Rain Industries - An oversold de-leveraging play

(Varun) #361

It’s true that Enterprise Value and EBITDA are good measures for taking over a company. True that it is theoretical take over price, just control premium needs to be added. However, being an owner, I have to pay the amount due to financiers. I can not count that part as mine.

I would say, replacement cost can be a good measure to value such companies. I am no expert in this industry, so I generally stay away.

Also, personally I do not solely rely on comparative multiples. For me, first of all, the company should be fairly valued in itself. Then I would compare it with respect to industry finding more reasons why should I buy this company vs others in the industry. Many times, industries in themselves are overvalued due to optimism eg. housing finance last year, maybe insurance sector also. So, if I do not have MOS from the company’s fundamentals itself, it’s useless comparing it with industry multiples.

(GSrikan) #362

The link might look like I placed it in a wrong thread.

I am trying to guess what would be the impact of China’s shift towards EAF from blast furnace.

I have very very limited knowledge of all the basic stuff about steel manufacturing or CPC or CTP, please consider this post as a “food for thought” rather than for coming to conclusion on anything. Also, the content in article could turnout to be entirely untrue (only by 2020, we can tell whether their projection will be right or not). The counter arguments and facts to prove my basic premise to be wrong are most welcome.

It seems China is limiting the capacity of steel manufacturing from current level and allowing only new EAF capacity (less polluting) to replace the old blast furnace capacity (polluting). Since Chinese infra is at “maintenance stage rather than growing stage”, they will be getting more and more steel scrap every year which will be used in EAF capacity.

If I am not wrong, the Coal Tar (raw material for RAIN’s CTP production) is a by product of steel manufacturing via blast furnace method where coal is used. Assuming no major draw down in Aluminium production in China or proportionately (with respect to Blast furnace capacity) lower cut down in aluminium production would probably ensure less Coal Tar to CTP generation. Even though there is no export of CTP from China to other parts of the world (since CTP markets are localized due to specialized logistics needed to keep CTP in molten state at high temperature), the CTP prices are mainly influenced by Prices in China (I guess this is due to China being largest producer of CTP). Like graphite electrodes (forms 1% of production costs), CTP forms 5% of production cost in aluminium and can grow sufficiently before becoming unviable.

With China trying to use up more scrap domestically (it is mentioned that they put in 40% export duty on scrap), the scrap might become bit more expensive making the Blast Furnace production competitive across the rest of the world.

Counter point:
Again, Rain is just a converter and may not enjoy the gains due to pricey CTP, as Coal Tar price would have gone up due to supply tightness in china.


Another point to ponder:
The ban on Pet coke as fuel in india (whose raw material is also green petrolium coke) affecting the fuel pet coke price to come down (no idea whether prices have come down or not), which would further bring down the prices in GPC? The low price GPC is good for Rain’s working capital as well as decreasing production costs in case more low sulphur GPC is available.

Disc: invested @avg price of about 200 rs and staying invested. The above points are not part of my thesis for staying invested.

(Akshay Kumar) #363

(D2018) #364

Had any body checked Graham no for Rain ? Its coming Rs 303 at EPS of 35, Rs 281 at EPS of 30 and Rs 250 at EPS of 23.72. The screener website is showing Graham no at Rs 287 for Rain. The Graham number is named after the “father of value investing,” Benjamin Graham. It is used as a general test when trying to identify stocks that are currently selling for a good price. Now I know Graham no is a bit obsolete & not in favour because its gives a very conservative value. However the interesting thing to note is that Graham no for most of the stocks is almost half of whats their CMP. Like Graham no for Graphite is Rs 385 (CMP= 882, PE = 18.88), for HEG its Rs 1725 (CMP= 3521, PE = 13.01), for Philips carbon its Rs 153 (CMP= 232, PE = 17.42), for Himadri special its Rs 56 (CMP= 138, PE = 28.65 ), for Goa carbon its Rs 438 (CMP= 752, PE = 12.79). Now isn`t Rain cheap or what. Going by above standards lets multiply Graham no of Rain by 1.5 (very conservative) i.e Rs 287 x 1.5 = Rs 430 i.e Rain CMP should be above Rs 430.
My apologies if any body is offended by this uneducated hypothesis.

(Rohit) #365

Is thier a circuit today in rain industries. I can not see any buyers and stock seems down by 5 %
If yes , why this circuit ? Any bad news ?

(Akshay Kumar) #366

(Akshay Kumar) #367

He says he increased stake in RAIN during current correction.

(simplyraghav) #368

Definitely, the risk associated with RAIN has come down but hasn’t withered away completely.
Disc: Waiting for even cheaper valuations.

(yourraj) #369

I am just creating a SNAP SHOT tool to analyse the company need your feed back is that correct
i have invested in the rain industries so am trying the rain as atest case .dat sources are from Screener and morning star

(mukeshbhatt77) #370

Hi yourraj, these look good. would you add the commentary to this ?

(GSrikan) #371

For fans of pabrai. Apologies if members feel it is misplaced. There is useful info on investing process.

There is a mention of rain but no fundamental info.

Disc: I am fan of pabrai. Invested in rain. Avg buying price around 200.

(Raj A A) #372

Rain Carbon To Build Water-White Resins Plant in Germany
as Part of Increased Emphasis on Advanced Materials

(Akshay Kumar) #373

Lot of smelting is getting restarted in US, should improve demand for CTP and CPC.

Is this the right time to catch this falling knife?

(Akshay Kumar) #375


My hunch is that Q1 willl disappoint but Q2 might be very interesting if markets return to normalcy.

