ICRA EQUITY RESEARCH SERVICE

KARUTURI GLOBAL LIMITED

January 03, 2012
Key Updates The ambitious agriculture venture of the company suffered a significant setback during Oct11 on account of a flash flood which destroyed the first maize crop in Gambella leading to an estimated loss of almost Rs 37 crore. However, on the positive side, after this setback the management has become more cautious in their approach towards agriculture expansion and is deliberating on several measures to mitigate the associated risks including increasing width of dykes and taking weather insurance. The management has also moderated its expansion schedule. Currently the company is planting 10,000 hectares in Gambella which will be followed by 20,000 hectares of plantation in May12 and 30,000-40,000 hectares in Nov12. As compared to this, the company had earlier targeted to sow almost 45,000 hectares in Gambella in May12 itself. In Bako, the agriculture operation has been smooth and the company has already harvested its first maize crop from 1,200 hectares of cultivated area. On the funding side, the challenges for the company has increased as it could not meet the pre-qualification criteria in a timely manner for draw down of sanctioned term loan of USD 180 million. The revenue and profit margin of the floriculture operation witnessed a decline in Q2FY12 on account of the re-plantation done in 15-20 hectares in Kenya. However, fundamentally the floriculture operation of the company remains stable with Karuturi maintaining its market position. Outlook: The recent flood in Gambella has highlighted the various unforeseen risk to which the company is exposed. The key risks include climatic risk, country risk, execution risk, regulatory risk and commodity price fluctuation risk (covered in detail in ICRA Online Coverage Initialization report). We however, continue to draw comfort from the various strengths of the company which among other things include the companys technically qualified team, its healthy cash flows from floriculture operation, its familiarity with operations in Ethiopia and availability of fertile land at low rentals. We therefore continue to maintain the fundamental grade of 3/5 assigned to the company. We have revised our earnings estimate considering the losses on account of recent floods and moderation in the companys expansion schedule. The key sensitivities for our earnings estimate are: (1) Significant risks associated with the foray into agriculture including execution and logistical risks (2) Adverse climatic changes resulting in lower than expected yield of agricultural and floricultural products (3) Global food and floral price fluctuations resulting in lower than expected realization from agriculture and floriculture products (4) Adverse political and regulatory changes (5) Possibility of further equity dilution (6) Inability to get timely debt funding at competitive rate Since our coverage initiation, Karuturis stock price has declined by almost 64%. As compared to this, broader indices like Nifty, CNX500, and CNX Midcap have declined by almost 15-20%. We believe that the sharp decline in the companys stock price factors in the losses incurred by the company on account of the recent floods, increase in perceived risk of the venture among the investors and the increase in funding challenges for the company. We also observe that the PE of the company based on FY11-12 earnings estimate remains almost at the same level as earlier; 4.1 times as per ICRA online revised estimates as compared to 4.2 times based on earlier estimates. We therefore continue to maintain our valuation grade of B on a grading scale of A to E, which indicates that the company is moderately undervalued on a relative basis.
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Industry: Floriculture/Agriculture

Update
ICRA Online Grading Matrix

Valuation Assessment A Fundamental Assessment 5 4 3 2 1 B C D E

3B

Fundamental Grading of 3/5 indicates good fundamentals Valuation Grading of B indicates moderately undervalued on a relative basis Key Stock Statistics Current Market Price* (Rs.): Shares Outstanding (crore): Market Cap (Rs. crore) 52-Week High (Rs.) 52-Week Low (Rs.) Free Float (%) Beta P/E on 2011-12 EPS Estimate (x) *As on January 03, 2012 4.6 80.6 371 23.6 4.0 82% 1.3 4.1

Shareholding Pattern (September 30, 2011)

O the rs 4 6 .3 %

P rom ote r & P rom ote r g rou p 1 8 .2 %

F IIs 3 5 .0 %

D IIs 0 .6 %

Share Price Movement (24 months)

