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Patanjali Foods Share Price Analysis – Why the Share Price Falling 2023

Patanjali Foods Share Price Analysis – Why the Share Price Falling

Introduction Patanjali Foods Share Price

Let’s start this article with a quiz. I’ll give you 3-4 clues, and you have to connect the dots to figure out what’s common among all of them.

Clue 1: A company gets delisted from the stock market after years of struggle. Clue 2: That company receives the support of a very famous Yog Guru of our country and gets listed again on the stock market. Clue 3: The company’s stock hits the upper circuit once it gets listed. Clue 4? No, I know you have already guessed. If yes, then pause the article and tell who I am talking about. Done?

So yes, you guessed it right, I am talking about Ruchi Soya. Now you have guessed the company, now you have another interesting task. But the trick is that whatever I want to say, you will have to type it in the comment so that I can know whether you have done this task or not.

Patanjali Foods Share Price 01-min
Patanjali Foods Share Price Analysis

So come on, are you ready? Okay. Go to Google, and share “Ruchi Soya Share Price.” And now which company’s share price is coming on your screen, tell in the comment. Done? Was there a stock chart of Ruchi Soya on the screen? Or of Patanjali Foods Share Price.? Don’t get confused, Patanjali Foods Share Price is Ruchi Soya Share Price. Last year i.e., in June 2022, Ruchi Soya was renamed Patanjali Foods.

So, what is the connection between Ruchi Soya and Patanjali Group? Why recently BSE and NSE have frozen the shares of 21 promoters of Patanjali Foods?

A company that gave multi-bagger returns to its shareholders as it was listed in the stock market, why is Patanjali Foods Share Price going down in the last 6 months? What are the challenges that Baba Ramdev’s Patanjali Group is facing?

Background of Ruchi Soya

Let us first go back about 10-12 years from today and see the business of Ruchi Soya then. So Ruchi Soya was primarily involved in the manufacturing and selling of Soya Products and Edible Oil. It used to sell products under brands like Nutrela, Nutri Gold, Mahakosh, Sunrich, Ruchi Gold, Ruchi Soya, and Ruchi Star at different prices.

Now the company’s business was going well, but one after the other problem, due to which the downward trajectory of the company started. The company’s edible oil and related products business contributes 70% to its sales. But this business runs on a very low margin. Therefore changes of duty in the domestic or international markets, or fluctuations in the prices of raw materials greatly impacted the business.

In Oct 2011, Indonesia, the biggest palm oil producer, increased the export duty on “crude” palm oil and reduced the export duty on “refined” products. Due to this, the import prices of crude palm oil increased in India, while the imports of refined products became cheaper. Its direct impact was seen on the oil refiners of this segment of our country! Like Ruchi Soya. Yes, their margins got hit badly.

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Patanjali Foods Share Price 02-min
Patanjali Foods Share Price Analysis

In 2014-15, several parts of India were reeling under drought, and their business of soybean extract contributed to around 15% of its sales, was badly hit. All this was not enough that in 2016, the company was accused of manipulating castor seeds futures, after which the stock of Ruchi Soya crashed and they were even banned from the securities market!

Another problem was the interest of Soya’s customers. Actually, the company used to supply its products not to direct consumers but to consumer goods makers. Due to this, Ruchi Soya’s payment cycles became very long. And the company had to depend a lot on short-term debts.

Patanjali Foods Share Price 03-min
Patanjali Foods Share Price Analysis

The result was that the trade receivables of the company kept on increasing, the debt of which kept piling up. When you sell to your customers on the same credit, it is counted in trade receivables. In short simple terms, the pending payments of your customers.

Let’s go ahead now. Then, the company was never able to recover its mounting receivables, and in March 2018 had to write off Rs. 5000 crores in receivables. As a result, Ruchi Soya defaulted on its loan repayments.

For the first time in two decades, the company’s net worth went negative. Banks took the company to Bankruptcy Court to recover their money. The company was delisted from the stock market in November 2019.

