2 Reasons Why I Didn't Recommend KRBL After Mohnish Pabrai Invested in It - The 5 Minute WrapUp by Equitymaster
Free Reports

2 Reasons Why I Didn't Recommend KRBL After Mohnish Pabrai Invested in It

Jun 29, 2018

Editor's note: Dear reader, we are celebrating 500,000 downloads of the Equitymaster Android App! Thank you for your support. To show our appreciation, we have a great offer for you. If you download the Equitymaster Android App... you will be immediately eligible to receive our premium report - How to Pick Money-Spinning Stocks Like Warren Buffett (worth Rs 950) for FREE! This is in addition to the complete Equitymaster experience on your Android smartphone. All our recommendations, two e-newsletters - The 5 Minute WrapUp and Profit Hunter - Chart of the Day, Intelligent Portfolio Tracker, the daily market commentary and more. If you're reading this on your mobile, head over to Google Play Store and download the app right away!


Kunal Thanvi, Research analyst

The mood in the share market in India is getting worse with every passing day.

Small and midcaps in particular are facing the heat. Their poor corporate governance practises are being exposed.

Did you know that more than 100 stocks have fallen as much as 60% from their peaks?

Some people have started calling it the end of the bull market and start of a bear phase.

I believe, the real pain in the small and mid caps is yet to come. The on-going correction is happening in those companies with bad corporate governance behaviour and questionable financials.

But, I'm not going to talk about that today.

To be honest, I'm feeling quite lucky.

Why?

In markets like these, the worst mistake you can make is to stick with a company with questionable management and corporate governance.

--- Advertisement ---
Grab Reliable Small Companies Before Others Find Out About Them

Did you ever find yourself thinking, "We wish we had invested in Titan while it was still young?" Or even in Pidilite for that matter?

These were once-unknown-small companies that have grown rapidly in the last decade to become household names in India today. But there was no way you could have known that sooner… until now…

Through our Hidden Treasure service, we're providing opportunities like that today.

Click here to know all about Hidden Treasure…
------------------------------

I've just side-stepped a big mistake.

Few months back, super investor Mohnish Pabrai, via a block deal, acquired a chunk of shares in Delhi based KRBL Ltd.

The company is the market leader in the basmati rice industry.

It has a strong brand recall for its product, 'India Gate'.

I'll be honest...I've always liked KRBL. It has, over the years, created a niche for itself in an otherwise commoditised rice industry.

In fact, it is one of the few players globally supplying high quality basmati rice.

Even though, at that time, some super investors held quite a big chunk in the company, I was not comfortable with the valuations. The stock was trading around Rs 600 levels back then. Its PE ratio of 32 was too high.

Have You Heard About India Gate Rice?

But, when Mohnish Pabrai did the block deal, I got excited and looked at the stock again.

Fortunately, two things stopped me from recommending it to my Smart Money Secrets subscribers:

  • Increase in Basmati Production: Last year was a dream year for basmati rice producers with paddy prices toughing life time highs.

    This was due to the reduction in the area under cultivation for basmati by the Government of India. Lower production led to high prices.

    However, this year, the government has again increased the area under cultivation for basmati rice.

    I thought, this would normalise the paddy and basmati rice prices. That would bring an end to the euphoria.

  • Lack of Margin of Safety: I thought, even though the business was quite strong, the run up in 2017 was not justified and the stock would need to fall to be a good investment.

Well, that's it. These two simple points stopped me from recommending KRBL.

Fast forward to today...

There are some interesting facts coming out about the company and the deal Pabrai was doing.

It turns out that Pabrai is lucky. The deal was never completed. He wanted to take a 2.7% stake in the company. That's massive.

However, Enforcement Directorate (ED) cancelled the deal.

This was in the wake of an investigation into a former KRBL director Gautam Khaitan. He is alleged to be a part of the bribery scandal in the purchase of helicopters from Agusta Westland.

Further, as per SundayGaurdianlive.com, the Enforcement Directorate believes KRBL's wholly owned subsidiary (incorporated in 2006, and sold to promoter's nephews), KRBL Rawasi Al Khaleej General Trading (RAKGT) played a role in the entire money laundering exercise.

It received a massive sum of Rs 11 billion from various other companies which was meant to be paid as a bribe. The company has denied this charge.

While, the courts are on the case the stock has corrected more than 40% from his deal price. It is trading at about Rs 325. Its PE ratio is about 17.

With a positive bias for the company I started looking at KRBL again after this correction.

But this time it was like a crime scene, and being a Sherlock Holmes fan, I wanted to be extra sure about the company.

What I found this time is even more dangerous.

The auditors of KRBL are the Bindal Brothers (Vinod Bindal and Sanjeev Bindal).

