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. India’s 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 India’s largest in that space. Mr. Ganpat Chowdhary was then asked to expand the family’s 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 didn’t just need large consignments; it also needed frequent despatches. The result was a strong logistics support system to service Nutrine’s 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. -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. 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