This is how the cash looks like for the past few years.
Let me know your thoughts, sometimes zooming out from quarter to quarter clutter helps.
Disc: Invested
Edited for slight mistake in copying the excel sheet.
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Any insights on the management bandwidth and succession ? is it a one man show ? how competent is the next gen ?
i request you to look at the investor presentation… they have the succession plan in the final slides.
Q4FY20 results give enough indication that KRBL as a business has tremendous longevity. Even COVID-19 couldn’t break the momentum that KRBL’s business has been having for last many years. Management confirmed on the con-call that they have 5 months worth export orders in-hand for next 3 months and it should keep them super busy. Goes onto show the resilience of the business. In a period where there will be significant de-growth in most businesses, KRBL’s management guided for 10% volume growth in FY21 which is quite outstanding. In my view, market is not giving enough terminal value to KRBL that it deserves. KRBL’s consistent results being in a commodity product business is quite remarkable.
Below please find my take on Q4FY20 results.
Earnings Con-call Notes:
EXPORTS
• Orders are very good. Order book is full. Couldn’t ship out orders due to issues at the port.
• Pre-covid port was able to load 5000MT per day, but now it has come down to 800-900MT per day. Now to load a 25,000MT vessel it takes 20-25 days which was taking 4-5 days earlier. There is long waiting period to fill the vessel. Labor at Kandla port was at 20% of precovid conditions
• For last 2.5 months (from 24th March) – there was labor shortage at various ports. Now most labor force has come back. Packing materials is available now without any issues. Next 3 months have orders equivalent of 5 months. Now things will come in strong momentum. Exports orders are better compared to last year.
• Basmati rice of more than 40k MT lying on Kandla port valued at 470-480cr. Most should ship out in June and some in July. By 30th June things should stabilize.
• Saudi and other ME countries age rice themselves. Generally they have stock of 1 year.
• US market share would be 10%. Do only branded business in the US.
• Except Iraq and Iran we don’t do private label anywhere else.
• Don’t expect ban of importing rice from Iran this year due to Covid-19 issues.
DOMESTIC
- Now since government has allowed restaurants and home deliveries, next 30-60 days HORECA segment should come back.
- About 30% of business lost in April and May. And believe that there will be no loss in June.
- Consumer packs going well. Decline is in 25kg pack which is mainly HORECA segment.
GENERAL BUSINESS
- Should be debt free by August or September.
- Full year volume increase for FY21 should be 10%.
- New investments will go into inventory, regional rice branding, packaging material, etc.
- Sona masoori niche market would be 40k MT. Overall sona masoori market may be 10mn MT.
- Govind Bhog in West Bengal is niche product. It’s sold above Rs. 100 per kg and it requires 1 year of aging. Big demand opportunity. Kerela market is 5lac tons. Premium market would be 40-50k MT. No national players, but regional players only.
- Have given work to KPMG to guide on demerging energy business but the progress got slower due to COVID.
- Realizations will be similar to Q4 in Q1FY21.
- Branded sales are 75-80%. Exports we do 20% private label. 85% overall is branded business.
- Closing inventory cost Paddy 28,934/ton, Rice 48021 / ton. 427000 MT of paddy at 1235cr avg price of 28000, 314000 MT of rice at 1512cr avg price 48000. Total inventory of 2852cr.
- Hoping to do 5000cr topline in FY21.
- New government ordinance have been issued which changes; no mandi fees, no market fees. New season from 1st oct – all products without mandi fees. So this should add around 20-25cr to KRBL’s bottom-line.
- Anup Mittal feels Balsharaf will get shares back from ED.
- This quarter there was 100% branded business and no private label business hence saw better margins.
- Benefit of lower paddy prices should start coming from Q3FY21.
- Applied for refund of 100cr from IT and we are expecting that back any day.
- Current strategy to invest all accruals into inventory will last at least for next 2-3 years. Post that management will recheck the situation. Management will not shy away from funding inventory at 4-5% interest rate.
Disc: invested with no transaction in last 60 days.
