Riddhi Siddhi Gluco Biols Ltd. – Q2 FY11 Results Analysis – Target Price Revised to Rs. 740

 

Riddhi Siddhi Gluco Biols Ltd. – Q2 FY11 Results Analysis – Target Price Revised to Rs. 740

Riddhi Siddhi Gluco Biols Ltd. – Q2 FY11 Results Update

Industry – Starch (Corn Starch)

BSE Code – 524480

Current Price – Rs. 495 /-

Revised Target Price – Rs. 740 /-

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. 550.90 cr.

FY10 Sales – Rs. 747.15 cr.

FY10 Operating Profit – Rs. 121.49 cr.

FY10 Net Profit – Rs. 39.22 cr.

1^stHalfFY11 Sales – 409.28 cr.

1^stHalfFY11 Operating Profit – Rs. 74.23 cr.

1^stHalfFY11 Net Profit – Rs. 55.77 cr.

FY10 EPS – Rs. 34.78

1^stHalfFY11 EPS – Rs. 49.88 (Not Annualised)

Annualised FY11 EPS based on reported 1^stHalfFY11 Results – Rs. 99.76

Current P/E based on Annualised FY11 EPS – 4.96

Highlights of Q2 & First Half Results of Riddhi Siddhi :

Riddhi Siddhi Gluco Biols Ltd. reported its Q2 FY11 results on 13^th October 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 1^stHalfFY11-numbers :

1. Riddhi reported a topline of Rs. 206.52 cr. in Q2Fy11 which translates into a YoY growth of 25.49 % and a QoQ growth of 1.85 % . This topline of Q2FY11 is achieved inspite of closure of company’s Gokak Plant which remianed completely shut for 14 days in Q2 due to a KPCB order and attained normal operations 7 days after the reopening of plant which entails to a normal unoperational period of 21 days for the plant. Minus this hiccup, topline for Q2 could have been higher by atleast 22-25 cr.
2. Riddhi reported a topline of Rs. 409.28 cr. in 1^stHalfFY11 (April-September) which translates into a YoY growth of 27.54 % but a sequential decline of 3.66 % over 2^ndHalfFY10 (October-March). Here, two important things need to be noted. First- historically, 1^st Half is the leanest period for the company with 2^nd Half always much better than 1^st Half; Second- if company would have not faced Gokak plant closure, its 1^st Half this fiscal would have been higher than 2^nd Half of last fiscal which is a sign of robust demand scenario prevalent in the marketplace for company’s products.
3. Riddhi reported EBITDA of Rs. 39.87 cr. in Q2FY11 which translates into a YoY growth of 70.24 % but a QoQ decline of 11.34 %. EBITDA margins expanded by a whopping 506 basis points YoY but shrunk 287 basis points QoQ. One important thing that needs to be noted here is that higher the contribution from value-added products higher will be the EBITDA margins and Q1FY11 was an exceptional quarter which experienced much higher contribution from value-added products. With introduction of few high-margin value-added products in polyols & baby-food segments planned to be launched in second half of FY11, EBITDA margins similar to Q1FY11 levels can very well be expected in Q4FY11.
4. Riddhi reported EBITDA of Rs. 84.85 cr. in 1^stHalfFY11 (April-September) which translates into a YoY growth of 101.45 % and a sequential growth of 9.11 % over 2^ndHalfFY10 (October-March). Sequential rise in EBITDA on a half-yearly basis inspite of closure of company’s largest plant in 1^stHalfFY11 as also the fact that 1^st Half is the leanest period of operation is a heartning thing and signals robust margin scenario ahead in 2^nd Half of FY11.
5. Riddhi reported an Operating Profit (EBIT) of Rs. Rs. 34.99 cr. in Q2FY11 which translates into a YoY growth of 83.52 % but a QoQ decline of 11.64 %. Operating Profit Margin (OPM) expanded by a whooping 532 basis points YoY but shrunk 265 basis points QoQ. Again, QoQ shrinkage in operating margins is because, higher the contribution from value-added products higher will be the Operating margins and Q1FY11 was an exceptional quarter which experienced much higher contribution from value-added products. With introduction of few high-margin value-added products in polyols & baby-food segments planned to be launched in second half of FY11, Operating margins similar to Q1FY11 levels can very well be expected in Q4FY11.
6. Riddhi reported Operating Profit (EBIT) of Rs. 74.23 cr. in 1^stHalfFY11 (April-September) which translates into a YoY growth of 127.07 % and a sequential growth of 17.58 % over 2^ndHalfFY10 (October-March). Sequential rise in Operating Profit on a half-yearly basis inspite of closure of company’s largest plant in 1^stHalfFY11 as also the fact that 1^st Half is the leanest period of operation is a heartning thing and signals robust margin scenario ahead in 2^nd Half of FY11.
7. Riddhi reported a Net Profit of Rs. 24.60 cr. in Q2FY11 which translates into a YoY growth of 168.85 % but a QoQ decline of 10.22 %. Net Profit Margins (NPM) have expanded by a whooping 635 basis points YoY but shrinked 159 basis points QoQ. NPM is largely influenced by contribution of value-added products as well as interest costs. Company has initiated an exercise from Q1FY11 to restructure its debt in such a way that interest costs can be reduced to minimum. Already interest & financial charges have reduced considerably in Q1 as well as Q2 and going forward this trend is expected to continue. Historically, not a single quarter has seen a double digit net profit margin for the company and to post a double digit NPM for two consecutive quarters is an extremely healthy sign which will go a long way in ensuring robust cash generation as well as provide ammunition for future growth.
8. Riddhi reported Net Profit of Rs. 55.77 cr. in 1^stHalfFY11 (April-September) which translates into a YoY growth of 290 % and a sequential growth of 124.07 % over 2^ndHalfFY10 (October-March). Such a huge sequential rise in Net Profit on a half-yearly basis inspite of hiccups like closure of company’s largest plant in 1^stHalfFY11 as also the fact that 1^st Half is the leanest period of operation is a sign of beggining of a boom cycle for the company which has coincided with such a scale of operation that it will catapult the company into big league in a very short period of time.
9. For Q2FY11, Riddhi reported an Earning Per Share (EPS) of Rs. 21.99 whereas for 1^stHalfFY11 EPS stands at Rs. 46.59 excluding extraordinary items and Rs. 49.88 including extraordinary items.
10. In Q2, the company paid Rs. 42.13 cr. as advance to suppliers of Wind Mill Infrastructure for its proposed foray into Wind Power Generation sector. Riddhi is planning to set-up 30-33 MW Wind Power Plants at Gujarat, Maharashtra & Tamilnadu and the plants are expected to be operational by March 2011. This foray is expected to reduce tax outgo significantly which will again add to bottomline in FY11 & FY12.

