We had discussed Riddhi Siddhi at Rs 285 at our blog here. The company did post much better than expected numbers and the stock had a fantastic run but the stock has been falling since last few weeks. The stock is now at Rs 360. Here is the price graph:
We had mentioned in our earlier post about the possibility of the French Co – Roquette acquiring a majority stake in the listed company. The deal has happened and the details are:
- The French co will be doing a complete takeover of the 3 plants of Riddhi Siddhi.
- The plants have been valued at approx. Enterprise Value of 1250 Crores. Today at CMP of 360, the Market Cap of Riddhi Siddhi is 400 Crore.
- To make the transaction, Riddhi Siddhi will transfer the plants to its subsidiary. Initially the French co will aquire a majority stake with an option of total buy-out.
- For the above arrangement, French co will cancel its existing 15% stake in the listed entity of Riddhi Siddhi.
The deal though looks good but the news hasn’t been welcomed by the market. Reasons:
- Nobody was expecting a total sell out by Riddhi Siddhi’s management. Now the listed entity would be left with just Cash and a power foray.
- The structure of the deal is such that there will be No Open Offer for the shareholders of the listed entity. Hence investors won’t get any major benefit of the takeover by French Company.
- The structure of the deal questions the integrity of the promoters. Had it been a direct take-over, the promoters and minority & small shareholders would have been at same level.
- It would take atleast 9 months to 1 yr for the deal to get fully completed.
- The expected cash on the books would be at the disposal of the promoters.
Our friend – Neeraj Marathe made a detailed post covering this new method of acquisition and how minority & small shareholders are being “robbed”. As there will be a lot of uncertainty in these cases, the market would continue to value the expected cash on the books at a steep discount in the range of atleast 30-50%. We feel SEBI should come forward and protect the interest of minority and small shareholders.
Riddhi Siddhi was an excellent bet on the growing starch business but post acquisition the business is no longer left. The cash expected to come (in the listed company – Riddhi Sidhi) from the deal is around Rs.800 per share.
Like in other cases, market might value the stock at about 50%+ discount till there is enough transparency and comfort from the management. The gap could narrow only if the management is more transparent and shares the cash with the minority & small shareholders in the form of dividend payout, buyback etc.
In the meanwhile, as there has been a good correction in the mid-cap space, we feel there are better opportunities and hence we are switching out from Riddhi Siddhi.
Riddhi Siddhi Gluco Biols is the largest producer of Starch & starch derivatives in India. The company has a market share of more than 25%.The most interesting thing about the growth of this company is – the promoters have build everything in just 20 years. They started from scratch in 1990 and today they control 25% market share and do a turnover of 750 Cr+. They now have three strategically located plants spread across different areas so that they can cater to customers across the County in the most efficient manner.
Starch & starch derivatives find application in diverse industries like – Paper, Textile, Pharmaceuticals, Adhesives, and Confectionery etc. Hence the characteristics of this industry is more like FMCG industry i.e.. the demand is ever increasing. The industry is expected to grow @ 15%+ for next few years. Riddhi Siddhi has been growing consistently with CAGR of 30% for last 5 years.
In India the per capita consumption of Starch is quite low as compared to the developed nations. The consumption is picking up every year. Another opportunity area is – as of now only 40 types of applications are done with Starch in India, while worldwide more than 1000 applications are there. So the company has a potential to do lot of value addition and grow.
If one analyses the past 10 year track record of the company, the company has had a wonderful CAGR of 27.58%. Very few companies can claim such growth rates. Operating profits & Net Profit CAGRs are even better.
A close look at the Balance Sheet of last ten year also gives some interesting insights –
- The company had been growing by way of debt till the year 2005 and the balance sheet was quite leveraged. Debt equity was as high as 3.62.
- In 2006, the company got equity participation from one of the biggest company in this business – Roquette. The French major took a 15% stake in the company.
- Since then the debt problems reduced and the debt equity ratio has been steadily decreasing. The debt equity ratio is now expected to be close to 1 now.
In year 2008 & 2009, the company had a couple of tough years. Since then the company has been witnessing strong topline and operating margin growth. They have been using the cash flows in expanding the swiftly reducing the debt to make the Balance Sheet stronger. In 2009 & 2010, due lower interest costs, the increased operating profits are making direct impacts at Net Profit levels. This trend is expected to continue.
People feel that this business is cyclical. But a closer analysis of P/L for last 10 years reveals that the margins remain between 13-16%. So we should use these margins for calculating the fair value.
- For Year 2011, we expect the company to do a turnover of close to 900 Cr.
- At operating margins of close to 15%, the company may be able to post a Net Profit of 60-65 Cr, resulting into an EPS of 53-58.
- At CMP of 285, the stock is available at a forward PE of less than 5.50
- The company has a strong BV of 175.
- Company has paid a dividend of Rs 5/share.
There were recent articles in media that the French partner of the company – Roquette (already holding close to 15%) wants to increase its stake to 51%. If so, it could lead to value unlocking and better future prospects.