Rain Industries Limited has informed the Exchange about Investor Presentation
RAIN INDUSTRIES LIMITED
RIL/SEs/2024
February 29, 2024
The General Manager Department of Corporate Services BSE Limited Phiroze Jeejeebhoy Towers Dalal Street, Fort Mumbai-400 001
The Manager Listing Department National Stock Exchange of India Limited Bandra Kurla Complex Bandra East, Mumbai – 400 051
Dear Sir/ Madam,
Sub: Transcript of Management Commentary on Annual Audited Financial Results for the
Quarter and Financial Year ended on December 31, 2023 – Reg.
Ref : Scrip Code: 500339 (BSE) & Scrip code : RAIN (NSE)
With reference to the above stated subject, please find enclosed herewith the Transcript of Management Commentary on Annual Audited Financial Results (Standalone, Consolidated and Segment) for the Quarter and Financial Year ended on December 31, 2023.
This is for your kind information and record.
Thanking you,
Yours faithfully, for Rain Industries Limited
S. Venkat Ramana Reddy Company Secretary
Regd. Office: Rain Center 34, Srinagar Colony Hyderabad 500073 Telangana, India
Phone : +91 (40) 40401234 Fax: + 91 (40) 40401214 Email:secretarial@rain-industires.com Website: www.rain-industries.com CIN:L26942TG1974PLC001693
Good day ladies and gentlemen.
This is Saranga Pani, General Manager Corporate Reporting and Investor
Relations at RAIN Industries Limited. Welcome to the RAIN Industries
Limited Q&A session for the Fourth quarter of 2023.
With me on the call today are:
- Mr. Jagan Reddy Nellore – Vice Chairman of RAIN Industries Limited.
- Mr. Gerard Sweeney – President of RAIN Carbon Inc.; and
- Mr. T. Srinivasa Rao – Chief Financial Officer of RAIN Industries
Limited
Following the Earnings Presentation and Management Commentary that
we released on February 24, 2024, we have been receiving questions
from certain investors and analysts regarding industry developments and
the status of our expansion projects. Accordingly, RAIN Management will
be addressing those questions in today’s call.
Before we begin, management would like to mention during this call, we
may touch upon forward-looking statements, which encompass various
topics such as performance, trends, objectives, and strategies. Please be
aware that these statements are rooted in our current expectations and
may be influenced by potential risks and uncertainties. Certain factors
could potentially lead to outcomes differing from those predicted by these
forward-looking statements.
With that, we will now start the discussion.
Sarang
Gerry, the first question is with regard to our margins. As we mention
ourselves a converter, acknowledging even a one quarter lag effect,
shouldn’t the margins have been stabilised by now? Why didn't we see
that in the last quarter? Are we really a converter or is there a change in
our business model?
Gerard Sweeney
Thank you. This is a good question. Yes, we are historically a converter
and both our Carbon Calcination and Distillation businesses run on a
managed margin business model concept. As we mentioned several
times during the upcycle in our business, just because we are a converter,
and focus on managing our margins, does not mean we are not a cyclical
business. We still have cycles to our business. As a converter, we strive
for a stated margin of $70-90 per ton for our product. Our product and raw
material prices do vary depending on demand. As such, as a converter,
regardless of the pricing cycle, high or low, we strive to manage the
business in a margin range of $70-90 per ton. This is what provides for
our normalized earnings level of $60-80 million per quarter.
Post Covid, from early 2021 until the end of 2022, we experienced strong
demand that led to escalating pricing throughout the period. As a result,
we had higher than usual margins, due to the constant run up of product
prices far and above our raw material prices. We called that an
“opportunity margin,” where we made margin above our normal $70-90
per ton target. As reiterated during our calls, it is essential for investors to
maintain a realistic perspective regarding our quarterly earnings,
particularly in relation to normalized margins. While we have seen higher
margins in some quarters, it is crucial to understand that sustained
earnings above normalized margins may not always be the norm. Our
commitment remains steadfast in delivering sustainable growth over the
long term, even if it means fluctuations in some quarters.
In the first half of 2023, our markets experienced a significant downturn,
primarily triggered by the resurgence of Chinese exports amidst their
economic slowdowns. This led to a gradual retreat in prices throughout
Q2, with some stabilization observed mid-year. However, the summer
months saw a further decline in prices, fueled by a reduction in raw
material costs, largely driven by increased Chinese exports once again.
Since then, the market for our products has witnessed a steep decline,
plummeting from previous highs ranging between $900 to $1400 per ton
depending on the product, to current levels hovering around $400 to $700
per ton.
