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Edited Transcript of RAID.NS earnings conference call or presentation 31-Jul-20 10:30am GMT

Aug 1, 2020 (Thomson StreetEvents) — Edited Transcript of Rain Industries Ltd earnings conference call or presentation Friday, July 31, 2020 at 10:30:00am GMT

* Gerard M. Sweeney

* N. Radhakrishna Reddy

* T. Srinivasa Rao

Good evening, everyone. On behalf of Rain, we welcome all the participants to the Second Quarter 2020 Earnings Conference Call of Rain Industries Limited.

Speakers on today’s call are Mr. Jagan Reddy Nellore, Vice Chairman of Rain Industries Limited; Mr. Gerard Sweeney, President of Rain Carbon, Inc; and Mr. T. Srinivasa Rao, Chief Financial Officer of Rain Industries Limited.

During the call, management will be referencing and discussing a slide show presentation which is available for viewing on our website at www.rain-industries.com in the Investor Relations section. It is recommended, viewing this presentation, while listening to the management’s discussion.

Before we begin, management would like to mention that some of the statements made in today’s discussion may be forward-looking in nature, and that could be affected by certain risks and uncertainties. The company’s actual results could differ materially from such forward-looking statements.

Now if you could turn to Slide 3, and I would request Mr. Jagan Reddy to provide an update on key developments within the Rain Group.

Thank you, and over to you, sir.

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [2]

Thank you. Good evening to everyone. I hope you are all well. And that life is returning to semblance normalcy in your part of the world.

Here at Rain, nearly all our production facilities have continued to operate without major interruptions. The lone exception was our operations in India, where our calcination and cement plants were halted for a few weeks due to the nationwide COVID lockdown in late March, April and early May 2020.

As we reported during our previous call, we have been doing everything possible across our global organization to keep our people safe and plants operating so that we remain a strong link in the global supply chain.

In terms of the business, after a reasonably stronger first quarter, our second quarter performance more closely resembled that of the global economy at large. At — while our Q2 earnings receded like nearly every company and associated with our peer group, we were pleased to see that demand and production edged back up to pre-COVID norms in many parts of the world by June.

Most probably for Rain, the automotive sector started to reemerge from its pronged slumber and the global aluminum industry continued production through it all. Of course, the potential for a second wave and our return to lockdown conditions in parts of the world would make it impossible to predict what the immediate future holds for us.

That said, if countries and regions can avoid a second wave of COVID, we anticipate that supply, demand and productivity will slowly but cautiously work their way back to the levels that we experienced in December, January and much of February earlier this year, which we expected, could continue for March of 2020 before coronavirus turned the world upside down.

With this as a background, turning to Slide 4 of the presentation. Revenues of INR 23.61 billion for the quarter, was a decrease of approximately 19% compared with INR 28.82 billion during Q1, and our adjusted EBITDA was INR 4.3 billion during Q2 compared to compared to INR 5.6 billion during the first quarter of 2020.

Our Carbon segment was impacted the most with EBITDA of INR 3 billion, a decrease of approximately 32% sequentially and volumes up off — by approximately 17%. The significant reduction in sales volume was driven by a lack of demand related to COVID-19 across our portfolio of products as we anticipated and alluded during last quarter — to last quarter.

April and May were tough months with regard to demand, and we saw inventory levels at all our global distillation facilities built significantly.

Fortunately due to advanced planning of our global response team, external storage locations were secured prior to the fall in oil prices and our actual need for the storage. These actions prevented us from our plans from having to be turned off and enabled us to hold inventory until market prices recovered some.

For Advanced Materials segment of EBITDA of INR 984 million, was an increase of 4% due to the various factors.

Certain sub segments were especially impacted by COVID, as this part of our business is closer to the end consumer and reductions in demand are more immediate. However, some of this business is seasonal, as evident in our engineered products group, which benefited from the return of the pavement sealer business, as it typically does in the second quarter, which helped minimize the sequential performance impact from a volumes and margins perspective.

On our Cement business, due to the nationwide lockdown due down in April and May, there was a decrease in volumes and revenue by approximately 30% and 15%, respectively, compared with the previous quarter. However, the realizations and EBITDA improved compared to first quarter 2020.

I would also like to take few minutes to touch on certain events in India. Recent border issues with China have resulted in higher scrutiny of Chinese imports into India and led to an increased focus on the honorable, Prime Minister of India’s initiative to “Make in India.” We have already seen some action related to this as domestic aluminum smelters evaluate suppliers’ contribution to Indian economy in their procurement analysis.

The government appear supportive of the domestic industry — aluminum industry, which will indirectly, support their domestic suppliers, including, Rain.

Also, while we are discussing developments in India, we are still awaiting the finalization of the national’s sulfur dioxide emission standards for the calcining industry.

Our existing Vizag plant and the new shaft calciner has scrubbing systems that remove at least 98% of the sulfur dioxide emissions. So we are confident in our ability to meet any new standards.

At the same time, it will be interesting to see what the impact — what impact the new standards will have on the industry in general.

With this business update, I will now turn over the call to Gerry, to take you through the industry and other business updates on Slide 5. Gerry?

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Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [3]

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Thank you, Jagan. Good evening, everyone. It’s a pleasure to speak with you all again. Turning to Slide 5. In the top left, we have our carbon product sales prices and volumes. As you can see, calcined petroleum coke, or CPC, prices were flat sequentially. From a volume perspective, in Q1, we benefited from spot sales, while China was shut down with COVID and unable to export CPC.

However, in the second quarter, the situation reversed course. China had emerged from peak COVID conditions during April, was ramping up its production facilities as well as exports. Which was the main driver of the sequential 17% reduction in volumes.

