Initiating Coverage

November 16, 2006 FOR PRIVATE CIRCULATION

Apurva Doshi [email protected] Riddhi Siddhi Gluco Biols Ltd. +91 22 6634 1366 Price: Rs.181 Recommendation: BUY Price target: Rs.308

Riddhi Siddhi Gluco Biols Ltd (RSGB) is the largest maize based starch- Stock details processing company in and its unit is the largest maize wet BSE code : 524480 milling plant in India. The company is also the leader in terms of NSE symbol : Not listed Market cap (Rs mn) : 2,017 derivatives of maize based starch and sweeteners, which find application Free float (%) : 54.89 in various industries like food and drinks, confectionary, pharmaceuticals, 52-wk Hi/Lo (Rs) : 239.75 / 99 textiles, paper and leather among others. Strong demand for the products Avg. daily volume BSE : 10,882 of the company coupled with capacity expansion from 850 TPD to 1500 Shares o/s (mn) : 11.1 TPD by March 2007 and tie-up with Roquette Freres of France, which is the leading global player in starch and its derivatives, is expected to lead Summary table (year end Mar) to a significant rise in revenues and profitability for the company going forward. Therefore, we are initiating coverage with a BUY Rs mn FY06 FY07E FY08E recommendation on RSGB with a price target of Rs.308 (70% upside Sales 2,299 3,163 4,217 potential) over a 12-month horizon, which is based on the DCF method Growth (%) 25.0 37.6 33.3 of valuation. EBITDA 328 492 672 EBITDA margin (%) 14.3 15.6 15.9 Net profit 113 188 278 Key investment rationale Net debt 1,303 2,078 2,414 q India is becoming a large consumption driven global economy. The EPS (Rs) 13.4 16.9 25.0 Indian GDP is growing at above 8% thereby leading to a growing high Growth (%) 187.1 65.9 47.8 consuming Indian middle class. The companies in food processing, paper, DPS (Rs) 2.0 2.0 2.0 pharma and textiles industries are all adding capacities to meet the growth for ROE (%) 12.9 14.0 17.3 ROCE (%) 10.9 12.6 14.0 its products. Also, maize based starch and its derivatives industry is a multi- EV/Sales (x) 1.4 1.3 1.1 billion dollar industry in the US, while in India it is estimated to be only at Rs.15 EV/EBITDA (x) 10.1 8.3 6.6 bn. Even on the per capita consumption front, India consumes less then 1 kg P/E (x) 13.5 10.7 7.3 as against the per capita consumption of 64 kgs in the US and global average P/BV (x) 1.7 1.4 1.2 of 6 kgs. FY06/07 Q3 Q4 Q1 Q2 q Wide range of products. As the demand for starch derivatives is rising in Sales (Rs mn) 630 685 711 749 India, people have also become quality conscious as it is used in food and EPS (Rs) 4.8 4.4 4.5 5.1 pharma industry. Hence, they are demanding better quality products and are Source: Company & Kotak Securities - Private also willing to pay for it. The company is present in all categories of products Client Research and currently it offers approximately 35 products. q Tie up with French starch major Roquette Freres. In order to move to high Shareholding pattern as of Sept 2006 value-added products,the company has entered into a financial cum intellectual Public cooperation with Roquette Freres, France which is a leading global player in 15% Promoters starch and derivatives with revenues exceeding 2 bn euros. Roquette markets 37% over 600 products in more then 100 countries worldwide. With the alliance with Roquette, the company plans to enter into high value products for nutrition, health, construction, biotech and fermentation categories and dextrose for the Corporates FIIs manufacture of sugar-free products. 32% 1% q Reputed client list. RGSB enjoys the confidence of reputed clients across user Foreign industries, which it serves. In every user industry the company directly deals Nationals with top players, thereby leading to strong customer relations, which would help 15% raise the business in future. Source: Company q Attractive growth in sales and profits. Net sales of RSGB have grown at a One-year performance (Rel to Sensex) CAGR of 25% from Rs.940 mn in FY02 to Rs.2.3 bn in FY06. Net profits of the company have grown at a CAGR of 86.4% from Rs.9 mn in FY02 to Rs.113 mn RSGB in FY06. We expect net sales of the company to grow at a CAGR of 35.5% from Rs.2.3 bn in FY06 to Rs.4.2 bn in FY08E and net profits to grow at a CAGR of 61% from Rs.113 mn FY06 to Rs.278 mn FY08E. q Attractive valuation. At the current price of Rs.181, the stock is trading at Sensex very attractive valuations of 7.3x FY08E earnings and 4.9x FY08E cash earnings. We feel valuations is attractive due to the strong past track record and good future potential due to capacity expansion, technology tie-up and growth in demand, which would lead to growth in terms of revenues and profitability going Source: Capitaline forward.

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Key risks q Any delay in commencement of the expansion would lead to flat or marginal growth for the company. q Maize is the main raw material for the company. Thus, any increase in the prices, which cannot be passed on to the customers could impact the profitability of the company. q An oversupply of products in the market could lead to competitive pricing and may impact the profitability of the company in the short term.

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BACKGROUND Mr Ganpatraj Chowdhary and Mr Sampatraj Chowdhary promoted Riddhi Siddhi Starch & Chemicals in July 1990. Later, in April 1992, its name was changed to Riddhi Siddhi Gluco Boils Ltd. In FY1994 the company commenced manufacturing operations at Viramgam in . In FY1996, the company acquired one unit of the pharmaceutical Gokak unit acquired from giant Glaxo (I) Ltd, which was known as KG Gluco Biols Ltd at Gokak in Glaxo (I) in FY96 Karnataka. Glaxo India and Karnataka State Industrial Investment & Development Corporation Ltd originally promoted the unit. The plant has been installed and erected by Glaxo, UK, which is one of the leading global players in the food industry. RSGB followed it by steadily hiking the capacity at its Gokak plant and finally made it India's largest maize wet milling plant. In FY02, the company implemented a 6.2 MW biomass based captive co- cogeneration power plant to meet its power requirements and also at the same time, reduce the unit cost of power. Acquired a functional Looking at the huge potential of starch derivatives in India the promoters biopolymer unit of acquired a functional biopolymer unit of Hindustan Lever at Pondicherry in FY06. Hindustan Lever at The acquisition is strategic in nature as it will enable the company to establish a Pondicherry in FY06 strong foothold in the niche high-value starch derivatives for the paper industry by acquiring their brands, patents and existing customers. In FY06, the company expanded the capacity of the Gokak plant from 500 TPD to 750 TPD for maize crushing making it he largest single location wet milling plant in India.

