Ruchi Soya Industries

Integrated edible oil player across value chain

Post takeover, the Patanjali Group turns around operations

Ruchi Soya is a diversified FMCG and FMHG (Fast Moving Health Goods) focused company, with strategically located manufacturing facilities and well recognized brands having pan India presence. Company is one of the largest FMCG companies in the Indian edible oil sector and one of the largest fully integrated edible oil refining companies in India.

Company is present across the entire value chain in palm and soya segment, with a healthy mix of upstream and downstream business. Its integration extends downstream to the oleochemicals and other by-product and derivatives business. Leveraging upon the brand ‘Nutrela’, Company has launched a range of premium edible oils and blended edible oils and ‘Nutrela High Protein Chakki Atta’ and ‘Nutrela Honey’ in FY 2021. Further it has expanded its packaged food portfolio by acquiring the ‘Patanjali’ product portfolio of biscuits, cookies, rusks, noodles, and breakfast cereals.

In FY 2022, company forayed into a niche and a high growth FMHG segment with the launch ofnutraceutical business. Company is also present in the wind power generation business, where the renewable power generated is used for sale and for captive use. This also helps offset its carbon footprint, to the extent possible.

Ruchi soya is a part of the Patanjali group, which is one of India’s leading FMCG and health and wellness company. Its portfolio includes health and ayurvedic products, cosmetics, processed food, beverages and juices, and personal and home care products.The company benefits from Patanjali’s expertise and technical know-how in nutraceuticals, synergy in the research and development and the pan India distribution network.

Company operates 9 business verticals(1) Edible oil its by-products and derivatives: one of the largest integrated oil seed solvent extraction and edible oil refining company in India.(2) Oleochemicals: manufacture products like soap noodles, glycerine, distilled fatty acids as well as value-based products of castor oil, soya, and palm-based derivatives. (3) Edible Soya Flour and Textured Soya Protein: pioneered the concept of soya chunks through ‘Nutrela’ brand. (4) Honey and Atta (flour): launched ‘Nutrela High Protein Chakki Atta’ and ‘Nutrela Honey’ in FY 2021. (5) Oil Palm Plantation: ventured into oil palm plantation development business as a route to backwardintegration and is now one of the largest palm plantation companies in India.(6) Biscuit cookies and rusks: forayed into biscuits, cookies, rusk and other associated bakery products category in May 2021 by acquiring it from Patanjali Natural Biscuits. (7) Noodles and breakfastcereals: focus on manufacture and sale of healthier version (non-maida) of noodles predominantly available in India with high contents of fibre and protein and are sold under the ‘Patanjali’ brand.(8) Nutraceuticals and wellness Products: recently forayed into the nutraceutical and wellness product space to take benefit from the experience of the Patanjali group which is an experienced player in natural and ayurvedic FMHG segment. (9) Renewable Energy (Wind Power): To counter its carbon footprint, company also generates power from renewable energy sources.

For edible oil and its derivatives business, Soya flour, TSP, and biscuits, company has a total of 23 processing plants (of which 17 are currently operational) across India, out of which 10 such processing plants form its oil crushing and refinery units, with an aggregate yearly oilseed crushing capacity of 3.71 mt and an aggregate yearly oil refining capacity of 3.92 mt and 1 biscuit manufacturing plant with yearly processing capacity of 27,900 mt.

Majority of company’s plants are located with access to National Highways, railway rakes and ports, while its refining plants are located at ports providing easier access to imported edible oil, and its crushing units are located around seed production belts.

For noodles and breakfast cereals business, the Patanjali Assignment Agreement has given the company ready access to four contract manufacturing units at Rajasthan, Uttarakhand, and Haryana. Its contract manufacturing facilities ensure that supply effectively meets the market demand for its products without significant capital expenditure. The entire range of nutraceutical and wellness products of company is manufactured by PAL at its modern and state of the art plant located at Patanjali Food and Herbal Park.

The company has developed an extensive distribution network throughout India. The products are sold through a pan India network of over 97 sale depots, 4,763 distributors who in turn reach out, directly to 4,57,788 retail outlets (general trade channel) in the urban, semi-urban and rural areas of the country in addition to increasing focus on modern trade and e-commerce platforms like Big Basket.