ICRA Equity Research Service

Karuturi Global Limited

Key Financials (Consolidated) (Rs. crore) FY11A Operating Income 638.7 EBITDA Margin (%) 37.3% PAT Margin (%) 24% EPS (Rs.) 2.8 EPS Growth (%) -9% RoE (%) 14.7% RoCE (%) 12.3% P/E (x) 1.6 P/BV (x) 0.2 EV/EBITDA (x) 2.9 Source: Company, ICRA Online Estimates FY12E 699.6 35.0% 13% 1.1 -60% 6.3% 6.1% 4.1 0.2 3.7 FY13E 1095.6 44.8% 20% 2.8 146% 13.4% 15.6% 1.7 0.2 2.5 FY14E 1502.4 44.2% 28% 5.3 92% 21.6% 17.5% 0.9 0.2 2.1 FY15E 1914.6 42.3% 28% 6.7 26% 21.9% 18.1% 0.7 0.1 1.7 FY16E 2423.8 41.2% 29% 8.8 32% 23.2% 20.2% 0.5 0.1 1.2

Agriculture: Flash flood destroyed crop in Gambella resulting in estimated loss of Rs 37 crore Karuturi had planted nearly 12,000 hectares of Maize in Gambella this year. In the beginning of October11 however, the fields got flooded by the water from adjacent Baro river. Although the company had built dykes to protect the fields against such a incidence, the excessive flow of the river resulted in breaching of dykes and water entering the fields. This has resulted in the damage of entire maize crop which was due to be harvested in November-December of 2011. However, the sugarcane nursery (100 hectare) and palm nursery (with almost 5 lakh saplings), which are adjacent to the maize field but at a higher gradient, were not impacted by the flood. The total estimated loss on account of the flood is pegged at Rs 37 crore, 40% of which pertains to the operating cost incurred for plantation and remaining 60% to repair cost for the damage of infrastructure like dykes, drainage, canals etc. Management cautioned by recent setback; Expansion schedule moderated In response to the recent setback, the management is taking various preventive actions in consultation with agriculture and water management advisory firms like WAPCOS Limited and Water Watch to avoid such incidence in future. The company proposes to increase the base width of the dykes from 5 meters to 9 meters. Additionally, weather insurance, which was earlier not approved by the management considering the stringent conditions in the agreement which protected the insurer against settlement claim in many cases, is being reconsidered. The company has also moderated its expansion schedule and wants to grow at a slower pace. It is currently planting approx. 10,000 hectares in Gambella. Subsequently, it plans to increase the area under plantation in phases - 20,000 hectares in May12 and 30,000-40,000 in Nov12. As compared to this, the company had earlier targeted to sow almost 45,000 hectares in Gambella in May12 itself. Considering the development, ICRA Online has also revised its earnings estimates. Maize crop sowed in area of 1,200 hectares in Bako harvested Karuturi harvested 4,000 tonnes of maize crop from nearly 1,200 hectares cultivated in Bako. The realized yield of nearly 3.3 tonnes/ hectare is significantly lower than ICRA online average yield estimates of 4.5 tonnes/ hectare. However, we think that it would be premature to revise our yield estimates based on the first harvest of the company from a very small area cultivated. The yield from the next harvest in Gambella and Bako would be a key sensitivity for our earnings estimate. Development progress satisfactory hitherto The company has already invested USD 140 million in the agriculture project as compared to nearly USD 110 million spent till June 2011. It has purchased machineries of almost USD 40 million hitherto. Additionally, it has cleared almost 80,000 hectares of field out of which nearly 20,000 hectares is ready for cultivation with the infrastructure like dykes, drainage, canals etc. in place.

