KRBL- The King of Basmati rice

Stock Opportunities Untested - but worth a good look
1011

A quick DCF (Discounted Cash flow) analysis on KRBL stock

This is the data table for the past 10 years
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Dividend in INR per share, and Net profit in Crores of INR

Valuepickr DCF analysis KRBL
Valuepickr DCF analysis KRBL833×284 55.6 KB

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Range of Price in 2011 was 12.65 (low on 22nd December) and 41.35 (high on 6th Jan)

Growth rate of dividend from 2011 to 2021 was a CAGR 27.85%

Based on this the expected Dividend in FY 22 should be around Rs 3.50 * 1.2785 = Rs 4.474750

Let’s compute the implied expected return to shareholder at the current price of around 250 Rs.

Expected return on equity using the dividend discount model

eR = expected dividend next year/ current share price + growth rate

eR = Rs 4.47/ Rs 250 + 27.85%

eR = 0.01788 + 0.27850

eR = 0.29638

eR = 29.64 %

Meaning shareholders can expected 29.64% CAGR returns at the current market price if the historical growth continues.

For 10 years it means = 1.296410^10 = 13.4067 times the price

If we try to use this number to find the historical price 10 years ago, then

Price 10 year ago = 250 / 13.4067 = 18.65

The share price indeed was Rs 18.65 as we saw the range was between 12.65 and 41.35

Mismatch between Profit growth vs dividend growth, A reason to worry?

As we can see in the chart that dividend has grown at faster rate than the growth of profits.

This can be reflected in the Dividend pay-out ratio as well. Which has grown from 6% to 15%.

Do we have a scope for similar 29.64% CAGR returns in the next 10 years?

Answer) Yes!

Even if 15%/ 16% growth in profit continues, then increasing in dividend pay-out ratio to 30% (which is a reasonable estimate) would enable the company to be able to deliver such returns.

Such a return would mean 13.4 Times the investment in 10 years.

Drawbacks:

  1. Use of Historical growth rates to estimate future growth rates,
    It is possible that the growth may not actually be realised, leading to lower expected return or fall in fair value of share

  2. the data selected has been from 2011 from where we see the growth happening,
    If we check older data from 2003 the dividend fluctuated between 0.10, 0.20 and 0.30
    Only after 2011 we see a pickup in growth of dividend.

  3. This research does not consider the ongoing problems relating to Augusta Westland case, and perception of poor corporate governance due to this case.
    These factors may have negative impact on the expected returns or the share price.

Disclosure: KRBL forms a small portion of my Portfolio,
have not bought any stock recently (past 3 months)
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Data based on closing price of 10th December 2021 (Friday)
Current share price = Rs 246.65
Market Capitalization = 5,805.89 Crores
P/E ratio = 10.33
P/B ratio = 1.50

Would be happy to hear Views and opinions for this!

2 Likes
1012

Does it mean, if the growth rate remains same as it for next 10 yrs, the market cap is expected to reach to around 5,800*13 = 75,400 Cr? Am I reading it right?

1013

Yup, 75K crores is the estimated market cap we could expect in 10 yrs based on the Dividend growth model (also the DCF method), if the current growth rate continues.

1014

DDM considers TERMINAL (Long Term Going Concern) growth rate. Your assumption for the growth rate (27.85%) seems too optimistic.

1015

Thanks for sharing your views:

Growth rate is based on last 10 years growth rate of dividends, where the growth was strong
And as growth rate is high, expected returns are also high at 29.64%

Let’s assume a pessimistic scenario where the company is not able to grow at all, the growth rate is 0%

But here since there are no investment opportunities, it would also distribute all of its earnings as Dividends.

