Rain Industries ltd- CMP 105 – A High Potential Multibagger

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May 21, 2019

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Strategic Alpha

Rain logo

     Rain Industries Limited (RAIN) is one of the world’s leading producers of calcined petroleum coke, coal tar pitch, and other high-quality basic and specialty chemicals. The group continues to grow through capacity expansions and mergers and acquisitions across the world. RAIN operates in three key business verticals: carbon, chemicals, and cement. Rain Industries is headquartered in Hyderabad, India. However, the bulk of its operations (and revenues) are in the United States and Europe. Rain is the world’s largest producer of coal tar pitch (CTP) and the second-largest manufacturer of calcined petroleum coke (CPC). It has 18 production facilities in eight countries across three continents. Employees around 2600 People worldwide.

For more info check,  http://www.rain-industries.com/

Products:-

rain products

Installed Capacities:-

Rain Capacities

Industries Served by Rain:-

RAIN INDUSTRY SERVINGS

 

NUMBERS- THE LATEST 

Market cap: 3620 crores         CMP on 20May 2019 : Rs 105.75                      BV: 138 Apx
Revenue TTM: 13936 Cr         Net profit TTM:  399Cr                                      FV: 2

POSITIVES

  • Experience:- It has a Legacy of over four decades, backed by industry-leading production capacities
  • Global Leader:- Rain is a global leader in essential carbon products for the aluminum industry.
  • Lowest cost manufacturer:  Rain is the lowest cost manufacturer of CPC in the world so it has been a prioritized supplier to smelters.
  • Excellent capital allocation by management:- Jagan Mohan has been an excellent capital allocator, which is evident from Investments in the Flue gas desulphurization Unit, Waste heat Recovery Plant, Buyout of a company bigger than rain in past and still able to keep debt at reasonable levels.
  • High Competitive Advantage: Due to its lowest-cost manufacturing ability it remains profitable even during the bad phase of the cycle.
  • Huge Entry Barriers:- 
  1. Long-term contracted raw material supply with suppliers like Motiva, Exxon Mobil, Phillips66 for sourcing GPC.
  2. A long-standing relationship with customers like Alcoa, Rio Tinto Alcan, Norsk Hydro ASA, Century Aluminum and Aluminerie Alouette Inc, Vedanta Aluminum Limited, etc.
  3. The rain has patented ICE Technology which allows usage of inferior grades of
    GPC to produce CPC,  without compromising the quality of the product materially.
  • Sector Tailwinds:
    1. China’s government-mandated (Ministry of Environmental Protection) environmental restrictions that target reducing air pollution resulting in shutdowns and curtailments in the country, which has helped Ex China Producers of CPC as the price shot up.
    2. The capacity utilization of the Aluminium Industry in the U.S. is currently only around 50%, as trump’s tariff imposed on Chinese exporters, more US-based Aluminum production will be live again after a long haul. This will benefit the most rain industries as it has the majority of its plants based in the US.
  • Decrease in finance cost and deleveraging:- Rain’s Interest outgo dropped from 593Cr in CY13 to 457Cr in CY18 due to refinancing of debts. Rain’s Debt to Equity Improved from 2.3 in CY2013 to 1.68 in CY18 and has the potential to improve further due to free cash generation from its operations.

INTERESTING INFO

  • Rain employees have published more than 20 key technical papers and patents over the last 15 years.
  • The rain has a market share of near 36% share in the United States(CPC). Rain has a
    market share of 8% globally and 16% ex-of China.
  • The rain has an Excellent dividend payout track record for the past 2 decades and has brought buybacks in 2011,2012 and 2013 which shows management’s care towards minority shareholders.
  • Ace Investor Dolly Khanna owns 2.22% (74.78lakh Shares) in Rain Industries.
  • Mohnish Pabrai’s pabrai Investment Fund owns a 9.8% Stake in Rain Industries

NEGATIVES – POSSIBLE RISKS

  • Stricter environment norms can impact production and in turn profitability. 
  • Change in global refining production patterns or crude oil specifications impacting GPC availability( GPC -Raw Material for Rain)
  • Volatile commodity market impacting margins.
  • Exposure to various currencies (USD, EUR, Ruble, INR) impacting overall profitability.

MY TAKE

    With nearly four decades of Legacy, Rain Industries has done a commendable job starting from a cement company in the 1970s, then from a small calcining unit in 1998, and then to acquire the second-largest CPC producer globally in 2007, managing debt was quite a task.  Sailing of rain was smooth due to excellent capital allocation skills by management led by N Jaganmohan Reddy. With key entry barriers such as the lowest cost manufacturers globally, Patented technologies, and other competitive advantages rain is placed to make the most in its industry it operates in. With sector tailwinds due to Chinese production cut and restart of many primary smelters in the US, Rain is excellently placed to make game-changing profits. Rain’s entry into the advanced material segment will help to create an image as a specialty chemical manufacturer, rather than just being a commodity company today which in turn is valuation assertive. Management is taking every step in the right direction. We are getting global Leader in such a niche CPC Market,cash-generating machine, at just 3600Cr Mcap led by such a brilliant manager Mr. Jaganmohan,
   Rain Industries Stock has priced around 40-50 Rs in 2014-2015 from there it topped at 480 Rs in Jan 2018, a nearly 10 bagger return to its investors, with smallcap meltdown and supreme court’s imposition of the ban to import GPC due to environmental reasons made stock to bleed on daily, weekly and monthly basis and stock made a low of 87 Rs in Feb 2018. However, the worst seems to over for the stock, as the supreme court has already allowed importing 1.4 MTPA of raw coke. The rain has already solved its raw material supply problem by replacing partial domestic petcoke with Imported GPC. The current fall of 75% was an overreaction by streets as only 20% of capacity was going to get affected in the case of the GPC ban. Thus giving informed investors an excellent opportunity to accumulate stock at beaten-down prices. Currently, it seems to have made a bottom for the longterm and poised to move upwards.
  Comparing its assets, Cash generation capability, and entry barriers, the stock is highly undervalued and it will not last for long and it is placed nicely to become a multibagger once again. With patience, we will be able to see the levels of 500-700-1000 in the Next 3-5 Years.

Rain is an obvious potential multi-bagger!!!!!!!!

Important NotePotential multi-baggers are those stocks that have the potential to give 100 – 500% profits. Obviously, such returns take time. Probably 3 – 4 years or more. Short-term volatility is the reality of the stock market and that will always happen. Short-term movements(upside and downside) are impossible to predict. Only invest funds that you will not need for the next 3 – 4 years. As long as you buy a stock for the right reason and are convinced about the future prospects of the company, there is no need to worry if the share price goes down and stays down for a period of time after you buy; provided you have followed the cardinal stock market mantra BUY LOW.

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

2 Comments

  1. Vicky Verma

    Good article to read.Is Rain industries a buy @125?

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