Riddhi Siddhi Gluco Biols

Background

Riddhi Siddhi Gluco Biols was promoted by the Ahmedabad-based Chowdhary family traditionally engaged in trading sago and tapioca starch, with its first manufacturing unit at Viramgram, Gujarat in 1994.

In 2010, it is already India’s largest wet-corn miller engaged in the manufacture of a wide range of starches and related value-added products like liquid glucose, maltodextrin, dextrine monohydrate, dextrose syrups, high maltose corn syrups, gluten, germs and corn fibre, among others. It has 3 manufacturing units located in Viramgam (Gujarat), Pantnagar (Uttarakhand) and Gokak (Karnataka), close to major maize growing regions and markets.

Gokak and Pantnagar plants enjoy tax and excise benefits. Gokak plant also enjoys sales tax deferment 2014. Effective tax rate is currently 21%.

French company Roquette Freres world’s 4th largest corn processing company holds 14.93% stake in the company (bought in 2006), which provides the company access to high-end starch derivatives technology. This relationship is set to be strengthened with Riddhi Siddhi deciding (Mar 31, 2010) to demerge the business pertaining to its units at Viramgam, Gokak and Pantnagar into a wholly owned subsidiary of the Company, and enter into a joint venture with Roquette Freres in the said subsidiary to avail of latest technologies and for more sustainable growth in those lines of business. Necessary agreement to this effect has been entered into with Roquette Freres.

Riddhi Siddhi also amended the objects of the company (24 Sep, 2010) to enable it to foray into power sector -mainly wind and solar, over and above the existing business. The company has moved quickly on this as Q2FY11 results announced mention paying an advance of 42.13 Cr as advance to suppliers for setting up 30-33 MW wind power generation facilities across 3 locations Tirunelveli (Tamilnadu), Pachav (Gujarat) & Satara (Maharastra). Total investments projected is 250 Cr.


Main Products/Segments

Riddhi Siddhi Gluco Biols manufacture a wide range of starches and related value-added products like liquid glucose, maltodextrin, dextrine monohydrate, dextrose syrups, high maltose corn syrups, gluten, germs and corn fibre, among others.


Main Markets/Customers

Food & Confectionery, Pharmaceuticals, Paper and textiles form the bulk of its customer segments. Prominent clients include Nestle, Hindustan Unilever, Cadbury, Cipla, Biocon, P&G, BILT, TNPL, ITC, Amul, Venkateswara Hatcheries among others.

Food & Confectionery and Pharmaceuticals sectors growing well over 15% CAGR augurs well for the company’s products.
Exports are across 25 countries and contribute less than 10% of total sales.

