Re: Riddhi Siddhi Gluco Biols - Q1FY11 Results Analysis Target Price Revised to Rs.
Text of The Report - If anyone wants pdf file with charts and tables then please provide your email-id.
Rgds.
Mahesh
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It is rightly said that ' To Grab an Emerging Opportunity in its Bud, One Needs to Keep His Ears close to Ground '. Investment is also based on this methodology and to extract maximum returns out of an Investment, one needs to keep eyes and ears wide open to sense early any opportunity coming in the way.
In the last report titled ' Comprehensive Analysis of Indian Starch & Starch Derivatives Sector ' a deep tabular and a brief theoretical analysis was presented of last 10 Years' Data to understand the scope and potential of Indian Starch & Starch Derivatives Sector. Now, in this report, we will present a deep theoretical argument based on the study of Chinese Starch & Starch Derivatives Sector over last two decades to understand the tremendous growth opportunity Indian Starch & Starch Derivatives Sector provides in the coming decade.
It is worthwhile to note here that Indian Sector is almost a replica of Chinese Sector and Indian Sector, as at 2010, is at a stage where Chinese Sector was there in 1992. Over the time period between 1992-2009, Chinese Starch & Starch Derivatives Sector has grown more than 10 times and Indian Starch & Starch Derivatives Sector is bound to replicate such growth in the span of coming 10 years.
We will also include in our analysis the consumption-trend of Sugar vis-a-vis Starch in China as well as India as Starch-based sweetners form 50 % of the marketsize of Chinese Starch & Starch Derivatives Sector whereas use of Starch-based sweetners as a substitute to sugar is only now catching up fast in India. We will also discuss briefly in this report the valuation aspect of Chinese and Indian sector at macro level and micro level to understand the gross undervaluation of Indian sector vis-a-vis China and a certain rerating expected of Indian Sector to correct this undervaluation.
Sections of The Report :
Boom Phase in Chinese Starch & Starch Derivatives Sector evident from large-scale successful Fund-Raising by a major company as well entry of strong financial investors like Soros, Blackstone & Citibank into the sector
Per-Capita Starch Consumption Study of last Two Decades of China
A Brief Comparison of Indian Starch & Starch Derivatives Sector of 2010 with Chinese Sector of 1992
A Detailed Study of last two decades' Sugar-Consumption Trend vis-a-vis Starch-Consumption Trend of China and India
Why Indian Starch & Starch Derivatives Sector is at an Advantage from Investment-point-of-view vis-a-vis Chinese Sector
Macro Valuation Aspect of Indian & Chinese Sectors ( Sector Valuation Considered )
Micro Valuation Aspect of Indian & Chinese Sectors ( Individual Companies Considered )
Detailed Evaluation of Selected Top Indian & Chinese Companies based on their Installed Capacities & TTM as well as Latest Reported Revenues, Gross Profits, Net Profit, GPM and NPM.
Conclusion
Boom Phase in Chinese Starch & Starch Derivatives Sector evident from large-scale successful Fund-Raising by a major company as well entry of strong financial investors like Soros, Blackstone & Citibank into the Sector
To continue with last Analysis Report on impending boom in emerging economies' Starch & Starch Derivatives sector and an expected rerating of Indian Starch & Starch Derivatives Sector, financial investors like Soros, Citibank and Blackstone have sensed this opportunity by investing in China Starch Holdings Ltd. - the cornstarch leader of China - in August 2010. This investment comes after China Starch Holdings announced that in six months ending June 2010, the group has experienced highest cornstarch price in the history of its existence. For six months ending June 2010, Company's cornstarch sales increased by 58.7 % over the same period last year while the average selling price of cornstarch increased significantly to RMB 2,322 per tonne over RMB 1,690 per tonne of 2009 which reflects a YoY increase of 37.4 %.
