Q2FY11 Likely Numbers,Deal with Roquette - Management Meet Note Riddhi Siddhi- Oct.10

Provided below are the Takeaways from the Management-Meet of Riddhi Siddhi Gluco Biols Ltd. [ BSE 524480 ]

Post-declaration of Robust Q1FY11 numbers & on Verge of Declaration of Q2FY11 numbers as well as Recent Announcement by the company regarding its foray into Power Sector, my colleague met with Mr. Mukesh Chowdhary, DGM (Finance) & Compliance Officer of Riddhi Siddhi last week and held detailed discussions with him on various points. Also, my another fellow analyst had a brief discussion with M.D. of Riddhi Siddhi Mr. Ganpatraj Chowdhary on 1st October 2010 and quizzed him regarding likely Q2 numbers as well as future growth path for the company. Both, Mr. Ganpatraj & Mr. Mukesh were very frank & transparent in their talks and my colleague & fellow analyst came quite satisfied from the discussions.

Given below are the broad takeaways from both the discussions which clarifies many of the issues Financial Fraternity members had regarding the company and gives a much clearer picture on likely future growth of the company :

Points Covered :

(1) Present Relationship with Roquette Freres, world's 3rd largest CornStarch Player, and likely Future Direction of Such Relationship post-transfer of all of the company's running Plants into a Wholly Owned Subsidiary

(2) Likely Q2 Numbers & Effect of Gokak Plant Closure on Q2 Numbers

(3) Likely FY11 Topline & EBITDA

(4) Contribution by Additional Capacity of Pantnagar Plant

(5) Impact on the Company of Likely Rise in Raw Matrial (Corn) Prices

(6) Likely Impact on the Company of Likely Fall in Tapioca Starch Prices which is a Competitive Product

(7) Capacity Expansions Planned

(8) Servicing of Existing Debt & Likely Future Cash-Raising by the Company

(9) Likely Export Scenario for the Company

(10) Edge over Competitors

(11) Likely Growth in Next 3 Years

(12) Details of Foray into Power Sector

(13) Inorganic Growth

(14) Conclusion

Covered below in detail are each of the above-stated points and Riddhi Siddhi management's take on each of the point :


Present Relationship with Roquette Freres, world's 3rd largest CornStarch Player, and likely Future Direction of Such Relationship post-transfer of all of the company's running Plants into a Wholly Owned Subsidiary :

Current Relationship with Roquette is helping company immensely in terms of Upgradation of Technology, Upgradation of Process Parameters and Maintaining International Product Standards. Company is actively exploring strentghning of relationship with Roquette in a different way and for this, it has recently formed a wholly owned subsidiary in which all the running-plants of the company will get transferred which will pave the way for an active joint venture with Roquette. In all possibilities, promoters will not give the full control of the subsidiary company. The discussions are still on regarding the valuation as well as the percentage of holding for the French Company (Roquette) in the subsidiary company and it is expected to be finalised before the end of this calendar year (December 2010).

The main reason for pushing hard for strentghning of relationship with Roquette is French Company's worldwide leadership in Polyols segment and Riddhi sees Polyols as holding tremendous potential for India as India is one of the world's largest diabetic centre and there are hardly few quality manufacturers of Polyols in India. If Roquette agrees to bring Polyols product to India jointly with Riddhi then it could be a game changer for Riddhi. Riddhi management is working hard to enter into & inroducing Polyols product in FY11 itself and future high-margin-sustainability of the company will largely depend upon how soon it is able to enter polyols segment.




Likely Q2 Numbers & Effect of Gokak Plant Closure on Q2 Numbers :

Company is likely to declare its Q2FY11 numbers by 3rd week of October 2010. Utilisation was exceedingly good in Q1, and in Q2 same sceanario is expected. During Q2FY11, Gokak Plant of the company, which contributes almost 50 % to the revenues of the company, faced a small hiccup because of an order by KPCB and remained close for 21 days. Inspite of this closure, management has indicated that Q2 topline is expected to be almost same as Q1. Good Monsoons and Expected Bumper Crop of Corn and Riddhi's close proximity to corn-growing areas will aid in maintaining profitability at Q1 level.




