Ruchi Soya: How a Bankrupt Company Gained 8929% in the India Stock Exchange

Note: All currency and amount in this article is in INR.

Ruchi Soya is one of the largest manufacturers of edible oil in India. It is currently acquired by Patanjali Ayurved.

Ruchi Soya Industries Limited manufactures and sells edible oils, vanaspati, bakery fats, soya chunks, granules, soy flour, textured soy protein, fruit juice, and soya milk. Moreover, the company also offers gram, wheat, rice, maize, sorghum, seeds, coffee, marine products, peas, barley, soap, fresh fruit bunch, seedling, and plant & machinery (equipment).

In December 2017, Ruchi Soya Industries entered into the Corporate Insolvency Resolution Process. It had a total debt amounting to INR 12,000 crore. This was before the company was acquired.

Patanjali Ayurved, a company with chairman Balkrishna Ramdev and widely represented by popular personality Swami Ramdev, then acquired the struggling company in a bankruptcy sale for INR 4,350 crores in December 2019.

Ruchi Soya was relisted on the National Stock Exchange of India (NSE) at INR ₹2 per share on January 24, 2020, under the symbol "RUCHI."

Sanjeev Asthana was appointed the CEO of the company and he has been effective from July 6 of this year. His term lasts for 3 years.

As of writing, the company's stock is priced at INR 784.45 in The National Stock Exchange of India Limited (NSE).

Ruchi Soya’s Market Movement

Ruchi Soya saw a leap of 8929% in five months of relisting after insolvency, and then a steep fall for six consecutive trading days.

On 24 January 2020, Ruchi Soya was listed on NSE at the price of ₹2 per share. Within 6 months of its listing, the stock price soared to ₹1519.65 on 26 June 2020.

(Pic taken from moneycontorl.com)

When Patanjali Ayurved acquired the company, its shares were listed at a meager INR 17 per unit.

Interestingly, this spike came at a time when Sensex had fallen 11% over the last five months.

Is Ruchi Soya’s stock behaving normally?

Numerous questions have been raised in the investing world about the rising and rapidly consolidating share price of Ruchi Soya.

In fact, the surprising stock movement of this company is seen as bizarre by the investing communities worldwide.

In this article, we analyze the factors that might have contributed to the stock uproar of this company.

1) There is less volatility of the stock.

99.03% of Ruchi Soya’s stock is owned by promoters. This creates an extreme shortage of liquidity in the market. As a result, the market cannot determine the best equilibrium price because there are only a handful of investors. 0.82% is owned by the public and the remaining 0.14% by “others.”

This means the stocks that are trading at such high prices are only 0.82% of the total stocks.

This results in extremely low volume and wide bid-ask spread in the stock market.

According to existing listing guidelines, companies have to ensure 25% public shareholding. However, since Ruchi Soya Industries was relisted following the resolution process, the promoters have 18 months to raise the non-promoter shareholding to 10% and 3 years to take it to 25%.

2) Suspicion of a reverse merger

In a documentary titled “The China Hustle,” the allegedly next big crisis-causing situation after the 2008 Housing crisis is documented.

The documentary revolves around how Chinese companies with shady businesses enter the New York Stock Exchange by merging or acquiring public companies in the NYSE.

This lets the companies trade freely on the stock exchanges around the world without having to go through the lengthy and scrutinized process of issuing an IPO.

A handful of analysts and investors are suspicious of whether Patanjali Ayurved is trying to do the same thing.

On their defense, this claim has been denied as factually incorrect by Patanjali Ayurved in a disclosure to the stock exchanges. Acharya Balkrishna is the chairman and MD of Ruchi Soya while Yoga guru Baba Ramdev is a board member.

So is the stock safe to buy now?

Numerous analysts believe that a company that has come out of an insolvency process is like a BlackBox with no clear picture of its current financial situation or the future growth potential. As such, they believe passive investors should study further before placing a bet.

How were the company fundamentals before the acquisition?

According to the print.in, “Ruchi Soya Industries reported a loss of Rs 41 crore in the quarter ended March 2020 and total revenues of Rs 3,190 crore — the first quarterly results after the acquisition. The results were announced on 26 June and since then the stock has seen a downward slide.

(Data were taken from moneycontrol.com)

At the time of the announcement of the results, the company said the pandemic has impacted capacity utilization at its plants due to the unavailability of labor and transportation as well as the procurement of packing materials. However, it expressed confidence in recovering its trade receivables.”

Referring to the market movement, Kolkata-based investor Arun Mukherjee says, “Nothing is related to fundamentals. It is a perfect example of demand-supply dynamics.”

Conclusion:

Many believe that the stock price will come to its intrinsic level once they raise public shareholding and the market gets more liquidity.

While investors in NEPSE aren’t concerned about the Indian Stock Market, the case of Ruchi Soya is a perfect example of how market movements can sometimes be highly irrational. Sometimes nothing makes sense, and yet some lose money while some catch multi-bagger companies.

The investment world is a massive world compared to the Nepalese Stock Exchange. It is always beneficial to think outside the box and outside our realm of operation.

Let us leave you with a relevant quote:

“Start to think outside the box because there is no box. Only the universe is your limit.”

Inputs from NSE, economictimes.indiatimes.com, theprint.in among others.