Company’s edible oil and soya products are also retailed through Wal-Mart India, More Retail and Spencer’s Retail. Additionally, company has significant indirect retail presence making it possibly to increase its overall reach as well availability of company’s products across India and catering to all segments of the society.

Following completion by the CIRP, implementation of the Patanjali Resolution Plan in terms of the NCLT Order and entering into the Distributor Agreement, company has gained access to Patanjali’s well-developed pan-India distribution network consisting of around 3,409 Patanjali distributors, 3,326 arogya kendras, 1,301 Patanjali chikatsalya, 273 Patanjali mega stores and 126 Patanjali super distributors. Such, 126 Patanjali super distributors and 3,409 Patanjali distributors provide access to 5,45,849 customer touch points including approximately 47,316 pharmacies, chemists, and medical stores, as of March 31, 2021.

Company intends to increase its market share in branded edible oil products and food products in India, with a particular focus on smaller towns with populations of less than 50,000 to be followed by a focus on towns with populations of less than 25,000.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 4300 crore.

Price band for the IPO is Rs 615 to Rs 650 per equity share of face value Rs 2 each.

Objectives for the fresh issue are-Repayment/prepaymentof Rs 2663.8 Crore of borrowings, funding of incremental working capital requirements of Rs 593.42 crore and remaining amount will be used for general corporate purposes.

Promoters pre issue shareholding pattern of the Company is as follows- Patanjali Ayurved holds 14,25,00,000 Equity Shares (48.16%), Patanjali Parivahan holds 5,00,00,000 Equity Shares (16.90%), Patanjali Gramudyog Nayas holds 4,00,00,000 Equity Shares (13.52%), Ruchi Soya Industries Beneficiary Trust holds 76,299 Equity Shares (0.02%)and Yogakshem Sansthan holds 6,00,00,000 Equity Shares (20.28%), cumulatively representing 98.90% of the pre offer issued and paid-up Equity Share capital. Remaining promoters do not hold Equity Shares of the company. The post IPO shareholding for the same is expected to be around 81.72%.

The issue, through the book-building process, will open on 24 March 2022 and will close on 28 March 2022.

Strengths

Post the takeover by the Patanjali Group and implementation of the Patanjali Resolution Plan, Company has managed to turnaround/improve its operations and successfully generate profits. Company has generated a profit of Rs 680.77 crore in FY2021 compared to loss of Rs 5573.2 Crore in FY2018. These numbers reflect the successful turnaround of the Company, by the Patanjali group, post the takeover.

For nine months period ended December 31, 2021, FY 2021, FY 2020 and FY 2019, its revenue from operations and other income was Rs 17608.18 crore, Rs 16382.97 crore, Rs 13175.36 crore and Rs 12829.25 crore respectively. This represents a CAGR growth of 13% from FY19 to FY2021.

Company benefits from Patanjali Ayurved sourcing capabilities, technical know-how, synergy in portfolio of products, in-depth understanding of local markets, extensive experience in manufacturing of FMCG products and trading and advanced logistics network in India.

Company has experienced leadership and management team. Its core management team consists of qualified and experienced professionals having significant experience in the FMCG, edible oils, palm plantations, soya foods industry with decades of hands-on experience in all areas of operations in the industry that company currently operates.

Company is amoung the few companies in this industry operating across the value chain, which includes sourcing, supply chain, manufacturing, branding and distribution. This enables it to manage costs more effectively than several competitors and helps in scalability of edible oil business. It also gives the company flexibility to alter its mix of products in line with any changes in the demand for products or in the availability or the price of key raw materials at any given time.

Over the years the company has developed relationships with some of the large oil suppliers in the world. Its supply chain is further bolstered, with the palm plantation business which works with farmers in a total aggregate area of 2,99,245 hectares of which 56,106 hectares is under cultivation across nine states, in certain specified areas, in return for providing them certain technical and other assistance in relation to palm oil cultivation.

Company’s oilseed crushing and oil refining plants are strategically located in terms of access to raw materials. It has one of the largest refining capabilities (of 11,000 tpd) along with oleochem division that uses the by-products of oil palm refining.

There has been an increased preference for branded food products among retail consumers in India. This shift is a result of many different factors, such as an increase in awareness of health and hygiene- related matters, growth of the organized retail distribution network and the rise in purchasing power among consumers, including in rural areas. This shift towards branded products should benefit the company as its products enjoy strong brand recognition in the Indian market.

