Riding Ruchi Soya

Yoga guru-turned- corporate honcho Baba Ramdev can make you believe that setting up a business empire is child's play. Not only is his appetite to take risks extremely high, but his confidence to succeed against all odds is even more compelling. His company, Patanjali Ayurved, acquired the bankrupt Ruchi Soya through an NCLT (National Company Law Tribunal) process in 2019. And in the two years since, the company has turned profitable. When asked what he did differently to turn it around in such a short span, Ramdev laughs aloud and says, "Ruchi Soya is Patanjali Ayurved's kulvadhu (bride). When a girl becomes a part of a renowned family, her brand equity automatically goes up. That's what has happened with Ruchi Soya, too."

Glib rhetoric aside, Ruchi Soya's turnaround story indeed sounds remarkable. Patanjali Ayurved bought out the company when it was staring at a debt of Rs 12,000 crore. In a short span of two years, the debt has reduced to Rs 3,300 crore. It also boasts net profit of Rs 680.77 crore and EBITDA of Rs 1,018.37 crore in FY21. Now, having transformed Ruchi Soya from a white elephant to a clear, deep grey, the 50-year-old swami wants to ride it to make Patanjali Ayurved India's largest FMCG company with international presence to boot — in at least 50 countries — within the next one year.

His track record with Ruchi Soya could lend some credence to this ambition. However, Ruchi Soya is a listed company, unlike Patanjali Ayurved. So, market watchers will have their say—stock market analysts as well as the industry at large are decidedly cynical. Both Ramdev and his close associate, Acharya Balkrishna (Joint Managing Director of Patanjali Ayurved), are no strangers to controversy. Chatter about the lack of corporate governance and transparency in Patanjali Ayurved has come out in the open far too often. The duo's political leanings make the analysts even more uncomfortable. Ruchi Soya was bought through an NCLT process after the banks took a haircut of over 60 per cent and that further adds to market scepticism. "Analysts are also sceptical because even during the heydays of Ruchi Soya, the owner never gave disclosures. After the takeover, there is again a perception issue as nobody [really] knows Baba Ramdev," says Arun Kejriwal, Founder of Kejriwal Research and Investment.

Expectedly, the swami and Balkrishna scoff right back at the sceptics — they know nothing of the company and its workings; Patanjali is the very epitome of transparency and high quality; and yes, the 'strategy' is a very sound one, thank you very much.

A most unusual story, you will agree, of two spunky monks and their spirited moves in the corporate battlefield of suits, ties, MBAs and M&As. And it has its natural twists.

The Monk Who Bought a Listed Company

The Ruchi Soya acquisition has been the yoga guru's introduction into the complex world of IPOs and stock markets. Ramdev claims it took him all of two hours to understand how the market functions. Soon after he bought out Ruchi Soya, a senior stock market analyst delivered a Markets 101 to him in his Haridwar office. "The analyst explained to me about market capitalisation and how market value is created. He told me the three things that I need to keep in mind while running a listed company — return on investment, debt and zero working capital. He was taken aback when I started telling him about my plan to make Ruchi Soya debt free and give maximum RoI (return on investment) to my shareholders. He then asked me how I would manage my working capital. I told him – udhaar mein paise lo aur nagad mein becho (borrow money and sell in cash); your working capital becomes zero," he laughs.

He's only half-joking. "To be an investor-friendly company, we need to give our investors RoI of at least 20 per cent and we are working towards it," says Ramdev. "Our dream is to optimise our working capital and make it zero, too." He also wants to make Ruchi Soya debt-free within the next six months, riding an FPO (follow-on public offer) in September. It seeks to dilute 9 per cent equity for Rs 4,300 crore, over 62 per cent of which would be used to retire debt, and 14 per cent would be used for working capital needs. More money can be raised within the next 12-15 months because Patanjali Ayurved currently owns 98.9 per cent of Ruchi Soya, and as per Sebi guidelines, it has to dilute at least 25 per cent of its equity by December 2022. The markets experience has been good enough for Balkrishna to say that a Patanjali IPO isn't too far away. "Our learning from the Patanjali journey is coming in handy to grow Ruchi Soya."

Saving Ruchi Soya and bulking up Patanjali Ayurved beyond HUL and ITC are two different ballgames, but bear in mind that Patanjali Ayurved and Ruchi Soya combined is already a Rs 25,300-plus crore entity, bigger than Nestle, Britannia and Dabur. Standalone revenues of HUL (Rs 45,996 crore) and ITC (Rs 48,524.54 crore) are some distance away, but the train has started to roll — Ramdev is eyeing a turnover of Rs 25,000 crore for Ruchi Soya alone by FY23. And Balkrishna admits that their growth strategy has been unconventional. "Most organisations do a market survey and then build a business plan; we took the plunge in things we believed in and we grew."

I Trust You, I Trust You Not...

