Ruchi Soya set to be debt-free after FPO

Ruchi Soya Industries Ltd is tapping the capital markets with its follow-on public offer (FPO). The issue would raise Rs4,300 crores in a price band of Rs615-650. The issue would open on Thursday the 24th of March and close on Monday the 28th of March. The current market price as of today (22nd March is Rs914 on BSE, implying a steep discount of Rs264 or 28.9 per cent to the current price. The 52-week high and low on BSE is Rs1,377-619. This means that the issue is being priced closer to its 52-week low and offers investors an opportunity to be part of a growth story.

The present promoter holding in the company is 98.90 per cent. The dilution at the top end of the price band would be about 18.19 per cent and make the public float about 19.30 per cent post the issue. The company would have till the end of the current calendar year to bring the public shareholding to 25 per cent.

The company is into the business of edible oils, oil palm plantation, edible soya flour and textured soya products, oleochemicals, honey and atta, noodles and breakfast cereals, biscuits, cookies and rusk, nutraceuticals and wellness and also renewable energy. During the last two years, the company has added the FMCG business and FMHG business to its portfolio.

Ruchi Soya Industries Limited was acquired by the Patanjali group through the 'IBC' process. The acquisition was a clean company without any baggage or past liabilities. The company has been turned around completely and is a profit-making company. The company is an Indian MNC with products across the FMCG and FMHG business verticals. There is a certain amount of overlap between what Patanjali does and what Ruchi Soya does. To get rid of these issues, the management has taken a conscious decision to bring all food business under the Ruchi Soya brand and management. To this end, the biscuits, breakfast cereals and noodles business was transferred to Ruchi Soya from Patanjali as a slump sale in May-June of 2021 at a cost of Rs60 crores. Going forward the remaining food business would also be transferred on similar lines.

The nutraceutical business is a new addition to the Ruchi Soya stable. They are into three types of products catering to general, medical and sports needs. Ruchi Soya outsources/contract manufactures from various vendors including Patanjali. Currently they have about 20 products and the same would increase steadily to double in the next six months. This is a big segment and would see robust growth in the coming quarters. A great USP of these products is that they are 100% vegetarian.

The palm cultivation is another thrust area for Ruchi. They have been allotted almost 3 lac hectares to do palm farming. Currently 57,000 hectares bear fruit and the company is producing about 75,000-80,000 tons of palm fruit annually which is further processed into oil and other by-products. This activity is highly profitable and is beneficial to the company and also the farmer who grows and cultivates palm plantations. This is an asset light model with no investment by Ruchi in the cultivation business.

The first part of the food business transfer plan already completed involved biscuits, noodles and breakfast cereals. The run rate of these three products put together has already crossed Rs100 crores per month and is a profitable business for the company. The products compete with the best in the category available in the country. Coming to the performance of the company, revenues reported for the six months ended September 2021 were Rs11,306.98 crores, EBITDA was Rs706.54 crores while Profit before Tax was Rs459.08 crores. If one looks at the three months ended December 2021 as the company is a listed company, these numbers show revenues at Rs6,280 crores, EBITDA at Rs352.75 crores and Profit before tax at Rs319.61 crores. The company earned an EPS of Rs23.02 for the year ended March 2021 which is Rs 11.42 in the period April to September 21 and has improved to Rs19.33 in the nine-month period ended December 2021. The PE for the company based on March 21 earnings is 26.72- 28.24 times. This compares very favourably with the peer group as mentioned by the company in the RHP. The NAV of the company as of 30th September was Rs148.82 which would improve to Rs237.95 – 240.43 depending upon the allotment price.

Coming to the prospects of the company, it is very well poised to take advantage of the niche segments it operates in. Considering the focus on palm plantation, food products and nutraceuticals, it would be fair to assume that their would-be significant growth in the top line and improvement in margins at the EBITDA and net levels. The object of the issue consists of a large part of repayment of debt of the company and it becoming a net debt-free company post the FPO. This would reflect in a saving of around Rs280-300 crores in interest in the coming year which would flow to the bottom line. While this is a fresh issue and would result in dilution of roughly 18% of equity, the earnings would get more than compensated with the increased earnings on account of interest saving. For the sake of simplicity, one is not considering the growth in the acquired businesses from the food segment, nutraceuticals which is a new vertical and so on.

The company offers investors ample opportunities for growth and returns on listing and for those looking to invest for the medium to long term.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)