U.S. markets closed
  • S&P 500

    +73.47 (+1.95%)
  • Dow 30

    +572.16 (+1.85%)
  • Nasdaq

    +196.68 (+1.55%)
  • Russell 2000

    +45.29 (+2.11%)
  • Crude Oil

    +2.45 (+3.84%)
  • Gold

    -2.50 (-0.15%)
  • Silver

    -0.17 (-0.65%)

    -0.0054 (-0.45%)
  • 10-Yr Bond

    +0.0040 (+0.26%)

    -0.0067 (-0.48%)

    +0.2690 (+0.25%)

    +1,977.32 (+4.23%)
  • CMC Crypto 200

    +39.75 (+4.21%)
  • FTSE 100

    -20.36 (-0.31%)
  • Nikkei 225

    -65.78 (-0.23%)

A Look at Why Mohnish Pabrai Is Still Holding Rain Industries

·3 min read

- By Rupert Hargreaves

Over the past few years, I've been keeping an eye on and writing about Mohnish Pabrai (Trades, Portfolio)'s investment in the Indian business Rain Industries Ltd. (BOM:500339).

According to interviews with the value investor, he started buying the stock for his funds in 2015, paying an average price of 60 cents per share.

Soon after that, shares in the company began rising in value. At the beginning of 2018, it was worth over $7 per share, giving it 10-bagger status in around three years.

Unfortunately, the bubble burst in 2018. Shares in Rain slumped, falling 70% to end the year at around $1.95.

A "dumb" move

In his 2020 letter to investors, Pabrai lamented not selling the stock at $7. He said it was "dumb" not to exit the holding after making such a large profit in such a short span of time.

However, he went on to add that he didn't sell at the time because "I understood the business better, and it wasn't just a cheap business." The value investor went on to explain that the company had an "exceptional capital allocator" in the driving seat, who is "continually improving the business."

This exceptional capital allocator is Jagan Reddy. Based on my understanding, Pabrai was first attracted to Rain because the stock was cheap. In fact, he later declared that it was trading at a "P/E of 1," putting it in that rare bucket of super cheap value stocks. However, after owning the business for several years and getting to know Rain and its team of managers, it seemed Pabrai's investment thesis changed entirely.

For example, in his 2018 letter, the value investor explained:

"In the last 3+ years that we have owned Rain, I have seen Jagan Reddy (Rain's Managing Director and 40+% shareholder) make one smart decision after another. In fact, I have never seen Jagan make even one dumb decision. He has made very large capital allocation calls over the last 12+ years and they have been flawless. It is a remarkable record. He is a dream manager."

He went on to provide some further analysis on the holding and his understanding of Rain's earnings power:

"Rain is being valued these days at $560 million. A bad year for the company would mean floor earnings of perhaps $100 million. A good year may produce more than $250 million in after-tax profit. Perhaps average earnings will be $150 million. However, we have to add to that Jagan's magic with reinvesting earnings at a high ROE. In that scenario, "floor earnings" may very well be $200 million in a few years."

Based on the fact that Rain remains one of Pabrai's most extensive holdings across all of his funds, it would appear that he still believes this company has a tremendous amount of potential. Indeed, in his 2020 letter, the fund manager declared that the stock could rise 10 times from its current level, and that might be a good point to sell.

Lessons learned

What can we learn from this? Pabrai has always excelled at looking past short-term market headwinds and focusing on a company's long-term strengths. He recently noted that he'd changed his investment strategy, away from deep-value plays toward buying "growing pies" at good prices. That certainly seems to be what the Rain investment provides.

Only time will tell if holding on is the right decision. Still, I think it is a good case study in the importance of doing detailed research and understanding a company's strengths and weaknesses. Doing so allows one to gain conviction in the opportunity and not be scared out of the market when the stock drops suddenly without any fundamental reason.

Disclosure: The author owns no shares mentioned.

Read more here:

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.