Likely FY11 Topline & EBITDA :

Based on current traction, management expects FY11 Topline to be between Rs. 950-1000 cr. with an EBITDA of 16-17 %. Based on pricing scenario currently prevalent and expected,, FY11 EBITDA, in quantitative terms, is expected to be minimum 150 cr. +. With the addition of the new capacity at Pantnagar Plant in current fiscal, the depreciation could be 28 cr. on yearly basis and interest is expected to be around 25 cr on yearly basis. 70 % of the revenues of the company are likely to accrue from FMCG & Pharma industries. In FMCG, particularly Food Segment, all MNC clients of the company are likely to grow by 20-25 % which will assist in Riddhi maintaining growth momentum going forward as alongwith its clients there is no reason why company should not grow.

Second Half of FY11 is likely to be far ahead of First Half in terms of both, revenues & profitability.



Contribution by Additional Capacity of Pantnagar Plant :

Additional 30 % capacity at Pantnagar was commisioned in July 2010. As of now Pantanagar is running at 700 TPD capacity and is expected to run at full capacity only by December 2010. This is mainly because of time required for proces stabilisation as well as getting new orders. Likely contribution by additonal capacity on a full year basis in revenue terms is likely to be Rs. 220-235 cr.




Impact on the Company of Likely Rise in Raw Matrial (Corn) Prices :

For the increase in Corn Prices which has now reached Rs.1,150/- per MT, management says it should not be a problem as they are in a position to pass on the increase in raw material prices with a lag of 1 to 2 months. This is because, domestic demand is far outstripping supply at current juncture and this scenario is unlikely to change in the foreseeable future. Management also stated that they have around 13 procurement centres in and around Gokak and many of agents also store Corn based on company's requirement. They are given 1% commission + Handling Charges + Interest Charges + Actual Buying Price. If the godown has good fumigation facilities, corn can be stored for one year. Based on the price trend and company requirements, these agents store corn for more than 6 months stock which gives good advantage to Riddhi Siddhi.




Likely Impact on the Company of Likely Fall in Tapioca Starch Prices which is a Competitive Product :

In India, in Tapioca Starch there are only two organised players with more than 300 TPD capacity which is basically used in the manufacture of Malto Dextrin, Liquid Glucose and to some extent in Textile Industry. Hence, decrease in Tapioca prices will not have much effect on the sales of the company.





Capacity Expansions Planned :

Capacity Expansions are planned by commisioning additional capacities in the existing plants rather than by setting up new plants. This is because, to start a new plant, it takes around 15 months but to add new capacity in an existing plant the company hardly requires around 5 to 6 months. Pantnagar Plant of the company has an additional vacant land of 3 to 4 acres while Gokak Plant has around 40 acres. Hence, capacity expansions at minimal cost is not likely to be a problem for Riddhi Siddhi atleast for the next 3 years.

Based on the demand, company would like to increase the capacities at regular intervals. This strategy is followed to adopt a sound business-model of derisking by attaining constant topline & bottomline growth without much advance cash infusion. Reassessment of Demand will be held in December 2010 and after that company will decide on the next capacity expansion.




Servicing of Existing Debt & Likely Future Cash-Raising by the Company :

The current debt on the books of the company is around Rs. 200 cr. To retire this debt no fresh fund-raising is planned via equity route by sacrificing 43 % stake of the promoters. Management is not willing to part with a lower stake than the existing one in the company. Considering the robust cash generation likely in FY11 and going ahead, company doesn't see debt as a major issue and going forward company's focus will be on effective debt-management to improve the quality of balance sheet of the company.

Not much money is required for setting-up of additional capacities at existing plants and going forward the main demand for cash will be for company's foray into power-generation sector where an investment of around Rs. 200-250 cr. is planned. Since the promoters have around 43% stake and are not willing to sacrifice this stake lower, there is no question of dilution. The only other alternative is the Debt. Management believes that once the new capacities come, there will be enough cash flow to take care of expansions. Management claims that they have developed such a good relation with the bankers that bankers are ready to offer company the loans at a rate of interest which is offered to only a AAA+ rated company and so raising of funds as well as servicing it will not be a problem for the company.