During the second quarter, we saw the impact global product demand shortfalls would have on refining assets, as refiners’ scaled back production due to the impact of COVID-19 on travel. This is carried to the present and reduced the availability of GPC in some areas.

While the availability of GPC impacted raw material pricing, our margins maintained during the quarter, and we have the opportunity to reprice our CPC sales to balance these cost increases going forward.

Looking at coal tar pitch sales. Pricing and volumes fell during Q2 due to the reduced demand from smelters and graphite producers. This was mostly related to the impact of slowed shipments and the curtailment of a North American aluminum smelter we supply.

From a coal tar raw materials perspective, the existing weakness of the steel industry has only been exacerbated by the COVID outbreak. Therefore, the anticipated recovery of the steel industry was probably 1 or 2 quarters away, as steel production continues to wane impact in coal tar volumes. We are matching our raw material costs to pricing declines, but did see a time lag in achieving this during the quarter, which impacted margins.

In terms of other carbon products, the average price for these products declined, which is not a surprise, given the general collapse in commodity prices and the indexing of these products to fuel oil pricing.

Volumes were also down primarily related to reduce demand from the carbon black industry, which was not being the essential and impacted by a near halt in automobile manufacturing for mid-March to mid-May. This was further complicated by the lack of cars on the road. Meaning, fewer tire replacements as well.

Moving to Advanced Materials on the top right. The general theme for this segment, again, was reduced prices and volumes across the board.

Resin sales were impacted by reduced demand for rubber and adhesives applications, particularly in the European auto industry.

Naphthalene derivates saw reduced demand for our phthalic anhydride and superplasticizer product. Volumes here were mixed, as demand for paints and polyesters remained steady, but PVC related consumption reflected the downturn of the automotive sector. Margins during the quarter were also tight since phthalic anhydride pricing is linked to orthoxylene, which remain depressed.

Our petrochemical intermediates saw a significant fall in prices as well, primarily related to BTX product. The raw materials for these products is produced from crude benzene, which saw a similar decrease in its cost, helping us maintain margins.

The Engineered Products were down. However, volumes were up due to the seasonal — excuse me, Engineered Products prices were down, however, volumes were up due to the seasonal return of the pavement sealer market.

Additionally, a bright spot in this segment during the second quarter, which was our PETRORES coating product for lithium-ion batteries, as prices increased in the quarter as consumers increasingly choose the electronics and electric vehicles.

In the aluminum market, the LME price improved significantly during Q2. This was expected and is important as curtailments worldwide loomed as the price lingered around $1,400 per metric ton. The current pricing is hovering closer to $1,700 per metric ton, which is much healthier. It remains to be seen, however, whether this price will hold as many shifted their product portfolio for more specialized, premium quality metal for the aeronautics and automotive sectors to producing standard billets, which are more easily inventoried. This can be seen in the build-up of LME inventories during Q2. We are seeing some signs of a positive churn with automotive manufacturing demand returning toward midyear. If the markets continue along this recovery path, more opportunity will present itself during Q3. On the other hand, if there is another round of lockdowns, this recovery could stop quite abruptly.

On the bottom right of the page, you can see that the key market prices that impact not only our finished product sales, but also our raw material purchases. In appearance, it looks like a race to the bottom. Obviously, it was a material movement driven by the fall in oil-related prices. We have since seen them recover. While the majority of our product pricing does reset from quarter-to-quarter. The drastic fall in prices forced another inventory adjustment in Q2. We simply could not work through slow-moving inventories to reset our costs due to the reduced demand from COVID.

Turning to our major product — major capital projects on Slide 6. The ramp-up of our Hydrogenated Hydrocarbon Resins plant in Germany is going according to plan. And we anticipate making our first sale of water-white resins late in Q3. Currently, we are working with customers, while they test over 100 product samples for stability, odor and color. We expects feedback from their testing in the next 4 to 6 weeks. To this point, the product quality has been a real bright spot from startup. Preliminary comments from a major customer indicate that our new NOVARES pure resins are hitting the mark and meeting expectations.

Also at the Castrop-Rauxel facility, we are progressing as planned with the installation of a dual solvent process to replace and integrate our outdated carbo-indene phenol production facilities. We expect a DSP system to come online during the fourth quarter.

Turning to the vertical-shaft calciner project in India. Upon receiving clarity from the authorities on raw material feedstock to the plant, we can commence operations within a quarter. Meanwhile, we are continuing to pursue alternate options for GPC that include procuring from domestic sources and carrying tolling of GPC into CPC for other calciners.

India has been perpetually short of good quality GPC suitable for calcination purposes. Our new ACP technology will enable us to upgrade the existing GPC produced in India that is unsuitable for calcination to convert into a blend component, suitable for the production of CPC in incremental quantities.

We are also in the process of having an internationally recognized lab to conduct a side-by-side analysis of GPC and ACP as well as calcine forms of each to demonstrate clearly that ACP is a superior product.

Looking ahead to the second half of the year, we anticipate that the economic impact of COVID will linger. And we are watching the potential that a widespread second wave could have — could impact several components. This would mean, new lockdowns that could erase the slow return in normalcy that we have seen to date worldwide.

In any case, we are doing all that we can to ensure that our employees remain healthy and safe. We are also focused on controlling our costs and securing a reliable supply of raw materials to feed our businesses. So we remain an unbroken link in the global supply chain. These are uncertain times, and that is saying a lot coming from a company that has weathered its share of economic upheavals in crisis — crises over the last few years.

Despite this uncertainty, 1 thing is certain. Across the entirety of Rain’s footprint, we are taking nothing for granted. We are watching the markets closely, and we’re prepared to react as needed. Just as important, we continue to look for ways to eliminate or delay spending that doesn’t provide a substantial return on investment, and we are reshaping the way we operate to take advantage of all that we have learned since the pandemic began.

As the saying goes.

