Rain Industries Limited (RAIN.BO) Earnings Call Transcript & Summary

We have made all necessary preparations to ramp up production at both plants, HHCR in Germany and the SEZ CPC plant in India. Currently, we are awaiting the required approvals for the SEZ plant in India and anticipating a surge in demand for HHCR in Germany. Fortunately, we do not see any significant investments needed to stabilize these new facilities. Additionally, due to the recent decrease in raw material and finished good prices, our existing working capital should be sufficient for meeting the incremental funding requirements.

Moving on to the next question. What the CapEx is planned for 2024?

Over the past couple of years, our management and Board have maintained a cautious approach when it comes to major capital expenditures. As you may have observed, there have been minimal new capital outflows during this period despite several proposals being in the pipeline. Our primary object remains debt reduction in the near future. However, it is essential to emphasize that maintaining our existing plants requires ongoing maintenance and capital expenditures, approximately USD 70 million to USD 75 million per annum is allocated for this purpose. This investment ensures the smooth operation and longevity of our facilities.

Okay. Moving on to the next question. We are expecting a 50% capacity utilization in our HHCR facility by end of the year. What is stopping us from ramping up the capacity faster? Is it mainly due to the stability of the plant or is it more on demand issue?

As previously discussed, HHCR products are high quality and environmentally friendly that meets the requirements of our diverse clientele across various industries. However, it is essential to acknowledge that HHCR is an energy-intensive product and the cost-effective production remains a critical goal. Over the past 2 years, we have grappled with a significant challenge to soring energy prices. This surge has directly impacted our plants operational capacity. Notably, some of our competitors in the European region have either permanently or temporarily shut down their plants due to the same energy-related concerns. But there is good news on the horizon. Energy prices are gradually returning to pre-spike levels and recent developments such as the Red Sea crisis have led to increased demand. As a result, we are strategically ramping up our plant's capacity to 50% for the time being. Our long-term plan involves a gradual production increase to 70% to 80%, all while carefully navigating the volatile market dynamics. As you are aware, balancing supply and demand out are crucial. We aim to avoid situations where excessive inventory outpaces demand, adversely affecting pricing. Moreover, the preference of the European players to source globally rather than from China bodes well for our stability and sustained growth -- demand growth. Our commitment to quality, efficiency and adaptability positions us well for the future.

Okay. Moving on to the next question. Can you provide some guidance on the improvement performance of cement EBITDA in 2024?

As we analyze the current trends and future prospects, we discover a landscape shift by both challenges and opportunities for the Indian cement industry, which is on an upward trajectory. According to a recent CRISIL report, we can expect moderate growth of 4% to 6% in the fiscal year '24-'25. However, this growth comes against the backdrop of a high base set by the previous 3 fiscal years. Rising raw material costs pose a challenge that the industry must navigate. Encouragingly, power and fuel cost for the cement sector are projected to decrease by 13% to 15% in the current fiscal year. This reduction is attributed to softening coal prices. Such cost optimization measures are crucial for sustaining growth and profitability. Adding to this, as mentioned in our earnings presentation, our expanded solar electricity generation to the existing waste heat power generation will not only reduce the carbon footprint but also reduce our overall cost of production. India's cement industry is gearing up for expansion. Over the next 5 fiscal years, it aims to augment its capacity by a staggering 150 million tonnes to 160 million tonnes per annum. This strategic move is fueled by the anticipation of increased demand from the infrastructure and housing sectors. Currently, the industry has a manufacturing capacity of 595 million tonnes per annum, notably approximately 119 million tonnes per annum were added in the previous 5 fiscal years, reflecting the industry commitment to growth. The demand for cement is poised to surge in the current fiscal year due to the government's unwavering focus on 2 critical areas: affordable housing and infrastructure development. Despite the positive outlook, we must acknowledge the realities. Incremental supply and intense competition have led to roll regularizations. In the near term, we will need to navigate these challenges while capitalizing on growth opportunities that will have an impact on the use case.

Thanks, Jagan. Our final set of questions are for Srinivas. With USD 50 million senior secured notes due in April 2025 being short term in nature, what is the plan source from the management in repaying the debt? Also, can you provide some guidance on overall debt reduction by management over the next 1, 2 years?

Thank you, Sarang. We are sitting with a liquidity position of USD 473 million as of the end of quarter -- as of the end of March 31, 2024, which include cash balance of approximately USD 240 million and the balance relating to the undrawn credit facilities. As mentioned in the earlier calls, we are moving from the high-priced market to the downfall cycle, which will benefit us from the working capital release point of view and increase in the cash inflows. That USD 50 million senior secured notes due in April 2025, which is the lowest cast debt in our entire capital structure. We are vigilant about the same and are confident in repaying the same on the due date without making any incremental borrowing. Just to add, during our refinancing in August 2023, we have reduced the overall debt by about USD 130 million, $80 million of long-term debt and $50 million of short-term debt. Post refinancing, we repaid approximately EUR 10 million of term loan B in Germany in the fourth quarter of 2023. In addition, we also paid EUR 33 million of debt in April 2024, totaling to a reduction of approximately USD 43 million -- EUR 43 million till date post refinancing the overall debt.

