Why is Ruchi Soya Share Price Increasing

In the past 100+ days, Ruchi soya has jumped by more than 8400+% . On Jan 27th 2020 the stock was trading Rs 17 and on 26th June its share was traded for Rs 1519. Therefore, many news outlets have started reporting the miracle of Ruchi soya stock.

Let’s deep dive and understand why Ruchi soya share price is increasing insanely?

To answer this in short, the upward movement is the by-product of the gap in supply and demand of ruchi soya shares.

Through this article, you will get to know about the following:

  • Brief History of Ruchi Soya
  • Downfall of the Company
  • Ownership Transfer to Patanjali
  • Why Ruchi Soya is hitting upper circuit
  • Other Frequently asked questions
    • Why Patanjali has acquired Ruchi Soya
    • What will happen to retail shareholders
    • Can we see an FPO of Ruchi Soya in future?

Brief History of Ruchi Soya

The company was formed in 1986 by Dinesh Shahra at Indore, to meet up the demand of edible oil in India and other geographies.

With the help of subsidiaries, the company is manufacturing cooking oils, soya foods, vanaspati and bakery fats under brand names like Mahakosh, Sunrich, Ruchi Star and Ruchi Gold and one of the most popular products is Nutrela, which is the largest selling soya foods brand in the country, with more than 50% market share.

  • Company has the refining capacity of 30 lakh tonnes/year of oil.
  • Company has 13 refining plants in the country, 6 plants are at strategic locations

For 15 years from 2001 to 2015, company gave dividends to its shareholders. But in 2016, company started to fail and in 2017, the company was forced to file for bankruptcy with NCLT as its debt had mounted to Rs 12,000 Crores. Subsequently, the company was delisted in November 2019 at a trading value of Rs 3.5/share.

Downfall of the Company

Like other famous downfalls; to enhance the operations, the company started taking loans from different lenders. Initially this turned out to be a positive move for the company. In 2008, company had a debt of Rs 2,000 Crores vs 11,500 Crores of revenue. Similarly, by infusing more money through the debt channel, company generated a revenue of Rs 30,270 crores against the debt of Rs 6,000 crores. Now top line was good for the company but the bottom line appeared to be dragger. For the past 10-15 years, the company had a thin profit margin of 2%-5% with significant inconsistency in shorter time frame. Not only that, the debt further went up to Rs 10,000 in 2012. In the meantime, the plans to attain growth didn’t work out for the company. Company started to face the heat of loan repayment and EMI.

It is anticipated that due to excessive gambling nature of the promoter, the company invested in commodities market and subsequently generated huge losses in the line of Rs 400 crores. To marginalize the business losses, promoters took loans from banks and to repay banks loans, promoters took more loans thereby created the vicious cycle of loans.

In December 2017, court declared the company as the wilful defaulter. This indicates that the promoters had lost the focus and thereby leading the company to its downfall.

To recover the capital in the line of Rs 9,300 crores, bankers like standard charted, DBS banks dragged the company to NCLT.

Ownership Transfer to Patanjali  

Adani Wilmar and Patanjali Ayurveda emerged as the top contender for Ruchi Soya to acquire the company. Initially, Adani won the bidding by quoting close to Rs 5,500 crores and was about to acquire the company but the section 29A of the insolvency code was triggered by the FMCG giant and finally, Patanjali acquired the company by paying Rs 4350 Crores and banks were paid Rs 4235 Crores of the total amount collected.

For acquiring the company, Patanjali has taken up loans from different banks in India

  • Rs 1200 Crores from SBI
  • Rs 700 Crores from PNB
  • Rs 600 Crores from Union Bank of India
  • Rs 400 Crores from Syndicate bank
  • Rs 300 Crores from Allahabad bank

Amounting to Rs 3200 as total debt. Interestingly to close the deal, Baba Ramdev and Acharya Balkrishna have pledged 99% shares of the Patanjali Group. Again, this is not considered good from the fundamental analysis side.

Company was restructured and the company was relisted on Indian exchanges on 27th Jan 2020.

Why is Ruchi Soya hitting upper circuit
Ruchi Soya hitting upper circuit

Ruchi soya is hitting upper circuit as there is a huge gap in demand and supply of the shares. The illiquidity of shares has made the stock to hit the upper circuit on Indian exchanges. Interestingly, as per SEBI guidelines, Patanjali can’t dilute its equity (98.87%) for a period of 1 year. Let’s see the share holding pattern and understanding the gravity of the situation.

  • Patanjali Ayurveda is holding 48.17%
  • Patanjali Parivahan is holding 16.9%
  • Patanjali Gram Udyog has 13.52% of total equity
  • Divya Yog Mandir has 20.28% of total equity
  • Retail investors are holding close to 0.82% of the total issued shares.
  • Remaining shares are being held by old promoters

As this is clearly evident, that the supply of shares is largely restricted by SEBI regulations, hence the market is seeing an unusual gap in demand and supply, which is leading to unprecedented price growth. The growth in price is highly unjustified against the earnings and therefore, soon we may see readjustment in the price of the share of this soya company.

In 2010, the company witnessed such a huge spike in its share price and there was drastic movement in both sides. Further, investigations revealed that the movement was engineered by a small operator. In current scenario, one can’t rule out such factor, but until proven let’s not factor in this event in the determination of reasons for upward movement.

Frequently Asked Questions

Why Patanjali bought Ruchi Soya

In recent times, Patanjali has emerged as one of the leading FMCG players in India and the company has a dream to become a top FMCG player in India. Currently HUL has registered close to a Rs 40,000 Crores revenue. To register a similar revenue numbers, Patanjali needed a company like Ruchi soya which is the top player in its segment. So, the dream to grab the spot of the Top FMCG company in India, Patanjali has taken up the risk of pledging its 99% shares.

What will happen to retail shareholders

At the time of delisting, Ruchi Soya was trading at Rs 3.32/Share. The share was relisted at a value of Rs 16.1/share. Now if you see that the price difference, you find that investors got a positive benefit of almost 500% but, one should understand that it’s not the case. As per the exchange filings by the Ayurveda giant, the company has diluted the share value by offering 1 new share against the 100 old shares, implying the capital erosion of old retail investors by 99% and this was done to increase the power of promoters (Patanjali) wrt retail investors.

Can we see the FPO of Ruchi Soya in future?  

Currently retail investors are holding less than 1% of total equity, as per SEBI regulation, a listed entity has to release 25% of its equity to general public. Now to catch up that, Patanjali will be given a time frame of 2 years post the lock-in period of 1 year. This will be interesting to see, how the company will dilute its equity, an easy way would be to bring a follow-on public offer, thereby releasing a huge chunk of shares to general public. Company may also look out for bulk deals with mutual fund houses and financial services firm and organizations. Time will tell us the fate of the dilution of equity holding.

Finally, we can say the SEBI levied rule and the illiquidity of shares has moved the price of shares up, to such a level. We may see some adjustment in prices due to unmatched valuation numbers. In two to three years down the line we may also sufficient liquidity in the stock price.