“Strength-through-adversity,”

“What doesn’t kill us, makes us stronger.”

With that, I’ll now turn the call over to Srinivas, who will take you through the consolidated financial performance of Rain.

Srinivas, over to you.

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T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [4]

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Thank you Gerry, and good evening, everyone. It is a pleasure to speak with you today. In the second quarter of 2020, Rain achieved consolidated net revenues of INR 23.43 billion compared to INR 33.23 billion in second quarter of 2019. A decrease of INR 9.8 billion or a decrease of 29.5%. This resulted from a decrease in revenue of INR 6.25 billion or 28.9% from our Carbon segment and decrease of INR 2.66 billion or 30.7% from our Advanced Material business and INR 0.89 billion or 30.2% from our Cement business.

Rain’s consolidated adjusted EBITDA increased by INR 165 million compared to the prior year. This resulted from a decrease in Advanced Materials segment by INR 246 million and a decrease in the Cement segment by INR 176 million, offset by an increase in Carbon segment by INR 257 million.

Now turning to the next slide, Carbon segment performance. Revenue from our Carbon segment was INR 15.35 billion for the quarter ended June 30, 2020, compared to INR 21.6 billion for the same period last year.

During the quarter, the sales volume has decreased by 18.3%, and the average blended realization decreased by about 13%, driven by changes due to COVID-19 and the demand supply situation in North American market and price pressure in the Asian market, coupled with the lower demand from the aluminum and graphite industry, which was offset to some extent by appreciation of U.S. dollars against Indian rupee by 9.1%.

Overall, due to the aforesaid reasons, revenue from Carbon segment decreased by 28.9% in second quarter of 2020 as compared to second quarter of 2019. Adjusted EBITDA of the Carbon segment increased by INR 257 million, due to higher margins resulting from working through high cost raw materials in the earlier years.

Turning to next slide on performance of Advanced Materials. Revenue from our Advanced Materials segment was INR 6.01 billion for the quarter ended June 30, 2020, as compared to INR 8.67 billion for the same quarter last year. During the quarter, there was a 20.5% decrease in volumes, which was driven by reduced demand due to temporary shutdown of a few of customer facilities due to COVID-19 and lower demand from automotive, rubber, adhesive and construction industries. Volumes were also impacted by closure of our Uithoorn facility in the Netherlands.

The average blended realization decreased by 12.8%. Due to the aforesaid reason, revenue from Advanced Materials segment decreased by 30.7% during second quarter of 2020 as compared to second quarter of 2019. Adjusted EBITDA of Advanced Materials segment decreased by approximately INR 246 million, mainly driven by reduction in volumes and margins.

Moving to next slide on Cement business. During the second quarter of 2020, Cement revenue decreased by 30.2% compared to second quarter of 2019 due to a 34.3% decrease in volume resulting from the shutdown of plants in April 2020 and partly in May 2020 due to COVID-19, which has been partially offset by an increase in realization by about 6.4%. Cement EBITDA decreased by INR 176 million due to fall in volumes.

Moving to the next slide on debt. We ended the second quarter with a total debt USD 1,188 million, including USD 87 million of working capital and other loans. Net debt was USD 992 million and based on LTM EBITDA of USD 265 million, we ended the quarter with a net debt-to-EBITDA ratio of 3.7x. Despite the ratio being above our target level, we are still comfortable here, as our average borrowing cost stood at 5.03%, and we expect it to remain stable since the floating rate portion of our long-term debt is tied to EURIBOR, which is still negative.

Cash outflow on capital expenditure and plant turnaround costs for the 6 months ended June 2020 totaled USD 96 million, of which USD 47 million was for our 2 major expansion projects, HHCR in Germany and Vertical-Shaft in India.

Regarding the liquidity. We ended the quarter with USD 196 million of cash in hand and USD 122 million of undrawn revolving credit facilities. Given the current circumstances, we are watching our liquidity position very closely in all reasons to ensure that our ability to access credit lines is not hindered by performance.

In addition, we continue to evaluate various government assistance programs in all countries where we operate. So we are prepared to access them in appropriate and to protect the jobs of our employees when we can.

With that, I will now turn the call over to the operator for Q&A session. Over to you, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Rohith Potti from Marshmallow Capital.

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Rohith Potti, [2]

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And it’s a heartening performance considering the time. My first question is on our raw material supply. I just wanted to hear more of your thoughts on how we have — how we are pleased on raw material supply for — of both GPC as well as the coal tar availability given these times?

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N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [3]

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Gerry?

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Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [4]

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Yes. We — thanks for your question. Obviously, with the onset of COVID, we were very concerned on how really these major industries and specifically refining and the steel industry would be impacted.

That initial concern is something that basically has worked itself through.

Now while we are seeing, as I said in my comments, while we’re seeing some reduction in availability for GPC in certain areas due to either shortened or changed crude runs. It’s nothing that’s overbearing to this point.

The bigger impact that it’s had on us is based on some of this non availability. We have seen — during the late — the second half of the second quarter and into the third quarter, we have seen prices rise as China came back on.

And so from that perspective, overall, we’re dealing with the price increase. We have not repriced our finished products for the third quarter as yet. And so we’re able to price that in.

On the coal tar perspective, we’re watching it carefully. There’s no doubt that there’s been some disruption on the steel side because of curtailments, and our traditional — some of our traditional supply has been reduced.

However, our response team has done an excellent job of ensuring up our supply chain, ensuring that we have all the product that we need. Granted, we are transporting this nominal part of the supply shortfall and sourcing it from further away, which adds some cost to us.

But by and large, it’s not a significant amount of our needs. And we’re comfortable with where we are right now and have a plan B, should we see a recurrence or any changes as far as supply is concerned.

