13 Jul Patanjali Foods hits lower circuit after OFS announcement- Should you subscribe?

Patanjali Foods OFS – What shareholders should do?

Patanjali Foods, a prominent FMCG major, has recently unveiled its plans for a new Follow-On Public Offering (OFS) aimed at increasing its public shareholding as per SEBI guidelines.

As of June 2023, the Promoter and Promoter Group of Patanjali Foods held a majority stake of 80.8% in the company, with Patanjali Ayurved owning 39.37% of the shares.

However, the stock exchanges had frozen 292.58 million shares of the promoter group entities in March due to non-compliance with the minimum public shareholding norm.

Patanjali Foods, previously known as Ruchi Soya Industries, faced insolvency proceedings initiated by the National Company Law Tribunal in December 2017. In July 2019, Patanjali Ayurved’s recovery plan for Ruchi Soya was approved by the tribunal. This led to a reduction in the company’s public shareholding to 1.10% following the implementation of the resolution plan.

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Floor Price and Discount:

The floor price for the OFS is set at ₹1,000 per share.
This floor price represents an 18% discount compared to the current market price.

Duration of OFS:

-The OFS will be executed over two days.
-Non-retail investors can participate in the OFS on July 13.

Twenty-five percent of the OFS offer is reserved for mutual funds and insurance companies.

-Retail investors can participate on July 14.

Equity Shares for Sale:

-Patanjali Ayurved plans to offload approximately 2.53 crore equity shares in the OFS.
-This represents 7% of the total paid-up equity share capital of the company.

-In case of oversubscription, the promoter intends to sell an additional two percent of equity shares.
-This would lead to a total stake sale of 9 percent.

Brokers for the OFS:

Jefferies India and IIFL Securities have been appointed as the brokers for the OFS.

Patanjali Foods’ public shareholding falls below the required 25% as per Securities Contracts (Regulation) Rules.

Previous OFS Challenges & Bumper Listing

During its previous OFS, the company encountered a significant issue with unsolicited SMSs that were found to be misleading and fraudulent.

In response to these concerns, the Securities and Exchange Board of India (SEBI), the market regulator, directed it to provide an option for investors to withdraw their bids, to protect investors’ interests and address the problems caused by the circulation of misleading SMSs.

In compliance with SEBI’s directive, Patanjali Foods introduced a withdrawal window for investors affected by the misleading SMSs, to withdraw their bids if they were influenced by the fraudulent communication.

Despite the SMS issue, Ruchi Soya’s previous OFS garnered substantial demand, with bids for 17.56 crore equity shares against the available 4.89 crore equity shares.

Notably, the retail quota, constituting 35% of the FPO, witnessed a 90% subscription rate. This overwhelming response resulted in a bumper listing for Ruchi Soya’s shares, reflecting the market’s positive sentiment toward the company.

Financial Performance 

Patanjali Foods, following its acquisition of Ruchi Soya, has witnessed significant changes in its ownership and management. The company has achieved record-breaking financial performance in FY 2023, with robust revenue growth and improved profitability.

-Patanjali Foods achieved remarkable financial performance in FY 2023, reporting revenue from operations of INR 31,525 crores and EBITDA of INR 1,577 crores.

-In Q4 alone, the company recorded INR 7,873 crores in revenue from operations, representing nearly 18% year-on-year growth.

Edible Oil Business

-Maintaining its market share and achieving substantial volume growth of around 21%, Patanjali Foods prioritizes selling branded products in the edible oil business.

-The company plans to expand its premium product offerings, including Patanjali’s mustard oil, Nutrela oils, and Sunrich brand.

-With a target EBITDA margin of 2-4%, Patanjali Foods aims to strengthen its position in the edible oil market.

Oil Palm Plantation Business

-Patanjali Foods’ oil palm plantation business is already generating significant revenue of INR 1,100 crores with a healthy margin base of 15-18%.

-The company anticipates it will become a mainstream business within four years, generating four times its current profits and serving as a consistent annuity business for the next 25 years.

-Patanjali Foods plans to expand the plantation area, planting approximately 25,000 hectares in the coming year and progressively increasing it each year.

-Trees planted in the previous year will bear fruit after four years and reach maturity after seven years, resulting in consistent four to 4.5 times EBITDA growth from the seventh year onwards.

-The company expects a healthy margin of 15-18% in this segment, further contributing to its overall profitability.

Expansion Plans

-The company aims to expand its oil business while focusing on the Atmanirbhar Bharat campaign to improve margins.

-Additionally, Patanjali Foods seeks to capture a larger share of the FMCG and FMHG markets, particularly in the food segment.

