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Wednesday, May 26, 2010

Q&A: Karuturi Global: DUMP DUMP!! DUMP!!




Karuturi Global:
CMP: 13.75
Market Cap: 672.79Cr
Debt March 2009: 395Cr
ROCE March 2009: 2.77%
EPS: 0.11
Website: http://www.karuturi.com/

Karuturi Global was incorporated in 1994 and is today the largest producer of cut roses in the world, with are area of over 239 hectares under Greenhouse cultivation and an annual production capacity of around 555 million stems.
An integrated production model encompassing in-house plantation, cultivation and distribution capabilities coupled with a series of green initiatives make us one of the lowest cost producer of cut roses in the world. Almost our entire produce is exported to high-value markets such as Holland, Germany, United Kingdom, Italy, Singapore, Hong Kong, Taiwan, Bahrain, Muscat, Dubai, Australia, Japan, New Zealand, Brunei and North America, with a small portion sold in India.
Having established our strong presence in floriculture, we now aim to broad base our portfolio into a larger agri-produce basket. The acquisition of large tracts of land in Ethiopia has set the stage for us to become a complete agriculture production company. Our goal now is to make a significant contribution to elevate the global and african food prices.
Equipped with a robust and de-risked business model, Karuturi Global’s other fast-growing business realms are food processing, floriculture retail including a flower auction portal and information technology.

First company is in farming business and its goal is to "elevate" (Increase) food prices!! or is it "alleviate" (lighten/reduce) global food prices. I think this statement in itself is contentious. Karuturi is in the food growing business and it wants to reduce food prices!! or Karuturi is in the food business and it wants to increase food prices!! So I think the management has to really look at what is their goal, without a definite and clear goal the company is going to be lost in a maze.. this is quite evident in  their next statement.
"Equipped with a robust and de-risked business model, Karuturi Global’s other fast-growing business realms are food processing, floriculture retail including a flower auction portal and information technology"
Karuturi is already looking at other business realms of "food processing", "Floriculture retail" including "Auction portal" and "Information Technology"
what we have here in Karuturi is a company:
1. With no clear definition of goal/vision
2. Without a clear focus the company is looking in each and every direction and lapping up anything that looks like a profitable venture (and mildly related to its area of farming).. from food processing, floriculture retailing, online portal and Information Technology.
3. Its like looking at vegetable selling at 45 per kg in bangalore and then say
- I can grow it for less than 10 bucks.
- Once you start growing it you see that the traders dont buy for more than 10 bucks.. do very little value addition.. so karuturi enters into food processing.
- Once it is producing processed "vegetables" it find that retailers are making more money ..so enter retail business.
- Now suddenly karuturi finds retailing is expensive so karuturi enters into online portal eliminating the middle man.
 
Promoter shareholding: As per the latest March 2010 results. promoter shareholding is 26.73% increase from 23.84% but look a little further and promoters have pledged most of the shares and FREE(non pledged) holding by the promoters is 9.47% .. yes you can rub your eyes.. Karuturi Global has reported a 28.16% increase in its consolidated net profit.. Karuturi has reported a Consolidated Net Profit of 146Cr and promoters free holding is just 9.47% !! Wait wait.. I would be lying to you if I did not tell you the next part.. Promoter FREE holding in March 2009 was 5.19% so a 9.47% shareholding is actually an increase in FREE shareholding by the promoters!! by 82.46%
PN: To me this looks like the lenders arm twisting the promoters to increasing their shareholding in the company.
 
Profits and Taxes!!: Yes we are in the good part of the story. Karuturi global has reported a Consolidated topline of 551.9Cr and PBIT of 155.79Cr thats an operating profit margin of around 28.22% very good operating margins.  Net Profits have also increase to 149.15Cr from 117.33Cr.
 
Before we look at taxes lets remember that "Death and taxes" are two things we can be sure about in life. Karuturi taxes for year ending March 2010: 59.7 lacs, Taxes for Year ending March 2009: 81.11 lacs
So karuturi global has a 28.22% increase in profits to 155.79Cr but taxes dropped down to 59.7 lacs!!
ie a drop of 26.3%. Also if we look at the taxes as a percentage of operating profit
March 2009 (Taxes as percentage of operating profit) = 81 lacs/13800.75 lacs = 0.58%
March 2010 (Taxes as percentage of operating profit)= 59.7 lacs/15579.41 lacs = 0.38%
Wow!! we need to learn a lot from Karuturi management about how to keep the tax man at bay!!
Infact Ambani, Birla's, Ambani's have to take a leaf out of Karuturi's management..
 