ICRA Equity Research Service

Karuturi Global Limited

Farm Outsourcing Model In a bid to further enhance its farming expertise and build up an ecosystem which is self sustaining in nature, Karuturi had invited farmers from Chandigarh and Punjab in order to partner with them in its agriculture venture in Ethiopia. The company has already signed agreements with almost 10 farmers and allocated them land parcels ranging from 500 hectares to 1,000 hectares. While the farmers would be taking care of the operating expenses and farming activity in their respective land parcels, the company would support them in terms of providing machinery, labour and other infrastructure. In return the company would be getting ~35% share of the crop grown by these farmers. Funding for expansion work emerges as an additional challenge The company has funded its expansion till date through a mix of debt, equity and internal accruals. Currently, the companys ability to get additional equity funding is limited given the low shareholding of the promoters (18.15%). On the debt front, the company had USD 180 million of sanctioned term loan from consortium of banks led by Axis Bank for the agriculture project. However, Karuturi could not fulfil on time an important pre-condition for disbursement of loan which stated that the company should get approval from National Bank of Ethiopia for the repatriation of proceeds from Ethiopian operation for the repayment of debt. As the disbursement of the loan could not be done on time, the earlier sanction has lapsed. Considering the above course of events, it is evident that renewal of sanction and draw down of the term loan would be challenging for the company. Although Karuturis low gearing level and healthy debt coverage ratio provides comfort, considering the high risk associated in the project and increase in the perceived risk among lenders after the recent flood would make bank funding increasingly difficult for the company. In addition to this the company would most probably have to borrow for the FCCB redemption due in Oct2012 (approx. Rs 286 crore including redemption premium of Rs 83 crore)1. This could further limit its ability to borrow for its agriculture project. ICRA Online notes that the availability of adequate funding would be critical for timely project development. Q2 Results: Revenue and profit margin of floriculture operation witnessed a decline on account of re-plantation of 15-20 hectares in Kenya During Q2FY12, floriculture continued to account for more than 95% of Karuturis consolidated revenue. The company witnessed almost 11% decline in revenue on Y-o-Y basis on account of loss of production due to re-plantation of almost 1520 hectares in Kenya. The additional cost incurred for re-plantation also resulted in drop in profit margin - operating profit margin of the business has dropped from ~37% in Q2 FY11 to ~30% in Q2 FY12 despite the promoter director of the company taking significant salary cut (~Rs 9-10 crore) considering the setback in the agriculture operations. Notwithstanding the drop in revenue and profit margin, fundamentally the floriculture business remains stable with the company maintaining its market position. Valuation Grading: B Grading retained Since our coverage initiation, Karuturis stock price has declined by almost 64%. As compared to this, broader indices like Nifty, CNX500, and CNX Midcap have declined by almost 15-20%. We believe that the sharp decline in the companys stock price factors in the losses incurred by the company on account of the recent floods, increase in perceived risk of the venture among the investors and the increase in funding challenges for the company. We also observe that the PE of the company based on FY11-12 earnings estimate remains almost at the same level as earlier; 4.1 times as per ICRA online revised estimates as compared to 4.2 times based on earlier estimates. We therefore continue to maintain our valuation grade of B on a grading scale of A to E, which indicates that the company is moderately undervalued on a relative basis.

FCCB redemption value calculated based on exchange rate of Rs 52 / USD; FCCB Issue Date: Oct, 2007; Maturity Date: Oct, 2012; Issue Size: USD 50 million; Coupon: Zero; Yield-to-Maturity: 7%; Conversion Price: Rs 19/ share; Fixed Exchange Rate for Conversion: Rs 39.73; Converted till date: USD 11 million
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ICRA Equity Research Service

Karuturi Global Limited

Company Profile
Incorporated in 1994, Karuturi Global Limited is a global market leader in the production and export of cut roses. Karuturi, has a holding company structure and operates its diversified businesses - including the flagship floriculture business, agriculture, floriculture retail, food processing and telecom (Internet Service Provider) - through its various wholly-owned subsidiaries. Karuturi has grown both organically and inorganically in the past. Its acquisition of Kenyan operations of Sher Agencies in 2007, an international floriculture player, placed Karuturi on the global map in the floriculture industry. The companys recent push into large-scale agriculture in Ethiopia is expected to catapult this business as major revenue contributor of the group in the future. Karuturi has been promoted by Mr. Sai Ramakrishna Karuturi and has a strong management team with a good mix of technical and functional expertise.
Table 09: Company Fact Sheet

Name of the Company Year of Incorporation Corporate Status Registered Office Auditors Board of Directors

Key subsidiaries/ associate companies

Karuturi Global Limited (Karuturi) 1994 Public Limited Company No. 204, Embassy Centre, 11 Crescent Road, Bangalore 560001 Ishwar & Goyal Director Name Designation Mr. Sai Ramakrishna Karuturi Managing Director Mrs. Anitha Karuturi Promoter Director Ms. Asleesha Madappa Non-executive Director Mr. Satish Caroli Non-executive Director Mr. Raja Vara Prasad Bommidala Non-executive Director Mr. Mahendra Kumar Sunkara Non-executive Director Mr. M. M. Ved Prakash Agrawal Non-executive Director Ms. Bina Dinesh Trivedi Non-executive Nominee Director Subsidiaries Karuturi Floritech P Ltd. Karuturi Telecom P Ltd. Karuturi Foods P Ltd. Karuturi Flower Xpress P Ltd. Karuturi Overseas Limited

Source: Company

Corporate Governance Karuturi is managed by a 8-member Board, which includes six independent directors and two members from Karuturi family. While the Karuturi family is closely involved in running the business, the company has a professional management structure. The promoter group holds 18.15% equity stake in the company and the rest is widely held and includes institutional investors. The company has constituted various committees, which include the Audit committee, the Remuneration Committee and the Investors Grievance Committee.

