Thanks Mahesh. I have always appreciated your willingness and effort to bring others on the same page -to your conviction levels!
It’s necessary to continuously look for the downsides while building one’s conviction -especially in concentrated bets, like the one I am mulling on Riddhi Siddhi. A one-sided story can be dangerous.The ifs & buts are so that we can all decide better how strongly to bet, or do we need to moderate our bets depending on whether this is a long-term play or a short-term mispriced play. or atleast be aware of the distinction right from the start.
So let’s discuss a few things we have not discussed so far, again, e.g the sheer size of the opportunity if the deal happens:
There is merit in your argument that if Roquette enters the market, it will enter in a big way. Roquettehas plants in Italy, Spain, the United States, the United Kingdom, Germany, Romania, China, South Korea.
1). The China Plant started in 2004 with a capacity of 150000 tpa, or roughly 3x Riddhis current capacity.So 5-10x new capacity is probably unrealistic unless Roquette may like to use this base as an export hub, which is unlikely again that it reportedly has 10 facilities in Asia alone.
2). What was China’s per capita starch consumption in 2004? Was it at the same 6kg levels that India is now or say will grow to in 2 years by when the new capacity becomes available? that may give a better idea of what supply the market can absorb? Roquette may need to spend more time to develop the market before 5x-10x capacity can be absorbed locally -even with high-end product introductions
Another aspect that we keep skirting:) Impact of the structure of the deal, 100% subsidiary divesting stake to Roquette (now that we are sort of clear this is the most likely scenario) :
1). Will there be equity dilution impact on listed entity shareholders? If so how can we quantify it?
2). Ifyou reduce the listed entity to a holding company status with just windmill and minority interest, is it any longer attractive?? Will anyone want to invest in that business?The options then may be to wait for the cliche “long” term when valuewillbe unlockedthrough a buyback or listing of the subsidiary or such other corporate action. Will such a business get valued at anything more than 0.5x Sales, let alone 1x Sales, ever??
3). In short, while this deal may be good for Riddhi Siddhi and its promoters, is it likely to be good for small shareholders?? Considering that the best deal for small shareholders would have been if Roquette upped its stake directly in the listed entity, triggering an open offer and things like that. But we agree thats not happening!