Re: Riddhi Siddhi Gluco Biols Ltd. - A Multibagger in the Making - A Research Note
Firstly, thanks for your kind words. Now, regarding your concerns, except first which I will keep pending as I am still to receive and analyse annual report 2010 of Riddhi, I will answer all of them 1-by-1 :
2) In history of last few years, company reported Net Profit margin of
15% in this quarter. Can you please elaborate in detail of all reasons
for this whopping increase in NPM? Is this NPM sustainable?
Ans. - In my Q1FY11 analysis of Riddhi I have already elaborated on the reasons for such high NPM so you can refer that but still, I will discuss them briefly here :
(a) A marked shifting of sector-curve in favour of demand wherein supply is far less than demand. This is because you take any end-user industry - Paper, Textile, F&B or Pharma - each one is growing and starch & starch derivatives are finding wider application in each industry every passing day. In addition to this, sugar prices are rising and so starch & starch derivatives are used extensively as a substitute to sugar in many applications. Hence, it is a clear case of demand far outstripping supply.
(b) Shift towards value added products which are fetching higher margins.
(c) Conclusion of investment phase by commisioning of 30 % additional capacity at pantnagar plant which has enabled achievement of higher operating efficiency.
Now, with rgds. to your query as to whether such higher NPM is sustainable, I will say we need to be conservative, and I think a NPM of 8.5-9.5 % is easily achievable by company in FY11.
3) Some of competitors like GAEL, Sukhjit Starch, etc has very good
asset turnover. Asset turnover of Riddhi siddhi is 1.7 in FY'2010
which is highest in last 6 years. Now, Asset turnover of 1.7 is "low"
compared to competitors who is enjoying high assset turnover. What are
reasons for this low asset turnover? What are steps management taking
to improve this? What kind of asset turnover does company see to
achieve in future?
Ans.- As you must be aware, asset turnover ratio is an indication of what kind of margins a company is enjoying. I think you have not read my analysis report on starch sector well. If you study it carefully then you will find that Riddhi has consistently enjoyed relatively higher EBIDTA and OPM over last 10 years. If a company is working with healthy margins, then its asset turnover ratio will definetly be lower. Since all of Riddhi's competitors like Sukhjit, Anil, GAEL enjoy relatively lower margins than Riddhi so they have a higher asset turnover ratio at 1.97, 2.2, 3.1 respectively as compared to Riddhi's 1.66. However,one most important thing to note here is that although Riddhi has lowest asset turnover ratio, its depreciation expense and tax expense relative to sales is considerably higher than that of all its competitors like Sukhjit, Anil, GAEL which reflects high quality earnings reported by Riddhi.
4) Return on Capital Employment is varying from 10% to 17% since last
6 years. I preassume that company will be paying 10%+ interest on
debt. Hence cost of capital is 10% and company is earning less than
17% [RoCE of < 17%]. Why management is not able to use capital
efficiently and generate good return on capital?
Ans.- Already in my reply to comparison of Riddhi with GAEL I have replied on this issue in detail so you can refer that. Still, I will discuss this point briefly here. You need to understand one thing that when a company has to grow exponentially by anticipating demand, it has to forego capital management for a while. First, it needs to set-up the capacities to such an extent that its competitors will have to spend years to reach its size and second, it has to improve utilisation of its capacities to such an extent that it will start deriving relatively higher margins out of them. Once these two things are in place, it enables extremely high cash generation in a boom phase which itself brings in capital efficiency. Investment phase is over for Riddhi with the commisioning of 30 % additional capacity at pantnagar plant and utilisation of all its capacities other than the latest one has reached 90 % in Q1FY11. A glimpse of higher cash generation is evident in Q1FY11 results when it achieved net profit of 27.40 cr. (excluding extraordinary gain). Hence, going forward one can see better capital efficiency.
5) Recently company announced in BSE about closure of Gokak plant.
What's manaegment envisage on how long will it take to fix problem and
re-open plant ?
Ans. - It will mean a per day revenue loss of approx. 1.5 cr. for Riddhi. The additional capacity at pantnagar commisioned in june10 will i think be utilised for critical clients.
KPCB order is part and parcel of business and has even happened one time before. Riddhi consumes 15 % of the entire corn produced by Karnataka annually and so long closure of plant will significantly impact farmers as well as rural economy. No state govt. can afford this and i think the matter should be resolved soon.
Still, the sooner the controversy gets over the better for the company.
Hope all your queries are answered to your satisfaction.
Rgds.
Mahesh
Firstly, thanks for your kind words. Now, regarding your concerns, except first which I will keep pending as I am still to receive and analyse annual report 2010 of Riddhi, I will answer all of them 1-by-1 :
2) In history of last few years, company reported Net Profit margin of
15% in this quarter. Can you please elaborate in detail of all reasons
for this whopping increase in NPM? Is this NPM sustainable?
Ans. - In my Q1FY11 analysis of Riddhi I have already elaborated on the reasons for such high NPM so you can refer that but still, I will discuss them briefly here :
(a) A marked shifting of sector-curve in favour of demand wherein supply is far less than demand. This is because you take any end-user industry - Paper, Textile, F&B or Pharma - each one is growing and starch & starch derivatives are finding wider application in each industry every passing day. In addition to this, sugar prices are rising and so starch & starch derivatives are used extensively as a substitute to sugar in many applications. Hence, it is a clear case of demand far outstripping supply.
(b) Shift towards value added products which are fetching higher margins.
(c) Conclusion of investment phase by commisioning of 30 % additional capacity at pantnagar plant which has enabled achievement of higher operating efficiency.
Now, with rgds. to your query as to whether such higher NPM is sustainable, I will say we need to be conservative, and I think a NPM of 8.5-9.5 % is easily achievable by company in FY11.
