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Edited Transcript of RAIN.NSE earnings conference call or presentation 13-Nov-19 11:30am GMT

Q3 2019 Rain Industries Ltd Earnings Call

Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Rain Industries Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gerard M. Sweeney

Rain CII Carbon LLC - CEO & President

* N. Radhakrishna Reddy

Rain Industries Limited - MD & Director

* Ryan Tayman

Rain Carbon Inc. - VP of Finance & IR

* T. Srinivasa Rao

Rain Industries Limited - CFO & Chief Risk Officer

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Conference Call Participants

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* Arvind Kothari;Niveshaay;Founder

* Bhavesh Chauhan

IDBI Capital Markets & Securities Ltd., Research Division - Analyst

* Gunjan Kabra;Niveshaay;Analyst

* Rohith Potti;Marshmallow Capital;Analyst

* Sarvesh Gupta

Maximal Capital - Founder

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Presentation

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Operator [1]

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Ladies and gentlemen, good evening, and welcome to the Rain Industries Limited Earnings Conference Call for the Third Quarter of 2019. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Mr. Ryan Tayman, Vice President, Global Treasury, Rain Industries. Thank you and over to you, sir.

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Ryan Tayman, Rain Carbon Inc. - VP of Finance & IR [2]

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Thank you. Good evening, everyone. I welcome all the participants to the Third Quarter 2019 Earnings Conference Call of Rain Industries Limited. Speakers on today's call are Jagan Reddy Nellore, Vice Chairman of Rain Industries Limited; Gerard Sweeney, President of Rain Carbon Inc.; and T. Srinivas Rao, Chief Financial Officer of Rain Industries Limited.

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

Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature 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, I would request Jagan to provide an update on key developments within Rain Group. Over to you, Jagan.

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

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Thank you, Ryan. A very good evening to all of you. Turning to Slide 3 of the presentation. EBITDA in the third quarter improved to INR 4.72 billion, up from INR 4.5 billion in the previous quarter. This improvement is further evidence that we are achieving the progress we had anticipated about improving margins. The increase in the bottom line was the result of enhanced margins, which we believe we can return to and hold at historic norms since we have essentially flushed out majority of our high-priced inventories that have been a drag on earnings for the past year.

On the Carbon side of our business, revenues for the segment decreased by 10.9% from the second quarter, primarily due to a decrease in carbon volumes, which includes the impact of the CPC import ban and GPC allocations in India. To help over from the impact of the restrictions in India, we have developed a new material called anhydrous carbon pellets, or in short form ACP, that we believe can be used in India that will offer some unique advantages to the anode producers. Going forward, our strategy is to grow our CPC sales volume as well as calcined version of our anhydrous carbon pellets, and we do anticipate future growth.

That being said, we won't chase sales at the expense of profitability in what is currently a highly competitive market. Despite the decrease in revenues, EBITDA for the Carbon segment increased sequentially by INR 879 million in the third quarter due to improved margins. Having worked through most of our high-cost inventory and with the GPC prices falling, margin spreads are gradually expanding. Hope -- however, pressure from weakness in aluminum market has placed a ceiling on our top line. So margins will continue to reflect market conditions. Our Carbon segment also benefited from a slight uptick in the coal tar pitch volumes. This includes a shipment to a nontraditional market. The resolution of the Russian sanction has also provided a boost to coal tar pitch sales, restoring the market where we had a strong presence.

Turning to Advanced Materials. Revenue for the segment decreased by 5.7% compared with the second quarter. This was primarily due to continued weakness in resins sales, stemming from sluggish global automotive market. Sales of our CARBORES specialty binder were also off in the quarter due to ongoing weakness in the steel industry and the downstream impact on steel suppliers in the graphite and refractory markets, which have been big consumers of specialty binders. Offsetting these declines was an impressive quarter in the engineered products, where revenues were up 21.8% sequentially. Of particular note was the performance of our environmental friendly sealer-base products and PETRORES specialty coatings, which are used in lithium-ion batteries, energy storage and other specialty applications.

Petrochemical intermediates performance was basically flat, primarily reflecting the current BTX situation where we are addressing quality issues in our supply chain.

Cement business revenue decreased by 20.1% compared with the second quarter. This was primarily due to a decrease in market volumes and realizations in all markets due to monsoons. With the onset of a good monsoon season and all the major dams reaching their full reservoir capacities, we expect there would be bumper harvest throughout the markets that we serve in India, which should give strong impetus to the rural economies. This combined with strong focus by the newly formed governments towards housing and pending irrigation projects should result in strong demand from cement from the fourth quarter 2019 onwards.

Finally, the cost of many of the raw materials we buy have been falling, which has resulted in reduced investment in receivables and inventory and consequently, an increase in cash flowing back into the balance sheet. This is flooding some of the resources being used to fund our capital investments, reducing our need to tap other funding sources for these important projects.

In short, while earnings are down from a year ago, we have been able to maintain steady cash position, and we are committed to the prudent use of capital as we position Rain to meet the evolving requirements of our customers and society.

With this business update, I will now turn over the call to Gerry Sweeney to take you through the industry and other business updates on Slide 4. Gerry?

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

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Thank you, Jagan, and good evening, everyone. It's a pleasure to speak with you all once again.

