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!!