ICRA Credit Perspective

KARUTURI GLOBAL LIMITED

Contact
Jayanta Chatterjee Rating
jayantac@icraindia.com
+91-44- 2434 0043 ICRA has assigned an LA (pronounced L A) rating to the Rs. 1 billion
+91-80- 2559 7401 term loan programme of Karuturi Global Limited (KGL). The rating
indicates adequate credit quality in the long term and the rated
Vikas Agarwal instrument carries average credit risk. ICRA has also assigned a short-
vikas@icraindia.com term rating of A1 (pronounced A one) to the Rs. 0.2 billion short term
+91-124-4545301 debt (including Commercial Paper) programme of KGL. A1 is the
highest-credit-quality rating assigned by ICRA to short-term debt
instruments. Instruments rated in this category carry the lowest credit risk
in the short term. While assigning the rating, ICRA has taken a
consolidated view of KGL and its subsidiaries.
(Refer Annexure for Rating History)

May 2009
Key Financial Indicators
Rs. billion
9 months 31.03.08 31.03.07 31.03.06
ended
Dec. 31,
2008*
Net Sales 3.17 3.87 0.99 0.43
OI 3.19 3.96 1.01 0.44
OPBDITA 1.06 1.40 0.44 0.15
PAT 0.86 1.03 0.39 0.14
Equity Capital 0.38 0.33 0.12 0.08
Tangible Net 6.24 4.75 0.96 0.40
Worth
PAT/OI % 27.12 25.96 38.74 32.03
PBIT/ Avg.(Total %
Debt + TNW + 16.42 24.74 33.68 48.21
DTL – CWIP)
OPBDITA/Interes
t and Finance Times 12.92 25.86 28.94 116.04
Charges
NCA/Total Debt % 36.11 34.48 31.83 622.71
Total Debt/TNW Times 0.57 0.66 1.28 0.05
Total Debt/TNW Times 0.57 0.66 1.27 0.05
Website: + DTL
www.icra.in Current Ratio Times 5.55 1.61 8.82 2.53
*Unaudited
OI: Operating Income; OPBDITA: Operating Profit before Depreciation,
Interest, Tax and Amortisation; PAT: Profit after Tax; PBIT: Profit before
Interest and Tax; CWIP: Capital Work-in-Progress; DTL: Deferred Tax
Liability; NCA: Net Cash Accruals; TNW: Tangible Net Worth
ICRA Credit Perspective Karuturi Global Limited

Credit Strengths
Increase in production capacity through expansion of operations into Kenya and Ethiopia; KGL is now a
leading exporter of cut roses
Diversified production base across three low-cost producing countries – Ethiopia, India and Kenya
Wide geographic presence through exports to US, Europe, Japan and the Middle East, resulting in low
geographical concentration risk
Moderate gearing levels and strong profitability translate into adequate debt protection indicators

Credit Concerns
Political risks arising from KGL’s large presence in Ethiopia and Kenya
Likely pressure on sales volumes and realisations of cut roses on account of the overall slowdown in
economic activity
Susceptibility of profitability to climatic conditions, adverse movements in foreign exchange and
withdrawal of tax benefits
KGL’s aggressive expansion plans in Ethiopia are expected to result in execution and funding risks

Rating Rationale
The rating reflects the position of KGL as a leading exporter of cut roses; its widespread revenue base, which
reduces geographical concentration risk; and its adequate financial risk profile, considering the healthy profitability
and debt coverage indicators. The ratings are, however, constrained by the uncertain political environment in the
major rose cultivation centres of Kenya and Ethiopia, the economic slowdown induced likely pressure on sales
volumes and realisations and the vulnerability of the company’s profitability to climatic conditions and fluctuations
in foreign exchange rates. The aggressive expansion plans of KGL and the possible withdrawal of tax benefits are
additional factors that influence the rating.

Company Profile
Promoted by Mr. Ramakrishna Karuturi in 1994, KGL is a leading producer of cut roses. As a group, KGL has rose
farms in three leading low-cost countries - India, Ethiopia and Kenya, producing about 510 million stems on
approx 254 hectares (ha) of land. The company exports cut roses to Europe, South East Asia, Middle East, North
America, Australia, Japan, New Zealand, besides sales in India; exports constitute about 90% of revenues. KGL
has recently ventured into the agro-based and food processing business sector with exports of bulk and bottled
gherkins to international processed food firms and super markets in major consuming nations such as Europe ,
Russia and the United States.

Its subsidiary, Karuturi Telecom Pvt. Ltd., is an internet service provider in India. The Group has major expansion
plans in agriculture in Ethiopia, where the company plans to grow sugar, cereals, vegetables and palm and has
acquired 336,000 hectares of land to this end.