On Slide 4, we are seeing weakness in the aluminum market, with the LME price having fallen to recent lows. This is not surprising as LME prices were down to retreat with the restart of the largest North American smelter and the resumption of production by a Brazilian producer as well, coupled with reduced aluminum costs following the resolution of Brazil's Alunorte aluminum mining situation. Declining LME prices and the current oversupply of aluminum is widely expected to force the curtailment of some high-cost plants. We're already seeing shutdowns in Europe and among some older, smaller smelters in China. Conversely, cost-advantage projects have moved forward, including an expansion in Bahrain in the Middle East.

The takeaway here is that we expect to see a rationalization of some smelting capacity around the world as long as current conditions persist. In the medium term, perhaps as early as 2020, aluminum demand is expected to increase, according to some industry sources. That being said, weak LME prices do not necessarily lead to reduced demand for our CPC or coal tar pitch products. Macroeconomic forces, such as the rapid growth of electric vehicles and the replacement of plastic with more sustainable aluminum in beverage containers, mean that the outlook for aluminum products and, therefore, range products is very good. Similarly, the recent restart of the largest smelter in North America and the ramp-up of 3 facilities in Russia should boost demand for pitch products as well.

Moving to Slide 5, regarding our major capital projects. Construction of our shaft calciner in India continues. However, to provide additional time to finish installation of an ACP, anhydrous carbon pellet plant in India that we referred to in our announcement on September 16 of this year and to produce enough ACP to keep the shaft calciner, we are moving the commissioning and commercial operation of the new calciner to Q1 2020. At the same time, we are installing a second ACP plant at our Chalmette facility in Louisiana in the United States.

On August 15, we completed the first part of a phased commissioning of our new European hydrogenated hydrocarbon resins facility. Our plan is to begin commercial operation during early Q1 of next year. This plant will be the cornerstone of our Advanced Materials business, and it will position us to help satisfy increasing demand for water-white resins required for contaminant-free adhesives in food packaging and hygiene products, such as disposable diapers. The plant will also supply advanced resins for adhesives used in technical applications, serving as the backbone of polymers in new high-strength glues. We see this as a big growth market for us and a potential game-changer for resins.

Over the past few quarters, we have alluded to a number of global initiatives, both in response to current market conditions as well as a means to improve the competitiveness -- excuse me, our competitiveness over the long term. This focus includes plant conversion costs, productivity, plant availability, downtime and utilization rates, turnarounds and maintenance, inventory management and production yields, functional SG&A management and our asset footprint, including previously announced plans to close our Uithoorn, Netherlands resins facility next year.

With that, I will 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 [5]

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Thank you, Gerry, and good evening, everyone. It is a pleasure to speak with you today. In the third quarter of 2019, Rain issued consolidated net revenues of INR 29.78 billion compared to INR 34.7 billion in the third quarter of 2018, a decrease of INR 4.93 billion or 14.2%. This resulted from a decrease in revenue of INR 3.52 billion or 15.5% reduction from our Carbon segment and INR 1.59 billion or 16.3% reduction from our Advanced Materials business, offset by INR 0.17 billion or a 7.7% increase in revenue from our Cement segment.

Rain's consolidated adjusted EBITDA decreased by INR 0.79 billion compared to the prior year. This resulted from a decrease in Carbon segment by INR 0.38 billion and in Advanced Materials business by INR 0.61 billion, offset by an increase in our Cement segment EBITDA by INR 0.2 billion.

Now turning to the next slide on Carbon segment performance. Revenue from our Carbon segment was INR 19.24 billion for the quarter ended September 30, 2019, as compared to INR 22.76 billion for the same period last year. During Q3 2019, the average blended realization decreased by about 14.1% due to changes in market trends, further affected by unfavorable impact from depreciation of the euro against Indian rupee by 3.9%, which is partially offset by appreciation of U.S. dollar against Indian rupee by 0.6%. The drop in CPC price was primarily driven by reduced prices in the Asian markets and price pressure in North America.

Gross sales volume in the Carbon segment decreased by 1.6%, mainly due to a decrease of -- decrease in CPC volumes by about 10.1% and other carbon products by 0.7%. This is offset by increasing CPC volumes by about 24.6%.

Overall, due to lower volumes and a decrease in realization, revenue from Carbon segment decreased by about 15.5% in third quarter of 2019 as compared to last year. The Carbon segment continued to be impacted by petcoke import restrictions in India, impacting the ability to compete with Asian markets and resulting in underutilization of our U.S. calcination plants.

Turning to next slide on performance of Advanced Materials. Revenue from our Advanced Materials segment was INR 8.18 billion for the third quarter of 2019 as compared to INR 9.76 billion for the same quarter last year, a decrease of INR 1.58 billion or 16.3%. During Q3 of 2019, sales volume decreased in petrochemical intermediates by 13.5% and resins by 17.6%, offset by increase in engineered products by about 3%. Naphthalene derivatives remained unchanged. Volume decrease was primarily driven by weakness in European automotive and adhesive industries and North American construction industries coupled with a shortage of raw materials.

During third quarter of 2019, the average blended realizations decreased -- in the resins business decreased by 9.5% along with the unfavorable impact of depreciation of the euro against Indian rupee by 3.9%. The decrease in price of petrochemical intermediates was driven by a reduction in oil-related prices.