Likely Export Scenario for the Company :

Exports currently stand at around Rs. 57.52 cr. which is less than 10 % of company's FY10 topline. However, management believes that domestic demand is so strong that to focus on exports will be a misadventure. Also, management doesn't find exports lucrative as they don't give them any extra margins. Current exports are basically done for obligation as few of the machines have been imported under some schemes. Going forward, unless there is significant fall in demand on the domestic front, which is unlikely, company doesn't plan to focus on exports.



Edge over Competitors :

Other than customer service and timely supplies, management seems to have an edge over the competitors in terms of quality of the products since all their plants are recent ones adopting latest technology and operate with total automization. Because of the huge capacities, company also has some scale advantages like availability or the speed with which they can fullfill the customer needs, etc. With the nearest competitor operating at half the capacity of Riddhi, company is unlikely to loose this edge in the foreseeable future and so company's leadership in Indian Starch & Starch Derivatives Sector will remain unchallanged for many years to come.



Likely Growth in Next 3 Years :

On a conservative basis, management is confident of achieving 25 % CAGR in topline and 20 % CAGR in bottomline totally on its own over next 3 Financial Years. If the tie-up talks with French Company Roquette materialises, the numbers will be much better with healthy margins.




Details of Foray into Power Sector :

Company plans to set-up 30-33 MW windmills at Tirunelveli (TN), Pachav (Gujarat) & Satara (Maharastra). Planned Investment in this project is around Rs. 250 cr. which will be raised via 75% debt and the rest from internal accruals. There are no present plans of setting up a SPV for this project and it will be directly under Riddhi Siddhi Gluco banner. Project is likely to be commisioned by March 2011. Vestas and Shriram EPC are the likely suppliers for the project and agreement is to be structured in such a way that suppliers will do the entire job including acquisiton of land, erection, maintenance and agreement with local SEBs. The net return on the project is expected to be around 12% and after deducting the interest cost of 8%, company should get around 3 to 4% returns without much work and land bank also gets appreciated in future.

This foray is meant for de-risking purpose and tax-saving purpose. Company wants to retain most of the robust cash likely to get generated out of the main business of the company to fuel future growth and for that it is foraying into power sector. Management's contention is that although power project is likely to add only 25 cr. to the topline but the advantage for the company is that 80 % of 200 to 250 cr. investment that they will do in this project can be claimed back as depreciation. So, it is like, company is not paying the tax to the Government now and utilising that money for some investment which will start generating revenues immediately. By the time company is compelled to start making the tax payment, the new business would have generated enough revenues plus the assets. Company is adopting a shrewd policy to emerge as one of the most consistent as well as fastest growing Mid-Cap Company of India.


Inorganic Growth :

There is nothing on the table as of now and organic growth opportunity is tremendous at present which hardly makes it lucrative to look at inorganic opportunity.

Conclusion :

Based on recent interaction and inputs by the management, we conservatively estimate Q2FY11 Topline to be in the range of Rs. 190-205 cr. and EBITDA in the range of Rs. 34-38 cr. FY11 topline target is maintained at Rs. 1056 cr. with an EBITDA of Rs. 182.80 cr. as second half is likely to be exceedingly better than first half.

Indian Starch & Starch Derivatives sector is amidst a phase of rapid demand-expansion with gradual rise in supply. This is because, unlike other parts of the world where companies expand more aggresively by anticipating rapid market-demand, Indian companies are much more conservative and have therefore adopted a de-risking model of gradual expansion. This scenario is likely to change significantly once MNCs like Roquette & CPI which are at present studying the Indian Market, enter the market few years down the line. MNCs have still not entered India because of the lack of attractive market size but the pace at which Indian Starch & Starch Derivatives market is expanding, it is just a matter of time before we will see aggresive entry of few of the players into Indian arena. This prognosis also gets support from the fact that worldwide, especially in emerging economies, starch & starch derivatives consumption is booming. It is the boom in cornstarch consumption which has pushed China on the verge of becoming a net corn importer. The demand scenario there, is such that Chinese Government has started squizzing the growth of the sector by disallowing fresh investments into the sector just last month i.e., in September 2010. Hence, MNCs will have no alternative than to look at India to set-up base here. Just consider the extent of current investment of MNCs in Chinese Starch & Starch Derivatives Sector :


Cargill
Cargill has a JV with second largest corn miller of China Global Bio-Chem and it has so far invested US$ 700 mn. in China.
Corn Products International (CPI)
CPI has one large modified starch manufacturing plant in China.
Roquette Freres
Roquette has the largest presence in China amongst all MNCs. It has one sorbitol plant and two modified starch plants in China. Roquette's aggresive expansion in China has enabled it to become 2nd largest starch producer of Europe and 3rd largest cornstarch producer of the world.

