We are happy to share that Rain Industries Ltd. has reported a good set of results which were better than our expectations. This quarter was one of the most challenging quarters in the past 2 years in terms of business environment and global events unfolding around the business of our company but the way our company has managed to pull off a strong performance speaks volumes about the ability of the management to perform even in challenging environment. After the last quarter result, many investors were worried about the company’s prospects and trend of earnings. This quarter’s result gives us a sense of comfort on various fronts keeping our investment rationale intact. Further the clarification given by the management on the earnings call on various concerns surrounding the business would soothe the nerves of many investors. The report further highlights reasons for the same.
The strong performance can be attributed to the following reasons
- Superior cost management as compared to peers
- Higher capacity utilizations
- Focus on Advance materials business
- Reduction in finance cost
- Favorable impact of currency fluctuations
Q2-2018 was a turbulent quarter for the Aluminium Industry globally. There were lot of uncertainties that prevailed because of geo-political reforms:
- UC Rusal Sanction
- Alunorte Refinery cutting down production of Alumina
- Trade Wars
Despite this, aluminium demand which is the major driver of Rain’s products remains very strong. The LME Aluminium inventory levels continued to remain at low levels supporting the Aluminium prices to be above $2000.
Pockets of Strong Production
Aluminium Production in Middle East and Asia(ex of China) in H1 CY2018 increased by 3.9% and 12.7% respectively as compared to H1 CY2017.
ALCOA restarted 2 of its 3 curtailed plotlines in Warrick, USA. Century restarted 1 of its 3 curtailed plotlines in Hawesville, USA. The restart of curtailed capacity was affected due to power outages. As per our discussion with analysts, the problem is expected to be resolved this year. The smelter restarts will further benefit Rain as most of the plants are located in US.
Update on Trump Sanctions on Rusal:
The sanction which caused an upheaval in the Aluminium Industry in Q2-2018 created a lot of uncertainities on aluminium and its allied industries is expected to be lifted soon as the composition of Board of Directors is getting changed.
Business Segment Updates
- Carbon Business Segment
- Calcined Petroleum Coke
The CPC volumes which was a huge concern in the last quarter has recovered in this quarter. The volume increased by 21.07% reaching 474kmt. Management forsesee a strong demand going forward. As the winter cut in China starts, the management believes it has an opportunity to source raw materials at cheaper prices and hence expand margins in that scenario.
Hindalco and Vedanta are the major customers of Rain Industries in India. With decline in supply of CPC by Goa Carbon as shown in the monthly update, Rain stands to benefit.
- Coal Tar Pitch
The Coal Tar Pitch realization declined slightly in this quarter. The reason is because of appreciation of US Dollar against Euro. Hence, the prices in Euro terms were stable.
The pricing trend remained favorable due to tight supply and increase in demand. .
From non aluminium perspective, Showa Denko(graphite electrodes manufacturer) is expanding its capacity from 45,000 tonnes to 75,000 tonnes by the end of 2018 in North America. This will further increase demand for CTP in North America.
- GPC (raw material for CPC)
The company did face higher input cost in this quarter. Management also highlighted that the surging GPC prices have moderated in Q3 2018.
Supply Contsraints due to MARPOL 2020
IMO has set a global limit for sulphur in fuel oil used on board ships of 0.50%(lowest sulphur coke) m/m (mass by mass) from 1 January 2020. The current global limit for sulphur content of ships’ fuel oil is 3.50% m/m (mass by mass). This is a significant change to bunker fuel. This can have an impact on production of green petroleum coke and also on the price dynamics and availability of different grades of petcoke. Hence, affecting the carbon part of the business and can cause an increase in freight rates.
Rain may not face much difficulty due to long standing relationship with suppliers, ability to use low grade coke efficiently (blending and SO2 Scrubbing),
Overall, the increase in revenue in Carbon Segment was led by higher CPC Volumes. The company was also favorably impacted by appreciation of US Dollar and Euro against INR. This segment did face a squeeze in margins this time primarily due to higher input cost. But considering the improving demand and lower input cost going forward, we may expect the margins to improve.
The Carbon Segment is operating at 80-85% utilization levels.
- Advanced Carbon Material
This segment reported good results and is expected to perform well in future. The demand for products is seasonal and realizations may vary. Some raw materials are indexed to crude prices. Higher crude prices in the quarter translated into higher raw material costs. Q2 and Q3 are stronger quarters for this segment.
Ralf Mexiner joins Rain Carbon as head of Advanced Carbon Material Division.
He served as BASF’s senior executive on a project to develop a 21st century customer service organization for the company’s Europe, Middle East and Africa region. Earlier, he spent nearly five years in the United States and China as senior vice president of BASF’s battery materials business. Meixner’s career also includes experience in Africa, Asia and Europe, supporting sales and marketing of a range of petrochemicals and intermediates.
This segment catering to sale to lithium ion battery industry led by a person of this global background and experience with battery technology may uplift the performance of this segment.
- Cement Segment
This segment is operating at 55% capacity utilization. The EBITDA Margin declined due to higher operating cost.
- Other Highlights
- Petcoke Ban
As on 26th July, 2018, The Supreme Court allowed 4 industries to use and import petcoke as feedstock. There is still clarification needed for Aluminium and Steel Industries. The company is also seeking clarification on the same from the Supreme Court and is sure to get exemption as the whole aluminium industry would be affected by this. The company maintains 3 months inventory and the production wouldn’t be impacted. The company also uses petcoke as a feedstock causing minimal pollution. The sulphur content in the petcoke used is also low.
- CPC plant in Vishakapatnam. The project is expected to be completed during Q3 CY19. Estimated Capex is US$ 65 Million.
- Hydrocarbon Resin plant in Germany: The project is expected to be completed during Q3 CY19. Estimated Capex is US$ 66 Million.
- Debottlenecking of petro tar distillation facilities in Germany, Belgium and Russia: The project is expected to be completed during Q4 CY18.
- Upgradation of Cement Plant: The project is expected to be completed by end of Q2 CY19. Estimated Capex for the project is 42 crores.
All the capex would be funded through internal accruals only.
Going forward we believe the following things would be aiding the performance of our company
- China winter cuts
- Consolidation in the industry
- Restarts of US aluminum smelters
- Higher production of Electronic Vehicles
- Availability of Raw materials
Overall, we maintain a positive outlook on the company.