Now moving to the next slide on the Cement business. During the third quarter of 2019, there was a favorable trend in the sales volumes in the Cement business, resulting in increase of 4.5% in our Cement business as compared to the last quarter -- same quarter last year. Most of our markets, such as Telangana, Tamil Nadu, Karnataka, Maharashtra, Goa and Pondicherry had seen increased volumes, but these were partially offset by decrease in Andhra Pradesh, Odisha, Kerala and other smaller markets. Sales realizations increased by 3.1% during Q3 2019 as compared to last year. Due to these reasons, revenue from Cement business increased by 7.1%, and EBITDA from the segment increased by about INR 0.2 billion.

So moving to the next slide, Slide #10 on the debt position of the group. At the end of third quarter 2019, our total debt was USD 1,095 million, which includes working capital debt of $56 million. Capital expenditure of INR 8.09 billion or about $115 million was incurred in the 9 months ended September 30, 2019, which includes $51 million spent on our 2 major expansion projects under construction, that is HHCR project in Germany and vertical-shaft kiln in India, which was just explained by Gerry Sweeney as well as the expenditure incurred on other expansion projects contributed for increase in the capital expenditure.

Net cash used in the financing activities is about INR 5.12 billion during the 9 months ended September 2019, which includes a reduction in the repayment of working capital loans of INR 1.13 billion. So balance amount of INR 3.98 billion is towards servicing of the interest payments. The company ended the quarter with a net debt position of USD 901 million and a net leverage ratio of 4.1x based on the LTM Q3 CY19 adjusted EBITDA.

Finally, finance cost during Q3 2019 were INR 1.13 billion, approximately the same as the third quarter of 2018. Although there was a reduction in working capital borrowing during the current quarter, the decrease in interest cash was offset by the increase in the exchange rates. Our average borrowing cost stood at 5.5%. We expect net interest expense to remain stable as the floating rate portion of our long-term debt is tied to the EURIBOR, which is still negative.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We take the first question from the line of [Ayur Chugani], individual investor.

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Unidentified Participant, [2]

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What is the reason of fluctuation in Advanced Materials division, as I assume the high cost inventory is already vanished. Then why the margins got impacted?

Hello, can you hear me?

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

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Yes.

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Unidentified Participant, [4]

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Hello, shall I repeat my question? Hello?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO & President [5]

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Yes, the Advanced Materials products do fluctuate with market conditions, and we did see weakness in the pricing in our larger volume products in Advanced Materials. So that's -- basically, a weaker liquid fuels market affects our pricing there. So that was the major impact on pricing and margins in the Advanced Materials sector.

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Unidentified Participant, [6]

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Okay. So my second question is that the Carbon division has posted 18.7% margin. So I question that, are they sustainable? And for CPC specifically, was -- as I see that it was strong due to the low GPC prices, so do you think it is sustainable or it was temporary?

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Gerard M. Sweeney, Rain CII Carbon LLC - CEO & President [7]

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Yes. Where we're really pleased on the Carbon segment is that in the third quarter after suffering from inventory overhang related to the disruption of the sale of our product, we really were able to reestablish our margins in the CPC business in particular. And so we're very pleased with that. You're right, it is a function of reducing our raw material cost, but this is sustainable. We'll have to -- given the weakness in aluminum, we'll have to continue to protect that margin by creatively purchasing and using our raw materials, but we do believe it to be sustainable.

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Operator [8]

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(Operator Instructions) Next question is from the line of [Darsh Sonam], individual investor.

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Unidentified Participant, [9]

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This question is for Mr. Jagan. Mohnish Pabrai says that you are a great capital allocator. So since the stock is trading at 0.7x book value, is there any reason that you chose a dividend rather than a buyback?

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [10]

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Capital allocation and buyback.

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

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Yes. Basically, the dividend buyback is not really attractive for us. The reason is we are a -- Rain Industries Limited is a holding company. So any money that comes into the holding company, actually we have to pay dividend tax and then declare dividend to Rain Industries, which can be set off if it is, again, paid only as a dividend. If we actually do it as a buyback, then the problem is we will actually be subject to double taxation. So the preferred route is dividend, please.

Another issue is when you are declaring dividend, all shareholders will get the benefits. And when we do the buyback, only certain shareholders who want to surrender their shares, they alone will get benefit. So minimum dividend has to be maintained to benefit all the shareholders of the company.

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Unidentified Participant, [12]

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Okay. And the second question I had was the basic process for manufacturing aluminum has been the same for so many decades. Do you see on the horizon, maybe 10 years from now something, a better technology which doesn't use maybe GPC or CPC to take over?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [13]

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At this point of time, there is no new technology we are aware of. Only thing is there is something under R&D that is being developed by a group of aluminum companies to see if they can produce any carbon-neutral material without calcined petroleum coke or green petroleum coke. But that is at least 4, 5 years away, and we don't even know what will be the cost of production because the alternates -- these people have been working on alternates for the last 15, 20 years. So far, there is nothing which is actually cost effective that has come into forefront. And assuming even something comes even 4, 5 years down the line which is actually environmental friendly, to retrofit all the smelters, basically all the new smelters that will be set up will be using the technology, so the existing smelters still will have to depend on this carbon. So we think that calcined petroleum coke and coal tar pitch will sustain for at least 2, 3 decades -- at least 2 decades.

