Mudar Patherya: Reinventing to stay ahead

Two companies reinventing themselves are Phillips Carbon Black and Rain Industries. Both have been dismissed as cyclicals, both have/had a debt issue on their hands and both have/had a challenge convincing analysts that they can be sustainable plays.
 
Phillips Carbon Black has transformed its personality in the past few quarters. The company was dismissed as a commodity play; it has since produced research-driven grades customised around customer needs used in lighter, stronger and durable tyres.
 
The company was considered as a low-margin proxy; it has increased Ebitda (earnings before interest, tax, depreciation and amortisation) margin from 10.5 per cent to 14.2 per cent across the past five quarters.

 

The company was considered as a pure volume game; it is increasing the proportion of speciality carbon black (non-automobile applications) from less than a per cent of revenue to a projected five per cent in 2017-18, with a 15-20 per cent share of the overall contribution.
 
The company was assumed to have peaked its volumes; it debottlenecked and enhanced production from 2015-16 (335,000 tonnes) to 2017-18 (estimated 410,000 tonnes).
 
The company was considered debt-weight; it has moderated its interest cum hedging cost from Rs 150 crore as recent as 2014-15 to a projected Rs 85 crore in the current year; interest cover has correspondingly strengthened from 3.4 to 5.7 across the past five quarters.

 
The result: Even as total income increased Rs 29 crore across the past five quarters, Ebitda increased Rs 20 crore.
 
The case for Rain Industries is even more compelling. It is one of the largest producers of calcined petroleum coke (CPC) and coal tar pitch in the world. Its operations are spread across North America, Europe, India and Russia.
 
Over the past few years, it enhanced capacities through incremental debt. Each time it did so, the market tut-tutted; the stock refused to move. The allergy is visibly pronounced. In the past two quarters, it reported an aggregate Ebitda of Rs 920 crore, with a reasonable interest cover of 3+. And yet, for long the market priced this company no higher than Rs 1,800 crore (now around Rs 2,615 crore).

 
Rain could well be at an inflection point. A 300,000-TPA (tonnes per annum) coal tar distillation capacity was commissioned in Russia (through a 65-35 joint venture). The impact of its US-based flue gas desulphurisation unit will reflect in 2017. Its quality blending CPC capacity has increased 50 per cent to 36,000 TPA. Realisations of most of its products have stabilised. A stronger management grip of US operations could translate into better numbers. The company announced the completion of its active capex cycle. Debt cost re-negotiation could enhance earnings. Prospective cash flows could moderate debt (Debt: Ebitda from 4.5x to 3x in three years).

 
My last argument: The company possesses 3.5 million tonnes of cement capacity (the Priya brand). Even if this asset were valued at a discounted $90 a tonne, that’s Rs 2,100 crore of value already built into the Rain market capitalisation (around Rs 2,615 crore). Which means the rest of the business — profitable and global scale — comes largely free.
 
Anyone cares to provide me a loan to buy these stocks?
 
The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed