Wal-Mart will pluck roses in Bangalore

Moonstruck Britons who will say it with flowers next Valentine's Day will not be mistaken if they find the roses scented extra sweet.

For they will be coming from the salubrious surroundings of Bangalore which combine the best of the tropics and temperates. ASDA, the large UK retail chain owned by top US retailer Wal-Mart, has placed an order for one million cut roses with Bangalore-based Karuturi Networks Ltd.

Karuturi, a publicly-listed floriculture company, will ship two plane loads of roses to ASDA in the first week of February 2005 to fulfill the Rs 65 lakh order.

The company is also preparing to enter the US market in a big way with the expansion of their operation in Ethiopia. It has promoted a $6 million cut rose farm on the outskirts of Addis Ababa, the Ethiopian capital.

A subsidiary, RoseBazaar PLC, has been incorporated for this purpose. Zemedeneh Nagatu, managing partner of Ernst & Young (Ethiopia) has a 30 per cent stake in the venture which will be in production by mid 2005-06.

"We are confident that Wal-Mart will come back to us with an order of 4-5 million roses next year. Our efforts to increase capacity in Ethiopia and India are to ensure that we are ready to take bigger orders from companies like Wal-Mart," Ramakrishna Karuturi, managing director of Karuturi Networks Ltd, told Business Standard.

The company has chosen Ethiopia not just to expand capacity but also to gain a quicker and an easier entry into the US market.

Ethiopia currently enjoys a 10-year tax holiday for exports to Europe and a 25 year tax holiday for exports to the US. This is as per the Africa Growth Opportunity Agreement signed by President George Bush over a year ago to boost Africa's chances of agri-exports into a developed economy like US.

The cost of air freight out of Africa is $1 per kg of rose as against $2.5 per kg out of India, a 60 per cent cost saving.

By setting up operations in Ethiopia, Karuturi will avoid a customs duty of 28 per cent levied on goods entering the US. Karuturi's newly-acquired 25 hectares of land in Ethiopia will be ready for production by June 2005. Around the same time Karuturi will also have nearly 20 hectares of land ready for cultivation in India.

"Last year, we shipped 4.8 million rose stems. We will ship seven million by the end of this year. With the recent acquisitions as well as our land in Ethiopia, our production capacity will go up by 150 per cent," Karuturi added.

Karuturi finds that it is more viable to hire charters for its shipments to the US, Japan, Singapore, Italy and Germany. It costs Rs 2 to grow a rose and Rs 4 to ship it. A charter pegs the landed cost at Rs 5 per rose. "We still manage to make a significant profit as they are sold at Rs 30 per rose," Karuturi said.

When the company was looking at newer options to diversify and derisk its rose export business, it came up with a novel idea of exporting rose plants. It is executing its maiden order of one million plants to Germany this year for which an advance payment has already been made by the client.

"This is a fantastic way to buffer the cash flow cycle. The entire plant export order will go by refrigerated containers by ship to Rotterdam and not by air. Thus, the sensitivity of the bottom line to high airfreight costs stands considerably diminished," added Karuturi.

The company plans to register a 66 per cent increase in revenues to touch Rs 10 crore in the current fiscal. Profits will constitute nearly 50 per cent of its revenues. Currently, the promoters of the company hold a 69 per cent stake.

Funds like Reliance Capital, IL&FS hold 11 per cent, while the public holding is 20 per cent. Last month, Karuturi declared an interim dividend of 5 per cent.