Roquette, with its aggresive attitude of expansion into emerging economies ahead of anticipated demand, is likely to be the first one to test Indian waters aggresively by entering into a Joint Venture with Riddhi Siddhi by December 2010. Already, since 2006, Roquette is passively studying Indian Markets by taking a 14.93 % strategic stake in leader of Indian Sector viz., Riddhi Siddhi Gluco Biols Ltd. This passive role is expected to be now an active one stage of which is already set by Riddhi by transferring all its running plants into a wholly-owned subsidiary. Valuation exercise as well as broad contours of the Joint Venture planned are presently being worked out and an announcement with this regards is likely to be made by December 2010.

Once Roquette actively enters Indian scene, other MNCs like CPI and Cargill will have no option but to start looking at India aggresively which will see hightened M&A activity in the sector in FY12. It is after this that aggressive volume growth will come from the sector as a whole with rapid cash generation in the initial phase of the cycle. Riddhi Siddhi will have a first mover advantage in this entire phase and will be the major beneficiary of the growth as it already has in place the larget capacities in the sector and with surplus land available at its existing plants, it can cater to booming demand atleast for next 3 years without much cash infusion.

Management of Riddhi has made the right move by foraying into Power sector to retain cash in the initial stage of growth and this shows the foresightness of the management and the ability of it to make the company grow aggresively with robust cash generation for many years to come.

To conclude, we maintain the 'Safest Buy' rating on Riddhi Siddhi Gluco with a medium-term target of Rs. 615 which could get significantly revised upwards if the management is able to clinch a win-win deal with Roquette

Re: Q2FY11 Likely Numbers,Deal with Roquette - Management Meet Note Riddhi Siddhi- Oc

Borad Meet of Riddhi Siddhi, the Indian Starch Sector Leader, is to be
held on 13th Oct. 2010 to consider Q2 numbers.

Also, on Oct.5, world starch major CPI entered Indian arena by
acquiring small Akzo Nobel starch business subsidiary at 1.2 x
topline. Still, all top 3 listed players of the sector which are much
larger in size (Riddhi topline for FY11 is 100x Akzo Nobel subsidiary
topline) are available at 0.5-0.65 sales which calls for significant
rerating of the companies on the bourses.


Rgds.
Mahesh

Q2 FY11 Analysis - Target Price Revised to Rs. 740

Riddhi Siddhi Gluco Biols Ltd. - Q2 FY11 Results Analysis Target Price Revised to Rs. 740

Riddhi Siddhi Gluco Biols Ltd. - Q2 FY11 Results Update

Industry Starch (Corn Starch)

BSE Code 524480


Current Price Rs. 495 /-

Revised Target Price Rs. 740 /-

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. 550.90 cr.

FY10 Sales Rs. 747.15 cr.

FY10 Operating Profit Rs. 121.49 cr.

FY10 Net Profit Rs. 39.22 cr.



1stHalfFY11 Sales 409.28 cr.

1stHalfFY11 Operating Profit Rs. 74.23 cr.

1stHalfFY11 Net Profit Rs. 55.77 cr.



