Why Rain Industries is a good buy for long term?

Q1. What is the reason for such a steep fall in Rain Industries after results?

• Results were lower than the very high expectations built in.
• CPC prices stopped rising in India.
• No reduction in debt, gross debt still being high around 1 billion $ (6800 crores)
• The arbitrage funds and few HNIs exited in a hurry, creating panic.
• Ongoing deep corrections in mid cap companies has further aggravated the negative sentiment.
• Short term traders making a killing by shorting while retail investors got panic.
• Many retail investors got trapped into buying this share assuming that CPC/CTP prices will keep rising every month like Graphite Electrode prices.

Q2. So, were the Q1 results so bad?

Positives:

• There is margin expansion across the carbon segments (both CPC and CTP).
• Net profit and EBITDA was good and has shown good growth.
• CTP prices are still rising. Also CTP production should increase by this year end.
• Though CPC prices have stabilized in India this year, it is still rising in USA.
• Aluminium production in USA is expected to rise considerably because of tariffs imposed by Trump on imports. Thus creating huge demand for CPC and CTP in USA.
• New expansion announced for very high margin white resins. Should help the company in deriving more profits from new high growth areas through advanced Materials.
• Interest charges come down as expected by around 20% from last qtr.

Disappointments:

• Slightly lower sales volume of CPC. New import tax in India on pet coke imports hurt the sales and margins of CPC in India.
• CPC prices have stopped rising after rising for last 18 months.
• No reduction in debt, gross debt still being high around 1 billion dollars. No plan of significant reduction in debt in next 18 months.

All in all results were very good. But high expectations from results have got the stock price to downward journey.

Q3. Now what is the current scenario of CPC/CTP and Aluminium industry?

• CPC and CTP demand is directly linked to the production of Aluminium. More aluminium produced, then more CPC is consumed. It has nothing to do with aluminium prices. Overall demand of aluminium is expected to continue rising for next 3-7 years.
• Alumina prices:  Alumina prices have corrected from highs and should now be stabilizing.  Alumina price reducing in china. Now it is USD 475 per ton. Rest of word it is expected to come down to 350$.
• Sanctions on RUSAL  : The sanctions on RUSAL is now seen going away in due course. It augurs well for aluminium production worldwide which will help in strong pick up of demand for CPC and CTP.
• Tariffs imposed by Trump on aluminium imports: Aluminium companies in USA are expanding this year because of tariffs imposed by Trump on aluminium imports. That augurs well for Rain, because it is the major producer of CPC in USA and can get better pricing because of greater demand.

Q4. Does Rain Ind has any cutting edge product or is a simple commodity company? 
       Electric vehicles & lithium-ion batteries:

• Rain industry is now focusing more on high value chemicals space. They have classified such fast growing products under AM (Advanced Materials) segment. Few products under this segment are showing more than 200% growth year on year.
• Electric vehicles depend on high performance lithium-ion batteries. Rain ind have advanced the use of special pitches in the anode-grade graphite essential to in the manufacture of these batteries.
• Carbon brushes used in electric engines utilize binders made from Rain supplied CTPs.
• The copper wire windings found in every electrical engine are insulated with cresol mixtures of which Rain is a leading provider worldwide.
• Rain is also a major supplier of chemicals for anode coating of lithium-ion batteries.

Q5. What will happen to Rain Ind if govt bans use of pet coke across the country? 

•  There will be news of country wide ban on use of pet coke, likely to be announced in June 2018. Rain stock might react negatively to that. But it should recover. Remember Rain uses Green Pet Coke as raw material which is a low sulphur pet coke different than the high sulphur pet coke which is used for burning by Cement industries.
• Govt can’t ban the import or use of Green Pet Coke, because if that is done, then Rain won’t be able to supply CPC to aluminium companies like Hindalco, Nalco, Vedanta etc. And in that case most of them will be under threat of closure of their plant. I don’t think govt would like to do that. So if that news comes, go in details of that and find out if they have banned all type of cokes or only high sulphur pet coke.

Q6. What to do now?

So now we have to think is there any silver lining? Is it still a good bet in short term or long term? Here is my opinion:

a.       Since CPC prices have stopped rising in India from high levels of March 2018, they have locked in those high prices with 6 months contract with most of the Indian customers including Hindalco. CPC prices are expected to rise again towards year end because of China pollution control policy closures happening during winter months. This is a smart move where they will be insulated from any price drop in CPC during this period. In USA CPC and CTP prices are still strong, so overall they can maintain the margin levels for next 2 qtrs. They can even do improvement in margins for carbon segment as well if the raw material (GPC) prices correct as well in this period as indicated by the management.

b.      The new expansion project in Germany for white resins is high value product where margins are in excess of 35%. It should provide the good profits starting Q3/Q4 of 2019.

c.       Also the CPC expansion projects in India will enhance the profitability and margins in CPC segment. But benefits of it should be visible towards the end of 2019, once the new plant stabilizes.

d.      Aluminium companies in USA are expanding this year because of tariffs imposed by Trump on aluminium imports. That augurs well for Rain, because it is the major producer of CPC in USA and can get better pricing because of greater demand.

e.       Now it will go up and down in sync with the other mid-caps in short term. When the mid cap indices starts recovering it might also recover along with them. It won’t outperform them like last year.

f.        We don’t know where the bottom is, but at this price of 230 it is available at good price. It can go down further along with market/mid-caps, better to average it on every 10 rs decline, but only if you can hold it till July 2019 at least.

g.       Don’t compare it with Graphite India and HEG. It can’t match them on profit front or stock price for next 1 year at least. If you are looking for short term profits or for trading gains, you can move to HEG and Graphite India. There is still money to be made in those counters in next 3-5 months.

h.      But keep in mind where you are buying Rain or HEG, never go overboard, don’t buy with borrowed money. Never ever hold only one or two companies shares. We should keep our portfolio diversified across at least 10 companies from different sectors. It will help in minimizing the losses from one sector/company. Also the stellar run in mid cap companies like we saw in 2017 may not happen again this year. So keep investing 50% money in large cap companies as well. I like Maruti, BioCon, TCS in large caps. There are plenty of good companies out there.

i.         Keep booking profits whenever there is 10-20-30% returns. Market is and will remain volatile for time to come and we should not be too greedy for many fold returns in one go.