Karuturi Global (KG) is at a 52 Week High of Rs 23…..It’s Face Value is Rs 1…Volumes are heavy and the Market Cap is over Rs 1100 crs
There is growing euphoria about this Bengaluru Company which claims it’s the largest Rose Buds Stems Producing Company in the World and is now embarking on an ambitious Ethiopia centric agricultural foray that has the potential to supply 5% of mankind’s Food needs in the future !
But this Blog serves to warn you to be careful about Investing in KG….be well informed of the Risks before you take them
KG is promoted by the Karuturis…MD is Sai Ramakrishna Karuturi and the Chairman is Surya Rao Karuturi
KG Needs a Lot of Monies before it can make these huge Monies it claims will be the outcome of the Ethiopian Venture….US $ 100 million annual profits by 2013 !…that’s Rs 460 crs !…that’s several times it makes currently
The excitement is centered around the Ethiopian Venture that invoves growing crops on government leased 3 lakh hectares ( 741000 acres) ….the land is 50 kms from the border of war torn Sudan and a four day drive to the nearest port…however the 90 years sweet deal with the Ethiopian Government is that for the first six years KG will not pay any rent for this land…after that the rent is a meagre 15 birr or US $ 1.18 per hectare for the next 84 years….Similar Land would cost US $ 350 annualy per hectare in Malaysia or Indonesia……Labour Costs are under US $ 50 per month and under World Bank’s Poverty threshold of US $ 1.25 per day…Children too are employed…..though the daily pay complies with the minimum wage of 8 birr (60 US cents)prescribed in Ethiopia….Profits are expected to be generated from exports of Food crops,including rice,corn and palm oil…Tax Treaties with China and India too are beneficial
However Several serious Corporate Governance Issues exist.The auditors,RGN Price and Co (Signing Partner,H S Venkatesh) have highlighted many of them in their Report that forms part of the FY 09 Annual Report….I’ve listed them below
Granting of unsecured Interest free loans of Rs 101.45 crs to11 interested parties…this is prejudicial to company’s interests…there is no prescribed repayment schedule and therefore the receipt of the principle cannot be verified as regular
Need to strengthen the Internal Control System with respect to procurement and sale of flowers
Company has taken four interest free unsecured loans of Rs 32.72 crs from associate entities and Directors.There is no repayment schedule
There is scope for improvement of the Internal Audit System in terms of coverage,reporting pattern and frequency
Company defaulted by by 58 days to pay Rs 66 lakhs to Banco Bilbao Vizcaya,Spain
Income Tax Authorities have raised a claim of Rs 7.19 crs for AY 2006/7
Now let’s examine some crucial Financials……The Current Equity is Rs 48.93 crs after Deutsche Bank AG London converted US $ 2 Million FCCBs to 7375000 shares…at Rs 23,they have more than doubled their monies…there is a ESOS too and under this there was a recent exercise to grant 2533750 shares…all included in the above Equity
The Half Year results at September 30,2009 are linked below
KG earned Rs 74 crs on sales of Rs 245 crs in the first half of FY 10…It had earned Rs 117 crs for the full year FY 09
KG has 239 hectares under Rose cultivation and produces 555 million stems annually
It also has granted 24.15 crs warrants in a preferential allotment to strategic investors with an option to convert at Rs 12…As is mandatory 25% of the Rs 290 crs,that’s over Rs 72 crs has been received on these.
So a fully diluted Equity would be over Rs 72 crs….that’s gives you a potential Diluted EPS of just over Rs 2 for FY 10…The CMP of Rs 23 is an 11+muiltiple of this
The Annual Report for FY 09 shows Networth at Rs 387 crs and debt of Rs 395 crs…that’s a Total Capital Employed of Rs 782 crs….so where’s the money applied ?…Rs 592 crs are in Investments…that’s over 75% of the funds…..The Book Value computes to just over Rs 8.50….CMP of Rs 23 is a 2.7 multiple of this
With FY 10 Projected Profits of Rs 150 crs and assumed exercise of the warrants the Equity will climb to Rs 72 crs and the Reserves will be over Rs 767 crs (341 of FY 09 + 150 FY 10 Profits + 276 Premium on the 25.15 cr warrants when convereted to shares)…..so the Networth would be Rs 839 crs,giving a Book Value of Rs 11.66…CMPof Rs 23 is a 2 Multiple of this
Now let’s play with the projected Annual Ethiopian Profits of US $ 100 Million….That’s Rs 460 crs…that’s an incremental Rs 6 + to the EPS….so with normal earnings growth rates plus this incremental can we say that KG will clock over Rs 10 EPS by 2013 !…now that’s just a 2 P/E muiltiple….and this is what is exciting the Investors and they are being seduced by this potential that’s being blitzed across all media by KG…ads on Stock Channels…near fullpage ads in leading Newspapers
Phew ! how can One not buy KG !
However exercise some caution….Given the lack of credibility,transperancy and other Corporate Governance Issues that have played up,it is prudent to remain skeptical of this spectacular growth in future earnings…..There are simply too many imponderables…The Ethiopian Government may realise they could have negotiated a far better deal…especially if there is a change in the government…Existing Lease agreement could be renegotiated…..Labour revolts cannot be ruled out as they begin to resent the wage scales below prescribed poverty lines…..What can stop other Corporates round the World from entering Ethiopia and stirring up Competition….Infrastructure Bottlenecks could hamper operations
One last ,but intriguing thought….Promoters hold only 22% of the current Equity of Rs 48.93 crs…and 78% of their Equity is pledged ! ……this holding will fall even further to 15% when the Warrants convert to shares….Now if the future was so rosy for this rose producing KG,then why did the Promoters not preferentially allot the warrants to themselves !,instead of outsiders ? and seize the opportunity to increase their stake to 48.5% ! ?
It seems they personally have no Monies !…and their company KG is playing around with Monies….auditors clearly think so !….Why would a Company pay out just a 10% Dividend …that’s Ten Paise per share aggregating Rs 4.5 crs when it is making Profits of Rs 117 crs !?….it’s a payout of less than 4% !…reminds me of another dubious company Tele-Data !…similar tactics
Nah ! even a KG kid would be wary of KG at this stage…Skepticism will ebb if they show the operational and financial transperancy in their performance
So if you do want to Invest in KG at this 52 Week High of Rs 23,then be well informed of the Risks involved before taking them…I would be wary…so should you…if they have really struck a goldmine with this Ethiopian Agricrop venture,let me see some of the Gold first !
As of now I remain a Huge Skeptic on KG even when it has moved from a low cap to a mid cap with a Market Cap of over Rs 1100 crs….There are many,including FIIs who hold one fourth of the Equity, who think KG has now got scalability and can become a Large Cap in the Years to come….I don’t share this Conviction as of Now….but I do believe in God …and God does give second and third chances too ! so just maybe…
Hope this blog helps all of you out there to make an informed Investment decision on KG