Kaveri Seed Company Management Q&A: Feb, 2013

Management Q&A

  1. KAVERI COTTON MARKET PRESENCE

KAVERI COTTON MARKET PRESENCE

2012 (lakh pkts)

2013E (lakh pkts)

2014E (lakh pkts)

Andhra Pradesh 5 16
Maharashtra & MP 5 13
Gujarat 1 2
Punjab, TN, Karnataka 7 10
Total 18 41 50

If Kaveri is to do a 20-25% increase over last year, you should be doing ~50 lakh packets in 2014E. Where will that growth come from?

Most of the growth will have to come from AP & Maharashtra. We introduced our hybrids early in AP, so we have some advantages there. In Maharshtra, the competition is more.

  1. KAVERI PENETRATION STRATEGY

KAVERI ANDHRA PRADESH PENETRATION STRATEGY?
TELENGANA(10 districts) COASTAL(9 districts) RAYALSEEMA(4 districts)
Dominance 2013 2014E 2013 2014E 2013 2014E
Nuziveedu 1 1 all equal all
Mahyco 4 2 all equal all
Kaveri 2 3 1 1 all equal all
Azith 3 4
Ankur
Total (90 lakh packets) 60 lakh packets 22-23 lakh packets 5-7 lakh packets

Is it right to say Jadoo Hybrid has seen very good acceptance in Coastal areas, post Neelam cyclone; earlier the response was mixed?  Apart from good yield, makes for easy plucking (just a finger tap is enough), a leading non-Kaveri distributor told us.

Jadoo has shown good acceptance almost everywhere – not just Coastal AP. Adilabad district is the only one where Jadoo has not done well. Even in Telengana Jadoo has done well esp. in Khammam & Mehboob Nagar districts. Also in Medak district.

Jadoo plant is tall with strong stem. Ball-to-Ball distance is less. Jadoo has shown some tolerance to Sucking Pest. The best part about Jadoo is its higher yield. The plant rejuvinates and gives a second yield which is 30% of the first.

3. 2014E – INVENTORY PICTURE /OVERALL

2.5 Cr packets nventory carry-over from 2012; 4.5 Cr packets New Production. 7 Cr packets Total. Expected 2014E Total Sales 3.6 Cr packets (10% less than 2013). Carry-over of 3.5 Cr packets.

Yes, there will be carry-over of inventory this year.

Only 30-35% sales Advance basis; 60-65% Sales PUSH Sales?

The advance we receive is 30-35% of Sales. Credit Sales is not more than 5-10%

Impact on Kaveri Seeds?

We didn’t have any unsold inventory last year. Marketing Expenses will be higher, as everyone will resort to aggressive marketing.

Lower performing brands – for them it is a matter of do or die – survival??

Yes. Those who carry over inventory for the second year running may find it tough to survive.

Risk of Advance payment Terms changing to Cash basis??

Not for the better-performing hybrids.

What if this was to continue for 1 more year?

You see the RISK is totally based on the demand for your hybrid. If there is demand for your hybrid, you can sell it after 2 years too. But if there is low demand, then you will have a tough time selling it ever!

4. 2014E – INVENTORY PICTURE /BIG 5

Mahyco and Ajith seem to have managed to scale up production levels – from ground vacated by smaller players?

2013 2014E
Nuziveedu 100
Mahyco 20
Kaveri 40
Azith 15

Mahyco had done 25-30 lakh packets last year. Azith had also done 25-35 lakh packets. Ankur had done almost 30-35 lakh packets. Monsanto Emergent had done 15-20 lakhs. Vibha had done 15-20 lakhs. Tulasi has done 15-17 lakhs. And there are also Mahyco types that do well! In the North, DCM Shriram did very well ~20-25 lakh packets.

Most bigger players are reported to have scaled up production 2x-3x? Most have to lose out??

Its going to be an extremely competitive season. Those with better performing hybrids will do better.

One view is Mahyco most well-placed to capture back lost ground? market share? What farmers paid Rs 2000 last year, they will get at Rs 930 this year.

The other view is that those who paid Rs 2000 last year did not benefit. Mahyco should be able to do 20% more than last year.

Why will Kaveri even maintain existing Sales? On such a high base?

We should do atleast 20% more. Yes we had more than doubled our Sales last year. But that also means our base of satisfied farmers is much bigger. We have atleast 3x more satisfied farmers. Our hybrid Jadoo has done extremely well. 70% of our Sales is driven by Jadoo. No competitor has one single hybrid accounting for such a high proportion of Sales. Nuziveedu’s Banni & Mallika together reportedly contribute around 50-55 lakh packets.

What Sales Promotion activities have you planned?

As we have indicated before we expect intense competition, this year. Kaveri will be using local-language advertisements in regional media for the first-time. We are ready with the Advertisements.

What about dealer/distributor incentives like Foreign travels?

These have been going on. We want a situation where the farmer should ASK for our product. So we will focus more on PULL for our product(s) than PUSH sales, though that too has its role.

Margin pressures?

We think we will be able to maintain margins. Normally we would have seen an increase in margins on higher volumes. But because of the intense competitive activity there will be higher spend on sales promotion.

5. CONTRACT FARMING – CHALLENGES/ MAINTAINABILITY/ SCALABILITY

The overall land available for contract farming isn’t expanding; it can only be reducing for several reasons. Producing at even 20% more each year, seems a very big challenge to keep managing?

