Stock Idea: Riddhi Siddhi Gluco Biols Ltd (RSGB)

Riddhi Siddhi Gluco Biols Ltd (Rs 216)

(BSE Code- 524480)

(P/E - 7.5, FY’09 Sales - Rs534 cr, Market Cap - Rs244 cr)

Riddhi Siddhi Gluco Biols Ltd(RSGB) is the largest manufacturer of various types of starch, liquid glucose, dextrose monohydrate and other derivatives, high maltose corn syrup and byproducts like corn gluten meal and enriched fiber, which are used in various applications such as chocolates, processed foods, glass and medicines, paper, glucose and textiles. RSGB controls about 17% of the total starch market. About 60-65% of its turnover comes from industry majors such as Nestle, Hindustan Unilever, Ranbaxy, Ballarpur, ITC, Grasim, Indian Rayon and Godrej. Catering to a sizeable market in India, RSGB has continuously tried to increase capacities and feed the growing industry demand, which is about 12-15% at present. Per capita consumption of corn starch in India is estimated to be about 1 kg as compared with 64 kg in US and the world average of 6 kg, which leaves room for a sustainable growth in the years to come. In 2006, RSGB, the largest corn wet milling company in the Indian subcontinent having the highest crushing capacity, had joined hands with France’s Roquette Freres, a leading player in this industry with a consolidated turnover exceeding $4.5 billion, to improve the yield parameters and develop new products

RSGB’s new capacities are already in place and for technical expertise; it has found a partner in Roquette Freres, France, which is the world’s fifth largest starch company. Roquette also has a 14.93% stake in RSGB. Roquette, which sells about 1,000 products, will help RSGB increase its current product offering of 40 to add more value added products in its portfolio by way of providing technology and know-how. These new value added products will be for nutrition, biotech and health and dextrose for sugar free goods. These value added products will also help RSGB in acquiring a larger pie of the existing market and enter new industries. Considering these developments, RSGB is targeting a market share of 25% in two years as compared with 17% now. RSGB currently generates about 65 per cent of its revenues from value added products. It is planning to increase this to 80% over the next two years. RSGB is also working closely with brand-enhancing food companies like Nestle, Heinz, Cadbury, Hindustan Unilever and Britannia and pharma companies like Ranbaxy, Wockhardt, Sun Pharma and Nicholas Piramal with repeat business and sustainable revenues.

For the Q3 ended Dec. 2009, RSGB has posted net profit of Rs 12.77 cr.(up 913%) on net sales of Rs 193.58 cr.(up 56%). For the nine months ended Dec. 2009, RSGB has posted a 158% rise in net profit to Rs 27.08 cr. on a 38% rise in net sales to Rs 514 cr. on consolidated basis. The EPS for nine months stands at Rs 24.3. For the year ended March 2009, RSGB had posted net sales of Rs 533.9 cr.(up 60%) and net profit of Rs 13.98 cr.(down 30%). The net profit was down mainly due to higher interest burden, forex losses and higher depreciation. On a equity of 11.13 cr.(Promoters’stake-43%), the EPS stood at Rs 12.5 and the dividend declared was 20%.

With global economy showing signs of recovery, consumer’s willingness to spend more and demand picking up, demand for products like starch & glucose is also likely to pick up. Also, FMCG companies have continued to grow by volume and there by would in turn increase the demand for raw materials/inputs used in bakery & confectionery products. At the current market price of Rs 216, the stock is trading at a P/E multiple of 7.6 times its FY10E earnings (Rs 28-Rs 29) and 6.4 times FY11E earnings (Rs 33-Rs 34). RSGB’ market cap stands at Rs 244 cr, against expected net sales of Rs 675 cr. for FY10. Considering that the company is the largest player in its sector, investors can expect good returns over the medium-long term. Investors can start accumulating the stock at current levels and add more on declines for decent returns of 45%-50% over the next 6-8 months.

Source: Internet (Valuenotes by Sanjay Chhabria)