“rain commodities 1qcy11 results conference call” call/100339_20110513.pdf2011/05/13 · if you...

13 May 2011 1

TΛTΛ Securities Institutional Research

“Rain Commodities 1QCY11 Results Conference Call”

May 13, 2011

MODERATORS: MR. NIRAJ AGARWALLA MR. JAGAN MOHAN REDDY MR. T SRINIVASA RAO MR. GERARD SWEENEY

TΛTΛ Securities Rain Commodities Limited

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Moderator: Ladies and gentlemen, good day, and welcome to the Rain Commodities Q1 CY’11 conference

call hosted by Tata Securities Limited. As a reminder for the duration of this conference all

participants' lines will be in the listen-only mode. There will be an opportunity for you to ask

questions at the end of today’s presentation. If you should you need assistance during the

conference call, please signal the operator by pressing “*” and then “0” on your touchtone phone.

Please note that this conference is being recorded. I would now like to hand over the conference

to Mr. Niraj Agarwalla. Thank you and over to you Sir.

Niraj Agarwalla: Good evening everyone. I welcome all the participants to the March 11 conference call of Rain

Commodities Limited. We have with us Mr. Jagan Mohan Reddy, Managing Director of Rain

Commodities Limited, Mr. Gerard Sweeney, President and CEO of Rain CI Carbon LLC, and

Mr. T Srinivasa Rao, Chief Financial Office of Rain Commodities Limited. We would

commence the call with opening remarks from Mr. Reddy to provide you with an update on

certain key developments in the Rain Group and also the outlook on the cement business. He will

be followed by Mr. Sweeney to provide you an outlook for the CPC Business and lastly Mr.

Srinivasa would provide you the highlights of the financial performance during the quarter ended

March 2011. This will be followed by the question and answer session where the management

will answer the question from the participants. Before we begin I would like to mention that

some of the statements made in today's discussion maybe forward-looking in nature. I would now

request Mr. Jagan to provide an update on the key developments in the Rain Group.

Jagan Mohan Reddy: Thank you, Niraj and once again welcome to all to our Q1 2011 results call. First I would like to

inform the key developments in the Rain group. As mentioned in the earlier call, we are setting

up a waste treat recovery facility at our existing PPC plant in Lake Charles, Louisiana, USA. The

developmental work for this project has already started and we expect the facility to commence

operations during later part of calendar year 2012. During the current year, we expect to spend

about $35 million from our internal accruals for this Lake Charles Project. During the current

quarter we also acquired Birla Cement and Industries Limited from Yash Birla Group for a

consideration of Rs.12 Crores. This company essentially holds certain limestone mining leases in

Adilabad districts in the state of Andhra Pradesh. The mining lease provides and opportunity to

the Rain Group to expand the cement capacity in the future and to cater to the new market

regions that is Maharasthra, northern region of Andhra Pradesh and Madhya Pradesh, etc.;

however, considering the excess cement capacities in the state of Andhra Pradesh we do not have

immediate plans to set up a Greenfield cement plant.

Further the fly ash handling and cement-packing units in Bellari has recently commenced

operations. The increased availability of fly ash is expected to improve the cement klinker blend

ratio, which would result in reduction in per tonne of cost of cement. In regard to cement outlook,

in the current market conditions the first quarter 2011 is reasonably good quarter for the cement

business. Our cement volumes have increased by more than 20% and the average realizations

have improved by about 3% compared to Q4 in 2010. Overall we were able to achieve an

EBITDA per tonne of about Rs.1012 compared to Rs.704 per tonne in Q4 2010. However, with


13 May 2011 3

the massive capacity additions that are being added in South India, particularly in Andhra

Pradesh we expect that there will be a pressure on both cement volumes and prices over the next

couple of years. We still remain positive on the medium-to-long-term expectation from the

cement industry. The expected increase in the cement consumption by more than 10% on an

annual basis, we expect that majority of the excess capacity should get absorbed in the next

couple of years. We are well placed to face the competition through our continued efforts to be

one of the low cost producers of cement including reduction in the cost of fuel with the increased

use of domestic coal optimizing the freight cost by setting up fly ash and handling instrument

packing plants at Bellari in the state of Karnataka and reduction in the interest cost that

accelerated the prepayments of that and by optimizing the working capital.

We are evaluating both organic and inorganic opportunities to grow in our core business;

however, our current corporate and capital structures enable us to pursue large value assertive

growth opportunities. To end, I would like to reiterate that our primary focus at all times will be

to protect our margins, effectively manage our balance sheet and grow our business over the long

term.

I would now request Mr. Sweeney to provide an outlook on CPC Business. Thank you.

Gerald Sweeney: Thank you Jagan and welcome everyone to our Q1 2011 conference call. From the aluminium

perspective the market continues to show strength in the aluminum price. Since beginning of the

year the price showed steady improvement reaching above $2600 per metric tonne in the last few

weeks. Many projections remain that the aluminum price would continue to rise to about $2800

per metric tonne during CY'11. Aluminum demand end production worldwide continued to

increase taking with the demand for carbon. Aluminum consumption and demand is expected to

increase by 8% to 9% during CY'11.

CPC prices are now been fixed for the first half and we have captured significant price

improvement for the first half of 2011 shipment. This was lead principally by CPC demand,

which created an upward price pressure due to shortages of suitable raw materials globally. The

primary reason for raw material shortages is due to poor refining margin. As such we have seen a

sharp rise in raw material prices but have been able to achieve prior margins than our second half

of 2010 realization.