(Tirath Muchhala) #376

Its an interesting case:
Mcap is approx 6000 Cr
PAT from 2008 onwards:
In INR Cr 335, 392 365 664 574 467 310 323 327 881
So 10 year total PAT is 4638 Cr

CFFO from 2008 onwards:
In INR Cr: 146,718, 126, 610, 1262,16, 755, 684, 950, 93
So 10 year total CFFO is: 5360 Cr

And 10 year total capex is 3152 Cr

ROE from 2008 onwards:
116% 47% 30% 48% 27% 18% 10% 11% 11% 28%
The worst was 10% in 2014

Those are just numbers.

How can we distill the business to a simple understanding?

Right now, its the 2nd largest Calcined coke maker in the world. ~ 2MTpa : LTM Rev: 4054 Cr
The largest Coal Tar Distiller in the world - ~1.3 MTpa : LTM Rev: ~7200 Cr
Has a 4MTPA cement plant in India - no debt and @60% capacity util.
LTM PAT is ~ 950 Cr

But what will the business be a few years from now?

  1. They are pushing their chemicals division to a higher quality standard - they want to expand their advanced chemicals portfolio and get into more margin accretive businesses.
    So while they could harp on about how they supply to Lithium Ion Battery makers, they instead choose to put real money into something as odd as Hydrogenated Hydrocarbon Resins. $66 M or so. While investing in their other products quietly.

  2. Using Petro Tar as additional feedstock for their distillation ops. Increased capacity by 200kT

  3. Elysis - the technology by Rio Tinto, Apple, and Alcoa and the Canadian govt. could be a problem.
    Theoretically, it could make the aluminum anode business useless;
    Practically, it needs to be
    a Proved to work consistently.
    b Proved to work at a reasonable cost
    c Proved to have adequate supplies for their process - For more than 60 MT of smelting capacity globally.
    d Capex required needs to be beneficial to smelters
    e Capex needs to be feasible at a technical level
    One can only wonder how and why a smelter might move to a new technology if it can disrupt operations.
    As someone once said: Outcomes are not usually binary.
    But this is a real fear.

  4. Their debt maturity is pushed to the year 2025; and is at a cost of ~5.25-5.5%
    Total Gross debt $1155 m; cash of $ 100 m
    Incidentally, the last time they had less cash than $100 m was in Dec 2010
    The management has always made sure they have a good amount of cash on their books + Unused revolver = $139 m

  5. New CPC plant in Vizag will push their capacity to 2.37 MT globally. Capex: $65m

But all this is not simple enough.
So lets try again.

A geographically diverse business, in many business segments, run with a sharp focus to increase cash flow per share.
Run by very able management that has invested when others quit, that has not invested when others pushed
(quite a few projects have been mulled over/ announced and then shelved), that has acquired when the correct financing was available and the price good enough;
And most importantly, has steadily made the business more diversified and stable.
The management has always been media shy and I have not yet found a red flag.
In fact, I believe that the MD did not take a salary for 2 years after acquiring CII Carbon in 2007. (Based on annual reports)
Their consistent message has been to serve their customers well.
LTM PAT ~950 Cr
ROE ranges between 10-30%

Would love some feedback on what makes this a poor/ bad business.
And if there are any big holes in my understanding.
We are all here to learn.

(rajput.delhi) #377

Just one question - Earlier also the company has shown good perf like in many yrs from 2008 to 2012…any idea why was it still never given a high valuation by the market?


(GSrikan) #378

I think, the reasons have been already discussed pretty much. As far as my opinion goes the reasons for the fall are below:

  1. It has gone up too fast too high due to the general euphoria in the market (bull run) and people were expecting HEG & Graphite india kind of profit & sales growth. Once they found that its not the scenario after couple of flat QoQ growth results people dumped the stock
  2. Even people with moderate expectation thought Chinese clamp down on pollution would make conditions favourable for growth for next few years. Once, these moderate expectation people observed that Rain could not pass on Duty hike to Indian aluminium customers (most likely due to Chinese CPC exports coming back), people thought the profits will go down further.
  3. Investors are suspecting that Trump’s decisions will lead to Trade war and world recession. So, people dumping all commodities and migrating to recession proof stocks.
  4. Rain moving to Additional surveillance and further to T2T squeezed the liquidity in the stock, which made lot of investors who prefer to buy stocks with liquidity (just in case of change of mind they can easily sell) either dumped it or stayed away.
  5. In Bull run, people did not bother much about amount of debt Rain has. Once the tide turned, people dump high debt stocks and chose to go for low debt or no debt stocks, which offer survival safety in case of recession.
  6. The CPC expansion project got delayed by about 6 months, thus causing reasonable growth in profits little further away, which also might be one of the minor reasons.

When things go well, confluence of factors worked in favor of Rain. When things go bad, confluence of factors going against Rain.

Personally, I believe, the current price is a bottom. Any further fall will make it more attractive for buying.

Discl: I am new to investing and these are my observations with very limited knowledge about either investing or aluminium or corbon industry. Please don’t make a decision of either sell/buy based on my observations.

I have been averaging slowly since 212 rs.

@thirupumpum If I am not wrong, you missed to include 2014 PAT in your PAT numbers, which was the lowest profit in last 10 yrs.

(mukeshbhatt77) #379

I am not sure of the the Impact of Elysis. This was discussed in the earning call, this technology is being tested for many years now and still the commercial viability is not ascertained. However, if this become viable then it will have a major dent on rain earnings. I live in CT, that is closer to rain HQ and have asked few folks and none of them sounded alarm bell on technology substitution.

Dic- I hold a very large quantity of rain from lower levels and not planning to sell or add more.

(Growth_without Debt) #380

(RamC) #381

Refer information on So2 scrubber , by adding this to existing plant , pollution impact can be reduced.

Source : https://link.springer.com/article/10.1007/s11837-014-1248-9