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Operator [14]

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Your next question is from the line of Rohith Potti from Marshmallow Capital.

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Rohith Potti;Marshmallow Capital;Analyst, [15]

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My first question is on the Supreme Court ruling, the latest one, could you explain as to where we stand and what's the next step ahead for us?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [16]

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See, basically, the Supreme Court has given orders that the Ministry of Environment and Forests actually have to come up with basically, the -- what are the environmental standards they would like to see for the calciners and submit something within 6 months. So basically, they have to submit something by March 15th to the Supreme Court and once Supreme Court approves that, then those standards will be actually prevalent for all the calciners. But from our perspective, we are not concerned about that because we follow the highest environmental standards in the world. And we are probably the very few carbon-neutral companies in the world. So we are not concerned about whatever standards Ministry of Environment and Forests can come up with. But we will need to be -- we do not know at this point of time what will be the standards. So we are just waiting and seeing till March what does happen. So meanwhile from our perspective, we are also using Indian raw materials to be able to meet our requirements.

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Rohith Potti;Marshmallow Capital;Analyst, [17]

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Understood. The second question I have is, if you could explain a little more the anhydrous carbon pellet? I mean it is great to see the amount of derisking that Rain does with petrol tar and now with ACP. If you could talk about how this whole thing fits into the CPC category that we have? And is it as economically profitable for us as CPC is? And will it sort of ensure that irrespective of what the Supreme Court comes out with, we'll maintain the full utilization of both these Indian facilities going forward? And also, if you could help us understand why we are setting up one in the U.S. as well because I don't think there is any restriction there.

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [18]

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See, anhydrous carbon pellets will actually be made from refinery bottoms and some organic carbon binders. So it is essentially a superior form of raw material, carbon raw material for making anodes. Basically, that improves the -- that packs the material very well and it improves the overall density of the product, and which is helpful in reduction of power consumption. And also, we can make -- customize this product to any quality that is required. So we are -- as we announced that we are setting up 2 projects, one project will actually be in Vizag in SEZ plant and one in the U.S. In India, we'll be making the ACP essentially from raw materials available within India where we can measure certain qualities. And -- but we are only setting up a plant in India for 250,000 tonnes, though our overall requirement is about 450,000 tonnes of raw material. So we will be importing about 200,000 tonnes from U.S., from our plants in the U.S. and 250,000 tonnes that we will be making in India.

The reason is why we have split the plant between India and U.S. is that let us assume that maybe 1, 2, 3 years down the line, once this -- there are change in laws and where the ban is lifted, then at that point of time we should be able to -- we want to be able to use this anhydrous carbon pellets, which we think will be a very important invention for making this prebaked anodes. We want to be able to produce them in the U.S. and supply to customers there in the blend form, and we will be able to use anhydrous carbon pellets here and then supply to the customers in this part of the region. So that's why we split the plants within both India and USA. And from a cost perspective, we do think that this will be on par or actually more competitive than green petroleum coke.

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Operator [19]

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We take the next question from the line of [Vikram Sharma] from [Meraki Wealth].

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Unidentified Analyst, [20]

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Sir, my first question is, cash flow from operations in first 9 months were higher compared to normal cash flows. So what changes we made in our working capital strategy? Or is it going toward sustainable cash flow?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [21]

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Actually, the reduction in the -- the improvement in the cash flow from operations is on account of reduction in the prices. Most of the products what we are dealing right now, whether coal tar pitch or calcined petroleum coke, you see a decline in the prices though. Compared to last year, the decline in some of the products is 30% to 40%. So because of that, there is a release in the working capital from the inventories and receivables. And that's why you could see a higher inflow from operations.

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Unidentified Analyst, [22]

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Okay. And sir, another question. Sir, euro has depreciated, so how it will affect our European business and what was the impact of this on our business?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [23]

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Yes. See, euro has depreciated, that's correct, but most of our revenues are generated from the local markets, like the revenues are generated in euros and costs are also incurred in euros. And if there are any exports that are happening from European countries to outside Europe, we will be selling in dollars. So we will get higher euros because of the depreciation of euro against dollar. So there's no impact to the business because of the euro deprecation.

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Unidentified Analyst, [24]

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Okay. And sir my last question, our export, CPC export from China has doubled in last 2 months only. So what were the main factors behind that?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [25]

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Basically because the imports from India actually have reduced. So which basically is contributing to our -- the available sales within India also have reduced. We are not able to export because of the tightness in the raw material availability for the Indian calciners. So because of that, China has been able to -- there's more imports coming from China.

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Operator [26]

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We take the next question from the line of Arvind Kothari from Niveshaay.