Due to significant price increases achieved in our pricing negotiations for a first half of CPC sale

and relatively lower cost raw materials already available to us in the inventory. There has been an

increase in margin during the Q1. While we will see margin compression from first to second

quarter we are reasonably confident at protecting the average first half margins despite recent raw

material price increases and overall shortage available volume.

From an operational perspective we are running all our facilities at full capacities with the

exception of our Moundsville, West Virginia facility, which is operating at approximately 50%

of capacity. While we have sufficient demand at run Moundsville facility at higher rates we do

not have sufficient raw material, as such we have made strategic decision to sell CPC only to the


13 May 2011 4

level of our raw material availability and not further drive up raw material cost by pushing the

market for more supply.

Our raw materials of finished products shipments have been affected basically due to the high

water situation, which is developed on our interior US river system. This is the way raw material

movements and CPC sales by barge and will exist as much of May into June. This has the

potential slower receipts of raw materials to our plants and shipment of finished products

especially to domestic customers in the second quarter. From the supply perspective, CPC prices

have moved significantly upward due to the strong demand from the calcining sector and reduce

supply due to reduced refine re-runrate.

As discussed in earlier calls, many US anode grade CPC producers reduced their production of

anode grade CPC at demand for refined products weakened since 2009 and the coke economics

did not favor continuing to run it more production. We do not see an end to the raw material

prices in the new term as refinery runrate are now projecting an increase. The demand for anode

CPC to beat aluminum demand continues to drop. We are watching the situation carefully to

move contested to this market change.

Out first half negotiation settled with a realization of about $100 per metric tonne for CPC supply

to the aluminum sector above our second half of 2010 realization. As mentioned earlier this will

keep us on par with raw material price increases to maintain margin. Demand from the TiO2 for

the titanium pigment segment sector also remains strong. This industry represents approximately

15% of our total sale and appears well placed from a supply end demand perspective to 2011.

Margins and sales for this sector are pretty much induct and do not fluctuate very rapidly. Overall

we will aggressively pursue protecting our margins in 2011 and are hopeful the raw material

shortages we are experiencing will begin to show signs of easing. The industry will be challenge

in the short-to-medium-term to keep up with growing demand from aluminum sector, barring any

unforeseen circumstances globally we perceive strong carbon demand and therefore a good

opportunity for us in the CPC Business provided adequate raw materials are available and the

high water situation on our interior river system 10.42 come for long. No matter the pattern of

our market however, we remain focused on protecting our margins as indicating our market

leadership in the CPC Business.

Now I would like hand over the call to Mr. Srinivasa Rao.

T Srinivasa Rao: Thank you, Jerry. To give you all an overview of our financial performance during the quarter

ended March 2011, I would like to highlight some of the key performance indicators on a

consolidated basis. Rain Group achieved consolidated net revenues of 1343 Crores during Q1 of

2011, an increase of about 78% compared to 750 Crores of revenue achieved during last year.

CPC sales volume in Q1 of 2011 was 477,481 tonnes, an increase of 11% as compared to

429,960 tonnes achieved during the March 2010 quarter. Cement sales volume in March 2011

quarter was 585,007 tonnes a decrease of 19% compared to 720,038 tonnes during March 2010.


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Consolidated operating margin EBITDA for March 2011 quarter was 374 Crores as compared to

operating profit of 143 Crores achieved during March 2010, an increase of 161%. The company

is able to achieve operating margin of 28% during Q1 of 2011 as compared to 19% achieved

during March 2010 quarter.

As indicated by our CEO Mr. Gerald Sweeney, we have consumed low cost raw material carried

forward from last year and reset the prices for our finished products in January 2011, which has

resulted in higher operating margin of 28%. Apart from the pet coke trading and marketing

business has contributed to the consolidated revenues of about 130 Crores and operating profit of

about 11 Crores during March 2011.

Interest cost during March 2011 is about 52 Crores after adjusting for exchange gain of 3 Crores

as compared to interest cost of 52 Crores after adjusting for exchange gain of 3 Crores during

March 2011. The consolidated net income during March 2011 is 202 Crores, an increase of about

242% compared to consolidated net income of 59 Crores achieved during the same period last

year.

Consolidated earnings per share are Rs.28.51 paisa during March 2011 as compared to

consolidated earnings for share of Rs. 8.33 paisa during March 2010. Our net term debt as on

March 2011 is US $588. Net term debt has decreased by about $27 million during the quarter

ended March 31, 2011.

With an existing cash balance of about $128 million we are comfortably placed to meet the debt

repayment obligation of about $170 million till December 2013. With continuously increasing

demand for CPC from end market and better price realizations in the cement business the

performance is expected to be robust during CY'11.

I would now request the operator to begin the Q&A session. Thank you everyone.

Moderator: Thank you. Our first question comes from the line of Sangam Iyer from Alpha Accurate

Advisors. Please go ahead.

Sangam Iyer: Actually my question is more on the volume outlook for the CPC segment and cement segment

for this calendar year. Could you provide us some outlook about what is the management is look

at?

Jagan Mohan Reddy: We expect about 1.95 million tonnes of CPC this CY or FY and cement we are expecting about 2

million tonne.

Sangam Iyer: Could you quantify the impact on the margins for this quarter from the low cost inventory of

CPC that you are carrying?

Jagan Mohan Reddy: In India we have about three months of inventory and in the US we have about 1.5 months or 2

months of inventory.


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Sangam Iyer: What price was that inventory and what would be the current levels I mean just to get sense how

the margin would trend going forward?

Jagan Mohan Reddy: Basically I would say that there may be about $50 price reduction because of using up the

inventory, we also have used combination of old and the new inventory, which had the good

portion of the old inventory so I cannot exactly tell you, which we used but the difference

between the old inventory and the new inventory may be $50.

