KRBL Limited: Mohnish Pabrai’s big bet

1. Is the business simple and understandable?
Yes. KRBL is the world’s larget exporter of basmati rice. Its flagship brand ‘India Gate’ is the market leader in 73 countries. It has two plants with a combined milling capacity of 195 MT per hour. Its warehouses have a total storage capacity of 600,000 MT.

2. Does the company have a consistent operating history?
Yes. KRBL is the fully integrated rice company in India since 1993. It has great credibility in the market, and pays the farmers within 24 hours.

3. Does the business have a sustainable competitive advantage?
Yes. Basmati rice is just 2% of total rice production in the World. Basmati is grown only in India (70%) and Pakistan (30%), with Indian Basmati being superior in quality. Basmati is highest quality and high valued product, not commodity. KRBL has 25% market share in branded basmati rice exports and 30% market share in India. It supplies 34% of the basmati seed supply in India.

4. How good is management at allocating capital?
Good. KRBL’s return on equity has increased from 20% to 24% over the past 5 years.

5. What are the risks?
High working capital requirements due to inventory as Basmati needs to be aged for 18 months.

6. Does the business operate in a good or bad industry?
Basmati rice industry has huge entry barriers for new entrants.

7. Does the company earn high profit margin?
India Gate Classic is priced at a 15% premium over its competitors. The profit margin of KRBL is 20%. The profit margin of LT Foods is 7%.

8. Does the company generate strong free cash flow?
Yes. KRBL has generated Rs 266 crore of cash in 2017. The cash flow has doubled over the past 5 years.

9. Can you sensibly estimate future earnings for next five years?
KRBL has compounded revenue and profit at 14% and 40% respectively over the past 5 years. KRBL’s earnings are expected to grow 14% CAGR over next 5 years.

10. What is the reasonable price?
Historically, KRBL has traded in the P/E range of 18x to 24x. At the CMP of Rs 600, the rate of return is 5.3% based on pre-tax earnings to market cap. It’s available at 4.3 times of sales to market cap.

 

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