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Sunday, April 10, 2016

Rain Industries-the good practice of written replies to possible shareholder questions

Equity research analysts are a privileged lot with respect to management access and 1:1 meetings etc.Therefore, when a company tries to level the playing field by giving helpful replies and seeking questions from investors, it is to be welcomed. The Motley Fool also praises this practice below

Companies which do this are
1) Expediators Inc-a freight forwarding firm-Answers FAQs via 8K quarterly filing on all topics-strategy, finance etc. For example http://www.investor.expeditors.com/pdf/fd/8-k_03-15-16.pdf
2) Morningstar-similar to Expediators-http://corporate.morningstar.com/US/asp/subject.aspx?filter=449&xmlfile=450.xml
3) Netflix-answers top questions on the website  http://ir.netflix.com/faq.cfm

Except Expediators, others also have conference calls to supplement them, Rain Industries is the only Indian company I have come across, which follows a smaller version of this practice. It really helps to understand them better and not club them as the petrochem stocks but rather as specialty chemicals..

Reproduced below are the frequently asked questions as outlined in the Mar-16 investor relations presentation(http://www.rain-industries.com/PDF/Rain%20Industries%20-%20Corporate%20Presentation%20-%20March%202016.pdf) This is NOT a new practice but I thought it fit to highlight it now-the company by addressing such questions preempts misunderstanding of its business model and helps for second level thinking. Of course, this is in addition to their conference call which makes them rather unique.

What is the Impact of Crude Oil / Commodity price fluctuations on Rain’s businesses? 
 CPC and GPC prices are not indexed to Crude Oil or any other Commodity prices. They are influenced by their own supply-demand dynamics. Although prices of both GPC and CPC fluctuate quarter on quarter, the spread between prices of GPC and CPC move in a narrow-range. o Sales prices of certain Carbon Products and Chemical Products produced by the Company are indexed to Fuel Oil or other Commodity prices. Fuel Oil prices fluctuate differently from Crude Oil prices. o Certain Raw Material costs and Finished Product sales prices in Coal Tar Distillation business are indexed to Fuel Oil or Other Commodity prices with a lag of few months. There is no impact of falling Crude Oil or other Commodity prices on the business of Coal Tar Distillation in the medium term. The Company has some exposure to the BTX and Ortho-xylene pricing.

What is the Impact of falling Aluminium prices on the businesses carried-out by Rain? o Prices of CPC and CTP are not indexed to Aluminium prices and they are influenced by their own supply-demand dynamics. o As CPC and CTP are critical consumables used in manufacturing of Aluminium metal, their global demand is directly proportionate to global production of Aluminium metal and not linked to Aluminium prices.

What impact is assumed from the shut down of aluminium smelters in North America?  The contribution to group revenue from aluminium smelters in North America is ~11% in CY 2015. The new energy policy in North America has provided an encouragement to the smelters to rethink or defer their shut down plans in this region. o Considering the projected increase in production of Aluminium in and around India combined with the major presence in these markets, the Company is uniquely placed to leverage its strategic, deep-water US plant locations with access to certain low-cost raw materials to quickly tap the growing demand for CPC. This unmatched combination allows the Company to re-align its global sales mix through its new, low-cost CPC importing and blending facilities in India

What is the Impact of weakening Euro (and Canadian Dollar) against US Dollars on the businesses carried-out by Rain?
 The Company generates 45% - 50% of revenues from its plants located in the Euro currency zone. About 10% of revenues from these plants are generated in US Dollars, for which costs are incurred in Euros. A 10% decline in Euro-Dollar Exchange rate would result in less than 2% decline in operating profitability in US Dollar terms. o A relatively weak Euro would make the Company’s European products more competitive in the international markets that are US Dollar denominated, resulting in improved capacity utilization and higher operating profits. o The above currency benefits hold true for the Company’s Canadian plants, where operating costs are incurred in currently-weak Canadian Dollars, but where sales are largely in US Dollars.

 What are the plans for de-leveraging the Company, considering the high-leverage? Gross Debt of the Company has reduced by US$ 66 million from US$ 1,211 million as on Dec 31, 2014 to US$ 1,145 million as on Dec 31, 2015. Net Debt during the same period reduced by US$ 53 million. Reduction in Gross Debt is mainly due to buy-back of Senior Secured Notes of US$ 51.4 million, repayments of Working Capital loans of US$ 15 million and exchange rate reinstatements. To reduce debt and optimize interest cost, the Company so far pre-paid Jr. Subordinate Notes $26.3 million in CY14 and Senior Secured Notes $ 51.4 million and partly replaced by low cost debt in CY15. o Net Debt-to-EBITDA is higher at 5X as on Dec 31, 2015; the EBITDA-to-interest for CY 2015 is at 2.3x, although facing challenging business conditions. o With no major repayments in the next two-years; the Company is well positioned to meet all repayment obligations. o The Company has options to make Bullet Repayments of US$ 373 million and US$ 585 million due in Dec.’18 and Jan.’21 respectively, partly through internal accruals and partly from fresh borrowings.

