KRBL- The King of Basmati rice

(GSrikan) #314

Apologize upfront for deviating from the purpose of the thread significantly. I don’t agree that any great investor would be following single method for investment. From what observed from his lectures, what he says is he looks for at least 2x (i.e. stock is trading at 50% of it’s intrinsic value) in 2-3 years. If the discount is more, it would lead to 3x or 5x or 10x or more. Rarely he finds an investment which is trading at 70%-90% discount (i.e. 10x if proven right). Most of the times this happens in a troubled company in troubled sector. It doesn’t mean he invests only in potential 5-10 baggers (although he said in one video that he aims for at least 5x; in another video he mentioned that initial 75% of new fund cash in potential 2-3x baggers in 2-3 yrs).

He is by no means god. If he is sure that he is going to be right 100% of times, he would not follow strategy of 5% max allocation per stock; he would be putting money 2or3 stocks. He moved from 10% allocation per stock/investment(basket of same type of stocks) to current 5% allocation due to some investment going bust in 2009. After 2009, he came up with a check list of abt 20qns (if I am right) based on his & other great investors’ wrong investment choices.

Coming to KRBL, i agree with forum members assessment that it has strong moat, great financials, great runway ahead and trading at reasonable valuations. As, the business grows, the capacity utilization would reach about 90-95% few years down the line & the share of power business would shrink. This duel change of rising share of basmati rice (thus increasing capacity utilization) and shrinking share of capital guzzler power business would make ROCE to probably inch higher towards 25-26% or more (this is just a blind guess). Another important point I observed in KRBL’s ARFY17 is, the advertisement costs are abt 40cr and there were significant power costs due to use of diesel generator. In few years down the line, these would also decrease significantly. If they stop investing in power business (which I believe is what management said, if I am not wrong), it would increase the cash flows. All, these factors, would make the stock lot more attractive than now. As they used demon as tail winds for taking market share from unorganised players (who still command 40% market share), the management would surely use GST as advantage to gain market share.

Like Samsung beat Nokia by bringing in mobiles in all price ranges from premium to cheapest mobile, KRBL too is doing the same thing. They are bringing products at all price points, to gain market share from competition. As e-commerce business grows, it would aid the margins as lot of middle points would be cut out (this is my uneducated guess; in Amazon, the seller is noted as India Gate, so I assume no middlemen involved). Lot of things going good. The major risk, I see is, somehow LT foods or other brands giving tough competition thus causing premium margin erosion.

Disc: invested after Doing basic study after Mr Pabrai’s investment.

(s) #315

LT food is aggressively marketing in US and has got foot hold in key wholesale chains for its Sona Masoori and Basmati rice. The strategy of low marketing cost and high volume seems to be the game LT is getting into. Indians being value conscious will help fan the product demand for LT foods. The forum does highlight the quality of product, management which generally garners well for the product, how ever the market share to expand needs more than quality. the difference in Basmati makes is margin of 20 percent taste and 80 percent brand.Markets value unilateral growth, there are some concerns on market share loss to competetive pricing by other companies atleast in the high margin markets.

(spachiap) #316

Brand name, and scale efficiencies allow KRBL to keep making good profit margins, which is around 13%-14%. This year’s KRBL rev is almost flat YoY, whereas their profits have grown, why? Last 2 quarters, they have made higher profits even though revenue dropped. Their “procurement cost” has come down in the last 2 quarters. But with Brand power they are still able to make good margins of 14%

Fixed Cost: Operating (plant, employee, storage etc): 315 Cr/year FY17

Floating Cost: Procurement price of basmati rice and Sale price (brand power puts a floor on downside price)

Key things to Note:
Lower procurement price continuing from last 2 quarters
Iran can restart basmati imports (
Brand Power, Continue to maintain higher sales price
New Products (Quinoa etc)
Low cost operator, and pass-thru higher cost nature of their business

My Expectations:

  1. Profits to gain slightly this year, on lower procurement cost
  2. Newer product growth
  3. High probability that they will continue to do maintain/do well in basmati business, and use the profits to fund newer growth business.
  4. I see it as a “compounder” than a multi bagger.

