Rain Industries is a flower that deserves to be watered, not a weed to be plucked
“When are you going to sell Rain Industries?” a bright-eyed student of the elite Boston College (Carroll School of Mgmt) asked Mohnish in a point-blank manner and with the typical confidence that youngsters have.
“We are not going to cut the flowers and water the weeds,” Mohnish replied with a sparkle in his eye.
“It is a very stupid gardener who cuts flowers and waters weeds,” he added.
It is worth recalling that Mohnish first bought Rain Industries in April 2015 when it was languishing at a throwaway price of Rs. 34.
At the CMP of Rs. 448, Mohnish has mind-boggling gains of 1200% (12-bagger) in his portfolio.
“30 months ago, we put less than $11 Million into it. Today, it is worth $90 Million. What am I supposed to do if the stock goes up 9x?” Mohnish asked with a big smile on his face.
Rain Industries’ moat is “deeper and wider” and it has a “number of tailwinds”
“My understanding of the business of Rain Industries is 3x what it was since when I first bought it,” Mohnish said.
“The best I can tell is that the Company is run by better people than I thought, the moat is wider and deeper than what I originally thought and there are a number of tailwinds as far as the eye can see,” he added.
“If I were to sell Rain Industries and buy anything else, it would be inferior in terms of knowledge and returns,” he said.
(Mohnish Pabrai tucks into Aloo Paratha in a Dhabha)
Allocation to Rain Industries can make “stomachs churn”
Mohnish revealed that PIF-III has an AUM of about $240 Million of which about $135 Million is allocated to Indian stocks. Of the $135 Million, $90 Million is allocated to Rain Industries.
“It doesn’t make my stomach churn but it might make your stomach churn a bit,” Mohnish chuckled.
— BloombergQuint (@BloombergQuint) December 30, 2017
Dolly Khanna aggressively hikes stake in Rain Industries and makes it crown jewel of her portfolio
Dolly Khanna shares Mohnish Pabrai’s outlook with regard to Rain Industries. She has been aggressively increasing her stake in the Company.
Dolly was first spotted in the June 2017 quarter with a holding of 42,68,092 shares comprising 1.27% of the equity.
In the September 2017 quarter, Dolly increased her stake to 68,77,710 shares.
As of 31st December 2017, Dolly holds a stranglehold of 86,30,115 shares of Rain Industries comprising 2.57% of the equity.
Dolly’s investment in Rain Industries is worth a colossal Rs. 387 crore at the CMP of Rs. 448.
There is no question that Rain Industries is today the crown jewel of Dolly Khanna’s portfolio.
Rain Industries’ higher return ratios means higher valuation multiples: IDBI Capital
The wizards at IDBI Capital were amongst the first to recognize the potential of Rain Industries.
They first recommended a buy in December 2016 when the stock was languishing at Rs. 54.
They assured that the stock has a target price of Rs. 82 (51% upside) which was effortlessly breached by Rain Industries.
Then, they increased the target price to Rs. 139 which was also effortlessly breached.
Now, IDBI Capital has again recommended a buy on the logic that the “outlook for CPC has improved”.
However, the wizards do not appear to have learnt the lesson that it is frivolous to cage stocks like Rain Industries with a target price.
The target price of Rs. 418 projected by IDBI Capital is now consigned to the history books and they will soon have to project a higher target price.
Rain Industries has “enduring tailwinds” and target price of Rs. 615 in “Bull case”: Motilal Oswal
When Rain Industries was soaring at Rs. 309, Motilal Oswal recommended a buy on the following basis:
“Rain Industries (RAIN) is the second largest carbon product supplier to the aluminum industry. Its carbon segment contributes 80% to consolidated EBITDA. Its chemicals segment converts coal tar distillates into resins, modifiers, aromatic chemicals, superplasticizers, etc. It also operates a 3.5mt cement plant in southern India and sells cement under the Priya brand.
Re-rated, yet attractive
– RAIN is riding tailwinds, triggered by supply disruption in China, which are driving margins and volume growth. We expect these tailwinds to last for 2-3 years, enabling EBITDA/PAT CAGR of 24%/50% over CY16-19.
– RAIN has been generating strong FCF and rewarding shareholders with dividends and buybacks. We believe it will continue to do so.
– The stock has been re-rated on change in business dynamics. Yet, our price target of INR362 indicates 33% upside. We initiate coverage with Buy.
Dual benefit of demand growth and supply shock driving CPC prices Calcine pet coke (CPC) production is hurt in China after the government’s firm action in 2017 to contain pollution. As a result, China has turned a net importer of CPC. Simultaneously, aluminum production is set to grow outside China – many smelters in North America and Europe are restarting. The dual benefit of demand growth and supply shock is driving up global CPC prices.
CT pitch market has stabilized on capacity cuts in key markets CT pitch (CTP) has been oversupplied for many years in RAIN’s key markets due to declining aluminum production. Consequently, there have been many shutdowns. Koppers, the largest producer of CTP in the world and a key competitor, has closed seven plants in the last 2-3 years. This has resulted in supply correction and improved utilization. The industry is now running at 80- 90% utilization and margins have stabilized. As aluminum production starts to recover on expected restart of smelters, demand and margins will expand.
Investing in high IRR organic growth projects RAIN has decided to set up a 370ktpa CPC kiln at a capex of USD65m near Vizag to meet strong growth in demand from Indian smelters. It is also investing USD17m in debottlenecking of petrochemical feedstock distillation by 200kt in Europe. Both projects are scheduled for completion by March 2019 and short payback period of 2-3 years should drive remunerative volume growth.”
The “regular” target price of Rs. 362 has long been breached. Now the “Bull case” target price of Rs. 615 is awaited.
Rain Industries is a “hidden gem” and “emerging global champion”: Ambit Capital
When Ambit Capital described Rain Industries as a “hidden gem”, some novices snickered as to how a stock which is already a mega multibagger can be described as a “hidden gem”.
However, it is obvious that the wizards at Ambit Capital know what they are talking about.
The buy recommendation is based on strong logic:
“A global supplier of carbon products like calcined petroleum coke and coal tar pitch, Rain Industries Ltd. is in a favourable position compared to its peers.
• The company will benefit from its long-standing relations with customers and suppliers.
• Proximity to raw material sources and diversified product offerings have added to the company’s success.
• The capacity shutdown by its key competitor, Koppers is likely to strengthen Rain Industries’ positioning in the tar distillation business.”
Rain Industries is no longer a “screaming buy”
Regrettably, though Mohnish described Rain Industries as a “flower that has to be watered” implying that it has more multibagger gains to offer, he also warned that he would not buy Rain Industries at the present valuations because it is no longer a “screaming buy”.
We will have to obediently obey his directive and keep away from the stock.
At the same time, we will have to keep our eyes peeled for Mohnish’s next stock pick and pounce on it when it is still a “screaming buy”!