Riddhi Siddhi Gluco Biols Ltd. - A Multibagger in the Making
Industry Starch (Corn Starch)
BSE Code 524480
Current Price Rs. 280/-
Target Price Rs. 530 /-
Target Price Period Short to Medium Term
Equity Capital 11.13 cr.
Promoter Holding 57.99 % [43.06 % (Founders) + 14.93 % (Foreign
Collobrator)]
Market Cap Rs. 316.40 cr.
FY10 Sales Rs. 747.15 cr.
FY10 Operating Profit Rs. 121.49 cr.
FY10 Net Profit Rs. 39.22 cr.
FY10 EPS Rs. 34.78
Current P/E 8.05
Theme of the Report :
In today's equity market scenario wherein domestic (Indian) equity
markets are refusing to go down & infact are touching new highs
everyday even when global equity markets are witnessing significant
correction, one needs to adopt a shrewd two-pronged investment
strategy. On one hand one needs to ensure that in a situation - if
Indian markets start to correct significantly because of some external
factor the invested money don't depreciate significantly ; whereas
on the other hand in a situation if Indian markets scale new
lifetime highs in 2010-11 the invested money appreciates
significantly. Adopting of such winning strategy demands tactful stock-
selection wherein one needs to select a company whose business model
is domestic-consumption-driven while at the same time has a lot of
scope for export-driven-earnings; is scalable while at the same time
generates significant cash ; whose management is credible while at the
same time is aggresive enough to take proactive steps to ensure long-
term sustainable growth of the company ; is operating in an industry
which is at a nascent stage but has a lot of scalable opportunities
ahead.
Riddhi Siddhi Gluco Biols Ltd. Is one such company which scores full
marks in all the above criterias but is still available at single
digit PE on Indian bourses. The most important factor which draws any
shrewd investor's interest towards this company is the fact that
eventhough it is a leader of the industry in which it operates
(commands 40% market share) with its closest peer operating at half
the capacity at which Riddhi operates, it is available at a discount
to all its peers. Yes this is an aberration which demands a
correction sooner rather than later as nowhere in the world we have
seen a situation where a company of a significant size with healthy
cash flow and an industry leader status trades at a discount to its
smaller size peers. Hence, Riddhi Siddhi awaits a significant rerating
on the bourses and the time is ripe for such rerating to happen.
We have divided the report into three parts wherein after providing
brief overview regarding the company, we will first analyse the Macro
Perspective then will analyse the Micro Perspective and then will
analyse the Valuation Perspective for investment into Riddhi Siddhi
Gluco Biols Ltd. So, lets start....
A Brief Overview of the Company :
Riddhi Siddhi Gluco Biols Ltd. is promoted by the Ahmedabad-based
Chowdhary Family who were traditionally engaged in the trading of
'sago' and tapioca starch for decades. Incorporated in 1990, Riddhi
established its first manufacturing unit in 1994 at Viramgam, Gujarat.
Today, Riddhi is India's largest corn wet miller with more than 1500
tonne daily capacity, producing a variety of starches and derivative
products.
Headquartered in Ahemdabad (Gujarat), Riddhi has strategically located
manufacturing plants proximate to raw material growing areas and
markets, i.e., Viramgam (Gujarat), Gokak (Karnataka), Pantnagar
(Uttarakhand) and Pondicherry (Union Territory). It has eight
marketing offfices across India, catering to various industry needs.
It manufactures a wide range of starches and value-added products like
Liquid Glucose, Maltodextrin, Dextrine Monohydrate, Dextrose Syrups,
High Maltose Corn Syrups, Gluten, Germs and Corn Fibre. Company's
products enjoy widespread downstream applications in food processing,
pharmaceuticals, paper, textiles, adhesives, biscuits,
confectioneries, dairies, ice-cream, beverages, leather applications
and other industries.
Investment Rationale :
Now, we will start with the main aspect - that of investment rationale
for Riddhi Siddhi Gluco Biols Ltd. This is an aspect which can't be
dealt with briefly and demands a deep understanding from each and
every angle. For this, we will first concentrate on the Macro
Perspective where we will deal with the Industry overview, industry
developments and scope of future growth of the industry.
After Macro, we will trickle down to Micro Perspective which is the
most important perspective to understand a company ; which helps us
immensely to decide whether the company demands a place in one's
portfolio or not. Here, we will look at the positioning of the company
in the industry, its strengths, its likely future avatar and, above
all, quality and strength of its management. This last point with
regards to the management of Riddhi is an extremely important point
which needs to be studied deeply by anyone who is even remotely
vetting the possibility of investment into the company. This is the
reason why we have dealt with this point as deeply as possible because
it is this factor which is likely to see Riddhi become an
international player to reckon with in the foreseeable future.
After Micro, we will straightaway deal with Valuation Perspective
which is the most important perspective to decide whether this is the
right time to make investment into the company or not. Here, we will
discuss the financials of the company, likely future financials,
current valuation of the company, its peer group valuation and likely
future valuation of the company.
Now, lets' start.....
Macro Perspective :
Starch, an abundant carbohydrate, is a major ingredient in the human
diet and, over decades, has emerged as a prominent industrial raw
material as well. Versatile in applications, starch's high
carbohydrate content makes it useful for use in multiple industries.
Global starch consumption is estimated at around 62 mn mtpa and is
projected to increase to 70 mn mtpa. The consumption of starch in
countries like USA, Japan and China is likely to register the growth
of 1%, 2% and 4% respectively. Indias per capita starch consumption
is still less than 1 kg, compared with the US (64 kg) and the global
average (6 kg). Corn starch industry is at very initial stage of
business cycle in India so there is lot of room for improvements. The
Indian starch industry is producing starch at 1800 crs tons. 65% of
the total production comes from organized sector and remaining 35% by
unorganized players. Organized sector comprises of 6 players and 16
manufacturing units.
To add, there are more than 1000 downstream applications of starch
(cornstarch), of which a mere 40 applications have been commericalised
untill now. Two simple applications use of starch in the manufacture
of ethanol and biodegradable plastics can potentially transform the
starch industry's size and health. Hence, domestic cornstarch industry
holds a lot of promise and is expected to register atleast a 15% p.a.
growth till 2015. Also, on export front, indian cornstarch industry is
at a very nascent stage with a miniscule share in world cornstarch
market. Recent removal of 5 % export rebate on cornstarch by China is
expected to act as a trigger for making Indian cornstarch and allied
products attractive for international buyers.
Micro Perspective :
Now, we will start with the most important perspective which will help
us decide whether Riddhi is a strong investment candidate or not. We
will concentrate on three main aspects viz.,
(1) Evaluating Management of the Company
(2) Current Avatar of the Company
(3) Likely Future Avatar of the Company
Amongst above 3 aspects, you will find that we have dwelled much more
deeply in the first aspect. It is really much more than usual but
still we have done so because it is this aspect which is the core
strength of Riddhi and which will surely take Riddhi towards a path of
surpassing higher and higher peaks every passing day. So, lets
start....
(1) Evaluating Management of the Company :
The best way to evaluate management of a company is to look at their
past. With past we mean the vision with which they started their
company, the difficulties faced by them during pre-startup and startup
phase, efforts put-in by them for overcoming such difficulties, steps
taken by them to grow the company and result of such steps, etc. We
need to dwell deeply into each step the management took in the past to
evaluate the strength of the management to foresee the future. This is
because what we have now on our hand is 'present' but this 'present'
is the result of the 'past' and so to evaluate 'future' we need to
cross-check 'past' with 'present'. Hence, in this section we will
dwell into following points :
(a) Pre-startup & Startup Phase of Riddhi
(b) Vision for Acquisitions (Glaxo Plant)
(c) Vision for Acquisitions (Uniliver Plant)
(d) Capability of Handling Crisis Situations
(e) Whether Management Keeping up to spoken Words
(a) Pre-startup & Startup Phase of Riddhi :
Chowdhary Family had been successful traders in tapioca starch and
sago since the late Forties. They would buy tapioca starch from
hundreds of small processors and market to large downstream users. Not
merely successful; they were Indias largest in that space. Mr. Ganpat
Chowdhary was then asked to expand the familys business in Ahmedabad
in 1985. He grew throughput from 100 tonnes per month to 500 tonnes
per month in just four years. He then told the family that a time
would soon come when our large and demanding customers would source
directly from manufacturers and before that happened we needed to
become manufacturers ourselves. The family said, Why leave our
comfort zone? Why get into a business that people are exiting anyway?