Scenario for Riddhi Siddhi post Robust Q2FY11 Results – Emergence of a Shrewd Leader :

While predicting the scenario for Riddhi Siddhi post Q1FY11 results, we had started with the proverb “Well Begun is Half Done”. The company met and even exceeded our expectations by surpassing entire FY10 Net Profit by quite a wide margin in first half itself. Hence, in Q2FY11, Riddhi has not ‘Half Done’ but ‘Fully Done’ and went ahead with a vengeance. This is the quality of a real leader – to talk specifically, a real ‘shrewd’ leader which not only knows how to maintain its leadership position in the operating sector but has the skill to exploit completely the favourable conditions of the operating sector to its full advantage. Hence, we begin our prediction of scenario for Riddhi post robust Q2FY11 results with the tag line “Emergence of a Shrewd Leader“. The scenario can very well get clear once we look from the following angles :

1. Robust Q2FY11 results posted by Top 4 players of the sector will compel PMS Managers entry into the sector
2. Impending Deal With Roquette as well as launch of New Products in Q3FY11 will act as a Trigger to significantly rerate the company
3. Power Sector Foray – a very shrewd Decision
4. Upward Revision in Future Financial Projections
5. Current Valuation

   Conclusion

Let us discuss each aspect in detail as follows :

1. Robust Q2FY11 results posted by Top 4 playes of the sector will compel PMS Managers entry into the sector :

It is not just Riddhi which is registering robust financials quarter after quarter. All the Top 4 companies of Indian Starch & Starch Derivatives sector including Anil Ltd., Sukhjit Starch and Gujarat Ambuja Exports (Maize Processing Division) are growing their topline and bottomline handsomely each quarter. The demand scenario of the sector is so promising that even the smaller players like Gayatri Bio, Universal Starch and English Indian Clays (Starch Division) are growing at a good pace. Here, we have not considered chinese counterparts which are also growing at a rapid pace each quarter.

