Rain Industries - An oversold de-leveraging play

Valcyc · April 25, 2018, 2:50pm

Interesting data point from Alcoa’s 1Q conference call. They said their carbon costs went up US$31 million versus 4Q2017. They shipped 800,000 tonnes of aluminum which would have consumed 320,000 tonnes of CP coke and 80,000 tonnes of pitch. So, carbon cost went up US$77/tonne (Rs 5000/tonne) versus prior quarter (4Q2017). It is difficult to break out what portion of this is due to CP coke and pitch. However, CP coke being 80% of the total, it would seem that its contribution would be the big one. Per Rain’s disclosure, 4Q2017 selling price for its CP coke was Rs 26,835 and for pitch was Rs 45,854 per tonne and the weighted average price for CP coke and pitch combined was Rs 31,430/tonne. So Rs 5,000/tonne increase would be +16% in price of carbon (coke and pitch)

Alcoa has budgeted for additional increases through 2018 suggesting they continue to see the market as tight. Key question in determining profit would be what has price of green coke and coal tar done over this period. But it does look like based on these numbers, Rain was probably able to at least maintain its margin. We will only know when they report. It’s good to know that CP coke and pitch price continued upwards in the first quarter

rareks · April 26, 2018, 6:11am

The alluminium prices on lme taking a pause. Rain ind is also going down everyday.
Guys, any specific reason, last quarter was also better, are we missing any head winds
Disc. invested from lower levels

Akshaykumar · April 26, 2018, 6:32am

Growing Aluminium price may not have much impact on Rain Industries, but growing Aluminium demand and growing demand for carbon products will be good for Rain. Price hike in its carbon products seem yet another tailwind for company. Not able to see any major negative that deserves this kind price action in Rain.
Disc: Invested

ishikaghose · April 26, 2018, 6:54am

From what I understand Rain Industries has been in the oversold territory - for the last few weeks. I think that Trump’s sanctions against Rusal and his subsequent back-tracking have left people rather wary of what may happen next. Nothing wrong with the fundamentals of Rain and it appears to be a knee-jerk market reaction. My two paisa worth! Invested from lower levels

yourraj · April 26, 2018, 7:14am

India Ratings Upgrades Rain Industries to ‘IND A’/Positive
Source
https://www.indiaratings.co.in/PressRelease?pressReleaseID=31539&title=India-Ratings-Upgrades-Rain-Industries-to-‘IND-A’%2FPositive-

a_bhalotia · April 26, 2018, 1:50pm

This rating upgrade was a few days back and was already mentioned in one of the post. Any particular reason for posting it again?

phreakv6 · April 26, 2018, 2:42pm

Instead of looking at Aluminium, you should be looking at crude which is nearing $75 and is the biggest raw material for Carbon companies. Sometimes the reason hides in plain sight.

yudiagg · April 26, 2018, 3:02pm

Interestingly, Indian Mutual funds have never owned any share in Rain.

GSrikan · April 26, 2018, 5:45pm

I dont think crude affects rain much. It’s chemical division’s externally sourced inputs are crude linked. The chemical contribution itself is 15%. It’s profit contribution is even lesser. Some of CTP derived chemicals’ selling prices are indexed to crude (in that way it is beneficiary of rising crude price).

I believe the GPC (crude refinary derivative) prices are going up due to supply crunch. The increase in raw material prices are always passed on. The only problem Rain had was when the demand for aluminum dipped, thus causing the aluminum production dip, which further caused low demand for CTP& CPC. With low capacity utilization the margins dipped drastically. As long as aluminum demand is there, which can be seen in aluminum price, rain will have no problem with maintaining 22% ebidta margin.

Rain has procured good amount of GPC, as GPC prices are going up. Over couple of quarters, they will pass on the increase in raw material prices to customers.

The vital part is, according to Rain AR, nobody else has sulfur scrubbing technology, which is used to scrub the sulphur out of low grade GPC derived from sour crude, which usage is increasing more and more. The costs for smaller players will rise as they have to procure good quality GPC at higher price, where as Rain would procure lower grade GPC and scrub it off sulphur and use it, thus maintaining competitive advantage.

Rain has come out saying they are going to produce more high margin advanced carbon products, which will go into electric vehicle batteries. Got to watch out and see how it works out.

