Rucha Soya’s stock has been on a tear since being relisted ages ago… in January 2020. In fact, even that seems like an understatement. By the end of June, the stock had jumped over 8800% in value to touch ₹1,535, at which point its market capitalization stood at over ₹45,000 crore. To put that into some context, that is a higher market value than many huge companies listed in India, such as Bosch Ltd., Punjab National Bank, Bata India, Voltas, Trent and TVS Motors. All of this while the Sensex had fallen over 10%, due to the volatility amid the coronavirus pandemic.
Hence, to say that Patanjali Ayurveda Ltd.’s investment in Ruchi Soya Industries Ltd. has paid off handsomely is perhaps putting it lightly. But what has actually caused this stock, which, under the previous promoters, had achieved a peak market value of ₹4,232 crore in November 2010, to trade at its upper circuit for over 70 sessions in a row and achieve a market cap higher than that of Adani Industries?
This has been achieved on the back of an illiquid stock and capital infusion-led turnaround after debt restructuring. Sounds complicated? Let’s look at it from the basics then. What is a share price? In very simplistic terms, it is the price determined by the forces of supply and demand in the market for the stock. Demand may also be interpreted as markets anticipation regarding the firm’s future. So let’s explore the Ruchi Soya story with these factors in mind.
But first, a little history!
Ruchi Soya is not a new company. In fact, it has been one of the largest manufacturers of edible oil in India for around 34 years. Before 2015, the firm was always known for paying out dividends to its investors – which the company did for 15 consecutive years from the year 2000 onwards (remember, paying out a dividend is a company’s way of giving back a part of its profit to its investors and shareholders). However, post-2015, things turned sour for Ruchi Soya. After registering losses continuously from 2016 to 2018, and having accumulated a huge debt to the tune of ₹12,000 crores in its bid to fulfill its expansion goals, the firm was forced to enter insolvency proceedings in December 2017. Bidders were invited to compete for Ruchi Soya’s assets in an attempt to restructure the firms debt and turn its fortunes around. Part of the amount bid would be used to pay off the debts, with the remaining being infused into Ruchi Soya in exchange for equity.
After an intense bidding war against Adani, Patanjaldi eventually came out on top, and finally acquired Ruchi Soya for a sum of ₹4,350 crores (which now pales in comparison to its equity return). As part of the resolution plan, the share capital was reduced drastically to face value of ₹2 only, and the ₹4,350 crore mentioned earlier would be infused into an SPV (special purpose vehicle) called ‘Patanjali Consortium Adhigrahan Pvt.’, which would then undergo a reverse merger with the insolvent edible oil maker.
Patanjali used about ₹4,235 crore of the amount to repay the firms debt, about ₹3,200 crore of which was financed via fresh loans from a consortium of the same banks who had had to take almost a 50% haircut on their initial loans to Ruchi Soya. SBI, PND, Union Bank of India and Allahabad Bank each provided amounts of between ₹300 and ₹1,200 crores to help Patanjali pay off Ruchi Soya’s debt… owned by them.
But why would you buy an insolvent company?
The answer to this is relatively straightforward. Ruchi Soya has already set up distribution channels, which Patanjali lacks and are the major sources of revenues for its rivals Hindustan Unilever and Proctor & Gamble. In addition to this, Ruchi Soya has an edible oil refining capacity of about 3.3 million tonnes per annum across 13 refining plants across the country. Out of these 13 plants, 5 are port-based, a key asset as 70% of India’s edible oil consumption is via imports. Lastly, after the takeover, Patanjali now owns its popular brands such as Nutrela and Ruchi Gold too.
Another key facet of the restructuring process was the dilution of the stake of the existing shareholders. Their shares were reduced in a ratio of 100 to 1, i.e. 100 shares held were now equal to 1 new share only. This process of dilution can also be described as a reverse stock split. But now since 100% of the previous shareholding was reduced to 1%, who owned the remaining 99%? Yup, Patanjali did. Which brings us to…
Notice anything peculiar about the graph below, which depicts Ruchi Soya’s shareholding pattern?
Yup, only 0.97% (about 28.48 lakh) of Ruchi Soya’s share are owned by public (or, are in free float, where they can be acquired and sold by any person). The remaining 99.03% of the firm’s 29.58 crore shares are owned by the Patanjali group. This has created resulted in a situation where the supply of shares to meet the demand by investors is too low, thereby inflating the stock price as everyone tries to get their hands on Ruchi Soya’s share.
So, as promoter shares are locked in for three years, 99.03% of the shares can’t be traded. The low amount of floating stock has thus resulted in incessant upper circuits on the stock since, due to the illiquidity, the average daily trade volume is only about 10,000-15,000 shares, as shown.
However, this is largely a temporary situation. As part of the NCLT resolution plan as well as under SEBI rules, Patanjali will have to reduce its shareholding in Ruchi Soya over time to the current maximum permissible limit of 75%. Within the first 18 months of relisting, public shareholding must be increased to at least 10%, to be increased to at least 25% by the end of 3 years.
So now that we have figured what is moving this stock from a supply-side angle, let’s move on to…
Illiquidity is not the only factor at play in Ruchi Soya’s remarkable rise. Its fundamentals go some way towards justifying it too. Its cash reserves are stable, largely as a result of the removal of the fixed debt obligations which had plagued it earlier. The company’s average collection period is also low, which has resulted in ample availability of liquid assets to meet its working capital (day-to-day operations) needs.
A successful business restructuring has also contributed to the firm’s success, providing market participants with much-needed clarity on the firms working. The restructuring managed to replace about ₹9,300 crore of Ruchi Soya’s old debt with equity for its new promoters. This greatly reduced the debt on its balance sheet, making it look much healthier. While Ruchi Soya still made an operating loss of ₹37 crores in Q4 2020, its profit for FY2020 came in at a whopping ₹7,672 crore (however, much of it was due to an exceptional income of ₹7,447 crores which was because of the debt and equity restructuring).
Ruchi Soya’s unusually high amount of promoter shareholding has also resuted in widespread speculation that its promoter, Patanjali Ayurveda, is considering a reverse merger with Ruchi Soya. A reverse merger is one in which a private firm merges with a public one, and the combined entity is a publicly listed company. Hence, the private firm becomes public without being listed. This merger could perhaps justify the increasing valuation of Ruchi Soya as a combined entity of Patanjali and Ruchi Soya is expected to have a combined turnover between ₹20,000 and ₹25,000 crores in FY2020, with ₹13,000 crores being contributed by the latter.
However, Ruchi Soya’s rapidly increasing stock price has resulted in claims that some market participants are taking advantage of the stock’s illiquidity. Many have even called for regulatory insight into the matter. But Ruchi Soya’s remarkable rise has benefited whoever managed to get their hands on the stock. The luckiest of these is perhaps Ashav Advisory LLP, who, in April, acquired 1.87 crore of Ruchi Soya’s shares at ₹7 apiece. While these shares have not been allotted yet, they are valued at over ₹1,800 crores, on an initial outlay of only ₹13 crores which was made… 2 months ago.