Rain Industries Ltd

The year is 2007.

Jagan Mohan Reddy Nellore (JN), a man with balls the size of the London eye, successfully orchestrates a Leveraged Buyout (LBO) of CII Carbon LLC for $619.3 Million in July 2007. His own contribution? $92 Million dollars.

When JN acquired CII Carbon LLC, a US based “calcining” player supplying to aluminium smelters, it had a calcining capacity of ~1.8 MTPA.

If you’re a football fan, you know Messi’s India tour can best be described as a poorly organised sh*t-show - with everyone & everything other than India’s footballing youth getting the limelight.

In any case, imagine Messi was playing a football match (alone) on top of 1.8MT of CPC:

This 1.8MT of CPC (Calcined Pet coke) can hypothetically support ~ 4.5 MT of Aluminium smelting i.e - 1MT of smelting requires about ~0.4MT of CPC (Fact #1).

For the visually minded, 4.5MT of Aluminium = 20 Million EVs.

And for contextually minded, USA hit a peak production of 4.65 MT in 1980 with 33 production sites. Ever since, Aluminium production in the country has been in a structural downtrend for a solid 45 years (Fact#2) !!

The Demand Side

Somewhere along this slow but consistent unravelling of America’s aluminium production capacities - JN stepped in - which, with the benefit of hindsight can be best described as ‘catching a falling knife’.

When In July 2007, JN signed off on the CII Carbon deal, in a renewed but often short burst of optimism (cylical) aluminium production growth had spiked, incentivised by increasing aluminium prices, supported by a booming US & world economy.

Since then, Aluminium smelting capacity in the US has been in a structural decline. Today, the ENTIRE US “boasts” ~ 1.3MT capacity (Fact #3). It has 4 operational smelters with only 2 operating at full capacity at a combined utilisation of ~50-55%. Yikes.

I’m not a math wiz. But I can add & subtract numbers.

When JN orchestrated the CII carbon deal (July 2007), its capacity was ~1.8MT, which could’ve hypothetically supported ~4.5MT of AL production.

BUT even during 07’-08’ peak Aluminium pricing scenario (chart above), US production was somewhere around just ~2.5MT (chart below).

If only US alum production were to be considered, CPC players in the US namely Oxbow carbon & Rain Carbon LLC( formerly CII Carbon LLC) would be operating at a fraction of their nameplate capacities.

However, CPC producers based in US also service the Canada market & to a lesser extent other markets globally (UAE, Europe).

In 2007, US & Canada combined production was ~ 5.7-5.8MT.

US & Canada Primary Aluminium production

source: The Aluminum Association, Industry Statistics, North American Primary Aluminum Production; and U.S. Geological Survey (USGS), “Aluminum Statistics and Information.”

US & Canada* are NOT the only consumers of North American CPC.

*Mexico has no primary alum production capacities.

US refineries tend to refine “sweeter crudes” that are ideal for low-sulphur GPC (< 2.5-3.5% Sulphur - Green Pet coke) which are ideal for producing Carbon anodes used in Aluminium production. So during high demand scenarios, North America based Calciners (Rain Carbon for example) can also ship their CPC to Middle east or Europe as well.

The long & short of the above sermon is that US & Canada’s Aluminium smelting capacity/production has declined structurally. And between the US & Canada, it is the US smelting production (& capacity) that has crashed more spectacularly than Canada’s. (Why? Canada has hydropower which is cheaper).

Since NA based calciners predominantly service smelters based in US & Canada, It’s no surprise that Rain Carbon’s (formerly CII Carbon LLC) capacity has declined from 1.8MT in 2007 to 1.4MT in 2025.

Even its Indian Calcining capacity Rain Carbon (Vizag) Ltd, which in 2007 the company had announced would be increased to 1MT has barely touched 0.8MT, 18 years later.

That’s basically the demand side story.

Nope. Its not surprising then, that CII Carbon LLC had a capacity of ~1.8MT in 2007 & 1.4MT TODAY. On a net basis, while Rain’s US calcining capacities has decline, Indian capacities increased so the overall calcining capacity for Rain has remained stagnant.

Another question:

If Revenue growth in the calcining (carbon) segment is a function of volume X price and if volume have remained stagnant since 2007, how does it plan to grow?

Answer:

You hope for the occasional spike in Aluminium prices & therefore carbon Anode demand & therefore a spike in CPC & CTP prices to support your operating performance.

THAT combined with low valuations is the thesis for Rain Industries. It was the same in 2014 when Mohnish Pabrai got a mystery letter on Rain. It is the same today.

And while every cycle doesn’t repeat itself exactly, it tends to rhyme.

