Wow good to see so much content, have to go through it. I had bought Riddhi siddhi at around 256 a few moths back(a very small position) after Ayush’s analysis(i am surprised he hasn’t spoken here) & it quickly raced away & i booked profits at around 480 as i felt the company was fairly priced & i hadn’t much of an understanding of the business. The reason i sold was it got expensive on a book value basis at about 2.5+ times P/BV for a commodity company returning around 7-13% over 10 years. I have to read up more and take a closer look but this looks to be deceptively cheap as its in the cyclical high.
Hi Siddharth, I am also trying to read up all the information. Just one quick query to you. Why do you think this is a cyclical? Other than paper industry, none of the other primary industries it supplies to are cyclical in nature. And as per reports, paper is in a up-cycle now and likely remain so atleast for the next few years. Can you help me understand this?
I am trying to understand the risks here. The story is very persuasive without doubt. What I do not understand is the overall market size. I don’t subscribe to the view that if the world uses 6 kgs of starch, India will also someday use it. I am trying to understand why the world uses 6 kgs and why China uses 10kgs of starch and why it grew from 1kg in 1992? So, the focus is on answering the question “why”, instead of looking at “what” happened? The “why” is critical to the understanding because “what” happened in China may not happen here in India, and from what I understood the bedrock of the investment thesis here is based on the assumption of continued growth.
About the windmills, why is a company which is reportedly earning 20% RoCE, spending money to earn a return of about 10-12% in a business it has no clue about? If the answer is that they want to reduce paying taxes, then I fail to understand the logic to it. The company is spending 250 crs from its pocket to save 60 crs in taxes??!! Had they been investing in a business which would have earned them a return higher than their current RoCE, it would have made a lot of sense to me.
Mahesh, Donald, Ayush or others who have a better understanding of this company, please help me out!
Hi
I went through most of the stuff posted here and the links.
**Positives: **
Sector leader available at extremely cheap valuations of around 5-6 as compared to market PE of around 16-18 and yet the sector potential is immense.
Possibility of link up with French company can catapult this company into altogether different orbit of growth and profitability. It can even get re rated to PE of fmcg levels because of value addition benefits derived from the tie up.
Good aggresssive management which is pro active in growing and managing their business.
Negatives
A big negative seems to be the alternative energy foray because if it is just for the purpose of saving taxes, it doesnt make sense.
Diworseification into windmills et all entails raising unnecessary debt. Conventional wisdom dictates that a company post its expansion phase should focus on reducing the debt raised for the expansion purpose whereas here debt seems to be augmented for a totally unrelated and somewhat risky venture.
The exact picture of the tie up with the French company is not clear and how the minority shareholders will be affected by the tie up in terms of equity dilution etc. also remains unknown.
In my view, after every sharp rise in any stock price, there is some consolidation needed wherein some or the other real or hypothetical concern surfaces (or is made to surface ) Riddhi seems to be going through this kind of consolidation phase.
I bought an initial position into this stock today around 465, just based on the valuations. Things look too good to be true but they often are true and once stock price runs up, everything else falls into place. We have had a similar experience with Pondy Oxides as well and the rerating happened in just a matter of weeks.
Riddhi Siddhi Annual Reports for last 6 years are available under shared workspace at www.acrobat.com.Anyone who wants access but is not yet a member, can alert me and I will send an invite.
Hi Abhishek,
Your prognosis of understanding ‘why’ is interesting and a well thought out question. Before going into the aspect of ‘why’ you need to understand in what way cornstarch is of value :
Thickening â it is used as a thickening agent in foods, such as noodles, puddings, gravies, sauces and pie fillings.
Dispersal/Suspension â it can be used to suspend and/or emulsify (i.e. effectively combine two liquids that do not normally mix well, such as oil and vinegar) fats and proteins in many food products. It is also used to suspend clay particles in the manufacturing of paper and adhesives.
Gel Formation â once cooled, starch pastes can congeal into a semi-solid gel for use as the base in starch-based salad dressings, puddings and some types of adhesives.
