Q2FY11 Likely Numbers,Deal with Roquette - Management Meet Note Riddhi Siddhi- Oct.10
Provided below are the Takeaways from the Management-Meet of Riddhi Siddhi Gluco Biols Ltd. [ BSE 524480 ]
Post-declaration of Robust Q1FY11 numbers & on Verge of Declaration of Q2FY11 numbers as well as Recent Announcement by the company regarding its foray into Power Sector, my colleague met with Mr. Mukesh Chowdhary, DGM (Finance) & Compliance Officer of Riddhi Siddhi last week and held detailed discussions with him on various points. Also, my another fellow analyst had a brief discussion with M.D. of Riddhi Siddhi Mr. Ganpatraj Chowdhary on 1st October 2010 and quizzed him regarding likely Q2 numbers as well as future growth path for the company. Both, Mr. Ganpatraj & Mr. Mukesh were very frank & transparent in their talks and my colleague & fellow analyst came quite satisfied from the discussions.
Given below are the broad takeaways from both the discussions which clarifies many of the issues Financial Fraternity members had regarding the company and gives a much clearer picture on likely future growth of the company :
Points Covered :
(1) Present Relationship with Roquette Freres, world's 3rd largest CornStarch Player, and likely Future Direction of Such Relationship post-transfer of all of the company's running Plants into a Wholly Owned Subsidiary
(2) Likely Q2 Numbers & Effect of Gokak Plant Closure on Q2 Numbers
(3) Likely FY11 Topline & EBITDA
(4) Contribution by Additional Capacity of Pantnagar Plant
(5) Impact on the Company of Likely Rise in Raw Matrial (Corn) Prices
(6) Likely Impact on the Company of Likely Fall in Tapioca Starch Prices which is a Competitive Product
(7) Capacity Expansions Planned
(8) Servicing of Existing Debt & Likely Future Cash-Raising by the Company
(9) Likely Export Scenario for the Company
(10) Edge over Competitors
(11) Likely Growth in Next 3 Years
(12) Details of Foray into Power Sector
(13) Inorganic Growth
(14) Conclusion
Covered below in detail are each of the above-stated points and Riddhi Siddhi management's take on each of the point :
Present Relationship with Roquette Freres, world's 3rd largest CornStarch Player, and likely Future Direction of Such Relationship post-transfer of all of the company's running Plants into a Wholly Owned Subsidiary :
Current Relationship with Roquette is helping company immensely in terms of Upgradation of Technology, Upgradation of Process Parameters and Maintaining International Product Standards. Company is actively exploring strentghning of relationship with Roquette in a different way and for this, it has recently formed a wholly owned subsidiary in which all the running-plants of the company will get transferred which will pave the way for an active joint venture with Roquette. In all possibilities, promoters will not give the full control of the subsidiary company. The discussions are still on regarding the valuation as well as the percentage of holding for the French Company (Roquette) in the subsidiary company and it is expected to be finalised before the end of this calendar year (December 2010).
The main reason for pushing hard for strentghning of relationship with Roquette is French Company's worldwide leadership in Polyols segment and Riddhi sees Polyols as holding tremendous potential for India as India is one of the world's largest diabetic centre and there are hardly few quality manufacturers of Polyols in India. If Roquette agrees to bring Polyols product to India jointly with Riddhi then it could be a game changer for Riddhi. Riddhi management is working hard to enter into & inroducing Polyols product in FY11 itself and future high-margin-sustainability of the company will largely depend upon how soon it is able to enter polyols segment.
Likely Q2 Numbers & Effect of Gokak Plant Closure on Q2 Numbers :
Company is likely to declare its Q2FY11 numbers by 3rd week of October 2010. Utilisation was exceedingly good in Q1, and in Q2 same sceanario is expected. During Q2FY11, Gokak Plant of the company, which contributes almost 50 % to the revenues of the company, faced a small hiccup because of an order by KPCB and remained close for 21 days. Inspite of this closure, management has indicated that Q2 topline is expected to be almost same as Q1. Good Monsoons and Expected Bumper Crop of Corn and Riddhi's close proximity to corn-growing areas will aid in maintaining profitability at Q1 level.
