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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

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