Sangam Iyer: In terms of the margins if we see the EBITDA per tonne for the CPC segment comes around

$140 plus if we have to look at it. Is this something that is sustainable going forward I mean

considering the last few days back I was discussing with Raviji that the prices in Northeast have

short up to around $550 per tonne for CPC etc., so what is your outlook in terms of the kind of

sustainable EBITDA per tonne for the CPC segment?

Jagan Mohan Reddy: The price may go into $700 but the margin is what that matters because green coke prices were

actually follow through. So as I said the last call they said last year then we in the second half, we

think in $100 equity of margin is the sustainable margin. We are not commenting on this quarter

as how it will be, it depends on each quality of the customer and in the kind of raw material we

use it may change because we procure raw materials from several different sources at different,

different prices but it is reasonable to assume that the $100 EBITDA margin is sustainable.

Sangam Iyer: Finally on the scenario for the cement in Southern India and if we see, which been over almost 6

to 8 months wherein players there have maintained the disciplined approach in term of when

releasing volumes and maintaining the prices, do you see this sustainable going forward I mean

considering that there are many new players who have also entered the segment and the capacity

utilization would be as low as almost 35% or 40%. So from our economical feasibility do you

think that this kind of disciplined approach is sustainable also going forward?

Jagan Mohan Reddy: I cannot comment on others but based on our strategy is, try to operate it at lower capacity and

for us price is more important than the volume itself, but at this point of time I do not know how

others may decide to this market.

Sangam Iyer: I mean as you have indicated in the starting comment that in the margins would be the key

criteria. You would like to maintain the absolute level?

Jagan Mohan Reddy: We will maintain. Our idea is to maintain.

Sangam Iyer: Internally you are looking a targeting at around Rs. 800 to Rs. 1000 per tonne being EBITDA per

tonne?

Jagan Mohan Reddy: Our target is we achieved Rs. 1000 and likely to keep Rs. 1000 profit.

Sangam Iyer: Okay and finally on the cash in the book that you said I just missed that point?


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T Srinivasa Rao: $127 million.

Moderator: Thank you. Our next question is from the line of Vishal Gajwani from Reliance PMS. Please go

ahead.

Vishal Gajwani: Congratulations sir for a very good set of numbers. I just wanted to understand you mentioned

something about lower volumes in Q2 in CPC. Can you please elaborate more on that?

Jagan Mohan Reddy: Jerry you want to talk about the Mississippi River issues, which you shared on the past moment?

Gerald Sweeney: We are necessarily talking about lower sales volumes for the CPC for the Q2. There the

reference to the potential for an impact on the volumes is just really related to high water that we

are seeing on the river system in the US and particularly Mississippi and the Ohio Rivers. Here

are some record levels, which are creating floods and disrupting traffic on the waterways, which

is affecting both our raw materials and our finished products movements, but as far as sales for

the Q2, we are doing it as right now from a forecasted or budgeted perspective for Q2, we are not

projecting any great impact on our sales volumes but it does have that potential and those high

water levels are really just playing out now.

Vishal Gajwani: But potentially there can be a negative impact because of that incrementally?

Jagan Mohan Reddy: We would say that the negative impact may be for a quarter but the customer will need the

materials, the material still need to be supplied may be during a later period.

T Srinivasa Rao: The volume whatever we have committed for CY'2011 with all our customers has to be delivered

and most probably it will get delivered by December 2011. There could be a minor slippage from

Q2 to Q3, which may not be a significant volume.

Gerald Sweeney: That is correct, anything where could be impacted would only be a timing type of issue. We are

really expecting that the water situation by the end of May should correct itself but it may take us

several months to catch up on shipments and product movement overall which means some could

fall over to the third quarter, but again it should be captured within this year.

T Srinivasa Rao: Just want to add in, our shipments are actually done in last shipments and there are

shipments done towards the end of the quarter and it normally gets postponed. This

time in March, we had a preponement of the shipment, which sometimes results in an

postponement of shipment, so this is the normal thing for us, quarter-on-quarter it will

be difficulty thing but on a yearly basis we thing in other volume is sustainable.

Vishal Gajwani: One more thing on CPC prices since we already know that CPC prices have gone up on

account of pressure of CPC price, how much increase in CPC prices have taken place?


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Jagan Mohan Reddy: About $100.

Vishal Gajwani: This is regarding CPC price right?

Jagan Mohan Reddy: We said both of them are more or less in timing.

Vishal Gajwani: On an absolute basis what is the CPC price right now?

Jagan Mohan Reddy: They vary depending on the quality, they vary from anywhere between $200 to about

$400.

Moderator: Thank you. Our next question is from the line of Bhavik Mehta from Girik Capital.

Please go ahead.

Bhavik Mehta: The price points that is the prices what you sell the CPC and the cement for the last

three years, average price for the last three years?

T Srinivasa Rao: The CPC prices are in the range of $300 to $500 dollars per tonne. Cement price is Rs.

Rs.140 to Rs.290.

Bhavik Mehta: Per kg?

Jagan Mohan Reddy: Quite a bit of variations both in CPC and cement business.

T Srinivasa Rao: In the CPC business, rather than the prices figure, we never get a percentage of the sale

price as a profit. It is like a fixed converter margins. When we pick the prices for the

CPC with our end customers we will be looking at the cost of the raw materials and the

conversion cost, the operating expenses to convert GPC into CPC and we had our profit

element for our investment and our managerial point. So that conversion margin is the

one which one has to look at evaluating the performance. In the last 3.5 years or 3 years

plus, the average if you look at it is around $80-$100 now. In few quarters, it could be

less but in general it is $80-$100 range, especially as aluminium sector is doing lot of

growth and so much of increase in demand is there from the aluminium sector going

forward we feel that it will be in the range of $100 and over and above that $100.


