Is high debt blocking Rain Industries’ third boom-cycle rally?

The business at a glance

Rain Industries operates under three segments: carbon, advanced materials, and cement, with the following revenue split over the last 20 quarters.

Fig 2: Source: Rain Industries, Quarterly filings

Let’s unpack each:

1. Carbon (73% of CY24 revenue)

Rain’s carbon business has its roots in Rain Calcining Ltd, founded in 1989 by Jagan Mohan Reddy Nellore. By 1998, the Vizag plant began converting green petroleum coke into calcined petroleum coke, a key raw material for carbon anodes used in aluminium smelting.

In June 2007, Rain acquired Rain Carbon (USA) through a leveraged buyout (LBO), making it the second-largest CPC/carbon anode player in the world.

In aluminium smelting, carbon anodes direct electricity to separate aluminium from alumina. Roughly 40-45 kg of carbon anodes are required for every 100 kg of aluminium produced. Naturally, aluminium output is the key demand driver for Rain’s carbon products.

Fig 3: Source: Author

Rain’s stock historically tracked aluminium prices closely, especially during the 2016-2018 and 2020-2022 rallies.

However, since 2024, that correlation has broken down: while aluminium prices rose from $2,100/ton to $2,800/ton, Rain’s stock trended lower.

Fig 4: Source: http://www.tradinview.com/www.tradingeconomics.com

Operating profit of Rain Industries

A better indicator of a positive correlation between aluminium prices and Rain Industries’ business would be its operating profit.

Operating profit, particularly from the carbon segment, has traditionally moved in step with aluminium prices. Higher aluminium prices incentivise smelters to boost production, driving volume and pricing gains for Rain.

Annual operating profits of the company over the last 10 years, especially in the carbon segment, suggest a positive correlation with aluminium pricing. Higher aluminium prices incentivise smelters to increase production, thereby increasing demand and therefore potentially better pricing and higher volumes of Rain’s carbon product segment.

Fig 5: Source: Rain Industries, Quarterly filings

What’s different this time is that despite better aluminium pricing since February 2024 and better operating profits in the carbon segment, Rain’s stock price has not followed a similar trend as in the past.

Is it different this time?

Evidence suggests something fundamental has changed: debt and interest costs are at record highs. Rain has outstanding gross term debt of €365 million and $448 million.

The US federal funds rate is the highest in the last 15 years. European policy rates are no different.

Fig 6: Source: http://www.tradingeconomics.com

As a consequence, the company’s blended cost of borrowings is around 11% (in INR terms).

From 2008 through 2021, Rain benefited from a “low-interest-rate regime.” That tailwind has now reversed, pressuring cash flows and valuations.

Rain Industries has said that its top financial priority is cutting down debt. They are tackling this in three ways:

1. Steadily paying off what they owe,

2. Running a tighter ship operationally,

3. Jumping on opportunities to refinance when rates are favourable.

The results are already showing. Over the past 18 months, Rain has cleared $150-180 million in debt, and its leverage ratio has improved to a relatively healthier 3.3x (down from 3.9x).

By optimising working capital over the next couple of quarters, the company expects to free up enough cash to reduce another 10% of its gross debt (roughly $100 million).

At the same time, it is keeping a close watch on the markets, ready to swap out its older, expensive loans for cheaper ones as soon as the opportunity arises. This debt refinance exercise is a key trigger to watch for.

If all goes to plan, it aims to bring its leverage down to around 3x by 2026 and hit 2.5x by 2027.

2. Advanced materials: 18-20% of revenue

This segment took shape in 2011 with the acquisition of Rutgers Group, a global powerhouse in carbon-based chemicals, for about €300 million. The deal allowed Rain Industries to add key plants in Germany, the US, Belgium, and China, laying the foundation for resins and specialities.

The product lineup has three main buckets:

Resins (like NOVARES, including green bio-versions) for tyres, paints, and coatings.

Battery coatings (LIONCOAT and PETRORES) to boost EV batteries.

Chemical intermediates like Phthalic Anhydride (from naphthalene, ~10% of sales) for carbon black and more.

These products power everything from greener tyres to longer-life power tools and EV tech.

However, this segment has faced its own set of challenges. Tough Asian price competition on resins, raw material shortages (battery demand eating up raw material supplies), and Europe’s high energy costs, though manageable, according to the management, are causing near-term headwinds in this segment.

As a result, margins lag the 15-17% goal at ~10%, with plants operating at 63% capacity.

Despite contributing 15-20% to sales, this segment’s operating profitability remains under 10% of the operating profits of the group.

Fig 7: Source: Rain Industries, Quarterly filings

While this segment is important, we’re treating this as an optionality. This will make more sense during the valuation exercise later.

3. Cement

Rain Industries’ cement business traces its roots to 1974, when it was a cement producer in Telangana. Today, it operates as an integrated player with 4 million tonnes of annual production capacity across its two main facilities: the flagship in Suryapet, Telangana (poised for a major expansion), and a dual-line plant in Nandyal, Andhra Pradesh.

The strategic focus here is clear: dominating the high-growth construction market in South India by supplying high-quality OPC (Ordinary Portland Cement) and durable PPC (Pozzolana Portland Cement) for both residential and infrastructure projects.

A notable attempt at improving cost metrics is its push toward sustainability. Currently, nearly 40% of its power is sourced from solar and Waste Heat Recovery (WHR).

However, the segment has recently wrestled with profitability.

Fig 8: Source: Rain Industries, Quarterly filings

Rain’s cement segment (Priya cement) has contended with market pressures, including consolidation by national players and squeezed margins due to higher coal and freight costs, which resulted in EBITDA dipping to just Rs 20 crore in Q3 FY26.

However, management views the segment as a non-negotiable anchor. The outlook is decidedly bullish: Rain has approved a Rs 757 crore brownfield expansion at Suryapet that will nearly triple its output from 1.5 MT to 3.8 MT by H2 2027. This expansion is designed for efficiency, targeting a “14-16% internal rate of return (IRR)” through strategic cost savings of Rs 150-200/tonne, driven largely by a new 7MW WHR unit.

The Rs 757 crore expansion is a point of contention for many investors. The rationale being that with a gross debt (term + working capital) of nearly $1 billion, the company should ideally use internal accruals to pay off the high-cost debt versus investing in a business which contributes little to the overall company’s revenue and operating profit.

The opposing POV is that for a cost of just Rs 757 crore, the company is expanding capacity by 2.3 MT. The market value of 2.3 MT at a base case $70/ton replacement cost comes in at Rs 1600 crore.

Valuations

At a market cap of Rs 3,700 crore, Rain’s cement division alone (4 MT) could be worth about Rs 2,800 crore, excluding the upcoming 2.3 MT expansion.

This leaves the rest of the businesses available at Rs 700-900 crore. The carbon and advanced material businesses are riddled with gross term debt of over $850 million as of September 2025. But even then, this pricing would generally suggest a degree of undervaluation.

On price-to-book value too, at 0.5x, the company trades at the lower end of the historical range.

Fig 9: Source: http://www.screener.in

On the flip side, the debt challenges of the company are significant. Whether the company can continue to pay down the debt and, at the same time, fund its capex plans remains to be seen.

Note: We have relied on data from http://www.Screener.in and http://www.tijorifinance.com throughout this article. Only in cases where the data was not available have we used an alternate, but widely used and accepted source of information.

Rahul Rao has helped conduct financial literacy programmes for over 1,50,000 investors. He helped start a family office for a 50-year-old conglomerate and worked at an AIF, focusing on small and mid-cap opportunities.

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