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Arvind Kothari;Niveshaay;Founder, [27]

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My first question is regarding our CapEx. The original CapEx in Vizag was designated at $60 million, has gone up to some $98 million, so that's fine, we have made adjustments because of the new environmental norms. Also HHCR has gone from $70 million to $93 million. So both the CapEx has seen a significant escalation. We understand that the products that we are making are also high margin. So if you could give us a brief payback periods for both the projects and the kind of margins that we'll be working at both the plants to justify the CapEx increases?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [28]

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See basically, the increase in cost in Vizag is mainly on account of 2 reasons. One is the -- so we actually -- see, we normally -- for a flue gas desulfurization system, we normally use lime-based system and the disposal actually what we do is, in our existing plant what we do is, we sell it to the brick manufacturers, but we almost don't get anything because we almost pay back -- we actually almost give it out almost at free to the brick manufacturers. So -- but when we decided to set up this SEZ plant, we decided to put up a ammonia-based scrubber, which costs almost 3x the cost of regular limestone scrubbing -- lime scrubbing FGD. But the advantage is that when you use this liquid ammonia in FGD, you actually get ammonium sulfate, which is a fertilizer that can be used by the Indian farmers. And payback period -- there's a payback period for that, which is about 3.5 years. So there's an advantage. So though there was a higher cost, we decided to actually put up a ammonia scrubber, which is actually -- which we believe is the first of its kind in India actually. So this actually helps us make a product that actually can be used by the Indian farmers.

And second is, now we are setting up diverse use with the ACP plant in the SEZ location. That also should be quite good for us because we are actually going to be consuming raw materials, which otherwise cannot be used for calcination, and actually making a very useful product out of that. So that should actually make us very competitive. And not only that, it will actually make a product that will be very useful for the aluminum smelters. And based on this, we expect our payback period to remain almost the same that was originally contemplated. We think it might be somewhere about 4 years. Similarly, the HHCR plant also with our R&D work -- though there has been an increase in the cost, with our R&D, we've been able to -- we expect -- we have been actually improve the quality of the product that will be coming out and probably it will be -- probably it's one of the cleanest, most whitest water -- white-water resin product. And also, our team actually has been able to reduce the cost of production. So with that, again, cost of -- the payback period should be somewhere about 4.5 to 5 years. This was actually what's originally expected. So the increase in cost should not overall impact as much.

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Arvind Kothari;Niveshaay;Founder, [29]

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So this HHCR, sir, what kind of margins we would be working and any sales guidance for next year, full capacity, if you could give?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [30]

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We don't give forecast. And second thing is that HHCR margin should be on par with our competitors, which your -- see, our competitors are basically Eastman and Arakawa and others. So you can check that, but we cannot give you any particular details at this point of time.

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Operator [31]

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Next question is from the line of Bhavesh Chauhan from IDBI Capital.

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Bhavesh Chauhan, IDBI Capital Markets & Securities Ltd., Research Division - Analyst [32]

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Sir, can you please explain a bit more on why Advanced carbon margins fell? I understand that it was mainly because of business -- I mean the industry and end consumer market not doing well. But having said that, are we seeing recovery or how should we look at it going forward?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [33]

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Actually, if you see the margins in the Advanced Materials business, there is a decline in the margins. One is we are shutting down our facility in Netherlands, and we are also reducing certain products, which are not remunerative to us. So because of all these reasons, you see a lower margin in the Advanced Materials business segment. It is also coupled with the slowdown in the automobile industry in Europe as well as the construction industry in the North America. Some of our resins, superplasticizers are used in the construction industry. Because of the negative growth in the automobile industry in Europe as well as the construction in North America, you see a decline in the volumes as well as operating margins. But we see that once the HHCR project is operational by early 2020, we see there will be improvement in the operating margins. Also, we will be focusing only on the products that are more remunerative. Because of that, we expect a better operating margins in the Advanced Materials business in next year, in 2020.

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Bhavesh Chauhan, IDBI Capital Markets & Securities Ltd., Research Division - Analyst [34]

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Okay. And for the current CPC business in India, we have developed a new material, so now should we expect volumes to be higher from current levels? What happened in this quarter, should CPC volumes also recover?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [35]

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Yes. We should actually expect -- now hopefully, now with the startup of the shaft calciner expected in the first quarter. And basically we do expect to see improvement in the sales volume of CPC starting next year.

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Bhavesh Chauhan, IDBI Capital Markets & Securities Ltd., Research Division - Analyst [36]

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Okay. And any particular level of margin that we feel -- I mean are the current margins sustainable, or can we have a little bit variations here and there?

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

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In terms of percentage I think these margins can be sustainable or do better actually, in terms of percentage.

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Operator [38]

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Your next question is from the line of Parvesh Gupta (sic) [Sarvesh Gupta] from Maximal Capital.

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Sarvesh Gupta, Maximal Capital - Founder [39]

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My first question is on the new product that we are trying to develop, how confident is that you will be able to commercialize the sales? And what will be the margin profile of this product compared to what we were normally selling?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [40]

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See, basically has been under development from 2011 onwards. This is not a new product for us, and we have done extensive testing on the same. And once we actually have more quantities available, there are several customers looking for this material. But actually, initial stages actually we'll be sending a blend component with the CPC, so where this may not exit more than 20%, 25% of the overall thing, so there will be no impact on the quality. Actually, it will only improve, if not -- there should be no other impact, but it will only improve. And hopefully, once this is stabilized and once the customers are more comfortable using it, then actually we may start selling that material on an individual basis.