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Rohith Potti, [5]

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That was helpful. My second question is based on the debt. In the last call, Mr. Reddy had mentioned that we intend to pay down debt once our major capital expansion projects are done. So I just was curious as to, if the COVID — if there is no second wave and if the situation slowly gets back to normal, by when do you expect to begin paying down the debt?

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N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [6]

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Probably early next — from next year onwards.

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Rohith Potti, [7]

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Okay. That was helpful. And my last question is on the expansion project then sir. When do you expect the HHCR plant to begin contribution to our revenues? And on the Vertical-Shaft Calciner plant, with the ACP plants being pushed, will we see any issue with raw material availability for this plant, given we still are under the Supreme Court mandated [dredging] of 1.4 million tons of available in India only?

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N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [8]

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See, basically, the HHCR project actually should start producing revenue in the Q4 that is next quarter onwards. From October onwards, we expect to stabilize and then start producing material. And hopefully, we also expect that our samples also should have been accepted by a lot of customers.

And in regard to the Vertical Shaft, we are actually evaluating a lot of options. One is purchasing raw materials from the local market. One is doing toll calcining for the — for our existing calciner.

And then still — and we also expect that the Ministry of Environment and Forest actually will file the revised environmental standard soon. And hopefully, thereafter, I think we are hoping that there should be some relief in the imports of raw material.

But we expect to get some kind of — we should be able to address this in the next few months, I think, in 2, 3 months, I think we should have some clarity.

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Operator [9]

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The next question is from the line of Arvin Kothari from Niveshaay.

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Arvind Kothari, [10]

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So my first question was regarding the situation in China. So the thing is that, the other economies, while they’re still facing shutdowns and other issues, China has not been facing. So with respect to refining production, so in the medium term, in fact, the refinery production from China being hike — can give them more GPC material. But also from the trend perspective, you can highlight, how the refining capacity coming incrementally in China can be detrimental to us because the same capacities are not being put up in the regions where we are located?

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N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [11]

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Gerry?

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Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [12]

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Yes. From the refining perspective and availability of GPC, China is — China has not returned to pre-COVID refining capacities.

So we’re watching that carefully because they’re still seeing a net reduction in total GPC availability. So we’re watching that.

As far as their potential to export and compete against us, it’s really no different than it’s always been, in China. So the impact that we saw sequentially from first quarter to second quarter was, really, we had opportunity because of China being out of the market during — because they had the early onset on — of COVID, really, which was January for them, while it was March and into April for the rest of the world.

So we really just returned to the same competitive position against China from a CPC and coal tar pitch perspective that we’ve always had.

So there’s nothing really surprising or unusual about what China is doing. They just resumed the exports. It’s really that we benefited, as we had said, in our first quarter call that we benefited from higher volumes of CPC, in particular, because of their curtailments during the first quarter.

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Arvind Kothari, [13]

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And their capacities that are coming up in China regarding refining, so would that mean a better material would be available from the GPC perspective to China over a long period of time rather than in the geographies that we are present?

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Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [14]

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From a refining perspective, there’s not really new refining. There’s not any meaningful new refining capacity coming up in China.

As a matter of fact, we’ve seen over the last couple of years a net reduction of refining capacity in China due to their own economics.

So we really don’t — we don’t anticipate any material change in GPC within China. We have seen slowing of some exports, in particular, to India from China related to some of the tension, the political tension between the countries, and we have seen more scrutiny of Chinese imports into India, but that’s all related to the border issues and some of the politics involved. Nothing that’s structural to the market to this point.

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Arvind Kothari, [15]

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Okay. My another question was on the overall scenario that after COVID, the world has been — if the interest rates in the world have just collapsed. So how we are positioning ourselves in this — regarding maybe refinancing the high cost 7.5%, USD 550 million facility that we have or the debt covenants that allow us to maybe start prepaying from next year or maybe listing our U.S. subsidiary? Because if you’ve seen a lot of corporates doing that, a prime example being Reliance, which is trying to do the same. So we also have excellent subsidiary, which can have a — fetch a great value in these situations.

So what is the management aiming at? Is the debt side or the equity side, anything which is on the table?

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T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [16]

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Arvind, actually, if you look at our capital structure, we have a right distribution of debt between floating debt and fixed debt and also right mix between euro currency and U.S. dollar.

We have close to 0 debt in India, are in Indian rupees because most of the Indian companies, our operating Indian companies are cash-rich and they have — they don’t have any debt obligations at all.

And both the debt what we borrowed in Europe as well as the U.S. is for the acquisition. And the average cost of borrowing is at 5%. In a market like this, the COVID-19-related situation, it will be difficult to raise funds for any corporate or to give funds by any investor.

So it is not right to look at reduction of the debt only looking at the temporary decline in the interest rates. You can borrow at the current rate, if it is indexed to LIBOR or EURIBOR, but we already have a structure in place, and we don’t want to borrow any further debt.

We will look at refinancing of the debt only after 2021 when the COVID situation will reduce and also our expansion projects will contribute, both our HHCR project in Germany as well as the Vertical Shaft project in India, will contribute in 2021, we will have a stronger balance sheet or stronger earnings to go for the refinancing.

So that is the time we can look at refinancing. And I don’t think we can reduce the interest rates substantially below the average rate of 5%.

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Arvind Kothari, [17]

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And on the valuation, if we could take benefit of the valuation of our U.S. subsidiary by listing some — is that something which we might be thinking of because a lot of corporates are thinking on those lines and have created a lot of value for the shareholders?

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T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [18]

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Agreed, Arvind. But the only thing is whether you want to rise debt or you want to raise equity, the market should be favorable and your earnings outlook should be good.

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Arvind Kothari, [19]

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Correct. So post everything is normalized, what would be our preference in terms of maybe refinancing or equity raising?