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Bhavik Mehta: In the cement sector do you operate in the same way as you said in the CPC sector?

Jagan Mohan Reddy: The raw material price more than that everything is same, so better the price, the better

the profitability we get.

Bhavik Mehta: Can you just repeat cement price is Rs.140 to Rs.290 a kg?

Jagan Mohan Reddy: No, 50-kg bag.

Bhavik Mehta: We had a significant margin expansion over here. Can you just comment on the margin

compression that can happen during Q2 and Q3?

Jagan Mohan Reddy: Basically it may vary depending on the quality and the quantity of raw materials that

are used of different qualities as regards to CPC and for cement prices if they drop, the

margins will drop up to the extent with the cement price drops, but at this time, the

cement prices are reasonably well, so it should be good.

Bhavik Mehta: The last question I would like to ask is about the capacity utilization in all the plants?

We have CPC plants in India, US and China; can I get the breakup of the capacity

utilization in all the three countries?

T Srinivasa Rao: I would say, we do not comment on this on each different country, but on an average I

would say we actually operate about 77% to 80%.

Bhavik Mehta: And the cement sector?

T Srinivasa Rao: Cement, we think we will operate about 70% to 75%.

Moderator: Thank you. Our next question is from the line of Luca Franza from Ausonio Fund.

Please go ahead.

Luca Franza: Good afternoon Congratulations from my side as well. You said that post demand you

hope demand will be around 1000, that is on margin?

T Srinivasa Rao: Yes, the Rs.1000 margin is what we have achieved for March 2011 quarter.

Luca Franza: But going forward we should see some compression in the cement price?


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Jagan Mohan Reddy: Yes. Actually if you look at last year in the December 2010 quarter we achieved

something like Rs.700 per tonne and we have seen that in the 2011 year also it will be

maintained somewhere between Rs.700 to Rs.1000 at the current market condition, but

it is not as stable business , the CPC business where we deal with thousands of dealers

and we have a very small market share in South India about 3 to 5% is our market share

whereas in the CPC business we are a prominent player and there is a market leadership

is there. Theoretically we have a 10% market share on a global basis but if you look at

the competing market it could be as high as 25%.

Luca Franza: I think you mentioned in an answer to one of the previous questions, that the manner in

US you hope to nowhere $100 margins?

T Srinivasa Rao: $100 plus, what is sustainable may be if the raw material prices do not increase

substantially or we are able to negotiate better prices sometimes you may get higher

than $100 also. But $100 is something manageable.

Luca Franza: Why you say $100, do you mean including those for the energy like the related to the

revenues in the US like the steam?

T Srinivasa Rao: Actually the new energy process is going to come into operations by second half 2012,

so once it comes in we may add something to the margin depending on the price little

of agility, but yes $100 is actually is considered that an expense and based on that we

take $100 EBITDA margins is kind of sustainable going forward and once then new

energy project comes it is increased by $5 to $10 on a global basis. This may vary, we

are just saying that could be an average how it can work but it can vary depending on

the raw material use, depending on the customer’s requirements and the date of

shipment, it keeps on varying it just cannot be said that it is a fixed margin and it will

not move. To give you an indication how well we are going to be there is about may be

$100 EBITDA margins which could be sustainable.

Luca Franza: Did you say the new31.32 they are besides $100?

Jagan Mohan Reddy: Yes, $5 to $10 is what the additional operating margins which will add per tonne basis

globally. See what I am saying is at around $15 to $20 million from that plant but when


13 May 2011 11

we have a 2 million tonne capacity globally but if you look at globally it will add $5-

$10 million per tonne.

Luca Franza: Do you expect the type CPC to ease in the second half of the year and if not given a

scenario was that the aluminium production might even sustain by availability of CPC?

Gerald Sweeney: I do not see any significant change in the availability of CPC for the second half of the

year. As we mentioned we really are in the short to medium term, we really do expect

the CPC market to continue to be tight and GPC markets are going to be dull, the anode

grade GPC market, I really do not believe in the short-term that the aluminium industry

will be affected by shortages because they still have the ability to broaden their

speciality from an allowable CPC quality that in any price despite for situation they can

accept poor quality products and still make an aluminium of suitable quality so I do not

really foresee that for the next few years at least that will potential impact on their

ability to beat the aluminium demand.

Moderator: Thank you. Our next question is from the line of Shrihari Sheshadri from Sundaram

Mutual Fund. Please go ahead.

Shrihari Sheshadri: This is regarding the cement, I wanted to know what was the kind of cement realization

that you saw in the end of March and what is the realization that we are getting till

now?

Jagan Mohan Reddy: There is not much change in realization between end of March and April, it almost the

same level.

Shrihari Sheshadri: Can you tell me the market where you sell?

Jagan Mohan Reddy: We sell in South India basically the main three states of South India, which are Andhra

Pradesh, Karnataka and Tamil Nadu.

Moderator: Thank you. Our next question is from the line of Mitul Kalawadia from ICICI

Prudential. Please go ahead.

Mitul Kalawadia: Can you throw some light on the cement part of the business? The performance during

quarter has been good, how do we see market going forward?