Market observers find the Ruchi Soya story too good to be true, especially because Patanjali Ayurved's meteoric growth and subsequent rapid fall plays large in their mind. After touching revenues of Rs 10,000 crore in 2017, it fell to Rs 8,500 crore within a year. Although the promoters attribute the fall to demonetisation, GST and a weak distribution system, industry perception is that Patanjali Ayurved lacks corporate governance and transparency. The constant chatter around the company's quality standards also adds to the mistrust.

"Patanjali promoters are known for making bombastic statements and subsequently one can't probe them as they are not answerable," says a senior analyst in a leading broking firm. "If you are listed, you have to be answerable to shareholders. However, one isn't sure how much they will fulfil their duty, given their past record." Adds Arvind Singhal, Chairman of retail consulting firm Technopak: "When you invest in stocks, you look at transparency, good governance standards, as well as the company's willingness to share information on a regular basis. Since Patanjali's track record on all these isn't too good, investors don't feel comfortable."

Balkrishna challenges the transparency and governance allegations. "No MNC has the level of transparency that Patanjali has. You use so many [of their] products without knowing anything about the manufacturer. Here, Swamiji's image is there on the packs; he is there to face the brunt of the consumer's likes or dislikes."

Talk about Ruchi Soya's stock taking flight after the acquisition (see chart Soaring Stock), and the analyst community remains cynical. Patanjali Ayurved owns 98.9 per cent of Ruchi Soya and Technopak's Singhal points out that with such little float, even a small trade of 1,000 shares will bump up or bump down the share price. "You will need a decent float of 15-20 per cent of capital, and that too widely distributed, to have some depth as far as the stock market is concerned," he says.

Moreover, since Ruchi Soya has largely been a commodity business that barely generates 3-4 per cent margins, it has never attracted the market. The recent spike in its stock, say analysts, has nothing to do with Patanjali taking over but is the result of the current bull market.

Through the acquisition and growth of Ruchi Soya, Baba Ramdev’s ambition is to make Patanjali Ayurved the largest FMCG company in India, overtaking the likes of HUL and ITC.

Ramdev's strategy for Ruchi Soya's growth is another point of contention. The swami plans to convert the commodity business of Ruchi Soya into a branded business, but analysts are incredulous. Abneesh Roy, Executive Vice-President (Research), Edelweiss Securities, calls Ruchi Soya a quasi-FMCG. "Ruchi's mainstay is lower-end edible oil, which is extremely price sensitive. Therefore, it is quasi-FMCG. Pure-play FMCG has a much higher pull from consumers." Roy says that brands such as Saffola and Fortune, which play in the premium- to mid-premium segments, can command much higher value. "In fact, ITC's FMCG is a much better business than Ruchi. ITC is in the mid and premium segments, focusing on margin improvisation, premiumisation, innovation, and is much more tech savvy."

According to Raghu Vishwanath, MD of brand valuation company, Vertebrand, Ruchi Soya in its prime had greater brand equity than Patanjali has today. "It is another matter that the company didn't succeed. The reasons for that were extraneous, more in terms of product irrelevance and company mismanagement. I don't think the acquisition by Patanjali is likely to be a magic wand."

TECH FOCUS

How Patanjali's technology innovations are adding to its muscle

Acharya Balkrishna, the Ayurvedic doctor who seldom uses a laptop, claims most of his tech knowledge has been acquired by listening to leading tech consultants. “I did learn but I also realised that their solutions won’t serve my purpose,” he says. In March 2020, Patanjali Ayurved launched its tech start-up, Bharuwa Solutions, through which it has put together a DMS or dynamc marketing software to manage its supply chain, distribution and retail billing.

Balkrishna is planning to offer this to other consumer product companies, too. He is also piloting a fintech solution that promises to offer post-due diligence services to MSMEs and banks. The biggest challenge for MSMEs, says Balkrishna, is finance. "As of today, only predue diligence solutions are available, but there is no post-diligence mechanism. Our solution will enable banks to analyse the health of the company it has offered a loan to.”

Bharuwa Solutions is test-marketing its solution by partnering with Punjab National Bank. “We have told them to offer loans to our distributors and retailers. Banks can monitor business health in real time. They can make out how much stock or inventory the retailer or distributor has,” explains Balkrishna.

The Ayurveda vaidya’s thirst for tech solutions doesn’t end here. His Rs 20-crore Bharuwa Solutions, which is eyeing a revenue of Rs 100 crore by end-FY22, is also working on a host of agri-tech solutions. It is piloting an e-mandi at Haridwar that helps farmers to sell their output virtually.

“We are building a dashboard for the government and an app for the farmer, which will give solutions such as soil testing and fertilizer and seed recommendation,” says Balkrishna.

Resuscitating a Dying Elephant

Disapproval from the market notwithstanding, the fact is that a few smart moves, and some favourable conditions, helped Patanjali Ayurved turn around Ruchi Soya's financials. The smart moves first. Ramdev's first step after acquiring Ruchi Soya was to bring in professional management. He hired former Reliance Retail and Cargill Chief Executive, Sanjeev Asthana, as CEO, and Sanjeev Khanna, who had previously done stints with ITC, Metro Cash & Carry and BigBasket, as COO.