Riddhi Siddhi Gluco Biols Ltd. - Q1 FY11 Results Update
Industry – Starch (Corn Starch) BSE Code – 524480 Current Price – Rs. 372/- Revised Target Price – Rs. 615 /- 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. 412.90 cr. FY10 Sales – Rs. 747.15 cr. FY10 Operating Profit – Rs. 121.49 cr. FY10 Net Profit – Rs. 39.22 cr. Q1FY11 Sales – Rs. 202.76 cr. Q1FY11 Operating Profit – Rs. 39.49 cr. Q1FY11 Net Profit – Rs. 31.17 cr. FY10 EPS – Rs. 34.78 Q1FY11 EPS – Rs. 27.89 (Not Annualised) Annualised FY11 EPS based on reported Q1FY11 Results – Rs. 96.95 Current P/E based on Annualised FY11 EPS - 3.84 Highlights of Q1 Results of Riddhi Siddhi : Riddhi Siddhi Gluco Biols Ltd. reported its Q1 FY11 results on 22nd July 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 Q1FY11-numbers : (1) Riddhi reported a topline of Rs. 202.76 cr. in Q1Fy11 which translates into a YoY growth of 29.7 % but a QoQ decline of 12.2 % . The normal topline trend for starch companies, especially Riddhi, depicts lowest topline being reported in Q1 and highest in Q4 of a financial year. A QoQ decline has to be seen in the backdrop of this trend. (2) Riddhi reported EBIDTA of Rs. 44.97 cr. in Q1FY11 which translates into a YoY growth of 140.5 % and a QoQ growth of 30.27 %. EBIDTA margins expanded by a whopping 1020 basis points YoY and 733 basis points QoQ. (3) Riddhi reported an Operating Profit (EBIT) of Rs. Rs. 39.49 cr. in Q1FY11 which translates into a YoY growth of 186.9 % and a QoQ growth of 1.23 %. Operating Profit Margin (OPM) expanded by a whooping 1067 basis points YoY and 270 basis points QoQ. (4) Riddhi reported a Net Profit of Rs. 27.40 cr. in Q1FY11. Here, we have not included one time gain of insurance claim received in Q1 amounting to Rs. 3.77 cr. including which Net Profit comes to Rs. 31.17 cr. for Q1. The reported pure Net Profit of Rs. 27.40 cr. translates into a YoY growth of 433 % and a QoQ growth of 125.89 %. Net Profit Margins (NPM) have expanded by a whooping 1022 basis points YoY and 829 basis points QoQ. (5) For Q1FY11, Riddhi reported an Earning Per Share (EPS) of Rs. 24.60 excluding extraordinary items and Rs. 27.89 including extraordinary items. (6) In Q1, all of Riddhi's plants operated at 90 % utilisation excluding the 30 % capacity expansion at pantnagar plant which got operational only in June 2010. Scenario for Riddhi Siddhi post Robust Q1FY11 Results – Significant Rerating Waiting Ahead : It is a well known proverb “Well Begun is Half Done”. This proverb perfectly fits Riddhi Siddhi in projecting its future ahead. Riddhi has really 'very well begun' its FY11 and it has more than 'half done' already if you look at the reported pure Net Profit figure of Q1 at Rs. 27.40 cr. For entire FY10, Riddhi reported a NP of Rs. 39.21 cr. while in Q1FY11 itself it has reached more than half of that, if we talk precisely, it has reached 70 % of the NP achieved in entire FY10. Still, three big qrtrs. are remaining and with this, one can imagine how robust entire FY11 is going to be for Riddhi Siddhi Gluco Biols Ltd. That is why we said 'Well Begun is Half Done' proverb perfectly fits Riddhi Siddhi. Now, lets' cite the reasons for such robust Q1 performace of Riddhi. (1) First and foremost reason is the change in product-mix. Product- mix in Q1 has tilted majorly towards value-added products which command high margins. This is the basic reason why you are seeing a healthy expansion in OPM and NPM in Q1FY11. (2) Second reason is the conclusion of investment-phase. Yes. With the expansion of Pantnagar Plant being completed in June 2010 and no major CAPEX planned for FY11 one can see healthy margin trend continuing in entire FY11. (3) Healthy internal policies like procurement and storage of raw material in main season and making upfront payment to farmers as well as strict adherence to expansion-schedules and completion of major expansion-plans before time has helped company achieve operational efficiency which has translated into better margins. (4) Long-standing relationships with major customers and tilting of client-mix in favour of higher percentage of clients prefering to give Riddhi the status of their critical-vendor has enabled reduction in debtor days which has eased pressure on working capital management thereby translating into healthy margins. (5) Economies-of-Scale clicking-in with Riddhi achieving critical mass of 700 + crores in topline last year and expected 1000 + crores topline this year, margins are bound to expand as such scale and efficient management of such scale brings in windfall margins for an emerging company. Now, having gone through the highlights of Q1FY11 numbers of Riddhi as also evaluating the reasons for attainment of such robust numbers, it is the time to discuss the scenario for Riddhi post Q1FY11 numbers. Scenario can very well be expressed in a single word 'RERATING' . However, such scenario has to be looked at from 4 angles, viz., (1) Industry Reaching Critical Mass and so will find a place in every Money Manager's Portfolio (2) Keeping Our Ears Close to Ground and Our Eyes Around to Evaluate Future Correctly (3) Revision in Future Financial Projections (4) Current Valuation Let us discuss each aspect in detail as follows : (1) Industry Reaching Critical Mass and so will find a place in