Likely FY11 Topline & EBITDA :
Based on current traction, management expects FY11 Topline to be between Rs. 950-1000 cr. with an EBITDA of 16-17 %. Based on pricing scenario currently prevalent and expected,, FY11 EBITDA, in quantitative terms, is expected to be minimum 150 cr. +. With the addition of the new capacity at Pantnagar Plant in current fiscal, the depreciation could be 28 cr. on yearly basis and interest is expected to be around 25 cr on yearly basis. 70 % of the revenues of the company are likely to accrue from FMCG & Pharma industries. In FMCG, particularly Food Segment, all MNC clients of the company are likely to grow by 20-25 % which will assist in Riddhi maintaining growth momentum going forward as alongwith its clients there is no reason why company should not grow.
Second Half of FY11 is likely to be far ahead of First Half in terms of both, revenues & profitability.
Contribution by Additional Capacity of Pantnagar Plant :
Additional 30 % capacity at Pantnagar was commisioned in July 2010. As of now Pantanagar is running at 700 TPD capacity and is expected to run at full capacity only by December 2010. This is mainly because of time required for proces stabilisation as well as getting new orders. Likely contribution by additonal capacity on a full year basis in revenue terms is likely to be Rs. 220-235 cr.
Impact on the Company of Likely Rise in Raw Matrial (Corn) Prices :
For the increase in Corn Prices which has now reached Rs.1,150/- per MT, management says it should not be a problem as they are in a position to pass on the increase in raw material prices with a lag of 1 to 2 months. This is because, domestic demand is far outstripping supply at current juncture and this scenario is unlikely to change in the foreseeable future. Management also stated that they have around 13 procurement centres in and around Gokak and many of agents also store Corn based on company's requirement. They are given 1% commission + Handling Charges + Interest Charges + Actual Buying Price. If the godown has good fumigation facilities, corn can be stored for one year. Based on the price trend and company requirements, these agents store corn for more than 6 months stock which gives good advantage to Riddhi Siddhi.
Likely Impact on the Company of Likely Fall in Tapioca Starch Prices which is a Competitive Product :
In India, in Tapioca Starch there are only two organised players with more than 300 TPD capacity which is basically used in the manufacture of Malto Dextrin, Liquid Glucose and to some extent in Textile Industry. Hence, decrease in Tapioca prices will not have much effect on the sales of the company.
Capacity Expansions Planned :
Capacity Expansions are planned by commisioning additional capacities in the existing plants rather than by setting up new plants. This is because, to start a new plant, it takes around 15 months but to add new capacity in an existing plant the company hardly requires around 5 to 6 months. Pantnagar Plant of the company has an additional vacant land of 3 to 4 acres while Gokak Plant has around 40 acres. Hence, capacity expansions at minimal cost is not likely to be a problem for Riddhi Siddhi atleast for the next 3 years.
Based on the demand, company would like to increase the capacities at regular intervals. This strategy is followed to adopt a sound business-model of derisking by attaining constant topline & bottomline growth without much advance cash infusion. Reassessment of Demand will be held in December 2010 and after that company will decide on the next capacity expansion.
Servicing of Existing Debt & Likely Future Cash-Raising by the Company :
The current debt on the books of the company is around Rs. 200 cr. To retire this debt no fresh fund-raising is planned via equity route by sacrificing 43 % stake of the promoters. Management is not willing to part with a lower stake than the existing one in the company. Considering the robust cash generation likely in FY11 and going ahead, company doesn't see debt as a major issue and going forward company's focus will be on effective debt-management to improve the quality of balance sheet of the company.
Not much money is required for setting-up of additional capacities at existing plants and going forward the main demand for cash will be for company's foray into power-generation sector where an investment of around Rs. 200-250 cr. is planned. Since the promoters have around 43% stake and are not willing to sacrifice this stake lower, there is no question of dilution. The only other alternative is the Debt. Management believes that once the new capacities come, there will be enough cash flow to take care of expansions. Management claims that they have developed such a good relation with the bankers that bankers are ready to offer company the loans at a rate of interest which is offered to only a AAA+ rated company and so raising of funds as well as servicing it will not be a problem for the company.
Likely Export Scenario for the Company :
Exports currently stand at around Rs. 57.52 cr. which is less than 10 % of company's FY10 topline. However, management believes that domestic demand is so strong that to focus on exports will be a misadventure. Also, management doesn't find exports lucrative as they don't give them any extra margins. Current exports are basically done for obligation as few of the machines have been imported under some schemes. Going forward, unless there is significant fall in demand on the domestic front, which is unlikely, company doesn't plan to focus on exports.