Based on the current EPS of Rs 23.74
And the expected rate of return of 29.64% we compute the current share price with no growth

Share price = EPS/ growth
Share price = 23.74 / 29.64%
Share price = 80.0944669366
Share price = Rs 80.09
At the current price of Rs 250
The present value of growth opportunities is = 250 – 80.09
Present value of growth opportunities is = 169.91

Since we are assuming No-growth scenario, let us ignore the present value of growth opportunities
Then the fair value of the share would be Rs 80.09 today, with Expected returns of 29.64%

We find the future value of Rs 80.09 at the rate of 29.64%

(assume all dividends are reinvested)
Future value = 80.09*(1.2964) ^10
Future value = 80.09*13.4088
Future value = Rs 1,073.91

If we believe the above future value to be fair future value, even then from the current price of Rs 250. The stock can provide 4.3 times Return on investment in 10 years (CAGR of 15.69%)

Another Possible Case

No growth scenario with Current earnings and current price

Considering the current price of 250
The expected return would be 23.74 / 250 = 0.09512
Meaning a 9.512% CAGR growth at this price
In 10 year, it means 2.48 times the investment or Rs 620
(assuming all dividends are reinvested at current price of 250)

1 Like
1016

The real overhang is the VVIP choppers purchase scam case, Incase if he used company resources to do the laundering then what court will do with company ?

If only MD is will be jailed then company should continue to do good, then there is no risk to shareholders ?

1 Like
1017

Maintenance Capex?

Past growth rate is just an indicator and already encashed. IF one thinks that this business will SUSTAIN TILL ENTERNITY, long term earnings growth rate shall be used to capitalize the current earnings.

Before making an educated GUESS about the EXPECTED long term earnings growth rate , sustainable growth drivers must be identified and quantified.

DDM (Dividend Discount Model) based thinking provides surface level perspective and not THE ONLY model for the market to assign valuation to the businesses. This approach may indicate that most businesses are UNDER valued.

DDM does not consider relativity (relative valuations across market opportunities), and psychology (one of the factor is already pointed out by @AmitContrarian ) that play a key role in valuations.

1018

Yes, Of course those things could be used to find out the long-term earnings growth rate, and you can also use different models to find the fair value of the stock.

But for every additional assumption you make, question arises why did you assume so and so?
There could be some supportive and some counter points for every assumption.

In my post no 881 I showed that 13.4 times returns can be generated,
And in post no. 885 I showed that based on different assumptions so and so returns can be expected.

Now, I have given the estimated future value, based on your perception of riskiness
(probability of growth actually happening or not, corporate governance issues, business risk, etc)
You can assign your own discount rate.

For example, consider someone who after completing his/her research feels that 25% shall be the discount rate applied
Then the present value of stock would be = 250* 13.40/(1.25)^10
Then the fair value of the stock would be 359.70 for that person.

For someone thinking the risk of growth component is too high,
So, s/he may assign a discount rate of 35%
Then the present value of stock would be = 250* 13.40/(1.35)^10
The fair value of the stock would be 166.61 for that person.

Thus, in the end my fair value of stock and yours could differ; based on the perception of riskiness and the discount rate that we use.

If you feel growth rate assumptions used are too high, consider my valuation targets risky one and use higher discount rate to find your fair value of the stock.

1 Like
1019

Thanks for this post. Meaningful data based analysis like this adds value to the thread.

I have a different way to interpret the calculations, however.

Dividend Discount Model says that the present-day price of a stock is worth the sum of all of its future dividend payments discounted back to their present value. From Investopedia,

image
image940×451 105 KB

In your case, you have taken the current price of the stock, the current dividend per share, assumed a dividend growth rate and worked backwards to calculate the Cost Of Capital. And this comes to 29.64%. If you invert the formula, the interpretation changes because the Discount Rate and the Cost of Capital are conceptually not the same, even though arithmetically they perform the same function.

Discount Rate is the rate at which future cash flows (i.e. dividends) are discounted to their present value. Cost of Capital is the minimum rate of return the shareholders expect for investing in the stock. Normally, it is arrived at as the Risk Free Rate plus an Equity Risk Premium. In the Indian context, one would take the Risk Free Rate to be around 6 – 8 % and Equity Risk Premium at say 5 %, giving a Cost of Capital of 10 – 15 %. In your case, this value comes to 29 %, which means an Equity Risk Premium of more than 20 %.

I would therefore interpret the whole calculation to mean that the equity investors are demanding a risk premium of 20+ % for investing in the stock. This is extremely high but also logical given the controversies surrounding the stock.