(Karthik) #317

Does anybody know the total market size of quinoa across the world and its growth rate?

(VP_amit) #318

Hey Dinesh - just meant looking at KRBL DCF valuation, this does not seem like a bet by Mohnish based on the DCF variables we are using :slight_smile: . In fact wrote that while watching his video on Youtube where he was talking at the University of California if I am not wrong and he was explaining Buffett’s investment in coke and he explicitly mentioned that had they done a DCF they would not have invested (last shares of coke bought by Buffett and Munger were at around 25 PE (TTM) - this was mentioned by Mohnish)

A big stretch to compare coke and KRBL :slight_smile: , but apparently he has made this bet on similar lines and seems like a very long term consumption play.

By the way - I am particularly interested in knowing more about Mohnish’s failed bets specifically in India, I tried myself to find them but have not found a lot of details (same names as you mentioned, but not how much money was lost etc). I will still be his fan though, just because of the amazing simplicity with which he explains things. It will be great if you/anyone who has them can share them.

(hemtan100) #319

south indian bank is one of them

(Dinesh Sairam) #320

South Indian Bank and J&K Bank are the ones that I know.

IIRC, I know some pieces of information about Pabrai correctly.

  1. Monish started investing in India pretty late (Maybe around 2014-15). Initially, the weight was low, but now it’s around 20% of the entire AUM of Pabrai Funds. So, it’s hard to judge his performance in this short term.
  2. 80%+ of his money is only in 3 companies: Alphabet, Chrysler and Aercap Holdings. Almost 60% is in Chrysler. So, even a complete loss in his Indian investments wouldn’t affect his portfolio’s performance.
  3. This article gives us the portfolio’s performance since inception (Inclusive of all stocks, abroad and in India). At the time (2013), his fund had returned a cumulative 1100% since inception.
  4. The AUM has dropped considerably since 2013 (The date of the article), according to this website. So let’s assume that the total returns are currently 900% (Instead of the 1100% mentioned in the article).
  5. This gives us a CAGR of close to 13% for those 18 years, which is impressive, but nothing to write home about.
  6. Hedge funds regularly return around 11% in the US post fee, so you could say he’s marginally better than the average Hedge fund.
  7. S&P 500 has returned a 9% CAGR in the same period. You can calculate it here.
  8. I’m not sure if the returns generated by Pabrai is pre or post fee. If it is pre-free, then the returns would be closer to 12% more likely.

I also like Monish Pabrai’s simplifying speeches. I love him especially for introducing me to the book ‘The Checklist Manifesto’, which has become a regular part of my investment code. However, he is too inconsistent with his own philosophies or words and does a lot of ‘going by the gut’ buys like Horsehead Zinc, J&K Bank or KRBL. I have no qualms with the investors choosing to follow him, but Monish Pabrai is not my cup of tea as an icon for investment decision-making.

(Sandeep) #321

M Oswal initiates coverage on LT Foods. Covers points related to the industry.

636585152050757232.pdf (754.1 KB)

(hanktaggart1) #322

In addition to fundamentals aspects mentioned by learned members which provides some downside margin, core point is the potential re-rating in coming 2-3yrs (Premium Branded Commodity Play - Premium Branded Healthy Food Play with wider penetration along price points) making it 3x play conservatively. Further based on recent initiatives and aggression its entry into organic food category adds to option value.

(Dana) #323

Looks like Trademark has been acquired. Can’t confirm the news though.

(harjotsingh87) #324

Prices in Toronto, as expected India gate is more expensive(approx 15%) but Daawat seemed to be selling more (given shelf space for Daawat)

(parthibansubramanian) #325

I live in Germany… and Daawat is cheaper and has the better shelve space…


Saw this at Star Bazaar, Korum Mall, Thane.
I was happy to see this.