PLANT DETAILS The company has its corporate headquarters in Ahmedabad . At present, the company has two corn crushing facilities in Gujarat and Karnataka. The third facility is coming up in Uttaranchal, which is expected to commence commercial production by March 2007. RSGB also has one modified starch processing facility in Pondicherry.

Plant details Unit No. Location Capacity 1 Viramgam, Ahmedabad 100 TPD 2 Gokak, Karnataka 750 TPD 3 Pantnagar, Uttaranchal (by March 2007) 500 TPD 4 Pondicherry(Modified Starch Processing) 8000 TPA

Note: TPD – Tons per day; TPA – Tons per annum Source: Company Annual Report 2006

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BUSINESS AND PRODUCT MIX The company's products include maize starch powder of all grades, liquid glucose, Diversified product mix high maltose maize syrup, dextrose monohydrate, dextrose syrup, malto-dextrine, white dextrine, yellow dextrine, thin boiling starch and oxidized starch. These products are used in industries like food products, pharmaceutical formulations, packing materials, textiles, etc. By-products The by-products generated during the manufacturing process are steep liquor, maize germs, husk fibre, gluten, oil cake and maize oil. Husk fibre, gluten and oil cake are sold as cattle feed and maize oil is refined further to produce edible oil. Started the exports in RSGB started the exports in FY2004 primarily to reduce the geographic FY2004 concentration of the company. The company exports to Japan, Bangladesh, Thailand, Turkey, Sudan, Dubai, Sharjah, Asean countries and West Asian countries. The Gokak plant has the widest portfolio of products under its roof and the Pondicherry unit serves as the manufacturing hub for all grades of modified starches. Strict quality norms The company maintains strict quality norms at every stage of the manufacturing process maintaining all the required records. The company also has the most modern equipments thereby ensuring complete traceability for every batch of finished product that is manufactured in the company premises. The company also has advanced laboratory equipment such as high performance liquid chromatography, brightness meter, viscometer, spectrophotometer, laminar flow units etc.

Operational process

Shelled Maize

Maize cleaners

Centrifugal Hydroclone starch Steep tanks Germ separators Grinding mills Screens separators washing

Steep water Germ Fiber Gluten

Germ washing and Refinery drying

Clean, dry germ Starch conversion Starch products products Oil expellers and Germ meal extractors

Crude oil Nutritive sweeteners Feed Products Maltodextrins Syrups Dextrose Oil refining Maltodextrins Liquid glucose high Dextrose Syrups powder Maltosecorn syrup Dextrose and other types Monohydrate Glucose D Refined Oil

Source: Company Annual Report 2006

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Certification n The company has already applied for HACCP (Hazard Analysis and Critical Control Point), which is a process control system designed to identify and prevent microbial and other hazards in food production. HACCP certification expected n HACCP involves a system approach to identification of hazard, assessment of by December 2006 chances of occurrence of hazards during each phase, raw material procurement, manufacturing, distribution, usage of food products, and in defining the measures for hazard control. It includes steps designed to prevent problems before they occur and to correct deviations as soon as they are detected. It is basically a preventive control system with documentation and verification. It is considered to be the most effective approach for producing safe food. HACCP enables the producers, processors, distributors and exporters among others of food products to ensure food safety. n The company is expected to obtain the HACCP certificate by December 2006, which would significantly open up the opportunities for exports with higher margins. In addition to HACCP the company is also expected to go for employee and environment certification in FY08, which would further enhance its reputation in the global markets.

Raw material and its availability Maize is the main raw n Maize and tapioca are the principal raw materials required to manufacture material starches and sweeteners and they are available throughout the year. The major states where maize is grown are Gujarat, Maharashtra, Madhya Pradesh, Karnataka, Bihar and Andhra Pradesh. Moreover, maize is sown in the above states during two different times a year, which helps the company procure raw material throughout the year at more or less consistent price. Karnataka accounts for the largest production with an average yield of approximately 3200 kg per hectare. Breakup of maize demand n Demand for maize in the domestic market has been rising mainly due to increasing demand from the poultry and livestock sectors. Also, ethanol producers are expected to place large orders for the coming few months. The breakup of the demand is around 1.45 MT for the starch sector, 7.1 MT for poultry, 1.45 MT for livestock and 3.6 MT for human consumption, thereby taking the total demand to 13.6 million tons (MT) per annum. Against this demand, maize production has actually fallen from 12.41 MT in FY05 to 11.5 MT in FY06. However as against the rise in maize prices the prices of the final products have shot up significantly thereby maintaining the margins for the company. Maize production expected n Going forward, the government has adopted a new approach in the area to go up in the near future expansion for maize in view of the growing competition from food and cereal crops. The program envisages the transfer of improved technology through a demonstration on improved crop production technologies, integrated pest management training programs, seeds production programs as well as the use of insecticides, pesticides, weedicides and other inputs, among others. As a result, the maize production is expected to go up in the coming years. Strategic plant location n The plants of the company are located around the corn growing belts of the ensures quality raw material country, thereby ensuring continuous supply of good quality maize at at competitive rates reasonable prices. Also, the company saves a lot on logistics cost, which has its impact on the profitability of the company. There has been no problem over the last few years for the availability in terms of quality and quantity of the maize.

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Clients Some of the major clients of the company are as follows:

Major clients Food & Confectionery Pharmaceuticals Paper Textile Other Nestle Glaxosmithkline ITC Bombay Dyeing Hindalco Heinz Ranbaxy BILT Grasim SAB Perfetti Pfizer JK Paper Indian Rayon Micro Ink Nutrine Cipla TNPL K. G. Denim United Breweries ITC Nicholas Piramal APPM Lakshmi Mills Godrej Agrovet Cadbury Novartis West Coast Paper Precot Mills Emami Dabur Wockhardt Hindustan News Print Anglo French Suguna Feeds Britania Lupin Khanna Paper Loyal Textiles Amul Wrigley FDC NR Group VTM India Gypsum HLL Torrent Pharma Abhishek Paper Paramount Venkateswara Hatcheries Lotte Biocon Pudumjee Paper Jansons Source: Company Annual Report 2006 The company has very strong relationships with most of the above clients and it Reputed client list meets a majority of their requirements. The superior product quality of the company is well appreciated by the above clients and thus we expect steady flow of business from the above-mentioned large domestic companies and MNCs.

