Just sharing few of my thoughts to get counter views:
Short term +ves:
- Oil prices going high increasing revenues to arab nations, which are the primary sources of revenues for KRBL.
- KRBL deciding to not invest further in energy assets. My estimate is they would looking to sell the power assets which are independent (I mean excluding the power generated from Agri waste). Even if they don’t get an attractive deal, it would still be very good for investors, as power division would not be generating as much return ratio’s as compared to agri division. With the money it gets from the sale and with no more investment to be done on power assets, the free cash flow would be very good for future business expansion (ex: for aquiring Rice NPA assets, to invest in inventory based aged kollam rice business etc.)
(Can anybody caclulate, what will be ROCE & ROE of agri business i.e. excluding power division?)
- The GST & easing of demonetization induced cash sqeeze, made domestic business suffer. So, the current domestic earnings being reflected in the stock price are depressed earnings. There is good chance, they will grow at decent pace due to low base, indian economic recovery in urban and rural etc.
- The competition having low inventory is forced to buy at current high prices of procurement increasing their inventory costs like debt. The increased realizations would offset those costs but not as much as in low inventory cost environment. The high procurement cost scenario is the scenario which favors the financially strong companies to gain market share over not financially strong competition.
- I am not sure how much inventory from last season are still left with KRBL but the old low priced inventory may provide some more support to ebidta margins for couple of more quarters.
Short term -ves:
- Not much of visibility over how Iran sanctions effect would turn out to be for Basmati players (even if sanctions wont apply on food items like Basmati, the banks being sanctions would affect the money flow causing disruptions).
- The current valuations of 24 PE for inventory heavy business like KRBL would still not leave too much of margin of safety for investor.
- Need to watch out how the new businesses (quinoa, chia, flax etc) would work.
- Need to watch out the effects of newly procured high priced paddy on this year’s and next year’s profit margins and return rations.
Discl: I don’t have much expertise in investing or in Basmati rice industry. Please consider these points only for further research. I Invested at 450 rs (5% of PF). Views are heavily biased.