Why get into a business that would transform the family from lenders
to borrowers, would need us to pay a large labour force even if we
failed to market anything and required us to stay invested whether the
market was bullish or bearish? Mr. Ganpat Chowdhary suggested that at
the end of the day we were traders and that real respect lay with
those who built large manufacturing plants and ran them successfully.
Initially the family was not convinced, but gradually he succeeded.
Then came the startup phase the most difficult phase in any
company's lifecycle. WHEN Riddhi's management, led by Mr. Ganpat
Chowdhary, DECIDED TO ENTER THE MANUFACTURE OF MAIZE STARCH, they HAD
NOTHING TO SHOW FOR their CAPABILITY. EXCEPT their ENTHUSIASM. They
created a project report of a plant that would process 25 tonnes per
day (TPD); the person at technology provider Alfa Laval laughed and
said they had stopped making equipment as small as this years ago.
They created a project blueprint estimated at Rs. 1.6 crores; experts
advised that they would need at least four times that amount. They
figured that they would set up the plant in a year-and-a-half ;
technical advisors said that even the best companies in the country
took two-and-a-half years. However, whatever they lacked by way of
experience, they covered up by doing more than most people would have
in their place. Their enthusiasm translated into a tangible reality. A
project that would normally have taken 24 months was compressed in 18;
a project (75 TPD) that would have normally cost Rs.9 crores was
completed in Rs. 6.50 crores with adequate working capital margin.
(b) Vision for Acquisitions (Glaxo Plant) :
After startup, the most critical phase for any company is the phase
when it charts out its growth path. On such path, if every seeming or
unseeming opportunity is not spotted as an opportunity and grabbed
with conviction then the derailment happens and company sinks deep
into it.
Now, such an unseeming opportunity came to the Riddhi's management in
the form of an advertisement in Economic Times on 27th April, 1995 FOR
THE PROPOSED SALE OF KG GLUCO BIOLS LIMITED AT GOKAK (KARNATAKA). The
company was promoted by the multinational Glaxo in joint-venture with
the Government of Karnataka to process maize starch into value-added
products. The management of Riddhi immediately went off to visit the
said plant in Karnataka. The grim pronouncement was that KG Gluco
Biols had until the previous year run up a turnover of Rs 12 crores
with an equivalent loss, but apart from that was ideal from the
perspective of layout, design and technology. Also, with all its
technical and financial muscle, KG Gluco had not succeeded in breaking
even, so there seemed to be something wrong with the place, though in
reality the plant was located in the midst of one of the most abundant
maize producing regions in India. Management of Riddhi took the
decision that they should bid for the plant and they did. They were
competing with heavyweights like Cargill, British Sugar, Lalbhai
Group, Finolex Cables and Mahyco. Riddhi was the smallest bidder
amongst all. It had only an annual turnover of slightly more than Rs.
12.5 crores at that time; still Riddhi's management made a counter-
offer of Rs.14 crores and when asked to raise it, they blurted Rs 16
crores and the general feeling in the meeting was that this young
company is crazy. This crazy company finally won the bid and acquired
the plant. It is after this what had happened which is very important
to note :
The problem was not the acquired plant; it was the high cost of
management, low operational flexibility and low capacity utilisation.
The problem was not the location; it was the decision to keep raw
material inventory just-intime in a volatile commodity space that
enriched vendors more than the company.
For ex., Even though the plant had a 150 tonnes daily maize crushing
capacity that would produce 95 tonnes of starch slurry, it could
consume not more than 50 tonnes; there was just no business plan on
how to utilise the remaining 45 tonnes a day of starch slurry.
Consequently, the management could not grind more than 70 tonnes of
corn a day. The solution of Riddhi's management - They commissioned a
starch drier in a record four months, which increased the plant's
grinding capacity to 130-140 tonnes a day, enhanced the revenues and
started company's turnaround.
For ex., There were hundreds of disgruntled farmers who had lost money
when the previous management discontinued operations. The solution of
Riddhi's management - They met the farmers to enhance confidence; they
assured that they would buy considerably larger volumes; they cleared
the past dues of the farmers incurred by erstwhile management to send
an unmistakable signal that they were there to stay.
Result of all these was Gokak plant's monthly turnover was Rs 50 lakhs
per month at the time of acquisition by Riddhi and today it is Rs. 25
crores per month.
(c) Vision for Acquisitions (Uniliver Plant) :
IN THE LATE NINETIES, HINDUSTAN UNILEVER, ONE OF Riddhi's CUSTOMERS,
INDICATED THAT IT WOULD BE INTERESTED IN SELLING ITS SPECIALTY STARCH
PLANT IN PONDICHERRY. The plant was not too sophisticated and it was
not having any first-grade equipment. Why would anyone want to buy it?
At Riddhi Siddhi, management agreed. The plant was not sophisticated
and nor was the equipment in an excellent condition. However, they
were looking beyond the usual. Something else was catching their
fancy. The plant enjoyed a near-monopoly position for paper starch.
Since Riddhi were not present in that segment, the acquisition would
help them widen their product portfolio with a readymade market.
Hence, Riddhi's management went ahead and acquired the Uniliver plant.
Surprisingly, they made a loss on their sales in the first two months.
However, In three months management had covered the growing needs of
all the customers they had inherited from the previous management. In
three months they were selling more than what the previous management
was selling.
(d) Capability of Handling Crisis Situations :
Here, one interesting fact comes to mind as to how Riddhi serviced
Nutrine (now Godrej Hershey), one of Riddhi's largest and long-
standing customers. Nutrine didnt just need large consignments; it
also needed frequent despatches. The result was a strong logistics
support system to service Nutrines requirements. However, the crisis-
situation came in the form of a transporter's strike. It was this time
when, if Riddhi would not deliver, it would lose a precious customer.
Look what the management did in this crisis - They branded their
loaded vehicles as those carrying critical milk material. They got
these vehicles out at night so that they could use the cover of
darkness and cover as much distance as possible. They equipped each
vehicle with two drivers, so that they could drive in turns. They
selected petrol pumps along the way where their vehicles could lie in
wait for darkness before they resumed their journey. Like this way
they transformed a crisis-situation into an opportunity to demonstrate
outstanding order-execution capability of the company.
Similarly, another crisis came in the form of a fire at Gokak plant of
Riddhi in FY08. This brought production at Riddhi's largest facility
constituting around 50% of their total output to a halt for seven
months, still, without bowing down to ill fate, Riddhi's management
immediately started taking corrective steps. In challenging
circumstances, they requisitioned the services of their expanded
Viramgam facility to ensure that supplies to most of their customers
deeply dependent on them remained on track. They resumed operations
at the Gokak plant in the third quarter of 2007-08 and immediately
scaled operations to an optimal level by the close of the financial
year. The tactful handling of such a difficult stuation is evident
from the fact that despite the main plant of Riddhi remaining
unoperational for 7 out of 12 months, Riddhi reported only a marginal
decline in topline and EBIDTA in FY08.
(e) Whether Management Keeping up to spoken Words :
This is a major thing to look for before investing into any company.