-Through partnerships with state governments, the company is exploring opportunities in oil palm plantations.

-Patanjali Foods is also leveraging technology, such as B-PoS and B-Force, to enhance customer reach and expand geographically.

-Furthermore, the company is diversifying its product offerings, entering the dry fruit segment, and launching new products and SKUs in the nutraceuticals segment. Repositioning itself as a premium brand is another strategic move by Patanjali Foods.

The Reaction in Stock Price

Shares of Patanjali Foods witnessed a 5% lower circuit limit on July 13, reaching Rs 1,166.65, as the company launched an offer for sale (OFS) at a floor price of Rs 1,000 per share. This floor price represents a discount of approximately 19% compared to the previous closing price of Rs 1,228.05.

This lower circuit suggests that investors are cautious about the offering and its pricing, resulting in limited trading activity. The discount offered in the OFS floor price compared to the previous closing price indicates a potential downside risk, which may have influenced the lower circuit.

However, it is important to note that the lower circuit does not necessarily imply a negative sentiment toward the company’s prospects. It could be a reflection of the market’s reaction to the discounted floor price and the existing supply-demand dynamics.

Investors may consider selling their shares in the current market and participating in the OFS to potentially gain trading benefits. However, it is important to note that this practice carries certain risks. There is no guarantee that all the shares applied for in the OFS will be allotted, which could potentially result in a loss of shareholding for investors.

Should You Subscribe Now?

When considering the decision to subscribe to Patanjali Foods’ OFS, it is essential to assess the company’s fundamentals and overall financial performance.

Currently, Patanjali Foods boasts a market capitalization of ₹42,232 crore, indicating a substantial presence in the FMCG sector. The company has demonstrated consistent sales and profit growth, with a quarter-on-quarter sales variation of 18.2% and a profit variation of 12.5%.

Additionally, Patanjali Foods maintains a healthy debt-to-equity ratio of 0.15, highlighting its relatively low debt burden. This factor contributes to a strong financial position and provides a favorable outlook for future expansion and investment opportunities.

Patanjali Foods has witnessed a remarkable transformation following the acquisition of Ruchi Soya, achieving record-breaking financial performance and outlining ambitious expansion plans. With a focus on strengthening its oil and FMCG segments, along with strategic repositioning and segment restructuring, the company has set the stage for further growth.

Considering the improved safeguards, the floor price discount, and Patanjali Foods’ solid fundamentals, retail investors may find subscribing to the company’s OFS an appealing opportunity. The discounted floor price at a 10% reduction compared to the current market price offers an attractive entry point.

Investing in Patanjali Foods and participating in the OFS carries several risks that investors should consider:

Market Risk: Like any investment, the value of Patanjali Foods’ shares can fluctuate based on market conditions, economic factors, and investor sentiment. The stock price may be influenced by various external factors that are beyond the control of the company.

Company-Specific Risks: Patanjali Foods operates in a competitive industry and faces risks associated with business operations. Factors such as changes in consumer preferences, supply chain disruptions, regulatory challenges, and product recalls could impact the company’s performance and stock price.

Business Performance: The success and profitability of Patanjali Foods are dependent on its ability to maintain and grow its market share, expand into new segments, and effectively manage its operations. Any decline in revenue growth, profitability, or market position could negatively impact the company’s stock price.

Liquidity Risk: In the case of an OFS, there is a risk that all the shares applied for may not be allotted. Investors may face difficulties in selling their existing shares in the market and acquiring new shares through the OFS. This could result in a loss of shareholding or an inability to participate in the offering as anticipated.

Regulatory and Legal Risks: Patanjali Foods operates in a regulated industry and is subject to various laws and regulations. Changes in regulations, compliance issues, or legal disputes could have an adverse impact on the company’s business operations and financial performance.

Price Volatility: The share price of Patanjali Foods may experience significant volatility, particularly during the OFS period. Fluctuations in demand, market conditions, and investor sentiment can lead to rapid price movements, potentially impacting the investment’s value.

It is important for investors to carefully assess these risks and conduct thorough research before making investment decisions. Evaluating the company’s financial health, competitive position, growth prospects, and overall market environment can help investors make informed choices and manage their risk exposure effectively. Seeking professional financial advice is advisable to align investment decisions with individual goals and risk tolerance.

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We are not SEBI-registered advisors or analysts. All the views shared in this article and all the content shared on aceink.com are only for learning and educational purposes. Any part of the article or any information on Aceink.com should not be interpreted or considered as investment advice. None of the opinions, views, or content posted on Aceink.com constitutes investment advice, as we are not SEBI-registered advisors or analysts.

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