Spot the opportunity

GUEST COLUMN

Dear Manisha (who sent me an e-mail asking for a buy list while I was writing my column on Friday evening),

I feel like the batsman who has finished a torrid T-20 game and is now headed for the Test match. I am secure in the knowledge that I will now - post-crash - be judged not as much by the delivery in which I failed to score as by the over in which I successfully protected my wicket; I will be favourably appraised not as much by the edge that streaked for four as by the outswinger that I prudently resisted for the wicket keeper to collect.

And it is with this realisation that I present my column to a world that suddenly wants to make money but okay, well, not overnight; a world that suddenly concedes that yes, it wouldn't mind buying for the medium term and without looking at the daily quote; a world that suddenly confesses that it would rather be preoccupied with what happens to profits than remain obsessed with what happens to prices.

Before I share my sesame, a disclaimer:

People buy stocks for two reasons: to protect their capital and to grow it. This sequence is deliberate. To be able to finish first, I must first be able to finish. So this need for capital preservation means that I must decide on a course strategy that makes it possible to safeguard what I have and then - and only then - enlarge it.

So how do I protect my capital? Simple. I buy stocks at a discounting (based on prospective earnings) that is so low that my capital stands preserved even in the worst of markets.

How do I enlarge my capital? Simple. I buy stocks of companies that will grow considerably (based on prospective earnings) so that my corpus can enlarge for years on end.

A number of things start happening when you integrate these disciplines:

The downside limited, the upside significant

Growth beyond the P/E at which you have bought comes for free - and often sustainably

You don't just earn income; you create wealth

This is precisely the rationale behind the selection of the stock that I discuss in this column. Riddhi Siddhi Gluco Biols. India's largest starch manufacturer and fastest growing starch company, manufacturing maize starch powder, liquid glucose, dextrose monohydrate, maltodextrine, high maltose corn syrup, dextrose syrup and allied by products.

This is why I am optimistic about the long-term prospects of this company:

Its products are not hostaged by dependence on few sectors. Its products represent a critical input in some of the things integral to every day living - food, beverage, confectionery, pharmaceutical, textile and paper industries.

Its sustainable demand prospects are remarkable. An Indian consumes nearly 1 kg of starch a year on average, the global citizen consumes around 6 kg of starch a year and the American nearly 64 kg a year, indicating room for significant year on year growth.

There are more than 1,000 known downstream applications of corn starch, of which a mere 35 applications have been commercialised by Riddhi Siddhi until now. Two simple applications - use of starch in the manufacture of ethanol and in the construction industry - can alone transform the starch industry's size and scope.

The company enjoys a strong pedigree; not only do its promoters enjoy a rich experience but they made the prudent decision of divesting the company's stake in favour of collaborator Roquette Freres, the world's third largest manufacturer of starch and starch derivates with a marketing presence in more than 100 countries. This ensures that the company possesses an immediate access to precious intellectual capital - no reinventing the wheel - that could translate into rapid productisation.

The company works closely with brand-enhancing food companies like Nestle, Heinz, Cadbury, Hindustan Unilever and Britannia and pharma companies like Ranbaxy, Wockhardt, Sun Pharma and Nicholas Piramal with repeat business and sustainable revenues.

The company invested in one of the most technologically advanced facilities in Asia (at Uttaranchal) during the current financial year, which will translate into new grades for the first time in India and the highest yields in the Indian starch industry. 

STARCH APPLICATIONS
Product	Application
Food and drink	Thickening agent in sauces, gravies, puddings and pies, preparation of baking powder and salad dressing
Textile and yarn	Sizing, finishing and printing, imparts strength to the yarn and stiffness to fabric
Paper	Gives strength, surface fuzz and stiffness to paper
Pharmaceutical	Compressing agent in tablet manufacture, dusting agent in the manufacture of surgical gloves
Adhesive	Used as an adhesive in pigment coating for paperboard
Bakery	Provides necessary sweetness, longevity and freshness
Leather	Imparts glossiness, fineness and optimum weightage
Industrial application	Manufacture of antibiotics, sorbitol and gluconates
Ice-creams and frozen dessert	Lowers the freezing point, provide a soft, creamy and plea sant mouth-feel, without increasing the sweetness

Why is all this relevant now?

Because Riddhi Siddhi commissioned an increase in corn milling capacity from 283,000 tonne a year to 500,000 tonne a year during the current financial year and announced interesting sequential (not corresponding) numbers for the third quarter of 2007-08.

A sharp increase in total income from Rs 60 crore in the September 2007 quarter (quarter affected by an industrial mishap) to Rs 88.3 crore in the December quarter

An attractive increase in EBITDA from Rs 10.24 crore in the September 2007 quarter to Rs 15.76 crore in the December quarter on an equity of Rs 11.14 crore

An increase in EBITDA by Rs 5.52 crore across the quarters but an increase in interest outflow by only Rs 9 lakh indicating strengthening terms of trade

Now for some number-crunching. The management expects to report flat revenues for 2007-08 compared with 2006-07. Don't get turned off; the implication is that after two unusually weak quarters (following an industrial mishap), Riddhi Siddhi will report a sharp pullback in the last quarter to cover the 'loss in revenues'. The implication then is that the third quarter has only been gentle net practice; the company could report a top line of Rs 130 crore for the last quarter of the current fiscal - at existing margins, if you please.

Now flip to the last paragraph on page 5 of the company's 2006-07 annual report for a forward view. The MD makes an unambiguous top line projection of Rs 550 crore for 2008-09. If you kick in a 200 basis point increase in EBITDA margin on account of the full blast of the much celebrated Uttaranchal plant and marry that to the projected top line, you have some interesting numbers for 2008-09. Make that 'very very very very interesting numbers' - at a market capitalisation of Rs 250 crore.

What makes Riddhi Siddhi compelling at this point?

The fact that it comes with a strong capital preservation argument on the one hand and a robust sustainable growth case on the other.

Handsome for bull markets. Safe for bear markets.

Regards,
Mudar

Disclosure: Mudar has invested in Riddhi Siddhi. His company Trisys has a fiduciary relationship with Riddhi Siddhi as well. Mudar responds with speed at mudar@trisyscom.com.