Afterall, it is the management which runs a company and if such
management is not keeping its words then stakeholders are put at
extreme risk. Hence, we need to dwell into the past and then check the
present to see if management has kept to its spoken words. To dwell
into the past of Riddhi, we need to look at the 2005-06, 2006-07 and
2007-08 Annual Reports of the company. In 2005-06 AR, the management
wrote that by 2008-09 they expect to cross the topline of Rs. 500 cr.
Then, in 2006-07 AR, the management again wrote that they plan to
cross Rs. 550 cr. topline in 2008-09. Continuing from there came the
most difficult year for Riddhi in the form of fire at Gokak plant in
07-08. Even in that Annual Report i.e. AR of 2007-08, the management
wrote that they will make all the efforts to keep to their words of
crossing Rs. 500 cr. topline in 2008-09 and gave another guidance of
crossing Rs. 700 cr. topline in 2009-10.
Now, let us see the present. In 2008-09, Riddhi reported a topline of
Rs. 534 cr. while in 2009-10 it reported a topline of Rs. 747 cr. This
fact proves that once Riddhi's management commits something, it puts
all sincere efforts with all the strength to keep up its commitment
which is an extremly healthy sign for the stakeholders of Riddhi.
(2) Current Avatar of the Company :
Today, Riddhi is the biggest starch producer of India. Its Gokak unit
in Karnataka is India's single largest corn wet milling plant followed
by its Patnagar plant which is the second largest in the country. It
is one of the largest exporters of Indian starch Industry; however
exports constitute only 10 % topline of Riddhi. Roquette Freres,
France the world's fourth largest corn starch and derivatives
company with a turnover of over Euro 2.6 billion holds 14.93 % equity
stake in Riddhi and is a strategic partner. Riddhi is far.. far ahead
of its competition with Sukhjit Starch, its closest competitor, having
half the capacity that of Riddhi. Riddhi today commands a 40% market
share in Indian starch industry and so is the undisputed leader of the
industry enjoying considerable goodwill. Nestle, Cadbury, Uniliver,
Britannia, Ranbaxy, Novartis, Wockhardt, Dabur, BILT, ITC, JK, Grasim,
Indian Rayon, Amul, Hindalco, Emami, UB, Venky's, etc. are some
amongst the ever-expanding client-list of Riddhi.
(3) Likely Future Avatar of the Company :
Future is the main ingredient without which any succesful investment
can falter. Certainity and visibility regarding bright future of a
company is the foremost criteria one needs to look for before
investing in it. For Riddhi, future seems extremely bright, if not
brightest. Past and present of Riddhi provide lot of visibility
regarding the foreseeable future.
First it commands leadership position in India with no formidable
competition ; Second its association with Roquette Freres ensures
that this leadership position is maintained while gradually opening up
international markets for its products.
Yes this is the main vision of the management going forward.
Management of Riddhi is working on a two-pronged strategy of widening
the scope of domestic industry by commercialising more and more
downstream applications of cornstarch via strong R&D ; while
simultaneously setting the pace to tap global markets for its products
which at present contribute hardly 10 % to its sales. The main support
for the later comes from Riddhi's association with Roquette Freres
which is the fourth largest corn starch and derivatives company.
Initial stage is set to further strengthen this association by setting
up a wholly owned subsidiary in April 2010 in which the business
pertaining to Riddhi's units at Viramgam, Gokak and Pantnagar will be
demerged.
Management of Riddhi has charted a vision of attaining 25 % topline
from exports by 2012 and for this it is working on a model of using
Roquette Freres' expertise and network in international markets and
combining it with Riddhi's efficient product manufacturing and
delivery execution capability. This will be a win-win association
wherein Roquette Freres will benefit from best quality products
available at lower prices while Riddhi will benefit from enhanced
sales and better price realisation.
Riddhi's management is willing to bring in Roquette Freres as 40 %
partner in its wholly owned subsidiary and is willing to part with
such stake for around Rs. 150 cr. While Roquette Freres wants 51 %
stake in the listed parent company viz., Riddhi Siddhi Gluco Biols
Ltd. in which it already owns 14.93 % stake acquired at the rate of
Rs. 200 in 2006. For additional 36.07 % stake Roquette Freres is
willing to give Rs. 150 cr. but Riddhi's management is refusing to
hand over management control in favour of Roquette Freres even at such
high price which happens to be 30 % premium to current ruling market
price of Rs. 280. Talks are on and a soultion is likely to emerge
shortly as no company, be it Roquette Freres or Riddhi, can afford to
ignore a win-win association which is immensely beneficial for both
the parties. In such a solution, Riddhi's management is expected to
emerge as a winner because of the leadership position they enjoy in
Indian market and the order execution capabilities they have
demonstrated in the past.
Hence, likely future scenario for Riddhi two years down the line seems
that Riddhi will emerge as a tough international player to reckon with
in cornstarch industry with 25-30 % of its sales coming from exports
and rest from the domestic market.
Valuation Perspective :
Now, after going through Macro and Micro Perspectives, it is the right
time to look at the Valuation Perspective of Riddhi which is the most
important perspective to time an investment into a company. From Macro
and Micro perspectives one thing is crystal clear that Riddhi surely
demands a place in one's portfolio, but, is current market price the
right price to include Riddhi in one's portfolio will get determined
after carefully going through Valuation Perspective. We will deal with
Valuation Perspective from four angles, viz.,
(1) Current & Past Financials of the Company
(2) Likely Future Financials of the Company
(3) Valuation commanded by Company's Peers
(4) Current valuation of the Company and its likely future Valuation
(1) Current & Past Financials of the Company :
This is the most intersting aspect to look for while valuing Riddhi.
Normally while looking at financials of any company we look at last
five years' financials but for Riddhi we will look at last ten years'
financials to rigorously test its capability to emerge as a future-
winner.
(in cr.) FY01 FY02 FY03
Sales 84.0 92.8 115.4
OP 11.28 11.67 18.50
NP 2.89 2.33 1.26
(in cr.) FY04 FY05 FY06
Sales 158.81 198.87 248.15
OP 22.50 25.28 33.09
NP 1.49 3.95 11.34
(in cr.) FY07 FY08 FY09 FY10
Sales 355.87 333.15 533.99 747.15
OP 54.33 54.62 62.28 121.49
NP 26.76 19.89 13.99 39.22
The main purpose to provide last ten years' financials is that one can
easily make out the inflexion point from which a company will surpass
one stage i.e. from small-cap to mid-cap and from mid-cap to large-
cap. This point we will deal with later on but for now lets
concentrate on last ten years' financials of Riddhi. Riddhi has grown
its topline 9 times (789 % to be precise) while bottomline by 13 times
(1,257 % to be precise) in the span of just last 10 years. Also, such
an astonishing growth has come with minimal equity dilution which is
evident from the fact the current equity capital of Riddhi stands at
just 11.13 cr. On such tiny equity capital it is not an easy thing to
generate such a healthy growth and that too with reasonable cash
generation and for this the management of Riddhi deserve an applause.
Also, if you closely look at last ten years' financials then you can
make out that except FY08, when company's Gokak plant faced fire, each
year company has grown its topline in double digit percentage. This
shows the capability of the company to win new customers, retain old
customers as well as generate more downstream applications for its
products thereby widen the market.
Also, again looking at last ten years' financials shows that company
has performed consistently on operating front but on net level there
are wide fluctations. This is common for a company which is scaling up
fast and so investing heavily in its operations. A foreign currency
loan was also the factor contributing to low net profit levels as also
sharp rise in maize prices which constitute 70% of the cost of any
company operating in cornstarch industry. Still, Riddhi has managed to
stay net-positive for all the ten years inspite of all the odds facing
the industry. This fact depicts the capability of the management to
manage available resources extremely well towards benefit of all the
stakeholders.