ICRA Equity Research Service

Karuturi Global Limited

Annexure 1: P&L Estimates (Consolidated) Rs Crore FY10A FY11A FY12E FY13E FY14E FY15E FY16E

Net Sales Other Related Income Operating Income

527.6 6.2 533.8

633.2 5.5 638.7

696.3 3.3 699.6

1092.3 3.3 1095.6

1499.1 3.4 1502.4

1911.2 3.4 1914.6

2420.4 3.4 2423.8

EBITDA Depreciation EBIT Interest Expenses Other Income Extraordinary Gain/ (Loss) PBT PAT Minority Interest PAT (Concern Share) No of shares (Cr) DPS EPS CEPS Source: ICRA Online Estimates

192.1 37.9 149.2 6.5 12.9

238.3 47.6 173.7 17.4 6.5

244.8 85.0 152.0 25.5 6.3 (40)

490.6 132.7 346.0 124.1 2.3

664.1 167.4 484.8 54.0 2.3

810.8 199.8 599.1 57.1 2.3

999.0 228.2 768.0 51.1 2.3

142.8 143.4 0.0 143.4 46.8 0.1 3.1 4.1

156.4 155.0 0.0 155.0 57.4 0.2 2.8 3.6

91.2 90.3 0.0 90.3 80.6 0.1 1.1 2.2

224.3 222.1 0.0 222.1 80.6 0.1 2.8 4.5

430.8 426.5 0.0 426.5 80.6 0.1 5.3 7.4

542.0 536.6 0.0 536.6 80.6 0.1 6.7 9.2

716.9 709.7 0.0 709.7 80.6 0.1 8.8 11.6

Note 1: Amounts are presented in Rs. Crore; EBITDA: Earnings Before Interest, Tax, Depreciation and Amortization; EBIT: Earnings Before Interest and Tax; PBT: Profit Before Tax; PAT: Profit After Tax; DPS: Dividend Per Share; EPS: Earnings Per Share; CEPS: Cash Earnings Per Share Note 2: Growth in revenue in FY12 is mainly on account of Rupee depreciation. Conversion rate assumed for FY12 and onwards: 1 USD = Rs 52 Note 3: 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. However, given the scale of projects and risks involved, as well as inherent volatility in prices of agricultural commodities, the company's ability to achieve the projected returns remain to be seen.

ICRA Equity Research Service

Karuturi Global Limited

Annexure 2: Balance Sheet Estimates (Consolidated) Assets (Rs Crore) FY10A FY11A FY12E FY13E FY14E FY15E FY16E

Net Fixed Assets Capital Work-in-Progress Total Net Fixed Assets

982.8 130.8 1113.6

1305.8 156.5 1462.4

1638.5 180.9 1819.4

1955.8 180.9 2136.7

2258.0 180.9 2438.9

2479.3 180.9 2660.2

2663.5 180.9 2844.4

Other Long-Term Investments Cash and Bank Balances Receivables Inventories Loans & Advances Other Current Assets

1.3 63.2 119.1 17.3 45.5 6.0

2.8 230.2 126.7 37.7 108.7 6.6

2.8 50.0 193.0 48.9 126.4 0.0

2.8 50.0 319.3 96.4 197.9 0.0

2.8 50.0 446.8 179.7 271.4 0.0

2.8 50.0 576.7 274.1 345.8 0.0

2.8 50.0 734.2 388.9 437.8 0.0

Total Assets Liabilities (Rs Crore)

1366.1 FY10A

1975.1 FY11A

2240.5 FY12E

2803.1 FY13E

3389.5 FY14E

3909.7 FY15E

4458.1 FY16E

Net Worth Minority Interest Total Debt Deferred Tax Liability Trade Creditors Other Current Liabilities and Prov.

