I came across this company through my twitter feed when I saw Mohnish Pabrai buying KRBL, a company at 30 times its earnings! That’s an outrageous buy for Mohnish looking at his historical track record. He likes to buy companies that are being sold at their next 2-3 year’s earnings (Rain Industries, Fiat Chrysler etc). However, I couldn’t hold myself when I saw that the stock was down by 25% after his buy-in. I decided to keep the blog short for new readers with brief highlights and an interested reader can download the file below to dig deeper into the business.
Out of 500 MMT global rice production, only 15MMT is Basmati rice. Basmati due to its highest quality, long grain length, and aroma naturally gets higher pricing premium in the market. Basmati rice works similar to wine business as the aging of rice increases its aroma and quality. The business is simple arbitrage and has a well-defined model with a long history of operations. KRBL buys quality rice paddies from farmers at low prices, processes, age them for 18-24 months and then sells Basmati rice at a premium to the market price. The company has been in operations for the last 25 years and there is an ultra-slow rate of change in this business except for cyclical nature of the paddy prices. KRBL maintains higher price premium industry wide due to the quality of their aged rice. Recently, KRBL’s most popular brand India gate was excluded from 5% GST tax in India. Thus their sales are expected to increase. Their sales have multifold 3 times in last decade whereas their earnings have 8 folded at a CAGR of 24%. The company has the lowest debt among the industry with debt to equity ratio of 0.57.
The management is smart enough to build its brand and procure paddy at lowest prices to maintain high margins. The industry does not necessarily look distressed at the moment but the company sales have flattened in last 3 years. Talking about moats, basmati rice is the highest quality rice in the world with geographic copyright for India and Pakistan only. No other country can produce Basmati rice. KRBL has the highest market share in domestic as well as international organized basmati markets. KRBL supplies high-quality seeds for basmati rice to farmers and has consistently maintained the quality of their rice through contract farming. The company is rigorously focussed on the supply chain and has a strong distribution network. Thus, a brand value as another moat allows KRBL to demand a premium over regular Basmati in the market. Moreover, the company was a leader & pioneer for introducing 1171 PUSA variant of Basmati which requires less water and has more yield per hector. This is beneficial for farmers. The company also produces value-added products such as electricity from rice husk and rice bran oils which have increased their margins over time. The company has invested in renewable energy resources such as solar and wind power of about 134 MW that have large contracts with governments and grants them tax benefits.
I have tried valuing this business with Ben Graham’s formula and estimated earnings method. There is no consistent free cash flow as the company is focussed on its growth and thus reinvests its earnings into buying larger inventory. Currently, the business looks at a discount of 25-30% compared to its intrinsic value. Rice business is dependent upon monsoon and paddy prices have fluctuated over the last 10 years. However, the company has been able to increase their margins and has built a global brand. KRBL has a largest Basmati rice milling plant in the world which is expected to run at full capacity by 2020. Basmati rice being less than 5% of global production provides a huge opportunity for growth in domestic as well as international market. Although, there is uncertainty as for how big KRBL can get and if they can maintain this growth for next 10 years.
This seems like a great buy at current prices but I could not depict how Mohnish thinks it can multifold in next 2-3 years. It would be very helpful if anyone could share their insights about the stock especially on valuing a commodity/ FMCG business that has high working capital needs.
Last but not the least, many thanks to few people I got the opportunity to discuss this stock on twitter Ankur (@ek1uno), Rohit (@rdkriplani), and Saurabh (@suru27). Also, Sangeet Lakkar New Berry Capital Analyst’s (@sangeetlakkar) insights on Bloomberg were helpful. I also found a couple of videos and a forum link on KRBL that had excellent insights about the business. Do check these out-
Disclaimer: This is not a stock tip. These are my personal opinions for educational purposes only. Anyone who invests in any company needs to do their own due diligence and are themselves fully responsible for the outcome.