This article provides in-depth fundamental analysis of KRBL Ltd, world’s largest basmati rice producer and exporter company owning the well-known India Gate basmati rice brand.
KRBL Ltd Research Report by Reader
Q: Dr. Vijay Sir, Can you please evaluate the company KRBL Ltd ,which is a food processing company.
The details are mentioned below:-
- Market Cap: ₹ 4,909.27 Cr.
- PEG Ratio: 0.68
- Debt to equity: 1.07
- Current Price: ₹ 208.55
- Book Value: ₹ 58.56
- Stock P/E: 14.60
- Dividend Yield: 0.82%
- Compounded sales growth of the company past ten years is 17.55%
P.S: I am a newbie in investing, so I hope I may receive you’re expert advice and gain some insights from your analysis.
Dr Vijay Malik’s Response
Hi, Thanks for your writing to me!
Let us analyse the past consolidated financial performance of KRBL Ltd.
Financial Analysis of KRBL Ltd:
KRBL Ltd, named after founder promoters, Khushi Ram and Behari Lal, has been growing its sales at a moderate pace of 15-20% year on year for last 10 years (FY2006-15). It is important to notice that the operating profit margins (OPM) of KRBL Ltd have been stable in the range of 14-15% over the years. This is a very good sign considering that the main product of the company “Rice” is an agricultural commodity where wide fluctuations in the raw material prices is very common.
Stable operating margins speak about the strength of its rice brand “India Gate” where KRBL Ltd is able to pass on the input cost escalations to the end consumers and protect its profitability margins. Brand India Gate commands premium over its peers and sells at a significantly higher price than other brands. The following chart from FY2014 annual report of the company tells the story:
KRBL Ltd is not paying tax at the standard corporate tax rate applicable in India. Its tax payout ratio has been varying from 17% to 33% over last 10 years. An investor should study about the tax incentives, if any, that KRBL Ltd has received from govt. and about the expiry periods of the same.
Varying tax payout ratio has led to the net profit margins (NPM) of KRBL Ltd have been varying a lot over last 10 years. NPM has been fluctuating from 4% to 10% over the years mostly in tandem with the change in tax payout ratio.
Operating Efficiency Analysis of KRBL Ltd:
Operating efficiency parameters of KRBL Ltd reflect that almost all the parameters have been fluctuating but remaining in a range bound level over the years. Net fixed assets turnover has been varying from 4.06 to 5.90 over the years, with no significant improvement over the years.
Receivables position of KRBL Ltd is following a cyclical pattern with movement between 30-40 days over the years. Similarly, inventory turnover ratio of KRBL Ltd has been varying from 1.3 to 2.0 over the years but with no significant improvement over the years. Inventory turnover ratio has also been showing cyclical patterns by increasing from 1.4 in FY2007 to 2.0 in FY2010, then falling to 1.3 in FY2012 and again increasing to 2.0 in FY2014.
This pattern in the inventory turnover ratio indicates that the company is exposed to commodity cycles prevalent in its inputs industry.
Inventory turnover of 1.3-2.0 are very low if compared with other industries indicating that the rice processing business is highly working capital intensive. This conclusion seems right when we understand that the business of KRBL Ltd involves buying the requirement of rice for the entire year within a short paddy season of October to December every year. On top of it, KRBL Ltd needs to store the rice for 12-18 months for aging it to command better realizations.
ICRA in its rating rationale for KRBL Ltd, has clearly highlighted the working capital intensive nature of its business. Let us see the following extract from ICRA rationale:
“The raw material intensity of the business is high on account of procurement of the entire year’s paddy requirement during the period from October to December coupled with the ageing requirement of basmati rice for a period of 12-18 months (to improve the realisation). This leads to high working capital borrowings, at the same time exposing the company to volatility in paddy prices, which are determined by demand and supply forces. Moreover, the company is exposed to adverse currency movements, since exports contribute to more than 50% of KRBL’s revenues.”
The working capital intensive nature of the business of KRBL Ltd has resulted in most of its profits getting stuck in the inventory to generate future growth and it is not able to convert its profits into cash flow from operations.
When we analyse the cumulative profits and cash flow data for last 10 years (2006-15), we realize that during these years, KRBL Ltd had profit after tax (PAT) of INR 1,226 cr. whereas the CFO over the similar period has been INR 640 cr.
