You must have heard of the brands Nutrela, Sunrich or Mahakosh, they all belong to Ruchi Soya, a company whose stock price is in news for quite a long time now.
What is happening with Ruchi Soya?
From 16.5 on 27/Jan/2020 the share price rose for about 9100% to 1500 in just 5 months.
Amazing, right? Curious what might have happened?
Go through this article to dig in further.
If one looks at the balance sheet of the company one can find the trouble, Debt of the company rose from the levels of 2500 crores in 2010 to levels of 8900 crores in 2018. Moreover, Net profits of the company of 175 crores in 2010 declined and turned into a loss of 5638 crores in 2018.
So, what’s the story behind it?
Back in 2011 Indonesia raised export duty on crude palm oil. This raised the raw material cost for Ruchi Soya since most of the crude palm oil is imported. However, the story doesn’t end here, Indonesia decreased export duty on refined edible oil making it difficult for Ruchi Soya to maintain its margins. The company decided to compete.
Due to reduced margins the company started incurring losses which were covered by debt. In order to push sales, the company started giving credit to customers, so much so that its receivables increased to levels of INR 5000 crores (it also possible that this sale never happened and the P&L statement of the company was inflated to escape the rage of investors).
In 2017, lenders took Ruchi Soya to bankruptcy court and the company was standing for a bail out. Patanjali and Adani Wilmar were among the top bidders. However eventually Patanjali won and acquired 99% stake in the company and settled dues for 4000 crores. Total financial creditor claims admitted by the resolution professional stood at Rs 9,300 crore. The transaction indicates a 56 percent haircut for financial creditors.
Equity Structure after acquisition?
As per the resolution plan the equity capital was slashed from 660 million to 6.6 million and after amalgamation with Special Purpose Vehicle created by Patanjali its equity capital stood at 591.6 million.
The previous shareholders were left with only 1% equity. Ruchi Soya was re-listed on 27th January’20 after being suspended from trading on 14th Nov’19.
With only 1% shares available to the public, Ruchi Soya became a highly illiquid share and it was much easier to hike the prices artificially. Also, 9100% return seems fictitious as very few people must have been able to ride this un-catchable horse.
Is the company violating existing SEBI guidelines by promoters owing more than 75% shares?
According to existing listing guidelines, companies have to ensure 25 per cent public shareholding. However, since Ruchi Soya Industries was relisted following the resolution process, the promoters have 18 months to raise the non-promoter shareholding to 10 percent and 3 years to take it to 25 percent.
This again put our brains at work as with 9100% increase in the share prices the further public offer (FPO) will be out by Patanjali at a heavy premium.
Why is volatility so high?
Ruchi Soya trades mostly at circuits either upper circuit or lower circuit, what’s so fishy about it?
No one knows the future course of the company so there is a lot of speculation going on in the market and due to lack of liquidity in the market share price is so volatile.
In my opinion such companies should not be allowed to be relisted without any memorandum so as to allow the public to make an informed decision.
Investors should be cautious as such high valuation of the equity is not justifiable even after considering the growth prospect of the company.
The prices may come down at the same speed when the equity is diluted by the promoters to adhere to the SEBI guidelines.