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Jagan Mohan Reddy: The market as of today, we are operating at a lower capacity and because of the lower

capacity we are able to get reasonable margins, there is not any oversupply in the

market as of today and we think this kind of lower capacity utilization if you can plan

or slightly increase at a maturable basis over the next two years. Then the current prices

could be sustainable. If that does not then the prices could reduce. The demand is there,

demand is improving with the energy projects and hopefully the new governments

coming into rule may be there will be some improvement, they have met some

promises, hopefully there should be improvements. The infrastructure projects and

other things may be we see a 10% growth going forward for earlier for cement.

Mitul Kalawadia: Any investment plans in this month?

Jagan Mohan Reddy: No, it is not a good time. We actually acquired the mining assets from the Yash Birla

Group, that is where you get for future requirements but at this point of time, no. Not in

cement, in organic no, inorganic if there is any opportunity we will certainly look at it.

Mitul Kalawadia: To understand on the cash flow part, what is our current gross debt in the cash level,

which we have?

Jagan Mohan Reddy: We have about $127 million of cash; our gross debt is about $588 million. That

includes the buyers credit, the revolvers, and everything, our current asset is to the

extent of $300 million. We are actually quite comfortable, the cash, the existing debt

levels.

T Srinivasa Rao: Gross debt is about $661 million.

Jagan Mohan Reddy: The current asset actually the receivables are about in the part of the normal, we do not

have much of over dues and other thing but receivables are to the extent of about $200

million, our net current assets are about $300 million plus. We are quite comfortable in

terms of debt perspective and repayment dates perspective.

Mitul Kalawadia: Looking at this quarter’s profit has there been some increase in the working capital

during the quarter because that net rate should have come down more sharply?

Jagan Mohan Reddy: No, because we said the price of the green coke has increased as such the working

capital inventory, work capital also has increased.

T Srinivasa Rao: Actually cash balance has increased by about 148 Crores excluding the cash balance

other working capital in the business like inventory and receivables has increased by

about 88 Crores, $20 million.


13 May 2011 13

Mitul Kalawadia: How much GPC price increase has happened on quarter-on-quarter basis?

Jagan Mohan Reddy: As we said earlier it is about $100 on an average.

Mitul Kalawadia: From Q4 to Q1?

T Srinivasa Rao: Yes.

Moderator: Thank you. Our next question is from the line of Pramod Bhatt from Bonanza Portfolio.

Please go ahead.

Pramod Bhatt: Good afternoon and congratulations. My first question is regarding plant utilization.

The guidance for production is 1.95 million tones, whereas we have produced about

4,77,000 tonnes in Q1, which includes in West Virginia, which is operating at 50%.

Now if I would extrapolate it, it would come more or less the same even, are we

assuming that West Virginia is going to operate a 50% for the rest of the year?

T Srinivasa Rao: Yes, at this point of time we think it will operate a 50% as we said, it is not from a

demand perspective there is enough demand but Jerry Sweeney said this is common

there is not enough raw material available and we actually do not want to more raw

material and increase the price of further raw materials that is the reason we are going

to operate on this 50%.

Pramod Bhatt: Just to clarify, the CPC pricing had seen an increase of about 100% so as of QH2

CY'10 am I to presume that CPC pricing is closer to 480 now?

T Srinivasa Rao: Not 100%, it is actually $100 if you see the compared to the first half of 2010, yes it is

kind of doubled, but the second half actually there has been an increase in the CPC

price. About $100 increase is there.

Pramod Bhatt: So it is about 580 currently?

T Srinivasa Rao: 480.

Pramod Bhatt: GPC prices have gone up $100 in QH1 CY'10?

Jagan Mohan Reddy: On a calcined basis, it is around $75 dollars.

Pramod Bhatt: So it will be close to 200?


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T Srinivasa Rao: You are talking about the price?

Pramod Bhatt: That is correct.

Jagan Mohan Reddy: As I said, it varies, we can say actually between $200 and $400 and each customer has

own requirement and depending on the quality it keeps changing actually. It gets at this

point of time, what would be the thing going forward for the quarter. Average will be

around, it is around $100 GPC margins is sustainable, likely profit because we cannot

exactly get how the requirements will change and how the prices of raw materials

which has been consumed will change.

Pramod Bhatt: Because last Q4, it was roughly around 160, the average GPC consumption cost so that

has increased to roughly around 200 levels?

Jagan Mohan Reddy: You are right, but as you said we also consumed a good portion of the old raw

materials that we have had in the inventory, that was the reason of the higher margin.

Pramod Bhatt: The inventory where profit is there, which is almost to the tune of $50 that you

mentioned that will start showing a declining trend somewhere in Q3 or did you thing it

may start in Q2 itself?

T Srinivasa Rao: The current margin what we had is about 143, what management estimates is only

about $100 per tonne is what is a sustainable margin.

Pramod Bhatt: So actually in the sense the spread, which you have between CPC and GPC, is almost

flat, let us say over the quarter or it is marginally declined actually?

T Srinivasa Rao: In the first quarter?

Pramod Bhatt: Yes.

T Srinivasa Rao: First quarter, it has increased to $143.

Pramod Bhatt: The second question is pertaining to the EBITDA and of the cement plant you had

earlier estimated that the cement output will be marginally higher than 2 million tonnes

while you have shown a degrowth in volumes the pricing and EBITDA have improved,

so are we to presume that the pricing discipline which you are showing is likely to the

sustain?

T Srinivasa Rao: We want to try because we like the Rs.1000 EBITDA.


13 May 2011 15

Pramod Bhatt: But foresee, that is your optimism share by the other players also?

T Srinivasa Rao: I did not know, I do not talk to them.

Moderator: Thank you. Our next question is from the line of Deepak Agarwal from Impetus

Advisors. Please go ahead.

Deepak Agarwal: I missed the early part of the call; can I have the sales and volume of CPC for the

quarter?