This is not just an isolated case as in July 2010, JP Morgan & Morgan Stanely successfully raised US$ 700 mn. for China Agri Industries, another major cornstarch player of China. The likely robust growth in company's corn processing business was one of the factors contributing to such a successful respone to its issue. Recently, China Agri Industries announced its results for six months ending June 2010 and in that its cornstarch sales reached 620,000 metric tons, contributing to a 76.4% growth in revenue. The realisation price of starch surged 36.2 % YoY while the gross profit margin was at 14.8 % up from 9.7 % of 2009.
To continue further, Asia Bio-Chem Group, another major pure cornstarch player of China, registered a 144 % increase in topline and a 170 % increase in bottomline in second quarter ended June 2010. This is on back of a 110 % increase in topline and a 179 % increase in bottomline registered by the company in first quarter ended March 2010. Gross Profit Margin for both the quarters stood at a healthy 17 %.
This is not the end as Luzhou Bio-Chem and Global Bio-Chem, both major corn products' players of China, have also reported healthy numbers for six months ending June 2010. Luzhou reported a 34.1 % rise in topline and 74.2 % rise in gross profit YoY while Global Bio-Chem reported a 13 % rise in topline and a 75 % increase in gross profit YoY for the six months ending June 2010.
All these figures reflect the robust demand scenario for Chinese Starch & Starch Derivatives sector which, in a way, provides an excellent opportunity for proactive financial investors to start investing in Indian Starch & Starch Derivatives sector. This is because, Indian Starch & Starch Derivatives sector is like a replica of Chinese Starch & Starch Derivatives sector and as of 2010, Indian Starch & Starch Derivatives sector is at a stage where Chinese sector was in 1992. Let us see how :
Per-Capita Starch Consumption Study of last Two Decades of China
Indian Starch & Starch Derivatives sector is mainly composed of cornstarch, quite similar to the trend of China. India's per capita starch consumption as of 2009 is at 1.3 kg. while that of China is 9.8 kg. and USA is 64.5 kg. while world average is at 6.1 kg.
Now, let's look back and study the Chinese sector to see what potential Indian sector has. In 1992, China's per capita Starch Consumption was at 1.1 kg. which went up to 1.3 kg. in 1994 and shot up to 2.1 kg. in 1995. Then, between 1995 to 1999 it remained in the range of 2.1-2.6 kg. and from 2000 it started registering exponential growth with 2000 per capita consumption standing at 3.7 kg., that of 2003 at 5.6 kg., that of 2005 at 8.5 kg. to the current 9.8 kg.
A Brief Comparison of Indian Starch & Starch Derivatives Sector of 2010 with Chinese Sector of 1992
In 1992, there were only 10 producers of starch & starch derivatives with production capacities exceeding 50,000 tonne per annum level in China. Also, in 1992, China had no producers with capacities greater than 2,00,000 tonne per annum. Today, as of 2010, China has 37 producers with a capacity above 50,000 tonne per annum and 19 producers with a capacity above 2,00,000 tonne per annum. To add, China today has 4 producers with an annual capacity of 1 mn. tonnes.
Now, let's look at Indian Starch & Starch Derivatives Sector scenario as of today. As discussed before, India's per capita Starch Consumption today stands at 1.3 kg. As of 30th June 2010. India has, in all, only 16 producers and out of them only 4 producers have production capacities exceeding 2,00,000 tonne per annum. This is quite similar to the trend experienced by Chinese sector in 1992 and the study of Chinese sector suggests that once per capita starch consumption crosses the threshold of 2.5 kg., it registers exponential growth thereafter very fast.