FY10 EPS Rs. 34.78

1stHalfFY11 EPS Rs. 49.88 (Not Annualised)

Annualised FY11 EPS based on reported 1stHalfFY11 Results Rs. 99.76


Current P/E based on Annualised FY11 EPS - 4.96



Highlights of Q2 & First Half Results of Riddhi Siddhi :
Riddhi Siddhi Gluco Biols Ltd. reported its Q2 FY11 results on 13th October 2010. Results surpassed even the most optimistic projections, especially on the margins front. Let's first look at the highlights of the reported numbers and then discuss the scenario for Riddhi Siddhi post 1stHalfFY11-numbers :

(1) Riddhi reported a topline of Rs. 206.52 cr. in Q2Fy11 which translates into a YoY growth of 25.49 % and a QoQ growth of 1.85 % . This topline of Q2FY11 is achieved inspite of closure of company's Gokak Plant which remianed completely shut for 14 days in Q2 due to a KPCB order and attained normal operations 7 days after the reopening of plant which entails to a normal unoperational period of 21 days for the plant. Minus this hiccup, topline for Q2 could have been higher by atleast 22-25 cr.

(2) Riddhi reported a topline of Rs. 409.28 cr. in 1stHalfFY11 (April-September) which translates into a YoY growth of 27.54 % but a sequential decline of 3.66 % over 2ndHalfFY10 (October-March). Here, two important things need to be noted. First- historically, 1st Half is the leanest period for the company with 2nd Half always much better than 1st Half; Second- if company would have not faced Gokak plant closure, its 1st Half this fiscal would have been higher than 2nd Half of last fiscal which is a sign of robust demand scenario prevalent in the marketplace for company's products.

(3) Riddhi reported EBITDA of Rs. 39.87 cr. in Q2FY11 which translates into a YoY growth of 70.24 % but a QoQ decline of 11.34 %. EBITDA margins expanded by a whopping 506 basis points YoY but shrunk 287 basis points QoQ. One important thing that needs to be noted here is that higher the contribution from value-added products higher will be the EBITDA margins and Q1FY11 was an exceptional quarter which experienced much higher contribution from value-added products. With introduction of few high-margin value-added products in polyols & baby-food segments planned to be launched in second half of FY11, EBITDA margins similar to Q1FY11 levels can very well be expected in Q4FY11.

(4) Riddhi reported EBITDA of Rs. 84.85 cr. in 1stHalfFY11 (April-September) which translates into a YoY growth of 101.45 % and a sequential growth of 9.11 % over 2ndHalfFY10 (October-March). Sequential rise in EBITDA on a half-yearly basis inspite of closure of company's largest plant in 1stHalfFY11 as also the fact that 1st Half is the leanest period of operation is a heartning thing and signals robust margin scenario ahead in 2nd Half of FY11.

(5) Riddhi reported an Operating Profit (EBIT) of Rs. Rs. 34.99 cr. in Q2FY11 which translates into a YoY growth of 83.52 % but a QoQ decline of 11.64 %. Operating Profit Margin (OPM) expanded by a whooping 532 basis points YoY but shrunk 265 basis points QoQ. Again, QoQ shrinkage in operating margins is because, higher the contribution from value-added products higher will be the Operating margins and Q1FY11 was an exceptional quarter which experienced much higher contribution from value-added products. With introduction of few high-margin value-added products in polyols & baby-food segments planned to be launched in second half of FY11, Operating margins similar to Q1FY11 levels can very well be expected in Q4FY11.

(6) Riddhi reported Operating Profit (EBIT) of Rs. 74.23 cr. in 1stHalfFY11 (April-September) which translates into a YoY growth of 127.07 % and a sequential growth of 17.58 % over 2ndHalfFY10 (October-March). Sequential rise in Operating Profit on a half-yearly basis inspite of closure of company's largest plant in 1stHalfFY11 as also the fact that 1st Half is the leanest period of operation is a heartning thing and signals robust margin scenario ahead in 2nd Half of FY11.

(7) Riddhi reported a Net Profit of Rs. 24.60 cr. in Q2FY11 which translates into a YoY growth of 168.85 % but a QoQ decline of 10.22 %. Net Profit Margins (NPM) have expanded by a whooping 635 basis points YoY but shrinked 159 basis points QoQ. NPM is largely influenced by contribution of value-added products as well as interest costs. Company has initiated an exercise from Q1FY11 to restructure its debt in such a way that interest costs can be reduced to minimum. Already interest & financial charges have reduced considerably in Q1 as well as Q2 and going forward this trend is expected to continue. Historically, not a single quarter has seen a double digit net profit margin for the company and to post a double digit NPM for two consecutive quarters is an extremely healthy sign which will go a long way in ensuring robust cash generation as well as provide ammunition for future growth.

