Rain Industries - An oversold de-leveraging play

You can listen to the concall

Playback facility:
Available from May 12, 2018 to May 16, 2018
Dial-in: India +91-22-7194 5757 or +91-22-6181 3322
Playback Code: 18468

@vivekchoraria EV/EBITDA is a ratio that can’t be used alone to measure a company’s performance. This has to be compared with peers and see where it stands. The procedure is same for all performance ratios like P/E, P/B, Marketcap/cashflow etc. A stock may be trading at 40 p/e. It doesn’t necessarily mean it’s expensive. It may also be that it’s trading cheaper than the peers from the same industry, and the whole industry is given premium. I’ve made some comparison of RAIN with its major peers. This will give an idea where RAIN stands.

Also regd. debt, avg interest rate is 5.22% (dropped from 7.56% from last year because of debt refinancing).
And accordingly, finance costs dropped down to 117.9cr (this quarter) from 146.5cr (last quarter).

Only 400cr debt is scheduled to be repaid in the next five years until 2022.
Also flexible to accelerate repayments against Term Debt of 3700cr, depending on cash-flows.

So, it of course makes sense to go for capex with the cash on books instead of repaying debt because the avg. interest rate is much lesser when you compare with the Indian companies.

6 Likes

If this is the case, then Goa Carbon and Himadri stocks should have crashed as well, but they didn’t. So, to me it looks like yesterday’s selling was just panic selling. We need to keep an eye on the following stocks (Goa Carbon, Himadri, Koppers) to understand if the whole sector goes down or the fall is just stock specific. At the same time, these 3 stocks are technically weak as well, so even when those go down, we can’t really understand if the Apple-Alcoa development is the reason for the downfall.

2 Likes

This is the best explanation I’ve come across. Also worrying is the news of pet coke ban across India.

Stocks need not go down on the same day. If one looks at Goa Carbon or Himadri or Koppers, all the 3 stocks came below 200 DMA in the last few weeks. Stocks which are in a very good uptrend rarely comes below or close below 200 DMA.

Check Graphite or HEG on charts, irrespective of so much news flow (positive or negative), they didnt come below or closed below 200 DMA after their uptrend commenced.

Disc: Invested from lower levels.

Reference to “Also worrying is the news of pet coke ban across India.” I am trying to put down my understanding of pet coke and the role it may play/not play with regard to Rain Industries.

  1. Pet coke is a byproduct of oil refining. The term “green” used in connection to petcoke refers to the raw, unprocessed pet coke which comes out of the coker. It does not refer to environmental friendliness.
  2. The raw coke which comes out of the coker may be either FUEL grade (high in sulphur and metals) or ANODE grade (low in sulphur and metals).
  3. It is the FUEL grade coke which the Supreme court is thinking of banning because petcoke emits between 30 and 80 percent more CO2 than coal per unit of weight.This fuel grade coke is used by cement companies and others and harms the environment.
  4. If Rain industries is using FUEL grade coke for its CEMENT business then the ban on petcoke will affect its cement business - short or long term - till they find other substitutes for fuel.
  5. The ANODE grade coke (refer to point 2 above) is further processed by calcining to manufacture CALCINED petcoke which is used by the aluminium and batteries sector. THIS activity of Rain Industries - manufacturing of CALCINED PETCOKE ought not to be affected by the Supreme Court ban.

This is my understanding of petcoke and its role in Rain Industries. Please feel free to correct me.

2 Likes

MOSL Review of the results.

Rain-Industries-Motilal -May 2018.pdf (351.7 KB)

3 Likes

Thank you. Clarity in assessment of the Carbon and Advanced Chemicals section is helpful.

Company has clarified in concall it uses imported coal for its cement plant, as such no impact of ban.

2 Likes

Motilal oswal expects 2000 cr debt reduction in next 21 months. Is this a correct assumption??

As per the concall with the management for Q1, this assumption is certainly wrong. The representative of Motilal was present in the concall when the management stated that that require funds for Capex etc.

Where did you get this info from?

Still looking to find the reasons of fall and in search of that i found this .Rain is testing my conviction in it …
https://www.quora.com/What-is-Gopal-Kavalireddis-view-on-the-rain-industry-Is-it-still-a-hold

http://www.rain-industries.com/pdf/corporate-announcements/ril-analyst-call-intimation-q1-2018.pdf

Posting this initial thesis (based on this report Mohnish Pabrai invested in rain ind in the year 2014) again for the benefit of the people who did not go through from the start of the thread.
It has great amount of details regarding the Rain’s products, company’s background, valuation etc.

Disc: Staying invested. Avg buying price about 200.
Not recommending the stock for buying. The price may go down further from here too.
My novice opinion is it is about 20% cheaper than fair value.