Jagan Mohan Reddy: CPC volume is 477,481 tonnes.

Deepak Agarwal: The EBITDA per tonnes?

Jagan Mohan Reddy: EBITDA per tonne is around $141 per tonne.

Deepak Agarwal: Any improvement in the GPC availability recently?

T Srinivasa Rao: Unless the consumption of the auto fuels increase, we do not expect that there will be a

change in the availability of GPC in the near term.

Moderator: Thank you. Our next question is from the line of Ashish Jain from Morgan Stanley.

Please go ahead.

Ashish Jain: I wanted to understand how are realizations on cement have moved from fourth quarter

to first quarter and how they are today?

Jagan Mohan Reddy: The fourth quarter prices were Rs.245 to Rs.250 and current is at about Rs.265.

Ashish Jain: In Q4?

Jagan Mohan Reddy: Rs.245 to Rs.250 in Q4 and currently about Rs.265.

Ashish Jain: So we are still seeing roughly like 4% to 5% increase versus March quarter average?

Jagan Mohan Reddy: No March quarter average is now the same. The current prices are the same. I mean to

say the current means this year.


13 May 2011 16

T Srinivasa Rao: Actually two things that have contributed there is a net realization after the tax percent

duty, which has increased by almost Rs.10 per bag, which is adding to Rs.200 per

tonne, so which has taken up the margins from Rs.700 to Rs.900. So the volume

increase is there. In Q4 2010 we have Rs.471000 and in Q1 it is about Rs.585000, so

because of that even the fixed overheads and per tonne cost will increase, per tonne cost

will be lower, plus another Rs.100 increase in there, so net-net from Rs.700 it has

increased to Rs.1000.

Ashish Jain: Fair point. So basically your current realizations are you in line with average for the

March quarter?

Jagan Mohan Reddy: Yes.

Ashish Jain: Sir, but you know does that mean that prices from where they were at end of March

have come off?

T. Srinivasan Rao: No it has not come off. I would say they increased by a couple of rupees, but they have

come down in March till now.

Ashish Jain: The reason I asked is because during the March quarter the price increase was gradual,

so I am sure the March end prices were much higher than the prices in between of

January and if prices today are equal to the average of March quarter, they have to

come down to kind of its level?

Jagan Mohan Reddy: The reason is we just cannot give a price for this month, because the cement prices are

fluctuating, so we will be more comfortable giving you a number of 265 for the current

price because they can fluctuate and we would be very uncomfortable giving any other

number.

Ashish Jain: Sir, can you just also indicate your coal, where do you source from in terms of

domestic or international?

Jagan Mohan Reddy: 65% of the coal comes from domestic and 5% is imported coal and the balance is

petroleum coal.

Ashish Jain: Sir, domestic is all linkage coal?

Jagan Mohan Reddy: Yes. We do not go and bid in the 48.04 for anything like that. It is all linkage.


13 May 2011 17

Ashish Jain: Sir, basically state wise what is the breakup of sales as a percentage because you have

negated the piece fell? Can you indicate anything?

Jagan Mohan Reddy: 50% will be all in the state of Andhra Pradesh and the balance 50% will be something

like 20% in Tamil Nadu and 30% in Karnataka.

Ashish Jain: Just one last question; on the demand side Sir, are we really seeing something

improving on the ground especially in the state of Andhra given Andhra was down

15% to 16% last year in terms of volumes, so are things improving structurally there or

it is more that there is just some seasonal pickup in demand and things are likely to

taper off as we move ahead?

Jagan Mohan Reddy: Actually our Chief Minister was in the planning commission earlier this week and they

gave last year 45,000 Crores I believe that is the amount the Chief Minister came and

made the statement, so hopefully if somebody else comes in and maybe we should see

the improvement in demand, but either compared to the last quarter and this quarter last

I do not see there is a considerable or appreciable increase I do not think so.

Ashish Jain: Can you give some sense on where is the demand in Andhra coming from in terms of

whether it is individual housing or it is residential project?

Jagan Mohan Reddy: Mostly housing.

Ashish Jain: That would also include rural housing and all that?

Jagan Mohan Reddy: I would say majority in the rural housing actually. Rural housing is actually the one that

is helping us to sustain more than I would say through the accounts and rural is actually

the majority of that at least for us.

Moderator: Thank you. Our next question is from the line of Nirbhay Mahawar from Rare

Enterprises. Please go ahead.

Nirbhay Mahawar: This 1.95 CPC volume and $100 conversion margin you are headed for a reasonably

strong cash flow. So what is the management’s thought on dividend payout and can we

expect a significant increase?

Jagan Mohan Reddy: As we said actually till 2013 actually you will see we have about $175 million in debt

repayment and we also have interest payments and apart from that we also actually are

funding the energy projects in US with $60 million per capital and we actually expect


13 May 2011 18

to improve, the things going well and if they sustain hopefully we actually think that

we should be able to do something on the dividend pattern numbers.

Nirbhay Mahawar: In terms of our pay out policy do we have something in mind like 15% or 20% your

profit?

Jagan Mohan Reddy: There is nothing like that but we try to see based on our overall requirements, we try to

declare the dividend.

Nirbhay Mahawar: Because in the last three years our bearing has reduced substantially and now are in

position of?

Jagan Mohan Reddy: We agree with you, actually we are exploring two things one is declaring the higher

dividend second is we are also exploring and then we can do some buyback of shares in

the market, but currently when the corporate restructuring is going on and when the

shares split is going on the board could not take any decision with regard to buyback of

shares. We expect that after by end of June 2011 the shares split will be over may be in

the next board meeting the management would take a decision on the buyback matter,

but those plants are certainly there with the management.