Acquisition of Ruchi Soya by Patanjali Group

It was almost all over for the company when Acharya Balkrishna and Baba Ramdev’s Patanjali Group came into the picture, and their interest in adding the edible oil business of Ruchi Soya would play a big role in fulfilling their dreams of becoming an FMCG giant.

Patanjali Foods Share Price 04-min
Patanjali Foods Share Price Analysis

Just then in December 2019, Patanjali Ayurveda bought bankrupt Ruchi Soya for ₹4,350 crores. So now you understand right? The structure of Patanjali Group is something like this. At the top, there is the parent company, Patanjali Ayurveda, with several subsidiaries, one of which is Ruchi Soya, known as Patanjali Foods.

Let’s talk now about that issue of the company due to which it is in the news these days. after the deal with the Patanjali Group, all the money that came into Ruchi Soya was used to repay its debt, and existing shareholders had to exit.

SEBI’s 25% Minimum Public Shareholding Guideline

After the deal, the promoters of Patanjali Ayurveda and the rest of the group held a total of 99% stake in the company. In fact, it is a guideline of SEBI that the minimum public shareholding in any listed company should be 25%. And if a company is getting listed on the exchange, then they are given 3 years to live by this rule. The reason is simple.

If the promoters of the company will have a significant shareholding, then it will be very easy to manipulate the shares or create artificial demand for them due to the low liquidity of the shares in the market. And something like this happened.

Patanjali Foods Share Price 05-min
Patanjali Foods Share Price Analysis

After Patanjali Group bought Ruchi Soya, on 27 Jan 2020, the Patanjali Foods Share Price was first listed at Rs. 17. In just 5 months, Ruchi Soya stocks touched Rs. 1,519 from Rs. 17 to 8988% return, i.e 90 times growth. Now the public does not have any shares because the majority shareholding was with the new promoters of the company.

That’s why the retail investor didn’t make money, right? SEBI has made this guideline only to protect retail investors from such cases. Post listing, Ruchi Soya stock was performing well but time was running out and promoter holding was still at 99%.

Therefore, in March 2022, the company adopted the route of FPO i.e. Follow-on-Public Offer. The meaning of FPO is that you should understand that when an already listed company wants to issue new shares, that process is called FPO.

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This FPO was successful for the company. Through this FPO the company raised Rs 4,300 crore, and FPO investors made 75% returns in less than 1 month.

Now tell yourself, how much was the promoter’s stake in Ruchi Soya before the FPO? 99%, isn’t it? And according to SEBI what should be the minimum public shareholding- is 25%. So ideally post FPO the promoters’ stake should have come down from 99% to 75% or less, right?

But even after the FPO, the promoters had an 80% stake in Ruchi Soya. Meanwhile, in June 2022, Ruchi Soya renamed Patanjali Foods and it also acquired its retail food business from Patanjali Ayurveda.

Patanjali Foods Share Price 06-min
Patanjali Foods Share Price Analysis

We will talk about this later, for now, let’s discuss the case of minimum public shareholding. So Patanjali Foods had to take the first public shareholding minimum to 25% before 18 December 2022.

But today we are talking about 25 May 2023, and still, the promoters’ holding in the company is at 80%. Now you would think that when the promoter’s shareholding was to be brought down from 99% to 75%, why didn’t the company do so at the time of the first FPO itself? The question is absolutely valid.

The reason may be that the promoters may not want to dilute their stake as of now due to poor market sentiment. But whatever the reason, rules are rules. You have to abide by them. And for not taking necessary action before the deadline, the stock exchanges froze the shares of 21 promoter entities of the company.

These include Patanjali Ayurveda, Patanjali Parivahan, Patanjali Gramodyog Nyas and Acharya Balkrishna. After this, the company’s stock fell by 5%. During this, the management of the company had to come out to pacify the investors.

Baba Ramdev said that the freezing of promoters’ stakes by NSE and BSE will not affect the company’s operations. He said that the promoters’ shares of the company are already under a lock-in of 1 year since the FPO last year, which will end in April.

