Natural Resources is seen as the next big oppurtunity with Mutual Funds coming out with an NFO on the sector (Reliance, DSP, Tata & Sundaram BNP). RNRF bought Ruchi Soya on Friday. The company looks interesting to me. Since margins are low, it will act as an entry-barrier.
9m FY08 PAT grew 59% YoY
From an interview of Dinesh Shahra, MD to DNA
These are exciting times for Ruchi Soya?
Ruchi Soya is a food processing company with a focus on vegetable oils. We are the largest edible oil processor in the country. The soy operations contribute about 40% to our turnover and the rest comes from other vegetable oils, soya foods etc. The industry size is about Rs 60-65,000 crore and is growing at 6-7% per annum. The future indeed looks promising.
What makes you so optimistic?
There are two reasons. Thanks to global bio-fuel initiatives, farmers are getting very high prices for agricultural produce. Soybean prices have shot up from Rs 10-15,000 per tonne last year to about Rs 22,000 this year. Last year the soybean produce in the country was about 7.8 million tonne. This year we expect at least 9.6 million tonne.
We have a capacity of 9000 tonnes per day. We will thus be the biggest beneficiary of this growth.
If the nineties brought information technology to the forefront and post 2000 was good for the telecom and infrastructure sectors, I strongly believe that 2007-2015 will belong to the agro-industry.
But your plant utilisation is still very low?
True. Our utilisation was around 65%. It only means we have enough headroom to grow faster. This year (to March 2008), our capacity utilisation will be 70-75%. So our capacities are intact. As we improve our utilisation, our profitability will improve further.
Prices of Ruchi’s main raw materials — soybean & palm oil — are also rising. This could impact profitability?
Basically, we are in a conversion business. If commodity prices increase so does the value of our inventory as we keep one month inventory for raw materials.
Because the American and Chinese soy crop has stagnated or put to other uses, the Indian crop is in great demand in southeast Asia. It is selling like hot cakes. In normal times we sold soymeal at $8-10 premium per tonne, we now sell at a premium of $40 per tonne.
Last year, the freight cost from Argentina was around $40 per tonne. It is now at about $110. India thus is in a commanding position. We get a premium. There is a queue out there, with the Japanese, Indonesian and even the Chinese lining up for our produce. This year the soybean industry is in great shape. Most of the players would have substantially improved their profitability margins.
What is Ruchi’s marketshare in India?
We have an almost 25% marketshare and we are expanding further. We are not only increasing our utilisation capacity but also adding capacity.
Are margins improving too?
The margins are definitely improving. This is apparent from our six-month performance. We are confident that it will improve further in the coming six months as the growing demand gives us the pricing power. Moreover, our capacity utilisation is improving.
As a major soymeal exporter, is the appreciating rupee a concern?
Appreciating rupee is definitely a concern. But with farmers getting higher prices some set-offs are possible. It hardly matters to them. In that sense rupee appreciation is not a serious concern and is not affecting the industry. We enjoy the pricing power.
Since it is a commodity, can you command customer loyalty?
We have dedicated Japanese customers who are highly quality conscious. They give the best price but demand high quality standards. Asia’s largest poultry feed manufacturer (CP group) with whom we have a tie-up, has their man posted in Indore. They pay a $15 to $20 premium for our quality produce.
The Adanis and KS Oils are your peers? They too have aggressive growth plans?
India consumes about 12 million tonne of vegetable oil. While seven million tonne produced domestically, five million tonnes are imported. Ruchi is the largest importer and processor of vegetable oils and commands 28% market share in this segment. We have six port-based refineries covering the entire coast of India.
Is the palm oil business as robust as soyoil?
As a result of the bio-fuel movement across the world, we see a lot of soybean crop being diverted to bio-fuel manufacturers. This is especially in countries like Argentina and Brazil.
This has pushed up soybean prices. Its free on board (FOB) price is $1200 per tonne now as against $600 a year back.
Palm oil is relatively cheaper — almost $150 cheaper.
The freight cost is also cheaper for palm oil as it comes from Indonesia and not from Argentina. So India is switching to palm oil. If we imported 5.5 million tonnes of edible oil last year, close to 4.5 million tonnes was palm oil. Ruchi is the largest processor of palm oil and we enjoy the best margins.
You are also entering the highly fragmented mustard oil industry?
We are present in the two major segments in the vegetable oil market — soyoil and palm oil.
Mustard oil is a very fragmented business. About 3000-4000 companies operate in this segment and government regulations have restricted growth in the sector.
In the next three years we’ll take leadership position in mustard oil. We have acquired a 150-tonnes-a-day plant in Ganganagar which we will expand to 1000 tonnes/day by the next fiscal year. We’ll thus have the largest mustard oil plant in the country. It is located there because mustard seeds are grown in plenty in the Rajasthan.
We have also recently acquired another plant in Rajasthan for processing mustard oil near Kota. Again it will integrated in terms of mustard processing. We are in an advanced stage of negotiations to acquire the assets of another plant in MP. We’ll do another greenfield project in Rajasthan.
Wouldn’t Ruchi’s tie-up with Kishore Biyani’s Pantaloon take away your share?
We have a large manufacturing capacity. This exclusivity will come in co-branding. We will provide them private labels. If we don’t partner them they will anyways tie-up with others. Since we are the largest maker of edible oil and also because we have a pan-Indian presence, many other retailers have approached us.
What are your plans for jatropha farming?
As a bio fuel industry, energy prices are very high. India is deficient in edible oils so edible oil cannot be diverted into the energy sector. So Jatropha is a wonderful crop. The government is encouraging contract farming and the conversion of wastelands in MP and Maharashtra. We’ll be putting plants in Rajasthan, MP and Maharashtra.
Are you open to acquisitions as a strategy for growth in India and abroad?
We are always been open to buying any plant which is on offer to us provided it comes at the right price and enjoys a good location. We are open to palm plantation in Malaysia and Indonesia. We are looking at setting up greenfield palm plantations in Indonesia. We are also looking at growing Jatropha in South Africa and East Africa. At the moment the opportunity in India is enormous.
Any other segments your company is looking at?
We will like to have a complete portfolio of edible oils. Coconut and sesame oils will be used to blend oils. These are cheaper.
In India, about 70-75% of the market is still dominated by loose edible oil. In the last three years, there has been 25% conversion. There is room for growing and we’ll secure the supply chain for palm oil.
We would like to have some good brands and strengthen our presence before we venture into brand building outside the country. We are looking at 30% market share.
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