In FY2009, KGL reported a consolidated Profit after Tax (PAT) of Rs. 1.25 billion on a consolidated operating
income of Rs. 4.4 billion.

Major Subsidiaries:

Karuturi Overseas Ltd (100% holding)

The Dubai-based Karuturi Overseas Ltd (KOL) consolidates KGL’s operations in Ethiopia. The total acreage under
rose cultivation in Ethiopia is 70 hectares with stem production of around 92 million. In 2007-08, KOL reported a
net profit of Rs. 0.41 billion on a turnover of Rs. 1.07 billion.

Flower Xpress FZE (100% holding)

The Dubai-based Flower Xpress Free Zone Establishment (FXFZE) is operating in the Dubai Airport Free Zone
Authority. FXFZE carries out marketing initiatives of KGL in East European markets and Gulf Cooperation Council
(GCC) countries. It was used as an investment vehicle for funding the Euro 46 million acquisition of Sher Agencies
Ltd, Kenya in October 2007 and carries out marketing of the entire production of Sher Agencies Ltd, Kenya. In
2007-08, FXFZE reported a net profit of Rs. 0.52 billion on a turnover of Rs. 2.54 billion.

Karuturi Telecom Pvt. Ltd (100% holding)

Karuturi Telecom Pvt. Ltd (KTPL) is an internet service provider (ISP) with a presence in Southern India; KTPL’s
acquisition of Estel Communications Pvt. Ltd. (ECPL) in May 2007, which is an ISP having presence in
ICRA Credit Perspective Karuturi Global Limited

Bangalore, Delhi, Gurgaon, Hyderabad and Noida, has enabled it to have a pan-India footprint. In 2007-08,
FXFZE reported a net profit of Rs. 4.8 million on a turnover of Rs. 61.7 million.

Business & Competitive Position

KGL’s business operations can be broadly classified as under:
1) Floriculture
2) Food Processing
3) Internet Service Provider (ISP)
4) Agriculture (to be operational from FY2010)

Table 1: Break-up of Revenues and Profitability

2006-07 2007-08 9M 2008-09

Particulars
Sales PBIT Sales PBIT Sales PBIT
Floriculture 972.6 384.4 3846.5 1245.2 2995.3 948.2
Food Processing - - 0.0 0.0 103.1 0.0
ISP 40.5 8.7 83.8 7.5 67.1 12.1
Total 1,013.1 393.0 3930.2 1252.7 3165.5 960.3
Note: Amounts in Rs. Million; Source: Company Data

KGL’s low scale of operations was significantly enhanced by its expansion into Ethiopia and the
acquisition of Kenya-based Sher Agencies Ltd; KGL is now a leading exporter of cut roses:

Floriculture is the core business of KGL and contributed around 95% to the company’s topline with a healthy PBIT
Margin (PBIT/Sales) of 32% in 9M 2008-09. KGL entered into the floriculture business in 1994 with an annual
capacity to process 7 million premium cut roses at its facilities in Doddabalapur on the outskirts of Bangalore.
Following its gradual expansion in India and Ethiopia and acquisition of the Kenya-based Sher Agencies Ltd, the
company has now become one of the leading rose growers in the world. The company has three main low-cost
production bases, namely, India, Ethiopia and Kenya. Its Indian facility serves markets in Australia, Japan, Middle
East and South East Asia; its Ethiopian and Kenyan Facilities cater to markets in Europe (including Russia),
Middle East and North America. KGL sells roughly 50% of its output through auctions and the rest directly to
various customers. The direct customers are primarily large distributors, bouquet manufacturers and large retail
chains. KGL has an efficient value chain, which is very critical in the cut rose business. The receivables are
assured through Flora Holland 1 to whom KGL pays a fee towards collections.

The global floriculture industry is highly fragmented. There are a number of small farms across Europe and Latin
America. The European Union, Japan and the United States are the largest cut rose-consuming markets,
accounting for two-third of the world market. The industry has well-defined trade channels for growers including
auction, direct sales and third-party sales. The auction market is the most preferred route because of price
competitiveness; in Europe, around 40% of the trade is through the auction route. Traditionally, the European
Union and the United States have dominated production. Greenhouses in the northern hemisphere require
artificial heating during cold weather. The profitability of producers in these regions is hit by the rising fuel costs,
which constitute 35-40% of total costs. As a result, there is shrinking acreage in countries in the northern
hemisphere. With an ideal climate for growing flowers, countries like Costa Rica, Ethiopia and Kenya are
emerging as the new production centres. KGL faces competition from African growers like Homegrown and
Oserion and other growers from Ecuador and Columbia.