The short term worry for investors would be very volatile global environment due to trade war going on between China n US Russia n US. This is making owning a global supplier a risky proposition due to unpredictability. The mutual funds will be vary of high debt in Rain. Once debt comes down to half of what it is now, lot of investors/funds won’t be comfortable with it. Another thing is, it is a commodity still which follows aluminum cycle. I believe market cap of 1x EV is right price. That makes it about 13K cr (1yr forward revenue)-5k(full debt-receivables-extra inventory)=8k cr. This is approx calculation.

The new CPC capacity+CTP capacity will help increase the revenues. The carbon materials should improve profit in next 1-2 yrs.

Disc: Invested from 100+ levels
Don’t give any importance to the valuation calculation I did. I know pretty much nothing abt valuation.

phreakv6 · April 26, 2018, 5:57pm

Please take a look at the Material Cost %. You can see that there is almost 10% dip in this in 2016 and 2017 when compared to 2013 and 2014 (57% vs 47% levels). This 10% makes a world of a difference on a topline of 10k Cr - That’s about 1000 Cr inc in EBITDA which was less than 1000 Cr to start with effectively doubling operating profits without doing anything different. What was different in the years in question? Crude of course (100+ vs 50+).

GSrikan · April 26, 2018, 6:13pm

If I am not wrong the 2016-17 the revenues from high margin CPC and CTP increased due to price rise in aluminium from 1800$ to 2000$. The revenue figure overall stayed intact since they have been reducing the trading volumes of GPC and some chemicals which are very low margin. I am not sure, how much was reduction of revenue due to trading volumes reduction. As far as I remember, the management always said, raw material prices will always be passed on with a lag due to long term contracts of 6-12 months.

sunilgct · April 27, 2018, 12:30am

RAIN Group estimates that over 280 oil refineries sell GPC in varying forms and qualities.
Generally, the sale of GPC does not constitute a material portion of oil refineries’ revenues.
In general, CPC and GPC prices move in parallel. Hence, CPC producers are converters with ability to pass on
the increase/decrease in GPC cost to their customers. However, there may be a time lag of one or two quarters for
adjusting the changes in prices of GPC and CPC. In the interim, the difference, if any, may have to be absorbed by
the CPC producers

I did an another exervise of why i am long and why i should be short

Reasons for Long
Spur in Electric Vehicles Demand which wil push teh demsnd for aluminium
Aluminium prices stable above 2000$
Corporate Tax cut in U.S.
Interest Savings should bring 35-40 crores per quarter on bottom line
Higher Trending CPC and CTP prices.US CPC Prices were at $460 MT Q12018, Compared with around $425 MT as of Q42017. So QOQ also has seen steady Higher Prices
CTP were 640(Q4 2017) vs 850 (Q12018)
Ability to keep teh raw materials cost to minimum by processing high suphur GPC priced much lower than LOW sulphur GPC) by SO2 Scrubbing
And lastly Dolly khanna continues to increase stake . she has 40% of her PF in Rain. though it is good but should not be the only criteria to invest

Reasons for Short
Rusal sanctions impact

As US softened its stand , Compared with Earlier Fears of Receivables from rusal, Since there is 5 Months time Periods,
for Completing all transactions, Rain industries should be able to recover Atleast Major Part of its Receivables
and Provisions may be CONTAINED to a great extent . Rain has a joint venture with severatas with 65% share .
Most likely Russia would nationalize Deripaskas shares in Rusal to have sacntions permananelty lifted.

Rusla stock up by 50% from its lows , Though it should not matter much fr Rain .FYI…

China gets aggressive on smelting and carbon capacities and need to keep an eye on Winter policy plans for 2018-19. However
it is estimated that policy for carbon smelters will be much stricter this year as they were only allowed to
close 50% during 2017-18

commodity stock and what PE can be given (10/15/20) ? I am comfotable giving a 15 PE

High debt , need to keep a watch on management focus on reductions and interest payemnts.
So far no red flags here as they are able to generate significant cash form operations to serve the interest cost

Improvement in Performance of Chemical & Cement Needs Watch. Again only 10% reveneue comes from here

Any drop in Carbon price relaizations and volumes. Again nothing seen so far.