While it would have been ideal for prices to decline steadily, mirroring the
market’s ascent, the reality has been a protracted and erratic descent.
This prolonged downturn has hindered our ability to swiftly recalibrate raw
material costs and restore our customary margins. Over the past few
quarters, we have been relentlessly tailing product and raw material prices
as they fluctuate downwards.
Encouragingly, we believe we have now reached the market’s nadir in Q1
and are hopeful about a return to more conventional earnings in the first
half of this year. However, it is important to acknowledge that we still have
to work through overpriced inventories to attain this goal. This challenging
market environment underscores the importance of adaptability and
strategic decision-making in navigating through turbulent times.
Sarang
Next Question: Management mentions a normalized EBITDA of $70-90
per ton margin as a converter. Does that mean this should result in a
higher margin percentage realization during lower pricing periods?
Gerard Sweeney
Absolutely, you are exactly correct. It is a proven fact that re-establishing
our margin percentage will yield a higher realization percentage compared
to when we had higher pricing. This historical trend underscores why we
prioritize discussing our business in terms of unit margin rather than
percentage margin. Whether our product is priced at $300 or $1000 per
ton, our focus remains on maintaining our normal per ton margin. This
approach ensures that we remain resilient and adaptable to market
fluctuations, ultimately safeguarding our profitability.
Sarang
Thanks Gerry. The next question is whether we still have some high value
inventory carrying over from the last few quarters or are we done with
those at the end of Q4? Also, can we expect contribution on the delayed
and deferred shipments of Q4CY23 in the coming months?
Gerard Sweeney
Thank you for this question, as it allows me to explain more clearly what
has been happening during this prolonged fall in product prices. We have
made considerable progress in utilizing our high-value inventories from
the previous year. While we do not have precise figures, it is likely that we
will deplete the remaining stock by the end of Q1, positioning us for
profitability across most products by Q2. However, our focus will be on
restoring our traditional managed margins as we navigate through this
inventory clearance phase, presenting a challenge we are eager to tackle
in Q2. Rest assured; we are fully committed to achieving this goal as
swiftly as possible.
Sarang
The next question is, in the opening remarks it was mentioned about some
additional CPC and CTP capacity to be introduced in India and elsewhere.
Is it possible to quantify the upcoming capacities and mention the regions
in which these capacities are likely to come up? Will this negatively impact
the demand-supply scenario for both the products?
Gerard Sweeney
In the short term, the imminent capacity additions, constituting 10-15% of
the existing capacity in this region, may pose challenges to the demand-
supply equilibrium for both products. However, looking ahead over the
next couple of years, we anticipate a gradual absorption of this
incremental production with the demand arising from the aluminium
capacity expansions in India and the Middle East. These expansions of
CPC and CTP are poised to align with new customer expansions,
fostering a more balanced market landscape. At present, beyond these
forthcoming expansions, there are no confirmed plans that have come to
our attention. This forecast underscores a strategic approach to
navigating market dynamics while maintaining a vigilant eye on potential
opportunities for growth.
Sarang
What are the capacity utilizations for carbon and advanced materials in
CY23 and what can we expect in 2024?
Gerard Sweeney
Our Carbon segment operated in the range of 65-70% during 2023. Our
Advanced Materials segment operated at a capacity utilization of 75%. As
we navigate through the ebbs and flows of our industry, it is important to
acknowledge the seasonal variations that impact our operations,
particularly with certain products. Historically, we have observed lower
demand for our seasonal offerings during the fall and winter months,
aligning with our fourth and first quarters, respectively.
While we cannot pinpoint exact targets for plant capacity utilization in
2024, we are optimistic about the trajectory ahead. We anticipate
improved capacity utilization in our CPC plants as we progress through
the year, given the recent relief granted by the Hon’ble Commission for Air
Quality Management or CAQM from petroleum coke import restrictions in
India. Also, given the disruption to global shipping due to recent hostile
acts, we are hopeful our Advanced Materials segment will continue to
benefit from the higher demand we are currently experiencing in the
future..
Sarang
Our next question is relating to Advanced material segment, Europe has
seen an exodus of major players from the chemicals industry as well as
closure of aluminum smelters. Will this have had an impact on RAIN’s
customer and supplier base?
Gerard Sweeney
It is true that European chemical industry has seen a major impact over
the last several years. This is mainly due to oversupply in the region. In
most cases, we are or were not direct competitors with large players like
Dupont, BASF and others in the marketplace. They made huge volumes
of fairly stock chemicals in a standard grade. We are a more niche player
making specific chemical compounds for our customer base. The only
impact we are seeing specific to consolidation of these major players, is
on the side of some raw material supply. We are comfortable with our
position though, and our placement in the market long term.