Spreading - starch paste can also be used to produce strong adhesive films when spread on smooth surfaces. Specific applications include paper coatings, textiles and corrugated board
Above-mentioned ways are just some of the so far discovered ways in which starch is adding value to the end products. Now, I will come to your contention of ‘why’ Indian starch sector will follow china’s or world’s consumption wave. You know Abhishek Chinese industry is very shrewd as far as their production processes go and they don’t hesitate to try something which can reduce the price of the end product as also add value to it. Similar is the case with US but US industry is more focussed on quality and innovation aspect than price reduction aspect. Now, user-industies applying cornstarch to their use in China or US are not much different than India. Also, we have the habit of learning and fast grasping from what others are doing. Our Govt.‘s joint collobration with many foreign countiresto improve India’sdefence as also many of our industries’ adoption of effficient foreign production processes is an example of the same. Even the companies that we are talking about say Riddhi is doing the same thing wherein it is using the technical know-how of Roquette to prodce efficiently with good quality and is also planning launch of new products which are already in the portfolio of Roquette. Hence when we are avid followers of good things of foreign countries there is no doubt that we will follow their consumption pattern of starch soon because their use of starch in many applications has not only made the production processes more efficient but has also considerably improved quality and acceptability of the product in marketplace.
Now, the question arises that if this is the case then the consumption of US is high since many decades then why we will follow now only when we have not done so since long. The answer to this is emerging countries like China and India are now becoming the buzzword ofdeveloping countries’industries and they are looking to find their markets in these countries to help their domestic troubled economies. A proof of this is recent visit of US prez Obama which came here on a business visit rather than a diplomatic visit. However, inspite of all these, one thing we need to agree that as far as innovations are concerend, developed countries are far ahead of developing countries like India & China. Its only recently that China and India have cultivated vigour in themselves to race ahead of developed countries in all aspects and China, because of its proactive and shrewd Govt.,occupies first slot in this. Thus China was the first country which adopted the efficient production processes of western countries and even improved on them to produce the products at much lower price than them. This is the reason why over the period under consideration in the report china increased its starch consumption almost 10 times while in the same period US starch consumption less than doubled. To put it in figure terms, US starch consumption in 1992 was approx. 38.1 kg which has less than doubled by now to 64.5 kg. whereas China’s starch consumption in 1992 was 1.1 kg which rose 9 fold by now. You know vey well the population statistics of US vis-a-vis china and india and based on that statistics such a wide gap still existing between US and China starch consumption is a golden opportunity investors are sensing there to mine. If you just study the price pattern of Asia-Biochem group, the company which has the similar topline that of Riddhi with a replica business model, you will understand the accumulation and appreciation phaseit is in since last many months. I am awaiting the results of chinese companies whiahc are likely to decalre numbersin this month and will update you on that soon.
Apart from above, the other point because of which I am 100 % sure of Indian sector’s growth ahead is the absense of any MNC still on Indian scene. This is the most positive thing that can happen to a worldwide booming sector and it confirms the opportunities ahead with least downside in the sector. Recently, before few months chinese govt. decided to go slow on fresh investment in chinese starch sector as also now we have the news out in the media that chinese govt. is planning many curbs to tame the inflation there all these are positive news for Indian starch sector companies as they are sitting on a perfect wicket wherein indian industries have only now started realising the potential applications of starch and still only 45-50 downstream applications of starch are commercialised in india vis-a-vis 650 + applications cvommercialised worldwide. I am n ot saying that we will in the short period of time reach the world stage as not many of the applications will at this time be applicable to india and might not find the market here but the wide gap here also provides a great margin of safety. One thing can be said with total certainity that india will definetly now see entry of mnc in the sector in FY12 or FY13 and once this happens the growth here will be very fast and exponential as mnc are known for that fast moving and strong marketing.
Again, apart from above two points there is another interesting point which gives a sureshot prediction of growth of indian sector - the innovation. Yes… every passingmonth more and more applications of starch & starch derivatives are getting discovered and commercialise in one or other part of the world (mostly western countries) which leaves ample scope for indian companies to study them at leisure and commercialise it in idnai if feasible.To give you anex., jelly candy manufacturers in usa are currently working on developing products that more closely approach the clarity, elasticity and texture of gelatin in gummy and chewy candy while at the same time reduce gelatin content in it. For achieving this they are finding cornstarch as the best replacement candidate and future products are to be driven with this innovation. Like this way we have a ever expanding applications marketplace alongwith an unpenetrated nascent market.
This is the reason ‘why’ i feel that after china, india is likely to be the next candidate which will see its starch consumption increase 10 fold in the coming decade.
_
Mahesh, out!
_
Hi,
Yes, I have been owning Riddhi from lower levels and more or less, my views remain the same like before -http://dalaal-street.com/riddhi-siddhi-gluco-biols-ltd/
The company has had a very good track record in terms of scaling up its business and I’m sure that they are the people who can repeat the past performance for next few years. Even today the stock is not too expensive and holds value.
Coming to the power foray - its impossible for me to distinguish if its a diversification or dis-worsification. Caus the reasons could be several - for eg: as indicated by others, co is in process of doing a stake sale to the French co and if that is to happen, they will be flush with funds and it may become a good move then.
