This stock might not be a gladiator in ancient Rome but is definitely one in Modern India and Ethiopia. Karuturi, often termed as the Global leader in cut rose production is one of the hottest stocks due to 2 reasons. One is the expansion in cut rose production (1.0 billion stems that they wise to produce and target for FY 2010 from 550.0 million previously) and the other is their foray into the agri business with a mammoth land allocation.

Price: INR 13.00

P/E: 4.0x

Expansions: As of now the company earns bulk of its revenues (around 95.0%) from floriculture. However, with significant assets acquired in Africa the company’s focus area is going to be Agro based commodities going forward. The revenues from Agro side of business are set to overtake company’s floriculture business in next three years. The company has leased huge chunk of land (311,000 hectares i.e 7x the size of Mumbai) on very attractive terms. The EV/Per hectare of KGL works out to be Rs.43,000.

You can find details of the expansions related to the agri business in the table below:

The company intends to allocate 50,000 ha of land for rice cultivation by FY 2013. An EBITDA margin of close to 40.0% (high for the industry) is achievable due to low labor costs and attractive lease terms.

The company is also planning on expanding its food processing business from a current capacity of 6,000 tons per annum to 20,000 tons per annum by 2012. The company has local contracts with farmers in Tamil Nadu to ensure continuous supply. Some of the products are Gherkins, Jalapenos and Green Bell peppers.

 The company recently acquired Florista to improve its retail distribution network in India.

Macro Scenario: The reserves of wheat, oat, soya bean and corn have gone down by 25.0%?40.0% in the last 10 years. Similarly, global rice stocks are also diminishing by ~ 3.0% yearly; while palm?oil which is considered to be the most important edible oil has reserves at all?time low (All data as of March 2010).

Why Karuturi?:

  • Strategic Location: The Company has operations in India, Kenya and Ethiopia. The Indian facility servers markets like Middle East, Japan and Australia while the Kenyan and Ethiopian facilities serve Europe and North America. This helps the company save on freight costs.
  • Excellent agreements with the Ethiopian government: The Company has managed to acquire land at a very cheap cost. It also enjoys 5 years income tax exemption and exemption on duties for imports of raw materials and equipment. 
  • A stable Floriculture Business: This segment is very stable due to a high global demand for roses especially. The bulk of the orders come during the wedding season.
  • Valuation: This is by far the most important point. The LTM EPS is INR 3.28 which, at current price levels, implies a P/E of 4.0x. The main reason for this is some operator activity in the stock since November 2010. The stock came under the scanner on suspicions related to price rigging. However, it is mainly independent groups and not the management which is being investigated. The management is very confident of achieving an EPS of INR 8.00 for FY 2012. Even if we are very conservative and assume an EPS of INR 5.00 and apply a P/E of 7.0x we achieve a target price of INR 35.00 per share. The stock was trading at these levels before the price rigging rumors.

To conclude, I am totally confident that this stock is a multibagger. It is cheap and has great expansions plans lined up. Revenues from the agri business are going to be realized from this quarter onwards. There is no more equity dilution expected. I am sure of tripling my money in 3 years and have personally been investing in the stock.

Be Sociable, Share!