KRBL Ltd has the largest rice milling capacity in the world at 195 MT/hour, whereas for last several years, the milling capacity at its Dhuri plant, which started operations in 2005, has not been utilized fully. Therefore, KRBL Ltd has to continuously keep investing in supporting infrastructure like covered godowns, silos etc. to utilized its Dhuri plant capacity fully. As per FY2014 annual report of KRBL Ltd:
“We are already the largest millers of rice in the world with a capacity to mill 195 MnT per hour. The focus in the coming years will be on to increase infrastructure facilities such as covered godowns, silos etc. so as to raise the capacity utilization by increase in procurement of Paddy. We expect that the Dhuri Plant to achieve 100 percent capacity utilization in the coming 2-3 years.”
Free Cash Flow Analysis of KRBL Ltd:
The continuous requirement of investment in its plants has made KRBL Ltd do a capex of INR 940 cr. over last 10 years (FY2006-15). However, when we notice that the cash flow from operations over last 10 years (FY2006-15) was only INR 640 cr. then we can conclude that the company would have to rely on alternate sources of money (like equity and debt) to fund the requirements of growing business.
KRBL Ltd has been tackling the situation of negative free cash flow (FCF): – INR 300 cr (640-940) coupled with continuous dividend payout history (cumulative dividend of INR 133 cr. over last 10 years) by raising debt on its books. Debt levels of KRBL Ltd have been increasing year on year. Total debt of KRBL Ltd has increased from INR 452 cr. in FY2006 to INR 1,281 cr. in FY2015.
It can be inferred that effectively, KRBL has been paying dividend to its shareholders from borrowed money, which is not a good sign.
Increasing debt levels with growing business are the features of companies operating in capital-intensive businesses.
Investors should be cautious of investing in companies, which have continuously increasing debt levels, as high debt has the potential of increasing the risk of bankruptcy and reduced profitability under tough business conditions.
You should read the analysis of two other companies: Metayst Forgings Ltd (erstwhile Ahmednagar Forgings Ltd) and Castex Technologies Ltd (erstwhile Amtek India Ltd), to understand the impact low fixed asset turnover can have on the debt levels of companies. You may read their analysis here:
- Analysis: Metayst Forgings Ltd (erstwhile Ahmednagar Forgings Ltd)
- Analysis: Castex Technologies Ltd (erstwhile Amtek India Ltd)
Margin of Safety in the market price of KRBL Ltd:
KRBL Ltd is currently available at a P/E ratio of about 16, which does not offer any margin of safety as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, KRBL Ltd seems to be a company growing at a moderate pace of 15-20%, which enjoys good value for its brands like India Gate basmati rice and thereby maintaining its operating profitability margins. However, the working capital intensive nature of its operations has resulted in most of its reported profits getting stuck in its inventory. Therefore, KRBL Ltd has to borrow funds from lenders to meet the gap for its capex and paying dividend to its shareholders.
The high raw material intensive nature of its operations is unlikely to change in future on account of it being agro-commodity in nature. However, KRBL Ltd has been diversifying its bets by investing in its energy division.
KRBL Ltd has created a renewable energy portfolio of 98.60 MW until FY2015 consisting of wind, solar and biomass based power plants. As per FY2015 annual report, KRBL Ltd is self-sufficient in its energy requirements. Moreover, the energy division constituted about 15% of cash profits of the company. It remains to be seen whether the energy division can bring the company out of negative free cash flow zone to generate net positive FCF in future.
KRBL Ltd being largest exporter of basmati rice and Iran being one of the largest importers of basmati, Iran formed one of the major export destinations for the company. Over last few years, the reduction on export of rice to Iran had an impact on its export earnings. As per FY2015 annual report:
“Though basmati exports to Iran declined about 35% y-o-y, to around 9,35,000 tonnes, exports to other destinations like US, Saudi Arabia and other Western countries increased significantly, resulting in total exports declining only marginally…”
Recent developments related to lifting of sanctions on Iran are expected to impact KRBL Ltd’s exports to Iran positively. An investor should keep a watch on related development about KRBL Ltd.
These are my views about KRBL Ltd. However, you should do your own analysis before taking any investment related decision about KRBL Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above in my portfolio.