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The Top 3 Stocks in the Market Revealed by One Document

Jul 16, 2018

Editor's note: Dear reader, the Sensex is at all time highs but most stocks are down for the year. Many stocks favoured by so-called market gurus have crashed. In this difficult market, I recommend reading Kunal Thanvi's wise words. Here's an excellent piece he wrote recently. Also, Kunal has a new special report out - The Top 3 Regulation 31 Stocks. Read on...


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 practices 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.

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.

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Regulation-31 makes this possible - read all about it here.
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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: Kunal Thanvi is on a mission. To find and recommend the best stocks India's top investors have bought for themselves and their clients. By analysing stocks named in a document called 'regulation 31' he has identified his top 3 picks. You can sign up for the report here.

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2 Responses to "The Top 3 Stocks in the Market Revealed by One Document"

sunil chavan

Jul 21, 2018

i want to know the top 3 stocks

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manish

Jul 16, 2018

last three years your company performance

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Equitymaster requests your view! Post a comment on "The Top 3 Stocks in the Market Revealed by One Document". Click here!