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Monday, January 14, 2008

Rosy Future - Stock Focus - Karuturi networks

At the start of 2007, Dawnay Day said that Karuturi Networks was a small-cap to watch out for. Now, at the end of the year, news reports state that George Soros has picked up 1.4 million shares in this Bangalore headquartered company. If so, then the Soros-led Quantum fund would hold a stake of around 4.6 per cent in the company.

This has turned out to be an exciting year for India's largest floriculturist company. The company wanted a stronger foothold in Africa and this year it realised its goal. Growing roses in Africa is a good deal considering the suitable climate, cheap farmland and labour costs, and advantages in trading with the US and the European Union, the primary markets for roses in the world. African countries need not pay any duty for exporting roses to Europe, while Indian exporters have to pay 10 per cent levy. Karuturi Networks was already the largest exporter of roses from Ethopia and has the biggest greenhouse in Ethopia for roses. In 2007, it acquired Dutch floriculture major Sher Agencies, which owns large farm land in Kenya, in a $69 million deal. That catapulted it from the fourth largest to the world's largest rose producer. The firm aims at increasing its production to 1 billion rose stems per annum.

The global floriculture market is estimated to be $80 billion and India's share is miniscule. And Karuturi has ambitious plans. They want to come up with greenfield projects in Vietnam and Cambodia to get a stronger foothold in the Asian markets. They are also considering a substantial pan-India presence. Total revenues have risen from Rs 53.93 million (March 2004) to Rs 1017.70 million (March 2007). Profit after tax (PAT) has moved from Rs 7.35 million (March 2004) to Rs 392.59 million (March 2007). However rosy the fortunes of the company may appear, this business does have its share of risks. There are many external variables in the form of climate, water supply, labour, perishability, short shelf-life, transportation and logistics which can destroy all well cultivated plans and play havoc with the profits. Also, they recently raised significant amounts of money in the form of External Commercial Borrowings (ECB) and Foreign Currency Convertible Bonds (FCCB) for the acquisition and expansion plans. A lot will depend on the management bandwidth to bring its vision to pass.

All said and done, this is one stock to look out for. Incidentally, just one mutual fund owned this stock as on October 31, 2007. Sundaram BNP Paribas Select Small Cap had 0.98 per cent of its assets in Karuturi Networks.
 

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