Ruchi Soya - An Healthy Investment

Ruchi Soya is one of the largest agribusiness companies in India. Ruchi is one of the largest producers and suppliers of vegetable oil and Soya food in India. Ruchi is also the highest exporter of soya meal and lecithin from India and it's brand Nutrela being the largest selling Soya food brand in the country. Ruchi currently has capacities of 2 MTPA of refining and over 2.6 MTPA of crushing spread over 12 strategic locations.

Ruchi Soya distribution reach covers around 5,83,000 retail outlets which includes strong brand portfolio such as Nutrela, Ruchi Gold, Ruchi Star, Mahakosh, Sunrich. As of Dec' 07 edible oil accounts for 72% of the revenue, Followed by Soya products 17% and vanaspati 9%. Ruchi currently accounts for 19% market share of edible oil business in India. Currently branded portfolio accounts for 29% of the business.

The company is the highest exporter of Oil meals from India with it's export presence in most of the south east Asian countries, Middle East and Europe.

Positives

1) Ruchi has entered into national tie-ups with celebrated players like Pantaloon retail, Subhiksha, Reliance Retail, Aditya Birla Group for sale of it's product through the growing modern retail outlet in India.

2) Soya being one of the best source of Vitamins and Proteins, Ruchi is well positioned in growing wellness and health food products. The company is planing to introduce Soya based flours like multi blend flour and also 100% soya flour. Ruchi is also diversifying into mustard products.

3) The company recent venture in to protein drink N'rich is expected to add on to the topline going forward. Apart from the branded products the company is also a manufacturer for pantaloon's private label - Fresh and Pure.

Risks

1) Government current measure to curb inflation by cutting import duty on edible oil.

2) Falling Oil prices in the international market.

At the current market price of Rs. 91/- the stocks trades at around 8 times it's FY09E EPS of 11. The earnings are considerate of the government recent impact to cut import duty. Investor with medium to high risk profile can consider investment into this stock with a horizon of 12 months and a target of Rs. 130/-. Ruchi currently operates in a low margin segment and any further duty cut by government can severely impacts it's margin unless they are able to procure raw materials at a lower cost. This remains a key risk to our recommendation.

West Coast Paper Mills Ltd

West Coast Paper Mills manufacturers writing, printing, wrapping and packing papers. West Coast paper division currently has an installed capacity of 1,63,750 MTPA. FY2006-07 the production at their capacities were running over 100%. West Coast also has a telecom cable manufacturing plant which produces armoured and aerial typed of Optical fiber cables and JFTC cables used in telecommunication network. Currently paper constitutes 96% of the revenue and the remaining by the cable division.

West Coast Paper Mills currently enjoys 7% market share in the domestic paper market. The telecom division of West Coast enjoys 4% market share. Some of the major clients for the cabling division includes BSNL, Reliance, VSNL, CATV among others.

The company currently exports 7 to 8% of its paper products to around 25 countries mainly to middle eastern and african countries. The export order book for the cabling division stands at Rs. 5 crores for FY08.

Positives

1) West Coast is investing around Rs. 1,100 crores in Expansion whereby it is increasing its pulp and paper capacity from 1,63,750 MTPA to 3,20,000 MTPA. The benefits of this project is expected to be realized in FY2009-10.

2) Over a period of 5 years, the company contrives to have 18,000 acres under management for its raw material supply. These initiatives are expected to meet about 25% of its raw material requirement.

3) West coast is leader in production of MICR/Non-MICR cheque paper and Ledger Paper.

4) Step down of excise on paper and its products in the 2008-09 budget.

Negatives

1) High debt leverage for the ongoing expansion program to impact the bottomline due to high interest cost.

2) Paper consumption is directly tied to the GDP growth. Any deterioration in GDP growth can dent the performance of the company.

3) Any further increase in raw material prices which the company is not able to pass on to the end customer. This can happen due to the inflation control program launched by the government.

