My Counter Reply
Dear WhatsUP,
I think you have not understood my post correctly and so I will take your points 1-by-1,
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Point - 1. A company (GAEL) is growing a business where it has higher margins and reducing its sales in lower margin business .. "You think that is negative?" - Poor management of Business?
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My Answer - If GAEL would have achieved higher topline and higher margins in a business segment irrespective of other players then it would have been called excellent management of business. However, this is not the case and all the major players of Starch segment have registered robust growth in topline as well as margins so GAEL management is riding with herd and so it is called opportunistic management rather than excellent management. If the opportunity of boom in Starch sector would have not come then GAEL would have registered a degrowth in topline for all the 5 years under consideration and its margins would have also got sqeezed considerably by now.
Now, take the case of Riddhi and see why I call its business management excellent. Here, let`s take an example of FY08 which saw corn prices (65 % cost for any company in starch sector) shot up by 40 %. In the same FY08, Riddhi was faced with another challange in the form of a severe fire at its Gokak plant which contributed 50 % to the company`s entire produce. This plant was forced to shut for 5 months out of 12 months of FY08. Now, apply a simple logic of cost of raw material going up by 40 % and a plant contributing 50 % of the topline shutting down for 5 entire months. In this case any company would have registerd a severe degrowth in topline and red figure in bottomline. Let`s see what Riddhi reported in FY08 - a topline of 333.15 cr. against the topline of 355.87 cr. of FY07 and an EBIDTA of 54.62 cr. against the EBIDTA of 54.33 cr. of FY07.
Now, take the same case with GAEL and see what figures its maize-processing division reported in FY08 which saw raw material cost rising by 40 %. It is worthwhile to note here that in FY08 GAEL or any other player for that matter was not faced with a calamity like Riddhi faced of fire at Gokak plant. Let`s see the figures - in FY08 GAEL`s maize-processing division reported a topline of 132.88 cr. as against the topline of 123.48 cr. in FY07 and an EBIDTA of 11.90 cr. as against 20.42 cr. EBIDTA of FY07.
From reported figures it is clear that an increase of 40 % in raw material cost saw GAEL`s EBIDTA erode by 41.72 % whereas the same case when presented before Riddhi with the addition of calamity of fire at its 50 % contributing plant saw its EBIDTA actually grow by 0.53 %.
To conclude, Mr. whatsup I am in no way saying that to take the opportunity of a growing segment is negative but here you want to compare GAEL with Riddhi and at the current satge GAEL is in no way a better bet than Riddhi on the starch sector.
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2. Company is performing giving better return on capital even when margins are tight? - Which means it can beat Riddhi if there is a price war as its more efficient in capital allocation?
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The above example itself shows how poor margin-management is of GAEL as compared to Riddhi but if you read my report on starch sector deeply then you will find that Riddhi`s EBIDTA margins are always higher than that of GAEL. The price war which you talk about is quite a far away as we are still at an inflexion point and at the bottom of the curve rather than at the top of the curve. And even if we take your poiunt of price war into consideration then Riddhi in all respects will be better placed than GAEL to control the price as it is commanding a 35 % + market share of Starch Sector.
When a company has to grow fast and set-up world-class plants, it needs to forego efficient capital management for a while and this is exactly what Riddhi has done. Now, entire investment phase for Riddhi is over and only rewards can be expected which is evident from a 13.50 % NPM attained by it in Q1FY11.
To talk frankly, price wars are much far away as still there are not many players in the industry and demand is overstripping supply by quite a wide margin. It is when you will see many players jumping to this sunrise sector when you need to be cautious regarding price wars and not now.
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3. GAEL Promoters (63%) are buying stock left right and center and hold 50% more shareholding than Riddhi Promoters(43%) .. and Riddhi promoters have not bought a single share .. it means Riddhi is better than GAEL?
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Here you are right but were infosys promoters holding 60-70 % stake even when it was growing rapidly and were Mr. Murty and his family buying stakes in the open market when they were expecting their company to perform well ? Dear whatsup, higher promoters stake is a comforting factor but in no way a barometer of how well the management or the company is.