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N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [20]

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See, we want to do a combination of both, please.

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Operator [21]

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(Operator Instructions) The next question is from the line of [Vikram Sharma] from [Meraki Wealth] Management.

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Unidentified Analyst, [22]

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So in Slide #11 of presentation, you have mentioned total debt in USD and USD 437 million euro-denominated, that is in USD or euro? If it is in USD, then it has not adjusted with any exchange rate difference?

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T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [23]

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No. Actually, it is rise in euros only and because we are reporting for consolidation and reporting the consolidated debt, simple to make arithmetical calculation, we have converted the euro debt into USD at the respective quarter end rates.

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Unidentified Analyst, [24]

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So there is not any adjustment? So like debt is…

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T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [25]

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Yes. It gets restated at the year-end rate and the quarter end rate. There is no adjustment required to separately show that, so much is on account of exchange rate changes.

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Unidentified Analyst, [26]

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Okay. And sir…

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T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [27]

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We are as a company, we are naturally hedged. We have revenues in euros. We have revenues in U.S. dollars. So we are naturally hedged. So we our currency will not impact us — the fluctuations in exchange currency should not impact us.

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Unidentified Analyst, [28]

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So my question is like, we mentioned USD 437 million in 2019 and also USD 437 million in end of the June 2020. So there is not any adjustment with the exchange rate difference between USD and euro. If we converted euro debt into USD…

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T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [29]

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There’s no exchange rate between euro and USD between December 2019 and June 30, 2020. Actually, you are seeing all that improve — increase in, say, U.S. dollar is only weakening in the July actually. So whatever you’re seeing from — when the average was about 1.11 that now actually you’re seeing 1.19. All this happened in July.

So when we are actually mentioning our numbers in euros, at the end of this Q3, you will actually be seeing an increase technically in U.S. dollars. But that will also positively impact our earnings also because a good portion of our earnings do come in euro.

When you restate that, so there’ll be an increase in that also. So as I said, we are naturally hedged. So it should not impact us much.

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Unidentified Analyst, [30]

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Okay. And my second question is, why our working capital debt has increased? What were the main reasons for that? Like business activities were lower in last quarter…

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T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [31]

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See, requirement of funds, this is a consolidated debt. There could be cash in certain operating subsidiaries in Belgium, Canada, Russia. There could be incremental capital requirement in other parts like U.S. and Germany.

So because of that, in some markets or some countries, we’ll be drawing cash and some countries will have surplus cash.

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N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [32]

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See, as we indicated, we have been continuously producing during this quarter, and we are actually holding it in inventories. So that was the main reason for increase in working capital debt. So that should reduce the…

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Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [33]

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Yes. Absolutely. That was the main reason.

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N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [34]

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Yes. Over the course of the year, it should reduce.

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Operator [35]

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The next question is from the line of Chirag Singhal from First Water Fund.

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Chirag Singhal, [36]

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Sir, my first question is on the Advanced Materials segment. We saw substantial improvement in the EBITDA margins during quarter 2. So if we look at the first half, the margins have been 13% and 16.4%, respectively.

And overall, yearly, our Advanced Materials segment reports somewhere around 9% to 11% run rate — margin run rate. So can you throw some color that what kind of outlook, what kind of margins we can see in Advanced Materials in the second half?

Is this sustainable or more like a one-off?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [37]

——————————————————————————–

No. I think that it’s a sustainable margin. We have been doing a lot of work in Advanced Materials, as we indicated in our several calls before. Once we started this Advanced Materials and we started looking at it, we do think that there’s a lot of potential for Advanced Materials and especially with the HHCR also coming into operations next quarter onwards.

So we do think this is more sustainable to us.

——————————————————————————–

T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [38]

——————————————————————————–

Since I have commented in the previous conference call, we have shut down the facility in Netherlands, and the production volume has been shifted to our German plant.

So some of the fixed cost has got reduced. And that is also indirectly contributing for higher margins in the Advanced Material business.

——————————————————————————–

Chirag Singhal, [39]

——————————————————————————–

Okay. So for this year, for 2020, can we expect the margins to remain above 13%, 14% or in the range of 13…

——————————————————————————–

T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [40]

——————————————————————————–

We expect good margins, but we cannot give you a guidance, but we do expect a stable earnings.

——————————————————————————–

Chirag Singhal, [41]

——————————————————————————–

Okay, okay. Now coming to the HHCR. You mentioned that it will start contributing to the top line to the revenues from quarter 4 onwards. So is it possible to give like, you would have done some internal estimate that what kind of volumes you can expect from this HHCR plant in this year and the next year?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [42]

——————————————————————————–

That we cannot guess at this point of time because, actually, we are producing well. And we are actually able to sell our product, also means you know in some quantity or form. But main thing is, if you can — see, basically, once the acceptance — we received the acceptance of all the customers. We do think that quantities will improve. And we are actually using this facility because we also found, apart from the hydrogenated project, our product actually even before hydrogenation also, there is demand for certain products. So we are also selling that also.

Suddenly, we saw that also. So it should contribute well. But we cannot give any details at this time because, it’s still in a start-up phase.

——————————————————————————–

Chirag Singhal, [43]

——————————————————————————–

Okay, okay. All right. My third question, sir, relates to CTP and CPC. So coal tar, we understand that the steel production — global steel production was down substantially during the quarter. But if you look at the global aluminum production, ex China, for the April to June quarter, it was — I think it was down like 1% or so.

So the production — aluminum production has not fallen, while our CPC production volumes have fallen quite substantially, 20% sequential basis. So what is the major reason behind this? Like I understand that our Indian plant was shut for a couple of weeks, but just to understand the trend going forward in CPC.