Similarly, HHCR, we think whatever we are going to produce will be probably one of the highest quality products that will be in the market today. And once that is done, we expect there is a lot of -- lot of customers are already reaching out for this product. And hopefully, that should actually develop into a good commercial sales going forward. But we already have a pilot plant. And actually, we are producing samples and actually giving out to customers. So the customers do know the quality of the product that will be coming up.

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Sarvesh Gupta, Maximal Capital - Founder [41]

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So basically, we don't feel that there is any risk to the commercialization of these products? It is only a matter of time before we can...

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

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Can you please come back, please, we cannot hear you.

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Sarvesh Gupta, Maximal Capital - Founder [43]

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No. I was saying that, basically, what you are saying that there is no risk in terms of product acceptance as such and this is only a matter of time before you are able to produce it on larger scale once the new plant comes up?

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

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No, I don't think there is a risk. I would say that the only thing is acceptance. The customers will -- actually, it may take about 3 months for the customers to accept that. Beyond that, we don't see it as a concern because, as we've said, the ACP product has been in development from 2011 and a lot of customers already know this product. And the HHCR is basically a product which is already being used for the last several years by various customers produced by other producers. We think our quality will be better. So we are not too much concerned about the acceptability of either of these products.

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [45]

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In fact both these products have been done based on the customer's requirements, and we have been working closely with the customer to understand what kind of material they require, et cetera. So we don't see any risk in marketing those products.

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Sarvesh Gupta, Maximal Capital - Founder [46]

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Understood, sir. And sir, in terms of our growth strategy, of course, we are undertaking these 2 CapEx programs. Other than that, are there any other growth strategies for the company other than the 2 CapEx projects which are going on?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [47]

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At this time, we are not looking at any additional new CapEx projects. No, there are no projects in pipeline at this time.

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Operator [48]

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Next question is from the line of [Akhilesh Kumar] from [AdPro Technologies].

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Unidentified Analyst, [49]

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Sir, I have first question regarding our HHCR plant in Germany, which I believe it's getting pushed, the commercial production at...

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Operator [50]

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Sir, I'm so sorry to interrupt, but may I please request you to speak a bit louder so that the audio is much audible.

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Unidentified Analyst, [51]

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Okay. The Germany plant for HHCR is getting every quarter delayed and now we are moving from end of Q3 to early Q1. Is there any like bottleneck we are facing there or there is something other issue there?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [52]

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Sorry, can you repeat the question again?

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Unidentified Analyst, [53]

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Yes, the reason for delay in commissioning of HHCR plant in Germany?

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

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See, basically, there is some -- see because of the delayed arrival of some equipment because there was so much demand for the product and basically the equipment has delayed and there were some other issues related to construction from the contractor side. Mainly because of that, it got delayed.

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Unidentified Analyst, [55]

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So we should be confident of starting in early Q1, right?

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

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Yes, yes, we should be. Actually, we hope to very early Q1 we should be in operations because the hydrogen plant that is already required is already being commissioned and actually that we are able to produce material, already hydrogen is already coming. The only thing is we are waiting for the resins also, part of it to be completed.

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Unidentified Analyst, [57]

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Okay. And in Vizag plant, this ACP plant will be separate than what we have, this vertical-shaft CPC plant?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [58]

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No. The ACP plant also will be located in the same place, special economic zone, where our vertical-shaft plant is being constructed. So it's not a new location.

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Unidentified Analyst, [59]

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Okay. So it will use CPC produced from our vertical shaft or it will use -- means, it will be additional capacity with us, the 2.45, right?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [60]

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No, no, the output of the ACP plant will be used as a raw material for our vertical-shaft kiln.

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Unidentified Analyst, [61]

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Okay. Got it. And one more doubt I have is like, sir, we are assuming that we will be procuring most of the raw materials for our Vizag plant from India within, but what I believe is, like, sir, most of the GPC producers are there in Bihar or Assam and they have the rules to selling it only to locally situated plants. How we want to overcome this?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [62]

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So we will be actually using -- see, the materials we will be using are refinery bottoms that will be coming from other parts of India refineries. So we don't depend much on for the ACP -- that is the reason the advantage of ACP plant is, we don't need to depend on the anode-grade coke that is being produced in India. We can use other alternate raw materials, but that is one of the benefits of the ACP plant.

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Unidentified Analyst, [63]

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Okay. And the same way, we can run the Vizag vertical shaft as well, right?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [64]

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See, Vizag, the existing plant already has sufficient allocation. There is some shortfall, but we are able to overcome that with buying raw materials within India.

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Unidentified Analyst, [65]

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Okay. And one last thing, like, long time we have forgot about that because we are running so much CapEx and all, still we have that in mind, like, if you want to list it our -- Rain Carbon in U.S.?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [66]

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Yes, we want to complete this first. And our target is to complete this project and try to work on -- our main target now is basically bringing down the debt-to-EBITDA level, and our target is to bring down the debt-to-EBITDA below 3 by end of next year. So that is our main target, and we'll be working towards that goal, please.

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Operator [67]

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Next question is from the line of [HR Gala] from [Finvest Advisers].

