• Anirudh Gupta

Rain Industries : A Hidden-in-Plain-Sight 'Spawner'?

You can mine for gold or you can sell pickaxes

This is of course an allusion to the California Gold Rush where some of the most successful business people such as Levi Strauss and Samuel Brannan didn’t mine for gold themselves but instead sold supplies to miners – wheelbarrows, tents, jeans, pickaxes etc. Mining for gold was the more glamorous path but actually turned out, in aggregate, to be a worse return on capital and labor than selling supplies.
When a major new technology trend emerges – say, the rise of online video or social media – entrepreneurs can try to capitalize on the trend by creating a consumer product (mining for gold), or by creating tools to enable consumer products (selling pickaxes) ~ Chris Dixon

Rain Industries Limited (RAIN) is one of the world's leading producers of calcined petroleum coke, coal tar pitch and other high-quality basic and specialty chemicals. And in my (biased) opinion, Rain is a relentless 'spawner' laying the groundwork to sell all sorts of pickaxes for the upcoming rebuilding of humanity's societal infrastructure.


I've been invested in Rain Industries for 4 years now. Through these years, it's stock has ridden a bone-chilling, frustrating roller coaster of short-term volatility, and long-term inactivity. It may turn out to be a total dud, but I'm optimistic and playing the long game. In many ways, this company reminds me of Amazon through the 2002-2009 slumber period. Or Deepak Nitrite through the 2015-2019 period. Here's why I have my hopes up.




3 Business Verticals




What are Spawners?



Analysis:


Credit ~ The School of Intrinsic Compounding (SOIC) : YouTube



6/10 Triggers for Rain's Future ROCE/ROIC:


  • Deleveraging Debt Profile: "If you look at our debt, we have one billion dollars, but our net term debt as of December it's only about $800 million plus. In the last seven-eight years we've been continuously investing in projects and we want to bring that down, and we should have improved cash flow both from our normal cash flow as well as contributions from these new projects should improve cash. So, based on that, our target is to reduce the debt in the next few years and I cannot comment on how much exactly we can pay but we do expect that it should come down. Our target Debt-to-EBITDA ratio should be to be well below 2.5 (~from 3.5 currently~) as soon as possible and we want to bring down our average interest rate to about 4% which we are hopeful that we can do it in the next one and half years" ~ Jagan Reddy, Vice Chairman


  • Product Mix Change:

  • Researched and now manufacturing new downstream, high-margin speciality materials of the Future like CARBORES, PETRORES and NOVARES ⬆️

  • Incorporation of new subsidiaries like Rain Verticals, to research and develop vertical farming, logistics and lithium-ion batteries

  • A shift away from it's previously cyclical, commodity-only identity


  • Capital Expenditure (Capex):

  • ~ $100M of capex every year has come to an end

  • Built a new HHCR chemicals facility + 2 new ACP plants + 1 new vertical shaft calciner + desulphurization units

  • Finished it's major capex cycle, right at the start of a commodity supercycle when most metals manufacturers (Rain's customers) are announcing capacity expansion plans


  • Industry Cycle: TBD

  • Commodity prices of Aluminium (globally smelters restart over Aluminium LME at $1600 ) and Calcined Petroleum Coke are ⬆️

  • Cement prices and volumes are ⬆️

  • Coal Tar Pitch volumes due to graphite electrode industry ⬆️

  • Titanium Dioxide for the paint industry ⬆️

  • Carbon black for the tyre industry ⬆️


  • Margin Expansion:

  • Capacity utilization across the carbon products board has been ~60% for the past 2 years. With the ramp up in demand, utilization is expected to cross 80% and lead to huge economies of scale in production

  • New advanced materials hitting the market have an expected ROCE of 30%


  • Cost Reduction:

  • Lower input costs by the planned mixing of engineered ACP in the production of CPC. Partially de-risks from highly variable Green Pet Coke (GPC) feedstock rates

  • Interest reduction from deleveraging debt (after the sale of two non-strategic subsidiary companies, which are engaged in manufacturing and distribution of polynaphthalene sulfonates, under product-group naphthalene derivates, in Dec 2020)

  • Capex savings from the end of Rain's extended capex cycle.



3 Bullish Themes for the Future:


  • Decarbonization of the Aluminium industry: "In terms of aluminium pricing, we are now seeing deals in the market for low-carbon aluminium. However, in Q4 of 2020 we began seeing companies pay a slight premium for low carbon aluminium. As smelters and anode producers look to capitalize on this emerging sustainability trend, we believe that our engineered Anhydrous Carbon Pellets (ACP) could be a differentiator in helping aluminium producers reduce their emissions and energy consumption contributing to the marketability of their low carbon aluminium" ~ Jagan Reddy Nellore


  • New Carbon Economy for Sustainability: "we must continue our metamorphosis into a 21st century company that transforms industrial by-products into essential materials for lighter, cleaner, and faster products and applications that have the dual benefit of creating new market opportunities for our company and driving long-term value. In a society where “sustainability” is quickly becoming a license to do business, our ability to maximize the productivity of carbon by “upcycling” these by-products make RAIN an indispensable player in an increasingly sustainable society" ~ Annual Report 2020




  • Demand from Electric Mobility Boom and Transportation Infrastructure Overhaul:






#₹AIN


Disclaimers:

  • This is not a stock tip.

  • I am not a SEBI registered investment advisor.

  • This essay is subject to edits and updates as my thinking on & understanding of Rain evolves.

  • All analysis is based on fundamentals, and not technicals.


Appendix:


563 views

Recent Posts

See All

On Giving