Hence, it presents a case of global boom in starch & starch derivatives sector to which India is a significant participant as it is grossly underpenetrated. When you have such a global boom in an unpenetrated sector and that too when the sector has a concentrated structure, its companies can’t trade in lower single digit P/Es for quite long. The underownership factor will start catching up fast and because of limited avenues available for exposure to the sector because of its concentrated structure, shrewd fund managers will have no option but to start accumulating top 4 players of the sector.

PMS managers will be the first one to start such accumulation phase as they have much lower restrictions as also much higher expectations from their clients. To meet such expectations amidst bullish markets, PMS managers will now, from Q3FY11 onwards, start accumulating the top 4 companies of Indian Starch & Starch Derivatives sector in which Riddhi will occupy the prominent position amongst all its peers because of its leadership position as well as its relatively lower valuation. Recent run-up in Anil, Sukhjit and GAEL has made them relatively expensive as compared to Riddhi and nowhere in the world a leader of a booming sector can trade at a pathetically low p/e of 5. Hence, PMS managers’ entry from Q3 onwards is inevitable which is evident from the positive reports of leading broking houses like KR Choksey, Anagram, MF Global and SP Tulsian post Q2 number declaration by Riddhi. A company which was not on radar of many in FY10 has suddenly seen 4 simultaneous positive reports from leading broking houses of India which depicts the start of a discovery phase for Riddhi which will get into full swing by Q4FY11 when discounting to likely FY12 numbers will start.

1. Impending Deal With Roquette as well as launch of New Products in Q3FY11 will act as a Trigger to significantly rerate the company :

By December 2010, two positive milestones are likely to be achieved by Riddhi.

First – Launch of New Value-Added products in Baby Food segment as well as Polyols segment..

Second – A JV deal with Roquette, the world’s third largest cornstarch player.

Launch of new promising products will help Riddhi sustain high margins in rest of FY11 as well as FY12 while deal with Roquette will ensure that its topline grows significantly in the years ahead. Each development is likely to rerate the stock significantly with the later development making Riddhi one of Asia’s prominent Starch & Starch Derivatives sector player.

1. Power Sector Foray – a very shrewd Decision

In Q2, Riddhi’s management decided to foray into renewable energy segment and the pace of foray was so fast that within one month of shareholders’ approval, it paid Rs. 43 cr. as advance to wind mill infrastructure suppliers to commercialise the project by March 2011.

To give details of the foray, Company plans to set-up 30-33 MW windmills at Tirunelveli (TN), Pachav (Gujarat) & Satara (Maharastra). Planned Investment in this project is around Rs. 250 cr. which will be raised via 75% debt and the rest from internal accruals. There are no present plans of setting up a SPV for this project and it will be directly under Riddhi Siddhi Gluco banner. Project is likely to be commisioned by March 2011. Agreement is to be structured in such a way that suppliers will do the entire job including acquisiton of land, erection, maintenance and agreement with local SEBs. The net return on the project is expected to be around 12% and after deducting the interest cost of 8%, company should get around 3 to 4% returns without much work and land bank also gets appreciated in future.

This foray is meant for de-risking purpose and tax-saving purpose. Company wants to retain most of the robust cash likely to get generated out of the main business of the company to fuel future growth and for that it is foraying into power sector. Management’s contention is that although power project is likely to add only 25 cr. to the topline but the advantage for the company is that 80 % of 200 to 250 cr. investment that they will do in this project can be claimed back as depreciation. So, it is like, company is not paying the tax to the Government now and utilising that money for some investment which will start generating revenues immediately. By the time company is compelled to start making the tax payment, the new business would have generated enough revenues plus the assets. Company is adopting a shrewd policy to emerge as one of the most consistent as well as fastest growing Mid-Cap Company of India.

1. Upward Revision in Future Financial Projections :

Robust Q2 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 96.10 128.8 177.6

After taking into account likely equity dilution in next two years, EPS for FY11 works out to be Rs. 86.34, for FY12 at Rs. 101.20 and that for FY13 at Rs. 118.40.

(5) Current Valuation :

At the current market price of Rs. 495, Riddhi is trading at a P/E of just 5.73 based on expected current FY11 numbers, at a P/E of just 4.89 based on expected FY12 numbers and at a P/E of just 4.18 based on expected FY13 numbers.

To add, Riddhi currently trades at a market-cap-to-sales of just 0.52 based on expected current FY11 topline of Rs. 1056 cr.,; at a market-cap-to-sales of just 0.46 (after taking into account equity dilution) based on expected FY12 topline of Rs. 1380 cr. and at a market-cap-to-sales of just 0.39 (after taking into account equity dilution) based on expected FY13 topline of Rs. 1870 cr.