(2) Likely Future Financials of the Company :
Factors that are likely to impact future financials of the company
are :
- commisioning of additional capacity at company's Rudrapur plant,
- Roquette Freres taking active part in operations of the company by
furthering equity participation either at subsidiary level or parent
level,
- increase in exports which will have direct positive impact on
EBIDTA,
- stable-to-declining trend of maize prices in near future which
constitute 70 % cost of the company,
- commercialisation of more downstream applications of cornstarch by
the company thereby widening of product portfolio.
Based on above factors likely future financials of Riddhi for next
three years are given below :
(in cr.) FY11 FY12 FY13
Sales 1056 1380 1870
OP 158.4 227.7 299.2
NP 61.25 84.1 114.8
After taking into account likely equity dilution in next two years,
EPS for FY11 works out to be Rs. 54.30, for FY12 at Rs. 62.20 and that
for FY13 at Rs. 77.80.
(3) Valuation commanded by Company's Peers :
Riddhi's listed peers include :
Sukhjit Starch
Gujarat Ambuja Exports
English Indian Clay
Universal Starch
Closest competitors of Riddhi are Sukhjit Starch and Gujarat Ambuja
Exports with both operating at half the capacity at which Riddhi
operates. Still, we will look at the valuation of all the listed peers
to judge the under- or over- valuation of Riddhi vis-a-vis them.
Sukhjit Starch is trading at a PE of 8.35 and a market-cap-to-sales of
0.47 based on its reported financials of FY10.
Gujarat Ambuja Exports is trading at a PE of 8.0 and a market-cap-to-
sales of 0.28 based on its reported financials of FY10. However, one
thing to note here is that Gujarat Ambuja is present into many other
segments like agro commodities, yarn, etc. in which Riddhi is not
present. It is Guj. Amb.'s presence in these loss making segments
which drag its valuation downwards.
English Indian is trading at a PE of 8.37 and a market-cap-to-sales of
1.35 based on its reported financials of FY10. However, this company
is also present in other businesses in which Riddhi is not present.
Universal Starch is trading at a PE of 17.69 and a market-cap-to-sales
of 0.14 based on its reported financials of FY10.
It is worthwhile to note here another important thing with regards to
topline of all the above companies vis-a-vis Riddhi's. Sukhjit Starch
had a topline of 267 cr., Guj. Ambuja Exports had a topline of Maize
Processing Division at 337 cr., English Indian had a topline of 159
cr. from starch division while Universal Starch had a topline of 90.57
cr. in FY10. This figures are no way near the topline of Riddhi at
747.16 cr. for FY10.
(4) Current valuation of the Company and its likely future Valuation :
At the current market price of Rs. 280, Riddhi Siddhi Gluco Biols Ltd.
trades at a PE of 8.05 and a market-cap-to-sales of 0.42 based on
reported FY10 numbers. This is at a discount to its closest peer viz.,
Sukhjit Starch and at par with other peer viz., Gujarat Ambuja
Exports. To continue the comparison, the current valuation of Riddhi
is far lower than that commanded by English Indian Clays as also that
commanded by smallest amongst the lot viz., Universal Starch. Nowhere
in the world we have seen a situation where an industry leader is
trading at a discount to its peers which are less than half of its
size. Hence, this abberation is expected to get corrected sooner
rather than later and Riddhi is bound to trade at a premium to all its
peers in near future.
Now, If we look at the future expected financials of Riddhi, then at
current market price of Rs. 280, it trades at a PE of just 5.16 based
on expected FY11 EPS of Rs. 54.30; at a PE of just 4.5 based on
expected FY12 EPS of Rs. 62.20 and at a PE of just 3.59 based on
expected FY13 EPS of Rs. 77.80.
To add, Riddhi currently trades at a market-cap-to-sales of just 0.29
based on expected current FY11 topline of Rs. 1056 cr.,; at a market-
cap-to-sales of just 0.24 (after taking into account equity dilution)
based on expected FY12 topline of Rs. 1380 cr. and at a market-cap-to-
sales of just 0.20 (after taking into account equity dilution) based
on expected FY13 topline of Rs. 1870 cr.
On conservative estimates, Riddhi is bound to command a market-cap-to-
sales of 0.60 and a PE band of 9.5-10 based on its industry leadership
position and expected rise in export earnings.
Conclusion :
Current equity market scenario is one which demands careful stock-
selection to maximise returns with minimal risk. If we can get an
industry leader at a discount to its peers then it is an opportunity
waiting to be grabed and current market environment will not let such
opportunity remain an opportunity for too long.
Also, one most important thing that might have missed the attention of
the reader of this report is the fact that Riddhi is at an inflexion
point of becoming a large-cap company from a mid-cap company. If you
again look at last ten years' financials of Riddhi given in previous
sections then you will note that it transformed from a small-cap
company to a mid-cap company in FY09 when it achieved a topline of Rs.
534 cr. Immediately after that i.e. in last FY10, it registered a 40 %
growth in topline when it achieved a topline of Rs. 747 cr. This was a
vindication of scalable business model that the company has and a
decisive transformation from a small-cap to a mid-cap company.
Normally, transition from a small-cap to mid-cap is the most difficult
and time-consuming phase for a company while the path towards large-
cap from mid-cap is quick embeded with high growth. Management of
Riddhi has already spotted this opportunity and so have taken steps to
form a wholly owned subsidiary and invite French cornstarch major
Roquette Freres to participate actively in the subsidiary. Management
is fully aware of the fact that without Roquette Freres it is
impossible to attain a large-cap status as the logical extension for
Riddhi is now tapping aggresively international markets which will be
extremely EBIDTA-positive. This is a good sign for the stakeholders of
Riddhi as today's stakeholder of Riddhi is bound to see his company
attain much higher levels very quickly than past.
Also, if you take the most current precedent of a significant
international M&A deal which happened in starch industry at the fag-
end of June 2010 wherein AkzoNobel sold its starch division to Corn
Products International, one can easily judge the future potential this
industry possess and the future valuation at which Riddhi should trade
at. In June 2010, AkzoNobel NV sold its National Starch Business to
Corn Products International for a whooping $ 1.3 billion in cash. If
we include pension liabilities, then the sale price works out to be $
1.4 billion. It is worthwhile to note here that National Starch
Business of AkzoNobel had 2009 revenue of $ 1.2 billion and street was
expecting a sale price of only between 0.9 to 1 billion. The fact that
the transaction was wrapped up at $ 1.3 billion cash vindicates the
fact that the industry has immense future potential and so Riddhi
Siddhi Gluco Biols Ltd. deserves to trade at a significant premium to
current ruling market cap which is not even half of its FY10 revenue.
Hence, to conclude, a company
(1) which is on the verge of transforming itself to large-cap from mid-
cap but is availabale at the valuation of a small-cap,
(2) is the leader of the industry in which it operates with its
closest competitors being less than half of its size,
(3) is operating in an industry which itself is at an inflexion point
and is likely to attain a growth of minimum 15 % p.a. for next five
years,
(4) is bound to see improved margins due to stable-to-declining price
scenario expected for maize prices which constitute 70 % of its cost
(5) in which world's 4th largest player of cornstarch industry viz.,
Roquette Freres likely to infuse Rs. 150 cr. at the parent or
subsidiary level (current market-cap of the company is just 316 cr.
and likely fund infusion by the french major is almost half of that
amount at Rs. 150 cr.)
(6) is available at single digit PE of just 8.05 and market-cap-to-
sales of just 0.42 based on trailing FY10 numbers and at a PE of just
5.16 and a market-cap-to-sales of just 0.29 based on expected current
FY11 numbers
is the safest company one can invest in to maximise returns with
minimum risk in current market scenario and so we put a conservative
price target of Rs. 530 on the company which will command a PE of just
9.76 and a market-cap-to-sales of just 0.56 based on current FY11
numbers.
All in all, a significant rerating for Riddhi Siddhi Gluco Biols Ltd.
is on the cards to correct the gap between its deserved mid-cap
industry leader valuation and current small-cap industry player
valuation.