Table 2: Production base of KGL

Location Acreage Stem Varieties
(in hectares) Production
(million)
India 10 18 Intermediates
Ethiopia 70 92 Hybrid & Intermediates
Kenya 174 400 Intermediates & Sweet Hearts
Total 254 510
Source: Company Data

1
Flora Holland is the leading flower auction house in Holland
ICRA Rating Services Page 3
ICRA Credit Perspective Karuturi Global Limited

Indian Floriculture Operations: The Indian facility of KGL has 10 ha of land under cultivation with the capacity to
produce 18 million stems per year. The company grows 18 varieties of roses of various colours at its Indian
facility. It contributed to 9% of its overall revenues in FY08. KGL is not targeting any capacity expansion in the
Indian farm and seasonal demand (if any) is likely to be met through contract-growers. Of the total produce, only
35% is sold in the domestic market and the balance is exported to markets like Australia, Japan and Middle East.

KGL has also opted to forward integrate into the flower retail business by floating a separate subsidiary, Karuturi
Flower Express Pvt Ltd, under the brand name FlowerXpress. The company currently has 23 retail outlets in and
around Bangalore and plans to expand its network across India. The company is adopting the franchise model for
its expansion activities and has already tied up with retail networks across the country.

Ethiopian Floriculture Operations: KGL entered into the Ethiopian market in 2005 in consideration of its several
advantages as a production base, including proximity to the European market, resulting in lower freight cost;
exemption of custom duties on imports of equipment and inputs ; favourable climatic conditions; income tax
exemption for 5 years and availability of low-cost land and labour. The Ethiopian facility has around 100 ha of land
in Holeta (40km from Addis Ababa) of which 70 ha is covered by green houses. Around 90% of its total production
(around 92 million roses) is of Hybrid Tees, which are of higher realisation. KGL has been allotted a further 366 ha
of Land in Wollisso for expanding its rose cultivation in Ethiopia. The company plans to cover around additional
190 hectares of land by green houses in this land, which is expected to be fully operational by 2011-12. The
Ethiopian facilities serve the markets in Australia, European Union, Middle East and North America.

Kenyan Floriculture Operations: KGL entered Kenya in October 2007, with the acquisition of Sher Agencies
Limited (Sher). with more than 6 times the revenues of KGL (standalone) in 2007-08. The cost of acquisition of
Sher, that is, Euro 46 million, was funded by the issues of Foreign Currency Convertible Bonds (FCCB). Pursuant
to Sher acquisition, KGL has a 229 ha facility in Kenya with 150ha under greenhouses, 55 ha under open
cultivation and the balance for housing, hospitals and schools. The company has effectively integrated its
operations. The facility produces around 400 million stems of roses of 40 species, mainly intermediates and the
sweet hearts variety. ‘Sher Karuturi’, its brand name for Kenyan operations, enjoys good brand recognition in the
European auction market. The company has not planned any further expansion in Kenya but strives to improve its
operational efficiency in order to achieve higher yields. While assigning the rating, ICRA has considered the
uncertain political environment in Kenya, which can affect its operations.

Food Processing – new venture for diversification of operations

KGL has entered into the food processing industry, with the commissioning of its food processing unit for gherkins
near Tumkur, Karnataka in February 2008 with an installed capacity of 6000 tonnes per annum. It has entered
into contracts with local farmers to ensure uninterrupted supply of gherkins. The company exports processed
gherkins to international processed food firms and super markets in major consuming nations such as European
Union, Japan, Russia and the United States. In 9M 2008-09, the food processing business contributed to approx
3-4% of the total revenues of KGL.

Internet Service Provider – relatively modest division with stable revenues

KGL provides internet services through its subsidiary, KTPL. The company has taken over an All India ISP, Estel
Communications Private Limited, giving it a pan-India presence. KTPL provides internet services across the
country to large and medium-sized companies including MNCs like Ericsson, Microsoft and Nokia. Besides, the
company also provides VOIP (Voice over Internet Protocol) services and software applications.

Agriculture – lined up aggressive expansion plans

In a pursuit to diversify its operations, the company is diversifying from floriculture to become a fully integrated
agriculture company. KGL has lined up aggressive expansion plans in Ethiopia, wherein the company plans to
move into the cultivation of cereal crops, sugar cane, vegetables and palm oil. KGL has been allotted 3,36,000ha
of land on long-term lease at a competitive rate by the Government of Ethiopia for agriculture in order to promote
employment and economic growth in Ethiopia. The execution of such a massive expansion project requires
significant funds as it involves large capital expenditure and set-up costs. Hence, the company plans to bring the
entire mass of land gradually under cultivation by 2014-15. Given its major expansion plans in Ethiopia, the
company is exposed to significant execution and funding risks. ICRA expects the uncertain political and economic
environment in Ethiopia to constrain the rating further.

