02/07/2018 2 Reasons Why I Didn't Recommend KRBL After Mohnish Pabrai Invested in It - The 5 Minute WrapUp by Equitymaster

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2 Reasons Why I Didn't Recommend KRBL After

Mohnish Pabrai Invested in It
Jun 29, 2018

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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 nancials.

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.

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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.

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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 justi ed 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 o cials. 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 ne. 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.

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02/07/2018 2 Reasons Why I Didn't Recommend KRBL After Mohnish Pabrai Invested in It - The 5 Minute WrapUp by Equitymaster

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 rst 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 nancial 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 nd evidence which makes it a good investment, I may recommend it.

Regards,

Kunal Thanvi (Research Analyst)

Editor, Smart Money Secrets

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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.

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