I think the reason for Rain’s lower P/E or relative undervaluation could be due to the following reasons.
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The product mix for the two companies is different. CTP is 73% of HSCL’s revenues and Carbon Black is 27% where as Rain Industries CTP & CPC contribution is 19% of their Carbon products revenue and 13% of their overall group revenue.
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CTP and Carbon Black is where HSCL is seeing improved margins and the same can seen in their improved showing QoQ where their OPM is now at 22% where as Rain’s product mix doesn’t allow them similar margins. It looks like HSCL may have clients willing to pay higher for quality Carbon Black (from the concall) which is helping their margins. Latest quarter margins for Rain are 17.74% and HSCL are at 22.07% which seems like a significant difference.
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HSCL has 70% market share in India for CTP and it looks like demand for Aluminium is higher in India and is set to grow from 2.75 million metric tonne from annum now to 4 million metric tonne per annum by FY19. Rain’s Asia revenues contribute 22% to their overall revenues and unsure about their market share here in India. So looks like HSCL has more to gain from Nalco, Hindalco, Balco and Vedanta’s growth than Rain.
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Debt situation is very different for the two companies. HSCL’s D/E was at 0.67 as of May and they have further reduced debt in August when they cut their long-term debt from Rs.414 Cr to Rs.310 Cr. This should bring their D/E to under 0.50. Rain’s D/E as of June is at 1.8. This again is a significant difference.
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Revenue and Earnings growth of the two companies as well are in totally different trajectories. Q1 FY18 Sales growth for Rain is at 5.24% vs HSCL’s 77.34% growth. Profit growth for Rain in latest quarter is at 12.54% vs HSCL’s 330%.
So overall I think market factors in these things when assigning a P/E. Thoughts welcome.