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;

Kaveri Seed Company Management Q&A: Sep, 2012 

Management Q&A

  1. TOTAL MARKET OPPORTUNITY

The Indian seed market is among the top ten largest in the world, estimated to be about US$1 billion in 2005. (Source: ISF Secretariat). Total Market size in 2012 is estimated to be ~8000-9000 Cr in India. The Indian hybrid seed industry is expected to grow at 12-15% annually in the coming years.

The total market for hybrid seeds is ~Rs 8000 Cr today. Cotton contributes 50% of that market with 40-50% being produced in Maharashtra, and the balance in AP & Gujarat. Next is Corn which is primarily produced in AP, Karnataka and Bihar. And then is Paddy which is grown in low-lying coastal areas mostly. The overall market for Hybrid seeds has been growing at 12-15% on an annual CAGR basis.

2.    KAVERI’S JOURNEY

Kaveri has blazed an exemplary track record in the last few years. Kindly ake us through the initial years and the recent journey.

In 1976, GV Bhaskar Rao, a young agriculture scientist graduate, built on his farm in the village of Gatla Narsingapur, Andhra Pradesh, a small seed production unit for public bred varieties of rice and corn. GV Bhaskar Rao also worked with some MNC companies engaged in the Corn Business. Kaveri Seeds was incorporated in 1986 as a private limited company, with a seed processing unit commissioned at Bellary, Karnataka. By the 90’s the company initiated extensive R&D on hybrids.

What you are seeing today is the result of a planned journey over the last 30-40 years. It took us 30yrs to reach a turnover of 30 Cr in 2004.

Getting to pure quality hybrids is both a Science & an Art form. There are seven steps to identify a good hybrid by crossing the right male & female varieties that have some sustainable traits (Yield, draught-resistance, flood-resistance, pest-resistance, etc.). The higher the contrast, brighter are the chances of a quality hybrid. This requires a huge number of permutations/combinations. One out of 10,000 times may yield a successful product.

It takes 6-7 years to get to a quality Hybrid (R&D phase). And another 3-4 years to build up the Volumes for the market (Multiply – scaling up production phase; Breeder Seed), Processing and then Marketing it (Foundation Seed). We have been in Cotton Hybrids for the past 13 years, since 1998-99. But we started seeing market success only in the last 3 years.

Typically a successful hybrid enjoys a 4-5 year run before Nature throws up new challenges in the form of new Pests or climatic changes, or both. For example the Cotton Hybrid Seeds market is finding a new challenge in the form of Sucking Pests!

3.   COMPETITIVE LANDSCAPE

Aside from Kaveri, the notable seed companies in India include Pioneer, Mahyco, Monsanto India, ProAgro, Syngenta, Nuziveedu, Vibha and Rasi Seeds. Any trade magazines/industry publications to validate industry figures and market share?

Nuziveedu Vibha Rasi Mahyco Pioneer Syngenta Monsanto
Primary Segment COTTON COTTON COTTON

CORN

CORN CORN CORN
Other Crops Corn,Veg Seeds Corn,Veg Seeds Corn,Veg Seeds Cotton,Veg Seeds

Cotton is the biggest market. Most players have a presence in all segments – Cotton, Corn, Vegetable Seeds, Paddy. The MNC companies are very strong in Corn Hybrids. Monsanto, Syngenta and Kaveri are the main players.

Cotton is the biggest market with annual 3.8 Cr packets sold. Only Nuziveedu has sold over 1 Cr packets – so that accounts for 25-30% of the market. Next is Rasi Seeds with 50-55 lakh packets. We did about 34 lakh packets. Tulsi & Vibha Seeds may be having similar figures.

The Vegetable Seeds market is 1500-2000 Crs annually, mainly concentrated near Urban centres. Enjoys high Gross margins (60%). 80% of this market is derived from Tomato, Chilli and Bhindi seeds. The balance 20% is Watermelon & other seeds. Namdhari Seeds is the market leader in Watermelon with some 100-120 Crs.

4.  BUSINESS GROWTH DRIVERS

BT Cotton. How much of BT cotton hybrid sales was led by volume growth? And how much by Price growth?

As mentioned before, most of the growth comes from the very aggressive volume growth registered. Only 5-10% may have been due to price increases.

