Analysts wary of ‘stretched’ KRBL, ace buyers lap it up
MUMBAI: Value investors prefer buying stocks that are least favoured by most in the market. So, when Mohnish Pabrai, a US-based value investor with a wide following, bought a stake in rice exporter KRBL on Monday, it raised eyebrows. Why has Pabrai bought KRBL, a stock that has soared 2,390 per cent in the past five years, and is considered richly valued after the run-up?
That’s the question many in the market are asking. Nonetheless, his purchases lifted the stock by 6.4 per cent to Rs 637.45 on Wednesday.
A stock exchange disclosure on Monday said Pabrai’s funds bought 2.7 per cent stake in the company on Monday at Rs 594 per share. He joins the list of foreign institutions and rich individuals including Anil Kumar Goel who own stakes in the company. Goel and his wife, Seema, who have held the stock for a while, own 5 per cent in the company.
The investment by Pabrai’s funds is an example of moat investing, an investment strategy popularised by Warren Buffett. In this approach, investors identify a company in sectors where competitors find it tough to replicate the strong earnings growth and margins for a long time.
“Basmati rice is a daily consumable, requires ageing cycle of 18-24 months, huge inventory holding power by serious players and a brand to sell to consumers. Very few companies in India pass this difficult litmus test. This is the real moat in the business,” said Manish Bhandari, CEO at Vallum Capital, a Mumbai-based portfolio manager.
The stock is now 5.6 per cent away from the 52-week high level of Rs 673 that it had hit on December 21 last year.
KRBL’s net profit rose to Rs 399.4 crore in the financial year ended March 2017 from Rs 73 crore in FY12, while net sales improved to Rs 3,149 crore from Rs 1,631 crore in FY12.
Despite the strong earnings performance, analysts said valuations of KRBL are stretched. “At this stage the stock is overvalued. The stock needs to correct to become more reasonably valued,” said investment advisor Sandip Sabharwal who sees the fair value of the stock at Rs 450.
G Chokkalingam, founder, Equinomics Research & Advisory said the fair value of the stock is between Rs 475 and Rs 500.
“From the low of 2014, the stock has multiplied nearly 20 times and valuations are stretched at over 30 times PE. Retail investors should be cautious,” he pointed out.