Everybody should become a farmer!! look at Karuturi Global and the operating margins.. even in Ethiopia looks like there are huge subsidies for farming.
 
Conclusion: Karuturi Global is a stock to be Dumped!! Dumped is the word not Sold!!. Promoters are taking all of us for a ride. It could very well be the next Satyam.. Company has Enterprise Value of approximately 1060Cr and an inflated bottomline of 149Cr. Equity dilution is rampant and surely the promoters cannot keep this going on forever and they know it cause they hold less than 10% free shares..Dividents are going to a thing of the past. You can expect further dilution in share price.. 
 
One must understand that Food is a commodity and we donot pay any premium for corn from Karuturi or from Tata's for that matter. Also it is a perishable item and seasonal. Yes it is a basic necessity but to really take advantage of it you need to be an integrated player. Players like Reliance and Aditya birla group are well established houses with strong cash flows required to setup retail stores and also integrate backward into contract farming. Karuturi global is doing farming in Ethiopia one of the poorest nations.. which is really very good for Ethiopia as they will soon be self sufficient but every nation protects its local food industry.. (why would you want to be dependent on imports for such a basic thing as staple food!!) Demand for agriculture produce is going to increase with time as earning potential of huge populations of India and China have surplus cash and it has been observed that with increase in income protein content of food intake increases. This increased demand by large asian economies has reduced exports which has increased food prices globally. Specially impacted are food importing nations like Ethiopia and other poor African nations dependent on UN food program. What Karuturi global is doing is noble but clearly not profitable.
 
Also the concept is great but streamlining operations is going to take some time. One can avoid the stock and can buy after debt reorganization.
 
Promoter shareholding clearly demonstrates the low commitment by the promoters. Also increased debt is going to soon make the financial condition of Karuturi very unstable and explosive. Avoid at all costs. Also if the pledged shares are sold you will soon have the promoter holding of 17% in the market ..
If you are looking for investment on agro produce then a company with strong set of numbers is "Gujarat Ambuja Exports" a recommended Best Buy
Another very interesting Agro/Peak Oil play not very well publicised is Castor derivatives major "Jayant Agro Organics"  also recomended as a Best Buy!!
 

21 comments:

Anonymous said...

What kind of analysis is this? Shame on you.

You touch upon spelling mistakes in *last years* annual report.

Then you critique a business strategy based on casual observations in a market in which you know evidently nothing about.

Pledged shares is not always a bad thing. You allege that "lenders are twisting the promoters arm" with absolutely no basis.

The profits are up but you choose to view that as a bad thing. You cast doubts on the companies taxes, again something you know nothing about.

These guys have a solid track record in operating plantations; their work on 300,000 hectares of various cereals and pulses is on track and will show massive revenue for FY2011.

Please dump this stock; I will purchase at every decline.

thanks,
anthony

What'sUp Prahalad said...

Anthony:
The spelling mistake that we are talking about is in the company website. Ofcourse what I was trying to say was that Karuturi is in a dilema cause:
1. Increase in production results in decrease in price of the commodity.
2. Food grains are commodities and generally are price sensitive and import sensitive politically.. ie the political class will prevent price rise and prevent imports which is both negative for karuturi as they might not be able to export to India or other countries..
3. Low taxes are serious issues as it is an indicator of fudged results...karuturi has 149.75Cr profit before tax and taxes paid is 59.70lacs thats a tax rate of 0.39 % which is very very poor rate of taxes. I donot see any other corporate in the field of commodities or any other sector of the economy having taxes as low as 0.39%
3. Low taxes paid.. sharp increase in equity and debt with a decrease in promoter holding is somthing to be awar of before making an investment commitment
4. Institutional, Promoter holdings are dropping and individual investor holdings are rising with poor fundamentals.. and a marketing machine which is cranked up to 100% ..

I will have another writeup cause my upload feature was not working (now it seems to be .. so will provide more details..for investors which will help them make the decision!!)

Will still standby my decision of a sell on karuturi global.

=happy investing

Anonymous said...

MR.WHATS UP,I WOULD LIKE YOUR VALUABLE INSIGHT ON JAI CORP.ITS INVESTMENTS ON BALANCE SHEET + SEZ VALUE IS HUGE.IS IT WORTH BUYING?

What'sUp Prahalad said...

Anonymous:

Jai corp as we know is known for its affiliations with the elder ambani brother..
What I am trying to do is look at jai corp from an investment prespective based on current financial results:
CMP: 227.8
Market Cap: 4055Cr
Sales March 2010:478Cr
ROCE: 3.11% (March 2009)
March 2010 segmented results Income from core activities(Plastic processing, spinning,steel) = 48.7Cr
unallocated income: 32.9Cr
Other income: 46.8Cr
=========================
Personally investment is to be done where there is value left on the table.. with Jai corp I dont think there is any value left on the table.
Core operating profits is 48.7Cr (before tax)
All the real estate and subsidiaries for infrastructure and power have made Jai more of a holding company as most of the earnings are from its holdings/investments.. also it is a minority partner else the sales would have reflected in the consolidated sales which is also missing..

==========================
As investors we need to find stocks which are discounted based on its current valuations where we can expect price appreciation.

In case of Jai the future earning potential is already being discounted in the price and we still need to see these plays work out.. Any negative news is going to negatively impact the stock price.
Also it seems Jai corp subsidiary has investments in UAE real estate ..

Conclusions: I would pass the option of investing in Jai corp..as the stock price already reflects a lot of future earnings also the core business is also not very profitable.. I think the best part is the Ambani connection but then.. would we have ever seen the valuations unfold from Reliance if the two brothers had stayed tight lipped.. So hoping for the Ambani connection to work is shooting in the dark. Avoid investing at all cost!! as valuations are very high and already discount future earnings.

Anonymous said...

Thanks for jai corp comments,lastly i have investments in one company which i am VERY SURE you will like it-Diamond Power & Infrastructure-Would you recommend investments in THAT COMPANY?

What'sUp Prahalad said...

Anonymous:

Diamond Cables:
CMP:176.10
Market Cap: 494.19Cr
Sales:840Cr (TTM)
Reserves: 192Cr
Debt 231Cr
ROCE: 17.17%
====================
Though resonably priced still more expensive than universal cables..
Universal cables:
CMP: 81
Market Cap: 187Cr
Sales: 520Cr(TTM)
ROCE:12.17%
Debt 125.62Cr
==========================
Prefer Universal cables over Diamond cables as the Uiversal cables has:
- Positive cash flows.
- Lower valuation
- divident paying
- lower debt
==========================
Would recommend Pitti laminations as a proxy for power/infrastructure play which is value buy right now and recommended

=happy investing

Anonymous said...

After year ending results of confidence petro have been announced yesterday ARE YOU STILL NEGATIVE ON THE STOCK> ANY CHANGE OF VIEW

What'sUp Prahalad said...

Anonymous:

Confidence still does not give any confidence!!
One can confidently sell even after the results.

I have a writeup in the blog.
=happy investing

Anonymous said...

WHATS YOUR VIEW ON GMDC AS AN INVESTMENT IDEA

What'sUp Prahalad said...

Anonymous:

GMDC:
CMP:123.20
Market Cap: 3917.76Cr
Reserves: 1155Cr
Debt: 478.57Cr
Sales TTM: 1065Cr
Gross Profit:494.6Cr

I think the company should do well in the short to medium term.. but long term would depend on reserves

in 2010 Panandhro mine produced 7.79 lakh tonnes less lignite and this was the largest mine for GMDC in 2009
.. ofcourse Mata-No-Madh mine produced 6.7 lakh tonnes of additional lignite..

all in all GMDC produced 2.7 lakh tonnes of additional lignite in 2010 than in 2009..

So one needs to keep track of reserves as these companies are nothing but valuations of the reserves.. The quality and quantity of reserves are crucial..

I would look at NHPC because its primary resource is water which is based on natural water cycle.. which is self generating..

2. It is the largest and has the most experience in running hydro electric power stations..

3. NHPC being a govt entity will be given priority in sensitive sites (no competition!!)

4. Power infrastructure already in place and as the hydro carbon cycle deteriorates.. electricity will gain prominence.. as the primary source of energy..

NHPC is a recommended best buy with a 5 years or more time period..

=happy investing

Anonymous said...

Why is there so much negativity about cement?Infrastructure beneficiary isnt it? Is prism cement a good bet?

What'sUp Prahalad said...

Anonymous:

Prism Cement:
CMP:50.85
MArket Cap: 2557.05Cr
Debt: 980.14Cr (March 2010 Consolidated)
Deferred Tax Liability: 105.77Cr
Goodwill on Concolidation: 31.42Cr
Cash: 130.83Cr
Sales: 3027.31Cr
Gross Profit: 459.09Cr
Interest: 60.07Cr
Taxes: 123.61Cr
Net Profit: 256.54Cr
All these are March 2010 numbers.
Company till date has been reporting great numbers..
Enterprise value: 3543.55Cr
==============================
Company looks to be fairly valued.. In Recent March annual results 1,23,51,600 shares held by Prism Trust are not considered for EPS calculation.. (I wonder why??)

