What’s happening with Ruchi Soya?

Did you cover Ruchi Soya?

Can you please talk about Ruchi Soya?

All right, we get it. Ruchi Soya is making headlines everywhere. The stock price has gone on a spectacular rally and nobody knows why. However, before we dive headfirst and try to work out this little mystery, perhaps it's prudent to gain some context.


Ruchi Soya

Ruchi Soya is one of the largest FMCG companies in this country. They process crude palm oil and turn it into refined oil. You’ve probably heard of the brands Nutrela, Sunrich or Mahakosh. That’s all Ruchi Soya.

But the company has had a topsy turvy journey this past decade. Back in October 2011, Indonesia raised export duty on crude palm oil. Ruchi Soya’s input cost soared overnight since they imported most of their raw materials. Ideally, they should have been able to pass on this cost to their customers.

However, there was one tiny problem.

Indonesia had also cut export duty on refined edible oil — the end product Ruchi Soya sold. So manufacturers had a very enticing alternative — buy refined edible oil from Ruchi Soya or import from elsewhere. And since most manufacturers prioritize “cost of procurement” above all else, Ruchi Soya had no choice but to take a hit on margins. They kept competing with these cheap imports by bearing brunt of the burden themselves.

Then their seed extraction business started failing. Droughts in many parts of India hit the oilseed industry. Ruchi Soya’s manufacturing facilities were barely running at half capacity. Margins kept tumbling. It was bad and when you thought things couldn’t get worse, they lost a fortune betting on castor seeds. Then they were in hot waters with SEBI and soon after, the company’s customers started bailing too.

The final blow

Ruchi Soya made most of its money supplying refined edible oil to other consumer goods companies. However, in a bid to push sales, they offered very generous credit terms to their customers. Collecting cash became an afterthought and at the end of the day, they were left with receivables to the tune of 5000 crores. Receivables they simply couldn't retrieve. So they gave up and took a hit on their bottom line once again. Their debt burden spiralled out of control.

And in late 2017, a couple of banks finally had had enough. They dragged Ruchi Soya to bankruptcy court and the company was now there for the taking.

Here’s where things really get crazy. The lenders agreed to resolve the bankruptcy proceedings by selling Ruchi Soya to another FMCG company. Patanjali and Adani Wilmar were top contenders. Eventually, though, Patanjali won out. They acquired 99% of the company and settled ~4000 crores in dues. While this might look like an exorbitant sum, know that Ruchi Soya collectively owed ~9000 crores. Meaning the creditors only retrieved half their dues. The other half was… well… lost forever.

But wait, we are not done yet.

Putting up 4000 odd crores is no easy task and Patanjali did not have the resources to buy Ruchi Soya upfront. Instead, they put up around 1000 crores on their own and borrowed the rest from the same banks that had sold Ruchi Soya. So technically the banks loaned out ~3000 crores to Patanjali in a bid to retrieve 4000 crores in dues from Ruchi Soya.

Fascinating!!!

But wait, there’s more. Loans are often backed by collateral. Collateral that’s usually worth something*. So when Patanjali borrowed 3000 crores, you’d expect them to put up something solid. Instead, they borrowed all this money by pledging Ruchi Soya shares as collateral. In fact, they pledged almost their entire shareholding (99% of Ruchi Soya) in the process.

Bottom line — They borrowed 3000 crores using shares of a bankrupt company and the banks complied because….

Well, we don’t know.

Point of Interest: It's quite possible that the lenders took assets of Ruchi Soya as collateral as well. However, that information is not in the public domain yet.

Meanwhile the existing shareholders lost pretty much everything. An individual who owned 100 shares was reduced to holding just 1 share. It was tragic.

Nonetheless, after Patanjali's acquisition Ruchi Soya was all set for a turnaround and take a stab at reemerging from the void once again. The company relisted on the market back in Jan 27th, 2020. Shares that were pretty much worthless (just a year ago) began trading at 16.5. Perhaps people expected Ruchi Soya to turn the tide. But then in almost spectacular fashion, the company’s stock price rallied by a whopping 9100%. From 16.5 to 1500 in ~5 months, Ruchi Soya had defied all odds. A week ago, the company was worth 44,700 crores.

It’s almost comical, to be honest.

But then again, remember — less than 1% of Ruchi Soya’s shares are now trading on the open market. Very few people own these shares and if they could all act in unison they could keep buying and selling these shares at whatever value they deem fit. We’re not saying that’s what’s happening. We’re saying it’s possible.

So theoretically, a small coterie of traders could keep pumping the value of the company’s stock and in turn, boost the value of Patanjali’s shareholding. And then if Patanjali were to issue new shares, they could potentially sell it a premium. A very hefty premium in fact.

After all, regulations mandate Patanjali to reduce their shareholding to 90% in the next 12 months. So they’ll have to start issuing new shares or offload existing ones soon enough. Also, that collateral backing Patanjali’s ~3000 crore loan — It isn’t looking all that bad now, is it?

Anyhow, Ruchi Soya’s story is far from over. Some have called this the greatest miracle of 2020. Others have called for an investigation into the rapid rise in the company’s stock price. But no matter how you look at it, this is a story that’s definitely worth talking about and now you know why…


Fuel Prices

Also, rising fuel prices have been a rather contentious topic. After all, global crude oil prices have been tanking for a while now. And yet, fuel prices in India have remained firm. It doesn’t make any sense. Unless you dig deep and try to piece the puzzle together.

Ergo — What really happened to petrol and diesel prices after India resorted to a nationwide lockdown?


What else happened

Collateral Damage — In other news, the Indian pharmaceutical industry seemed to be in a bit of a quandary after authorities stopped clearing shipments of APIs from China — raw materials used in making drugs. This came against the backdrop of India’s trade pushback against China and right now, there seems to be very little clarity on how to make progress on this front. More details here.

Until next time ...

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Correction: We have added an extra note on the collateral backing Patanjali's loans