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [44]

——————————————————————————–

So first of all, the Indian plant was shut down for almost on average because there is 1 kiln that actually started after 2 weeks, but the other plant actually only started after almost 6 weeks or 5 to 6 weeks. So on average, it was a month of shutdown. That is one reason.

And as we indicated quarter-on-quarter because there was an increased demand for our products in Q1 because of the China shutdown during that time, there was a lot of demand. So we actually had to meet some spot markets. So that was the reason why there was an increase. But we think that the sustained demand should actually continue going forward unless there is, again, a second wave of COVID cases.

——————————————————————————–

Chirag Singhal, [45]

——————————————————————————–

So in the current month, what kind of trend are you seeing?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [46]

——————————————————————————–

We are just seeing normal production. Actually, we are not seeing any shortfall or shortage actually, means, any cuts.

——————————————————————————–

Chirag Singhal, [47]

——————————————————————————–

Okay. All right. And sir, my last question is on the accounting side. So we have adjusted for Ind AS 116. We have recognized some INR 446 crores of assets, the right to use assets. So I was just trying to understand that what is the impact on the interest and depreciation, if you can give me, so I can adjust to the EBITDA?

——————————————————————————–

T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [48]

——————————————————————————–

Actually, this is nothing but all operating leases also will be classified as financial leases. And which is — in Ind AS, what it happens is, till now what we are showing as rents, it will be reclassified as — capitalized as an asset and partly depreciated and some amounts of interest cost will be added. It’s about $3 million per quarter is the impact of incremental depreciation on these leased assets.

And the interest cost should be very negligible. It should be less than $0.5 million.

——————————————————————————–

Chirag Singhal, [49]

——————————————————————————–

So overall, $3.5 million has gone from other expenses to interest and depreciation per quarter?

——————————————————————————–

T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [50]

——————————————————————————–

That’s correct, that’s correct.

——————————————————————————–

Operator [51]

——————————————————————————–

The next question is from the line of Anubhav Sahu from MC Research.

——————————————————————————–

Anubhav Sahu, moneycontrol.com, Research Division – Research Analyst [52]

——————————————————————————–

A couple of questions. In your opening remarks, you mentioned about this greatest [tokens] for products imported from China. Could you elaborate what it means for us? Is there a reduced import or dumping intensity of carbon products from China? Or is it that, the domestic end clients in the sale of GPC and CTP are looking for increased sourcing from Indian manufacturers?

——————————————————————————–

T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [53]

——————————————————————————–

See some of the public sector enterprises, they are giving preference to local suppliers. They are classifying the suppliers into 3 category, depending on how much is the value addition they are bringing to the GDP.

So we feel that in that manner, the public sector enterprises are giving business only to companies which are producing within India.

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [54]

——————————————————————————–

For example, recently, one of the large aluminum companies in public sector actually came up with in the tender bit condition that companies that have more than 50% value addition in India will actually receive priority. And then the second level is 20% and then 0%, if it’s totally imported.

So that is where it is. But one thing that should actually work in our favor is that once our ACP plant starts, we should be able to upgrade the Indian raw material, which is actually technically unsuitable today. Most of the raw material is unsuitable for calcination, but we should be able to upgrade that and then actually increase the local content.

So it should actually in — over the — in the short to medium term, I think it should help us.

——————————————————————————–

Anubhav Sahu, moneycontrol.com, Research Division – Research Analyst [55]

——————————————————————————–

Got it, sir. Got it. And sir, would you be able to put a number for our market share in India, including the market — including imports for both CTP and GPC?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [56]

——————————————————————————–

See India still imports about 500,000 tons. So basically, going forward, I think we still have — once our new plant comes, we still have the opportunity to go after that 500,000 tons also.

At this point of time, we cannot give particularly any market share.

——————————————————————————–

Operator [57]

——————————————————————————–

The next question is from the line of Gunjan Kabra and individual investor.

——————————————————————————–

Gunjan Kabra, [58]

——————————————————————————–

Sir in the last con call where we talked about the aluminum industry, the LME price is around $1,500, and there was a wait and see approach to what is going to happen. So now with the price of $1,700, what kind of a situation are we seeing in the market now? Wanted to understand your perspective on the happenings in the industry with respect to China and the rest of the world.

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [59]

——————————————————————————–

Gerry?

——————————————————————————–

Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [60]

——————————————————————————–

Yes. Thanks, Jagan. Thanks for your question. As far as the LME pricing and the trend that we’ve seen, the price that we saw during the first quarter was viewed by analysts and the industry followers as unusually low compared to where their costs were seen.

This was largely believed to be because of the instability that we saw from the COVID outbreak and the impact that it could potentially have that investors were a bit skittish.

The health that we’re seeing of the price was actually projected during the first quarter and the belief was that the price would improve just based on the supply demand parameters that the industry was seen.

The weakness that had been in China early in the first quarter strengthened. We saw the [shafting] strengthened greatly as well. So we’re watching it carefully. At the current $1,700, I believe the latest I saw was in the high $1,600s with the price. It’s not retreating abruptly. But there’s quite a balance to watch here as far as we did see a rise, an uptick in LME inventories during the second quarter, not surprisingly, given the market disruption that we saw.

But it will be important to watch the inventories during the second half of the year. And we believe that the price will likely follow the trend that we see in the inventories going forward.

By that, I mean, if we see a continued increase in LME inventories, then we’re likely to see price weakness and a retreat in the price moving forward.

If we see stability or even decline in inventories in the second half of the year, that will bolster price and likely keep the price in a band between $1,600 and $,1800.

——————————————————————————–

Gunjan Kabra, [61]

——————————————————————————–

Okay. Sir, can we — sir, my second question is, can we expect some impact on the margins on the Carbon segment, particularly CPC going forward because of the increase in CPC prices and because of the tight — the import supply because it reduced. So can we expect some impact on the margin going forward? Because with a lag for quarter only, I think we are able to pass the prices. Can we expect some more info?