Moderator: Thank you. Our next question is from the line of Subhankar Ojha from SKS Capital &

Research. Please go ahead.

Subhankar Ojha: Just wanted to get the balance sheet numbers which I missed out?

Nirbhay Mahawar: Which number you are looking for.

Subhankar Ojha: Basically gross blowing the cash balance.

Jagan Mohan Reddy: Our gross debt is about $661 million and we have a cash balance of $128 million.

Subhankar Ojha: Okay so out of the gross debt; is there anything in foreign currency?

T. Srinivasan Rao: Except for around $9-$10 million of bank loan are in Indian rupees and entire debt is

in US dollars only either it is an Indian balance sheet or in the US balance sheet.

Subhankar Ojha: And what would be our cost of debt?


13 May 2011 19

T. Srinivasan Rao: Our cost of debt is around 6.3%. That is before tax it is 6.3%, post tax it will be below

5%, because around one-third of the debt is in LIBOR linked bank debt with a spread

of around 250-300 bases points. LIBOR being less than 1% the cost of borrowing is

less than 4% than the bank debt and around two-thirds of the loan is in the form of

debentures issued by our US subsidiary where the coupon may be of 8%. Our average

cost of borrowing is 6.3%.

Subhankar Ojha: Okay and if you can also say that the maturity profile of these gross borrowing?

T. Srinivasan Rao: Actually in 2011 next nine months we have a repayment of about $22 million in whole

of 2012 we have a repayment of $26 million, in 2013 we have a larger repayment of

about $122 million. In the next three years about $170 million is the total repayment

obligation.

Subhankar Ojha: Okay and Sir you have also mentioned that globally you have a market share of 10% in

CPC. That is what you mentioned?

T. Srinivasan Rao: That’s correct.

Subhankar Ojha: So who are the other global competitors you are competing with?

Gerard Sweeny: From the CPC prospect within the US our main competitors is a company called 54.47

they are the next largest competitors that we have from the CPC perspective. Beyond

that we really compete against more integrated refiners like PC and Canonical Spiller

and then much smaller regional players around the world.

Subhankar Ojha: Are they listed in US?

Jagan Mohan Reddy: No.

Jagan Mohan Reddy: The Only other listed company, is a company called Goa Carbon with a capacity of

about 2.5 lakh.

Subhankar Ojha: You have said that the EBITDA realization over the CPC currently is $100 per tonne

that is right?

Gerard Sweeny: Correct. We believe this is sustainable level is $100 EBITDA per tonne.


13 May 2011 20

Jagan Mohan Reddy: That is a sustainable number. We do not think we are not giving guidance of any

numbers going forward, but we are just giving what is the sustainable numbers that is

it.

Subhankar Ojha: Basically what you mean is the current quarter performance is kind of likely to be

repeated going forward for the next rest of the quarters?

Jagan Mohan Reddy: See actually we have received an EBITDA of $141 in the CPC business. Our comfort is

only about $100 per tone; to that extent the subsequent quarters will be slightly

moderated.

Moderator: Thank you. Our next question is from the line of Bhavik Mehta from Girik Capital.

Please go ahead.

Bhavik Mehta: You mentioned that there is a new fly ash handling unit in Bellari and EBITDA

realization per tonne of cement is around Rs.700-Rs.1000. So what position of this

EBITDA realization comes from the advantage that is from the fly ash handling units?

Jagan Mohan Reddy: As of now there has been no advantage from that we just recently started our operation

from that.

Bhavik Mehta: Okay and when would this commencement be from?

Jagan Mohan Reddy: Actually half of this current quarter is when you will see that impact.

Moderator: Thank you. Our next question is from the line of Mr. Heman Bhimani from Eight

Capital management LLC. Please go ahead.

Heman Bhimani: Congratulations Sir for good number. Can you share some thought on the interest cost

have behaved over Q4 and current quarter?

T. Srinivasan Rao: Basically as I mentioned in earlier question most of our debt 95% of our debt is dollar

denominated, two-third of the debt is a fixed coupon 8% and even if the LIBOR moves

up by another 100-basis points or 200-basis points our average cost of debt will not

change significantly, it may move from 6.3% to 7% and all our companies are fully tax

paying companies and the post tax cost of debt will be around 5% or 5.25%. It will not

change significantly, because we do not have a rupee borrowing.


13 May 2011 21

Heman Bhimani: In absolute terms can I just confirm the figures, absolute terms interest cost of this

quarter was 61.3 Crores and for Q4 was 52.9 Crores would I be right?

T. Srinivasan Rao: Yes you are right.

Heman Bhimani: So the only reason would be increase in working capital debt?

T. Srinivasan Rao: You are right.

Moderator: Thank you. Our next question is from the line of Mr. Vinay Bhandhari from Enam

Securities. Please go ahead.

Vinay Bhandhari: Good evening Sir. Great set of numbers. Just wanted a breakup between cement and

clinker dispatches and what are the current realizations of clinker if at all in dispatch?

Jagan Mohan Reddy: They have been nil sales of clinker. We have not sold any clinker actually.

Vinay Bhandhari: What are current coal prices basically at what price you are procuring?

Jagan Mohan Reddy: The local cement is being procured at about Rs.3400 I think.

Vinay Bhandhari: What is the contract like; it is a one quarter or two quarter contract?

Jagan Mohan Reddy: That is linkage. That is treaty is not run, the local coal company the linkage is nothing

do with this.

Vinay Bhandhari: It is from Singareni coal mine.

Jagan Mohan Reddy: It is an Andhra Pradesh government coal mine.