Industry Starch (Corn Starch)
BSE Code 524480
Current Price Rs. 280/-
Target Price Rs. 530 /-
Target Price Period Short to Medium Term
Equity Capital 11.13 cr.
Promoter Holding 57.99 % [43.06 % (Founders) + 14.93 % (Foreign
Collobrator)]
Market Cap Rs. 316.40 cr.
FY10 Sales Rs. 747.15 cr.
FY10 Operating Profit Rs. 121.49 cr.
FY10 Net Profit Rs. 39.22 cr.
FY10 EPS Rs. 34.78
Current P/E 8.05
Theme of the Report :
In today's equity market scenario wherein domestic (Indian) equity
markets are refusing to go down & infact are touching new highs
everyday even when global equity markets are witnessing significant
correction, one needs to adopt a shrewd two-pronged investment
strategy. On one hand one needs to ensure that in a situation - if
Indian markets start to correct significantly because of some external
factor the invested money don't depreciate significantly ; whereas
on the other hand in a situation if Indian markets scale new
lifetime highs in 2010-11 the invested money appreciates
significantly. Adopting of such winning strategy demands tactful stock-
selection wherein one needs to select a company whose business model
is domestic-consumption-driven while at the same time has a lot of
scope for export-driven-earnings; is scalable while at the same time
generates significant cash ; whose management is credible while at the
same time is aggresive enough to take proactive steps to ensure long-
term sustainable growth of the company ; is operating in an industry
which is at a nascent stage but has a lot of scalable opportunities
ahead.
Riddhi Siddhi Gluco Biols Ltd. Is one such company which scores full
marks in all the above criterias but is still available at single
digit PE on Indian bourses. The most important factor which draws any
shrewd investor's interest towards this company is the fact that
eventhough it is a leader of the industry in which it operates
(commands 40% market share) with its closest peer operating at half
the capacity at which Riddhi operates, it is available at a discount
to all its peers. Yes this is an aberration which demands a
correction sooner rather than later as nowhere in the world we have
seen a situation where a company of a significant size with healthy
cash flow and an industry leader status trades at a discount to its
smaller size peers. Hence, Riddhi Siddhi awaits a significant rerating
on the bourses and the time is ripe for such rerating to happen.
We have divided the report into three parts wherein after providing
brief overview regarding the company, we will first analyse the Macro
Perspective then will analyse the Micro Perspective and then will
analyse the Valuation Perspective for investment into Riddhi Siddhi
Gluco Biols Ltd. So, lets start....
A Brief Overview of the Company :
Riddhi Siddhi Gluco Biols Ltd. is promoted by the Ahmedabad-based
Chowdhary Family who were traditionally engaged in the trading of
'sago' and tapioca starch for decades. Incorporated in 1990, Riddhi
established its first manufacturing unit in 1994 at Viramgam, Gujarat.
Today, Riddhi is India's largest corn wet miller with more than 1500
tonne daily capacity, producing a variety of starches and derivative
products.
Headquartered in Ahemdabad (Gujarat), Riddhi has strategically located
manufacturing plants proximate to raw material growing areas and
markets, i.e., Viramgam (Gujarat), Gokak (Karnataka), Pantnagar
(Uttarakhand) and Pondicherry (Union Territory). It has eight
marketing offfices across India, catering to various industry needs.
It manufactures a wide range of starches and value-added products like
Liquid Glucose, Maltodextrin, Dextrine Monohydrate, Dextrose Syrups,
High Maltose Corn Syrups, Gluten, Germs and Corn Fibre. Company's
products enjoy widespread downstream applications in food processing,
pharmaceuticals, paper, textiles, adhesives, biscuits,
confectioneries, dairies, ice-cream, beverages, leather applications
and other industries.
Investment Rationale :
Now, we will start with the main aspect - that of investment rationale
for Riddhi Siddhi Gluco Biols Ltd. This is an aspect which can't be
dealt with briefly and demands a deep understanding from each and
every angle. For this, we will first concentrate on the Macro
Perspective where we will deal with the Industry overview, industry
developments and scope of future growth of the industry.
After Macro, we will trickle down to Micro Perspective which is the
most important perspective to understand a company ; which helps us
immensely to decide whether the company demands a place in one's
portfolio or not. Here, we will look at the positioning of the company
in the industry, its strengths, its likely future avatar and, above
all, quality and strength of its management. This last point with
regards to the management of Riddhi is an extremely important point
which needs to be studied deeply by anyone who is even remotely
vetting the possibility of investment into the company. This is the
reason why we have dealt with this point as deeply as possible because
it is this factor which is likely to see Riddhi become an
international player to reckon with in the foreseeable future.
After Micro, we will straightaway deal with Valuation Perspective
which is the most important perspective to decide whether this is the
right time to make investment into the company or not. Here, we will
discuss the financials of the company, likely future financials,
current valuation of the company, its peer group valuation and likely
future valuation of the company.
Now, lets' start.....
Macro Perspective :
Starch, an abundant carbohydrate, is a major ingredient in the human
diet and, over decades, has emerged as a prominent industrial raw
material as well. Versatile in applications, starch's high
carbohydrate content makes it useful for use in multiple industries.
Global starch consumption is estimated at around 62 mn mtpa and is
projected to increase to 70 mn mtpa. The consumption of starch in
countries like USA, Japan and China is likely to register the growth
of 1%, 2% and 4% respectively. Indias per capita starch consumption
is still less than 1 kg, compared with the US (64 kg) and the global
average (6 kg). Corn starch industry is at very initial stage of
business cycle in India so there is lot of room for improvements. The
Indian starch industry is producing starch at 1800 crs tons. 65% of
the total production comes from organized sector and remaining 35% by
unorganized players. Organized sector comprises of 6 players and 16
manufacturing units.
To add, there are more than 1000 downstream applications of starch
(cornstarch), of which a mere 40 applications have been commericalised
untill now. Two simple applications use of starch in the manufacture
of ethanol and biodegradable plastics can potentially transform the
starch industry's size and health. Hence, domestic cornstarch industry
holds a lot of promise and is expected to register atleast a 15% p.a.
growth till 2015. Also, on export front, indian cornstarch industry is
at a very nascent stage with a miniscule share in world cornstarch
market. Recent removal of 5 % export rebate on cornstarch by China is
expected to act as a trigger for making Indian cornstarch and allied
products attractive for international buyers.
Micro Perspective :
Now, we will start with the most important perspective which will help
us decide whether Riddhi is a strong investment candidate or not. We
will concentrate on three main aspects viz.,
(1) Evaluating Management of the Company
(2) Current Avatar of the Company
(3) Likely Future Avatar of the Company
Amongst above 3 aspects, you will find that we have dwelled much more
deeply in the first aspect. It is really much more than usual but
still we have done so because it is this aspect which is the core
strength of Riddhi and which will surely take Riddhi towards a path of
surpassing higher and higher peaks every passing day. So, lets
start....
(1) Evaluating Management of the Company :
The best way to evaluate management of a company is to look at their
past. With past we mean the vision with which they started their
company, the difficulties faced by them during pre-startup and startup
phase, efforts put-in by them for overcoming such difficulties, steps
taken by them to grow the company and result of such steps, etc. We
need to dwell deeply into each step the management took in the past to
evaluate the strength of the management to foresee the future. This is
because what we have now on our hand is 'present' but this 'present'
is the result of the 'past' and so to evaluate 'future' we need to
cross-check 'past' with 'present'. Hence, in this section we will
dwell into following points :
(a) Pre-startup & Startup Phase of Riddhi
(b) Vision for Acquisitions (Glaxo Plant)
(c) Vision for Acquisitions (Uniliver Plant)
(d) Capability of Handling Crisis Situations
(e) Whether Management Keeping up to spoken Words
(a) Pre-startup & Startup Phase of Riddhi :
Chowdhary Family had been successful traders in tapioca starch and
sago since the late Forties. They would buy tapioca starch from
hundreds of small processors and market to large downstream users. Not
merely successful; they were Indias largest in that space. Mr. Ganpat
Chowdhary was then asked to expand the familys business in Ahmedabad
in 1985. He grew throughput from 100 tonnes per month to 500 tonnes
per month in just four years. He then told the family that a time
would soon come when our large and demanding customers would source
directly from manufacturers and before that happened we needed to
become manufacturers ourselves. The family said, Why leave our
comfort zone? Why get into a business that people are exiting anyway?