Distribution Network n The company sells directly to the big corporate buyers including domestic companies and MNCs through centralized marketing department at the head office in Ahmedabad. Strong distribution network n The company also markets and distributes the products through their marketing points at New Delhi, Mumbai, Chennai, Bangalore, Coimbatore, Ahmedabad and Hyderabad. The company also has agents in various regions of the country, which bring in regular business and thus strengthens the distribution network of the company.

Competition Largest player n RSGB is the largest player in the starch-processing segment in India with the current corn crushing capacity of 850 TPD. Other major players are Anil Starch, Maize Products, Sayaji Industries, Universal Starch and Gujarat Ambuja Exports Ltd. All these companies have varied manufacturing capacities. Expand from 850 to 1500 n The closest competitor is Gujarat Ambuja Exports, which is planning to expand TPD by March 2007 its capacities from 500 TPD to 1700 TPD by September 2007. As against this, RSGB with the addition of the new capacities by March 2007 is expected to have a maize crushing capacity of 1500 TPD. Strong growth in demand to n The maize-processing product has diversified applications in various industries. absorb competition All end user industries using the maize processing products like textiles, pharmaceuticals, confectionery and food products are expanding capacities and growing well in India. In view of this, we feel there is enough growth in demand to absorb competition.

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GLOBAL STARCH INDUSTRY Per capita consumption is a n Maize based starch and its derivatives industry is a multi-billion dollar industry fraction of global average in the US. In comparison to that, in India it is estimated to be Rs.15 bn only. Even on the per capita consumption front, India lags far behind the US as the country consumes less then 1 kg as against the per capita consumption of 64 kgs in the US and a global average of 6 kgs. Starch has more than n Starch is the major carbohydrate reserve in plant tubers and seed endosperm. 1,000 apoications It is also versatile and economical. Starch, together with its derivatives, enjoys more then 1,000 applications in various industries as a thickener, water binder, emulsion stabilizer and gelling agent. Starch is also one of the major renewable resources and a mainstay of our food and industrial economy. n The global maize crop is estimated at 26908 mn bushels or 683 MMT per World maize production annum. (1 MT = 39.36 bushel). The conversion of nearly 10% into starch or Romania South Africa starch-derived sweeteners makes maize starch the largest starch commodity 1% 1% Others in the world. The annual global market for maize starch is estimated at 70 15% MMT by volume. Canada n The industry is concentrated in a few global pockets like the US, EU, China, India 1% US India and Japan. The US is the largest maize starch producer accounting for 2% 40% Argentina close to 51% of the global production. 2% n The EU community, which is, 17% of the global output is second to the US, Mexico with an annual value of close to 10 bn euros. Every 2 tons of maize starch 6% Brazil generates around 1 ton of by-products. These by-products generate higher China 6% EU realizations per ton than maize. 19% 7% n While starch can be made from other agricultural commodities, namely wheat, Source: Company Annual Report 2006 potatoes and tapioca among others, maize occupies the major share. In the US, which is the largest global starch producer, starch is made only from maize while the other regions use a mix of maize, wheat and potatoes. Maize has major shares in n The most promising new market for maize based starches is as raw material starch manufacturing for the production of industrial chemicals and plastics currently being made from petroleum feedstock. Newer uses of starch n With fuel prices shooting northward, maize starch is fast being used as an essential and environment friendly additive to reduce the oil bill. Ethanol alone accounted for 53% of the entire US starch industry output and we expect this practice to be replicated in other developed and developing economies like India in the visible future. Typical percentage composition of common raw materials Source Starch Moisture Protein Fat Fibre Maize 65 12 9 4 12 Potato 19 75 2 0.2 1.6 Wheat 65 14 13 2 3.5 Tapioca 30 63 3 0.3 5.5 Source: Company Presentation

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INDIAN MAIZE STARCH INDUSTRY n The Indian maize starch industry is estimated at Rs.15-bn per annum. The Indian starch industry is at a nascent stage as the per capita consumption is a fraction of the global average. This is primarily because till now we are using starch for only limited number of applications while globally it has over thousand applications. Very few players have large n Maize is the key input for the manufacture of starch and, typically, the raw maize crushing capacity in materials account for more than 55% of revenues. Plant locations are India generally close to raw material growing areas or end-users to save on logistics costs. The number of players in India is restricted to a handful, each having good experience in the industry. n In India the downstream applications of starch have been concentrated in food processing, confectionery, pharmaceutical, paper and textile industries. India is the world's seventh n Maize is a universal crop grown in the developed and developing countries. largest Maize producer India is the world's seventh largest Maize producer. Its yield is low at 1721 kg per hectare as compared to 9285 kg per hectare in the US. n Maize possesses tremendous potential in terms of feed for dairy, poultry, piggery and other agro and maize processing industries.

