Ruchi Soya Rose 8,988% In 103 Days: 4 Reasons To Stay Away From The Stock

Ruchi Soya, the edible oil making company that went bankrupt last year has been on a relentless climb in market value, entering the top 60 companies listed in the Indian stock exchanges (in terms of market cap) last week. After being relisted on 27 January at Rs 16.9 per share, the stock has made an almost ridiculous surge of 8,988 percent to touch a 52-week high of Rs 1,519.65 on Friday, 26 June.

Those who missed out on putting money on the stock have been regretting, however, analysts have been demanding a probe into the stock by markets regulator SEBI.

If you look closer, the reasons for its surge are not that of a hopeful turnaround company with strong fundamentals.

Circuits

On Friday, after the stock's relentless rise for over 100 days to a high of Rs 1,519.65, Ruchi Soya reported a loss of Rs 41 crore for the March-ended quarter when compared to a profit of Rs 32.11 crore in the corresponding period a year ago. These results came out after market hours.

On Monday as well as Tuesday, for two consecutive days after the Q4 results, the stock price hit the lower circuit of 5 percent.

If you are an independent retail investor, stay away from the stock as its constantly trading it circuits due to low liquidity available making it difficult to enter or exit with ease.

Restructuring

On 18 December 2019, Ruchi Soya was taken over by Patanjali Ayurved through the bankruptcy process. Ruchi Soya had to initiate bankruptcy proceeding after bankers Standard Chartered Bank and HSBC dragged it to the National Company Law Tribunal (NCLT) for the close to Rs 9,300 crore debt it owed.

Patanjali Ayurved made a better offer among bidders and paid bankers around 48 percent of the company's debt. Patanjali then infused Rs 4,300 crore into Ruchi Soya via equity, debt and preference shares and as part of the restructuring of equity, the equity of previous shareholders was written down to zero.

Investors faced losses as 100 shares were considered as one at the time of delisting.

On 26 June, the company despite the net loss for the March quarter, reported a massive 100 percent increase in profit for the full financial year 2019-20 at Rs 7,672.02 crore from Rs 76.72 crore in the previous year. This profit is largely due to the debt and equity restructuring by Patanjali.

This also means that the rise in stock value was not backed by the financial performance of the firm. The March quarter results were the first quarterly earnings reported since the stock was relisted on exchanges on 27 January 2020.

Low liquidity

The most important reason (as well as a concern) for the rally is that currently 99.03 percent (about 29 crore shares) of Ruchi Soya is held by 15 Patanjali group entities, all of which are locked in for 3 years. The whole of 99 percent can't be traded and simple demand-supply dynamics will tell you that low trading volume causes a surge in prices.

Lacks clarity

Analysts have raised concerns about the massive rise in Ruchi Soya's share price. As per SEBI rules, a company has to increase the public shareholding to 10 percent in 18 months of relisting and to 25 percent in 3 years.

"SEBI should investigate why promoters are holding 99% stake even after 5 months of relisting," an analyst told Economic Times.

"Retail investors currently own less than 1 percent in the company. I think SEBI should take note and put the scrip in the T2T segment. Retail investors should not be allowed to buy such shares," the analyst added. Trade-to-trade (T2T) is the segment where one compulsorily take delivery for every trade, and cannot square off intraday.

Further, while COVID-19 may have been partly responsible for the operational loss in Q4, the kind of rise in share value cannot be due to exceptional scope of a rise in sales of the company's edible oil or other soya products. Most traders are banking on the hopes of a reverse merger of Patanjali Ayurved with Ruchi Soya.

The insolvency resolution plan put forward by the Patanjali Group included the reverse merger of consortium Adhigrahan with Ruchi Soya.

Further, Patanjali's Baba Ramdev has also been quoted in news reports saying that for the year ended March 2020 the combined revenues of Patanjali Ayurved (Rs 12,000 crore) and Ruchi Soya (Rs 13,000 crore) is Rs 25,000 crore and hopes that the combined revenues will reach Rs 50,000 crore to Rs 1 lakh crore in the next five years. For the current financial year, he said the combined revenue target is Rs 35,000-40,000 crore.

Notably, Patanjali Ayurved reported revenue of Rs 3,562 crore for the first half of the financial year 2019-20, but the company did not share a net profit figure.

On the other hand, Ruchi Soya made revenue of Rs 13,117 crore for the financial year 2019-20 but operating profit was significantly lower at Rs 210 crore. For Q4, it reported an operational loss.

Analysts say that there isn't enough data in the public domain to justify a market cap of Rs 44,592 crore, that makes it bigger than Marico, Tata Steel, HPCL and more.

"SEBI should not give more time to the company for any offer for sale (to public shareholders). To protect investors, there is a need to get clarity over promoters' next step," an analyst told Economic Times.

The terms of the reverse merger are currently unknown and there isn't data to forecast future earnings to bet on the stock, making it a risky bet for a retail investor.

Disclaimer

The article is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.