What is the Impact of weakening Russian Ruble on the viability of Russian Tar Distillation Plant? The weakening Russian Ruble will not impact the viability of Russian Tar Distillation plant. The finished product from the new Russian Plant will be sold either in Russia (as an import-substitute) or exported from Russia. With conversion costs being incurred in Russian Ruble, this new plant will be more competitive in the international market

Saturday, April 9, 2016

Beyond shared services-Unbundling the finance organization by outsourcing the ‘core’

Till now, I believed that only certain activities were capable of being outsourced in toto. However, a landscape view of financial report and articles in the press, have made me reconsider this view, and hence this blog post. Please note, reference to organizations is basis my limited familiarity and does not constitute an endorsement of their services.

Some examples of the shared services transition or Uberization of professional whitecollar services are as below

    CFO-Virtual CFO services-these offer services as below
o   Interim Management to firms with CXO vacuum(eg after hostile takeover) 
o   Full time management on long term contracts(1-3 years)
·         Investor Relations
o   Earlier, annual report prepared using help of firms like TRISYS
o   Now, advisors like Strategic Growth Advisors Pvt. Ltd, prepare presentations, schedule conferences and are points of contact along with the company

·         FP&A in shared services(eg Unilever)-whitepapers
·         ERP moving to the third party cloud-a Quickbooks taking over Tally/SAP due to user friendlines

Even earlier, temporary requirements (such as fund raising) were met using merchant bankers who provided the expertise and relationships. But now, even recurring requirements, which would otherwise necessitate full time hires, is now being managed by parties external to the organization

What are the implications of this trend increasing?
  • ·    Finance going the way of IT services-becoming commoditized body shops
  • ·         Large organizations now hiring selectively, and reskilling the team.
  • ·         Startups pay differential to narrow-this option means lesser need to pay top dollar for talent

Will this run the risk of hollowing out the core, when the remaining team members are no longer able to manage the strategic relationships? A well known telecom company which pioneered the novel IT contracts, has now renegotiated the contracts to better manage in house and get control over it. Will these things happen in India? Only time will tell.

However, as a professional, one should prepare themselves by not only having subject matter expertise, but honing communication and business partnering skills, so that the eventual outsourced setup can be managed by  you

Discount brokers and online trading-the unheralded ecommerce revolution

As Marc Anderssen put it, software is eating the world, and with the advent of cheap personal computing technology/consumer electronics i.e smartphones, this trend has reached B2C sectors such as travel, retail, home services. For those active in the financial markets, one such impact is the ability to trade online through your smartphone app, without needing a terminal or to call. This is possible through discount brokers like Zerodha who facilitate online trading-in fact the cornerstone of their business model is the online self service model which mitigates the need for expensive brick and mortar branches, people and call centres. As a user of these services, i though to list the pros and cons of this, along with eco system impact, since this business is well known to those trading in the markets, but maybe not to the lay person. This is now ~20% of the total volumes but growing rapidly


  • Cost-Brokerage costs are low-as marginal cost is near zero-this week I read an article in the Economist where brokerage is even free as the brokers get some money from the exchanges to which they direct volume
  • Time-If internet access speed is good, one can place an order in the time it otherwise takes to get through to the agent
  • Convenience-Can be done 'on the move' or even at the desk-This is especially useful for those on field jobs. 
  • Self Service for fund transfer: One can transfer funds if shortage/excess on the app itself, without the need to do a website login.
  • Reduced friction for margin funding: This can often automate the need for margin funding at 0.05%/day or so, and make it less evident to the customer since no explicit margin application done. 


  • Distraction from day job: One of the reasons organizations insist on brick and mortar offices is the assumption that employees within the same premises will dedicate their attention to their work, and the monitoring of laptops/phones/CCTV/min hours norm ensures that. Online trading through smartphones disrupts this social contract, and makes time leak for those who do it. While employees might be able to juggle both without loss to themself or organization, there would be many who cannot, and who hence lose out in networth and at work. This is the biggest risk to day trading since the market hours(for equity/F&O segment atleast), are squarely in the prime office hours of 9-6-unless of course one works in shift based timings which fall outside this bucket. 
  • 'Fat finger' orders-chances of errors-while there is an order confirmation page AND a post order validation, things can still go wrong especially while closing orders in a hurry
  •  Internet Access limitations/No QoS guarantees-With low internet speeds in India, and inconsistent network quality(telcos doing their best but issues still possible), it is possible that
  • IT Issues(in App)-If the app does not work then the call centre is inundated with call volumes and woe befit you if you have any positions hitting the upper/lower circuit against you.
  • Addiction-Like the well documented smartphone/social network addiction phenomemon to getting updates due to dopammine bursts, the same is true since ready access to prices may make you check your positions more often. 
  • Encourages trading over value investing-With the phone accessible and the ease of trading and MTM data on positions, one may panic and tend to liquidate positions while it was better to hold.
  • Screen size limits charting and other functionalities as it may distort visual effect of charts
  • Not all order types available/Limited functionality-Some order types like bracket orders are not available on apps due to complexity of coding or processing power requirement. While this caters to the most frequent use cases, it does not help advanced users. 
In the future, I see the business driven to technology based differentiation where the app speeds, UI, research and flexibility commands business share like in loan business-where often the one to process the loan fastest or flexibly wins over the lowest cost lender 

Some useful links/References