“Ruchi Soya is giving me sleepless nights. How could I miss it? Now I am talking about it with a deep sense of regret,” veteran investor Shankar Sharma said on CNBC-TV18 last week. But before investors start looking for an entry point here are some facts.

The latter made the better offer, paying the banks around 48% of their debt. All told, Patanjali group infused 4300 cr into Ruchi Soya via equity, debt and preference shares. As part of the restructuring the equity of the previous shareholders were written down to zero.

Ruchi Soya was taken over by Patanjali Ayurved on December 18 through the bankruptcy process; Ruchi Soya owed bankers close to Rs 9,300 crore and was dragged to the National Company Law Tribunal (NCLT), Standard Chartered Bank and HSBC. Among the bidders for the company were Adani Wilmar and Patanjali Ayurved; the latter made the better offer, paying the banks around 48 percent of their debt. All told, Patanjali group infused Rs 4,300 crore into Ruchi Soya via equity, debt and preference shares. As part of restructuring the equity of the previous shareholders were written down to zero.

Currently 99.03 percent (about 29 crore shares) of Ruchi Soya are held by 15 Patanjali group entities. These shares are locked in for 3 years. The remaining 0.97 percent (about 28 lakh shares) is held by 82,000 public shareholders. Patanjali, under the NCLT resolution plan and the Securities and Exchange Board of India (SEBI) rules has to increase the public shareholding to 10 percent in 18 months of its relisting. (The shares were listed after the NCLT process on January 27, 2020.) Further minimum public shareholding has to reach 25 percent in three years. So here’s why Ruchi Soya shares have been climbing since January 27:

1. 99.03 percent of the shares can’t be traded. These promoter shares are locked in for thee years

2. The floating stock is low and the incessant circuits on the stock are because the average daily volume is about 10,000-15,000 shares

3. The company on relisting had fundamental reasons to be far better than the pre- NCLT Ruchi Soya. The restructuring had knocked off Rs 9,300 crore of its old debt, and the new promoters had infused equity via common and preference shares. The balance sheet was thus much lighter on debt and much healthier on equity. It needs to be noted that despite the steep reduction in debt and infusion of Rs 115 crore by Patanjali to restart the company, it still made an operational loss of Rs 37 crore in the quarter ended March 31, 2020. For the full year ended March 31, however, the company reported a massive profit of Rs 7,672 crore, entirely because of exceptional income of Rs 7,447 crore, which (as the company explained in point 4 of the notes to accounts) is because of the debt and equity restructuring.

4. While COVID-19 was partly responsible for the operational loss in Q4, it is unlikely that the exponential rise in the stock price from Rs 16.10 on January 27 when it listed to Rs 1,519 at close on Friday June 26 is because of the future growth prospects of the company’s vanaspati and edible oils business. Traders are clearly banking on the hope that Patanjali may reverse merge Patanjali Ayurved with Ruchi Soya.

The question to ask now is whether Ruchi Soya merits its current valuation of Rs 44,592 crore, a shade higher than that of Marico at RS 44,495 crore, even if a merger with Patanjali Ayurved is on the cards. Patanjali’s owner Baba Ramdev has been quoted in newspapers as saying that for the year-ended March 2020 the combined revenues of Patanjali (Rs 12,000 crore) and Ruchi Soya (Rs 13,000 crore) is Rs 25,000 crore and that the two will together hit revenues of Rs 50,000 crore to Rs 1 lakh crore in the next five years. He has also reportedly spoken of a combined revenue target of Rs 35,000-40,000 crore for the current fiscal.

Statements like these give more fodder to the reverse merger hopes. But even assuming there is a merger, can revenues alone justify huge market caps. Patanjali Ayurved reported revenues of Rs 3,562 crore for the first half of FY20, but the company did not share a net profit figure.

Also, while Rushi Soya made revenues of Rs 13,117 crore in FY20 its operational profits were only Rs 210 crore and it reported an operational loss in Q4. For the retail investor, there isn’t enough data in the public domain to justify a market cap of Rs 44,592 crore.

Even if a reverse merger is likely, one doesn’t know the terms of that merger, nor does one know enough to forecast earnings. Consequently, one can’t be sure if Ruchi Soya at the current juncture is a good candidate for a retail investor (assuming the upper circuits stop sometime soon).

However, Ruchi Soya is definitely a good candidate for SEBI to ask some tough questions of its promoters and investigate on what’s driving the stock higher on such abysmal volumes.

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