(8) Riddhi reported Net Profit of Rs. 55.77 cr. in 1stHalfFY11 (April-September) which translates into a YoY growth of 290 % and a sequential growth of 124.07 % over 2ndHalfFY10 (October-March). Such a huge sequential rise in Net Profit on a half-yearly basis inspite of hiccups like closure of company's largest plant in 1stHalfFY11 as also the fact that 1st Half is the leanest period of operation is a sign of beggining of a boom cycle for the company which has coincided with such a scale of operation that it will catapult the company into big league in a very short period of time.

(9) For Q2FY11, Riddhi reported an Earning Per Share (EPS) of Rs. 21.99 whereas for 1stHalfFY11 EPS stands at Rs. 46.59 excluding extraordinary items and Rs. 49.88 including extraordinary items.

(10) In Q2, the company paid Rs. 42.13 cr. as advance to suppliers of Wind Mill Infrastructure for its proposed foray into Wind Power Generation sector. Riddhi is planning to set-up 30-33 MW Wind Power Plants at Gujarat, Maharashtra & Tamilnadu and the plants are expected to be operational by March 2011. This foray is expected to reduce tax outgo significantly which will again add to bottomline in FY11 & FY12.



Scenario for Riddhi Siddhi post Robust Q2FY11 Results Emergence of a Shrewd Leader :

While predicting the scenario for Riddhi Siddhi post Q1FY11 results, we had started with the proverb Well Begun is Half Done. The company met and even exceeded our expectations by surpassing entire FY10 Net Profit by quite a wide margin in first half itself. Hence, in Q2FY11, Riddhi has not 'Half Done' but 'Fully Done' and went ahead with a vengeance. This is the quality of a real leader to talk specifically, a real 'shrewd' leader which not only knows how to maintain its leadership position in the operating sector but has the skill to exploit completely the favourable conditions of the operating sector to its full advantage. Hence, we begin our prediction of scenario for Riddhi post robust Q2FY11 results with the tag line Emergence of a Shrewd Leader. The scenario can very well get clear once we look from the following angles :

(1) Robust Q2FY11 results posted by Top 4 players of the sector will compel PMS Managers entry into the sector

(2) Impending Deal With Roquette as well as launch of New Products in Q3FY11 will act as a Trigger to significantly rerate the company

(3) Power Sector Foray - a very shrewd Decision

(4) Upward Revision in Future Financial Projections

(5) Current Valuation

Conclusion


Let us discuss each aspect in detail as follows :

(1) Robust Q2FY11 results posted by Top 4 playes of the sector will compel PMS Managers entry into the sector :

It is not just Riddhi which is registering robust financials quarter after quarter. All the Top 4 companies of Indian Starch & Starch Derivatives sector including Anil Ltd., Sukhjit Starch and Gujarat Ambuja Exports (Maize Processing Division) are growing their topline and bottomline handsomely each quarter. The demand scenario of the sector is so promising that even the smaller players like Gayatri Bio, Universal Starch and English Indian Clays (Starch Division) are growing at a good pace. Here, we have not considered chinese counterparts which are also growing at a rapid pace each quarter.

Hence, it presents a case of global boom in starch & starch derivatives sector to which India is a significant participant as it is grossly underpenetrated. When you have such a global boom in an unpenetrated sector and that too when the sector has a concentrated structure, its companies can't trade in lower single digit P/Es for quite long. The underownership factor will start catching up fast and because of limited avenues available for exposure to the sector because of its concentrated structure, shrewd fund managers will have no option but to start accumulating top 4 players of the sector.

PMS managers will be the first one to start such accumulation phase as they have much lower restrictions as also much higher expectations from their clients. To meet such expectations amidst bullish markets, PMS managers will now, from Q3FY11 onwards, start accumulating the top 4 companies of Indian Starch & Starch Derivatives sector in which Riddhi will occupy the prominent position amongst all its peers because of its leadership position as well as its relatively lower valuation. Recent run-up in Anil, Sukhjit and GAEL has made them relatively expensive as compared to Riddhi and nowhere in the world a leader of a booming sector can trade at a pathetically low p/e of 5. Hence, PMS managers' entry from Q3 onwards is inevitable which is evident from the positive reports of leading broking houses like KR Choksey, Anagram, MF Global and SP Tulsian post Q2 number declaration by Riddhi. A company which was not on radar of many in FY10 has suddenly seen 4 simultaneous positive reports from leading broking houses of India which depicts the start of a discovery phase for Riddhi which will get into full swing by Q4FY11 when discounting to likely FY12 numbers will start.