——————————————————————————–

Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [62]

——————————————————————————–

Yes. I would say, no. In any material sense, no, because of our ability to pass-through and where we are in the pricing cycle. So we’ll befit from that in passing that through, where we’re watching more carefully as volumes during the second half to see if there’s a fallout.

To this point, other than the curtailment that we’ve seen in the major North American smelter that impacted us from a coal tar pitch perspective, we are not seeing much in the way of curtailments.

Of course, we’re all going to — we all know that the second wave of COVID is something that looms over us, and we’ll have to watch that carefully to understand what impact the second wave could potentially have on demand.

——————————————————————————–

Operator [63]

——————————————————————————–

The next question is from the line of Manan Patel from Equirus — EMS.

——————————————————————————–

Manan Patel, Equirus Portfolio Management Services – Analyst [64]

——————————————————————————–

My question is, again, continuation of sort of previous question on aluminum industry. I wanted to understand, sir, like in 2008 and 2009 also, we saw inventory buildup probably outside LME as well.

And this time, also, lot of financial, like as for the report sort of financial investors are piling up aluminum inventory and that sort of took a long time to work off. So do you see growth in actual production of aluminum, while we have been hearing that electric cars and all will contribute to the growth in industry itself, but that has not come through? So what is your take on that?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [65]

——————————————————————————–

Gerry?

——————————————————————————–

Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [66]

——————————————————————————–

Yes. It’s — it’s a very difficult comparison to look back to 2008 and 2009 and draw conclusions over the current market.

Remember, the aluminum collapse, if you will, of the structured market in 2008 and 2009 was consistent with the global downturn and a strategic decision by the Chinese to capture market share and dump product into the west in order to bolster their economy.

Without going too far into the industry structure, that situation doesn’t exist anymore. The protective tariffs that have come up and been put in place and the fact that now sitting in 2020, China is the dominant producer of 55% to 60% of the aluminum produced in the world that their position in the market is materially different than the 35% to 40% market share that they enjoyed back in that time period.

So if the demand were to fall off, we have to watch how the Chinese react to it. But their ability to disrupt markets and dump on the west in a material way has been severely, severely restricted due to anti-dumping duties that most countries have put in place to protect the industry.

——————————————————————————–

Manan Patel, Equirus Portfolio Management Services – Analyst [67]

——————————————————————————–

Okay. And sir, in the last call, you mentioned that on the cost curve, lot of Chinese capacity is sitting at the higher end. So do you see any bankruptcies in China or in where in the coming years if the price band is around $1,700?

——————————————————————————–

Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [68]

——————————————————————————–

Not at $1,700. When the market was sitting at $1,400, we had concerns, and we were watching closely the more marginal consumers and our potential exposure to payment with them.

But at $1,700 it is by and large, pretty healthy cash price for aluminum smelters.

If they can’t survive at $1,700, they’ve pretty much already fallen out of the market because they’re very high.

So as far as China’s concern is, as we all know, a centrally planned economy, does not let major industry go under. So I don’t really expect that to happen, although in areas of China from a pollution control perspective and from a demand for electricity perspective, we are still continuing to see the industry in China matriculate. And we are seeing smaller, less efficient producers fall out of the market in incrementally large producers come on.

In the west, if we retreat back towards $1,400, we will have to watch the more marginal producers because they do tend to start getting under water from a cash churn perspective. But at $1,400 price is generally viewed by the industry as not sustainable, given their current cost structure.

——————————————————————————–

Manan Patel, Equirus Portfolio Management Services – Analyst [69]

——————————————————————————–

Understood, sir. And sir, in regard to our Carbon business as a whole, so like last past many years, we haven’t seen volume growth as such.

The major driver was probably price of CTP which shot up. So like do you see volume growth substantially increasing? Or what is your perspective in a medium term for our Carbon business volumes?

——————————————————————————–

Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [70]

——————————————————————————–

Do you want me to take that, Jagan?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [71]

——————————————————————————–

Yes.

——————————————————————————–

Gerard M. Sweeney, Rain CII Carbon LLC – CEO & President [72]

——————————————————————————–

Thanks for the question. The — there’s no doubt that the volumes and the overall performance of our Carbon segment over the last several years has been disappointing. And our strategy, in particular, related to CPC has seen nothing short of upheaval due to the regulation that’s been put in place 2 years ago in India.

We did have our India-led strategy where we brought product from the U.S., and it was working very effectively. So we’re still — as our volumes will grow as we reopen the new — as we reopen — as we open our new shaft calcination plant and as we grow the volumes there, so as we wait for rulings on the permissibility of import and still seek allocations for our new capacity, and we wait — we await official rulings on SO2 emissions related to the calcination industry, we’re very comfortable in our place in the industry and our strategy for the Carbon products segment.

What we really need is to clear these hurdles and be able to progress because we do have available capacity.

——————————————————————————–

Operator [73]

——————————————————————————–

The next question is from the line Manpreet Singh a private investor.

——————————————————————————–

Manpreet Singh, [74]

——————————————————————————–

I have questions around 2 areas. One is the vertical-shaft plant and the other one is ACP.

So on the vertical shaft, my question is that, is the construction complete on this and you’re just waiting for possibly the issue of ACP to get sorted out and you start this plant? Or still there is some portion of construction left?

And as — if yet, then what percentage of construction is left? How much capital expenditure you need to spend on it? And how long it will take?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [75]

——————————————————————————–

See, basically, we are ready to start by middle of September, I think we should be ready to start the plant. So it’s not far away. So we should be able to complete it. See majority of the plant is done. The only thing we are waiting for was, the flu-gas desulphurization system, some equipment that has to come from China. Because of the COVID, it got delayed. Apart from that, there is no other delay with the plant.