Company benefits from a strong, established, and extensive distribution network in India and a large sales force which is focused on maintaining and developing distribution relationships. Company’s products are also exported to over 30 countries, as on September 30, 2021, across the world, which reflects the popularity of its brands across the globe.

Presently, India is experiencing a spate of lifestyle changes and a corresponding rise in lifestyle diseases. This has increased the demand for nutritional supplements among upper and middle-class consumers. Nutraceutical intake is growing in popularity as consumers look for products to boost energy and health, especially given the current Covid-19 situation. To capitalise on the aforesaid demand, company is in the process of broadening its offering capabilities in the products portfolio and enhancing brand visibility. Company currently has 18 nutraceutical products, in its product basket, offering wide array of choice in sports, medical and general nutrition.

Company is the market leader in branded soya chunks with a market share of 40%. From introduction of this category in late 1980s, Company established its brand Nutrela by becoming a household name for soy chunks. Brand Nutrela is positioned well to tap the growing opportunity.

Company’s diversified product portfolio enables it to cater to a wide range of tastes, preferences, price points and consumer segments. Company offers products in the premium as well as mass market categories, which makes its products less susceptible to shifts in consumer preferences, market trends and risks of operating in a particular product category.

Weaknesses

Demand for company’s products depends primarily on consumer-related factors such as demographics, local preferences, food consumption trends, the level of consumer confidence as well as on macroeconomic factors. If company is not able to anticipate, identify or develop and market products that respond to changes in consumer tastes and preferences, demand for its products may decline.

Company’s revenue significantly depends on the sale of edible oil products, and any decline in that sale could materially impact financial performance. In FY 2019, FY 2020, FY2021 and six months period ended September 30, 2021, its revenue from sale of edible oil products contributed 79.10%, 81.03%, 84.51%, and 81.42%, of total revenues from operations, respectively.

Company depends almost entirely on third-party suppliers in respect of availability of raw materials. An interruption in the supply of such products and price volatility could adversely affect its business. Imported raw materials constituted 42.00%, 30.00%, 28.19% and 26.22% of total raw material purchase in for the six months period ended September 30, 2021, FY 2021, FY 2020, and FY 2019, respectively.

Company is required to comply with the minimum public shareholding (MPS) requirements prescribed under the SCRR. In accordance with the applicable SEBI circulars, BSE and NSE vide their email and letter, respectively dated September 17, 2021, have levied fine of Rs 76,700 each for non-compliance of MPS from June 18, 2021, till June 30, 2021, which has been paid by the Company. Further, BSE and NSE vide their emails and letters, respectively dated December 1, 2021, have levied a fine of Rs 5,42,800 each for continuous non-compliance of MPS from July 1, 2021, till September 30, 2021, which has also been paid by the Company. There can be no assurance that similar fines will not be levied. Also, any sale of Equity Shares of the Company by its Promoters to comply with the minimum public shareholding requirements may adversely affect the trading price of Equity Shares.

Pre-Issue paid up capital held by certain of the Promoters viz. Patanjali Ayurved, Yogakshem Sansthan, Patanjali Parivahan and Patanjali Gramudyog Nayas were pledged in favour of a common security trustee towards due repayment of the term loan facility of Rs 2,40,000.00 lakh, working capital facility of Rs 80,000.00 lakh and COVID-19 (Adhoc facility) of Rs 8,000 lakh availed by the company. Any exercise of such pledge by any lender or enforcement of such pledge could dilute the shareholding of the Promoters, which may adversely affect its business.

Company has a long term ‘Take or Pay Agreement’ with one of its Promoters, Patanjali Ayurved to ensure sufficient cash flows of the Company and for timely repayment of the facilities through assured capacity utilisation of the certain refining units for a term of 10 years. Any discontinuance or termination of this agreement will result into material adverse effect on business financial condition.

Company has no operating experience in nutraceuticals business which it has forayed into on June 2, 2021. Sales of its nutraceutical and wellness products to customers may not be as high anticipated.

Company’s various segments are sensitive to weather conditions, including extremes such as drought and natural disasters. There is growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Unfavourable local and global weather patterns may have an adverse effect on its business.

There are outstanding legal proceedings involving Company, Directors and Promoters which are pending at different levels of adjudication before various courts, tribunals, and other authorities. Adverse outcome in any of these litigations may have an adverse impact on its business.

