Just because there is a bad news around the corner you are giving PE-10 to this biz. How about the brand value which they have developed over a period of time? it takes lot of efforts to develop a brand like India Gate. Just check with FMCG veteran if promoters would like to sell India Gate Brand to someone how much value they can fetch thats why FMCG players trade at 40-50 PE. Here, it is a mix of FMCG & exporter of rice, it should command minimum PE-20. Pabarai was not fool he saw value at 500 plus…
I wonder how discussion changed because of bad news. Aging Inventory was a moat for the company and big positive and now we are suddenly started seeing negative in this. Similar was the case with their business model.
If you stay flexible and discount the bad news, KRBL currently at a confluence of supports.
Unlike Manpasand, Vakrangee cases, there is a legit business underneath here. This is more like Avanti’s and DCM Shriram’s big fall which offered a quick trade.
Disc: Trading position at 300.
I have no idea about what pabrai saw. My assessment is based not on the news but on the possibility that margins will revert. If they do then the market valuations it is quoting do not look exciting.
Ofc if margins sustain at current levels and the co becomes more capital efficient then there is a case for higher valuations but in my view that wont happen.
In the end, we are all trying to derive valuation comfort. The bad news has nothing to do with it.
Just to aid the discussion around PE, here is the chart of historical PE of KRBL.
Before 2016, it always traded below PE of 15. Only in 2017, PE started to jump from 20 to 35.
My limited point is that we are completely ignoring the brand value and Moat which company ha developed over no. of years. Anyway, it will reflect in stock price over a period of time.
Patanjali is in fashion. Nothing more. Maintaining consistent rice quality year on year packet to packet is an insurmountable challenge. I can tell me this with 100% conviction in case of branded atta (flour). Only Ashirvaad managed to crack the code. Rest all brand still give difffent taste and conssutency in diffenf season and geography.
As Yogesh has pointed out, the rice companies used to quote at cheap valuations of 10-15 PE and that too on the higher side in the immediate period prior to Jan 2016. Post that most of these stocks had a superb run more due to re rating associated with higher profit growth than actual topline growth. The real strength of a brand is in its pull which drives its topline even though it may be at a lower rate.
In case of KRBL as figures reveal, in March 2014 topline was 2910 crores and in subsequent years the figure is 3200, 3300, 3150, 3250 crores. This is hardly encouraging growth. So profitability probably has increased because of higher realisation of inventory or somehow drastically improved margins.
I had studied this sector in some details when I had bought LT foods as a techno funda bet and the first impression I got was that this was a good business though not a great business with enduring moats. I couldnt figure out paying valuations higher than 20 PE esp for LT foods which appeared to be slightly inferior business as compared to KRBL.
Brands are of no use if they dont contribute to sales and profits. e.g Hawkins. In all such cases stock prices dont go anywhere barring few periods of swings according to changing market fancy.
I liked whatever I read about KRBL as a business (barring the current fiasco) but in the current market scenario with everything correcting one can be spoiled for choices about what to buy. With the kind of drubbing KRBL has received it might very well give a tradeable bounce but it should not be confused with resumption of uptrend in the stock price. If one were to see vakrangee charts also, it nearly doubled from 145 odd levels to 290 plus in March 2018 before finally resuming its downtrend and went down as low as 32-33 and now 60 plus. These can be roller coaster rides and suitable only for people with strong stomachs.
I beg to differ here. Wheat and rice are two different ball games. Wheat taste changes according to breed and environment but in case of Basmati, more than 80% of farmers have already shifted to a single highly successful variety, Pusa 1121 (https://en.wikipedia.org/wiki/Pusa_1121_rice). Now almost every long grain unbroken basmati rice is Pusa 1121 with almost no change of taste among all major producers. Most of the value addition by KRBL is just ageing, milling, packing and branding. (My opinion is about Indian market only, I have no idea how their export story plays out).
Disc. Tracking position, may enter if valuation becomes attractive in due course.
Surprised this hasn’t been discussed here so far. Thank you, @Uservijay for bringing it to my notice.
M/S Vikram Roller Flour Mills Ltd Vs. M/S Krbl Limited on 2 Jan 2012 (https://www.casemine.com/judgement/in/574990d8add7b016e0f04bfc)
Here is a gist of the case:
- KRBL does not exclusively own the brand “India Gate” (Read ahead).
- KRBL applied to register the brand “India Gate” in 1999 and 2002, but both the applications were rejected.
- This was because another company, Vikram Roller Flour Mills had already registered for the brand “India Gate” in 1991.
- The court concluded that since KRBL had already done Crores worth of business under the brand “India Gate”, it was allowed to keep the brand, but only for the sales of Basmati Rice.
