Monday, March 09, 2015

Karuturi Global Ltd: Buy
CMP: Rs.1.87
Face Value: Re.1
Book Value: Rs.16.61
Introduction: Banglore-based Karuturi Globa Ltd (KGL) is the largest producer of cut roses in the world, with are area of over 292 hectares under Greenhouse cultivation and an annual production capacity of around 555 million stems. Headquartered in India, the company has international offices located in Ethiopia, Kenya, Dubai and Holland. It exports products to countries namely Holland, Germany, United Kingdom, Italy, Singapore, Hong Kong, Taiwan, Bahrain, Muscat, Dubai, Australia, Japan, New Zealand, Brunei and North America. 

Shareholding Pattern: The promoters hold 5.52% while the general public holds 93.19%. In the general category, Elara India Opportunities Fund Ltd, Emerging India Focus Funds, Rays Global Corporation, Maxworth Investment Ltd, India Focus Cardinal Fund, Tara India Holdings A Ltd, and SRY Crust Ltd holds 7.54%, 4.56%, 5.06%, 5.06%, 3.51%, 3.36%, and 2.89% respectively. In fact these large shareholders hold 34.34% shares of the company. Therefore, low promoters' holding is  not an issue for the scrip. 

Financials: On a standalone basis, Karuturi Global reported a net loss of Rs.1.12 crore in the quarter ended December 2014 as against net profit of Rs.9.36 crore during the previous quarter ended December 2013. Sales rose 5.03% to Rs.3.34 crore in the quarter ended December 2014 as against Rs.3.18 crore during the previous quarter ended December 2013.

On the consolidated basis however in the December, 2014 quarter KGL posted a net profit of Rs.10.31 crore, an increase of 31.34%, as against Rs.7.85 crore during the previous quarter ended December 2013. Sales of the company, however, declined 61.3% to Rs.56.98 crore in the quarter from Rs.147.31 crore during the year-ago period. In the September, 2014 quarter, the company came out with a revenue of Rs.62.14 Cr and a net loss of Rs.8.51 lakhs, this is after adding exceptional item of Rs.154. Or else the loss would have been Rs.15.7 Cr in the Q2FY15. Hence, this is a turnaround case. 

(i) Karuturi Globa Ltd is the largest producer of cut roses in the world, with are area of over 292 hectares under Greenhouse cultivation and an annual production capacity of around 555 million stems and hence it has the necessary size to withstand any slowdown in the sector. 
(ii) All of you are aware of the unfortunate developments in Kenya last year. Due to continued non-cooperation of various stake holders, Company was unable to complete consolidation of financials beyond 31.12.2013. The Company experienced extremely hostile situation and despite great efforts, found resistance in debt raising.
Now, the Company has found a sudden change of fortune with the Government of Ethiopia offering debt and christening the Company’s project as National Project. Also, the Company has generated significant liquidity with sale of surplus assets. Moreover, with the lower Oil price the Company expects a huge sustained saving in its freight cost. This, it is hoped, these development will more than compensate for the weaker Euro.
(iii) During the financial year 2013 -14, the Company was able to maintain its position in the Floriculture Industry during continued European Crisis which is its key market. The Company continued to make steady progress in its Agricultural foray developing Land in Ethiopia.
(iv) The book value of the shares of the company is Rs.16.61, while its P/E is only 3.74, as against the industry P/E of 42.88. It has a market cap of only Rs.151.42 Cr at Rs.1.87. A decent P/E re-rating of 15 can take the scrip to around Rs.5, after suitable discounting.
(v) The Company continued its efforts to develop the agriculture farm. Major crops expected are corn, pulses, sugarcane, oil seeds and paddy. Company has been focusing on wet cultivation during the monsoons. Agriculture during the dry seasons will be driven by construction of canals and implementation of over 90-high-performance pumps to draw water from the river Baro. Water supply will be further augmented by bore wells.
The Company works with expert farming companies from South America, USA, South Africa and India who have been contributing immensely to the farming operations in Gambella. Karuturi is synonymous with responsible and good business in Ethiopia.
(vi) The cut flower business had a stable beginning in CY15 with the Euro remaining more or less stable against the USD. This has added more visibility towards margins of the company. The weather conditions till now also remained helpful to the flower business.
The Company continued its efforts for sustainable initiatives like cutting edge biological controls like Phytoselius (Predatory Mites). It has eliminated spraying for two spotted red spider mites by 95%. Moving to Hydroponics resulted in 10% improvement in production with 30% reduction in consumption of water & fertilizers. 
(vii) The Company has established an earth worm project on an area of 2000 square meters and is consulting organic scientists from the University of Nairobi for further refining the leachate. This project has already reduced the fertilizer cost by 10-12%.The above efforts have considerably reduced the operational costs and are making floriculture business sustainable for a longer period. This has been seen in the Q3FY15 consolidated results of the company. 
(viii) Karuturi Foods Private Limited (KFPL) continued its efforts to maintain its top line in food processing. The Company continued its reach to Africa,Greece, South America and East European countries besides its main markets in Russia & Ukraine Regions. In FY16, the Company would continue its efforts to spread its market across various countries to reduce its dependency on Russia which is a very price sensitive and volatile market.
(ix) To strengthen the Agri Operations, the Company had gone to nontraditional Gherkin growing areas to improve the yield as well as to source higher volumes to avoid field competition.
The Company’s factory has been certified by BRC (British Retail Consortium) besides HACCP, FDA & KOSHER, as all customers expect these Certifications as a pre-requisite for placing the Orders with KFPL. 

Conclusion: Th Company has a strategic goal to bring a larger area under Agricultural Production and simultaneously continue to create new opportunities in its Floriculture and Food Processing businesses. Moreover, Karuturi Global Ltd (KGL) has received an approval from the board of directors to offload its 53% stake in Mumbai-based Florista India Pvt Ltd, which operates a chain of floral designing boutiques across India. Florista India was an unlisted subsidiary of KGL and disinvestment was a business strategy to bring in some working capital, though the net worth and annual turnover of this subsidiary was less than 1% of its (KGL's) net worth or annual turnover.

According to some web-portals KGL has signed a 50-year renewable lease on 300,000 hectares in Ethiopia where its rentals are $1 per hectare per year. The Company is in dialogue with World Bank to insure against political risk in Africa.

Looking at the above points it can be safely concluded that the shares of the company are trading at a discount to its intrinsic worth. The risk-taking investors are therefore suggested to buy the scrip at the CMP of Rs.1.87 and keep holding for a target of Rs.5+.

Note: This recommendation was sent to the Premium (Paid) Group Members on 5th March, 2015.
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