Ruchi Soya Industries, the stock that has been in the headlines in recent weeks thanks to its colossal upmove. After getting relisted on the bourses at ~Rs. 17 on January 27th, 2020 the stock has rallied 8,841% in a matter of five months. From undergoing corporate insolvency process in 2019 to becoming one of the top companies in terms of market cap (~Rs. 45,000 cr).
So the big question is what has led to the rally?
Before we jump into this, let’s recap a bit. Starting its operations in 1,986, Ruchi Soya offers a wide range of food products that include healthy cooking oils, nutritional soya foods, top-grade vanaspati and bakery fats. Over the decades, it has emerged as the largest player maker of edible oil. However, working on thin margins, long working capital cycle and high borrowings meant that any negative factor could de-rail the company. And catastrophe struck in 2016, the global prices of castor seed (key source to make castor oil) witnessed an unprecedented fall, which led to the troubles for the company as it actively traded the commodity.
So much so, that SEBI barred Ruchi Soya from the securities market for rigging castor seed futures. This coupled with falling revenues in other business (due to erratic monsoon and other factors) led to a big blow on the company which was already debt-ridden. As a result, inability to re-pay the debt of ~Rs. 9,000 cr, the lenders dragged the company into insolvency resolution under India’s new bankruptcy law in 2017. There emerged two potential buyers to acquire debt-ridden Ruchi Soya – Adani Wilmar and Patanjali. While Adani bid the higher amount, it pulled out off the race and Patanjali emerged as a sole contender.
Patanjali would infuse Rs. 4,350 cr
The nuances of the deal were decided and Patanjali would infuse Rs. 4350 cr through a mix of equity and preference share. The lenders had to take a haircut of nearly 60%. Coming to equity shareholders, here is the interesting part; the existing shareholders holding took a haircut of as much as 99%. This means that if you hold 100 shares in the company before restructuring, you would get one share post it. However, the re-listing price was ~Rs. 17 (v/s Rs.3.4 before restructuring) which means that the total value was reduced to 5-6%.
Below are pre and post capital reduction and consolidation of equity of the company. Considering the sharp reduction in equity, the existing shareholders would have still made money (if held till June 26) as the quoted price as on November 2019 was ~Rs. 3 (3*100 = 300 Rs ) which is now equal to 1 share of Ruchi Soya i.e price of ~Rs. 1,500. Still a nearly 500% gain.
Source: Snippet from Ruchi Soya Filing
Three main reasons for the rally
1. Restructuring bodes well for Ruchi Soya – The infusion of capital by the Patanjali shapes the balance sheet in a much better position than what it was pre-structuring. This gives investors the confidence over the sustainability and growth of the business.
2. Low float – At present, the promoter group owns 99.03% (Patanjali 98.87%) of the company which are in lock-in for 3 years. There are only 28,59,318 shares which are available for trading in the open market. These are held by 82,000 shareholders. The upmove has been on a very thin volume with average trading volume at 10-15k shares. Therefore, this is a classic example demand and supply mismatch meaning that the demand for its share is more whereas supply is limited leading to a sharp surge.
3. Possible merger with ‘Patanjali Ayurved’ – This is one of the prime reasons behind the astounding upmove in Ruchi Soya. The buyout by Patanjali has raised hopes of a possible merger (nothing is confirmed yet) between Ruchi Soya and Patanjali Ayurved an entity whose revenue is Rs. 12,000 cr. And, Baba Ramdev has quoted to one of the newspapers that both these companies would hit revenue of Rs. 50,000 cr to Rs. 1 lakh cr in the next five years.’
While the two of the above reasons are fundamentally positive, the financial performance of the company is not very encouraging. Therefore, the upmove of this scale definitely warrants caution.