A detailed Study of last two decades' Sugar-Consumption Trend vis-a-vis Starch-Consumption Trend of China and India
Now, let's look from the other angle. Let us study the corelation of sugar consumption and starch consumption as starch-based sweetners account for a major portion of an emerging country's starch consumption pattern. In 1992, China had a per capita consumption of sugar at 6 kg. whereas its per capita consumption of starch was at 1.1 kg. In 1995, per capita sugar consumption of china went up to reach only 6.5 kg. while its per capita starch consumption went up to reach 2.1 kg. Then, from 2001 onwards, sugar consumption went up at a faster pace with 2001 consumption at 7 kg., 2003 consumption at 9 kg., 2006 consumption at 10 kg. while 2009 consumption at 11.5 kg. On the other hand, if you look at per capita starch consumption of china for the same period then, 2000 per capita starch consumption stood at 3.7 kg., that of 2003 at 5.6 kg., that of 2005 at 8.5 kg. while that of 2009 at 9.8 kg. This clearly reflects a trend of rising substitution of sugar with starch-based sweetners in an emerging country like China.
Now, let us look at Indian sugar consumption pattern. In 1992, India had a per capita sugar consumption at 9.1 kg. and per capita starch consumption at 0.6 kg. Sugar consumption in India has shown a consistent uptrend with 2000 per capita sugar consumption standing at 15.5 kg. and 2009 consumption standing at 20.4 kg.
Thus, between 1992 to 2009 per capita sugar consumption of China has increased by 91.67 % while that of India has increased by 124.17 %. In the same period, China's per capita starch consumption has increased by a whooping 790.91 % while that of India has increased by only 116.67 %.
The rise in price of sugar as well as no likelihood of substantial respite from such rise in near future has recently given rise to a trend in India of substituting sugar with other alternatives and starch-based sweetners are occupying prominent place in this trend. By carefully studying the chinese consumption pattern of sugar vis-a-vis starch, it is but obvious that starch-based sweetners are likely to drive the growth of Indian Starch & Starch Derivatives market going forward. With current wide gap between per capita sugar consumption and starch consumption which are standing at 20.4 kg. and 1.3 kg. respectively, an exponential growth in consumption of starch to fill the wide gap is inevitable.
Why Indian Starch & Starch Derivatives Sector is at an Advantage from Investment-point-of-view vis-a-vis Chinese Sector
Already top 4 players of the Indian starch industry have announced their intention to increase their capacity manifold in the span of next 3-5 years and FY10 as well as Q1FY11 has seen robust growth registered by each of the top player of the industry ( Refer Research Report on Comprehensive Analysis of Indian Starch Sector ). Per Capita Consumption of Starch in India is expected to reach 1.8 kg. in 2010 and 2.5 kg. in 2011 because of the robust demand expected from each of the user industry viz., Food & Beverages, Pharmaceuticals, Paper, Chemicals and Textiles and more downstream applications getting commercialised by top 4 Indian companies.
If we look with the backdrop of Chinese Sector developments, then, Indian Starch & Starch Derivatives sector is at an advantage because of its more concentrated structure. In India, the top company is cornering 35 % market share with its immediate competitor cornering less than half of it at 16 % market share and 80 % of the market is being served by top 4 companies. There is no denying of the fact that the size of Indian Sector is much smaller at just ` 2082.17 cr. but it is quite similar to the size of Chinese Sector size in 1992. In the short span of just 17 years, Chinese sector has grown 9 times its size of 1992 and such a robust performance can very well get replicated by Indian Starch & Starch Derivatives Sector in the span of just coming 10 years.
This scenario can get more clear if one sees where Indian Sector was there in 2006 at a size of just ` 880.99 cr. The sector has already grown almost 2.5 times in the span of just 5 years and going forward it is expected to continue with such momentum looking at Q1FY11 size registered by the sector at ` 580.09 cr.
Macro Valuation Aspect of Indian & Chinese Sectors ( Sector Valuation Considered )
Now, let us look at the valuation aspect of Chinese Sector and Indian Sector. First consider Chinese Starch & Starch Derivatives sector valuation. At present, the sector is enjoying an average P/E multiple of 15.1 TTM EPS and an average forward P/E multiple of 11.3. Sector is enjoying an average 8.1x EBITDA TTM and 7.2x EBITDA forward. Sector is trading at an average market-cap-to-sales of 1.2.
