Saturday, February 16, 2013

Why Karuturi Global’s Q3 Results is Unimpressive

By A Vidya, Staff Reporter:
Saturday, 16th February 2013, 07:50 PM IST:

Karuturi Global Ltd (BSE: 531687, NSE: KGL), the India headquartered floriculture and agriculture company with its main operations in Kenya and Ethiopia, has published its Q3 financial results on BSE and NSE.

The highlight of this latest set of numbers is, however, delivered as the last footnote in the filing at exchanges.

This footnote reads as, “The Company's agri project in Ethiopia has commenced commercial production and first crop revenue stands at USD 5.2 million.”

Public and retail investors who have been holding majority stake in the firm for long, have been anxiously waiting for the numbers from Karuturi Global’s agricultural foray in Ethiopia.

This has been the floriculture company’s third major agricultural harvest of maize in Ethiopia, but the first harvest was lost to floods in late 2011, and the second harvest was used for seeds.

The Q3 headlines numbers are impressive, but when one delves deeper it has clearly not kept up with the guidance and expectations.

Because, speaking to Business Standard newspaper on September 3rd 2012, Sai Ramakrishna Karuturi, CMD of Karuturi Global, had guided about this third and latest harvest which was upcoming back then, “…we are now ready with a decent harvest here and even the prices are firming up admirably. We should be adding as much as $12 million to our bottomline during the third quarter of FY13”.

Though it was very doubtful whether a profit of $12 million was ever possible from a 5000 hectare harvest of corn, many investors were hoping that at least a topline of $12 million would be somehow posted by the company, maybe through expanded acreage.

But this hope has been dashed now as the agri topline has come in at only Rs. 5.2 million which is around Rs. 28 crore only, at current exchange rates.

Though Karuturi Global has not disclosed at the exchanges on what acreage this revenue was obtained, and what was the yield, a subsequent newspaper advertisement given out by the company discloses that the acreage was lower than announced earlier, at 10,000 acres which is around 4047 hectares.

The ad also reveals that the total output from the harvest was 21,000 tonnes, which works out to a yield of 5.19 tonnes/hectare which is reasonable, if not outstanding. 

However, the price obtained which works out to around $248 per ton seems to be much on the lower side when compared with publicly available Ethiopian and East African maize prices for that period, which quoted between $312-325 per ton. 

Also, a report by rating agency ICRA, which was commissioned by Karuturi and came out in late September, had quoted prices at $330 per ton. The company has not clarified in the Q3 results on why it could sell at only a 25% reduced price from the market rate.

If the price realization was at $325 per ton, the difference of $77 per ton would have contributed an additional $1.62 million to the topline.

However, an equally big loss is from the reduced acreage. The same commissioned ICRA report, which came out on September 27th 2012, clearly mentions that the current wet season harvest was for 5000 hectares. ICRA discloses in its report that, “In projecting the company's performance, ICRA Online has primarily relied on the inputs provided by the company, which have been validated to the extent possible from independent sources.”

The loss of crop from 953 hectares, which is around 20% of the expected harvest, has not been explained in the Q3 results. This alone amounts to around 4946 tons, which at $325 per ton would have contributed another $1.61 million more to the topline.

Despite floriculture and agriculture being two separate business segments, Karuturi Global’s Q3 results doesn’t provide segment-wise results. In fact, apart from the last footnote regarding the revenue from agriculture, there is no other mention of either the agricultural output or the profits from this segment. 

It is not even known whether the agricultural revenue has been added to the total sales revenue. However, this can be assumed, keeping in mind CMD Sai Ramakrishna Karuturi’s earlier cited view that agricultural numbers would be reflected in Q3 results.

Assuming this, however, the quarterly performance of Karuturi Global doesn’t come across as impressive.

The headline numbers, of course, are reasonable, as on a year-on-year basis,  sales revenue has grown from Rs. 142.43 crore to Rs. 167.68 crore, which is a rise of Rs. 25.25 crore.

But with revenue from the new agriculture harvest contributing around Rs. 28 crore, it is clear that the core floriculture business has actually witnessed a YoY sales de-growth despite the quarter benefiting from the Christmas season. Because of this, the 17.73% year-on-year growth in revenue doesn’t come across as impressive.

Net profit has grown year-on-year by a reasonable 34.40%. However, the profitability from the agricultural operation nor its accounting treatment is mentioned. 

Since the core floriculture sales is down YoY, and the total expenses has not gone up significantly, there is a chance that much of the expenditure for the Q3 crop would have been incurred in Q2, Q1, or even Q4 of earlier fiscal. Karuturi Global had posted poor profits in Q2 and Q1, and exceptionally high expenses in Q4.

In other words, the current Q3 profit is attributable to more than this quarter. With only two crop seasons per year, it should be attributable to at least two quarters.

However, the key takeaway from Karuturi’s Q3 numbers is that, as earlier noted, both the topline and bottomline would have been much higher if all the 5000 hectares had yielded results, and the price realization was at $325 per ton.

If that were the case, the topline would have been higher by $3.23 million or Rs. 17.44 crore, by recording a total revenue of $8.43 million (or Rs. 45.52 crore) and net profit too proportionately higher. This was especially needed as the only two quarters with harvests-to-report need to post maximum profits to even out the other two quarters’ low profitability.

Limiting losses and maximizing profitability is also of mission-critical importance to Karuturi Global now as it is facing a mounting debt burden due to a default on an FCCB amounting to Rs. 332.5 crore, which is now almost four months past redemption date. The company’s consolidated 9-monthly profit is now at Rs. 89.53 crore, which when annualized comes to just Rs. 120 crore, with the defaulted FCCB amount being 2.77 times higher than this. 

Despite the urgent and serious nature of this FCCB default, the company has not mentioned anything about efforts to resolve the same with bondholders.

ICRA further notes in its report that Karuturi Global is also facing a sharp jump in contingent liabilities of around Rs. 156 crore due to tax claims by India and transfer pricing claims by Kenya. To quote from the rating agency’s report, “In case these contingent liabilities materialize, the company’s networth would get significantly eroded.”

The rating agency also notes why return on capital would suffer: “Against planned capex of USD 209 million (~Rs 1150 crore) for cereal production in 80,000 hectare land, as per ICRA estimate the company has already incurred a capex of almost Rs 1000 crore. Adequate return on the significant capital investments done by the company is not expected in near to medium term. This of due to the company’s moderated development / cultivation plan.”