>Ruchi Soya: 2Q12 miss; expect negative stock reaction (NOMURA)

Ruchi Soya’s 2QFY12 results were below our estimates - (net income of Rs37.8mn was down 94% both y-y and q-q). Higher raw material cost and sharp depreciation of the Indian rupee (vs the USD) led to a drop in earnings. Though the stock is currently trading at 11x CY12F earnings, 1H12 standalone now forms only 26% of our full-year numbers, and we think there is a downside risk to our FY12F estimates. These weak results continue the trend we have seen in global supply players (weak trading conditions), and we see some negative reaction to stock price.

Lack of bargaining power and unhedged forex exposure hurt 2Q12 Management commented that the quarter was impacted by higher raw material prices (as we noted for Mewah, companies with large downstream operations were unable to pass on higher raw material prices to consumers), volatility in commodity prices and mark-to-market (MTM) provisions due to a steep fall in the USD-INR exchange rate. The company made an unrealized loss provision of Rs849mn on restatement of USD borrowings of which ~Rs420mn is MTM loss on loans payable during the next 2 years, ~ Rs220mn is forward contract losses for which physical contracts are not executed and Rs170mn loss due to unhedged exposure. In our view, some portion of MTM losses may be reversed if the Indian rupee strengthens vs the USD in coming periods, but we do not treat it as part of exceptional income. On the positive side, utilizations improved and plantation momentum remained strong. As a result, management expects 2H12F earnings to be more comparable to 2H11 earnings.

Other key takeaways from management:

⇒ Total revenues grew by ~60% y-y and 3% q-q mainly due to strong growth in the Oil segment (up 75% y-y and ~2% q-q). Segment-wise, the Oil segment recorded negative EBIT of Rs363mn with EBIT margin of -0.7% during the quarter, due to most of the adverse impact of exchange rate movements being in this segment.

⇒ Management expects soya crop for the current season (11mn vs 9.5mn) to be better than the previous year and higher capacity utilization of soya crushing operations.

⇒ Capacity utilization of crushing facilities increased from 36% to 41%. Capacity utilization of refining facilities increased from 76% to 82% from year ago. While port-based refiners are running at 90%+ utilizations.

⇒ Branded sales have gone up by 50% from Rs9,308mn to Rs13,972mn.

⇒ Current palm plantings are at 37,000ha - mgmt says they should be able to reach 40,000ha by FY12F, and at least 10,000ha per annum thereafter.

⇒ 2Q12 tax rate was high at ~63% vs ~35% tax rate during same period in previous years.

To read the full report: RUCHI SOYA