“Intense drill down research” leads to 10-bagger gains from Rain Industries
Mohnish Pabrai has such a casual and easy-going demeanour that most novices imagine that he pulls out his stock picks from a hat.
However, this is far from the truth.
Mohnish himself realized that he is sending the wrong message to novices. He clarified that he does not buy a stock “even if Warren Buffett recommended it” except after doing “intense drill down research”.
Never buy a stock without doing your own thorough research. I'd never buy a stock even if Buffett recommended it to me without doing the wrk https://t.co/Ed6vDTnkh8
— Mohnish Pabrai (@MohnishPabrai) November 5, 2017
It is a starting point to begin an intense drill down. I use other people's ideas as a starting point for intense research. https://t.co/b0H94r79st
— Mohnish Pabrai (@MohnishPabrai) November 5, 2017
We can see the fruits of this research from the fact that Rain Industries is today a magnificent 10-bagger (1000% gain) from the time that Mohnish first bought the stock.
Of course, Mohnish has to acknowledge that Dolly Khanna’s august presence in the stock has played a major role in the success of the stock.
(The three amigos: Rajiv (Dolly) Khanna, Mohnish Pabrai and Porinju Veliyath)
Balaji Amines’ inexpensive valuation makes it a compelling BUY: Edelweiss
Balaji Amines is one of Mohnish’s favourite stocks. As of 30th September 2017, his Pabrai Funds holds 6,07,204 shares. The investment is worth Rs. 32.73 crore at the CMP of Rs. 539.
Mohnish has already made a tidy profit from the stock. He bought the stock in the Jan-March 2017 quarter. The stock is up nearly 45% since then.
In an earlier piece, I pointed out that Balaji Amines was first recommended by Ashish Chugh in January 2011.
Thereafter, luminaries like Porinju Veliyath and Shyam Sekhar have dipped their hands into the stock and pocketed gains of as much as 1000%.
Edelweiss has now recommended a buy of Balaji Amines with the assurance that its valuations are “inexpensive” and “compelling”.
The logic is very convincing:
“High growth rider in the oligopolistic aliphatic amines industry
Strong demand-led volume growth coupled with steady margins
BAL has steadily built up capacity in methylamines and other specialty chemicals between FY10-FY14 riding on the strong demand potential from its key end-user industries — pharmaceuticals and agrochemicals. With limited competition (duopoly) and ability to substitute imports via competitive pricing, BAL is rapidly increasing utilisation levels and gaining operating efficiencies. While its methylamines and derivatives capacity is operating at blended 80% utilisation levels, its remaining portfolio is operating at near 65-70% levels. Methanol being a key raw material for methylamines, a substantial portion of revenues is from price-linked contracts that allow BAL to pass on the methanol price volatility without significantly impacting its gross margins.
Brownfield capacity expansion to add substantially to shareholders’ returns and cash flows
The company is adding production capacity for DMA HCL, morpholine and acetonitrile in its existing facility, Unit III, from internal accruals. Whilst BAL’s existing capacities in DMA HCL and morpholine are nearly fully utilised, the expansion is on account of strong: i) domestic demand for DMA HCL, and ii) potential for import substitution in morpholine. Further, acetonitrile will be a new addition to BAL’s portfolio with healthy demand potential from exports and domestic markets. The additional infusion of INR 60 crore for the three products should add nearly INR 170 crore in incremental revenues by FY19 and up to INR 280 crore at the peak utilisation level. Resultantly, the company is expected to generate cumulative free cash flows of nearly INR 180 crore in FY18 and FY19 with higher asset turns and profitability sans any new investment allocation.
Inexpensive valuation makes it a compelling BUY
In our view, BAL is all set to benefit immensely from its capacities and client base built up historically coupled with incremental expansions. Ergo, we expect strong growth in revenues, improving margins with higher utilisation levels and product expansions. Our earnings estimates per share for FY18 and FY19 are INR35.1 and INR42.4 respectively. We value the company at 18x FY19 earnings estimate of INR42.4/share and initiate our ‘BUY’ recommendation with a target of INR764/share.”