The Supply Side

Ladies & Gentlemen, contrary to what a structurally declining end user industry (in NA) suggests i.e Doomsday, JN & Rain continue to earn sufficient cash flows to :

1. Pay off Interest payments.
2. Remain competitive by doing maintenance capex for its US & India calcining units. (Estimated $50-70 Million / year)
3. Invest marginally in growth capex.

How is this possible in an Industry getting bamboozled on the demand side?

Reasonable cash flows for NA (North America) calciners are a courtesy of high stickiness with customers (Alcoa, Century, Rio Tinto etc) and long standing (10-15 years+) relationships on both the supplier & customer side.

Most importantly cash flows have remained healthy because of consolidation on the supply side.

“With GPC supply being tight globally, sourcing linkages act as effective barriers to new capacities. The consolidated entity benefits from CII's strong relationships and long-term contracts with major GPC suppliers.” - Fitch Rating update, 2007

In plain english, a boring declining NA Aluminium smelting industry & a consolidated supply side for CPC suppliers means Harvard MBAs are not stomping over each other to start a calcining business i.e - Less competition.

Rain Carbon (US) combined with Rain calcining Ltd (India) is the second largest CPC player in the world (~2.4 MT) and largest player in CTP (Coal Tar Pitch) in the world ( Ex-china. Of course)

The Business Model

Calcining is essentially a “conversion business” i.e - source GPC (Petroleum by-product) and calcine (burns off heavy metals & sulphur). It basically earns a “calcining margin” which is best measured in EBITDA per ton terms.

In the 5 years post acquisition of CII carbon LLC, Rain Carbon business combined was making north of 20% EBITDA margins, however, margins have generally trended downwards. This is owing to generally higher GPC prices as increasing demand for GPC is coming from Battery anode material players.

Overall, “Good ol days” are gone & operating margins (EBITDA) are not what they used it be.

The Cash Flows

As previously mentioned, Rain Industries as group earns sufficient cash flows. Since more than 71% of Revenue & upward of 80% of EBITDA is from carbon business, a majority of cash flows are courtesy of the carbon business too.

The other two segments: "Advanced Materials” & Cement are best treated as “optionalities”. This helps make life easy from an analysts’ perspective.

Although, CFOs are healthy enough to service Interest payments & maintenance capex, they’re NOT ENOUGH to service the principal debt payments especially when much of the “Free cash flow to owners” have been re-invested in growth.

My BOTE (back of the envelope) calculus suggests that consolidated EBITDA margins of the business is ~15.8% (pre-2023). Assuming 100% EBITDA to CFO conversion & assuming 30-40% of CFO must be ploughed back in terms of maintenance capex i.e 4-5 % of EBITDA margin MUST be spent to maintain the assets in their current form.

Then there’s the Interest burden. Another 30% of EBITDA margin (or 5%) was spent as Interest costs. This leaves the company with about 5% of their EBITDA margin or ~30% of their CFO on avg in the pre-2023 era.

This means that after maintenance capex & covering the Interest cost, Rain Ind had ~30% of CFO on avg to invest in:

1. Growth
2. Dividends
3. Pay off Principal &/or
4. Retain cash for liquidity on the balance sheet.

Post 2023, EBITDA margin went down & simultaneously requirement for Interest increased & the ~30% CFO figure we just calculated has shrivelled significantly in the last 2 years.

The Growth Matrix

Consolidated Net fixed asset turnover of the co’ is about 1.4x !

This means to generate INR 1000 cr of additional sales, the co’ needs to invest ~INR 700 cr.

This figure constitutes about 43% of the average CFO of ~INR 1600 cr per year.

As we just outlined, atleast pre-2023 Rain could hypothetically invest on average about ~INR 480 cr/year or ~INR 4000 cr over 8 years for growth. This should theoretically generate incremental revenue of ~INR 5600 cr.

Revenue in FY15 was INR 10,200 cr vs Revenue in FY24 was INR 15,300 cr. Both FY15 & FY24 have been “bottom” years. The difference between the two is ~INR 5000 cr.

Of course, this “43% of CFO available for growth” is just not happening post 2022 because Interest burden has shot up significantly. More on the debt later.

so, If Rain has to double its Revenue by selling higher volumes of exactly what it sold in FY25 at the same price as FY25, it must incrementally invest ~INR 10,500 cr.

NOT HAPPENING CHICO !

ADD to the above - Dividends paid of INR 35 cr (INR 1/share) per year.

ADD TO THE ABOVE, retention of cash on balance sheet for bad times.

Reasoning from the above, Rain’s cash flows (read balls) have been squeezed tight by a simultaneous increase in Interest burden ($400 million borrowing at 12.25%) & a decrease in operating performance (improvement over last 4 quarters).

While historically, management has been very comfortable refinancing millions of dollars of debt vs cut down on growth investments, the situation is entirely different today.

Where the Growth Capex went !

