Low number of free-float pushes Ruchi Soya Industries to record high

The edible oil maker's market capitalisation is up nearly 300 times since the beginning of November last year and 70 times since its acquisition by Pantanjali Ayurved under the IBC

History is repeating itself with Ruchi Soya Industries, which has seen an unprecedented rise in market capitalisation in the past six months, thanks to a combination of a very low number of free-float or non-promoter shares and thin trading on the counter.

The edible oil maker’s market capitalisation is up nearly 300 times since the beginning of November last year and 70 times since its acquisition by Pantanjali Ayurved under the Insolvency and Bankruptcy Code (IBC).

At the close of trading on Friday, Ruchi Soya’s market capitalisation was nearly Rs 35,000 crore against Rs 111 crore on November 13, 2019, a day before trading was suspended in the stock due to IBC proceedings.

“There are few stocks available in the market so existing investors can get whatever price they want from new investors. Its simply a issue of scarcity and we seen this in the past with stocks like MMTC,” says G Chokkalingam, founder & MD Equinomics Research & Advisory Services.

The stock opened for trading again on January 27 this year after Patanjali Ayurved acquired it for Rs 4,350 crore.

That day the stock closed with market capitalisation of Rs 500 crore and has been hitting the circuit of 5 per cent every day, including Friday, since then (see chart).

At its current market capitalisation, Ruchi Soya is among one of the most expensive stocks, with a P/E multiple of 125x its trailing 12-month earnings, nearly 50 per cent higher than that of Hindustan Unilever and double that of Marico.

The P/E calculation excludes exceptional gains and losses.

Around 15 years ago, there was a similar surge in the stock price of Metals and Minerals Trading Corporation (MMTC), in which the Central government owned 99 per cent, which translated into a free float of less than 1 per cent.

MMTC’s market capitalisation zoomed from Rs 890 crore at the end of March 31, 2004, to Rs 1.09 trillion at the end of March 2008 and an all-time high of Rs 1.57 trillion at the end of March 2010.  At its peak, it was one of the most expensive stocks, with a price-to-earnings multiple of 1,108x at the end of March 2010.

But its share began to collapse as soon as the government proposed a plan to reduce its stake in the company in 2010. Its market capitalisation declined by 97 per cent between 2010 and 2015 as the free float increased to 10 per cent by the end of the period from 0.67 per cent earlier.

The company’s current market capitalisation is around Rs 2,600 crore with a P/E multiple of 43x.

And like MMTC, the spike in the Ruchi Soya stock price occurred with a sharp decline in the free float or non-promoter stake in the company. The free float in the company fell to 1.1 per cent at the end of March 31 this year against 15.53 per cent at end of the quarter ended September 20, 2019, 28 per cent at the end of March 31, 2019, and 58.28 per cent at the end of June 30, 2018. This led to a sharp decline in trading volume because there are fewer stocks with the public to buy and sell in the secondary market.

The non-promoters or the public now owns 3.26 million shares of Ruchi Soya, down from 282.2 million at the end of December 31, 2019, and 172 million at the end of June 30, 2018.

Around 1,500 shares of Ruchi Soya changed hands every day in February, declining to 435 in March and further to 222 in April.

The daily trading volume in the stock has now grown to around 13,000 shares as many old investors are booking profits at higher levels but it still a fraction of what is was in 2019. Before its acquisition by Pantanjali Ayurved, an average of half a million shares of Ruchi Soya changed hands on the bourses every day during 2019.