Main thing that needs to be resolved is the petroleum coke or the raw material. So we’re just trying to ensure that we get a stable supply of materials. And once we have that, we can start the plant at a short notice.

As a matter of fact, we also started — already started — 1 kiln heater process has already started as early as in March. We are hoping to start. So we had to continue because you cannot stop — once you start a shaft calciner, you cannot stop it. So we are continuing the heating for the last 5 — 4, 5 months.

So we are hoping to get resolved this and then we can start the plant.

——————————————————————————–

Manpreet Singh, [76]

——————————————————————————–

Okay. So that’s helpful. And my second question is around this ACP testing that you’re getting done. So my question is that, why are you getting this testing done? Were you asked by, let’s say, some Indian authority? Or is it your own initiative to get it done?

Second question is, which international firm is it? I think you said international firm. So are you able to disclose which international firm is this?

And my third question on this is, when do you expect the results of that laboratory testing to come?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [77]

——————————————————————————–

See, first of all, it is — test is being done because it’s a product — we have developed it and then actually we have tested it and we have already analyzed it, but we also good to have an outside party testing it.

As a matter of fact, apart from this outside party, there are a few smelters also which are already looking at this. It’s not just only that lab. This is the world’s most premier lab. We cannot tell the name because, I don’t know, if we can even mention that, but it’s a world’s best lab in carbon.

So it is — mainly they only focus on carbon and nothing else. So they are doing. It’s based in Europe. So we hope to get the test in October phase.

——————————————————————————–

Manpreet Singh, [78]

——————————————————————————–

Okay. Great. And as soon as you get the result, and hopefully, it’s going to be positive, then that will further help you build your case, if there are any concerns from the Indian authorities, and then you can take the next step of starting the construction for the ACP plant?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [79]

——————————————————————————–

Yes. So see, one of the reasons, actually, we stopped — we actually withheld the construction of the ACP plant was because of the lack of labor, actually, because whatever we had, we actually are concentrating on completing the main plant.

So hopefully, if that is done, then immediately after that is done, we can start the work.

——————————————————————————–

Operator [80]

——————————————————————————–

The next question is from the line of [Mohit Jain] from [Value Educator].

——————————————————————————–

Unidentified Analyst, [81]

——————————————————————————–

Sir, my question is regarding HHCR. So how big is the market price for HHCR? And so what is our capacity — total capacity per annum for to produce HHCR?

——————————————————————————–

T. Srinivasa Rao, Rain Industries Limited – CFO & Chief Risk Officer [82]

——————————————————————————–

Our capacity is 30,000 tons. The market is much larger.

——————————————————————————–

Unidentified Analyst, [83]

——————————————————————————–

Okay. So how big is the market globally, if you could just share some light on that?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [84]

——————————————————————————–

Globally, we cannot comment on because in China, there are a lot of places, but we think we’ll actually be on a large producers in Europe. And actually, we’ll also be actually expect to supply a good amount of material into the U.S.

And we are actually in trying to — because this is also food grade, actually, we are in the process of getting approvals from the FDA in the U.S. So hopefully, all these accrual should be in place by October, then we should be able to continue supplies, please.

——————————————————————————–

Unidentified Analyst, [85]

——————————————————————————–

And sir, what are the margins — a ballpark figure on margins of HHCR on our revenue?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [86]

——————————————————————————–

See I don’t think we can comment on that because it depends on the raw materials. And — but one thing I can tell you is, this plant has a unique capability to process the lower cost raw materials, which is not possible for others. That I can help.

——————————————————————————–

Unidentified Analyst, [87]

——————————————————————————–

Okay. And sir, the last question would be, so can you list some competitors in this segment, globally?

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [88]

——————————————————————————–

So — for HHCR, the main competitors are Exxon and Eastman Kodak, for us in Europe and U.S.

——————————————————————————–

Operator [89]

——————————————————————————–

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Jagan Reddy Nellore for closing comments.

——————————————————————————–

N. Radhakrishna Reddy, Rain Industries Limited – MD & Director [90]

——————————————————————————–

Thank you. During our previous call, we told that Rain is in a unique position as an essential part of the global supply chain.

As a result of our performance during the first quarter — as a result of our performance was strong in the first quarter, relatively strong in the context of the global pandemic. During the second quarter, however COVID’s cascading effect reached our businesses, as demand for our products fell sharply due to the virtual shutdown of airplane and auto manufacturing, coupled with the broader global economic impact of coronavirus on nearly every aspect of life and the nationwide lockdown in India.

Looking ahead to the second half of the year, we are cautiously optimistic as we watch certain parts of the global economy begin to reemerge and reactivate.

At the same time, we are acutely aware that COVID is far from contained in some parts of the world and that a second wave would significantly set back a recovery.

With that in mind, we are doing all that we can do to ensure that Rain is a low-cost, high-efficiency producers that is well positioned to weather the current situation and to capitalize on a post-COVID recovery.

We have taken steps to right size our businesses to match earning expectations, and even more significant and far reaching we are working across our global footprint to improve plant reliability, energy production and resource management.

Obviously, we need something approaching normal economic conditions for our business to return to normal, which was a pre-COVID trajectory.

Nonetheless, we are confident that by contributing to a driving efficiency — continuing to driving efficiency, bring creativity to everything we do and introduce sustainable products of 21st century applications.

We will further enhance our ability to compete with or without COVID. Thank you for joining us today and best wishes for the family for the health of — and safety of you and your families. We look forward to speaking with you again in the next quarter. Be Safe. Thank you.

——————————————————————————–

Operator [91]

——————————————————————————–

Ladies and gentlemen, on behalf of Rain Industries Limited, that concludes this conference. Thank you for joining us and you may now disconnect your line.

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