Story of Ruchi Soya. How it emerged from a company who filed for bankruptcy to giving 9100% returns for shareholders
Ruchi Soya is one of the largest Fast Moving Consumer Goods (FMCG) companies in India. They process crude palm oil and turn it into refined oil. You’ve probably heard of the brands Nutrela, Sunrich or Mahakosh. That’s all about Ruchi Soya.
But the company has had a topsy turvy journey this past decade. Back in October 2011, Indonesia raised export duty on crude palm oil. Ruchi Soya’s input cost soared overnight since they imported most of their raw materials. Ideally, they should have been able to pass on this cost to their customers.
However, there was one tiny problem. Indonesia had also cut export duty on refined edible oil — the end product Ruchi Soya sold. So manufacturers had a very enticing alternative — buy refined edible oil from Ruchi Soya or import from elsewhere. And since most manufacturers prioritize “cost of procurement” above all else, Ruchi Soya had no choice but to take a hit on margins. They kept competing with these cheap imports by bearing brunt of the burden themselves.
Then their seed extraction business started failing. Droughts in many parts of India hit the oilseed industry. Ruchi Soya’s manufacturing facilities were barely running at half capacity. Margins kept tumbling. It was bad and when you thought things couldn’t get worse, they lost a fortune betting on castor seeds. Then they were in hot waters with SEBI and soon after, the company’s customers started bailing too.
Two years later, after the market regulator barred Ruchi Soya Ltd. for rigging castor seed futures, its lenders may recover only half their loans as India’s largest edible oil maker is sold under the new bankruptcy law. More than a financial loss, the ban was a tipping point for the company. Its troubles began much earlier in 2011.
They stemmed from unfavourable duty structures for its largest edible oil refining business, and two successive below-average monsoons that hurt seed extraction—the second-biggest revenue contributor. Being a supplier to makers of refined oil to shampoos, the company had a long working capital cycle, leaving it short of cash. Short-term borrowings to tide over the crunch eventually left it under a pile of debt.
As it failed to repay more than Rs 9,000-crore loans, the central bank named Ruchi Soya in the second list of accounts identified for insolvency resolution under India’s new bankruptcy law last year. Adani Wilmar Ltd., a Gautam Adani-group company, emerged the highest bidder with an offer of Rs 6,014 crore—Rs 4,300 crore to repay lenders led by State Bank of India and an equity infusion of Rs 1,71crore, BloombergQuint reported earlier. That’s a sixth of the peak market valuation of about Rs 36,000 crore of the edible oil maker.
It’s been about 100 days since Ruchi Soya Industries Ltd’s shares resumed trading after completing the resolution process under the bankruptcy law. Barring six trading sessions, the stock has risen by the utmost permissible limit every day. The stock has increased by 8,000% since trading services resumed in January.
At this rate, it’d overtake the market capitalisation of Marico Ltd by the top of the week. Of course, the 2 companies aren’t strictly comparable, although a neighbourhood of their portfolio includes marketing edible oils. But here is why the comparison is striking. Before trading in its shares was discontinued last November, Ruchi Soya’s market cap amounted to only 0.23% of Marico’s.
There are other strange consequences of the sharp rise within the stock. The Patanjali group did an acquisition of ₹4,350 crore, which was primarily debt-funded. At current prices, the acquirer’s stake is worth over ₹40,000 crores, above the worth of a number of the banks, like Punjab commercial bank, who extended the loans.
Of course, as was acknowledged in many reports, the worth rise is primarily due to a pointy reduction in free float of the stock. As a part of the restructuring, existing shareholders were nearly exhausted and handed one share for every 100 shares held. With a particularly low float of 0.97%, Ruchi Soya’s share price isn’t a really good reflection of its value. Indeed, in mid-January, just before trading within the shares resumed, the Ruchi Soya board approved a preferential issue of shares to a non-promoter entity at just ₹7 per share. In contrast, the shares now trade at ₹1,367 apiece.
Needless to mention, because the Patanjali group attempts to bring down its stake further, the share price will better reflect true value. Current rules allow high promoter shareholding soon after a bankruptcy resolution process, with the stipulation that the non-promoter holding should be increased to 10% within 18 months, and 25% within three years.
Securities and Exchange Board of India (Sebi) should stay up and note because, during this instance, the extremely low float is resulting in strange price movements. A relook at the policies and timeline for reducing high promoter stake, or taking the delisting route, might be considered for companies that undergo bankruptcy proceedings. J.N. Gupta, a former Sebi executive, said in such bankruptcy resolution cases, companies should even be asked to file an information memorandum, which is somewhat like a draft prospectus.
The aim is to stay informed about the vast changes in capital and therefore the business structure of such companies, also because of the plans of the new promoters and new management.
Of course, Ruchi Soya isn’t alone. Shares of Alok Industries Ltd have also behaved strangely post the resolution process. Sebi will have to look at and frame policies for stocks beginning the bankruptcy process.