Vinay Bhandhari: What are the imported coal prices?

Jagan Mohan Reddy: We do not consume the coal price, but just for your reference it is about Rs.6500.

Vinay Bhandhari: That is for grade A or grade B sir?

Jagan Mohan Reddy: Cement grade. As I said, we do not consume.

Vinay Bhandhari: What was our dispatch in terms of trade and non trade if you just give me a break up in

terms of percentage?


13 May 2011 22

Jagan Mohan Reddy: 100%, we do only trade we do not do non-trade at all. It is only the retail we do not do

wholesale. As a policy we only do retail.

Vinay Bhandhari: Total dispatches you have mentioned are?

Jagan Mohan Reddy: 585 tonnes.

Moderator: Thank you. Our next question is from the line of Mr. Pramod Bhatt from Bonanza

Portfolio. Please go ahead.

Pramod Bhatt: Srini if you can give me the figure of rates and taxes, which you mentioned in the other

expenditure and for Mr. Jagan Rao any ideas of a transaction or inducting a partner in

the global structure especially now since it is possible?

Jagan Mohan Reddy: We are not looking at adding any partner at this point of time because we are quite

comfortable with our debt levels and there is no requirement of funds, but as you aware

we are actually post restructuring with a global holding company in the United States,

we actually can list the company at any point of time with a short notice of three

months so basically we do not require to induct any foreign partners.

Pramod Bhatt: So would the company take any steps in that matter?

Jagan Mohan Reddy: As I said we do not need any funds at this point of time as I said we do not have much

repayment and we still have a lot of cash. So what you do is that cash is the question.

We raise funds. So we would not do any M&A or not going to expand or any large

organic expansion.

T. Srinivasan Rao: Answering to your other question rates and taxes, it is already received from the gross

sales and the net sales only were expected and rates and taxes are to be about 2 Crores

for the quarter.

Pramod Bhatt: Because your corresponding other expenditure included 106.67 Crores for March 10

includes rates and taxes, I just wanted a comparison?

T. Srinivasan Rao: Both the years it is excluding rates and taxes actually. On the top line net sales duty and

tax.

Pramod Bhatt: There were some almost 2.73 Crores of entry as for March 10, which is now clubbed

with other expenditure?


13 May 2011 23

T. Srinivasan Rao: You are looking at consolidated?

Pramod Bhatt: Yes, consolidated only. Or I can take it from you later that is not at all a problem. It

will be more or less around the same percentage approximately right

T. Srinivasan Rao: Thats correct.

Moderator: Thank you. Our next question is from the line of Mr. Achal Lodhae from JM Financial.

Please go ahead.

Achal Lodhae: Thank you so much for taking my question couple of questions one in the last earnings

call we talked about looking at business like carbon, iron ore, I was just trying to

understand what the sense is at the moment since we have completed the restructuring

process. So how do we see growth coming from which sector, which side?

Jagan Mohan Reddy: At this point of time we are working with a large aluminum company on an annual

plan, but it is just that we are exploring the possibility whether it is viable or not,

because they are looking at setting an iron ore smelter and we are looking at putting up

1.04.26 plant and exporting to them, where this quarter we are quite preliminary at this

point of time and see growth actually we think we may have lots of opportunities but at

this point of time we are just looking at evaluating them. We have just completed

restructuring and we just completed our Q1. So I think now we can start more

concentrating on growth opportunity.

Achal Lodhae: What is the status on the plants of listing for company on US stock exchanges?

Jagan Mohan Reddy: We actually are looking as possibility of listing but we do not know what to do with

that money, so we are actually looking for any opportunity to invest the money and

then list it.

Moderator: Thank you. Our next question is from the line of Mr. Jaideep Merchant from Janak

Merchant Securities. Please go ahead.

Moderator: Thank you. Our next question is from the line of Mr. Heman Bhimani from Eight

Capital Management LLC. Please go ahead.


13 May 2011 24

Heman Bhimani: Sir wanted some sense on the realization in terms of cement Q4 to Q1 I missed the

earlier part, but if I look at it if I adjust for the realization net of excise and VAT, would

I be correct if it has come down from the Rs.360 per tonne to Rs.310 per tonne

average?

Jagan Mohan Reddy: No it has increased by about Rs. 200 actually, the net realization.

Heman Bhimani: Yes net realization.

Jagan Mohan Reddy: The net realization actually has increased from Rs.2900 to Rs.3100. Net of taxes we

also exclude freights and discounts given to the dealers. So if you exclude those things

in Q4 2010 we have 2900 in March 2011 it is 3100. So there is an increase in the net

realization say by about Rs.200, which has contributed for the increase in the EBITDA

margin.

Heman Bhimani: So the sales in terms of rupees in Indian which we circulate which is 169.6 Crores,

would this not exclude all the expenses because what we communicated is net of excise

and everything so freight and realization everything would be adjusted in this right?

Jagan Mohan Reddy: That is correct.

Heman Bhimani: So if the volumes figures are 471,000 so if I adjust for this then my realization per

tonne comes 3600?

Jagan Mohan Reddy: When we report, we actually only just take out excise duty and sales tax, but when we

told you the number after the excluded freight that as 50,600 it should include freight.

Heman Bhimani: But similarly with Q1 numbers 814 million and 5850 tonnes it gives you 3100 tonnes.

So that is not an apple-to-apple comparison when you say?

Jagan Mohan Reddy: I will just give you the numbers I have it for Q4 is Rs.3793, Rs.3676 is for December

2010 and 393 is for March 2011.

Moderator: Thank you. On behalf of Tata Securities Limited that concludes this conference call.

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