(2) Impending Deal With Roquette as well as launch of New Products in Q3FY11 will act as a Trigger to significantly rerate the company :

By December 2010, two positive milestones are likely to be achieved by Riddhi.

First Launch of New Value-Added products in Baby Food segment as well as Polyols segment..

Second A JV deal with Roquette, the world's third largest cornstarch player.

Launch of new promising products will help Riddhi sustain high margins in rest of FY11 as well as FY12 while deal with Roquette will ensure that its topline grows significantly in the years ahead. Each development is likely to rerate the stock significantly with the later development making Riddhi one of Asia's prominent Starch & Starch Derivatives sector player.


(3) Power Sector Foray - a very shrewd Decision

In Q2, Riddhi's management decided to foray into renewable energy segment and the pace of foray was so fast that within one month of shareholders' approval, it paid Rs. 43 cr. as advance to wind mill infrastructure suppliers to commercialise the project by March 2011.

To give details of the foray, Company plans to set-up 30-33 MW windmills at Tirunelveli (TN), Pachav (Gujarat) & Satara (Maharastra). Planned Investment in this project is around Rs. 250 cr. which will be raised via 75% debt and the rest from internal accruals. There are no present plans of setting up a SPV for this project and it will be directly under Riddhi Siddhi Gluco banner. Project is likely to be commisioned by March 2011. Agreement is to be structured in such a way that suppliers will do the entire job including acquisiton of land, erection, maintenance and agreement with local SEBs. The net return on the project is expected to be around 12% and after deducting the interest cost of 8%, company should get around 3 to 4% returns without much work and land bank also gets appreciated in future.

This foray is meant for de-risking purpose and tax-saving purpose. Company wants to retain most of the robust cash likely to get generated out of the main business of the company to fuel future growth and for that it is foraying into power sector. Management's contention is that although power project is likely to add only 25 cr. to the topline but the advantage for the company is that 80 % of 200 to 250 cr. investment that they will do in this project can be claimed back as depreciation. So, it is like, company is not paying the tax to the Government now and utilising that money for some investment which will start generating revenues immediately. By the time company is compelled to start making the tax payment, the new business would have generated enough revenues plus the assets. Company is adopting a shrewd policy to emerge as one of the most consistent as well as fastest growing Mid-Cap Company of India.


(4) Upward Revision in Future Financial Projections :

Robust Q2 numbers have necessited an upward revision in our previously projected financials of Riddhi. However, like before, we will again be conservative in our approach thereby leaving ample scope for the management of Riddhi to surpass even our revised projections. The revised projections are given below :

(in cr.) FY11 FY12 FY13
Sales 1056 1380 1870
OP 182.8 241.5 336.7
NP 96.10 128.8 177.6


After taking into account likely equity dilution in next two years, EPS for FY11 works out to be Rs. 86.34, for FY12 at Rs. 101.20 and that for FY13 at Rs. 118.40.



(5) Current Valuation :

At the current market price of Rs. 495, Riddhi is trading at a P/E of just 5.73 based on expected current FY11 numbers, at a P/E of just 4.89 based on expected FY12 numbers and at a P/E of just 4.18 based on expected FY13 numbers.

To add, Riddhi currently trades at a market-cap-to-sales of just 0.52 based on expected current FY11 topline of Rs. 1056 cr.,; at a market-cap-to-sales of just 0.46 (after taking into account equity dilution) based on expected FY12 topline of Rs. 1380 cr. and at a market-cap-to-sales of just 0.39 (after taking into account equity dilution) based on expected FY13 topline of Rs. 1870 cr.