Then Baba Ramdev assured the investors that Empress will do another FPO in April 2023 to reduce promoter shareholding. However, soon after, Patanjali Foods clarified in a regulatory filing that the company will not go through the FPO route this time, but instead, want to raise public shareholding through OFS (Offer for Sale) or QIP (Qualified Institutional Placement).

Business Challenges for Patanjali Foods

This issue of minimum public shareholding will probably be resolved in a few months, but Patanjali Foods’ business is also facing challenges. In August 2022 the Patanjali Foods Share Price was corrected almost 35% from its high of Rs. 1,375.

Obviously, some challenges in the business of Patanjali Foods are now being overcome. Friends, last year Baba Ramdev talked about making Patanjali and Ruchi Soya the number 1 FMCG company in India in 5 years.

A few years ago, he had also told me that he would leave giants like HUL behind in the coming times. To put these ambitious plans into motion, Patanjali Foods started restructuring its business. In May 2022, Ruchi Soya bought the food business of Patanjali Ayurveda for Rs. 690 crores. And with this move, Ruchi Soya, today’s Patanjali Foods has positioned itself as an FMCG brand!

Patanjali Foods Share Price 07-min
Patanjali Foods Share Price Analysis

Post restructuring, Patanjali Foods today operates in 4 major business segments. One is the Foods business, which includes the company’s existing food products and the food portfolio of Patanjali Ayurveda. Now for the last 1-1.5 years, the company is positioning itself very aggressively in the market to become a leading FMCG brand.

In Q1 FY22, they entered the nutraceuticals and wellness segment, under which it caters to the sports, medicine, and general nutrition segments. And of course, they have a huge presence in the edible oil and palm oil plantation verticals.

Patanjali Foods Share Price 08-min
Patanjali Foods Share Price Analysis

As per a report in The Morning Context, while the company’s edible oil business grew by 10% in Q3 of FY23, the industry grew by just 5%. That is, the edible oil business of Patanjali Foods is performing well. But during the same period, the company’s food business revenue had dropped by 34.5%!

While the company’s revenue from the food business has declined by 6% over the previous quarter if you look at HUL, its revenue has grown by 4%. Still, if you analyze the revenue of Patanjali Foods, almost 76% of the revenue comes from the edible oil business of Ruchi Soya. Even though this business is growing faster than the Foods business, at the same time this business is also a high-risk-low margin business.

Remember how Ruchi Soya struggled from 2011 to 2018. Hence this business is pulling down the overall margin of Patanjali Foods. Now if you look at Patanjali Foods as just an edible oil company then it was different.

But the company positions itself as an FMCG brand. So the comparison will be with FMCG companies as well, right?

Patanjali Foods Share Price 09-min
Patanjali Foods Share Price Analysis

So if we look at the margins of other FMCG companies, they are between 18 and 30%, while Patanjali Foods’ operating margin is just 4.64%. Another point of concern is that the company’s trade receivables as a percentage of its total sales are quite high at 33.2%. That is, the company has not yet received the money for almost one-third of its sales.

Patanjali Foods Share Price 10-min
Patanjali Foods Share Price Analysis

For companies like HUL and ITC, this number is less than 10%. If we analyze the last 4 quarters of the company, which quarter is odd for you? December 2022 quarter, right? The company had given a disappointing performance in the previous quarter to grow with the increase.

Although their sales are down, their raw material cost has come down due to inflation, and for this, their operating margin expanded One last thing, the food vertical of Patanjali Foods could be the reason behind the fall in sales and it’s effects on Patanjali Foods Share Price.

For eg, when Patanjali came into the market, some of its key strengths were its indigenous theme, claims of natural products, and low prices. But the company probably forgot that there are many deep-pocketed players. Competitors started offering products at similar prices.

On top of that Patanjali offers a very little discount on its products at around a 5% discount, whereas the company’s competitors like Nestle, Amul, and Dabur offer a 5-20% discount. Due to this, retail and grocery stores get very less profit from Patanjali’s products, and they prefer to sell the products of other companies.

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