819.3 0.0 439.7 -0.6 85.2 22.5

1294.4 0.0 558.5 -0.2 82.4 39.9

1554.2 0.0 575.9 0.0 89.1 21.3

1767.0 0.0 908.0 0.0 106.8 21.3

2184.2 0.0 1054.4 0.0 129.6 21.3

2711.6 0.0 1020.4 0.0 156.4 21.3

3412.0 0.0 838.3 0.0 186.5 21.3

Total Liabilities

1366.1

1975.1

2240.5

2803.1

3389.5

3909.7

4458.1

ICRA Equity Research Service

Karuturi Global Limited

Annexure 3: Cash Flow Estimates (Consolidated) Cash Flows (Rs Crore) FY10A FY11A FY12E FY13E FY14E FY15E FY16E

PBT Taxes Paid Depreciation Change in net working capital Cash flow from operating activities

142.8 0.1 55.6 69.0 267.2

156.4 1.0 61.9 (80.4) 136.7

91.2 0.9 99.1 (100.2) 89.2

224.3 2.2 146.8 (227.7) 141.2

430.8 4.3 181.5 (261.5) 346.6

542.0 5.4 214.0 (272.0) 478.6

716.9 7.2 233.2 (334.2) 608.7

Investments Capital Expenditure Cash flow from investing activities

(0.1) (351.8) (352.0)

(1.5) (410.6) (412.1)

(0.0) (456.2) (456.2)

0.0 (464.1) (464.1)

0.0 (483.7) (483.7)

0.0 (435.3) (435.3)

0.0 (417.4) (417.4)

Equity Raised / (Buyback) Loans Raised / (Repaid) Others (Including Extra-ordinaries) Dividend Cash Flow from Financing activities

118.4 (27.1) 1.7 (4.5) 88.5

380.3 118.8 0.0 (6.1) 493.0

0.0 17.4 0.0 (9.4) 8.0

0.0 332.1 0.0 (9.3) 322.9

0.0 146.4 0.0 (9.3) 137.1

0.0 (34.0) 0.0 (9.3) (43.2)

0.0 (182.1) 0.0 (9.3) (191.4)

Cumulative cash flow Opening Cash Balance Changes in Retained Earnings* Closing Cash Balance

3.8 42.4 17.0 63.2

217.7 63.2 (50.7) 230.2

(359.0) 230.2 178.9 50.0

0.0 50.0 (0.0) 50.0

0.0 50.0 (0.0) 50.0

(0.0) 50.0 (0.0) 50.0

0.0 50.0 0.0 50.0

* Mainly on account of changes in foreign exchange translation reserve

ICRA Equity Research Service

Karuturi Global Limited

Annexure 4: Key Financial Ratios (Consolidated) Key Financial Ratios FY10A FY11A FY12E FY13E FY14E FY15E FY16E

Growth Indicators Sales Growth EBITDA Growth EPS Growth Cash EPS Growth 22% 39% -5% 39% 20% 24% -9% -12% 10% 3% -60% -38% 57% 100% 146% 100% 37% 35% 92% 67% 27% 22% 26% 24% 27% 23% 32% 26%

Profitability Indicators EBITDA Margin EBIT Margin PAT Margin RoE ROCE 36.0% 28.0% 26.9% 21.0% 15.0% 37.3% 27.2% 24.3% 14.7% 12.3% 35.0% 21.7% 12.9% 6.3% 6.1% 44.8% 31.6% 20.3% 13.4% 15.6% 44.2% 32.3% 28.4% 21.6% 17.5% 42.3% 31.3% 28.0% 21.9% 18.1% 41.2% 31.7% 29.3% 23.2% 20.2%

Liquidity Ratios Debtor Days Inventory Days Net Working Capital/ Sales 82 30 0.2 73 53 0.3 101 78 0.4 107 95 0.5 109 114 0.5 110 127 0.5 111 135 0.6

Capitalization Ratios Total Debt/ Equity Interest Coverage Total Debt/EBITDA 0.5 29.6 2.3 0.4 13.7 2.3 0.4 11.8 2.4 0.5 4.0 1.9 0.5 12.3 1.6 0.4 14.2 1.3 0.2 19.5 0.8

Valuation Ratios Price/Sales Price/Earnings Price/Book Value EV/EBITDA 0.41 1.5 0.3 0.42 1.6 0.2 2.9 0.53 4.1 0.2 3.7 0.34 1.7 0.2 2.5 0.25 0.9 0.2 2.1 0.19 0.7 0.1 1.7 0.15 0.5 0.1 1.2

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