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On valuations - If we take a 4-5 year view, Sales growing to 8k crore and profits doubling & ROE moving to 25%.
Can KRBL be valued at 20PE? if this happens KRBL can provide 4x kind of returns
In these 4 years:ED issues should be sorted
Tile companies are valued at 20PE, KRBL can get atleast get that.
If ROEs move up(30% kinds) with separate energy business that would be a bonus
Future lower interest rates should anyways move PEs slightly higher for all companies.
Any views?
Do you think the downfall in crude prices will have an impact on it’s exports of expensive quality to gulf countries and domestically , the people remaining away from restaurants and lavish marriages/gatherings not being there is also going to impact sales.
In my limited experience I have seen that once a company is caught in an legal issue like the one with KRBL, it’s return to name and fame becomes difficult.
Have you considered the above factors in your thought process?
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Think about it, even in such an environment management is guiding 8-10% growth in topline.
Yes legal issue remains a risk, enough has been said about it already in this thread.
My only concern was inconsistency in promoter actions and commentary related to buying shares in open market in personal capacity. Earlier guidance of increasing stake has now been refused. Also not a satisfactory explanation for not buying shares during pledged sale issue in mar19.
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KRBL has been an interesting developing story. I think that concerns related to promoters and management are overdone especially when compared against the valuations which the market is ascribing given:
a) 10+ year track record of excellent numbers in terms of RoE, Debt control and reduction, margins and most importantly in the stock price itself
b) nature of the business wherein the domestic branded revenues numbers are corroborated with impartial and creditable agencies such as Nielsen as well as in terms of reputation among the competitors (basis primary research) as well as fair visibility of products across channels.
c) strength shown in cash flows as exhibited in cash tax outgo, continuously increasing dividends and most importantly debt reduction through the years. Perhaps the best example of the same was set in FY20 itself wherein company generated a mind-boggling ~1000+cr of free cash flows and used it to pay down debt by ~1000 cr resulting in lowest ever debt to equity ratio along with paying decent dividend
d) some other soft factors which I found comforting is that way the company has never lost a single rupee in bad debt (as per consistent commentary of the management in concalls) as well as the way capex and aquisitions (where there is a lot of possibility of cash siphoning) have been kept at a very low levels.
Once the income tax case which was a major overhang on the stock price was also announced in company’s favour, still this stock which generated ~1000+ cr of free cash flows in FY20 was available at a paltry valuation of ~2500 odd cr few weeks back. I think it was a screaming buy at those unbelievable levels as the fall was caused more due to technical levels (one of the major shareholders’ stocks were sold by the brokers in the market indiscriminately for lack of margin) than any promoter related or fundamental reasons.
Even now while the stock is trading at 5000 odd crore market cap with almost zero debt and a trailing P/E of less than 10 times, I think it can be a attractive long term bet. But of course, this is not a HUL, so it requires active monitoring and smart position sizing given that the volatility in the stock price as well as any positive/negative news flow which can give multiple opportunities to buy and sell at attractive levels thereby giving an opportunity to earn returns far exceeding the long term returns of the stock which by the way are also very impressive at over 10 times in the last 10 years.
The other very attractive proposition for the sector is the size of opportunity itself. When I look at it, a similar example I can think about is 5 star hotels. If one goes 15-20 years back, 5 star hotels in India were almost fully positioned and built for foreigner clientele (for instance, you would hardly find water jets in the washrooms of 5 star hotels back then ;-)). Now if one visits any 5 star hotel in India, almost 80% plus customers are Indians - be it for leisure or business (and waterjets are also omnipresent ;-)). The same I feel can happen for Basmati (and few more premium category) Rice market, which is considered a pricey delicacy in India. As incomes grow, in a decade or two we will find that a significant % of Indian population are able to afford Basmati rice. Currently almost half of the current opportunity for these companies are in exports but India by itself can be a much larger producer and consumer of such and other pricey branded rice. A significant part of that as well as adjacent market opportunities are available in the hands of just few companies which have a potential to grow at high rates for a long time. This means a high terminal value and hence a much higher Price to earning ratio for such companies. Hence there seems to be a potential for both multiple re-rating and earnings growth which is the requisite condition for spotting a multi-bagger.
