Ramdev-led Patanjali’s magic recipe behind meaty gains from Ruchi Soya

Yoga, they say, can elevate one to a higher plane of consciousness. But what happens when a Yoga guru takes over a bankrupt business? It soars.

On 18 December 2019, edible oils major Ruchi Soya Industries Ltd was officially bankrupt. 

On that day, a Wednesday, Patanjali Ayurveda, the Yoga guru Baba Ramdev-promoted FMCG company paid Rs 4,350 crore under a resolution plan approved by National Company Law Tribunal (NCLT) to acquire a 98.9% stake in the company from the Dinesh Shahra family. 

Soon after, in February 2020 Ruchi Soya re-listed on the bourses after being suspended from the stock exchanges a few months before.

And then, things took such a turn that they put Ramdev’s masterful yogic wizardry to shame. 

Just over two years and four months later, Ruchi Soya commands a market capitalization of more than Rs 25,600 crore and Patanjali’s stake is now worth more than Rs 25,300 crore, or nearly six times the money it had paid for the bankrupt company.

Last week, the company launched a follow-on public offer (FPO), hoping to garner Rs 4,300 crore, of which, it has already raised Rs 1,290 crore from anchor investors. The price band for the offer is Rs 615-650 a share, significantly lower than its current market price of Rs 873. The public issue closes March 28.

Following the FPO, Patanjali’s stake in Ruchi Soya will come down to 81%, while the remaining 19% will be held by minority public shareholders. 

As of 25 March, Ruchi Soya had received bids for 1.8 crore out of the 4.89 crore equity shares it has offered to the public, a 37% subscription, till the second day of the FPO. 

Retail investors have put in bids for 39% shares of their reserved portion, while the allotted quota of employees was subscribed 3.68 times. Qualified institutional buyers and non-institutional investors also started submitting their bids, as the portions set aside for them were subscribed 41% and 26% respectively.

Ruchi Soya’s FPO is in line with the guidelines of market regulator, the Securities and Exchange Board of India (SEBI) and are part of the bankruptcy resolution. Patanjali has to increase the free float in the company to 10% within 18 months of the takeover. To meet the stipulations of SEBI’s takeover code, it has to increase the public shareholding to 25% within three years of its re-listing. 

The hen that lays golden eggs

However, these numbers do not fully describe how the company has seen a stupendous turnaround in its fortunes and has proven to be the proverbial hen that lays golden eggs for its owner. 

In fact, Ramdev’s Patanjali is not the only shareholder that has managed to make a killing from Ruchi Soya. Delhi-based Ahav Advisory LLP, a little-known company related to auto components manufacturer Minda Corp, managed to turn a Rs 13 crore investment made via a preferential allotment in February 2020, into Rs 1,500 crore, in just five months. 

This was just around the time Ruchi Soya’s stock had zoomed inexplicably from Rs 21.55 per share in February, upon re-listing on the stock exchange, to Rs 1,519 apiece, on 26 June 2020.    

Citing regulatory filings, the Business Standard newspaper had reported in July 2020 that Ruchi Soya had agreed to issue 18.67 million shares to Ashav Advisory LLP on a preferential basis at mere Rs 7 per share — a massive discount to the then market price of Rs 48.7 on that day. “Ashav Advisory bought the stake at Rs 13 crore, which is now valued at about Rs 1,500 crore,” the report had said. 

“On 27 January 2020, the shares were listed at Rs 17 apiece. The stock price rallied to a 90x growth in just five months to Rs 1,535 per share on 29th June. For a company that had been acquired in a bankruptcy sale just months ago, this was an incredible feat,” the July 2020 report said.

Subsequently though, the stock price began declining just as quickly as it had shot up, bottoming out at Rs 446.25 on 25 September 2020, before it again began a slow climb up. It is presently trading at Rs 870 levels. 

The rise in the company’s share price and the subsequent fall, were intriguing, but not totally unwarranted. With nearly 99% of the stake held by the promoters, it has had a public float of just over 1%, severely restricting trading volumes and giving enough elbow room for interested parties to influence the price to their advantage. 

Banks burn a big hole

Rochi Soya’s shareholders profited, even as Indian banks that financed the previous bankrupt management with thousands of crores in loans, were left twiddling their thumbs, and staring at massive holes in their balance sheets.  