Sarang
Are there any segments/ products within the advanced materials business
that are facing structural headwinds and may need to be reviewed from a
business viability perspective going forward?
Gerard Sweeney
In
the volatile
landscape of Advance Materials, challenges are
commonplace, particularly with fierce competition from Asian players.
However, our strategic niche
in Europe, specializing
in custom
compounds on a local scale, affords us resilience amidst these
headwinds. While growth may be tempered, our focus remains on adding
substantial value
to downstream
feeds, ensuring stability and
sustainability in the long term.
Sarang
The advanced materials business was a disappointment in H2 2023.
Though not a subject of impairment, the continued low margins despite
plant reopening are a cause of concern. what is the roadmap to get to
higher EBITDA (at least 15%) for this product group?
Gerard Sweeney
While the Advanced Materials segment faced challenges in the second
half of 2023 due to plummeting product prices, we have successfully
navigated through this phase and anticipate brighter prospects ahead.
Our strategic restructuring initiatives and the reduction of major capacities
in Europe, are poised to bolster our historical margins and position us for
sustained growth in the future.
Sarang
Can you provide the capacity utilisation of the HHCR plant for the last six
months and the expected utilization for 2024?
Gerard Sweeney
In regard to the update on the HHCR Plant, we are currently operating at
about 30% - 40% capacity. With two major suppliers permanently closing
their European operations and the ongoing Red Sea shipping crisis, our
customers are reassessing their procurement strategies. To ensure a
steady supply, they are increasingly considering the local sources. This
strategic shift is resulting in an uptick in sales demand, underscoring the
resilience of the HHCR business. As we navigate these challenges, we
remain optimistic about our trajectory, buoyed by the prospect of
continued improvement alongside broader economic recovery.
Sarang
What is the expected capex for 2024?
Gerard Sweeney
We expect the capex for 2024 should be in the range of US $75-80 Million
including turnaround costs. This is our normal level of Capex without any
major projects.
Sarang
Thank you, Gerry. We now have a few questions for Jagan. The first
question is relating to the recent CAQM order. Have we got full import
freedom for our new vertical shaft plant (SEZ)? Can we import RPC as
well CPC for blending? When can we expect the announcement on SEZ
unit commissioning to the full capacity? And restarting of the second line
that was closed earlier? With the latest CAQM orders can we expect the
capacities to be utilized above 90% plus? If yes, how soon?
Jagan Nellore
Thanks, Sarang. We are pleased with the relief granted by the Hon’ble
Commission for Air Quality Management or CAQM by relaxing petroleum
coke import restrictions. The overall limit for import of RPC by Calciners
was increased from 1.40 million tons per annum to 1.90 million tons per
annum. All Calciners in India would benefit from such increase in limit for
importing RPC into India. Further, CAQM has also increased the limit for
import of CPC by Aluminium Smelters from 0.5 million tons to 0.8 million
tons from Financial Year 2025-26; considering the incremental production
of Primary Aluminium in India. Further, our Vertical Shaft Calciner set-up
in the Special Economic Zone is eligible to import both RPC and CPC for
use within the SEZ Plant. These measures would help us to increase the
capacity utilization of our CPC Plants. We already initiated various steps
for ramping-up the capacity utilization; including discussing with both our
customers for incremental supplies and with the suppliers for sourcing
incremental sourcing of raw-materials. We also need to make logistical
planning to source higher volume of raw-materials and supply higher
volume of finished products to Aluminium Smelters. There will be gradual
improvement in Capacity Utilization over next few quarters. The increased
capacity utilization would certainly lower the per ton fixed costs.
Sarang
Thanks Jagan. Moving on to the next question, Query regarding
comparing RAIN's underperformance in its Carbon segment versus its
competitors in India. We have noted that competitors results are not
impacted as much as the profitability impact on RAIN in the recent past.
Why our operating margins are less than competitors in India in carbon
segment in last few quarters.
Jagan Nellore
Our performance is not comparable to other players in the industry,
primarily because we operate on a global scale, with operations and
plants strategically positioned across three continents. It is crucial to
acknowledge that the market dynamics in India significantly differ from
those in other parts of the world.
In the past, we proactively maintained higher inventory levels of various
raw material grades in India to safeguard against potential disruptions in
RPC supply resulting in shutting down of calcination facilities. This was
essential to ensure uninterrupted facility operations, in the event of lower
allocation or delays in import allocations and to meet the stringent quality
specifications demanded by our valued customers. However, this
approach, while necessary, had its drawbacks, particularly when faced
with fluctuating raw material prices. The elevated inventory volumes
exacerbated the impact of falling raw material prices, resulting in
increased costs and operational challenges. However, our strategic
approach, including increased capacity utilization and optimized import
limits, empowers us with operational agility in sourcing raw materials.