Growth in user industries n Pharmaceuticals 9% CAGR in expenditure on The pharmaceutical industry represents a key opportunity for sustainable growth health services in demand for starch. Between 1994 and 2002, the household expenditure on health services grew at a CAGR of 9%. As India's working population rises to 65% of the total population by 2020, healthcare spending is likely to rise further. In 2001, the healthcare delivery market accounted for 5% of the GDP of US$18.7 bn and is likely to rise to almost 9%, that is, US$45 bn by 2012. Indian pharmaceutical companies are expected to raise their exposure in the US and Europe, where US$73 bn worth of drugs are set to go off patent over the next five years. In addition, following the commencement of the new product patent era in 2005, over the next five years, as many as top 10 drugs are going to lose patent protection. The Indian companies are expected to produce six of these top 10 drugs. n Textiles Domestic and export growth The Union Textiles Ministry's white paper on textiles called Vision 2010 envisages to drive up the demand a growth in the Indian textile industry from US$37 bn to US$85 bn by 2010. This will raise its share in world textile trade from 4% to 8% at an export value of US$50 bn from the current US$12 bn. Apart from the opportunity in world textile trade, the domestic market at US$16 bn presents an attractive opportunity as it is likely to grow at a healthy CAGR of 8-9% between 2005 and 2010. n Paper Stringent environment According to Indian Paper Manufacturers Association, while the demand for paper norms to improve paper is expected to grow at 6%, capacity expansion is estimated to grow at only 3%, quality up to 2008-09. By 2012, India would be consuming more than 10 MT of paper, close to twice its present consumption, according to ICRA and IPMA estimates. The demand is growing rapidly due to a thrust on education, India's greater commercial importance and growing importance of packaging for branding and exports. In addition, compliance with stringent environment norms has necessitated huge investments by the paper industry, also improving paper quality to international levels. India has one of the lowest India's per capita consumption of paper is around 4 kg, which is one of the lowest per capita consumption of in the world. With the expected rise in literacy rate and growth of the economy, paper in the world an increase in per capita consumption of paper is expected. Existing paper units like ITC, Ballarpur, AP Paper, West Coast and others are expanding capacities. The demand for upstream market of paper products like tissue paper, tea bags, filter paper, light weight online coated paper, medical grade coated paper, etc, is also growing.

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n Food processing Growing preference for The Rs.8600-bn food processing industry is expected to grow at a phenomenal value-added products pace over the coming years, largely due to higher consumerism driven by growing per capita income and a growing preference for value-added products. The sector is expected to attract an investment of Rs.621 bn in the Tenth plan period against Rs.385 bn during the Ninth plan period. Over the long term, the food processing industry is expected to attract an estimated investment of Rs.1500 bn over the next decade. n Ethanol 10% blending with petrol The US is the largest producer of ethanol as fuel from maize starch. In India, likely in the near future the blending of petrol with 5% ethanol has been permitted and this is likely to be doubled over the years to 10% blending. The use of starch for the production of ethanol is being explored in India as well and could be a great opportunity going forward. n Construction Could be the next growth The application of starch in the construction industry is yet to be tested in the trigger Indian environment. Addition of starch in the preparation of concrete could reduce the cement requirement by about 10-15%, besides reducing setting time. With India currently in the midst of a construction and retailing boom this could be a huge opportunity going forward. n Replacement opportunity Starch is being looked upon In India, the fight against lifestyle diseases, particularly diabetes, is assuming as a sugar replacement. significant importance today as India has the highest population of diabetic patients in the world. Starch is being looked upon as a sugar replacement. This is because the sugar derivative, in combination with other sweeteners, that is, aspartame possesses the sweetness of cane sugar of an equivalent volume but with very low colon, content. The replacement application is initially being targeted at fermentation industries like bulk drug, beer and enzyme manufacture.

Source: Company Annual Report 2006

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KEY INVESTMENT RATIONALE

India becoming large consumption driven global economy Sustainable 8% GDP The Indian GDP is growing at above 8% and is also expected to continue to grow growth to lead to higher at such rates, if not higher, for the visible future. This has led to a growing Indian consumption middle class, which is the main consumption class. India is getting transformed into a rapidly developing large consumption driven global economy. More and more people are buying wider range of maize-based downstream products and we feel the growth is sustainable. We are also seeing more and more applications of starch for the products of various industries ranging from food, pharmaceuticals, textiles, leather etc.

Strong growth expected in user industries User industries are The company primarily serves the food, pharma, paper and textiles industries increasing capacities apart from various other applications. The present Government has focused heavily on agricultural growth. This, in turn, is expected to spur the growth of agro-food and food processing industries. Besides, the companies in paper, pharma and textiles industries are all adding capacities to meet the growth for their products. Since the company has a presence in all the above fast growing sectors through its clients, we expect strong growth for the products of the company going forward.

Low per capita consumption Per capita consumption to Maize starch and its derivatives are a multi-billion dollar industry in the US. In increase comparison to that, in India it is estimated to be at Rs.15 bn only. Even on the per capita consumption front, India lags far behind the US as the country consumes less then 1 kg as against the per capita consumption of 64 kgs in the US and a global average of 6 kgs. We see a huge opportunity in terms of rising per capita consumption of maize starch and its derivatives, thereby providing greater opportunities for the company to grow at a rapid pace in future.

Wide range of products Currently the company As the demand for starch derivatives are increasing in India, people have also offers 35 different products become quality conscious and, hence, are demanding better quality products and are also willing to pay for it. Looking at this opportunity, RSGB has proactively increased the rage of its products and is now offering a wide variety of products to suit the different needs of the people. The company is present in all categories of products ranging from low value products to very high value-added quality products for which the company is able to command a premium for its products. At present, RSGB offers approximately 35 different products comprising starch, modified starch and value-added derivatives, which is the largest offering by any Indian starch manufacturer.

Tie-up with French starch major Roquette Freres Global revenues of more n In order to move to high value-added products, which command better pricing than 2 bn Euros power, the company entered into a financial cum intellectual co-operation with Roquette Freres, France, which is a leading global player in starch and derivatives with revenues exceeding 2 bn euros. Roquette, founded in 1933, is among the top five leading manufacturer of starch and starch derivatives in the world. Roquette is the world's largest producer of polyols, sorbitol, maltitol, mannitol, xylitol and injectibles. Roquette has production facilities in seven nations across Europe, America and Asia employing more then 5700 people worldwide. 600 products in more than n Roquette markets over 600 products in more then 100 countries worldwide 100 countries and processes 6 MMT of agricultural raw material every year. Roquette has processing capacities of 10000 TPD of corn, 500 TPD of wheat and 1 mn TPA of potatoes. The 2-bn euro revenue is distributed like 49% from Western Europe, 20% from North America, 16% from France, 8% form Asia and 7% from the other countries of the world.

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n The cooperation agreement between the two companies provides for a transfer of know-how for an improvement in the existing product categories of RSGB and the introduction of new products. Also, Roquette will assist the company in increasing exports. RSGB could become the n This is the first tie-up by the global major, which studied several companies preferred outsourcing for many years and finally decided to tie-up with RSGB. Roquette has already partner for Roquette commercialized over 600 applications, which is about 17 times the size of the company's present portfolio, thereby opening up a huge window of opportunity for the company to expand its product portfolio and create a niche for itself with superior products. Also, we feel there is a large opportunity in terms of if Roquette makes RSGB as preferred outsourcing partner to sell in the growing Middle East and South East Asian markets.