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Unidentified Analyst, [68]

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As we have been discussing, it is really nice to see some sequential improvement in Carbon performance. Now my question pertains to, can you just tell us now what exactly will be the CapEx number? You just said a little earlier, but the line was not good, so I could not hear it, at the vertical-shaft Vizag and the HHCR plant?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [69]

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See, we think the vertical shaft, including the ACP plant, we expect it to be $90 million and also the HHCR plant should be $90 million. Each will be $90 million.

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Unidentified Analyst, [70]

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Each will be $90 million. Okay. So this will include the ACP also at Vizag, $90 million?

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

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Yes, please, that's correct.

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Unidentified Analyst, [72]

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Okay. Okay. That's about $12 million what you have planned?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [73]

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Yes, $15 million.

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Unidentified Analyst, [74]

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Yes. It is $12 million, I think, $12 million -- sorry, it is $15 million, correct at India. Okay. Now my second question pertains to, apart from this CapEx requirement, what will be the normal routine CapEx that we may have to incur?

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

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See, apart from that -- see, the way our -- there are 2 kinds of CapEx, one is discretionary, one is nondiscretionary, are the maintenance of CapEx. So the nondiscretionary maintenance CapEx, we expect it to be about $70 million, about $70 million plus/minus $5 million.

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Unidentified Analyst, [76]

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How much, $17 million, 1-7?

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

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7-0, plus/minus $5 million.

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Unidentified Analyst, [78]

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7-0 million, that will be the nondiscretionary?

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

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Nondiscretionary and maintenance CapEx per annum.

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Unidentified Analyst, [80]

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Okay. Okay. And in addition, we will have this $27 million of 2 projects, right? $15 million plus $12 million?

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [81]

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That's ACP project.

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Unidentified Analyst, [82]

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Yes, ACP project.

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [83]

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Basically which will come in -- basically, these projects will come into operations in early part of next year. So thereafter, I think the maintenance CapEx is what will be maintenance.

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Unidentified Analyst, [84]

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Okay. So normally, $70 million is what we should consider for the cash flow projections purpose, okay. Now sir, how close we will be getting to about $70 to $80 EBITDA margin in carbon products, especially CPC. That is what we had guided in the next -- last con call, that this is what you are aiming to?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [85]

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Yes. So if you call -- as you may have seen in the last 5 quarters, actually, if you just see the last 5 quarters of performance, what has happened is, CPC prices were falling, so were GPC prices. But what is happening is by the time the CPC prices fall and the GPC prices also fall and with the inventory consumed and basically the margin was actually getting eroded, but finally we have reached a stage where I think the CPC prices and the GPC prices are leveling. So hopefully, I think we should return back to our normal margins going forward.

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Unidentified Analyst, [86]

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Okay, okay, okay. Now my last question is, do we have all the environmental and other approvals to manufacture this ACP and use at Vizag? Or can there be any other issues?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [87]

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Yes, we have all the approvals.

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Operator [88]

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We take the next question from the line of Parvesh Gupta from Maximal Capital.

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Sarvesh Gupta, Maximal Capital - Founder [89]

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In terms of the utilization...

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Operator [90]

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I'm sorry sir, we are unable to hear you, Mr. Gupta.

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Sarvesh Gupta, Maximal Capital - Founder [91]

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Is it better now?

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Operator [92]

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Yes.

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Sarvesh Gupta, Maximal Capital - Founder [93]

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So my first question is, how soon can we achieve 100% utilization in our India business with the new ACP plant?

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [94]

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See, our rotary kiln existing CPC plant is always operating at 100% capacity utilization. The vertical-shaft kiln plant may operate at 70%, 80% when it is operational.

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Sarvesh Gupta, Maximal Capital - Founder [95]

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Okay. So 80% is the maximum utilization that one can...

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [96]

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No, no, no. We can go to 100%, that's not a problem. Basically, as Srinivas said, the existing plant, though we have lesser allocation, we're able to manage with -- we are procuring raw materials from within India and able to actually operate the plant at full capacity. And the new plant also is basically based on the raw materials that are procured in India and also with the ACP that may be imported or that will actually produce within India, we actually are hoping. But the ramp-up will take some time because the first year in 2020, we expect to reach about 70%, 80% capacity, thereafter to 100% capacity.

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Sarvesh Gupta, Maximal Capital - Founder [97]

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Understood. And if you can guide me for similar thing for the new European plant?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [98]

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That will actually increase in increments. So maybe next year we are targeting about 50% capacity utilization, and then probably 70% and then 90%.

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Sarvesh Gupta, Maximal Capital - Founder [99]

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Okay. Okay. Understood. And sir, the other one was on your cash flow from operations. So I think these 9 months was better because of some working capital release, but going forward, do you see any major changes in your working capital cycle or is it going to be stable?

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [100]

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No. Because the prices of our raw materials as well as finished products will be changing or fluctuating with market conditions. So net-net, we are not incurring any loss in any of the businesses. All are profit contributing or cash-generating assets only. But the working capital changes, it is difficult to predict, but our cash conversion cycle will always remain in the range of 60 days to 75 days.

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Operator [101]

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Next question is from the line of Gunjan Kabra from Niveshaay.

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Gunjan Kabra;Niveshaay;Analyst, [102]

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Sir, my question is on the new plant, the new CPC plant...

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Operator [103]

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Gunjan Kabra, requesting you to please use the handset mode, ma'am. We are unable to hear you.

