Roses for greetings and Food for thought
About Karuturi’s Business
1. Company grows roses on an area of 239 hectares and has a capacity to produce 555 million Rose stems annually. It has operations in India, Kenya and Ethiopia which are low cost production bases. US, Europe and Japan are the key markets served by the company. Europe is the largest consumer for Roses and the company has 9% share in this market.
2. The game changer proposition however is company’s entry into cultivation of premium cereals, Edible oils and processed foods. Karuturi has acquired 3.11 Lac Hectares of land parcel on lease in Ethiopia for this purpose.
3. Out of above 3.11 Lac hectares, company has already started operations on 11 K hectares for maize and Rice cultivation. On the 3 Lac hectares, the company proposes to grow cereals and Oil Palm. The company plans to cover a major area of the above in cultivation in the next two years.
4. The agriculture business will primarily cater to the COMESA (Common market for Eastern and Southern Africa) which has a population base of 400 Million. Hence there is a ample market for company’s produce.
Positives
1. With ever increasing population and reducing area of cultivation due to conversion of agriculture land for habitation, there is a concern of acute food shortage in the coming future. Hence Agriculture as a business class would have excellent growth prospects. Karuturi has chosen a location which provides access to large area for cultivation at reasonable cost of access to land as well as low cost of production. Another added advantage is proximity to the consumer base.
2. The floriculture business continue to grow and is a good margin business. With recessionary trends still seen in US and European countries, Roses may provide alternatives to costly gifts. This may provide resistant to recessionary pressures of these economies.
3. The foray into agriculture would provide a significant boost to the Revenue and profits of the company and has the potential to make it a major player in this segment in next couple of years.
Major concern Areas
1. The company has embarked upon a rapid expansion plan and as such has execution risks associated with it. Any delay in execution or not being able to cultivate two crops in a year as per the plan may reduce the attractiveness of this expansion.
2. This expansion would require major capital expenditure and hence the company would need to demonstrate highly efficient use of funds.
3. Promoter stake in the company is comparatively lower at 27% and may come further down as the company would require to infuse funds for its expansion program. Lower stake of promoter in a fast expanding business may not be a looked upon as a good indicator.
The investment in Karuturi can turn out to be multi-bagger if the company is able to effectively execute its foray into the Agri business. The investment in this company may be suitable for those investors who have high risk apatite and are willing to hold on to the stock for a couple of years to reap the benefits as the company converts itself to a agriculture powerhouse. At the same time it is important for investors to monitor the developments in the stocks and take suitable actions to switch out in case of any major failure in the company’s growth plans.
Disclosure & Disclaimer : I have a small position in this stock and I can buy further or exit my position, fully or partly, based on my investment needs and may not communicate the same on this blog. This article is my opinion on the stock and should not be construed as a Buy or sell recommendation.
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