Wednesday, August 11, 2010

Starch and Starch Derivatives sector - Riddhi Siddhi Gluco and Sukhjit Starch

RIDDI SIDDI GLUCO BIOLS - 2x upside potential in one year
Before coming out with its blockbuster results for June 2010 quarter ,Riddhi Siddhi Gluco RSGB was trading at 285 on 22 July 2010. 3 days later the results it crossed its previous lifetime high of  300 and jumped ~ 35% to new lifetime high 395.
Technicals - It is up ~ 5x from March 2009 lows of 60.
In past 3 months , it is up ~ 50%. 50 DMA at 300 ( very strong support). 200 DMA at 220.
1 year chart - Absolute and vs Sensex

Detailed chart from Google finance here

Equity - no of shares ( crores) = 1.11
Cmp Current Market Price -  390.
Market Cap 432 crores
Business - in very unglamorous but profitable sector .Riddhi Siddhi Gluco is India`s leading start and starch derivatives producer with ~ 800 crores Revenues in FY 10.
Milestones of the co. see here   ( Expanded capacity 20 times in last 15 years. Acquired corn processing units from Glaxo and HLL)
For customer segments of the co. see here ( Basically supplies a lot to good growing sectors such as Food /FMCG and Pharma.)
Main raw material - Maize / Corn
Latest Results  - June`10 ending Quarter ( 3 months)
  • Sales at 202 crs .up 25% YoY
  • PBIT 40 crs up 5x YoY ( or 52% of  entire last year(12 months) ending Mar`10 PBIT of 76 crs)
  • PAT 31 crs up 6x ( vs 39 crs PAT for entire year(12 months) ending Mar`10)
  • Lifetime high margins for the co. Net margins at 15%. This should warrant higher PE multiple.
Valuation - At cmp of 390 or market cap of 432 crores, Riddhi Siddhi Gluco is trading just at 3.5x its Q1 FY11 annualized earnings. ( this was 2.5x before the results on 22 July 2010)
so easy 2x-3x upside for the stock. i.e min. target of 600 , if this kind of result sustains.Also Lifetime high earnings = should result in lifetime highs for the stock. Made new high of 419 on 10 Aug `10.
Now biggest question is can this quarter`s results be sustained ? Yes to a reasonable extent.Well fact is even in the previous quarter i.e Mar` 10 ending , it had posted EBIDTA of ~ 50 crores , that is same as this quarter`s EBIDTA. But Mar`10 quarter PAT was 12 crores only because of Deferred tax of 15 crores in that last quarter of  FY 10. So adjusted for this tax, the company could have made higher PAT of ~ 30 crores in Mar`10 quarter itself ( similar to the latest Jun 2010 quarter PAT of 31 crores). The below table will provide a better picture.

Reasons to Buy
  • Too cheap = tremendous value - at PE of 3.5 x and PSR of 0.5. Definitely deserves PE of at least 8 and PSR of 1.0. Thus offering great potential of 2x return in a year.(in March 2009, when Sensex was at 8000 it was at PE of 6 ( worst case))
  • Takeover play - In feb 2006 it had raised ~ 30 crs from the World`s 2nd largest starch and starch derivatives French producer ROQUETTE at 200 per share.Roquette has a Revenue of $ 4 Billion.They are holding 15% now. About Roquette details here  and here . On 17 May 2010 , in ET Economic Times , it was reported that Roquette wants to increase its stake from 15% to 51% by offering price of Rs. 375 per share but till date no update on that. Article here
  • Under-owned stock  - Barely any institutional or Fund  holding except Morgan Stanley has been holding 3.5% stake since the last 1.5 years at least.
Risks /Issues
- Surge in main raw material corn prices  - Well last year thanks to a good maize crop, corn prices are low. But problems with other agri commodities such as Wheat ( at a 23 year high after Russia banned exports and China record imports of Corn from US) could also imapact Corn. this year prices are up 24% , details here . But US the largest exporter is also expected to have good harvest leading to downward pressure on Corn prices. details here   Corn rising above 4 / 4.4 could impact margins and maybe warrant a down grade in ratings.The past 10 year trend of corn is given as below

- Slight corp. governance issue as latest annual report not available on website. Even latest shareholding as on Jun`10 also not yet given. And inspite of news in ET that they are selling stake to Roquette at 375 a share, they have not reverted with any announcement to BSE.
- Debt issue - This co. has debt of ~ 250 crs as it has expanded its capacity regularly. ( Latest Balance Sheet yet to be seen  but going by the reducing interest cost , it can fairly be assumed that the debt has been going down.

Proxy same sector play  - Sukhjit Starch & Chemicals Ltd -
35% size of Riddhi Siddhi.
  • Cmp 169 ( 22 July 2010)
  • Equity = 0.74 crores
  • Mkt cap = 125 crs.
  • trailing PE = 8
  • FY10 Sales of 260 crs + 30%
  • PAT 15 crs  + 25%
  • FY10 dividend of 6 per share up 50%
  • Dividend yield of 3.5%
Debt of 55 crs as on Mar`09 ( decline of 2%)
Projected debt to increase by 32 crs due to capex plans announced in Jun`10 Technicals - Made new lifetime high today.
Very bullish Promoter increasing stake from open market - Promoter has hiked stake by 4% in the last 6 months through buying from open market. to raise its promoter holding to 73% as on Mar`10.
Trigger - results on 9 Aug 2010 . Given Riddhi`s mega results, an encore by Sukjhjit should be expected.
Current update - Sukhjit Starch & Chemicals net profit rises 372.38% in the June 2010 quarter. Results here
Cmp 241 - new lifetime high. up +42% since Riddhi Siddhi Gluco results was out.
At cmp ,market cap of 179 crores or at PE of 5 on Q1 Jun`10 annulized earnings. and PSR of 0.6 . Thus both RSGB and SS have good 2x potential over a year.But being the market leader, I would rate Riddhi Siddhi Gluco as slightly higher.

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