Let's now consider Indian Sector valuation. Indian Starch & Starch Derivatives Sector is currently enjoying an average P/E multiple of 12.88 TTM EPS and an average forward P/E multiple of 7.1. It is trading at an average 4.4x EBITDA TTM and 3.1x EBITDA forward. Sector is trading at an average market-cap-to-sales of 0.49.
Micro Valuation Aspect of Indian & Chinese Sectors ( Individual Companies Considered )
Now, let's take an example of specific micro valuation. Consider the valuation of Riddhi Siddhi Gluco Biols Ltd. ( BSE 524480 ), an Indian company enjoying 35 % market share on an all-India basis of Indian Starch & Starch Derivatives Sector and a 45 % market share in Northern India. This company is used as a proxy by world's 4th largest cornstarch producer Roquette Freres to gain quick entry into Indian market as and when market reaches a reasonable size. Roquette has made a strategic investment in the company by taking a 14.93 % equity stake in 2006. Without going into other details let's straightaway focus on the valuation aspect of the company and then compare its valuation with its Chinese peers.
Riddhi is currently enjoying a P/E multiple of 11.8 TTM EPS and 5.31 forward. It is trading at a valuation of 3.9x EBITDA TTM and 2.54x EBITDA forward. It is enjoying a market-cap-to-sales ratio of 0.62 TTM and 0.44 forward.
Now, let's pitch this valuation against those enjoyed by Riddhi's Chinese peers :
China Starch Holdings (HKSE 03838) in which recently Soros, Blackstone and Citibank took an equity exposure is trading at a P/E multiple of 29.8 TTM EPS and 22.77 forward. It is enjoying a valuation of 22.71x EBITDA TTM and 14.51x EBITDA forward while its market-cap-to-sales ratio stands at 2.13 TTM and 1.79 forward.
China Agri Industries (HKSE 00606), which, in July 2010, successfuly raised 700 mn. US$, is trading at a P/E multiple of 15.1 TTM EPS and 11.3 forward. It is enjoying a valuation of 9.2x EBITDA TTM and 6.9x EBITDA forward while its market-cap-to-sales ratio stands at 0.85 TTM and 0.61 forward.
Asia Bio-Chem (TSX.V ABC) is trading at a P/E multiple of 29.7 TTM EPS and 6.4 forward. It is enjoying the valuation of 17x EBITDA TTM and 3.4x EBITDA forward while its market-cap-to-sales stands at 0.95 TTM and 0.42 forward.
Detailed Evaluation of Selected Top Indian & Chinese Companies based on their Installed Capacities & TTM as well as Latest Reported Revenues, Gross Profit, Net Profit, GPM & NPM
Now, after considering the micro valuation aspect of selected Indian and Chinese companies, it is now time to pitch the Starch & Starch Derivatives Sector leader of India against 2 top companies of Chinese sector in terms of Installed Capacity, Revenue Generated from such capacity, Gross Profit & Net Profit generated, Margins achieved in TTM as well as in latest reported results, etc. to check the operational efficiency as well as judge the investment opportunity Indian Companies offer.
Here, we have considered two chinese companies viz., Asia Bio-Chem (TSX.V ABC) and China Starch Holdings (HKSE 03838) as their business model as well as business segments closely replicate Indian Companies' business model and segments. Also, while considering figures of China Starch Holdings, we have only included the topline and profits of its 'Cornstarch & Ancillary Corn-Refined Products' business segment and excluded the business and profits generated by other segments like 'Lysine', 'Fertilisers', etc. as otherwise it will not result in fair and accurate comparison.
Also, Year-ending for Chinese companies is December while that of Indian companies is March. So, for TTM figures, we have considered reported results for year ended December 2009 of Chinese companies and year ended March 2010 for Indian Company.