Company operates in 9 business verticals. Operating such diverse businesses makes forecasting future revenue and operating results difficult. If company is unable to manage diversified operations and different regulatory regime for each of its business verticals, its financial condition may be adversely affected.

As on December 31, 2021, company had fund based and non-fund based outstanding borrowings of Rs 298,218 lakh. The terms of sanction of such borrowings and certain terms of the financing agreements include restrictive covenants which may adversely affect its business.

The examination report on Restated Financial Statements contains certain qualifications and matters of emphasis which require adjustments to the Restated Financial Statements. There is no assurance that auditors’ reports for any future fiscal periods will not contain qualifications or matters of emphasis or that such matters of emphasis will not require any adjustment in its financial statements for such future periods.

Company has high exposure to foreign currency risks in respect to non-Indian Rupee-denominated trade. For the six months period ended September 30, 2021, FY 2021, FY 2020 and FY 2019, revenue from exports was Rs 12,270 lakh, Rs 40,498 lakh, Rs 24,136 lakh and Rs 46,372 lakh, respectively. Exchange rate fluctuations may adversely affect its results of operations.

A spike in edible oil prices is likely in the near-term as the Russia-Ukraine war has hit shipments of sunflower oil. Ukraine and Russia together account for 90% of India's sunflower oil imports. This oil comprises 15% of most edible oil brands. The company primarily imports crude palm oil fluctuations in the price of crude palm oil and other oil palm products could adversely affect business.

Valuation

For FY 2021, standalone sales were up by 24.40% to Rs 16318.63 crore compared to FY 2020. OPM increased by 279 bps to 5.85% which led to 137.98% increase in operating profit to Rs 954.02 crore. Other income increased 11.76% to Rs 64.34 crore, while interest cost rose 230.08% to Rs 370.71 crore and depreciation decreased 1.86% to Rs 133.25 crore. PBT before EO rose 144.51% to Rs 514.40 crore. PBT after EO fell 93.32% to Rs 514.40 crore due to extraordinary income of Rs 7490.23 in FY20. Tax credit for FY2021 was of Rs 166.37 crore compared to tax credit of Rs 14 crore in FY2020. Net profit (excluding extraordinary income in FY2020) went up by 203.40% to Rs 680.77 crore.

For 9M FY2022, standalone sales were up by 52.80% to Rs 17541.65 crore compared to 9M FY2021. OPM increased by 2 bps to 6.16% which led to 53.45% increase in operating profit to Rs 1080.90 crore. Other income increased 53.47% to Rs 66.53 crore, while interest cost fell 4.18% to Rs 269.22 crore and depreciation decreased 0.84% to Rs 99.52 crore. PBT increased 112.50% to Rs 778.69 crore. Tax expenses for 9M FY2022 was of Rs 206.81 crore compared to nil in 9M FY2021. Net profit went up 56.06% to Rs 571.88 crore.

The TTM EPS (excluding extraordinary items and relevant tax) on post-issue equity works out to Rs 24.50 (boosted by deferred tax credit of Rs 4.6 per share in March 2021 quarter). At the upper price band of Rs 650, P/E works out to 26.55.The higher end of the price band represents 29% discount from its price of Rs 916 as of 22 March 2022. However, currently only 1.1% of pre-issue equity is listed.

As of 22 March 2022, its listed peers such as Adani Wilmar trades at TTM P/E of 57.56, Marico trades at TTM P/E of 52.62, Dabur India trades at TTM P/E of 51.70, Britannia Industries trades at TTM P/E of 50.35, Zydus Wellness trades at TTM P/E of 30.39, Godrej Agrovet trades at TTM P/E of 25.55, ITC trades at TTM P/E of 20.82 and Agro Tech Foods trades at TTM P/E of 93.76. For FY21, Ruchi Soya Industries OPM and ROE stood at 5.85% and 16.75% respectively, compared to 3.57% and 23.89% for Adani Wilmar, 19.77% and 36.17% for Marico, 20.94% and 22.09% for Dabur India, 19.10% and 52.53% for Britannia Industries, 18.45% and 2.59% for Zydus Wellness, 9%and 15.29% for Godrej Agrovet, 34.51% and 21.80% for ITC, 5.94% and 7.17% for Agro Tech Foods respectively.