Bullish Viewpoints

  • Sector Potential – Global starch consumption is estimated around 62mn mtpa and is projected to increase to 70 mn mtpa. The consumption of starch in countries like USA, Japan, 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 1800 crs tons. 65% of the total production comes from organized sector and remaining 35% by unorganized players. Organized sector comprises of 6 players, 16 manufacturing units and around 40 products compared to 1000 starch products available across the globe. (Source: Company AR, India Infoline)
  • Market dominance – Riddhi Siddhi is the largest corn starch producer in the country with 2000 tpd (44000 tpa) capacity. The company, enjoying over 25% domestic market share and 45% market share in North India, has a product basket of over 40 products such as corn starch powder, modified starches, liquid glucose, high maltose corn syrup, dextrose monohydrate, maltodextrine, gluten, germs, dextrose syrup and allied by-products. These products are used in food and food processing, pharmaceuticals, paper, textiles and adhesives sectors. Company’s key clients include include Nestle, Hindustan Unilever, Cadbury, Cipla, Biocon, P&G, BILT, TNPL, ITC, Amul, Venkateswara Hatcheries among others. Closest competitors are less than half the size of the company viz., Sukhjit Starch and Anil Starch.
  • High growth – Riddhi Siddhi has grown at a rapid pace in the last 5 years. Net Sales have more than tripled from 229Cr in FY06 to 746 Cr in FY2010 at a 5yr CAGR of 34%. Earnings per Share (EPS) has grown at a slightly lower 27% CAGR and gone up 2.6 times in 5 years. For FY10, the company recorded a turnover of Rs. 746 crore and net profit of Rs. 39 crore, earning net margin of 5.3%. EPS for the year was Rs. 34.78 on a low equity of just Rs. 11.14 crore, while cash EPS was Rs. 56.97.
  • Excellent first half FY11 – For the first six months of FY11, the company’s financial performance improved significantly. Although revenues grew to Rs. 409 crore, the net profit shot up sharply to Rs. 55.77 crore, which is more than the full year profits of FY10. Net margin for the half-year jumped to a whopping 13.6%, while EPS and cash EPS for H1FY11 stood at Rs. 49.88 and about Rs. 59.61 respectively.
  • Excellent Working Capital Management – Its great to see debtor days consistently coming down from ~80 days in FY06 to ~42 days in FY10. Similarly Inventory days have more than halved from ~115 days in FY06 to ~53 days in FY10. For a company growing as rapidly as Riddhi Siddhi, this record speaks well about Management’s focus on operational efficiency.
  • Increasing Cash Flows – The company has a good track record in steadily increasing Operating Cash flows. Operating Cash flow/sales increased from 7.5% in FY07 to ~ 13% in FY10 to be at 95 Cr. (one needs to ignore FY08 in this picture because of the fire at Gokak plant in FY08, see below – else it might cloud the judgement). The Free Cash Flow (FCF) record in recent years is also good, with Free Cash flow/Sales increasing from 6% in FY09 to 8% in FY10 to 62 Cr.
  • Crisis Handling capacity – Riddhi Siddhi had suffered a major fire at Gokak plant in FY08. This brought production at Riddhi’s largest facility constituting around 50% of their total output to a halt for seven months.  Corrective steps were taken and expanded Viramgam facility ramped up to ensure that supplies to most of their customers remained on track. Operations resumed at the Gokak plant in the third quarter of 2007-08. Despite the main plant remaining unoperational for 7 out of 12 months, Riddhi reported only a marginal decline in topline and EBIDTA in FY08. 
  • Diversification into Wind Energy  – The company is foraying into wind energy business. It plans to establish 30-33 MW windmills by March 2011 in Tamil Nadu, Gujarat and Maharashtra, with an investment of Rs. 250 crore to be funded by debt and internal accruals. This will be a big tax shelter for the company in FY11/12 as it will be able to claim 80% depreciation benefits in first year. (The company now pays tax at an average rate at 21.50%). Riddhi Siddhi has a good track record of managing debt so far, progressively lowering debt -from a high 1.75 debt-to-equity  in FY2006 down to 1.07x in FY2010.
  • Good Valuations – Riddhi Siddhi dominates its niche, is approaching ~1000 Cr turnover in FY11, has reported excellent first half FY11 results, with improving margins, returns and cashflows with good growth, but is available at a PE of 5-6x FY11 estimated earnings, Price to Sales 0.69, Price to cash flow 5.46, Price to book 1.98 (CMP 264, 16 Nov 2010)