Robust Financials makes Balaji Amines lucrative: GEPL
GEPL has also recommended a buy of Balaji Amines on the basis that it has multiple virtues which make it investment worthy.
The investment rationale is as follows:
“Unique business structure provides an edge over its peer
Balaji Amines has unique business structure. It is one of the leading manufacturers of Aliphatic Amines. It specialized in manufacturing Methylamines, Ethylamines and derivatives of them. The company enjoys leadership position in many of its products like Monomethylamine (MMA), Dimethyl amine (DMA), Trimethylamine (TMA), Dimethyl Amino Ethanol (DMAE), Mono Methyl Amino Ethanol etc. It caters to host of industries like Pharma (51% of revenues), Agro Chemicals (26%), Paint Stripping & Resins, Rubber cleaning etc. The company has three state of the art units – two near Solapur and one near Hyderabad. In addition Balaji possess a fully furnished Laboratory which helps the company in development of newer products. It also operates a 5 start hotel in Solapur – Balaji Sarovar, the only 5 star properties in the city.
Niche play provides high growth momentum in the upcoming period
Worldwide Amines technology is a closely guarded process with only few handful companies having access to such technology. For the first time in India, Balaji tests on a indigenously developed products and over the years has become a leading player in the segment and commands healthy market share of 60-70% in domestic region for various products. Balaji has mastered the complex process which we believe, would act as a major entry barrier for domestic competitors and would provide revenue visibility and stable profitability.
Robust Financials makes Balaji Amines lucrative
Consistent growth in the top line also backed by operating margin improvement makes Balaji Amines more lucrative. Consolidated EBITDA margins have improved to 20.9% in FY17 from 16.4% in FY13. This shows that company has improved in operating efficiency. A net profit margin has also improved to 12.8% in FY17 from 6.1% in FY13. Return on equity has improved from 18.3% in FY13 to 23% in FY 17. ROCE has shown strong growth of 9.6% in FY13 to 19.1% in FY17. This makes Balaji Amines a safer bet as compared to others. We believe that this will create a great opportunity for the investor for longer term horizon.
At CMP of Rs. 574, Balaji Amines Ltd. is trading at 22.5x at its FY17 earnings of Rs. 25.4. With strong margin improvement and strong Business perspectives; We expect stock to trade at 21.4x its FY19E earnings of Rs. 33.9. We assign a BUY rating on the stock with a price target of Rs. 725 which is more than 26% upside from current levels.”
Three new specialty chemical products will add to the top line and profits
D Ram Reddy, the JMD of Balaji Amines, said that for FY18 the Company is expected to clock revenues between Rs 850 and Rs 900 crore. He also said that the hotel business is expected to improve going forward.
The sustainable EBITDA margins would be at 20-23% in FY18-19, he said.
He also assured that the Company has three new specialty chemical products which will come on stream as soon as the NOC from the Government comes through.
Balaji Amines To BTVI: Expect To Clock In Profits Of Around Rs 850-900 cr Going Forward; Aim To Sustain Margins at 20-23% In FY18-19 pic.twitter.com/pdIX8OLUBM
— BTVI Live (@BTVI) November 7, 2017
Can Balaji Amines be a 10-bagger like Rain Industries?
Prima facie, it is not far-fetched upon our part to expect powerhouse stocks like Rain Industries and Balaji Amines to give mega multibagger gains.
This is especially so because Mohnish has himself made it clear that he not interested in buying any stock if it does not have the potential to give a minimum of 5x returns.
Also, Balaji Amines is not a stranger to 10-bagger gains.
As I pointed out in my earlier piece, the stock has already given 10-bagger gains since the time that Ashish Chugh recommended it and 5-bagger gains since the time that Porinju Veliyath recommended it.
Also, given that the Company is still a small-cap with a market capitalisation of only Rs. 1,700 crore it is not unreasonable to expect 5x or 10x gains from it.
Of course, whether the stock will in fact deliver such gains is another story altogether. That depends on Mohnish Pabrai’s luck and our own luck!