High margin products n With the alliance with Roquette, the company plans to enter into high value products for nutrition, health, construction, biotech and fermentation categories and dextrose for the manufacture of sugar-free products. Currently most of the sugar-free sweeteners are imported in India.

Roquette invests annually n Roquette has dedicated facilities for an analysis of products customized for 10mn euros for R&D each industry. Also, it makes annual investments of approximately 10 mn euros in R&D, which RSGB can now access and thus could drive its business over long-term.

Quality of products & innovation through continuous R&D RSGB follows serious quality norms to ensure quality product for its consumers. Strict quality norms The company is dealing with the food and pharma industry that is very sensitive. Thus, the level of quality is very important. The company, through its research and development center, understands the needs and demands of customers and delivers affordable, nutritious, healthy and innovative products. RSGB also expects to introduce new products over the next three years like pyrogen free dextrose to be used in the manufacture of IV fluids and denim grade starch that enhances fabric smoothness and help to manufacture world class cotton fabric.

State-of-the-art equipment to lead to better productivity and profitability Increased productivity due The company possesses modern and state-of-the-art equipment, which enhances to modern equipments the efficiency of operations and, thereby, yields superior results. RSGB has purchased the most critical crushing equipment from Alfa Laval, which is the world leader in the equipment space. The company is the first Indian buyer of the SX217 separator from Alfa Laval, Sweden, thereby reporting a 20% saving in power consumption compared to the old equipment. RSGB has also imported a drier from Vetter, Germany for improved dried fibre, which is also the first- time technology in the industry. As a result of the superior quality of equipment, the company enjoys higher then average industry recovery of starch from maize, thereby leading to better capacity utilizations and, thus, leading to higher revenues and profitability for the company as compared to its peers.

Strategic location of Gokak plant Karnataka is the largest The Gokak plant is located in Karnataka, which is the largest maize growing state maize growing state in India in India. Its annual production is 2.6 MMT of maize and contributes 17% of the total output of India. Also, the average yield has gone up from 1.7 to 3.2 tons per hectare. The Gokak facility is within a 100 km radius of the major corn growing areas like Belgaum, Dharwad and Gadag, which together account for 45% of Karnataka's production. Maize is the main raw material for the company. The strategic location of the plant helps the company to significantly reduce the logistics cost for the procurement of the raw materials. Also, RSGB is the largest maize buyer in Karnataka, thereby enabling the company to avail of attractive volume-based concessions and reduce the overall cost of raw materials.

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Strategic acquisition of HLL unit at Pondicherry n In FY06, the company acquired the functional biopolymer unit that was set up in Pondicherry in 1991. It is the first of its kind in India for the manufacture of tapioca-based specialty modified starches for the paper industry. National Starch and Chemicals (NSC), USA, then a Unilever subsidiary, had provided the plant design and process know how. Pondicherry was considered the ideal site because of its proximity to the main tapioca growing regions of the country as well as major paper mills, which are the ultimate end-user of its products. 65% market share in high n The unit pioneered the concept of wet-end starch use in paper making in end paper starch segment India. Beginning with just three main products, it has expanded its portfolio significantly over the years entirely through in-house innovation. The business now enjoys a dominant market share estimated at 65% in the country in the high-end paper starch segment. n The acquisition is strategic in nature as it will enable the company to establish a strong foothold in the niche high-value starch derivatives for the paper industry by acquiring their brands, patents and existing customers. RSGB expects to garner a majority share in the upper end starch requirement of India's paper industry. n Also, the acquisition is strategic in terms that the company has made it the Net Sales (Rs mn) R&D hub for the development of new starch-based products to meet the 2,500 different demands of all segments. The company is already in the process of developing new value-added products for the paper and textile industry. RSGB 2,000 is also hopeful of achieving a breakthrough and patenting the product in next six months, which could lead to increased revenues and profitability for the company going forward. 1,500 CAGR 25%

1,000 Reputed client list The company enjoys the confidence of reputed clients across user industries, 500 which it serves. In every user industry, RSGB directly deals with the top players, thereby leading to strong customer relations, which would help to increase the

FY02 FY03 FY04 FY05 FY06 business in future. Also, the company would find ready buyers for the innovative high quality products that it is expected to launch by next year, thereby leading Source: Company to higher revenues and more importantly superior profitability going forward.

Robust growth in sales and profits The net sales of the company have grown at a CAGR of 25% from Rs.940 mn in Net Profits (Rs mn) FY02 to Rs.2.3 bn in FY06. The net profits of the company have grown at a CAGR 125 of 86.4% from Rs.9 mn in FY02 to Rs.113 mn in FY06. Due to the strong demand and good potential, the company is adding capacities, which would help it 100 continue its strong growth in terms of revenues and profitability, going forward. We expect net sales of the company to grow at a CAGR of 35.5% from Rs.2.3 bn 75 in FY06 to Rs.4.2 bn in FY08E and net profits to grow at a CAGR of 61% from 50 Rs.113 mn FY06 to Rs.278 mn FY08E. CAGR 86.4% 25 Attractive valuation - At the current price of Rs.181, the stock is trading at very attractive valuations of 7.3x FY08E earnings and 4.9x FY08E cash earnings. The stock is available at FY02 FY03 FY04 FY05 FY06 6.6x EV/EBIDTA multiples and only 1.1x EV/Net Sales multiple, based on FY08E estimates. We expect RoE to improve from 12.9% in FY06 to 17.3% in FY08E. Source: Company We feel the valuation is attractive due to the strong past track record and good future potential due to capacity expansion, technology tie-up and growth in demand, which would lead to growth in terms of revenues and profitability going forward.