Why get into a business that would transform the family from lenders
to borrowers, would need us to pay a large labour force even if we
failed to market anything and required us to stay invested whether the
market was bullish or bearish? Mr. Ganpat Chowdhary suggested that at
the end of the day we were traders and that real respect lay with
those who built large manufacturing plants and ran them successfully.
Initially the family was not convinced, but gradually he succeeded.
Then came the startup phase the most difficult phase in any
company's lifecycle. WHEN Riddhi's management, led by Mr. Ganpat
Chowdhary, DECIDED TO ENTER THE MANUFACTURE OF MAIZE STARCH, they HAD
NOTHING TO SHOW FOR their CAPABILITY. EXCEPT their ENTHUSIASM. They
created a project report of a plant that would process 25 tonnes per
day (TPD); the person at technology provider Alfa Laval laughed and
said they had stopped making equipment as small as this years ago.
They created a project blueprint estimated at Rs. 1.6 crores; experts
advised that they would need at least four times that amount. They
figured that they would set up the plant in a year-and-a-half ;
technical advisors said that even the best companies in the country
took two-and-a-half years. However, whatever they lacked by way of
experience, they covered up by doing more than most people would have
in their place. Their enthusiasm translated into a tangible reality. A
project that would normally have taken 24 months was compressed in 18;
a project (75 TPD) that would have normally cost Rs.9 crores was
completed in Rs. 6.50 crores with adequate working capital margin.
(b) Vision for Acquisitions (Glaxo Plant) :
After startup, the most critical phase for any company is the phase
when it charts out its growth path. On such path, if every seeming or
unseeming opportunity is not spotted as an opportunity and grabbed
with conviction then the derailment happens and company sinks deep
into it.
Now, such an unseeming opportunity came to the Riddhi's management in
the form of an advertisement in Economic Times on 27th April, 1995 FOR
THE PROPOSED SALE OF KG GLUCO BIOLS LIMITED AT GOKAK (KARNATAKA). The
company was promoted by the multinational Glaxo in joint-venture with
the Government of Karnataka to process maize starch into value-added
products. The management of Riddhi immediately went off to visit the
said plant in Karnataka. The grim pronouncement was that KG Gluco
Biols had until the previous year run up a turnover of Rs 12 crores
with an equivalent loss, but apart from that was ideal from the
perspective of layout, design and technology. Also, with all its
technical and financial muscle, KG Gluco had not succeeded in breaking
even, so there seemed to be something wrong with the place, though in
reality the plant was located in the midst of one of the most abundant
maize producing regions in India. Management of Riddhi took the
decision that they should bid for the plant and they did. They were
competing with heavyweights like Cargill, British Sugar, Lalbhai
Group, Finolex Cables and Mahyco. Riddhi was the smallest bidder
amongst all. It had only an annual turnover of slightly more than Rs.
12.5 crores at that time; still Riddhi's management made a counter-
offer of Rs.14 crores and when asked to raise it, they blurted Rs 16
crores and the general feeling in the meeting was that this young
company is crazy. This crazy company finally won the bid and acquired
the plant. It is after this what had happened which is very important
to note :
The problem was not the acquired plant; it was the high cost of
management, low operational flexibility and low capacity utilisation.
The problem was not the location; it was the decision to keep raw
material inventory just-intime in a volatile commodity space that
enriched vendors more than the company.
For ex., Even though the plant had a 150 tonnes daily maize crushing
capacity that would produce 95 tonnes of starch slurry, it could
consume not more than 50 tonnes; there was just no business plan on
how to utilise the remaining 45 tonnes a day of starch slurry.
Consequently, the management could not grind more than 70 tonnes of
corn a day. The solution of Riddhi's management - They commissioned a
starch drier in a record four months, which increased the plant's
grinding capacity to 130-140 tonnes a day, enhanced the revenues and
started company's turnaround.
For ex., There were hundreds of disgruntled farmers who had lost money
when the previous management discontinued operations. The solution of
Riddhi's management - They met the farmers to enhance confidence; they
assured that they would buy considerably larger volumes; they cleared
the past dues of the farmers incurred by erstwhile management to send
an unmistakable signal that they were there to stay.
Result of all these was Gokak plant's monthly turnover was Rs 50 lakhs
per month at the time of acquisition by Riddhi and today it is Rs. 25
crores per month.
(c) Vision for Acquisitions (Uniliver Plant) :
IN THE LATE NINETIES, HINDUSTAN UNILEVER, ONE OF Riddhi's CUSTOMERS,
INDICATED THAT IT WOULD BE INTERESTED IN SELLING ITS SPECIALTY STARCH
PLANT IN PONDICHERRY. The plant was not too sophisticated and it was
not having any first-grade equipment. Why would anyone want to buy it?
At Riddhi Siddhi, management agreed. The plant was not sophisticated
and nor was the equipment in an excellent condition. However, they
were looking beyond the usual. Something else was catching their
fancy. The plant enjoyed a near-monopoly position for paper starch.
Since Riddhi were not present in that segment, the acquisition would
help them widen their product portfolio with a readymade market.
Hence, Riddhi's management went ahead and acquired the Uniliver plant.
Surprisingly, they made a loss on their sales in the first two months.
However, In three months management had covered the growing needs of
all the customers they had inherited from the previous management. In
three months they were selling more than what the previous management
was selling.
(d) Capability of Handling Crisis Situations :
Here, one interesting fact comes to mind as to how Riddhi serviced
Nutrine (now Godrej Hershey), one of Riddhi's largest and long-
standing customers. Nutrine didnt just need large consignments; it
also needed frequent despatches. The result was a strong logistics
support system to service Nutrines requirements. However, the crisis-
situation came in the form of a transporter's strike. It was this time
when, if Riddhi would not deliver, it would lose a precious customer.
Look what the management did in this crisis - They branded their
loaded vehicles as those carrying critical milk material. They got
these vehicles out at night so that they could use the cover of
darkness and cover as much distance as possible. They equipped each
vehicle with two drivers, so that they could drive in turns. They
selected petrol pumps along the way where their vehicles could lie in
wait for darkness before they resumed their journey. Like this way
they transformed a crisis-situation into an opportunity to demonstrate
outstanding order-execution capability of the company.
Similarly, another crisis came in the form of a fire at Gokak plant of
Riddhi in FY08. This brought production at Riddhi's largest facility
constituting around 50% of their total output to a halt for seven
months, still, without bowing down to ill fate, Riddhi's management
immediately started taking corrective steps. In challenging
circumstances, they requisitioned the services of their expanded
Viramgam facility to ensure that supplies to most of their customers
deeply dependent on them remained on track. They resumed operations
at the Gokak plant in the third quarter of 2007-08 and immediately
scaled operations to an optimal level by the close of the financial
year. The tactful handling of such a difficult stuation is evident
from the fact that despite the main plant of Riddhi remaining
unoperational for 7 out of 12 months, Riddhi reported only a marginal
decline in topline and EBIDTA in FY08.
(e) Whether Management Keeping up to spoken Words :
This is a major thing to look for before investing into any company.