Financial Position
Strong revenue growth driven by acquisition and expansion; healthy profitability of operations: The
operating income of KGL grew at a CAGR of 198% over the last 4 years ended 2007-08 led by the acquisition of
Sher Agencies Limited in 2007-08; expansion to newer markets like Japan, Middle East and Russia; expansion of
facilities in Ethiopia and Kenya and establishment of food processing facilities. In 9M 2008-09, revenues grew by
70% as compared to 9M 2007-08 on account of an increase in the area under cultivation in Ethiopia. The
company has maintained operating margin (OPBITDA/OI) of more than 33% in the last 5 years. In 2006-07, KGL

ICRA Rating Services Page 4

ICRA Credit Perspective Karuturi Global Limited

registered an operating margin of 44% on account of higher realisation and better product mix. The company has
consolidated the results of Sher Agencies Limited for the full year; however, the pre-acquisition profits were
deducted to reflect only post acquisition earnings. Hence, net margin reported at 26% in 2007-08 as compared to
39% in 2006-07. The operations of the company come under agricultural income on which there is no tax in India,
as per the Indian Income Tax Act. Its Ethiopian subsidiaries has tax-free period of 5 years and Dubai is a tax-free
zone. As it has no significant tax liability, the company enjoys high net margin. The withdrawal of current tax
exemptions may constrain the profitability of the company. The rating further takes into account likely pressures
on sales volumes and prices of cut roses on account of slowing economy and vulnerability of the company’s
profitability to adverse movements in foreign exchange rates and air freight rates. Nevertheless, ICRA expects
KGL to maintain healthy revenue growth and profitability, considering its sound operations; envisaged expansions
and position as a leading rose exporter.

Moderate capital structure and adequate coverage ratios

The company has a moderately leveraged capital structure, with gearing at 0.57 time as on December 31, 2008.
Its total debt increased to Rs.1.23 billion in 2006-07 from Rs. 0.02 billion as a result of the issue of FCCBs to the
tune of USD 25 million (Rs.1.11bn) to fund its expansion plans in Ethiopia and acquisition of Sher Agencies
Limited. In 2007-08, KGL issued further FCCBs to the tune of USD 50 million to fund the acquisition of Sher
Agencies Limited and contracted short-term loan of Rs.0.58 billion to fund the working capital requirements, which
resulted in higher debt of Rs.3.11 billion. The net worth of the company increased to Rs. 4.75 billion in 2007-08
from Rs.0.96 billion in 2006-07, led by conversion of FCCBs (Rs.1.17 bn); issue of share warrants (Rs.1.69 bn)
and internal accruals. In 2007-08, the debt coverage ratios of KGL were at comfortable levels with NCA/Debt at
34.5% (36% in 9M2009) and interest coverage ratio at 26 times (13 times in 9M 2008-09). ICRA expects the
funding requirement of KGL to increase in the medium term to fund its expansion plans; and its debt servicing
ratios to stretch but remain at adequate levels.

MAY 2009

ICRA Rating Services Page 5

ICRA Credit Perspective Karuturi Global Limited

Annexure

Rating History

Instrument Maturity Date Rating

Outstanding
May 2009
Rs. 1 billion Fund Based Limit - LA
Rs. 0.2 billion Short Term Debt May 24, 2009 A1
(including Commercial Paper)
Programme

ICRA Rating Services Page 6

ICRA Credit Perspective Karuturi Global Limited

ICRA Limited
An Associate of Moody's Investors Service

CORPORATE OFFICE
Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002
Tel: +91 124 4545300; Fax: +91 124 4545350
Email: info@icraindia.com, Website: www.icraratings.com, www.icra.in

REGISTERED OFFICE
1105, Kailash Building, 11th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001
Tel: +91 11 23357940-50; Fax: +91 11 23357014

Branches: Mumbai: Tel.: + (91 22) 24331046/53/62/74/86/87, Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434
0043/9659/8080, 2433 0724/ 3293/3294, Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283
1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065
Ahmedabad: Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373
5061/7251, Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231

© Copyright, 2008 ICRA Limited. All Rights Reserved.

Contents may be used freely with due acknowledgement to ICRA.

ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subjec t
to a process of surveillance, which may lead to revision in ratings. Please visit our website (www.icra.in/www.icrarating s.com) or
contact any ICRA office for the latest information on ICRA ratings outstanding. All information contained herein has been
obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that
the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular ,
makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such informat ion.
All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses
incurred by users from any use of this publication or its contents.

ICRA Rating Services Page 7