every Money Manager's Portfolio : While discussing all this while regarding robust growth experienced by Riddhi, the one critical thing which missed our attention is the growth of the industry in which Riddhi operates i.e. Cornstarch Industry. Riddhi is commanding a 40 % marketshare in cornstarch industry and so when it is growing at 25 % p.a. and is expected to maintain this growth rate in the years to come, cornstarch industry is also growing alongwith it and so are other players of the industry. If we look at the other way round, then as per the Global Industry Analysts Report titled ' Starch : A Global Strategic Business Report' (in this report a special detailed mention was given to Riddhi alongside global cornstarch majors like Corn Products, NSFI, Cargill and Roquette), released on July 1 2010, despite witnessing a temporary deceleration in growth in the year 2008 and 2009, the world market for starch, by consumption is expected to recover poise and register healthy growth to reach 80 million metric tons by 2015. Growth in this market will primarily be driven by resurgence of demand fundamentals, such as, improving income levels, and waxing propensity to spend, and the subsequent increase in demand for a variety of food & manufactured products. The liquid starch market will continue to remain the largest segment over the period 2007-2015. The modified starch market is projected to be the fastest growing segment over the period 2007-2015. This growth in the modified starch segment is due to the waxing health awareness across the globe and growing functional and nutritional needs in global economies, which demands use of innovative modified starches. The US represents the largest geographic market for starch, having accounted for a share of about 51% in the total volume of starch consumed in 2009. Given the country's large per-capita income, the demand for starch in the US has been steadily on the rise. Asia- Pacific represents the fastest growing market over the analysis period 2007-2015. Growing employment opportunities, and subsequent increase in per-capita income over the last few years, particularly in China and India, have been driving the growing demand for starch in the region. A robust industry structure and deployment of improved technologies for starch processing are resulting in an increasing production of starch in the region. With this backdrop, and the fact that cornstarch industry in India is bound to reach Rs. 3000 + crores in size in FY11 with a prospect of 15 % p.a. growth over the next five years, it has atained the staus of a niche industry and now is the right time when money managers will be compelled to provide a spcae for this industry in their core portfolio. Considering the corpus size of funds investing in emerging opportunities as well as that of PMS, and the limited options they have with less than 10 major companies constituting entire industry, there is bound to be an i-first attitude which will see shrewd managers proactively creating room for cornstarch industry in their portfoilo thereby enabling rise in average valuation commanded by cornstarch industry on Indian markets. (2) Keeping Our Ears Close to Ground and Our Eyes Around to Evaluate Future Correctly : If one wants to keep margin of error as close to zero as possible then one needs to keep ears close to ground and eyes around. Let's explain what we mean by this: Since Riddhi is the leader commanding 40 % market share of cornstarch industry, so, now, after declaration of such robust Q1FY11 numbers by Riddhi, the focus should shift to the declaration of numbers by its peers. Two of them are extremely important viz., Sukhjit Starch which will be declaring its numbers on 9th August and Anil Products which will be declaring its numbers on 31st July. Here, three scenarios are possible and we will discuss each of them below alongwith its impact on Riddhi : (a) Peers of Riddhi announce robust numbers on the similar lines as announced by Riddhi with healthy topline and bottomline growth. (b) Peers of Riddhi announce healthy topline growth but OPM and NPM remain at historical level with minimal expansion in margins. (c) Peers of Riddhi announce modest-to-stable growth in topline and bottomline. Out of above, if first possibility becomes a reality then entire sector will get rerated and so Riddhi will also benefit from it but it will command only a modest premium to its peers. If second possibility becomes a reality then also entire sector will get rerated but Riddhi in this case will trade at a significant premium to its peers because of its size and its scalable and profitable business model. If third possibility becomes a reality then the sector will not get rerated and Riddhi will get rerated gradually depending on its Q2 and Q3 results. Logically speaking, third possibility is far away from reality but first two possibilities can very well happen. Still, we need to look at the numbers of Anil Products and Sukhjit Starch very closely and then revisit our assessment. (3) Revision in Future Financial Projections : Robust Q1 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 87.30 117.6 159.1 After taking into account likely equity dilution in next two years, EPS for FY11 works out to be Rs. 77.60, for FY12 at Rs. 84.50 and that for