Moving forward, we are committed to enhancing our operational efficiency
and flexibility, leveraging our global presence and optimizing our supply
chain management. By doing so, we aim to mitigate risks, drive down
costs, and further strengthen our position in the industry.
Sarang
Moving on to the next question, we have not heard any update on our
many of the new areas we embarked upon few years back which included
vertical farming. Any progress on them? Any new plans to install solar
power plants which got scrapped long back, given that we had surplus
land to utilize for same?
Jagan Nellore
We continued with our Green Power Initiative of Solar Power Plants for
captive consumption within our Cement Plants. We have aggregate
capacity of 19 MW within our Cement Business and combined with our
Waste-heat recovery Power Plants at both our Cement Units; we generate
40% of our electricity consumption captively within the Company. Our
immediate target is to implement the Global CPC Blending Project as
quickly as possible. We had worked on such Global CPC Blending Plan
until July 2018, before introduction of import restrictions in India. We have
to make commercial, operational, and logistic changes to increase the
capacity utilisation of CPC Plants over next few quarters.
Sarang
Moving on to the next question, we had developed ACP thorough R&D
back in 2018 and continued to develop that product. In last management
commentary it was mentioned that the product is in testing by smelters.
Now with RPC restrictions relaxed, what is the future plans with our ACP
plants? Are we going ahead with them or reviewing them? Please confirm
whether management expects significant contribution from that product in
2024. To our understanding blended CPC and ACP are supplementary,
is that correct? If so, will we still continue with ACP Capex plans in India?
If yes, when is that expected and how much Capex is needed for that?
Jagan Nellore
As an update on the progress of our ongoing R&D project focused on
Anhydrous Carbon Pellets or ACP, we would like to inform that this
initiative is strategically aimed at meeting the long-term demand for RPC,
essential for manufacturing the ever-increasing demand for CPC from our
valued Aluminium Smelters.
We have received promising feedback from couple of North American
Aluminium Smelters, which has fueled our determination to enhance the
competitiveness of manufacturing ACP. Our efforts are concentrated on
optimizing the conversion cost while utilizing marginal grade RPC for ACP
production, which is essentially high dense raw material. Notably, the
utilization of ACP will not only bolster cost-efficiency but also contribute to
a significant reduction in CO2 emissions, aligning with the sustainability
goals of our Aluminium Smelters.
Moreover, our exploration extends beyond mere substitution. We are
actively investigating diverse applications for ACP and are diligently
pursuing patent protection to safeguard our intellectual property rights.
Once the operations of the ACP Plant in the USA are stabilized, we will
seamlessly transition to advancing the ACP Project in India.
It is important to emphasize that while ACP does not directly contribute to
incremental revenues, its adoption as a substitute for RPC or in CPC
manufacturing processes for use by the Aluminium Smelters underscores
its strategic importance. ACP represents a tangible opportunity for our
partners to not only optimize costs but also demonstrate a commitment to
environmental stewardship. ACP is a transformative journey shaping a
future that is both economically viable and environmentally sustainable.
Sarang
Moving on to the next question, how do you see the Cement business
performing in the next few quarters?
Jagan Nellore
The cement demand is expected to surge across South India, fueled by a
multitude of factors that promise to drive sustained growth in the industry.
In recent times, this region has witnessed an unparalleled momentum in
infrastructure development spearheaded by visionary governmental
initiatives. From ambitious road networks to transformative urban
rejuvenation projects, these endeavors have not only accelerated
economic progress but also propelled the demand for cement.
Moreover, the burgeoning construction of residential dwellings, both in the
bustling urban centers and the burgeoning rural landscapes, has
contributed significantly to the escalating demand for cement products.
This trend underscores the robustness of our market and the enduring
need for quality building materials to cater to the evolving needs of our
communities.
As we look ahead to the promising prospects of CY 2024, our projections
indicate a continuation of this remarkable volume growth trajectory. We
remain steadfast in our commitment to meeting this burgeoning demand,
ensuring seamless supply chains and unwavering quality standards to
sustain our market leadership.
Furthermore, amidst the global economic landscape, we are pleased to
report that the prices of critical inputs such as coal and fuel-grade
petroleum coke remain stable and well within control. This scenario not
only bolsters our operational efficiency but also safeguards the resilience
of our cement business, especially considering that almost 40% of the
energy required for the cement plant operations comes from captive
renewable energy sources.
