Rain Industries Limited (500339) Earnings Call Transcript & Summary

Thanks, Sarang. We are pleased with the relief granted by the Honorable 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 1.4 million tons per annum to 1.9 million tons per annum. All calciners in India would benefit from such increase in limit importing into -- importing RPC into India. Further, CAQM has also increased the limit for import of CPC by aluminum smelters from 0.5 million tons to 0.8 million tons from the financial year 2025-'26 onwards considering the incremental production of primary aluminum in India. Further, our vertical shaft calciner setup 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 both with 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 material and supply higher volume of finished products to aluminum smelters. There will be a gradual improvement in capacity utilization over the next few quarters. The increased capacity utilization would certainly lower the per ton fixed costs.

Thanks, Jagan. Moving on to the next question. This query is regarding comparing Rain underperformance in its Carbon segment versus the competitors in India. We have noted that competitors' results are not impacted as much as the profitability impacted on Rain in the recent past. Why our operating margins are less than competitors' in India in Carbon segment in the last few quarters?

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 3 continents. It's 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 delay in import allocation 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 exasperated the impact of falling raw material prices, resulting in the increased cost and operational challenges. However, our strategic approach, including increased capacity utilization and optimized import limits, empowers us with operational agility in sourcing raw materials. Going 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.

Okay. Moving on to the next question. We have not heard any update on many of the new areas we embarked upon a few years back, which include vertical farming. Any progress on them? And any new plans to install solar power plant which got scrapped long back given that we have surplus land to utilize now?

We continued with our green power initiative of solar power plants for captive consumption within our cement plants. We have aggregate capacity of 19 megawatts within our Cement business, and combined with our waste heat recovery power plants at both our cement plants, we generate about 40% of our electricity consumption captive within the company from renewable sources. 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 2018 -- July 2018 before the introduction of import restrictions in India. We have to make commercial, operational and logistical changes to increase the capacity utilization of CPC plants over the next few quarters.

Okay. Moving on to the next question. We have a couple of questions on the ACP project. We have developed the ACP through R&D back in 2018 and continue to develop that product. In the last management commentary, it was mentioned that the product is in testing by smelters. Now with RPC restrictions relaxed, what is the future plan with -- on our ACP plants? Are we going ahead with them or reviewing them? Please confirm whether management expects significant contribution from that product in 2024. And to understand whether the blending of CPC in ACP are supplementary, is that correct? If so, will we still continue with ACP CapEx plans in India. And if yes, when is that expected and how much CapEx is needed for that?

As an update on the progress of our ongoing R&D projects 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 essentially for manufacturing the ever-increasing demand for CPC from our valued aluminum smelters. We have received promising feedback from a couple of North American smelters, which has fueled our determination to enhance the competitiveness of manufacturing ACPs. Our efforts are now concentrated on optimizing the conversion cost while utilizing marginal-grade RPC for ACP production, which is essentially a high-dense raw material. Notably, the utilization of ACP will not only bolster cost-efficiency but also contributes a significant reduction in carbon dioxide emissions, aligning with the sustainability growth of our aluminum 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 U.S.A. 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 the CPC manufacturing for use by the aluminum 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.

Thank you. Moving on to the next question. How do you see the Cement business performing in the next few quarters?

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, the region has witnessed an unparalleled momentum in infrastructure development spearheaded by visionary governmental initiatives. From ambitious road networks to transformative urban [ restoration ] projects, these endeavors have not only accelerated the economic progress but also propelled the demand for cement. Moreover, the burgeoning construction of residential dwellings, both in the bustling urban centers and the increase in 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 calendar year 2024, our projections indicate a continuation of this remarkable volume growth trajectory. We remain steadfast in our commitment to meeting this increasing demand, ensuring seamless supply chains and unwavering quality standards to sustain our market leadership. Furthermore, amidst a global economic landscape, we are pleased to report that the price 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 safeguard 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.

Thanks, Jagan. Our final set of questions are for Srinivas. With capacity utilization going to improve in coming quarters, will working capital requirements delay our debt reduction plan in next year? Do we still plan to reduce the debt by at least 15% to 20% over the next 15 months? And noted that $50 million debt is expected to be repaid in April '25, how much more is expected to be repaid during the next one year?

Thank you, Sarang. Our plan to reduce the term debt has not changed. There will be incremental need for working capital with increase in sales volumes, specifically the CPC volume over the 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 USD 50 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.

Okay. Our next question is, what are our strategies to bring down the interest cost?

As we completed the refinancing of both our long-term debt, that is U.S. 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. And euro term loan is a floating interest loan. Any reduction in EURIBOR will reduce the interest cost. We are optimizing our working capital borrowings to the maximum extent possible, and we'll also reduce the amount of long-term debt to reduce the interest cost over the next few years.

Okay. Moving to the next question. The other expense line item 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 expense going forward?

Yes. Other expenses line item includes costs like power and fuel, outward freight, other selling and distribution expenses, repairs and maintenance, consultancy charges, et cetera. The increase in costs compared to last quarter was around 10%. This majorly include increase in the power and fuel costs in our Cement business due to increase in production and sales volume compared to Q3 of 2023. Overall, other expenses line item for the current year was lower than the last year.

Okay. Moving to the next question. What is the likely cost savings from the initiatives taken by management such as consolidating corporate office, optimizing operations, et cetera?

We are consolidating our corporate offices to optimize administrative expenses. We also initiated the process for reduction of certain workforce to reduce the SG&A cost. The benefit of these cost reduction initiatives will be realized partly during current year 2024 and fully next year, CY 2025.

Okay. The next question is regarding the impairment loss during the quarter. We have overall goodwill on balance sheet of approx INR 6,000 crores and we have impaired approximately INR 750 crores. 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, which would have increased due to the increase in debt to 12.5% and the current target operating model of 15% EBITDA for carbon, is it too low 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.

We have assessed the impairment in all cash-generating units and also engaged the 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 the Commission for Air Quality Management from import restrictions in India. We are of the view that with the expected normalization of the margins, with resets of both raw material costs and the finished good prices and increased capacity utilization, the realizable values will be higher than the carrying value. And we'll be reassessing them at the end of each period for any indication of further impairment and we will carry out an in-depth analysis at the end of each financial year.

Thank you. Our last question for today's call is regarding, the management commentary speaks about taking additional time to implement the revised business strategy. Is this pertaining just to the CPC blending strategy, or the other parts of the business as well? And what is the likely duration for implementing this new strategy?

Over last few quarters, we are operating both of our Indian CPC plants in the range of 55% to 60% capacity utilization. Four out of our six kilns in our new SEZ plants 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 startup would take about 3 to 4 months to start manufacturing of CPC. We also need to make logistic arrangements to handle higher volumes. Accordingly, there will be a gradual increase in the capacity utilization of CPC plants, even after the relief is granted by the CAQM in mid of February 2024.

Thank you, Gerry, Jagan and Srinivas. Ladies and gentlemen, this concludes Rain's management Q&A session for the fourth quarter of 2023. Thank you.