Corn. Margin led growth?

Corn has higher margins but low volumes.

5.   KAVERI PRODUCT SEGMENTS/REVENUE CONTRIBUTION

BT COTTON

Well we did about 480 Cr in 1st Qr this year. And cotton is ~325 Cr, so that’s about 68%. For the full year too, Cotton share should be at similar levels.

BT Cotton overall market is declining (-12% in FY12?); Whom are you taking market share away from?Why is Competition not able to match up? Sales have been doubling every year? How long before the trend reverses for Kaveri? Penetration of Cotton Hybrid seeds 90% plus?

Success depends on a number of factors. First you must have the right product. And then you need to have the ability to scale up production and supply all the demand that the market can absorb. As mentioned before only Nuziveedu has been able to do more than 1 Cr packets. Rasi has done 50-55 lakh packets. We hope to grow our share.

We heard there is some shortage of Cotton Seeds? Mahyco? Is that true?

Mahyco seems to have some challenges with the Hybrid – that has scaling up issues.

CORN

We did Corn sales of ~100 Cr; ~20% of Sales

BAJRA

Less than 40 Cr: ~10% of Sales; but on an all India basis share of Bajra acreage is coming down because of others like Guar Guam.

RICE

Less than 40-50 Cr

How do you foresee the market in the next 2-3 years? Where will the growth come from?

We do not see any change for the next 3 years. The segment contributions will remain more or less the same. We should be able to grow our business at a 20% CAGR basis.

MICROTECK

Where does the company stand currently in terms of competition. If and when company expects it to scale up and start contributing meaningfully to sales and profits?

This segment comprises of micro-nutrients, bio-fertilisers and bio-pesticides. The micro-nutrients segment has no technology barriers or other edge. Margins are around 15%. 85-90% of the turnover comes from AP. Unlikely to see any significant growth.

The bio-fertiliser and bio-pesticides segments may reach significant size in 5 years.

VEG SEEDS

This segment is at a nascent stage. Unlike others, these require controlled farming and is capital intensive ~50lakhs/acre. This also requires skilled labour. However we have seen vegetable prices continually going up.

The payback is in 3-4 years, while the investment lasts you 25-30 years. Margins are high and there is good export potential.

6.   INTELLECTUAL PROPERTY

11000 Germaplasm Bank; What does it take to build this huge a bank; Is this across crops? Across soil conditions? Pests; Drought resistance patterns: Briefly explain what does this take?

We never gave out a figure for our germaplasm bank.

168 lines/hybrids registered with PPV&FR, 54 DUS test cleared, 15 in line for certification. 14 Registrations. How long for the 15 in line for Certiification to Commercial availability?

The registrations are an investment for future intellectual property protection of parental lines and hybrids. There is no commercial significance.

R&D to Registration to Commercial Process. R&D Team strength? Skills? R&D Spends as % of Sales?

We have a ~100 member R&D team. The strength has doubled in the last 5 years. Each crop has a Team leader. 

R&D to Commercial success is long.

Cotton – 8 years; Breeding can be for 15-20 years

Maize – >10 years; breeding can be for 75 years

Reverse-Engineering Risks? Partner Farmers? Smaller competition stealing a successful hybrid line?

Seeds can not be technically cloned. The original parental lines for the hybrid matters. If stolen form production, impurities crop up in next season and the resultant seed’s effectiveness is not the same.

How does Kaveri’s Pipeline compare with those of competitors who have already filed for approvals? Any serious competition coming up?

Registration pipeline has no commercial launch significance. Visibility about competition hybrids is reported from the field.

Dupont Unit accuses Kaveri of Gene Piracy in 2011? Any other Litigations? What are the liabilities if you were to lose any of these cases? Please react.

We don’t think there can/will be any liabilities. We are marketing this product for over 7 years. The Dupont case is about a hybrid having similar traits. The case is about IPR violation. The courts cannot rule on that. It will have to refer to the IPR authorities who have to test both the products, establish originality of parental lines, and revert back with the results. The time needed for this is probably much more than the life-cycle of the hybrid.

7.   CROP SHIFT PATTERNS

Farmers are known to aggressively shift crops depending on their expectations of realisations. Risks?