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NEW PROJECTS

500 TPD plant in Uttaranchal To be operational by n The company is setting up a plant in Pantnagar, Uttaranchal with maize March 2007 crushing capacity of 500 TPD. The project is expected to cost approximately Rs.1.1 bn. The civil construction is already going on in full swing and the plant and machinery has also been ordered. n The unit is expected to commence trial production runs in February 2007 and Quantity sold (Lakh tons) we expect the plant to commence commercial production in March 2007. The 2.5 unit is expected to stabilize its operations in a couple of months after production. Hence, we feel the full potential of the plant will be realized in FY08E & FY09E. n The rationale behind setting up the plant is that a lot of its user industries, 1.5 that is, food and pharmaceuticals have set up their plants in Uttaranchal due to tax concessions offered by the government of Uttaranchal. Also, the demand for the company's products is growing at a pretty rapid pace. Hence, 0.5 the company felt the need to expand the capacities in order to cater the demands of various industries.

FY03 FY04 FY05 FY06 n Based on the heavy demand from its regular customers, the company decided FY07E FY08E to strategically set up a plant in Uttaranchal, thereby moving closer to its Source: Company, Kotak Securities - customers. This makes strategic sense as RSGB can save a lot on Private Client Research transportation cost, thereby improving the margins of the company. n Also, the unit has a ten-year tax holiday, so we expect the company to benefit from the lower overall tax outflow.

Possible expansion at Viramgam n Currently, the company has 100 TPD maize crushing capacity at Viramgam. RSGB is contemplating further expansion at the Viramgam plant. The total capacity is expected to be 200 to 300 TPD at the Viramgam plant in the near future. Cost effective expansion n The expansion at Viramgam would be very cost effective as the company would be expanding in the same premises. RSGB is required to only add the plant and machinery, as the other infrastructure required is already present at the Viramgam unit. Also the expansion could be completed with minimum gestation period and at low capital cost.

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FINANCIALS

FY06 Financial performance Exports (Rs mn) For FY06, the company reported net sales of Rs.2.3 bn registering a 25% YoY 200 growth. RSGB recorded higher EBIDTA margins of 14.3% in FY06 as against 13.0% in FY05. The company reported net profits of Rs.113.4 mn, which is a 150 187.1% YoY growth. The company reported an EPS of Rs.13.4 and CEPS of Rs.23.1 in FY06. At the current market price of Rs.181, the stock is trading at 100 13.5x its FY06 earnings and 7.8x it's FY06 cash earnings.

50 Equity Dilution In FY06, the equity of the company rose from Rs.64.5 mn to Rs.84.5 on account 0 of the issue of 2 mn shares as follows: FY04 FY05 FY06 Equity shares Source: Company Month Issued to Mn shares Face value Premium Dec-05 Siwana Engineering ltd. 1.0 10 40 Feb-06 Safari Biotech 0.2 10 105 Feb-06 Telecon Infotech 0.2 10 105 Feb-06 Marg Biotech 0.6 10 105 Total 2.0 Source: Company

In FY07 the company further issued 2.11 mn shares and 0.59 mn convertible warrants as follows:

Convertible warrants Month Issued to Mn shares Face value Premium May-06 Roquette 1.58 10 190 May-06 Yatish Trading Company Pvt. Ltd. 0.53 10 190 May-06 Convertible Warrants to Promoters 0.50 10 190 May-06 Convertible Warrants to Roquette 0.09 10 190

Source: Company

Fully diluted equity of Considering the above issue and assuming full conversion of warrants into equity Rs.111 mn shares, the equity of the company is expected to rise from Rs.84.5 mn to Rs.111.4 mn. Going forward, we do not expect any further dilution of equity shares, as the funds already raised, coupled with tied-up debt and internal accruals would be sufficient to meet the planned expansion plans of RSGB.

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Q2FY07 Results Analysis Rs mn Q2FY07 Q2FY06 YoY% Q1FY07 QoQ (%) H1FY06 Net Sales 749 588 27.4 711 5.3 1,461 Total exp. 633 514 23.2 605 4.6 1,238 EBIDTA 116 74 56.7 106 9.0 222 Depreciation 24 21 14.3 23 3.9 47 Robust Q2FY07 numbers EBIT 92 53 73.4 83 10.4 175 Interest 38 26 46.0 35 7.1 73 PBT 54 27 99.9 48 12.8 102 Tax & deferred tax ------NPAT 54 27.01 99.9 48 12.8 102 Equity shares o/s (mn) 10.6 6.4 10.6 10.6 Equity shares o/s (mn) diluted 11.1 11.1 11.1 11.1 Ratios Operting profit margin (%) 15.5 12.6 +290 bps 15.0 +50 bps 15.2 Raw Materials / Sales (%) 63.3 - 63.9 63.6 EPS Reported(Rs) 5.1 4.2 4.5 9.7 EPS (Rs) - Fully Diluted 4.8 2.4 4.3 9.1 CEPS (Rs) - Fully Diluted 7.0 4.3 6.4 13.4

Source: Company

27.4% YoY increase in sales n Net sales for Q2FY07 were at Rs.749 mn as against Rs.588 mn in Q2FY06, lead to doubling of profits thereby registering YoY growth of 27.4% and 5.3% sequential growth. The to Rs.54mn growth in sales is primarily due to better product mix and higher realizations due to strong demand for its products. Increasing EBIDTA margin n The company recorded an EBIDTA margin of 15.5% for Q2FY07, which is up 290 bps on YoY basis and also up 50 bps on sequential basis. The higher EBIDTA margin was achieved due to higher capacity utilization and better pricing power in the maize-based starch derivates products of the company. n PAT for Q2FY07 is up 99.9% YoY and up 12.8%, on a sequential basis, to Rs.54 mn, translating into a quarterly EPS of Rs.4.8 and quarterly CEPS of Rs.7.0 on a fully diluted basis.