Edge over Competitors :
Other than customer service and timely supplies, management seems to have an edge over the competitors in terms of quality of the products since all their plants are recent ones adopting latest technology and operate with total automization. Because of the huge capacities, company also has some scale advantages like availability or the speed with which they can fullfill the customer needs, etc. With the nearest competitor operating at half the capacity of Riddhi, company is unlikely to loose this edge in the foreseeable future and so company's leadership in Indian Starch & Starch Derivatives Sector will remain unchallanged for many years to come.
Likely Growth in Next 3 Years :
On a conservative basis, management is confident of achieving 25 % CAGR in topline and 20 % CAGR in bottomline totally on its own over next 3 Financial Years. If the tie-up talks with French Company Roquette materialises, the numbers will be much better with healthy margins.
Details of Foray into Power Sector :
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. Vestas and Shriram EPC are the likely suppliers for the project and 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.
Inorganic Growth :
There is nothing on the table as of now and organic growth opportunity is tremendous at present which hardly makes it lucrative to look at inorganic opportunity.
Conclusion :
Based on recent interaction and inputs by the management, we conservatively estimate Q2FY11 Topline to be in the range of Rs. 190-205 cr. and EBITDA in the range of Rs. 34-38 cr. FY11 topline target is maintained at Rs. 1056 cr. with an EBITDA of Rs. 182.80 cr. as second half is likely to be exceedingly better than first half.
Indian Starch & Starch Derivatives sector is amidst a phase of rapid demand-expansion with gradual rise in supply. This is because, unlike other parts of the world where companies expand more aggresively by anticipating rapid market-demand, Indian companies are much more conservative and have therefore adopted a de-risking model of gradual expansion. This scenario is likely to change significantly once MNCs like Roquette & CPI which are at present studying the Indian Market, enter the market few years down the line. MNCs have still not entered India because of the lack of attractive market size but the pace at which Indian Starch & Starch Derivatives market is expanding, it is just a matter of time before we will see aggresive entry of few of the players into Indian arena. This prognosis also gets support from the fact that worldwide, especially in emerging economies, starch & starch derivatives consumption is booming. It is the boom in cornstarch consumption which has pushed China on the verge of becoming a net corn importer. The demand scenario there, is such that Chinese Government has started squizzing the growth of the sector by disallowing fresh investments into the sector just last month i.e., in September 2010. Hence, MNCs will have no alternative than to look at India to set-up base here. Just consider the extent of current investment of MNCs in Chinese Starch & Starch Derivatives Sector :
Cargill
Cargill has a JV with second largest corn miller of China Global Bio-Chem and it has so far invested US$ 700 mn. in China.
Corn Products International (CPI)
CPI has one large modified starch manufacturing plant in China.
Roquette Freres
Roquette has the largest presence in China amongst all MNCs. It has one sorbitol plant and two modified starch plants in China. Roquette's aggresive expansion in China has enabled it to become 2nd largest starch producer of Europe and 3rd largest cornstarch producer of the world.
Roquette, with its aggresive attitude of expansion into emerging economies ahead of anticipated demand, is likely to be the first one to test Indian waters aggresively by entering into a Joint Venture with Riddhi Siddhi by December 2010. Already, since 2006, Roquette is passively studying Indian Markets by taking a 14.93 % strategic stake in leader of Indian Sector viz., Riddhi Siddhi Gluco Biols Ltd. This passive role is expected to be now an active one stage of which is already set by Riddhi by transferring all its running plants into a wholly-owned subsidiary. Valuation exercise as well as broad contours of the Joint Venture planned are presently being worked out and an announcement with this regards is likely to be made by December 2010.
Once Roquette actively enters Indian scene, other MNCs like CPI and Cargill will have no option but to start looking at India aggresively which will see hightened M&A activity in the sector in FY12. It is after this that aggressive volume growth will come from the sector as a whole with rapid cash generation in the initial phase of the cycle. Riddhi Siddhi will have a first mover advantage in this entire phase and will be the major beneficiary of the growth as it already has in place the larget capacities in the sector and with surplus land available at its existing plants, it can cater to booming demand atleast for next 3 years without much cash infusion.
Management of Riddhi has made the right move by foraying into Power sector to retain cash in the initial stage of growth and this shows the foresightness of the management and the ability of it to make the company grow aggresively with robust cash generation for many years to come.
To conclude, we maintain the 'Safest Buy' rating on Riddhi Siddhi Gluco with a medium-term target of Rs. 615 which could get significantly revised upwards if the management is able to clinch a win-win deal with Roquette