of Rain. Except the ongoing support to service the debt at standalone level, there has not been any material funding support extended within the group entities recently. Ind-Ra expects Rain to continue to receive steady dividends, supported by the improving performance of its key subsidiaries.

Modest Standalone Financial Profile:
Rain is the holding company and hence its revenue is in the form of dividend income, interest income and service income, apart from trading revenue. Standalone revenue was INR2,091 million in 2018 (2017: INR1,190 million) with an EBITDA of INR975 million (INR568 million) which was through interest income, dividend income and service income from its subsidiaries. Rain’s standalone debt was INR3,476 million at end-2018 (end-2017: INR3,179 million), which is on-lend to Rain Commodities since 2015.

Carbon Segment Profitability Impacted:
Carbon segment is housed under Rain Commodities, which contributed 69% to the revenue of INR140,490 million in 2018 (2017: INR113,007 million) and 79% to the EBITDA of INR19,656 million (INR22,703 million). Carbon segment’s operating profitability declined to INR15,689 million in 2018 (2017: INR16,477 million) on account of lower volumes along with an increase in raw material cost. Segmental volumes were lower primarily due to a ban on import of pet coke in July 2018 in India. With a continuous decline in CPC prices, Rain’s raw material expenses were higher due to utilisation of high cost inventories during 3Q18-1Q19, which impacted its profitability.

While the import ban was subsequently lifted with a limited exemption of green pet coke (GPC) to be imported for the calcination industry, import of CPC continues to be restricted for calcination industry. Rain imports CPC produced at its US plants to be blended with the one manufactured in India to meet the growing demand in Asia and the Middle East. Also, Rain is yet to secure GPC allocation for its new CPC facility in Vizag; although it plans to rationalise some of its GPC from its existing plant and increasingly utilise GPC available locally.

Carbon segment’s profitability improved to INR2,503 million in 1Q19 (4Q18:
  INR528 million). Ind-Ra expects the segment’s profitability to improve further with the GPC prices largely aligning with CPC prices and a large portion of high cost inventory being already utilised, although the volume improvement would remain contingent upon positive developments with respect to import of CPC into India for blending and GPC for its new facility.

Cement Segment’s Profitability Decline, Although Likely to Improve
: Cement segment contributed 7% to Rain’s revenue in 2018 (2017: 8%) and 4% to EBITDA (3%). RCL’s revenue grew 2.8% to INR9,138 million in 2018 (2017: INR8,886 million) owing to an increase in cement volumes to 2.23 million mt (2.10 million mt), resulting from an improved demand for cement. However, cement realisations moderated to INR4,100 per tonne in 2018 (2017: INR4,223 per tonne). Lower realisation along with continued cost pressures in 2018 led to a decline in operating EBITDA margin to 7.8% in 2018 (2017: 9.6%).

Ind-Ra expects the profitability to improve in 2019 on the back of an improvement in realisations, likely commercialisation of a 4.1 MW waste heat recovery plant from July 2019 and some moderation in coal prices. However, the sustenance of improved realisations remains key to maintain the improved profitability in 2020 and beyond.

Increasing Focus on Advanced Materials:
Rain is focussing on improving the share of value-added products under this segment and increase its profitability through product optimisation and operating efficiency improvements. The capex to produce the margin accretive water-white resins from its 30,000 tonnes hydrogenated hydro carbon plant is likely to be completed in 3Q19, which finds application in varied consumer products.  In 2018, the segments profitability was impacted due to an increase in raw materials expenses and a slowdown in Europe’s automobile industry.

Moderation in Consolidated Credit Profile:
Rain’s continuous reliance on cash flow support from its key subsidiaries for its debt servicing makes the consolidated credit metrics a relevant benchmark for assessing its ratings. While linkages between Rain’s key subsidiaries are assessed as moderate, the combined cash flows would be available for Rain for debt serving, subject to approvals by respective lenders for any distribution in excess of permitted limits. Any weakness in the performance of the key subsidiaries would reduce financial flexibility of the group.

Rain’s consolidated net leverage (net debt/EBITDA) increased to 3.6x in 2018 (2017: 2.9x), primarily on account of a decline in operating EBITDA during the period. Despite some moderation in operating EBITDA, the consolidated interest coverage (gross interest expense/operating EBITDA) improved to 4.3x in 2018 (2017: 3.8x), due to lower interest expense following the refinancing undertaken by the company. Ind-Ra expects the credit metrics to moderate marginally in 2019 on account of some moderation in EBITDA before improving gradually, aided by operationalisation of new projects and normalised profits from its carbon business.

Moderation in Consolidated Operating Performance:
Rain’s consolidated EBITDA margin declined to 14.0% in 2018 (2017: 20.1%), primarily on account of lower profitability from the advanced materials and carbon segment. Consolidated revenue grew 24.3% in 2018 to INR140,490 million (2017: INR113,007 million) primarily on account of higher realisations in the carbon segment and depreciation of rupee against US dollar and euro.

Adequate Liquidity Supported by Group Entities:
On a standalone basis, Rain had a free cash of INR18 million at end-2018 (2017: INR29 million). The company does not have any operations on its own and is dependent on its subsidiaries to service its debt and declare dividend. However, on a consolidated basis, Rain had cash and cash equivalents of INR10.4 billion and unutilised working capital facilities of INR11.5 billion as on 31 March 2019. Rain’s cash flow from operations improved to INR11.9 billion in 2018 (2017: INR2.4 billion) and its net working capital cycle was 88 days (120 days). Its capex requirement for 2019 is likely to be around INR10.5 billion. Its long-term debt repayment obligation remains low at around INR0.6 billion and INR1.3 billion over 2019 and 2020, respectively, which is likely to be comfortably serviced through its operating cash flow generation. Rain’s major scheduled debt repayment arises only in 2025.


RATING SENSITIVITIES

Positive: An improvement in the EBITDA margin while maintaining the working capital cycle, leading to the consolidated net adjusted leverage reducing below 3.0x on a sustained basis could be positive for the ratings.


Negative: Developments that could, individually or collectively, lead to a negative rating action include:

·         Lack of timely and adequate support from group entities for debt servicing

·         Increase in indebtedness at standalone level without any back-to-back cash flow support arrangement from its operational subsidiaries

·       Decline in EBITDA margin and/or an elongation in the working capital cycle, leading to the consolidated net adjusted leverage increasing above 4.5x on a sustained basis.


COMPANY PROFILE

Incorporated in 1974, Rain is a holding company with subsidiaries engaged in the manufacturing of cement, CPC, coal tar pitch and downstream products, including resins, modifiers and superplasticisers.


FINANCIAL SUMMARY

Particulars (Standalone)

2018

2017

Revenue (INR million)

2,091

1,190

EBITDA (INR million)

975

568

EBITDA margin (%)

46.6

47.7

Profit after tax (INR million)

605

321

Gross interest coverage (x)

5.0

3.2

Net adjusted leverage (x)

3.5

5.5

Source: Rain, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

13 April 2018

13 February 2017

21 December 2015

Issuer rating

Long-term

-

IND A/Stable

IND A/ Positive

IND A-/Stable

IND A-/Stable

External commercial borrowings

Long-term

USD30

IND A/Stable

IND A/Positive

IND A-/Stable

IND A-/Stable

Term Loan

Long-term

USD20

IND A/Stable

-

-

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Analyst Names

  • Primary Analyst

    Prakash P

    Senior Analyst
    India Ratings and Research Pvt Ltd Harmony Square 3rd Floor, Door No. 48 & 50 Prakasam Street T Nagar Chennai 600 017
    044 43401700

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121