Financial news website Moneylife reported that State Bank of India (SBI) wrote off Rs 746 crore of non-performing assets (NPA) of Ruchi Soya and had not recovered a single rupee from the company. SBI also gave a fresh loan of Rs 1,200 crore to Patanjali Ayurveda, to buy Ruchi Soya.

The news website further says that while the government-owned lender was to recover around Rs 883 crore as per the resolution plan under the Insolvency and Bankruptcy Code (IBC), till March 2020, it had got nothing. 

Ruchi Soya was in fact, among the top 10 defaulters in the country as per a statement by the All India Bank Employees Association (AIBEA) as of early 2020. It owed Rs 1,618 crore to SBI and Rs 289 crore to Bank of India, as on 30 September 2019 per AIBEA, the Moneylife report said. 

The origins, the expansion and the pain

Things weren’t always so bad for the company. Ruchi Soya was founded in 1986 and went on to become the biggest producer of soya foods in India, and one of the most recognised brands in the Indian fast moving consumer goods (FMCG) space. 

In fact, it was one of the only companies in the business with a presence across the whole value chain across both upstream and downstream businesses, including palm plantations. 

Apart from edible oils and their byproducts, Ruchi Soya also produces several other products like oleochemicals, textured soya protein, honey and atta, oil palm plantation, biscuits, cookies, and rusks, noodles and breakfast cereals, nutraceuticals and wellness, and wind power. 

But then began a run of bad luck and self-inflicted injury. Ruchi Soya’s tale of woes had begun as far back as 2011 when the company had to face unfavourable duty structures that made imported Indonesian refined palm oil cheaper than imported crude palm oil. 

This severely impacted its edible oil refining business, followed by two successive monsoon failures in 2014 and 2015, that hurt seed extraction, effectively singing its second largest revenue earning business. This, even as production of soybean in other countries remained healthy, further exacerbating Ruchi Soya’s problems. 

The company had a long working capital cycle, leaving it short on cash. Short term borrowings, made to tide over the working capital crisis, soon left it under a Rs 9,000 crore debt pile, eventually leading to insolvency proceedings.  

Then, in May 2015, Ruchi Soya bet that castor seed prices would rise as high as Rs 5,000 per quintal. But it did not hedge its bets and paid the price. Global demand dropped, and it was left with cash losses in the futures market, eventually leading to a ratings downgrade. 

Around the same time, it came under scrutiny for allegedly manipulating castor seed futures contracts. In May 2016, Ruchi Soya and a group company National Steel and Agro Industries Ltd were barred by SEBI from accessing the securities market, finding the company guilty of forming a cartel to execute trades in the castor seed futures market in January 2016 to “corner/control the market on the long side in castor seed contracts.”

What further hurt Ruchi Soya was the fact that it is a supplier to FMCG companies that make finished products, rather than directly to consumers. This effectively elongated the working capital cycle, causing its short-term borrowings to pile up, and the company eventually whittled under the pressure of the loan pile and collapsed. 

A lengthy insolvency process followed, with Gautam Adani-promoted Adani Wilmar emerging as the highest bidder for the beleaguered Ruchi Soya, with a Rs 6,014 crore offer—Rs 4,300 crore to be repaid to creditors including SBI and an equity infusion of Rs 1,714 crore.

Adani had sought to buy the company for a song, as the price it had quoted was just a sixth of Ruchi Soya’s peak market valuation of Rs 36,000 crore. 

But the process dragged on, and by December 2018, Adani pulled out of the process, leaving the coast clear for Patanjali, which was the second-highest bidder. Ramdev’s company pounced on the opportunity, and exactly a year later, had Ruchi Soya in its bag. 

New beginnings

Ruchi Soya says that it will be net debt free following the FPO, even as it is looking to reorganise its business. There are overlaps between Patanjali’s and Ruchi Soya’s businesses and to sort that, it is set to bring all the food business under its own brand and management. 

In May 2021, the biscuits, breakfast cereals and noodles business of Patanjali was transferred to Ruchi Soya on a slump sale basis, for Rs 60 crore, in May and June last year. Other Patanjali food businesses will also be transferred going forward. 

This, even as it adds nutraceutical business to its portfolio and looks to increase its palm oil cultivation from 57,000 hectares to 3 lakh hectares. 

Yoga guru Ramdev would certainly be hoping that his company’s plans come to fruition. Else, he may have to face the wrath of the markets that have a mind of their own and operate on their own plane of consciousness.