Deep Value Portfolio

My two cents on Rain Industries:

Positives and Key Considerations for Rain Industries:

1. Raw Material Availability: Rain Carbon recently received approval for a higher allocation of Graphitized Petroleum Coke (GPC), a critical raw material for their Vizag and SEZ plants. This development comes after a long period of restriction and should enable the SEZ plant to operate at full capacity within 6 to 12 months. This increased capacity could significantly boost revenue and profitability, thanks to enhanced operating leverage.
2. Debt Management: Although Rain Carbon’s debt is high and interest rates are elevated, the company historically took on loans at low interest rates for expansion projects. Their Return on Equity (ROE) was previously higher than the interest rates on the debt, making this a reasonable strategy. With most of the capital expenditure completed and plants coming online soon, the company is positioned to start reducing debt more aggressively as no major capex has been planned in near term. Also interest savings flow through to the bottom line, this could lead to a re-rating of the company’s stock. This can change the perception of investors looking towards this business.
3. Aluminum Market Outlook: The demand for aluminum is expected to rise due to trends such as the shift toward electric vehicles, automotive and aerospace light-weighting, and the expansion of renewable energy infrastructure. Global aluminum production is projected to grow, surpassing previous highs over the next few years.
4. Cost Efficiency: Rain Carbon is among the world’s lowest-cost producers of GPC and CPC Though they don’t beat their chest and say, their cost advantage is reflected in their operating margins, even during downturns, positioning them favorably compared to competitors.

Optionality and Strategic Moves:

1. Anhydrous Carbon Pellets (ACP): Since 2011, Rain Carbon has been developing ACP to mitigate risks associated with the availability and quality of GPC. This patented product could provide a significant competitive moat by safeguarding margins against raw material price fluctuations.
2. Shift to Value-Added Products: The company is transitioning towards value-added products in advanced carbon materials, which should stabilize margins and reduce cyclicality compared to their traditional products.
3. Focus on Energy Storage Materials: Rain Carbon is making strides in the energy storage sector with the establishment of a new R&D facility in Hamilton, Ontario. This center will support the development of energy storage materials for lithium-ion batteries, solid-state batteries, sodium-ion batteries, and hydrogen fuel cells. The R&D efforts are expected to drive innovation and strengthen their position in the energy storage market.

Given Rain Carbon’s strong cash flow, low valuations, potential for debt repayment, Operating Leverage, recovering carbon product demand, and other strategic initiatives (Optionality Playing out), it appears that many of the negative factors have been addressed. Any positive developments could lead to a significant re-rating of the company’s stock, which is currently undervalued and overlooked.

DISC: Invested (Can be Biased)