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Projected Financials n For FY07E, we expect sales to grow 37.6% to Rs.3.2 bn and net profit to be Rs.188.2 mn, translating into an EPS of Rs.16.9 and CEPS of Rs.26.4 on a Net sales (Rs mn) fully diluted basis. This is primarily due to full utilisation of the maize crushing at Gokak plant, which expanded the capacity from 500 TPD to 750 TPD in 4,500 FY06. 3,500 n For FY08E, we expect sales to grow by 33.3% to Rs.4.2 bn and net profit to be Rs.278.1 mn, translating into an EPS of Rs.25.0 and CEPS of Rs.37.1 on 2,500 fully diluted basis. This is primarily due to expansion at Viramgam unit, 1,500 commissioning of Uttaranchal unit and higher contribution form the modified starches from its Pondicherry plant. 500 n For FY07E and FY08E, we expect the book value to be Rs.132.8 and Rs.155.2 per share, respectively. FY04 FY05 FY06 FY07E FY08E n The company reported EBIDTA margin excluding other income of 14.3% in Source: Company, Kotak Securities - FY06. We expect EBIDTA margin excluding other income to increase to 15.6% Private Client Research in FY07E due to growth in revenue led by higher capacity utilization leading to more productivity and better efficiency. RSGB is likely to achieve higher operating margins due to strong demand for liquid glucose, dextrose EPS (Rs) monohydrate and other starch derivatives. n We expect EBIDTA margins to further rise to 15.9% in FY08E due to 30 commissioning of the new 500 TPD maize-crushing plant at Uttaranchal in March 2007 with state-of-the-art machinery. Also, the company plans to sell 20 superior varieties of starch derivatives with the help of technical know how from Roquette Freres of France that is likely to yield superior margins 10 compared to traditional derivatives of starch. - n We expect RoE to improve from 12.9% in FY06 to 17.3%in FY08E. n We expect RoCE to improve from 10.9% in FY06 to 14.0% in FY08E. FY04 FY05 FY06 FY07E FY08E

Source: Company, Kotak Securities - Capex and its funding Private Client Research The company is expected to spend approximately Rs.785 mn in F07E and Rs.250 mn in FY08E to execute its expansion plans in the maize starch processing. RSGB is comfortably placed to raise additional debt, as the debt to equity ratios is 1.2x, as of March 2006. The company has already tied up debt for the capex programmes and we feel the combination of money already raised, internal accruals and debt will be sufficient for the ongoing and the planned future capex of the company.

Return ratios (%)

ROE % ROCE% 20.0

15.0

10.0

5.0

- FY04 FY05 FY06 FY07E FY08E

Source: Company, Kotak Securities - Private Client Research

Initiating Coverage Please see the disclaimer on the last page For Private Circulation 16 November 16, 2006 Kotak Securities - Private Client Research

VALUATION AND RECOMMENDATION

n The stock trades at 1.4x FY07E and 1.2x FY08E to book value. n It discounts FY07E and FY08E earnings at 10.7x and 7.3x, respectively. n The stock looks attractive on a cash earnings basis. It trades at 6.8x FY07E and 4.9x FY08E cash earnings. n We are positive on the growth prospects of the company and we are initiating coverage with a BUY recommendation on the stock with a price target of Rs.308 over a 12-month horizon. n At the current market price of Rs.181, the stock offers upside potential of 70%. n We have derived our target price based on two-stage DCF valuation methodology, with a WACC of 10.4% and terminal growth rate of 4%. We initiate coverage with a BUY recommendation.

DCF valuation per share (Rs mn) Free Cash Flow to Firm Total FCFF from above table 1,623 (Rs mn) 2007 2008 2009 2010 2011 2012 2013 2014 2015 Terminal value 4,222 PAT 188 278 320 368 423 455 489 525 565 Total FCFF 5,845 Depreciation 106 135 145 153 159 164 169 174 179 Net debt 2,414 Shareholders’ value 3,432 Interest (1-Tax) 106 135 125 120 115 110 105 100 95 Value per share (Rs) 308 Capex (785) (250) (100) (100) (100) (100) (100) (100) (179) Terminal value % of FCFF 72 Change in NWC (495) (455) (235) (267) (284) (201) (164) (141) (112)

Source: Kotak Securities - Private Client FCFF (880) (156) 255 274 313 428 499 559 548 Research Discounted Value (880) (149) 219 214 220 273 288 293 260

Source: Kotak Securiites - Private Client Research

Assumptions Sensitivity analysis Adjusted beta 1.1 Terminal / WACC 10.0% 10.5% 11.0% Risk free rate (%) 7.00 3 294 254 221 Market Risk Premium (%) 7.00 4 359 308 267 Cost of Equity (%) 14.7 5 451 382 328 Cost of Debt (%) 9.0 Source: Kotak Securiites - Private Client Research Equity 2,017 WACC (%) 10.4 Terminal growth (%) 4.0

Source: Kotak Securities - Private Client Research

Initiating Coverage Please see the disclaimer on the last page For Private Circulation 17 November 16, 2006 Kotak Securities - Private Client Research

ANNEXURE

Various applications of Starch n Food Used as thickening agent in sauces, gravies, puddings and pies. Widely used as a dusting agent in baking industries. Also used in preparation of baking powder and salad dressings. n Paper Widely used in the paper industry to give strength, surface fuzz and stiffness to paper. It is used to improve the writing and printing characteristics of all paper stationeries. n Textile Used to strengthen wrap yarn and to improve resistance to abrasion while weaving. Also used to increase consistency in printing paste. Used as back filling improves the stiffness of the weave. n Pharmaceutical It is used as a compressing agent in tablet manufacturing. Free from microbial bacteria, cornstarch is also used as a dusting agent in the manufacture of surgical gloves. n Adhesives Used as an adhesive in pigmented coating for paperboard and, thereby, improving the appearance of the paper by giving the required glossiness.

Various applications of Liquid Glucose n Confectionery It is an extremely popular ingredient in confectionery. Liquid glucose prevents crystallization and provides homogeneity in manufacturing of chewing gums and chocolates. It imparts smooth texture and gives longer shelf life for different confectionery products. n Processed food Used in the manufacture of jams and jellies, glucose syrup helps in the prevention of crystallization and spoilage. It also acts as a flavor enhancement. n Bakery Gives the necessary body, bulk and the necessary sweetness to different bakery products. The hygroscopic properties impart longevity and freshness to its products. n Pharmaceutical It acts as an important carrier for cough syrups and vitamin-based tonics. It also acts as a granulating agent in tablet coating. n Leather Liquid glucose imparts glossiness, fineness and optimum weight age to leather goods.