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Gunjan Kabra;Niveshaay;Analyst, [104]

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Yes, my question was on the CPC plant. Sir, there's a huge expansion coming up in the Middle East also of around 1.75 million capacity of CPC and this new plant would also be catering to port markets only. So how do you think the capacity utilization would pan out? Are there any new aluminum smelters coming up in the Middle East or what is the capacity that is still needed globally for CPC?

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [105]

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The CPC expansion in Middle East, what you are saying is not so high like what you mentioned just now. But we don't expect that there will be any impact to our capacity utilization in spite of this new calciner coming in Middle East because the worldwide production of aluminum is expected to increase on a 65 million to 70 million tonnes capacity. Even if there's one -- 2%, 3% increase is there year-on-year, there will be incremental aluminum production and incremental demand for both CPC and CTP.

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Gunjan Kabra;Niveshaay;Analyst, [106]

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Sir, and the second question was on the raw material for CPC, that is ACP. So unlike when we make CPC, it was directly made from GPC. Now with one more production process added, do you think still the prices would be very, very competitive and the raw material dynamics for ACP would be similar to the raw material dynamics of CPC?

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [107]

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Yes. Basically, as I said, we do use different models for the production of ACP along with some organic materials that we actually produced -- taken from farmers in India. So that is the main raw material. But yes, the dynamics should be actually much better for the ACP product than what is -- and or CPC, calcined carbon pellets, that are produced from the ACP because it's much superior quality because it's custom made, it's actually engineered products. Basically, it is addressing the concerns of the customers. Basically, they have issues with the density and other packaging and other issues, so this ACP addresses all those concerns.

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Operator [108]

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Next question is from the line of [Akhilesh Kumar] from [AdPro Technologies].

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Unidentified Analyst, [109]

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I want to just know -- want to know the product, it's regarding so many smaller calciners we have in our country. Would they be able to sustain if the Supreme Court forces them to install FGD? What was the expenditure we incurred on Vizag FGD, may I know?

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T. Srinivasa Rao, Rain Industries Limited - CFO & Chief Risk Officer [110]

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FGD costs, operation costs.

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [111]

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See, the FGD costs mean -- we cannot comment on the other calciners. But from our side, we can say that, for example, our existing plant, we do spend about INR 25 crores per annum on the FGD. So whereas with the old -- the lime-base technology is the older technology, so the technology what we're going to be using now in our SEZ plant is ammonium sulfate production as a byproduct. So once we get that, then it -- see, basically, that has a payback period, as we said, about 3.5 to 4 years because we make fertilizer in that. So it depends on what is the technology they will actually adopt and how will they produce. And based on their capacity, they will have to decide, and we cannot comment on the competitor space.

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Unidentified Analyst, [112]

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Would you be able to, like, say, comment on like if in future, if any of the Indian calciners are up to sale, would you like -- we will be looking for them?

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [113]

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Sorry, can you repeat the question?

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Unidentified Analyst, [114]

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Like, do we are open to acquiring any Indian calciners as...

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [115]

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No. We cannot comment on those actually. It's not appropriate for us to be on talking that.

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Operator [116]

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Well, ladies and gentlemen, as there are no further questions from the participants, I would now like to hand the conference over to Mr. Jagan Reddy Nellore for closing comments. Over to you all.

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N. Radhakrishna Reddy, Rain Industries Limited - MD & Director [117]

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Thank you, operator. As we discussed earlier, our businesses continue to make positive progress and returning our earnings to historically normal levels. While we are still waiting for CPC prices to bottom out, reduce raw material prices and the fact that we have exhausted our high-cost GPC inventory and having it decidedly, all should impact on our margins. Similarly, we are seeing increased demand for coal tar pitch, and we believe the continued rise of aluminum as a metal of choice for a growing number of applications will have a positive impact on CPC and CTP volumes in the quarters ahead.

Just as important, anticipated infrastructure development in India should result in increased demand for cement. When you couple all of that with the continued growth of the electrical vehicle market and the resulting need for our PETRORES specialty coatings, I am confident we will see strong demand for a number of our existing products. Even more exciting are the opportunities ahead of us. We are months away from commercial sales of our NOVARES pure water-white resins and our value-added anhydrous carbon pellets could be a real differentiator for us, both in terms of market niche and our ability to supply our new shaft calciner.

At the risk of appearing starry-eyed about our future, I want to assure you that we are well grounded and are very conservative in how we are running our existing business and pursuing future opportunities. We are carefully managing our spending, and we are determined to eliminate expenses that don't add significant value for our company, customers and shareholders. Moreover, we have demonstrated a willingness to walk away from unprofitable businesses and close unprofitable operations. With the improved performance, our target is to reduce our -- the leverage of net debt-to-EBITDA below 3x by end of 2020. The bottom line is that while we are optimistic about our future, the management team and our employees around the world are acutely focused on returning our business to the levels of performance and profitability that originally prompted you to invest in Rain.

Thank you for joining us on today's call. And we look forward to speaking with you again in February. Thank you.

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Operator [118]

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Thank you very much. On behalf of Rain Industries Limited, we conclude today's conference. Thank you all for joining. You may disconnect your lines now.