Conclusion :

We are a fortunate witness of start of a 'Boom Phase' for Indian Starch & Starch Derivatives Sector and the Sector's concentrated structure as well as nascent status is working to our advantage by giving us an opportunity to invest in it at our leisure as valuations are inching up only gradually and not vertically. However, this gradual rise in valuations is likely to now sustain only for a short period of time as one full fiscal of healthy topline growth accompanied by robust cash generation at net level and the prospect of continued topline & bottomline growth for next fiscal will compel the conclusion of gradual-rise phase and will initialise a vertical-rise phase for the sector from Q4FY11 onwards. Declaration of Q3FY11 results by top 4 companies of the sector could be the maximum time-limit untill which fund managers can continue with current accumulation-phase in the sector after which the 'me-first' attitude will start which will take the valuation of the sector to a respectable double digit p/e level based on FY11 earnings from the current grossly undervalued single digit p/e level.

This has to happen because its not just that valuation of the sector needs to come at a respectable level but they also need to catch-up with international run-up in prices of the players of the same sector. Lets cite here two examples, - first - of a company which is the world leader of the sector and second a company whose business model is a replica of top 4 Indian companies especially, the leader Riddhi.

The world leader which we are talking about is Corn Products International over the last 3 months its share price has run-up 34 % and is currently trading at all time highs.

The other company which we are talking about is Asia Bio-Chem Group, a chinese company which has almost the same business model as Riddhi with similar product lines and has the topline similar to that of Riddhi. Over the span of last 3 months its share price has run-up 40 % and is on verge of breaching all time highs.

Contrary to these, if we consider Riddhi, then its share price over the span of same last 3 months has run-up by only 28 % inspite of it trading at much lower p/e, mcap-to-sales as well as other valuation matrix relative to both the international companies. This disparity can't sustain for too long as Indian Leader has to catch-up with international peers, if not with world leader then atleast with chinese counterpart.

Also, recent run-up in prices of Riddhi's Indian peers has made Riddhi much more cheaper as compared to them and nowhere in the world a leader with double the capacity of closest peer can trade at a cheaper valuation than smaller peers. Lets take the simple example of 1stHalfFY11 Annualised EPS and pitch Riddhi's peers Anil Ltd. and Sukhjit Starch against Riddhi's valuation based on p/e commanded by each one of them based on annualised 1stHalfFY11 EPS.

Anil Ltd. Is trading at a p/e of 8.44 based on annualised EPS of 1stHalfFY11 while Sukhjit Starch is trading at a p/e of 6.18 based on its annualised 1stHalfFY11 EPS.

To our surprise, Riddhi is currently trading at a p/e of just 5.31 based on its 1stHalfFY11 Annualised EPS excluding extraordinary items and at a p/e of just 4.96 if we consider its annualised EPS by accounting extraordinary gains. A company which is a leader of the sector with topline more than double that of Anil Ltd. & Sukhjit Starch is trading at a steep discount to them.... This is an anomaly which has to get corrected sooner rather than later and so if we look at any angle whether the valuation and run-up of chinese counterpart with similar topline or valuation commanded by Indian counterparts with half the topline that of Riddhi, fund managers' safest choice for exposure to the booming Starch & Starch Derivatives sector has to be Riddhi Siddhi Gluco.

Coupled with these, when we consider the robust performance of each of the player of the sector amidst the leanest period of operation for them being the first half, a rerating of the sector is evident and so Riddhi will be at a double benefit wherein it will get advantage of the sectoral rerating as well as its undervaluation-rerating over which underownership factor will weigh heavily which will enable a vertical rise in its valuations on spark of a smallest trigger.

To conclude, we still maintain the Safest Buy status for Riddhi Siddhi with a upward revision in our previous target price of Rs. 615 to Rs. 740 at which it will trade at a p/e of just 8.57 based on FY11 conservatively expected EPS of Rs. 86.34 and at 0.77 marketcap-to-sales based on expected FY11 topline of Rs. 1056 cr. We have refrained from giving a base-price range in this report as we had done so in our last reports because we feel that significant rerating of the company is round the corner and could surely happen before the declaration of Q3FY11 numbers. The current gross undervaluation of the company is unsustainable and so depiction of a base-price-range will deprive of an opportunity of investment into this multibagger company once the rerating is in place.