Afterall, it is the management which runs a company and if such
management is not keeping its words then stakeholders are put at
extreme risk. Hence, we need to dwell into the past and then check the
present to see if management has kept to its spoken words. To dwell
into the past of Riddhi, we need to look at the 2005-06, 2006-07 and
2007-08 Annual Reports of the company. In 2005-06 AR, the management
wrote that by 2008-09 they expect to cross the topline of Rs. 500 cr.
Then, in 2006-07 AR, the management again wrote that they plan to
cross Rs. 550 cr. topline in 2008-09. Continuing from there came the
most difficult year for Riddhi in the form of fire at Gokak plant in
07-08. Even in that Annual Report i.e. AR of 2007-08, the management
wrote that they will make all the efforts to keep to their words of
crossing Rs. 500 cr. topline in 2008-09 and gave another guidance of
crossing Rs. 700 cr. topline in 2009-10.
Now, let us see the present. In 2008-09, Riddhi reported a topline of
Rs. 534 cr. while in 2009-10 it reported a topline of Rs. 747 cr. This
fact proves that once Riddhi's management commits something, it puts
all sincere efforts with all the strength to keep up its commitment
which is an extremly healthy sign for the stakeholders of Riddhi.
(2) Current Avatar of the Company :
Today, Riddhi is the biggest starch producer of India. Its Gokak unit
in Karnataka is India's single largest corn wet milling plant followed
by its Patnagar plant which is the second largest in the country. It
is one of the largest exporters of Indian starch Industry; however
exports constitute only 10 % topline of Riddhi. Roquette Freres,
France the world's fourth largest corn starch and derivatives
company with a turnover of over Euro 2.6 billion holds 14.93 % equity
stake in Riddhi and is a strategic partner. Riddhi is far.. far ahead
of its competition with Sukhjit Starch, its closest competitor, having
half the capacity that of Riddhi. Riddhi today commands a 40% market
share in Indian starch industry and so is the undisputed leader of the
industry enjoying considerable goodwill. Nestle, Cadbury, Uniliver,
Britannia, Ranbaxy, Novartis, Wockhardt, Dabur, BILT, ITC, JK, Grasim,
Indian Rayon, Amul, Hindalco, Emami, UB, Venky's, etc. are some
amongst the ever-expanding client-list of Riddhi.
(3) Likely Future Avatar of the Company :
Future is the main ingredient without which any succesful investment
can falter. Certainity and visibility regarding bright future of a
company is the foremost criteria one needs to look for before
investing in it. For Riddhi, future seems extremely bright, if not
brightest. Past and present of Riddhi provide lot of visibility
regarding the foreseeable future.
First it commands leadership position in India with no formidable
competition ; Second its association with Roquette Freres ensures
that this leadership position is maintained while gradually opening up
international markets for its products.
Yes this is the main vision of the management going forward.
Management of Riddhi is working on a two-pronged strategy of widening
the scope of domestic industry by commercialising more and more
downstream applications of cornstarch via strong R&D ; while
simultaneously setting the pace to tap global markets for its products
which at present contribute hardly 10 % to its sales. The main support
for the later comes from Riddhi's association with Roquette Freres
which is the fourth largest corn starch and derivatives company.
Initial stage is set to further strengthen this association by setting
up a wholly owned subsidiary in April 2010 in which the business
pertaining to Riddhi's units at Viramgam, Gokak and Pantnagar will be
demerged.
Management of Riddhi has charted a vision of attaining 25 % topline
from exports by 2012 and for this it is working on a model of using
Roquette Freres' expertise and network in international markets and
combining it with Riddhi's efficient product manufacturing and
delivery execution capability. This will be a win-win association
wherein Roquette Freres will benefit from best quality products
available at lower prices while Riddhi will benefit from enhanced
sales and better price realisation.
Riddhi's management is willing to bring in Roquette Freres as 40 %
partner in its wholly owned subsidiary and is willing to part with
such stake for around Rs. 150 cr. While Roquette Freres wants 51 %
stake in the listed parent company viz., Riddhi Siddhi Gluco Biols
Ltd. in which it already owns 14.93 % stake acquired at the rate of
Rs. 200 in 2006. For additional 36.07 % stake Roquette Freres is
willing to give Rs. 150 cr. but Riddhi's management is refusing to
hand over management control in favour of Roquette Freres even at such
high price which happens to be 30 % premium to current ruling market
price of Rs. 280. Talks are on and a soultion is likely to emerge
shortly as no company, be it Roquette Freres or Riddhi, can afford to
ignore a win-win association which is immensely beneficial for both
the parties. In such a solution, Riddhi's management is expected to
emerge as a winner because of the leadership position they enjoy in
Indian market and the order execution capabilities they have
demonstrated in the past.
Hence, likely future scenario for Riddhi two years down the line seems
that Riddhi will emerge as a tough international player to reckon with
in cornstarch industry with 25-30 % of its sales coming from exports
and rest from the domestic market.
Valuation Perspective :
Now, after going through Macro and Micro Perspectives, it is the right
time to look at the Valuation Perspective of Riddhi which is the most
important perspective to time an investment into a company. From Macro
and Micro perspectives one thing is crystal clear that Riddhi surely
demands a place in one's portfolio, but, is current market price the
right price to include Riddhi in one's portfolio will get determined
after carefully going through Valuation Perspective. We will deal with
Valuation Perspective from four angles, viz.,
(1) Current & Past Financials of the Company
(2) Likely Future Financials of the Company
(3) Valuation commanded by Company's Peers
(4) Current valuation of the Company and its likely future Valuation
(1) Current & Past Financials of the Company :
This is the most intersting aspect to look for while valuing Riddhi.
Normally while looking at financials of any company we look at last
five years' financials but for Riddhi we will look at last ten years'
financials to rigorously test its capability to emerge as a future-
winner.
(in cr.) FY01 FY02 FY03
Sales 84.0 92.8 115.4
OP 11.28 11.67 18.50
NP 2.89 2.33 1.26
(in cr.) FY04 FY05 FY06
Sales 158.81 198.87 248.15
OP 22.50 25.28 33.09
NP 1.49 3.95 11.34
(in cr.) FY07 FY08 FY09 FY10
Sales 355.87 333.15 533.99 747.15
OP 54.33 54.62 62.28 121.49
NP 26.76 19.89 13.99 39.22
The main purpose to provide last ten years' financials is that one can
easily make out the inflexion point from which a company will surpass
one stage i.e. from small-cap to mid-cap and from mid-cap to large-
cap. This point we will deal with later on but for now lets
concentrate on last ten years' financials of Riddhi. Riddhi has grown
its topline 9 times (789 % to be precise) while bottomline by 13 times
(1,257 % to be precise) in the span of just last 10 years. Also, such
an astonishing growth has come with minimal equity dilution which is
evident from the fact the current equity capital of Riddhi stands at
just 11.13 cr. On such tiny equity capital it is not an easy thing to
generate such a healthy growth and that too with reasonable cash
generation and for this the management of Riddhi deserve an applause.
Also, if you closely look at last ten years' financials then you can
make out that except FY08, when company's Gokak plant faced fire, each
year company has grown its topline in double digit percentage. This
shows the capability of the company to win new customers, retain old
customers as well as generate more downstream applications for its
products thereby widen the market.
Also, again looking at last ten years' financials shows that company
has performed consistently on operating front but on net level there
are wide fluctations. This is common for a company which is scaling up
fast and so investing heavily in its operations. A foreign currency
loan was also the factor contributing to low net profit levels as also
sharp rise in maize prices which constitute 70% of the cost of any
company operating in cornstarch industry. Still, Riddhi has managed to
stay net-positive for all the ten years inspite of all the odds facing
the industry. This fact depicts the capability of the management to
manage available resources extremely well towards benefit of all the
stakeholders.