FY13 at Rs. 104.30. (4) Current Valuation : At the current market price of Rs. 372, Riddhi is trading at a PE of just 4.79 based on expected current FY11 numbers, at a PE of just 4.40 based on expected FY12 numbers and at a PE of just 3.57 based on expected FY13 numbers. To add, Riddhi currently trades at a market-cap-to-sales of just 0.39 based on expected current FY11 topline of Rs. 1056 cr.,; at a market- cap-to-sales of just 0.35 (after taking into account equity dilution) based on expected FY12 topline of Rs. 1380 cr. and at a market-cap-to- sales of just 0.28 (after taking into account equity dilution) based on expected FY13 topline of Rs. 1870 cr. Conclusion : Declaration of robust Q1FY11 results marks the beggining of an entirely new phase in Riddhi's lifespan; a phase which will see Riddhi attain its real value ; a phase which will see its industry-leadership position getting recognised; a phase which will make Riddhi an international player to reckon with in the cornstarch industry; a phase which will see foreign cornstarch majors like Roquette and Corn Products actively pursuing management of Riddhi to let them participate in its growth by taking equity exposure in the company; a phase which will see emergence of a new leader on Indian Bourses. Yes. As explained in previous sections, taking exposure to cornstarch industry will be a compulsion rather than a choice for every fund manager managing PMS as well as funds which take exposure to emerging opportunities. An industry size of Rs. 3000 + crores and a growth prospect of 15 % p.a. till 2015 will make this industry tough to ignore for any money manager and the time is ripe for shrewd money managers to start taking limited exposure to the industry in FY11 itself. However, the concentrated nature of the industry with only 6 listed players as also only 3 amongst them having topline of 100 + crores and to trickle down further, only one player having a topline of 500 + crores will compel the money to find only limited avenues to invest in and so money will flow to only selected players and those selected players will command a valuation which will be much higher than the current industry average valuation of 7.5 (PE). To talk specifically, the only options left for money managers to take exposure to the niche cornstarch industry will be Anil Products, Sukhjit Starch and Riddhi Siddhi and if Anil Products and Sukhjit Starch fail to deliver on margins front then the only safe exposure with sound business model will be Riddhi Siddhi. Evenif Anil and Sukhjit deliver robust numbers then also Riddhi Siddhi will be the first choice where wise money will try to find shelter in, because, when you have a company which commands 40 % marketshare of the industry and is also on the verge of achieving a critical mass of 1000 + crores with its closest competitor likely to report a topline below 500 cr. in FY11 ; such leader will create a commanding position in the industry and so will have a larger say on various issues pertaininig to that industry. Hence, the leader will continue to grow at a healthy pace with margins getting better and better day by day and so it will make its position indispensable in the portfolio of every emerging fund and PMS having vision to grow their clients' money. To conclude, two things will happen with Riddhi Siddhi post Q1FY11 results : (1) Its base price will shift to a price band of Rs. 430-500 depending on the market trend with correction phase dipping it to Rs. 430 and a rally raising it to Rs. 500. Hence, at any rate below Rs. 430, Riddhi will command a 'Safe Buy' Status. (2) Its target price will shift upwards to Rs. 615 at which rate it will command a PE of just 7.93 and a market-cap-to-sales of 0.65 based on expected current FY11 numbers. One thing to note here is that if we look at the expected FY11 numbers of Riddhi's peers then all its peers have now started to trade at a significant premium based on current market prices. Declaration of robust Q1 numbers have placed Riddhi far... far lower in the valuation matrix as compared to its peers and, for this situation to correct, either the peers need to declare similar robust numbers or they need to correct pricewise which is not happening. Instead, what we have seen is that declaration of Q1FY11 numbers by Riddhi has sparked a rally in listed cornstarch players and all of Riddhi's peers have seen a rise in their prices in the range of 15-30 %. Surprisingly, the leader, i.e. Riddhi which sparked this rally by declaring robust Q1FY11 results has seen a rise of only 35 % and so a significant rerating is still waiting to happen for Riddhi. As mentioned in last report, nowhere in the world we have seen a situation where an industry leader trades at a discount to its smaller size peers and declaration of excellent figures for Q1 will act as a trigger to correct this anomaly and therefore we will see a significant rerating of Riddhi in the days to come. To conclude, we have a multibagger in our hands and it is just a matter of time when under-ownership starts catching up and creates a demand-supply gap in favour of Riddhi Siddhi to push it to the level of our target price of Rs. 615. -- 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]. For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en.
