Case Study #3 : Ruchi Soya Industries Ltd. by Shailendra Ajmera and article by N. Mahalakshmi

Summary: Today we stress on the concept of value-buy, whether we buy a used-car or a distressed company the concept remains the same. Ruchi Soya once valued at Rs 4 billion in 2010 was in 2020 with a debt of ?120 billion, a distressed asset. At what value should one buy it to be considered as a great bargain? Seeing this case from the point of view of banks, how far can you push banks to lend you to buy a distressed asset?

An interesting case where a company (Patanjali ) is arm-twisting banks to provide them a loan with over 50% haircut to buy a distressed company (Ruchi Soya) which is unable to repay its loans to the same banks. Patanjali realised that the banks have a tough choice, which is to either write-off the entire debt provided to Ruchi Soya or hope for a turnaround by providing loans to Patanjali to buy and run the distressed company.

Also if someone following this case had taken a bet on Ruchi Soya shares and believed Patanjali ?could have pulled off such a deal, their bet could have made a 40X return over a period of 6 months. Market cap of Ruchi Soya rose from ? 5 billion to ? 214 billion within that time span.

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Company Details

Starting its journey in 1986 at Indore, Ruchi Soya Industries Ltd (RSIL) had plants at 23 locations in India, more than 90 depots with storage and other logistical facilities, which served 4,000+ distributors. Company ‘s net profit decreased from ?2.84 billion in FY13 to a net loss of ??57.48 billion in FY18.

Funding for buying Ruchi Soya

Funded to Patanjali as debts/debentures by banks: ~?36 billion?

Self-infused funds by Patanjali : ~?8 billion

Total Bid Offer by Patanjali ?to buy Ruchi Soya: ~?43.5 billion

Creditor Claims on Ruchi Soya

Loans for popular banks ~?33 billion

Other Creditor Claims: ~?94 billion

Total Debt : ~?120 billion

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After Patanjali bought Ruchi Soya

Settled to Creditors: ~?42.35 billion.

Working Capital: ~?1 billion

Net reduction in debt which was written-off by banks and creditors that reflected in increase in market value: ~?80 billion

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Key Takeaways:

1)????? Debt is a double-edged sword: The case shows two sides leveraged debt, one reduced its market cap and the other to raise it by 40X.

2)????? Every crisis is a potential opportunity: Patanjali saw the opportunity for banks to write-off >50% of the debt instead of seeing the ~?120 billion debt

3)????? Close deals quickly: There were initially 4 bidders (Adani, Godrej Agrovet, Emami and Patanjali) and while the banks were considering the numbers which were against them, 3 of the 4 bidders backed out, leaving Patanjali who was not even the highest bidder the only option for the banks.

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