Still, you are wrong in other way also as you are not counting the stake of Roquette, the world`s 3rd largest cornstarch player in Riddhi. Roquette holds a 14.93 % stake in Riddhi which when coupled with promoter holding brings the total holding to 58.15 % which is not far away from that of GAEL. On the contrary, it is an extremely comforting factor as you have a world major holding almost 15 % stake in a company which itself gives credibility to the management skills of Riddhi.
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Lastly, regarding your last points, Mr. whatsup why you are talking regarding tops when we have just done a take-off. Top is far away, most probably 5-10 years down the line and if we invest by keeping our minds closed or emotionally attaching ourselves towards a particular comapny then in no way we will derive excellent return. Nither I am in love with Riddhi nor should you be in love with GAEL. We need to keep our minds open and here each other`s points and discuss them frankly to arrive at a decision for the benefit of all of us. Take my words, if you have a genuine point I will never counteract it and instead will be the first one to appreciate you.
Lastly, I again say there is no comparision between a pure play and a diversified company and each company has its own place in the portfolio but if you want to bet on Starch & Starch Derivatives sector then Riddhi is a much safer and better bet than GAEL.
Rgds....
Mahesh
Attached here is the link to a comprehensive tabular analysis of 'Indian Starch & Starch Derivatives' sector which has, in FY10, reached a critical mass of Rs. 2082.17 cr. with an EBIDTA margin of 17.97 % attained in Q1FY11. With a strong prospect of 15 % p.a. growth for next five years on the back of a 21.8 % CAGR registered in last five years, provided in the report is a comprehensive tabular analysis of past 10 Years and Last 9 Quarters of all BSE- & NSE- Listed Companies of the sector. Also provided is a brief overview of the industry as well as all listed players of the industry for your reference.
Alternatively you can provide your email id in case you want the report via email. I will be more than happy to provide it to you.
Rgds.
Mahesh
----------- Contents of the Report ------------------------------------------------------------------------------------------------------
Last Fives Years' Performance of Starch Industry as a whole
Percentage Contribution by each of the Listed Player to industry Sales & EBIDTA over last 5 Years
Q1'FY11 Performance of Starch Industry as a whole
Percentage Contribution by each of the Listed Player to industry Sales & EBIDTA (Q1'FY11 over Q1'FY10)
Current Valuation Commanded by each of the Listed Company (execept GAEL & EICL) based on price as on 13th August 2010
Last 10 Years' Sales, EBIDTA, OP & NP Performance of Each of the Listed Company
Last 10 Years' Expenditure Trend of Each of the Listed Company (except GAEL & EICL)
Last 10 Years' Expenditure Viewed w.r.t. Sales & EBIDTA (of 3 Top Listed Companies)
Last 10 Years' Margin Scenario of Top 3 Listed Companies
Last 9 Quarters' Sales, EBIDTA, OP & NP Performance of Each of the Listed Company
Last 9 Quarters' Sales, EBIDTA, OP & NP Growth % of Top 3 Listed Companies
Last 9 Quarters' Expenditure Trend of Each of the Listed Company (except GAEL & EICL)
Last 9 Quarters' Expenditure Viewed w.r.t. Sales & EBIDTA (of 3 Top Listed Companies)
Last 9 Quarters' Margin Scenario of Top 3 Listed Companies
Brief Textual Overview & Analysis of the Industry asto Why It will Start Carving its Place in Every Portfolio meant for Growth
Brief Textual Overview of All Listed Players
Riddhi Siddhi Gluco Biols Ltd. - An Industry Outperformer
Anil Products Ltd. - An Industry Performer
Sukhjit Starch & Chemicals Ltd. - A Consistent Performer
Gujarat Ambuja Exports Ltd. - A Dark Horse
English Indian Clays Ltd. - A Sell-off Story
Universal Starch-Chem Allied Ltd. - A Possible Risky Winner
Gayatri Bioorganics & Tirupati Starch A Complete Avoid