At the current market price of Rs. 65/- the stock trades at around 4 times it's FY08E EPS of 16. Investor with medium risk profile can consider investment into this stock with a horizon of 18 months and a target of Rs. 118/-. With the government primary thrust to education and the booming textiles and manufacturing exports the demand for paper products is expected to remain strong. With rising raw material prices we expect the topline of the company to be flat until the expected capacity expansion is in place. At the same time with the operation efficiency initiatives taken by west coast we expect the Operating margins to remain robust and deliver a bottomline growth of 20% y-o-y.

A Question of Answers - Mail replies

I am holding Tata Motors at an average price of Rs.815. Do you see any recovery possible in near term?

Kudos to Tata Motors for making the world most luxurious car brand come under the Indian portfolio. Having said that tata's have surely got a brand image but only to harm it's bottomline. The acquisition is a difficult to be turnaround with the terms and conditions these acquisition has been negotiated on. I would wait for atleast 3 quarters to see how things move on the integration front. As of now we have a Sell on tata motors. Their domestic brands are as well losing market share to hyundai, maruti etc.

I would rather bet on Mahindra and Mahindra in automobile sector for a term of 2 years. This brand is gaining good global presence. Again with high inflation rate and a possible rate increase the outlook of automobile sector looks very gloomy at this point.

Your views on Abhishek Industries and vesuvius India?

Both are one of the few market leaders in the business they operate in.

On Abhishek Industries

I would say Invest in this stocks if you have patience and also believe in the company. Abhishek is definitely one of my favorites. The company as such has seen a strong topline growth of around 20 to 30% y-o-y. The bottomline has been dented mainly due to high interest cost and depreciation due to the huge capex the company is undergoing.

Two negatives to the companies

1) Rupee appreciation and a possible US recession
2) High interest rate would adversely affect its bottomline due to its huge debt leverage.

I would advise investors to use any fall from the current level as an opportunity to enter into Abhishek and take advantage of its aggressive capex returns.

On Vesuvius India

Vesuvius India is one of the largest manufacturers of refractories which is used in the steel Industry. With huge capacity expansion in the domestic steel sector the order book is expected to remain strong for Vesuvius. Moreover Vesuvius is almost doubling its unshaped refractories capacity and this is expected to be done by FY09. Add on to this the company is debt free which makes it a nice hedge to the rising inflation and interest cost. The stock at current market price of Rs. 208/- trades at around 13 times it's trailing 12 months EPS of 16 which provides a room for around 30% return in and around a year.

I have been following your blog continuously and you have been having a bearish view of the market for almost 6 months now. With most of the stocks correcting more than 40% has your view changed on the Indian Markets?

The global outlook still looks negative with the US seems to be already in a recessionary phase. As of Indian markets are concerned I would be cautious and go for stock specific buying. I would look for undervalued stocks with strong fundamentals. I will still hold some amount of Cash in hand for the worst.

With the Inflation rate touching 7% and a possible rate hike in place it is advised to Invest in companies with fewer debt in place at the same time having good business model to sustain with.

Thanks for your recommendation on Neyveli Lignite, I made a hefty profit on that stock. At the same time I had brought JK Lakshmi Cement on your recommendation and it is down almost 40% from my purchase price. What is your view on that?

I am still holding JK Lakshmi cement and positive on this stock from a term of 18 to 24 months. True the correction has really hurt the stock to a larger extent but the business fundamentals still look solid.

You seem to be too much positive on Orchid Chemical. After the promoter sale their holding has come down to almost 14% now. Do you not see that as a negative sign?

I don't think so. The promoters of Infosys are holding only 16% in the company. This does not make Infosys a non promoter friendly company. Still as I reiterated earlier there has been some negative news on Ochid and to add on to this lot of liquidity has been floating on the market. I feel time will heel the Investors negative bias on the company and Orhcid will regain it's lost glory.