As of now, the power foray is not a major risk for me caus over next 6 months lots of positives may be lined up like:
1). Next qtr may be good due to scaling up at Pantnagar plant. If they are able to post good nos again, the stock should zoom.
2). Stake sale news might come in.
Lets see how things shape up.
Quarterly Results now have to publish Balance Sheet data, as we have seen from the Q2 results of companies.
This is very useful, because we can get a much better handle on current debt position, addition to Reserves & Suplus a/c, working capital management cf. inventory & debt levels. (Qn for CAs -what has been shown as Reserves & Surplus in Q2, I assume cannot be undone e.g. Q3 may not add anything to Reserves & Surplus, but it really can't show lower Reserves & Surplus in Q3 unless there is a net loss, right?)
With this data available, I had been meaning to check debtor & inventory levels, jumps in BV, asset turns, Returns, etc.
I did this for Riddhi Siddhi assuming a modest 25% rise in Qtrly sales (over same qr FY10) and a 15% PBIDT margin for the company in Q3 & Q4 to annualise results. Please see below:
|
Riddhi Siddhi |
2HFY11 |
2HFY10 |
|
Book Value per share |
239.47 |
177.52 |
|
Total Debt |
227.78 |
253.34 |
|
Debtor days |
36.92 |
36.62 |
|
Inventory days |
46.33 |
48.79 |
|
Interest cost/Debt Outstanding |
||
|
Cash/Total Assets |
2.87% |
2.90% |
|
Fixed Assets Turnover |
2.52 |
2.39 |
|
Asset Turnover |
1.78 |
1.57 |
|
Return on Assets (%) |
16.50% |
8.77% |
|
Financial Leverage |
1.98 |
2.39 |
|
Return on Equity (%) |
32.67% |
20.95% |
|
Capital employed |
494.50 |
451.06 |
|
Return on Capital Employed (%) |
28.47% |
18.22% |
Those who want to check the excel and help refine, can use the file attached. Someone can make this more user-friendly??
-Donald
Hi Ayush,
I like how you put it - that it’s impossible to take a call now whether the power foray is good or bad. but that we should concentrate on the positives -which are many. Interesting developments may take it to a different trajectory. and now looking at the table Donald put up on reducing debt and improving returns, we can take a more favourable view of its prospects.
Thanks Donald for the Table, its another nice handle on tracking a company’s progress/slide during the year. It should be useful to many others.
Rgds
Arindam
Attaching for ref. Crisil Report which revised Riddhi’s rating to Stable from Negative in August 2010.
Rgds.
Mahesh
CRISIL-Ratings-The-Most-Reliable-Opinion-on-Risk.mht (79.5 KB)
I was trying to look at competition, capacities and the like.
Came across this Starch Sector ReportJuly 2010, from Asset Alliance. Useful starter on the industry & competition as it profiles Anil Ltd, Sukhjit starch, Riddhi Siddhi and mentions some others like Tirupati Stach, Gyatri bio-org and Universal starch.
Interestingly it makes a case only for Anil Ltd.
Thanks tcx…useful backgropunder. I wanted to start looking at competition a bit…just to cross-check their version of the industry and prospects.
Uploaded latest ARs of Anil Ltd. and Sukjhit Starch at Annual Reports shared workspace at acrobat.com. Annual reports/Riddhi Siddhi folder
lets share anything significant.
This Aug report is before the power foray announcement/amendment of objects in Sep 2010.
Would have been interesting to see what CRISIL had to say post the bigger debt.
-Arindam
Latest Asset Alliance Starch Sector Report (Nov.2010) Part I attached for ref.
Rgds.
Mahesh
Starch_Sector_2QFY11_Result_Update_AASPL-Part-I.pdf (97.5 KB)
Latest Asset Alliance Starch Sector Report (Nov.2010) Part II attached for ref.
Rgds.
Mahesh
Starch_Sector_2QFY11_Result_Update_AASPL-Part-II.pdf (71.7 KB)
Thanks Mahesh. Useful to see the Industry growing at a nice 30% plus.
I notice Sukhjit starch is doing very well on all fronts, infact doing much better than RIddhi Siddhi -Sales, PAT & EBITDA growing much faster, the difference in growth is kind of huge!
What in your opinion are the contributing factors pro Sukhjit, and why is Riddhi not able to deliver the same??