To my knowledge there is nothing which warrants this fall unless artifically orchestrated.I am continuing to stay invested as i dont see anything RED apart from the rusal issue which is also taken care .
If someone has anything which i am missing , please point out.

sunilgct · April 29, 2018, 5:42pm

And as expected …

https://www.google.co.in/amp/s/amp.ft.com/content/341eaf56-4a2d-11e8-8ee8-cae73aab7ccb

harshb232 · April 29, 2018, 6:58pm

What is it about. Its not allowind access.

sunilgct · April 30, 2018, 12:32am

and as expected Deripaska agrees to relinquish control of RUSAL

harshb232 · April 30, 2018, 4:59am

Can you please explain, how will this effect Rain?

malikvikrant00 · April 30, 2018, 8:56am

US may lift sanction from Rusal , if Deripaska takes a tumble from Rusal, and aluminum prices which are already soften now from 2700$ to 2200$ , may be back to normal, and demand will pick up which in turn means more raw material from RAIN will be called in by Rusal, if not then Rusal has to face the impact of sanction and Rain can not do their business with Rusal as per the Sanction, means low profits…
My 2 cents …

sunilgct · May 1, 2018, 11:14am

Please read in conjuntion with my earlier update.
First of all apart from the RUSAL Issue there is nothing which is pointing as an issue as far as my knowledge goes and as expected US had softened its stand

Read this as its typical TRUMP style negotiations

https://www.myallies.com/news/aluminum-supply-fears-fade-as-mnuchin-toes-softer-line-on-rusal-257

and lets also not forfget taht US has already put import duty on aluminium .
If RUSAL(6% of world aluminium prod) is out of business , it would mean aluminium would surge above 3K$ which would hurt the US manufacturing industry the most as
right from cars to coal cans needs aluminium which would inturn surge the prices which in turn would raise the inflation

It will also leads to shortage of alumina( as rusal manufactures 7.7 million ton of alumina) which would surge the aluminum prices
Moreover US does not produce enough aluminium for its consumptionwhich means it has to import which will cause teh additional burden of import DUTY

Now Coming back to Rain .

Why the prices are falling , can only be one Reason which is RUSAL news . But does this warrants so much fall ,
or it is just panic created to exit weak hands,
only time can answer But what is clear is

There could have been impact of Rusal receivables which with softeneidng US stand shoudlbe largely
contained as mentioned earlier .
Rusal also produces 7.7% of world Alumina. So the alumina market went into tizzy and prices sky rocketed
and tehre is a supply demand mismatch of alumina for aluminium production . Now wih sanctions easying and deripaska
will give up control of Rusal and there by sanctions will be compeltely lifted ( its matter of time as there
are large scale Implication of RUSAL and US already softeneded understadning the same as explained in the link )

and tehre by restoring the production of alumina which will soften the prices of alumina which woudl in turn
increase the aluminium prodcution which will in turn increase the demad for CPC and CTP.

Now if you see it is one big circus and rain got sandwhiced for no fault and this is also because there is too much of retail whcih understandly gets panicky with small news.

For long termers should hold on to Rain as Demand for alumium looks robust and can look at avergaing around 300-330(strong demand zone) and shorterms can look at exit as there will be some volatility and it would also mean the weak hands would exit which means strong hands will hold longer as long as the fundamentals are intact.
In my experiece if the fundamentals of the co are intact and magnagement is trust worthy and if the stockprices falls for no major reason , it would only tend to rise higher post the fall.

My views could be biased because of my holding but i would really appreacite your
Comments/Feedback . as i am also learning from stalwarts like @jitenp through their tweets n updates…

apart from this , there are other intiiatives which RAIN is getting into which are highlighted in my earlier post and also by PE_RATIO.

malikvikrant00 · May 2, 2018, 12:30pm

U.S. Gives Rusal Path to Escape Sanctions
Aluminum giant’s owner EN+ Group was at risk of a delisting from LSE without Treasury reprieve

sunilgct · May 2, 2018, 3:30pm

I am not good at charts But can some one correct me if i am wrong.

Is it a nice triple bottom confirmation with twice retraced from 50% levls and most importantly volumes are decreasing with each bottom