(2) Likely Future Financials of the Company :
Factors that are likely to impact future financials of the company
are :
- commisioning of additional capacity at company's Rudrapur plant,
- Roquette Freres taking active part in operations of the company by
furthering equity participation either at subsidiary level or parent
level,
- increase in exports which will have direct positive impact on
EBIDTA,
- stable-to-declining trend of maize prices in near future which
constitute 70 % cost of the company,
- commercialisation of more downstream applications of cornstarch by
the company thereby widening of product portfolio.
Based on above factors likely future financials of Riddhi for next
three years are given below :
(in cr.) FY11 FY12 FY13
Sales 1056 1380 1870
OP 158.4 227.7 299.2
NP 61.25 84.1 114.8
After taking into account likely equity dilution in next two years,
EPS for FY11 works out to be Rs. 54.30, for FY12 at Rs. 62.20 and that
for FY13 at Rs. 77.80.
(3) Valuation commanded by Company's Peers :
Riddhi's listed peers include :
Sukhjit Starch
Gujarat Ambuja Exports
English Indian Clay
Universal Starch
Closest competitors of Riddhi are Sukhjit Starch and Gujarat Ambuja
Exports with both operating at half the capacity at which Riddhi
operates. Still, we will look at the valuation of all the listed peers
to judge the under- or over- valuation of Riddhi vis-a-vis them.
Sukhjit Starch is trading at a PE of 8.35 and a market-cap-to-sales of
0.47 based on its reported financials of FY10.
Gujarat Ambuja Exports is trading at a PE of 8.0 and a market-cap-to-
sales of 0.28 based on its reported financials of FY10. However, one
thing to note here is that Gujarat Ambuja is present into many other
segments like agro commodities, yarn, etc. in which Riddhi is not
present. It is Guj. Amb.'s presence in these loss making segments
which drag its valuation downwards.
English Indian is trading at a PE of 8.37 and a market-cap-to-sales of
1.35 based on its reported financials of FY10. However, this company
is also present in other businesses in which Riddhi is not present.
Universal Starch is trading at a PE of 17.69 and a market-cap-to-sales
of 0.14 based on its reported financials of FY10.
It is worthwhile to note here another important thing with regards to
topline of all the above companies vis-a-vis Riddhi's. Sukhjit Starch
had a topline of 267 cr., Guj. Ambuja Exports had a topline of Maize
Processing Division at 337 cr., English Indian had a topline of 159
cr. from starch division while Universal Starch had a topline of 90.57
cr. in FY10. This figures are no way near the topline of Riddhi at
747.16 cr. for FY10.
(4) Current valuation of the Company and its likely future Valuation :
At the current market price of Rs. 280, Riddhi Siddhi Gluco Biols Ltd.
trades at a PE of 8.05 and a market-cap-to-sales of 0.42 based on
reported FY10 numbers. This is at a discount to its closest peer viz.,
Sukhjit Starch and at par with other peer viz., Gujarat Ambuja
Exports. To continue the comparison, the current valuation of Riddhi
is far lower than that commanded by English Indian Clays as also that
commanded by smallest amongst the lot viz., Universal Starch. Nowhere
in the world we have seen a situation where an industry leader is
trading at a discount to its peers which are less than half of its
size. Hence, this abberation is expected to get corrected sooner
rather than later and Riddhi is bound to trade at a premium to all its
peers in near future.
Now, If we look at the future expected financials of Riddhi, then at
current market price of Rs. 280, it trades at a PE of just 5.16 based
on expected FY11 EPS of Rs. 54.30; at a PE of just 4.5 based on
expected FY12 EPS of Rs. 62.20 and at a PE of just 3.59 based on
expected FY13 EPS of Rs. 77.80.
To add, Riddhi currently trades at a market-cap-to-sales of just 0.29
based on expected current FY11 topline of Rs. 1056 cr.,; at a market-
cap-to-sales of just 0.24 (after taking into account equity dilution)
based on expected FY12 topline of Rs. 1380 cr. and at a market-cap-to-
sales of just 0.20 (after taking into account equity dilution) based
on expected FY13 topline of Rs. 1870 cr.
On conservative estimates, Riddhi is bound to command a market-cap-to-
sales of 0.60 and a PE band of 9.5-10 based on its industry leadership
position and expected rise in export earnings.
Conclusion :
Current equity market scenario is one which demands careful stock-
selection to maximise returns with minimal risk. If we can get an
industry leader at a discount to its peers then it is an opportunity
waiting to be grabed and current market environment will not let such
opportunity remain an opportunity for too long.
Also, one most important thing that might have missed the attention of
the reader of this report is the fact that Riddhi is at an inflexion
point of becoming a large-cap company from a mid-cap company. If you
again look at last ten years' financials of Riddhi given in previous
sections then you will note that it transformed from a small-cap
company to a mid-cap company in FY09 when it achieved a topline of Rs.
534 cr. Immediately after that i.e. in last FY10, it registered a 40 %
growth in topline when it achieved a topline of Rs. 747 cr. This was a
vindication of scalable business model that the company has and a
decisive transformation from a small-cap to a mid-cap company.
Normally, transition from a small-cap to mid-cap is the most difficult
and time-consuming phase for a company while the path towards large-
cap from mid-cap is quick embeded with high growth. Management of
Riddhi has already spotted this opportunity and so have taken steps to
form a wholly owned subsidiary and invite French cornstarch major
Roquette Freres to participate actively in the subsidiary. Management
is fully aware of the fact that without Roquette Freres it is
impossible to attain a large-cap status as the logical extension for
Riddhi is now tapping aggresively international markets which will be
extremely EBIDTA-positive. This is a good sign for the stakeholders of
Riddhi as today's stakeholder of Riddhi is bound to see his company
attain much higher levels very quickly than past.
Also, if you take the most current precedent of a significant
international M&A deal which happened in starch industry at the fag-
end of June 2010 wherein AkzoNobel sold its starch division to Corn
Products International, one can easily judge the future potential this
industry possess and the future valuation at which Riddhi should trade
at. In June 2010, AkzoNobel NV sold its National Starch Business to
Corn Products International for a whooping $ 1.3 billion in cash. If
we include pension liabilities, then the sale price works out to be $
1.4 billion. It is worthwhile to note here that National Starch
Business of AkzoNobel had 2009 revenue of $ 1.2 billion and street was
expecting a sale price of only between 0.9 to 1 billion. The fact that
the transaction was wrapped up at $ 1.3 billion cash vindicates the
fact that the industry has immense future potential and so Riddhi
Siddhi Gluco Biols Ltd. deserves to trade at a significant premium to
current ruling market cap which is not even half of its FY10 revenue.
Hence, to conclude, a company
(1) which is on the verge of transforming itself to large-cap from mid-
cap but is availabale at the valuation of a small-cap,
(2) is the leader of the industry in which it operates with its
closest competitors being less than half of its size,
(3) is operating in an industry which itself is at an inflexion point
and is likely to attain a growth of minimum 15 % p.a. for next five
years,
(4) is bound to see improved margins due to stable-to-declining price
scenario expected for maize prices which constitute 70 % of its cost
(5) in which world's 4th largest player of cornstarch industry viz.,
Roquette Freres likely to infuse Rs. 150 cr. at the parent or
subsidiary level (current market-cap of the company is just 316 cr.
and likely fund infusion by the french major is almost half of that
amount at Rs. 150 cr.)
(6) is available at single digit PE of just 8.05 and market-cap-to-
sales of just 0.42 based on trailing FY10 numbers and at a PE of just
5.16 and a market-cap-to-sales of just 0.29 based on expected current
FY11 numbers
is the safest company one can invest in to maximise returns with
minimum risk in current market scenario and so we put a conservative
price target of Rs. 530 on the company which will command a PE of just
9.76 and a market-cap-to-sales of just 0.56 based on current FY11
numbers.
All in all, a significant rerating for Riddhi Siddhi Gluco Biols Ltd.
is on the cards to correct the gap between its deserved mid-cap
industry leader valuation and current small-cap industry player
valuation.