1 Like

The above report seems to be 2012 or 2013 report

From the con call transcript:
Short term negatives:

  1. CPC volumes have come down last quarter due to prolonged negotiations with Indian customers over passing on Import duty. This shows the supply demand mismatch existed during China’s winter cut does not exist any more tilting the balance slightly towards Aluminium smelters. According to management, during winter, the aluminium production did not go down. The CPC production was curtailed, which is coming back onstream after winter.

  2. The high grade GPC (very low sulphur content), which is raw material for CPC, prices have gone up substantially, which they were unable to pass on to indian customers. US there is no such problem.

  3. The Q2CY18 is going to be subdued too because of above reasons and also they are planning maintanance shutdowns this quarter as it is relatively dull with respect to demand.

  4. Russel sanctions & Brazil’s Alunorte effect would be there indirectly, although not substantial, it will affect Q2CY18 in minor way, which is already turning out to be weak.

  5. The new indian CPC capacity getting delayed by two quarters.

  6. Crude oil price rise would impact the transport costs in minor way.

  7. The last two major acquisitions (bigger than the size of the company’s size; funded by huge debt) spooked investors. The management gave hints that they might do an acquisition. Hope this time, the acquisition would be smaller.

Short term positives:

  1. The indian rupee depriciation will show positive impact in Q2CY18 and further as long as it is weekening or staying at current 67.5 rs/$.

  2. The Advance carbon material division which showed subdued performance during Q1CY18 due to shutdown and repairs, would run at full capacity in Q2CY18 and repair expenses would not present in other expenses.

  3. CTP is doing well and will have no problem this quarter too.

  4. US companies restarting aluminium production capacities would increase demand for CPC over next one year. This if it happens as planned would be significant positive for Rain in next 1-1.5 yrs.

  5. The management is suggesting the advance carbon materials would see robust growth due to Engineered products going into Li-ion batteries. The contribution from this is very small (10-15%), so the impact overall is not going to be very significant.

  6. The management says demand pick up for cement is visible in Andhra & Telangana regions, which would help with cement revenues (10% contribution).

  7. Management sees robust demand for Hydrogenated Hydro carbon Resins (white water resins) and investing $66mln, which would start production in Q1CY19. The new CTP capacity (via debottleneck) would also come onstream around same time. The new 4.1MW power plant too would come onstream around Q1CY19. These would improve revenues and profitabilty.

  8. The tax might be lower by 20-25 cr next quarter onwards (not sure though) compared to Q1Cy19.

Long term positives:

  1. Rain’s focus on continued cost reductions would help it over long term. It makes it more resilient during negative cycles. With comfortable cash position, they might go for small acquisitions to augment more carbon products.

  2. Over the next 2-3 years, as the size of the company grows, the net debt would come down and debt would look smaller, which would make institutional investors take notice of Rain.


The Chines production capacity cut which triggered Rain’s substantial re-rating is looking like coming back online, which might be reason for price going down.

Disc: staying invested with 2-3 years time horizon

3 Likes

The CPC volumes reduction may be marginal. The company wants to rationalize the inventory to reduce the working capital requirement and hence the possible outages but not with the prime focus to reduce the CPC volumes. As I can make it out though it’s not clear, that some sale meant for Q1 fell in Q2 this time too.

Hi all new entrant, disclosure - I have dabbled in this stock in the past but am currently not holding it. Most people on this thread seem much better informed than me so it would be great if the other participants can validate my initial thoughts on this.

I have gone through & appreciate all the detailed discussions on aluminium capacity expansion and also RM integration/ price variation etc but my feel was that the main story in the stock was the closure of Chinese capacity which would have led to shortage and increase in realizations that would have gone directly to the bottomline (akin to what is happening in HEG or Graphite).

That angle which was being marketed by the research reports (& perhaps the management also) is clearly not happening as per the last concall. In spite of the supposed winter closures Chinese production is up and talk is more on shifting the plants to less populated areas rather than any closure as such.

In such scenario, the fundamental business is probably not too attractive; cyclical, very capital intensive, bad RoCE, high debt (absolute levels still high even if cost is down after refinancing). On the flip side PE ratios are low and yes demand is strong so even if outlook on price is as good as expected realizations should be steady.

Also the way the stock has crashed last week kinda indicated that some of the strong hands may be exiting. The BNP paribas theory makes no sense as it is an arbitrage fund, so if they sold on NSE, they would have levelled elsewhere. More likely one of the institutional chaps or some HNI like Dolly Khanna may be on their way out. So broadly i feel if you got in at the beginning it’s still ok but not much risk/ return advantage from these levels. Any thoughts???

1 Like