Its not entirely true that the land available is reducing. There are new areas that have taken up contract farming. For Cotton, the entire production area about 130,000 acres is in AP (70%) and Karnataka, Gujarat & Maharashtra (30%).

We have 75-80% of our production in Gadwal (Mahboobnagar district) & Nandhyal (Kurnool district) in AP which are higher yield regions. We also procure from Eluru region from West Godavari district.

Challenge seems to be to hold on to contracts/relationships. Once you scale down, scaling up may be much more difficult/costly.

Farmer’s incentive is Yield. Having a higher yield reduces cost of production. The other way is to commit more money to the farmer.

6. PRODUCTION -OVERESTIMATION RISKS

There seems to big risks of Inventory Carry-over?

There might be some who are carrying inventory over from last year. For players like us who had near-zero inventory last year, it is not a big risk. 

But the bigger longer-term risk seems, if one were forced to cancel/scale down contract farming relationship size

Yes, there are challenges here, but it’s not impossible (to scale back). You must remember Kaveri has scaled up in the last 2-3 years from nowhere. Good higher-yield hybrids play their part too, as production costs are less for the farmer.

Is it possible someone is off the mark by 40-50%? That will have a cascading pattern?

Yes it is possibleThere are some players who are carrying 2-3 years inventory.

7. COTTON SEED PRODUCTION PATTERN

Can you please explain how do you go about sowing/procuring the required production seed quantity?

Sowing time is generally between February to October – at different times in different regions – to spread our risks on the weather/climatic front. Usually it takes 120-140 days for seed to be available – harvesting, ginning for seed, and quality control.

So July-Aug, the first seeds become available, and we continue to get seeds till May.

8. KAVERI INVENTORY PICTURE

Is it correct to say 2nd batch from Jan-Mar is usually much larger?

Actually most of the seeds, 80% is in by December.

209 Cr – 2H Inventory; 179 Cr – Q3 Work in progress; totals 389 Cr; plus Q4 inventory; Totally looks like 400-500 Cr Inventory??

One can forward project anything! The key thing to see is how much we can sell. And that picture looks like 20-25% higher over last year.

What if Kaveri underachives targets?

We are reasonably confident of achieving 20-25% higher sales

9. FUTURE – GROWTH

How does the future of hybrid seeds look?

We see growth continuing for at least a decade.

Any impact of new technologies? Others are experimenting with Closer Density plantations and mechanical plucking/cutting?

Yes. These will probably start getting introduced 2-3 years later. We are also working with closer density planting. Mechanical plucking/cutting  work with mostly varietals (non-hybrids), short-duration crops with 1 time harvesting, etc.

10. FUTURE – HYBRID RICE

2.5 mn hectares – mostly North India? Why not in South India?

Currently hybrid rice is available in thicker rice varieties. In South India, slender rice – Sona Masuri varieties are more preferred.

How far from solving Quality issue? We have heard hybrid rice is mostly sticky rice?

Stickiness problem is already solved. Much of the technical challenges are being solved. Yield is much higher – minimum is 20%. Work is going on in Draught resistance – where once a week watering will be enough. Resistance to pests is being brought in. Unlike Maize (7 mn hectares) Rice is grown in 40 Mn hectares in India, so the potential is big.

So are we going to see widely acceptable commercially available products in 2-3 years?

More like 5-7 years.

11. FUTURE – MAIZE GROWTH DRIVERS

Poultry Consumption/Paddy or Cotton Conversion/Easy cultivation/Mechanisation/2 crops in a year – many advantages. Do you see major shifts from Cotton to Maize

Maize is cultivated in 7 million hectares. Poultry and starch industries are main drivers for maize cultivation. Some of the other drivers you cited augur well for the future of Maize cultivation in India. So a stable picture for Maize seeds demand is envisaged. It is a high margin business, as prices are market determined, with no price caps. Monsanto dominates the Corn business. We are among the Top 3. But Maize is also a very sensitive crop, if it doesn’t rain, the crop suffers.

125 Cr FY13, FY14E?

It should see normal 10-15% growth

12. TAXATION

Unlike your company, Some Seed companies are still paying Taxes at full rates? Like DCM Shiram on Seed division income? What are the risks of taxes being levied retrospectively?

Yes, and there are many others who are of the view that taxes are not applicable for this sector. Recent court orders have vindicated this stand. Tax Laws are the same. It’s interpretation cannot/shouldn’t be different for different Assessment Officers. Monsanto is not paying these taxes. Our view is simply this – We have paid full tax in earlier years. We then claimed Refund as per the existing law, and we got back the full amount from the government. That kind of settled it for us.

13. REGULATIONS

The Maharashtra Government order cancelling the company’s (Mahyco) licence? Last time round you were pretty confident of the order getting reversed. What’s the latest status?

If we look at this objectively, with this government order, who’s suffering? It’s the farmer. The farmer needs to have access to good quality seeds. If it comes to that, the farmer can always buy the seeds at the border.


Disclosure(s)

Tirumal Rao: More than 5% of Portfolio in the Company; Holding for more than 1 year;
Davuluri Omprakash: No Holdings in the Company; ;
Vinod MS: More than 5% of Portfolio in the Company; Holding for more than 1 year;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years;