For the longest time NA calcining has not been a fertile ground for directing growth capex. Indian calcining capacities have seen investments of ~INR 424 cr for capacity of 0.4MT. This was done in 2019 but it wasn’t until 2024 that this facility began to get optimally utilised.

Then there’s the “Advanced material” adventures in Europe which were meant to engender growth have not paid off either. You can see from the operating profit chart by segments below, that “advanced materials” EBITDA has not “advanced” since 2015. Barring an upbeat 2017-2018, operating profit has has only declined.

What about Cement?

Nothing to rave about yet its where more than 750 cr has been committed for a 2.3MT capacity expansion. Given the high debt burden, allocating this amount (although not material) in the current context pissed off the market.

However, if they can pull this off - they would effectively be adding capacity at $36/ton vs replacement cost being anywhere in the range of 2-3x that number atleast.

P.S - I have not done a detailed breakdown of exactly the maintenance vs growth capex & within growth capex - which segments the investments were made.

The Debt

As of September 2025, Rain Ind has €365 Million @ Euribor (~2% current) + 5% (variable rate) due by October 2028) & $448 Million outstanding @ 12.25% (fixed rate) due by September 2029.

12.25% !

WTF.

Here’s why re-financing can expose a business to serious risks. While Rain Ind has managed to kick the can down the road without major consequences, the 2023 refinancing of its $$ bonds coincided with a teetering US economy, failure of SVB bank, Fed jacking up rates after more than 15 years etc. Bad luck.

You want to refinance nearly $500 million when banks are going under left, right & center? - That’ll be 12.25% FIXED rate, with a 3 year “No call” period & your left kidney.

WT actual F.

You just look at the P&L since 2023. It’s been ROYALLY SCREWED by the high Interest burden. Just read the Sales, EBITDA, Interest cost, PAT Trend respectively.

Refinancing of this debt at lower might become possible from March 2026. The 6-year notes were issued with a 3-year “no call” period, expiring March 1, 2026. No call period means you can’t payback bondholders and retire debt during this period.

Thankfully, management is on the lookout for better financing terms.

“We are actively monitoring [the] market and will act decisively when market conditions are favorable.” - CFO (Q2 2025 concall)

Why I’m buying i.e - The Thesis.

Whether its 2009, 2014, 2020 or 2024 - Rain Industries moves on Aluminium prices.

What’s amusing is that EVERY CYCLE, investor theses include:

1. A DCF Model showing how CFO will grow to this & that etc
2. How the market is undervaluing the cement business - “the value of the cement business itself is almost as much as the current Mcap 😯 even at $60-70/ton”
3. Trigger #3 - This one usually changes from cycle to cycle to some extent.In 2014 it was a combination of “deleveraging” & “demerger & listing of CII carbon LLC in the US to unlock value”. In 2020, it was “new capex already done and cyclicality of business will bring some bumper years.” In 2025 it is again “refinancing on better terms” & “higher utilisation of Indian calcining capacities” etc.

All is fine, except that what matters is Aluminium prices.

1. March 2009 to April 2021 → 11.6/share to 48.5/share = 4X
2. Nov 2015 to May 2018 → 40/share to 240/share = 6X
3. March 2020 to May 2022 → 65/share to 185/share = ~3X
4. Feb 2024 to Dec 2025 → 120/share to 129/share = 👎🏽

In cycle#4 (Feb 2024 to Dec 2025) - Aluminium prices have increased from $2100/ton to $2900/ton yet the stock literally crashed from INR 120/share to INR 105/share before recovering to INR 129/share as of Wednesday 24th December 2025 closing.

Effectively, Rain Industries stock price had “decoupled” from aluminium prices for the first time in last 18 years.

So what’s different this time?

1. The delta from bottom to top in aluminium prices may not be as sharp this time (speculative statement)
2. Interest costs are super high
3. EBITDA margins compressed (GPC prices remain high due to demand from Battery anode materials’ players)
4. Cement capex?
5. General Market weakness

A combination of the above meant that Rain got hammered after getting hammered for the last 3 years.

This 40% odd dislocation in stock price was/is the opportunity. We started covering the business around 16th November 2025 as “Homework” in our DIY Investing program (more on that later).

After wracking our heads for a good few weeks, this is our thesis:

• Aluminium prices are up - Rain operating performance is improving especially as the Indian calcining capacities get utilised upto 90% going ahead. The trigger here was the regulatory approval by DGFT in early 2024 to import 1.9MT of GPC for calcining purposes. This had been restricted since 2019.
• Yet the stock was getting hammered.
• Refinancing likely to happen by mid 2026 when no-call period ends.
• Cement capex - 750 cr for 2.3MT - something that made investors nervous might actually not be so bad. As outline earlier, it means adding capacity at $36/ton.

Disclaimer: This is NOT a recommendation.

That’s it.

Regards,

Rahul Rao, CFA