Rain Industries Ltd. (Rain) is one of the largest producers of calcined petroleum coke (CPC) and coal tar pitch (CTP) in the world with operations spread across North America, Europe, India and Russia. Apart from large size, Rain has long standing relationships with suppliers to source the key raw materials – green petroleum coke (GPC) and coal tar. During FY13-15, Rain’s profitability was affected due to lower demand from its end customers (aluminium industry). Nevertheless, Rain took several initiatives including setting up a greenfield distillation unit in Russia, partially securing supply of raw material (coal tar) for its European CTP plants, setting up CPC blending facility in India, etc which is likely to push volumes and improve margins. Further, the company has nearly completed its capex cycle and is focused on deleveraging balance sheet and refinancing (to lower interest costs). These measures are likely to boost its net profit (27% CAGR over FY16-19) over the coming three years as per our estimates. We value the stock on sum-of-total-parts (SOTP) basis and initiate coverage with a BUY rating.
If you look at the categorization of this stock, it is listed as a cement company on moneycontrol. That is where casual investors give a miss to this stock. If you go deeper and look at it, the cement business of this company, doesn’t make much EPS, it is the other divisions which are making the most EPS for this stock.
Hence,
instead of standalone numbers, consolidated numbers should be
considered for this company, to get the best perspective for investing.
Stock Performance:
In one year, this stock has moved from Rs. 44 to Rs. 190, an excellent 4.3X returns. There are quite a few reasons for this rise in stock price, which I will discuss in the later part of the answer.
Basic Parameters:
If
you look at the basic numbers, cement business EPS is only at Rs. 0.52,
but when you include the Calcined Petroleum Coke (CPC), Coal Tar Pitch
and other Specialty Chemicals, the EPS zooms to Rs. 10.89, which is very
decent. The P.E. instantly drops from 203 to 17.18 and the P/BV becomes
inexpensive at 2.08.
Quarterly Financials and Balance Sheet:
Net
sales shows consistent growth over the last few quarters and the Net
Profit also has been more than doubling Q-O-Q over the last 3 quarters.
The high debt is the only worrisome factor, which can be understood
because of the cement business. High net block is encouraging.
Shareholding: With a consistent 41.1% shareholding by the promoter, there is interest from large shareholders, which is evident from the large deals that have happened in the last one year.
What does the future hold for this stock:
- I have mentioned in my previous answers also, that this company is a major supplier of raw materials which are used by companies like Phillips Carbon Black, Goa Carbon Black, Graphite India and HEG.
- With the closure of many factories in China which produce graphite electrodes as well as other chemicals, the prices have been rising continuously for the last 6 -8 months. Also, this closure in China is not a temporary phenomena and will push the prices higher and higher in the coming year.
Conclusion:
Rain Industries Last coverage was done in July 2017 on this blog : Mohnish Pabrai reveals his multibagger
Rain Industries Last coverage was done in July 2017 on this blog : Mohnish Pabrai reveals his multibagger
- As I see it, this stock has the potential to be a multibagger and move to around Rs. 400 in the next one year, considering all the good momentum and support it is getting by way of product mix, demand growth and market outlook.
- If things go according to the indicated business prospects, this stock might even give 5X returns atleast from this point onwards.
Next read : New Short term and long term pick
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