Bearish Viewpoints

  • High Debt -The company’s debt exposure is high. As on 30 Sep 2010, the company had 230 Cr of debt on its books. This will be compounded by the additional debt of ~250 Cr that the company will be incurring in 2HFY11 for the wind mills diversification project taking debt-to-equity ratio past 1.8x. It must be mentioned to its credit, that while growing at a fast pace, Riddhi Siddhi has a track record of progressively lowering debt – from a high 1.75 in FY2006 debt-to-equity in FY2010 was down to 1.07x. Also the full debt may not be incurred in FY11 if project execution spills over into FY12.
  • Forex exposure – The company is having $29.4 million (~ 132 Cr @44.92) forex loan in its books. This exposure is un-hedged so its prone to the risk of adverse movement of currency like in FY 09 where the company had to pay higher interest cost which dented its margins badly.
  • Raw material prices – The raw material (maize) accounts for 60-65% of the total operating cost of the company. The prices of corn (maize) is dependent upon the many factors like rain, international demand and nowadays corn is also used for Bio diesel so prices of this commodity is also affect by the prices of crude in international market. Though the company has efficient procurement processes in place to cope up with price hike, still uncertainty regarding the prices of corn is a concern.
  • Wind Power foray – The wind mills foray seems like an unrelated diversification exercise. After years of not-so-good results, just when it seemed the existing corn-starch business is stabilising and started producing high margins and returns (9% plus NPM, 20% plus RoCE in 1HFY11), the company goes ahead and plunges into another line of business with no prior experience -taking on high levels of debt and making it vulnerable to business cycles.
  • Capacity constraints – Due to high growth in demand, the company is already operating at 95% plus of recently upgraded capacity. Further capacity additions and/or funding plans for the same are unknown as late as Q3 FY11. Company’s claims of 30% CAGR growth for the next 5 years (AR 2010) may be hit if the company doesn’t move on upgrading capacity by Dec 2010. It will take atleast 5-6 months to augment capacity by 30% at existing facilities.
  • Roquette Freres deal overhang – Roquette Freres, 3rd largest corn-processor in the world, already holds 15% stake in Riddhi. Instead of Roquette Freres hiking the stake to 51% in the listed entity as initially reported in the press in May 2010, as per this announcement to the exchanges, the company had decided (Mar 31, 2010) to demerge the business of all its plants into a wholly owned subsidiary of the Company, and enter into a joint venture with Roquette Freres in the said subsidiary. It is likely that Roquette will not settle for anything less than a controlling stake in the subsidiary if this is its vehicle for entering the Indian market. In which case existing shareholders in Riddhi Siddhi may be left with the fledgling wind energy business and a minority stake in the subsidiary. This may be a big overhang on valuations for the company going forward.
  • Low trading volumes – The scrip listed only on BSE does not generate large volumes on a consistent basis. This could lead to higher impact costs.

Barriers to entry

  • Customer relationships – Riddhi enjoys strong revenues from existing customers and has been able to penetrate deeper into major accounts. More than 70% of revenues come from customers more than 5 years old (Source: 2010 Annual Report)
  • Largest wet-corn miller with 2000 tpd capacity, more than double that of the nearest competitor Sukhjit Starch. Capacity further augmented by 30% at Pantnagar plant.
  • Strategic partnership with Roquette Freres (4th largest corn starch producer) with a portfolio of 650+ starch varieties, places it ahead in the technology & knowhow upgradation cycle and has enabled it to expand product range.
  • Location advantage – The plants are locate within 350 kms of the main maize producing regions in the country. Andhra Padesh (15%) and Karnataka (18%) are close to Gokak plant, while UP (9%) and Bihar (9%) are close to Pantnagar plant. (Source: company)
  • Tax Advantage – Gokak and Pantnagar plants enjoy tax and excise benefits. Gokak plant also enjoys sales tax deferment 2014. Effective tax rate is currently 21%.

Interesting Viewpoints

  • Riddhi Siddhi is confident of growing revenues at a CAGR or 30% for the next 5 years  (Source: Annual Report 2010)
  • The company is likely to get close to a 1000 Cr turnover in FY11 (full benefits of capacity expansion and 2H is historically better for Riddhi Siddhi). If achieved, this will demonstrate the company successfully transitioning from a relatively small company with potential to one that has achieved scale and critical mass. Apart from the improvements in profitability and returns that might bring the stock and the sector into notice, closing in on a 1000 Cr revenue size might also trigger a re-rating!
  • JV with Roquette Freres is expected to be concluded in near future. This will bring in additional funds, ensure technology & knowhow transfer, and launch of higher-margin, value-added starch derivative products by the company. This might propel the company to a higher growth and profitability trajectory, than hitherto possible.
  • While the JV deal structure is still not clear, it will entail some equity dilution for common shareholders

Disclosure(s)

Donald Francis: No Holdings in the Company;


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