But at Star Bazaar and at DMart, Daawat had better shelve space and larger visibility. Not sure about the margins available from both to Star Bazaar and DMart. I went there to try branded basmati rice and searched for India Gate as I recently invested in KRBL. But if did not knew about India Gate (KRBL) I would have purchased Daawat, seeing that it had a special counter at the centre and larger no. of options to choose from and available at a cheaper price. Not sure if the current generation would also have similar behaviour.

(GSrikan) #327

I have listened to last few quarters’ conference calls. Following are my observations.

  1. The GST seems have had big disruption in Company’s momentum of gaining market share from unorganized sector, which has gained significantly post demonetisation, The transition is not smooth as lot of retailers do not want to come under GST. Another disadvantage seems to 5% GST compared to 0% GST on private labels. Management feels 5% difference in price may not sway the customer much.
  2. Iran imports were supposed to start mid Nov post lift of import ban. There was a big disruption in Iran due to one super sized import for private label, which caused lot chaos. The exporters seem to have taken 30% haircut when the payments happened (dont remember exactly which quarter this happened). Exporter is not KRBL. KRBL now does not sell any unbranded Basmati except for Govt tenders which are backed by proper security.
  3. Company is trying hard to gain market share in US & Canada (where I believe LT foods is No 1). This market is growing at 12% and KRBL is growing more than 12% indicating they are gaining market share.
  4. Company is trying to expand exports to countries like Africa, Brazil, Europe.
  5. Basmati Seeds market share is 32-35% (since last 3 yrs). Govt is also supplying Basmati seeds at cheaper price. Though management claims KRBL’s seeds are superior with 99.98% germination rate.
  6. KRBL is first company to have got clearance for imports from China. Management expected it to be big market around Dec 2016 quarter. In recent times, they are not optimistic about China market. They say this is due to political reasons.
  7. Abt 2 years back there was unprecedented fall in basmati paddy prices to upto 21/Kg. KRBL bought huge amount of rice as it was in comfortable financial position & KRBL is the only company which ages rice in more than 2 yrs aging category. This low cost inventory is still helping KRBL in big EBITDA margins.
  8. This year Paddy prices are very high 31-32/Kg & may reach or exceed 35-36/kg. This will help in better realizations in export as well as doemestic sales. As prices are high, KRBL will procure less rice as it still has good amount of inventory. Every year price rises, the following year there will be too much supply and prices would fall eventually. This cycle is repeating since 45 years with one very recent exception of two year high prices.
  9. No more investments in Power sector. No specific plans for sale of the power assets though they do not reject the idea of selling.
  10. SAP fully implemented to track demand & supply from retailers (?) & distributors. They are using big data analytics to improve the sales.
  11. The advertising budget is same as LT foods which is close to 40 crores.

Please correct me if there are inaccuracies in my statements. These are “not” meticulously noted down facts.

Disl: Invested (4% of PF)

(Sandeep Patel) #328

KRBL is one of the companies featured in “India’s Emerging Global Companies” report by Ambit. As always, the report illustrates a good framework/checklist (deserves a dedicated thread for discussion). The following is excerpt of an interview (related to India’s EGC report) by Outlook Business with Nitin Bhasin, head of research at Ambit.

What innovation are we seeing in a commodity such as basmati rice?

Innovation doesn’t necessarily have to revolve around R&D, it could mean doing things differently. The kind of people the company hires, the kind of machinery the company uses, the branding strategy that it adopts and also what unique processes does it follow. In the case of KRBL, innovation can also be seen in its farmer engagement programme. KRBL maintains its own farms to identify the kind of seeds it should be developing for better yields even if there is not enough water. Although it has not entered into contract farming, working with farmers has helped create a strong ecosystem. On the distribution side, it has entered modern trade. It is building a portfolio of multiple brands of rice with different positioning. The KRBL story is not widely known with hardly any institutional investor presence. The whole sector was stereotyped as most rice players ran their businesses in a shoddy manner. KRBL changed the perception. Look at its return on capital employed versus the industry, it clearly stands out. Look at its branding practices versus the industry, it’s different. This is in spite of the fact that KRBL’s product may not be the most expensive compared with peers, but it is more profitable among its peers. KRBL has complete control on its production process — right from power, raw materials to the farmer. At the same time, it is focusing on making the balance-sheet better. The story for KRBL began when it developed a seed with better productivity — the rice that came out from the seed was of a superior quality and found wider acceptance. But the company did not just engage merely in product innovation, but innovated its processes as well.