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Various applications of Dextrose Monohydrate n Bakery DMH imparts flavor enhancement, and sweetness to cakes, biscuits and other bakery products. It also contributes crust color and texture to its products. It acts as an accelerator to brewing reaction and ferment ability in bakery process. n Ice creams and froze desserts DMH lowers the freezing point in order to give a soft, creamy texture, and pleasant mouth feel to its products. It has a unique ability to increase the solid substance of the product without unduly increasing the sweetness and hence improves the flavor of the product. n Confectionery Used as a controlling agent for crystallization, softness and sweetness of confectionery and other foods. n Pharmaceutical Used as a rehydrating agent in pharmaceutical products. n Industrial Widely used in the manufacture of antibiotics such as streptomycin and refampicin. Also used in the manufacture of Sorbitol, mannitol and gluconates.

Various applications of malto dextrin n Infant Food Malto dextrin is the simplest form of sugar, has a soft mouth feel and is easily digested. This attribute has made it indispensable to infant food manufacturers. n Beverage Malto dextrin imparts flavoring, bodying and drying agent in chocolate drinks, flavor powders, special diets, and coffee powders, besides others. n Dairy It is extensively used in coffee whiteners, imitation creams and toppings. n Confectionery It is perfect for candy coating and soft-center candies, for frosting and glazing, for nut and snack coating. Its candies improve the hygroscopic characteristics. n Pharmaceutical Used in special diets, isotonic drinks and different alkalizes as a nutrient supplement. n Other Applications It is used as a moisture-holding agent in breads and as a dispersing agent in instant drinks concentrates.

Source: Company presentation

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Profit and loss statement (Rs mn) Balance sheet (Rs mn) Year end March FY05 FY06 FY07E FY08E Year end March FY05 FY06 FY07E FY08E Revenues 1,839 2,299 3,163 4,217 Cash and cash equivalents 20 156 22 36 % change YoY 27.5 25.0 37.6 33.3 Accounts receivable 362 504 696 949 EBITDA 238 328 492 672 Inventories 339 576 799 1,075 % change YoY 6.6 37.6 49.9 36.6 Others 27 46 63 84 Other Income 2 3 10 5 Current assets 748 1,282 1,579 2,145 Depreciation 77 82 106 135 LT investments 1 1 1 1 EBIT 163 249 395 542 Net fixed assets 1,410 1,673 2,352 2,467 % change YoY 7.0 52.7 58.9 37.0 Total assets 2,160 2,956 3,932 4,612 Net interest 109 119 160 205 Payables 114 140 198 264 Profit before tax 54 130 235 337 Others 26 35 47 63 % change YoY 88.0 141.8 81.2 43.3 Current liabilities 140 175 245 327 Tax 14 16 47 59 LT debt 1,329 1,459 2,100 2,450 as % of EBIT 8.7 6.6 11.9 10.9 Net income 40 113 188 278 Other liabilities(deferred tax) 53 57 57 57 % change YoY 163.8 187.1 65.9 47.8 Preference capital 90 50 50 50 Shares outstanding (m) 6.5 8.5 11.1 11.1 Equity 65 85 111 111 EPS (reported) (Rs) 6.1 13.4 16.9 25.0 Reserves 484 1,131 1,369 1,617 CEPS (Rs) 18.1 23.1 26.4 37.1 Total liabilities 2,160 2,956 3,932 4,612 DPS (Rs) 1.5 2.0 2.0 2.0 BVPS (Rs) 49 109 133 155

Cash flow statement (Rs mn) Ratio analysis Year end March FY05 FY06 FY07E FY08E Year end March FY05 FY06 FY07E FY08E EBIT 163 249 395 542 EBITDA margin (%) 13.0 14.3 15.6 15.9 Depreciation 77 82 106 135 EBIT margin (%) 8.9 10.8 12.5 12.8 Change in working capital (51) (354) (356) (464) Net profit margin (%) 2.1 4.9 6.0 6.6 Chg in other net current assets 11 (9) (5) (5) Adjusted EPS growth (%) 163.8 187.1 65.9 47.8 Operating cash flow 201 (32) 141 208 Interest (109) (119) (160) (205) Receivables (days) 64.3 68.7 69.2 71.2 Tax (5) (12) (47) (59) Inventory (days) 70.0 72.7 79.3 81.1 Cash flow from operations 86 (163) (66) (56) Sales/assets (%) 132.6 149.1 157.2 175.1 Capex (149) (366) (785) (250) Interest coverage (x) 1.5 2.1 2.5 2.6 (Inc)/dec in investments (1) - - - Debt/equity ratio (x) 2.4 1.2 1.4 1.4 Dividends (20) (27) (29) (29) Cash flow from investments (169) (393) (814) (279) ROE (%) 7.2 12.9 14.0 17.3 Proceeds from equity issue (3) 558 105 - ROCE (%) 8.9 10.9 12.6 14.0 Increase/(decrease) in debt 76 130 641 350 EV/ Sales (x) 1.8 1.4 1.3 1.1 Deferred tax credit 11 4 - - EV/EBITDA (x) 13.9 10.1 8.3 6.6 Cash flow from financing 84 692 747 350 Price to earnings (x) 29.5 13.5 10.7 7.3 Opening cash 19 20 156 22 Price to book value (x) 3.7 1.7 1.4 1.2 Closing cash 20 156 22 36 Price to Cash Earnings (X) 10.0 7.8 6.8 4.9 Source: Company, Kotak Securities - Private Client Research

Research Team Name Sector Tel No E-mail id Dipen Shah IT, Media, Telecom +91 22 6634 1376 [email protected] Sanjeev Zarbade Capital Goods, Engineering +91 22 6634 1258 [email protected] Teena Virmani Construction, Mid Cap, Power +91 22 6634 1237 [email protected] Awadhesh Garg Pharmaceuticals +91 22 6634 1406 [email protected] Apurva Doshi Logistics, Textiles, Mid Cap +91 22 6634 1366 [email protected] Saurabh Gurnurkar IT, Media, Telecom +91 22 6634 1273 [email protected] Vinay Goenka Auto, Auto Ancillary, Sugar +91 22 6634 1291 [email protected] Saday Sinha Economy, Banking +91 22 6634 1440 [email protected] Lokendra Kumar Oil & Gas +91 22 6634 1540 [email protected] Shrikant Chouhan Technical analyst +91 22 6634 1439 [email protected] Kaustav Ray Editor +91 22 6634 1223 [email protected] K. Kathirvelu Production +91 22 6634 1557 [email protected]

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