(Disc: No positions)

5 Likes
1020

53f06a9b-7c66-4f26-bdbf-1bc1f3b0efb5.pdf (bseindia.com)

The company posted its results. And they were not good. Exports took a hit due to sanctions on Iran. The surprising thing is that OPM has fallen by more than 10% for the quarter which is not in line with previous years.

Management says its due to product mix change and higher raw material costs in addition to higher logistics cost and marketing spends. It is hard to believe that either of these reasons can cause such a huge change in OPM for the quarter.
Does anyone have any insight regarding the cause of this drastic drop in OPM?
If this is a temporary setback, then i believe KRBL is a good value at this price albeit somewhat risky, considering one is willing to accept the risks that are prevalent here (Legal cases, Market Perception , Iran, etc).

Disclosure : Invested small % of PF

2 Likes
1021

Exited after the results. Primary driver for myself and @akash_1cr have been the drop in margin.

I think it could be because of two reasons: Decline in sales in overseas market (which generates higher price), and launch of Unnati (which is priced slightly lower than India Gate brand).

Compared with LT Foods, which has maintained its margins, and grown margin accretive business segments – India Gate has been an underperformer.

3 Likes
1022

Don’t they already have a huge inventory so how can procurment cost hit them plus is the dependence on iran so high that margins can fall so much.

1 Like
1023

That is right. They have possibly sold higher quantity of broken/lower quality rice as a percentage of total. Also they might have got lower realizations and sold locally due to lack of export options due to high container costs. I feel margins will be back once freight/container costs normalize which will be very soon. Their brand is very strong and I feel this is a good opportunity to add

Disc: invested and added

5 Likes
1024

Given that are the market leaders and that LT Foods, did better in terms of holding on to historic margins, I too exited. But that said, the price has corrected a lot and a PE of 9 can make it an attractive bet if it corrects further. I’d assume (as others pointed out) that this could be a one-time issue that might normalize in the next few quarters.

3 Likes
1025

I am not a type of person who sells his stock because of 1 bad quarter,I didn’t sell it even when it was trading at almost twice my price and i wont sell it if it touches that price again .Historically speaking the company is at a best point it has ever been ,few years down the line they had taken debt to build this inventory they had to age that inventory paying interest , so much so that debt had reached 1500 cr at one point in march 2019 ,so if they could reduce it to almost zero and still churn out a yield of 1 to 2%,gives you a rough idea how big of a cash cow machine this business is. They have the biggest godown in the whole world to age rice and have featured in many videos online ,building such a huge warehouse then having the buying power that comes with economies of scale of what krbl has and then ageing it like they do is not impossible but requires a huge amount of investments,expertise and market presence which takes years to build ,so it is safe to say that this buisness has moats with high barriers to entry .

i have 5% position size i wont add at this price but i don’t mind doubling my holding if the market cap touches the inventory valuation ,i am pretty optimisitc that the company will be able to resume its export sales in future sooner or later and if and when that happens the minority shareholders will be rewarded in the form of dividends or by inorganic growth.

11 Likes
1026

I think both companies(LT and KRBL) cater to different markets,may be thats one of the factors
I haven’t sold yet

1 Like
1027

Important to note that KRBL’s margin except for last quarter have been close double to that of L T foods. The valuation multiple are almost similar at present valuation. There seems to be good enough growth driver for KRBL despite challenges in its usual markets e.g. Iran. Halving the margin is no small disappointment but adequate business model strength and growth opportunity still appears to be there. Around 3100 Cr. inventory provides good comfort. Doesn’t seem like company is planning for the earnings conference call. Watching for the growth and potential rebound of margin in Q4 would be key monitorable.

Disc-Invested and biased

6 Likes
1028

Promoters today have increased stake on 18th feb 2022 by .2 % or 435000 shares Stock Share Price | Get Quote | BSE

4 Likes
1029

Promoters are constantly adding more quantities from the open market! Pretty good sign that they see this as extremely undervalued right now

2 Likes
1030

Does anyone know why there is no concall after Q3 Result? Is no investor approached for call?

This never happened where management skipping the call post result announcement.

Disclosure: Invested

Happy Investing,
Karthik