Karuturi needs more funds to bloom

Karturi Global, a niche player in floriculture, has been witnessing high investor interest. The Rs 600-crore company plans to foray into agriculture for products such as maize, palm oil. This ambitious strategy is expected to increase the funding needs, thereby diluting its earnings per share. 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. The company has spent more than Rs 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 huge magnitude of the agriculture business that the company wants to achieve, it may have to further raise money from external sources either through debt or equity or both. This may dilute the earnings per share 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 Rs 12 crore in November 2006 to Rs 62 crore as on date. 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.

According to the trend in the past few years, demand in the second half of the fiscal is better due to higher offtake of roses for events such as Christmas and Valentine’s Day. In the second half, the management expects a Y-o-Y growth of 10-15% in its floriculture business. The company also expects around Rs 40 crore of revenue from its agriculture business.

Despite Karuturi’s stagnant earning per share (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 the number of risks such as country risk, execution risk, dilution risk and forex risk, the valuation enjoyed by the stock looks high, at least as of now.

Of this, it plans to develop 70,000 hectares of land for maize and 20,000 for palm oil over the next three years.