Latest Reported Results for Chinese companies is for six months ended June 2010, so, for fair and accurate comparison, for Indian Company too we have combined two Quarterly Results for Quarter ended March 2010 and for Quarter ended June 2010 - and considered the results for six months ended June 2010.
Asia Bio-Chem reports its figures in Canadian Dollar (CAD) whereas China Starch Holdings reports its numbers in Renminbi (RMB), so, for comparison purpose, we have converted the reported numbers of both the companies into Indian National Rupee (`) with the conversion rate of 1 CAD = 44.80 ` and 1 RMB = 6.9 `.
Now, let's enlist all the parameters and then discuss each one in detail :
Riddhi Siddhi Gluco
(BSE - 524480)
Asia Bio-Chem
(TSX.V - ABC)
China Starch Holdings
(HKSE - 03838)
Installed Annual Capacity
440000
900000
1300000
Revenue TTM
` 745.61 cr.
` 397.51 cr.
(CAD 88.73 mn.)
` 983.73 cr.
(RMB 1425.70 mn.)
Gross Profit TTM
` 119.91 cr.
` 64.49 cr.
(CAD 14.39 mn.)
` 65.76 cr.
(RMB 95.30 mn.)
Gross Profit Margin TTM ( in % )
16.08
16.2
6.7
Net Profit TTM
` 39.21 cr.
` 9.45 cr.
(CAD 2.11 mn.)
NA
Net Profit Margin TTM ( in % )
5.26
2.38
NA
Latest Reported Revenue
(for 6 Months ended June 2010)
` 434.02 cr.
` 433.74 cr.
(CAD 96.81 mn.)
` 590.70 cr.
(RMB 856.08 mn.)
Latest Reported Gross Profit
(for 6 Months ended June 2010)
` 94.06 cr.
` 73.31 cr.
(CAD 16.36 mn.)
` 65.82 cr.
(RMB 95.39 mn.)
Latest Reported Gross Profit Margin in %
(for 6 Months ended June 2010)
21.69
16.95
11.1
Latest Reported Net Profit
(for 6 Months ended June 2010)
` 39.53
` 29.53 cr.
(CAD 6.59 mn.)
NA
Latest Reported Net Profit Margin in %
(for 6 Months ended June 2010)
9.11
6.81
NA
Following things need to be noted from above figures :
(1) With an installed capacity of just 4,40,000 tonnes per year, Riddhi Siddhi is reporting on a TTM basis a revenue which is :
75 % of that achieved by China Starch Holdings which is having a capacity of 13,00,000 tonnes per year and
2 times of that achieved by Asia Bio-Chem which is having a capacity of 9,00,000 tonnes per year. Problem at one of the plants of Asia Bio-Chem in the TTM period considered needs to be noted here which has got resolved subsequently thereafter and so the 'Latest Reported Results' for 6 months ended June 2010 will provide a fair comparative picture of Aisa Bio-Chem and Riddhi Siddhi.
(2) In 'Latest Reported Results', where we have considered results of six months ended June 2010 of all the three companies, Riddhi Siddhi has achieved a topline which is :
73 % of that achieved by China Starch Holdings which is having a capacity of 13,00,000 tonnes per year and
almost similar to that achieved by Asia Bio-Chem which is having a capacity of 9,00,000 tonnes per year.
(3) Gross Profit Margin of Riddhi for TTM is :
almost 2.5 times of that achieved by China Starch Holdings over the same period
almost same as achieved by Asia Bio-Chem over the same period
(4) Gross Profit Margin of Riddhi for Six Months Ended June 2010 is :
2 times of that achieved by China Starch Holdings in six months ended June 2010
1.3 times of that achieved by Asia Bio-Chem in six months ended June 2010
(5) Net Profit Margins of Riddhi for both, TTM as well as six months ended June 2010, has been 2.2 times and 1.3 times respectively of that achieved by Asia Bio-Chem over the same periods. Comparable figures of NPM for China Starch Holdings are not available as the company has other reportable segments like 'Lysine', 'Ferilisers', etc. which are not considered.