Okay. Moving on to the next question. On Page 11 of the investor presentation. Our cash outflow from financing activities is INR 521 crores with our interest payment being INR 235 crores and debt repayment of INR 8 crores, what relates to the remaining outgoing?

Just to clarify in detail. The interest expense of INR 235 crores in the income statement is based on accrual basis. Whereas in the cash flow statement, the outflow of interest payment is based on actual cash movement, which can be higher or lower than the actual -- than the accrual for the quarter. In the current quarter, there was an interest payment outflow of INR 345 crores in the financing activities as the interest was due for payment on a half yearly basis on the senior secured notes in U.S. in March and September. Apart from this, there was interest on lease liabilities amounting to a INR 25 crores during the quarter and payment of noncurrent borrowing amounting to INR 8 crores. The balance amount majorly relating to distribution of dividend to minority shareholders during the quarter. As mentioned in our unaudited financial results, point #5 in the notes to the account, which is also classified as financing cash flows.

Our next question is on effective tax rate. What is our consolidated effective tax rate? Are there ways to optimize our tax outflow? Last year, our tax outflow was INR 344 crores, which -- with our adjusted profit after tax being INR 153 crores.

This is a good question. Based on the entities and locations we operate across the globe and the enacted tax rates at the respective tax jurisdictions, our global effective tax rate should be in the range of 30% to 32%. However, as we mentioned in earlier earnings calls, we are not recognizing the deferred tax assets in Germany and tax attributes like unclaimed interest expense carry forward and unabsorbed tax loss carryforward due to the accounting standards restrictions in certain situations. Similar is the case in U.S., post the Tax Cuts and Jobs Act of 2017 where there's a limitation on the interest expense allowance, certain deferred tax asset portion were unrecognized. Also with few entities in profit with low tax rate and few entities in losses with high tax rate will have impact on the overall effort to tax rate for the group.

Thank you. Our next question is during the closing remarks in the last slide of the presentation, it was mentioned that the focus for 2024 was cost control. Also in the call, it was mentioned that some initiatives were taken in this regard already. Can you please elaborate on the same?

Thank you, Sarang. As mentioned by Mr. Jagan during the earnings presentation discussion, we cannot control the market, but we can control our costs. During this down cycle, where the prices are falling from the abnormal range, we see more pressure on the margins and unlike our earlier cycles, which lasted for 2, 3 quarters, we are seeing this for a longer period. During this tough situation, management is diligently working on various initiatives to reduce the cost, which we can -- by some proactive steps. The measures we have taken are like consolidating corporate offices, reduction of manpower, reduction in the travel cost, optimizing the operational performance, et cetera. We should see the benefit of these cost saving initiatives in the coming periods.

Okay. Our next question is, we are sitting with a cash position of approximately USD 240 million. What are the management plans in optimizing the same? Are we generating any treasury income on the same? And where is it reported in the statement of profit and loss? Also, what is the management strategy in utilizing the same when we are sitting on a high debt in the books?

This is a good question. If we see the debt in the group is mostly residing in U.S. and Germany in the form of senior secured notes and Term Loan B, respectively. However, the cash balance of $240 million is in various geographies that we operate, including India, U.S., Germany, Canada and Belgium. There are tax implications if we want to move the funds from one tax jurisdiction to the other tax jurisdiction. And also considering the maintenance CapEx and other working capital requirements, we maintain minimum cash balance required at each legal entity. If any excess funds are available, they are generally invested in fixed deposits on which we earn an interest income depending on in which geographies such fixed deposits are kept. The interest income is presented in the financial line item of other income in the statement of profit and loss account. Just to add, we generated an income of INR 1,212 million for the year ended December 31, 2023, and INR 476 million for the quarter ended March 31, 2024.

Okay. Our last question for today's call is, during the last quarter, there were additional onetime finance costs that were expensed off. Hence, the current quarter finance cost should have been lower by approximately in INR 30 crores, but it was not the case. Any reason? And what would be the steady finance cost per quarter?

We have completed the refinancing in August 2023 and hence, there was onetime additional impact of INR 347 million on account of charge of deferred finance costs relating to prior financing during third quarter of 2023. As the refinancing got completed in mid of Q3, we have seen partial effect of increase in interest costs during that period. During fourth quarter of 2023, we have seen the first time full impact of increase in interest expense on the overall debt. Hence, the interest cost was INR 242 crores in Q3 and INR 245 crores in Q4 of 2023. In Q1 of 2024, we have seen interest expense of INR 235 crores, which reduced due to partial reduction Term Loan B to the extent of EUR 10 million. Based on the current position, we expect the interest cost to continue in the same range and may reduce further in future based on reduction in overall debt.

Thank you, Gerry, Jagan and Srinivas. Ladies and gentlemen, this concludes Rain Management Q&A session for the first quarter of 2024. Thank you.