Hi Arindam,
Focus of Anil & Sukhjit has been the profitability and sustainability since many years and so it is no surprise to see them expand margins healthily in the begginning of an upturn in the sector. On the other hand focus of Riddhi has always been scale and it is only now that it has started focussing on profitability. Hence, if you want a safe exposure and are not fully convinced of the sector growth in the years ahead Sukhjit can be a good bet but if you are convinced of the sectoral upturn then Riddhi is the only safe bet to take full advantage of the upturn. This you can see from Anil’s results which has now started delivering muted margins than Riddhi and Sukhkjit. This is because, Anil’s management has already anticipated growth ahead for the sector and so have now started expanding aggresively and thus a pressure on margins are obvious in coming two fiscals. Similarly, if Sukhjit has to take benefit of sectoral upturn then it will also need to start expanding from next FY which will see its margins also shrink going ahead. However, Riddhi is in a comfortable position as it can serve the booming demand of the sector for atleast coming two fiscals by just expanding existing facilities within a very short time at minimal costs becuase of vacant land available at two of its plants. Hence, its leadership position of the sector will remain undisputed and if the demand continues booming as is the case now it will be the major beneficiary as it now has to bear fruits of the investments made so far.
Rgds.
Mahesh
Having gone through the reports posted (alliance reports), and comparing valuations and capacities it seems Riddhi is a sitting duck at current prices. It seems to be consolidating currently because markets I think cannot believe such stupendous growth can continue.
Mahesh, I would like to know about negatives (I know from your write up that demand shrinkage is not here to coome for some more time but still playing devil’s advocate):
First any chances of demand shrinkage? (due to negatives of user industries or excess capacities coming up?)
Second any chances of correction in starch prices or excessive rise in corn prices which could affect profitability going forward? Because the packaging sector stocks have been taking a severe beating after correction of BOPET prices by around 10-15% where stocks have corrected around 30% from peak.
Hi Hitesh,
Demand shrinkage is a remote possibilty as two factors are working here - 1st user-industries themselves are growing and expanding and 2nd - many innovative applications are getting discovered for the sector’s products .
Hence, when we have an expanding marketplace alongwith openeing up of new untapped markets, there is least possibility of demand shrinkage. Ex. of 2nd factor I have already covered in my previous write-up and To give you a smallex… of the 1st point, Nestle India, Riddhi’s major client, has just 4 months before decided to set-up a plant to manufacture instant noodles, mixed codiments and seasonings at a cost of 350 oddcr. It will be worthwhile to note here that each of the products planned to be manufactured in the plant contain starch & modified starch as a key element. Hence, alongwith the expansion of Nestle, Riddhi will also expand as Riddhi isone of the keysupplier of starches & modified starches to Nestle.
Now to cover your query rgdg. possible negatives as far as macro picture for the sector goes… here I will say the first and foremost possible negative is the Indian companies unable to tap fully the potential offered by their operating sector. This I feel because still most of the companies are cautiously optimistic on the demand scenario and they are adopting a policy of expanding just on verge of anticipated demand. If this scenario persists for long and if before the entry of MNCs into Indian landscape Indian companies don’t expand aggresively, they will lose out to MNCs. To my surprise is the silence of Riddhi on expansion front because so far over the last decade when most of the companies were hesitant in expanding, Riddhi was the only one apart from GAEL which expanded aggresively. I feel this is because it is in the process of becoming an MNC itself once Roquette deal is out, but the negotiations are taking much more time than previously anticipated as the talks are going on since feb.10. I will wait to hear from Riddhi on this front by Feb.11 and if no deal is signed by then will look forward for their expansion moves as w/o expansion the guided 20-30 % growth for FY12 is impossible. What I belive is if the deal with Roquette doesn’t materialise, a blueprint of a major expansion in various stages will be announced by Riddhi before March.11 which can result in 20-30 % growth in next 3-5 years as is guided by the management in its AR2010.
The second negative factor is the possible rise in corn prices but it will matter to Indian companies only if it rises more than 30-40 % which is a remote possibility. Because of the robust demand scenario, a rise in corn price upto 20-30 % can easily be passed on and so unless Indian corn crosses 1300-350 mark I will not be concerned.
theres not enough discussion on the negatives. more positive data does not mean everything is hunky dory. i used to own k.g. gluco biols (earlier name)… this was promoted by glaxo, but the mnc decided to sell out. it’s not such an easy business.
investigate more on the manage,ent side. all industry players have mgnt of questionable intgrt.
these scrips are speculators fav - they rachet them up every few yrs - hope you dont end up taking the hit.
Thanks for your views Conservative.
The company which bought the Glaxo facility is Riddhi Siddhi, and Mahesh’s reports mention how and why Riddhi made a success of the buy.
Looks like you haven’t read the Annual Reports. Please read AR 2010, the way Management discusses industry issues and how they have gone about it, puts them in a good light. They have the self-confidence to do things differently in their industry. Haven’t found anything yet that can point to questionable Management integrity.