Regards,
Sarvesh Gupta
PS - I run a SEBI registered investment advisory firm and I have bought the stock for myself and clients right from levels of 110 and upwards in the recent fall. I am an active investor and may add more or exit depending on how the opportunity unfolds.
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A comparison of different Indian consumer brands performance with ROE in 20s & PE ratios
High ROE FMCG players are intentionally left out for reasonable comparison. (Discl - Invested)
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- In share holding pattern of krbl I found some reliance commodities dmcc holds significant stake in the company what is that I mean it is related to reliance industries?
- Very less participation from mutual funds FIIs DIIs could it be the reason of Less share prices?
Disc.Invested
classic rice bag on e commerce platforms is available at deep discount … What I remember from group discussions is that the same is mostly sold without discounts … The company claimed in the last interview that they are witnessing strong retrial and e commerce demand … This might be due to low basmati price in general this year …
2. The company does mention in one full para on how climate change is a systemic risk in its annual report for fy 19 …we should keep a watch for the same more keenly … I was posted in Punjab for a long time …though the govt their provides free electricity and water to farmers , the weather is getting pretty erratic from past few years …the kharif crop still passes smoothly with the onset of monsoon the only big factor …there are frequent untimely showers and windstorms ( factor for lodging ) in the region from Jan to April… And my personal experience says things are going pretty erratic …also if one remembers every winter Delhi becomes a smog house which it attributes to stubble burning of the kharif crop by the farmers of Punjab and Haryana. This has become a pretty sensitive issue where in even the supreme court is pretty active. The bowing season is such that the farmer has to clear the field and get rid of the residue for next crop after harvesting the crop between Oct to Dec… what if the environmental issues gather traction…what kind of scenarios might emerge for paddy farming …how can the govt make it less lucrative or discourage it’s farming ( msp related tricks or other substitute)
3. We need to keep a eye on the second generation of management , they might make all the difference here … I am not trying to comment on their intent or professionalism …but they are lucky to be born privileged… As of now Mr Mittal is able to hold the team. He also has smartly given roles to the second generation as the company has lot of important moving parts like procurement , retail ,export and storage.
4. The agri reforms which will now allow better price discovery at the same time allowing the farmer to sell his produce outside the apmc domain is a plus for krbl. It might be able to source more steadily and at a better price… the management should be asked about their views on the same …how much of a tailwind can this new change be …
Regards
Divyansh
Disc: tracking position initiated recently
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The Auditor remuneration seems so be on the lower side, almost @ Rs. 8/Lac. I’m taking this from Annual Report of '18-19.
Isn’t this a matter of concern?
Disc. Not invested. Analysis in progress
i can see the remuneration as 36 lacs. Auditor- M/s Walker Chandiok (auditing firm under Grant Thornton). Dont see an issue here…
Not going into environmental and political issue but this practice actually make no sense. they can just mix the residue into soil while they are preparing soil for sowing, burning soil actually reduces moisture and nutrients from soil. so my point is even if the govt tries to stop this practice it is not going to cause any harm to the farmland or product.
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The DMCC is “Dubai Multi Commodities Centre”, so RI is having something there in Dubai and they are holding KRBL from that subsidiary(?) may be… the KRBL is anyway having Dubai connection.
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Reliance Commodities dmcc is ADAG undertaking. Wanted to clarify this so that people don’t confuse it as Reliance Industries subsidy and tie KRBL story with Reliance Retail opportunity.
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Thanks, actually i don’t know anything about this, I did a google search and come up with this DMCC thing, that’s why I put a ? there. 
Every year we see part of company’s WC borrowings are from interest-free loans from promoters. What is the reason for this??
Not sure if this has been discussed above in the thread or not, but if the bank loans are available, then why the indulge in such related party transactions. Hope @rupaniamit, others can throw light on this.
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