(amit.hardwired) #329

Dear Dinesh,

Hi, this is amit agarwal again.

If you have read MPs book,the dhando investor…he is very much using DCF for ratifying his investment rationale. Also,he has a very strict time frame also…say about 18 months to get the most out of his investment.Since KRBL has fallen from 600 to 440 odd levels…do you think it will be able to get to 800 IN 18-24 months to get MP his desired result. YOU may be thinking I am too focused about the price,but all the hard work ultimately is for the price.

Aslo,one more thing which I don’t know is ok. In india in rice/.wheat or any sort of agricultural market there is a large amount of unorganized debt(hundi) as they call it…I think they use this thing a lot. NOt verified but heard from small people in the rice trade.This will no way reflect in the balance sheet but only pump up the value of the inventory having a positive impact on the share price.
i think MP will not be able to figure this thing out…unless he has gone to khari baoli in Delhi.

Please provide your valuable input for these.

Thanks in advance.

(Dinesh Sairam) #330

The way I see it is, ignoring the Price for a minute, Basmati is still seen as a luxury food item. So, it is not recession proof. Should there be a shock in the economy or some kind of local money crisis, the first thing people will drop is buying luxury. My investments are more aligned towards basic human needs in a specific industry. So as far as products in the rice industry goes, I might be more interested in tractors, seeds or basic farm equipment. In the rice exporting space, I might be more inclined towards basic rice variants and not Basmati.

The only exception is if the product is primarily targeted towards wealthy people. An example would be Eicher Motors. The affluent do not care about percentage point changes in inflation. They are buying the product for its aesthetic appeal or bragging rights. This makes the product partially recession proof.

I have not done market research or anything to see if customers of Basmati rice have started looking at it as a necessity rather than a luxury. If that is the case, that makes KRBL a better investment. Of course, these are ultra-safe checks to ensure you stay out of cyclical stocks. It may or may not apply to market leaders like KRBL. But I’d still be cautious if I ever were to invest in it.

Coming to the question of Price, you can download my DCF template from here and tell your own story:

The most important thing in Valuation is to tell your own story and then try to match the numbers to fit that story. If you want to tell a wonderful story with KRBL taking over the Basmati Exports market, go ahead and tell it with appropriate numbers. This will get reflected in the Value, but then you will have to live with your story.

Nobody can say when the Price will revert to Value. MP himself suggests holding a stock for 3 years to see if it reverts to Value or sell it. So, you may want to follow that. Warren Buffet on the other hand, has held on to under-performers for as much as 7 years (IBM). Of course, if it does revert to Value, then selling the stock will depend on availability of better investment opportunities. If a company, even after reverting to Value, produces extraordinary CROIC, it makes sense to hold on to it. Again, of course, provided you don’t find another company with a higher CROIC and which is also a better investment opportunity.

(phreak) #331

Looks like a base is forming due to accumulation (Hourly chart). Could perhaps go on for another couple of weeks.

(Marathondreams) #332

News report below suggests that Iran has become largest importer of Basmati rice in FY 18 taking over from Saudi Arabia.

Hence US missile attack in Syria followed by rhetoric from Trump about Russia and Iran is bringing back possibility of US sanctions on Iran. In that case, India’s Basmati export can come under pressure. I believe this is the reason for softness of stock prices of all rice exporters like KRBL (although LT foods and Chamanlal Setia are up today)

(atulgupta80) #333

I understand KRBL is domestic consumption driven story. Share of export to total sales is falling.