Conclusion :

We are a fortunate witness of start of a ‘Boom Phase’ for Indian Starch & Starch Derivatives Sector and the Sector’s concentrated structure as well as nascent status is working to our advantage by giving us an opportunity to invest in it at our leisure as valuations are inching up only gradually and not vertically. However, this gradual rise in valuations is likely to now sustain only for a short period of time as one full fiscal of healthy topline growth accompanied by robust cash generation at net level and the prospect of continued topline & bottomline growth for next fiscal will compel the conclusion of gradual-rise phase and will initialise a vertical-rise phase for the sector from Q4FY11 onwards. Declaration of Q3FY11 results by top 4 companies of the sector could be the maximum time-limit untill which fund managers can continue with current accumulation-phase in the sector after which the ‘me-first’ attitude will start which will take the valuation of the sector to a respectable double digit p/e level based on FY11 earnings from the current grossly undervalued single digit p/e level.

This has to happen because its not just that valuation of the sector needs to come at a respectable level but they also need to catch-up with international run-up in prices of the players of the same sector. Lets cite here two examples, – first – of a company which is the world leader of the sector and second – a company whose business model is a replica of top 4 Indian companies especially, the leader Riddhi.

The world leader which we are talking about is Corn Products International – over the last 3 months its share price has run-up 34 % and is currently trading at all time highs.

The other company which we are talking about is Asia Bio-Chem Group, a chinese company which has almost the same business model as Riddhi with similar product lines and has the topline similar to that of Riddhi. Over the span of last 3 months its share price has run-up 40 % and is on verge of breaching all time highs.

Contrary to these, if we consider Riddhi, then its share price over the span of same last 3 months has run-up by only 28 % inspite of it trading at much lower p/e, mcap-to-sales as well as other valuation matrix relative to both the international companies. This disparity can’t sustain for too long as Indian Leader has to catch-up with international peers, if not with world leader then atleast with chinese counterpart.

Also, recent run-up in prices of Riddhi’s Indian peers has made Riddhi much more cheaper as compared to them and nowhere in the world a leader with double the capacity of closest peer can trade at a cheaper valuation than smaller peers. Lets take the simple example of 1^stHalfFY11 Annualised EPS and pitch Riddhi’s peers Anil Ltd. and Sukhjit Starch against Riddhi’s valuation based on p/e commanded by each one of them based on annualised 1^stHalfFY11 EPS.

Anil Ltd. Is trading at a p/e of 8.44 based on annualised EPS of 1^stHalfFY11 while Sukhjit Starch is trading at a p/e of 6.18 based on its annualised 1^stHalfFY11 EPS.

To our surprise, Riddhi is currently trading at a p/e of just 5.31 based on its 1^stHalfFY11 Annualised EPS excluding extraordinary items and at a p/e of just 4.96 if we consider its annualised EPS by accounting extraordinary gains. A company which is a leader of the sector with topline more than double that of Anil Ltd. & Sukhjit Starch is trading at a steep discount to them…. This is an anomaly which has to get corrected sooner rather than later and so if we look at any angle – whether the valuation and run-up of chinese counterpart with similar topline or valuation commanded by Indian counterparts with half the topline that of Riddhi, fund managers’ safest choice for exposure to the booming Starch & Starch Derivatives sector has to be Riddhi Siddhi Gluco.

Coupled with these, when we consider the robust performance of each of the player of the sector amidst the leanest period of operation for them being the first half, a rerating of the sector is evident and so Riddhi will be at a double benefit wherein it will get advantage of the sectoral rerating as well as its undervaluation-rerating over which underownership factor will weigh heavily which will enable a vertical rise in its valuations on spark of a smallest trigger.

To conclude, we still maintain the “Safest Buy” status for Riddhi Siddhi with a upward revision in our previous target price of Rs. 615 to Rs. 740 at which it will trade at a p/e of just 8.57 based on FY11 conservatively expected EPS of Rs. 86.34 and at 0.77 marketcap-to-sales based on expected FY11 topline of Rs. 1056 cr. We have refrained from giving a base-price range in this report as we had done so in our last reports because we feel that significant rerating of the company is round the corner and could surely happen before the declaration of Q3FY11 numbers. The current gross undervaluation of the company is unsustainable and so depiction of a base-price-range will deprive of an opportunity of investment into this multibagger company once the rerating is in place.