The uncanny investor in C Sivasankaran is making a disruptive move in the staple but commoditised foods business in these inflationary times.
Sivasankaran-backed firms have built up nearly a 11% holding in edible oil and soya products company Ruchi Soya, India's largest player in this space, in less than two weeks. What has Siva, as he is called in close circles, seen that most analysts seem to have missed? A value buy in the core foods play can rake in big bucks if firms like Ruchi Soya get their integration story right. Companies like Ruchi Soya and Sree Renuka Sugars have been betting heavily on backward integration through accumulation of large tracts of agricultural land in India and overseas.
And this comes at a time when inflationary pressures, and warnings on food scarcity, are taking centrestage of socio-economic discussions globally. Add to this the chance of edible oil being chased by both bio-fuel demand and human consumption. "I would like to believe that Sivasankaran's entry is very symbolic, coming at a time when structural changes are happening in the commoditised foods business. There will be a significant spike in valuations if Ruchi Soya, or anyone as big as them, can pull off the integration story," said Sanjay Jain, Director, Taj Capital, a New Delhi-based boutique investment firm.
Siva, who once raided several listed counters, may be stepping into Ruchi Soya in tandem with Indore-based Shahra family that controls the company. Backward integration is the current theme for a player like Ruchi Soya. A better grip over the critical first mile, controlling oil seed plantations, could translate into a significant uptick in profitability in times of volatility.
Ruchi Soya reported Rs 93.1 crore net profit on a topline of Rs 12,167 crore for FY09, indicating wafer thin margins it operates on currently. Simultaneously, Ruchi Soya is also tapping the last mile retail story with brands like Nutrela even though a sharper focus appears to be on the backward integration involving plantations across continents.
Since mid-December, the share price of Ruchi Soya has increased by more than 25% to closing today at Rs 103.75. The promoters have also recently increased their stake to 42.24% from 36.24% through a preferential allotment on 13 February.
According to sources, firms such as Ruchi Soya, which leads the domestic edible oil pack that also include peers like Adani Wilmar, Cargill and KS Oils, will be adding more oil seed plantations in South East Asian countries. The backward integration in soya could happen in Latin American markets such as Argentina and parts of Africa.
In India, Ruchi Soya has been scouting for larger agri land banks in Andhra Pradesh, Karnataka and Tamil Nadu. Its recent acquisition of Palm Tech has given the company exclusive rights for 55,000 hectares of palm oil plantation in Andhra Pradesh and Karnataka. .As of March 31, 2009, the company has a planted area of 13,645 hectares out of the total potential of 55,000 hectares of development in the region.
The Ethiopian Government has also given Ruchi Soya 61,775 acres land for cultivation of soyabean and processing facilities on lease basis for a period of 25 years. This could go up to 1.23 lakh acres based on the performance, said the company in a stock exchange filing last month. The soya story is acquiring interesting hues as it finds a place as non-vegetarian derivative in vegetarian cusine worldwide.
While the company is on the prowl for mopping up agri-lands, its acquisition of Gemini Edibles was intended to bolstering the refining play especially in southern markets. Ruchi Soya currently has palm oil refinery capacity of 20 lakh tonnes a year and plans to increase that by an additional two lakh tonnes per annum through brownfield expansion at Kandla and Haldia refineries. The company has chalked out an outlay of around Rs 100 crore to increase refinery capacity at both Kandla and Haldia by two lakh tonnes a year.
As we script this story, the latest inflation numbers are out, indicating a rise in food inflation to 17.87% for the week ended Feb 20 as compared to 17.58% the week before. The government's decision to raise fuel prices has lead to fears that food inflation could rise. The oil prices are also globally rising on the backdrop of economic recovery which could boost fuel demand.
The entry of Siva, who is known to make big ticket investment exits, could help in getting the sector re-rated. "The trouble here is that the sector has had a history of fly-by-night operators in the past, and hence there is a bit of reputation baggage," explained Jain of Taj Capital.
Siva, the chairman of the Sterling Infotech, has several businesses in the food and agricultural space. Aiwo Ltd, part of Siva's Sterling Infotech Group, was set up in 2005 in the health and low-calorie food space. Another one of his group firms is Sterling Agro Products Processing Private Limited, which is involved in export of agricultural products.
Siva has managed to make money by buying and selling companies in diversified sectors like banking, telecommunications, retail and most recently the real estate sector. Currently he has interests in areas like telecom, wind energy and shipping.
Siva is currently scripting a bulge bracket exit, estimated at close to Rs 3000 crore, from lifestyle real estate venture Aamby Valley, where he picked up 49% stake for Rs 1,800 crore in 2007.
Siva, who sold his first telecom firm Aircel to Malaysia's Maxis Communications for $1.08 billion, is now back in the play with S Tel, a new telecom operator with licences in six circles, and in the midst of a larger roll-out. His other deals include companies like RPG Cellular, Barista, Tamil Nadu Mercantile Bank and Best & Crompton. Could edible oil, the least glamourous of his picks till date, join this list?
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