3) Some of competitors like GAEL, Sukhjit Starch, etc has very good
asset turnover. Asset turnover of Riddhi siddhi is 1.7 in FY'2010
which is highest in last 6 years. Now, Asset turnover of 1.7 is "low"
compared to competitors who is enjoying high assset turnover. What are
reasons for this low asset turnover? What are steps management taking
to improve this? What kind of asset turnover does company see to
achieve in future?
Ans.- As you must be aware, asset turnover ratio is an indication of what kind of margins a company is enjoying. I think you have not read my analysis report on starch sector well. If you study it carefully then you will find that Riddhi has consistently enjoyed relatively higher EBIDTA and OPM over last 10 years. If a company is working with healthy margins, then its asset turnover ratio will definetly be lower. Since all of Riddhi's competitors like Sukhjit, Anil, GAEL enjoy relatively lower margins than Riddhi so they have a higher asset turnover ratio at 1.97, 2.2, 3.1 respectively as compared to Riddhi's 1.66. However,one most important thing to note here is that although Riddhi has lowest asset turnover ratio, its depreciation expense and tax expense relative to sales is considerably higher than that of all its competitors like Sukhjit, Anil, GAEL which reflects high quality earnings reported by Riddhi.
4) Return on Capital Employment is varying from 10% to 17% since last
6 years. I preassume that company will be paying 10%+ interest on
debt. Hence cost of capital is 10% and company is earning less than
17% [RoCE of < 17%]. Why management is not able to use capital
efficiently and generate good return on capital?
Ans.- Already in my reply to comparison of Riddhi with GAEL I have replied on this issue in detail so you can refer that. Still, I will discuss this point briefly here. You need to understand one thing that when a company has to grow exponentially by anticipating demand, it has to forego capital management for a while. First, it needs to set-up the capacities to such an extent that its competitors will have to spend years to reach its size and second, it has to improve utilisation of its capacities to such an extent that it will start deriving relatively higher margins out of them. Once these two things are in place, it enables extremely high cash generation in a boom phase which itself brings in capital efficiency. Investment phase is over for Riddhi with the commisioning of 30 % additional capacity at pantnagar plant and utilisation of all its capacities other than the latest one has reached 90 % in Q1FY11. A glimpse of higher cash generation is evident in Q1FY11 results when it achieved net profit of 27.40 cr. (excluding extraordinary gain). Hence, going forward one can see better capital efficiency.
5) Recently company announced in BSE about closure of Gokak plant.
What's manaegment envisage on how long will it take to fix problem and
re-open plant ?
Ans. - It will mean a per day revenue loss of approx. 1.5 cr. for Riddhi. The additional capacity at pantnagar commisioned in june10 will i think be utilised for critical clients.
KPCB order is part and parcel of business and has even happened one time before. Riddhi consumes 15 % of the entire corn produced by Karnataka annually and so long closure of plant will significantly impact farmers as well as rural economy. No state govt. can afford this and i think the matter should be resolved soon.
Still, the sooner the controversy gets over the better for the company.
Hope all your queries are answered to your satisfaction.
Rgds.
Mahesh
Hello Maheshi,
First of all I would like to thanks for great analysis report on Riddhi Siddhi.
Since you are following this company closely, I was wondering if you have idea on couple of following concerns that I have.
1) They have deferred Tax of almost ~34 crores as on FY 2010. Any idea why this taxes are not paid?
2) In history of last few years, company reported Net Profit margin of
15% in this quarter. Can you please elaborate in detail of all reasons
for this whopping increase in NPM? Is this NPM sustainable?
3) Some of competitors like GAEL, Sukhjit Starch, etc has very good
asset turnover. Asset turnover of Riddhi siddhi is 1.7 in FY'2010
which is highest in last 6 years. Now, Asset turnover of 1.7 is "low"
compared to competitors who is enjoying high assset turnover. What are
reasons for this low asset turnover? What are steps management taking
to improve this? What kind of asset turnover does company see to
achieve in future?
4) Return on Capital Employment is varying from 10% to 17% since last
6 years. I preassume that company will be paying 10%+ interest on
debt. Hence cost of capital is 10% and company is earning less than
17% [RoCE of < 17%]. Why management is not able to use capital
efficiently and generate good return on capital?
4) Recently company announced in BSE about closure of Gokak plant.
What's manaegment envisage on how long will it take to fix problem and
re-open plant ?
First of all I would like to thanks for great analysis report on Riddhi Siddhi.
Since you are following this company closely, I was wondering if you have idea on couple of following concerns that I have.
1) They have deferred Tax of almost ~34 crores as on FY 2010. Any idea why this taxes are not paid?
2) In history of last few years, company reported Net Profit margin of
15% in this quarter. Can you please elaborate in detail of all reasons
for this whopping increase in NPM? Is this NPM sustainable?
3) Some of competitors like GAEL, Sukhjit Starch, etc has very good
asset turnover. Asset turnover of Riddhi siddhi is 1.7 in FY'2010
which is highest in last 6 years. Now, Asset turnover of 1.7 is "low"
compared to competitors who is enjoying high assset turnover. What are
reasons for this low asset turnover? What are steps management taking
to improve this? What kind of asset turnover does company see to
achieve in future?
4) Return on Capital Employment is varying from 10% to 17% since last
6 years. I preassume that company will be paying 10%+ interest on
debt. Hence cost of capital is 10% and company is earning less than
17% [RoCE of < 17%]. Why management is not able to use capital
efficiently and generate good return on capital?
4) Recently company announced in BSE about closure of Gokak plant.
What's manaegment envisage on how long will it take to fix problem and
re-open plant ?