Sarang
Thanks Jagan. Our final set of questions are for Srinivas.
With capacity utilization going to improve in coming quarters, will working
capital requirements will delay our debt reducing plan to next year? Do we
still plan to reduce the debt by at least 15-18% over the next 15 months?
Noted that $50 million debt is expected to be repaid in April 2025. How
much more is expected to be repaid during the next one year?
Srinivasa Rao
Our plan to reduce the Term Debt has not changed. There will be
incremental need for working capital with increase in sales volume,
specifically CPC volume over next few quarters. We will meet such
incremental need of working capital either through Working capital loans
or from funds released from operations through lower prices for our end-
products. We have adequate liquidity to repay the balance amount of CY
2025 Notes of US$ 50.0 million due in April 2025. Our focus is to reduce
the Euro-denominated Term loan, both as per the amortization schedule
and also to use any surplus cash from the business.
Sarang
What are our strategies to bring down the interest cost?
Srinivasa Rao
As we completed the refinancing of both our Long-term Debt (US Dollar
denominated second-lien bonds and Euro denominated first-lien bank
debt) during August’2023; before they become current and extended their
maturities to September 2029 and October 2028, respectively. As Euro
Term Loan B is a floating interest loan, any reduction in EURIBOR will
reduce the interest cost. We are optimizing all working capital borrowings
to the maximum extent possible, and we will also reduce the amount of
long-term debt to reduce the interest cost, over next few years.
Sarang
The “other expenses” line time increased significantly in this quarter. What
are the main reasons for the increase and are these temporary or
permanent in nature? What is the likely run rate of other expenses going
forward?
Srinivasa Rao
Other expense line item includes costs like power and fuel, outward
freight, other selling and distribution expenses, repairs and maintenance,
consultancy charges etc. The increase in the cost compared to last
quarter was around 10%. This majorly include increase in the power and
fuel cost in cement business due to increase in production and sales
volumes compared to Q3 2023. Overall other expenses line item for the
current year was lower than last year.
Sarang
What is the likely cost saving from the initiatives taken by the management
such as consolidating corporate offices, optimising operations etc.?
Srinivasa Rao
We are consolidating corporate offices to optimize administrative
expenses and we also initiated the process for reduction of certain
workforce, to reduce the SG&A Costs. The benefit of these cost reduction
initiatives will be realized partly during CY24 and fully in CY25.
Sarang
The next question is regarding the impairment loss during the quarter. We
have overall Goodwill on balance sheet of approx. INR 6,000 crore. We
have impaired approx. INR 750 crore. Request you to share the CGU wise
impact. What is the threshold margin for carbon business below which
such a review is triggered again. With the higher Cost of capital (would
have increased due to increase in debt to 12.5%), the current Target
operating model of 15% EBITDA for carbon is too close for comfort and
management should consider aiming for a higher EBITDA target to have
a sustainable business - any clarification on this would be highly
appreciated.
Srinivasa Rao
We have assessed the impairment in all Cash Generating Units and also
engaged Independent Experts to analyze the potential impairment in
certain CGUs. Both the management estimates as well as the experts’
reports were reviewed by the auditors and made provision for impairment
in the CGUs of Carbon – Calcination and Carbon – Distillation. For the
impairment charge in Carbon – Calcination; we have taken the revised
business plan, considering the relief granted by CAQM from import
restrictions in India. We are of the view that with expected normalization
of the margins; with re-sets of both raw-material costs and the finished
goods prices and increased capacity utilization, the realisable values will
be higher than the carrying-values and we will be re-assessing them at
the end of each period for any indication of further impairment and an in-
depth analysis at the end of each financial year.
Sarang
The management commentary speaks about "taking additional time to
implement the revised business strategy". Is this pertaining just to the
CPC blending strategy or to other parts of the business as well? What is
the likely duration for implementing the new strategy?
Srinivasa Rao
Over last few quarters, we are operating both of Indian CPC Plants in the
range of 55% - 60% capacity utilization. Four out of six Kilns in our SEZ
plant are operating at lower capacity and the remaining two kilns were not
yet started, considering the shortage of raw materials. Now, we initiated
the steps to start the operations at the remaining two kilns and the process
of start-up would take about 3 – 4 months to start manufacturing of CPC.
We also need to make logistic arrangements to handle higher volumes.
Accordingly, there will be gradual increase in the capacity utilisation of
CPC Plants, even after the relief is granted by CAQM in mid of February
2024.
Thank you, Srinivas, Jagan and Gerry.
Ladies and gentlemen, this concludes RAIN’s Management Q&A session
for the Fourth quarter of 2023.