Also the company has goodwill of 31.42Cr and deferred Tax liability of 105.77Cr (Last year 52.77Cr) I wonder how they are going to use it.. by reporting losses or pay it out with cash in bank 130.8Cr??

Most likely by reporting losses..
==========================
Conslusion: I would wait for Prism to fall.. they have just done a merger and there could be interested parties who want to sell their shares..


Also the deferred taxes is a growing and looming number..

The company does seem to be doing quite well.. and will keep a watch on it..
for addition in the future
Right now I will skip ..
Thanks!!
=happy investing

Vway said...

Fidelity recent bought BIHAR TUBES,this compant valuation wise looks relatively cheap? You for sure would like this one I hope,what your outlook on this xo? And what stocks do you like in the Indian Market.I am new to your blog!

What'sUp Prahalad said...

VWay:

Bihar tubes:
CMP: 120.20
MArket Cap: 243.97Cr
Debt: 137.24Cr
Reserves: 163.4Cr
Cash: 7.87Cr
Sales TTM:410.45Cr
Gross Profit: 33.54Cr
ROCE March 2009: 6.89%
Company has been posting -ve Cash flows from operations for the past 4 years..
- inconsistent divident payout.
11.8% of promoter shareholding is pledged..

Also Enterprise value of 372Cr for a company with 580Cr of consolidated sales figures makes bihar tubes a fairly priced stock..

I would sell.. and maybe buy at lower levels.. as results could deteriorate in the future..

I also try to avoid sectors.. such as bihar tubes..

My best buy recommendations are in "Best Buy" section
link:

http://whatsup-indianstockideas.blogspot.com/2010/05/best-buys.html

=happy investing
whatsup-indianstockideas.blogspot.com

Anonymous said...

Investment is not always about facts and figures.It includes faith & conviction CONFIDENCE PETROLEUM STOCK UP 50% IN4 DAYS.LOOK@THE RECENT ANNOUNCEMENTS.WHATS UP! ADMIT YOU WERE WRONG,BETTER DAYS AHEAD FOR THE COMPANY

What'sUp Prahalad said...

Anonymous:

I think you have said it yourself

"Investment is not always about facts and figures.It includes faith & conviction CONFIDENCE PETROLEUM STOCK UP 50% IN4 DAYS"

I think I must congratulate you for your "Faith and Conviction"

I also have "Faith and Conviction" in my investments but after the facts are checked.. it is that faith that allowed me to buy GAEL when it fell from 30 down to 17 levels..
===================
Stocks dont run up because I have a positive bias.. Stocks prices run up based on demand and supply..
===================
Best of Luck and Happy Investing

whatsup-indianstockideas.blogspot.com

Anonymous said...

You used to cover CONFIDENCE PETRO,whats your take on the recent run up in share price and its quarterly results

What'sUp Prahalad said...

Anonymous:

IF you see the Equity of confidence petroleuim

It has increased by 300%
2009 : Equity: 28.32Cr
2010 : Equity: 89.60Cr

A 3 times increase in Equity means even a 300% increase in sales or Profits will not provide any advantage to an equity investor..

Debt has also increased 232%:
2009 debt: 89.61Cr
2010 debt: 208.64Cr

So you might see some good topline sales and bottomline numbers but of no use to an individual investor because of dilution of equity.. and additional debt

I would think this is a good time to sell Confidence petroleum.. when things look rosy..

==================
http://whatsup-indianstockideas.blogspot.com/2010/06/q-confidence-petroleum-result-analysis.html
==================
The numbers will look rosy but that it because of a heavy dose of Equity and Debt infusion.. it is of no value to an equity investor.. and ROCE is also very poor (less than 10%)

As I said before You can "sell with confidence"

=happy investing
whatsup-indianstockideas.blogspot.com

Anonymous said...

WHATS UP BUDDY EQUITY OF CONFI LAST 3 YRS IS 26 CRORES ONLY HAVE A RELOOK, CHECK UP!

Anonymous said...

SHARP INDUSTRIES ANY VIEW? CONFIRM 70% APPRECIATION NEWS FROM CO SOURCES IN A FEW MONTHS

What'sUp Prahalad said...

Anonymous:

stocks move up .. but not necessarily on basis of some fundamental change..
as far as I can see I donot see ay justification for sharp to move up more.. it already is fairly valued..

it would be speculative buy to buy now when the company has no fundamental justification

=happy investing
whatsup-indianstockideas.blogspot.com