Stock Review: Karuturi Global

Floriculture Player Plans Agri Foray, Higher Funding Needs May Hit EPS

 

KARUTURI Global, a niche player in floriculture, has been attracting a lot of interest from investors.

   The . 600-crore company plans to enter agriculture for products such as maize and palm oil.

   This ambitious strategy is expected to increase the company's funding needs, thereby diluting its earnings per share (EPS). This may even make its current valuations unviable in the medium-term.

   The company has acquired over 3 lakh hectares of land on lease in Ethiopia and has also spent more than . 1,000 crore for acquiring fixed assets over the three years ended FY10. Karuturi is also planning to increase the capacity of its floriculture business by 30% by FY12-end.

   Though the floriculture business generates cash, it won't be able to finance the greenfield agriculture project entirely.

   Considering the magnitude of the agriculture business that the company is seeking to achieve, it may have to further raise money from external sources either through debt, equity, or both. This may dilute the EPS, and rising debt would increase interest outgo, thereby reducing margins until the agro business starts generating a strong cash flow.

   Over the past four years, the company's equity base has increased more than five-fold from . 2 crore in November 2006 to . 62 crore now. Recently, it raised $22 million through a GDR issue.

   The company is also in talks with various banks to raise debt. Currently, its debt-equity ratio is 0.5.

   Going by the trend in the past few years, demand in the second half of a fiscal is usually better due to higher offtake of roses for events such as Christmas and Valentine's Day. In the second half of the current fiscal, the management expects a year-onyear growth of 10% to 15% in its floriculture business.

   The company also expects a revenue of close to . 40 crore from its agriculture business.

   Despite Karuturi's stagnant EPS in the past few quarters, its stock price movement has been quite volatile. The stock trades at FY11 estimated price-earning multiple of 8.3 after anticipating an optimistic growth of 15% in its EPS.

   Karuturi operates greenfield projects in the African countries, which are politically not stable.

   Considering risks relating to country, execution, dilution and forex, the valuation enjoyed by the stock appears high, at least as of now.