Back in 2014, the CBI restrained them from working with the government and its officials. The CBI suspects they manipulate contracts and government functioning.

Unfortunately, not many people know about the history of auditors of KRBL. And when things like this come out in to the open... the situation looks even worse.

I still believe KRBL is a strong business with a competitive advantage. But these developments will stop me from considering it for my Smart Money Secrets subscribers.

I may be wrong on this one.

That's fine. I would love to be wrong than right with these serious issues on my mind.

Happy Quality Investing!

Chart of the Day

Apart from Mohnish Pabrai, super investor Anil Kumar Goel holds arounds 5.2% in KRBL ltd.

KRBL is already a multi-bagger for Anil Goel. And he has, over the years, increased his stake in the company.

In fact, KRBL has created a lot of wealth for both big and small investors.

However, in the light of recent events, the stock has corrected more than 40% from its peak.

The big question - Is the recent correction a good opportunity to consider buying?

After all, it's a strong business and one of the largest basmati rice companies in the world.

This is a Crime Scene. Hire a Sherlock Holmes Before You Buy

Well, being a Sherlock Holmes fan, I treat situations like this as a crime scene.

And when Sherlock, comes across situations like this, he is sceptical about everything and doesn't fall prey to any obvious mistakes.

I mean, a great business with multi-year growth story available at 40-50% discount to its peak. Should you think of buying?

Many may argue this fall is temporary and the stock will rise again. This might be true.

However, I as editor of Smart Money Secrets, I would rather try to behave like Sherlock.

Well, the first thing I did was check the background of the auditors of KRBL.

I am glad I did.

It turns out, the auditors are allegedly involved in financial shenanigans and manipulating books of accounts by the Central Bureau of Investigation (CBI).

So for now, I will dig some more and stay away from KRBL.

But if I find evidence which makes it a good investment, I may recommend it.

Regards,

Kunal Thanvi
Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets

PS: What are India's best investors doing with their portfolios in such a volatile market? Kunal Thanvi is on a mission to reveal their top picks to you. Follow India's top 40 super investors here.

Recent Articles

Where Can You Find Safe Quality Stocks in This Market? July 13, 2018
Don't define quality by market capitalisation. Look for quality stocks across market caps instead.
How to Avoid a 90% Loss Suffered by This Super Investor July 12, 2018
Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.
Protect Yourself from Trump's Trade War July 11, 2018
The US and China hit each other with punishing tariffs last week. The collateral damage could be huge if the trade war escalates further.
A Small Tweak to Buy Stocks with Maximum Upside at Minimum Risk July 10, 2018
The headline grabbing stocks are not the best ones to buy. They are typically the ones that have already gained the most or are losing the most.

Equitymaster requests your view! Post a comment on "2 Reasons Why I Didn't Recommend KRBL After Mohnish Pabrai Invested in It". Click here!

3 Responses to "2 Reasons Why I Didn't Recommend KRBL After Mohnish Pabrai Invested in It"

Rajan Kharangate

Jul 1, 2018

9819948271

You are absolutely right in not recommending KRBL. Actually some investment experts like you should try to provide Forensic accounting service to investigate company accounts. Now a days looks like it has become a common practice to cook the books of accounts to show fantastic performance and growth leading to high valuation of the companies thereby attracting cheap funds and investments in the company. Old principle of conservative Accounting has been replaced with aggressive and manipulative accounting, And no investor has the time and will to investigate before investing. All are after making a fast buck.

of late I have become very fearful of the Indian equity market because I doubt whether there are any companies left who may be following conservative accounting principle.

Like 

Mohan Raghav

Jun 30, 2018

Dear Kunal

You should stop taking credit for mistakes you did not do. You should instead spend your energies on finding out new ideas. If this is going to be your standard you will start writing irrelevant articles. I am a subscriber to read your research which works rather than defensive articles. Your primary duty is to avoid mistakes so do not trumpet this song every week. Pure cacophony!

Like 

Chandravadan Ajmera

Jun 29, 2018

Thanks Kunalfor the right advice at right time. In fact I had written to equity master regarding the crash in KRBL and once upon a time you had written that this stock is value pro contender but valuations are preventing you from recommending it. I was just thinking that as valuation has come down let me purchase it. Meanwhile I just heard in CNBC about Mr Gautam Khaitan's involvement in Agusta westland and I postponned the idea of purchasing it and enquiring with you. You have taken out more skeletons from the cupboard and saved my money.I appreciate your vaue system. Thanks again. I would love to listen from you.

Like 
  
Equitymaster requests your view! Post a comment on "2 Reasons Why I Didn't Recommend KRBL After Mohnish Pabrai Invested in It". Click here!