To conclude the evaluation aspect, it is evident that with less than half the capacity as compared to Chinese peers, Indian Starch & Starch Derivatives companies like Riddhi Siddhi are reporting much better utilisation levels as well as operational efficiencies. In case of an accelerated growth of the sector driven by booming demand, Indian Companies, especially top 4 companies, are in a position to create much larger scale accompanied by robust cash generation as compared to Chinese peers.
Conclusion
Indian Markets have started trading at par, if not at premium valuations, than its peers like Hongkong and China. In such a scenario, investment into Indian Markets needs to get channelised in such sectors of the economy which are not only expected to register a double digit growth for next decade but offer potential for exponential growth in the coming decade. Indian Starch & Starch Derivatives Sector is one such sector of Indian economy which is expected to emerge as the next sunrise sector of Indian Economy. A Study of Chinese Starch & Starch Derivatives sector provided in this report confirm this prognosis and the current undervaluation as well as concentrated structure of Indian sector provide proactive financial investors a safe investment opportunity into the sector.
A premium operational efficiency, a premium utilisation, a premium margin environment as well as a premium cash generating ability has to be rewarded by premium valuations and not by remnant valuations. Although in this report we have taken into consideration the financial parameters as well as valuation aspects of only the leader of Indian Starch & Starch Derivatives Sector which is the most efficient company of Indian sector, still, even if one goes down the line to 2nd 3rd or 4th company, each of the company scores high in terms of operational efficiencies as compared to all the chinese companies. All the top 4 companies viz., Riddhi Siddhi, Anil Products, Sukhjit Starch and Gujarat Ambuja Exports (Maize-Processing Division) operate at much higher operating margins than Chinese companies and at net level their cash generating ability is much superior. Still, each of the company is available at a substantial discount to all Chinese peers, most probably because of their size of operations. However, with aggresive expansion in capacities planned over the next 3-5 years by each of the player, the size issue is expected to get corrected sooner rather than later. This process has already started with the leader of the sector viz., Riddhi Siddhi Gluco reaching the size of many of the Chinese Companies in FY10 and is expected to surpass the size of some of the Chinese Companies in FY11.
A case in point here is the fact that with rise in size, the margins are expanding aggresively, in fact. at a much faster pace which augurs very well for the Top 4 Indian Companies. With Gross Margins and Net Margins of top 4 Indian Starch & Starch Derivatives Companies standing at double that of Chinese Companies while the valuation of them ruling at a significant discount to Chinese peers, a correction in valuation is expected in the near future because, gone are the days when Indian Markets were trading at discount to China and Hongkong. Now is the phase when one is seeing a premium valuation attached to India's Growth and in such a phase one is getting an opportunity to invest in a sector which is trading at a discount. Hence, a phase of discovery is bound to start for Indian Starch & Starch Derivatives Sector which will see it trading at par, if not at premium, to Chinese sector valuation. Underownership of the Indian sector players is another thing which will act as a hedge to any expected correction in Indian or World Markets and a single digit P/E valuation as well as sub-1x sales valuation provide a great margin of safety towards the investment into Indian Sector.
Finishing again with the saying ' To Grab an Emerging Opportunity in its Bud, One needs to Keep His Ears close to Ground '. Investment is also based on this methodology and to extract maximum returns out of an Investment, one needs to keep eyes and ears wide open to sense early any opportunity coming in the way. Healthy FY10 and robust Q1FY11 numbers posted by each of the top 4 players of Indian Starch & Starch Derivatives sector are the developments that need to be sensed and the deep study of Chinese Sector a replica of Indian Sector is the tool one can use and the entry of financial investors like Soros, Blackstone and Citibank into Chinese Sector in August 2010 as well as successful fund-raising by many companies of Chinese Sector are the prima-facie indications one can diagnose to predict the emerging opportunity of investment into Indian Starch & Starch Derivatives Sector.