- Vikram Roller Flour Mills was also allowed to use the brand “India Gate” for the sales of its Aata, Maida, Rawa, Suzi and Bran (Company Website: http://vrfmills.com/). For example, the following is legal:
Krbl Ltd vs Lal Mahal Ltd And Anr on 23 February, 2015 (https://indiankanoon.org/doc/106774650/)
Here is the gist of this case:
- KRBL sued Lal Mahal to obtain injunction against Lal Mahal using the brand “Church Gate” to sell their Basmati rice.
- KRBL has, in the past, successfully sued and obtained injunctions against the usage of the brands “Bombay Gate” and “Royal Gate” selling Basmati rice.
- However, in the case Vs Lal Mahal, KRBL was very late in producing the required documents to court and even concealed their case against Vikram Roller Flour Mills (Case described above).
- Hence, the court concluded that Lal Mahal can continue to use the brand “Church Gate”, since KRBL didn’t care so much about the case, was generally lethargic in producing evidence and actively concealed relevant information.
If Vikram Roller Flour Mills also has rights to “India Gate” brand for non-basmati products, let’s see how it affects KRBL. The other company has held the brand too since 1991 and yet no one has heard of their Chakki Atta and the same is not available anywhere. The packaging is distinctly different and non-premium but in general a different packaging and different brand logo with the same brand name usually will come across as a fake product. It might let VFR mills cash in a little bit on the India Gate brand made famous by KRBL but beyond that, size matters a lot.
If someone gave me joint ownership of the Coca Cola brand name, will I be able to dent their sales? Brand name without the logo and related things is quite useless and the ability to do anything will be quite limited. However, a bigger company can take over VFR Mills and with that muscle try to exploit the brand but they will face the same problem - A brand is not just the name and unless the objective is to dent KRBL’s sales at whatever cost, no one will venture into it as the same effort in building a fresh brand would yield probably better results. This I think is elementary game theory. A small player like VFR Mills might be able to milk the brand name in smaller markets but beyond that, its quite useless.
This is the equivalent of someone calling themselves Elvis Presley and dressing up like the King but the name can only go so far. There were hundreds of Elvis impersonators but no one has gone beyond being a tribute artist and for a good reason.
The bigger problem I see here is that KRBL will not be able to capitalize on its own brand in these other products that VFR has the rights. This will be a big loss if KRBL spends crores to build the brand and are not able to capitalize on this.
Also what if this other company is acquired by a bigger company for its brand?
Yes, that’s actually what I was hinting at, to be precise. I’m not sure if KRBL can use the brand for non-Basmati, non-Flour products, but as far as I can tell, they can’t. They were allowed to keep the brand because they’d already done so much of sales specifically in Basmati.
Serious concerns on KRBL’s old auditors Bindal Brothers.
I am seriously worried now. Probably, after this only Pabrai added checking Auditors background to his checklist as mentioned in his latest interview.
Disc: Still invested. Seriously evaluating about exiting.
Thanks for sharing. I think the money laundering for AugustaWestland, Balsharaf’s holding and trading and the auditor’s murky past, along with the Gautam Khaitan and also the way the management hid the ED enquiry and also the truth behind the Pabrai deal are all part of one story. Not completely sure how much the underlying business is actually worth but it is definitely worth something because the export data for Basmati rice does substantiate KRBL’s export numbers at least. However the P/E re-rating it went through in the last couple of years is probably related to providing an exit for the laundered money. Once the dust settles, we will know at what levels it is available and how much of the numbers are cooked, if at all.
Disc: No position.
KRBL did not change the Auditors. The same auditors are still continuing. The old auditors changed name of their company.
Good way to clean past sins. What a mess.
EquityMaster report mentioned;>>
It received a massive sum of Rs 11 billion from various other companies which was meant to be paid as a bribe. The company has denied this charge.
As it is reported in the news and other articles its 110 Crores i.e., 1.1 billion, is n’t it?? Might be typo error…
However it is immaterial and secondary thing, whether it is 1 .1 or 11 billion, fraud is fraud but with the volume, perception and seriousness of fraud and its repercussion may vary…
Have not been following the market for a few days and what have we got here - a bit shocking actually. So my “worry” over Pabrai funds not showing up in the shareholder report have come true. Happy because I atleast tried to investigate, wrote to investor relations etc (inspired by this forum), however, disappointed why the management would not share these details even when probed by us (retail investors)?!
Disc: invested, but planning not to sell for now
Any idea how government controls rice production acerage? Ref : equitymaser article quoted above. Thanks
A great strategy by the company to confuse retail investors