Not really. The picture has not changed dramatically over the years. Cotton hybrids have remained the mainstay and has only grown in acreage over the years to reach 90% penetration. Maize has remained at 40-50% penetration. In between Sunflower seeds had their time briefly but that has died down. Rice hybrids have potential and a long way to go still.

Depending on the monsoon, some shifts happen to other crops like Pulses. Some shifts have happened to Guar. But this has not caused any dramatic shifts in cropping patterns.

The acreage under cultivation for any crop sees a 5-10% change at most from year to year, usually.

8.  FUTURE GROWTH DRIVERS: 2-3 YEAR TIMEFRAME

As mentioned before, Cotton will continue to be the mainstay, followed by Corn, and Paddy.

9.   SEED PRODUCTION MODEL

600 Acres Company owned Land. Bulk of the production is carried out through leased land/contract farming. Do you really need that much land for R&D?

We have always looked at land as an investment. We have acquired land when it was 5000/- per acre to when it was 10,000/- acre to even 30 lakhs/acre – this was the last transaction undertaken by us in 2008. As you mentioned for R&D purposes you dont require so much land, 50-100 acres may be enough.

So what do you do with the 600 Acres?

We have been able to use for different crops and crop cycles. We rotate crops better.

State govt acquiring land from Kaveri in FY 2012 (as much as 124 acres) does not augur well. If this recurs, how does it affect your research/operations?

AP Government wanted to make that area as Reservoir and notified it. They have not been able to do so, and we are still using the land. We have not been compensated for it either. But we have provided for it.

~75000 Acres under Seed Production totally!! all for 350 Cr Sales? Outsourced Farming/Risks? “Much of our seed production is carried out on leased land and through production growers. The company enlists loyal production growers – 100,000 such growers – and offers them attractive remuneration.” Please elaborate manageability & scalability of the same.

The area under lease by us is now ~100,000 acres. Nothing special is done. It has to be in-line with industry practices. Better pay and incentivised for production performance.We have a 100 member Team closely planning/monitoring the performance.

We heard 85% of hybrid rice seeds production in India happens in AP by 40 different companies?

Indeed Andhra Pradesh accounts for bulk of the seed production.

All of Sunflower

50-60% of Cotton

70% of Paddy

70% of Corn

70% of Bajra

Doesn’t that create huge pressures on available land? And does that create entry barriers for new folks entering the game?

The land is leased for each crop cycle, and renewed every cycle. As mentioned before better pay and production incentives matter. The farmer has an in-built interest in going with where he can get better yields, right. Relationships also matter a lot.

So how do you do your advance planning for the next year Production/& Sales?

Actually we start planning 3 years in Advance. In fact we are now preparing for 2015 June, within a +/- 20% range.

What about the costs incurred? How realistic is this? What if something goes drastically wrong in-between?

3 years are needed to build up to the volumes desired. 95% of the cost is actually incurred in the year before Sales. So for 2015 June, 95% of the cost will be incurred in 2014. We have just started the process in 2012, only 5% of the costs will be spread over these 2 years. We have enough time to do course corrections, as needed.

10.   MAHYCO-MONSANTO RELATIONSHIP

Rs. 180/- per bag: Sales Price Rs.930/bag. What are the Terms? Royalty Increase risks? As per some WTO norms Monsanto can increase royalty by?

Over the years this has evolved to a win-win relationship. The government has increased the price cap from Rs 750-930. However the Royalty has gone up only from Rs. 165 to 180, but that has been more than made up by the surge in volumes.

How does it monitor under-reporting?

They generate 500-600 Cr Sales only by Auditing! So they make sure they do a very good job of auditing. Their audit process is more thorough than the I/Tax dept!

11.   SALES: DISTRIBUTION/DEALERSHIP NETWORK

15000 Retailers; Distributors/Dealers pay months in advance. How do you nurture and incentivise this critical part? Are they exclusive to Kaveri?

There is no Exclusivity. Every retailer stocks most products that sell. Exclusivity is not preferred. The farmer also sows 2-3 different hybrids from different companies.

90% of Sales are due to to your Products merit. Channel push can only account for 10% of Sales. Key is in having the right product.

Debtor days have improved drastically from 138 days in FY08 to 28 Days in FY12? What are the reasons for this drastic improvement? Is it sustainable?

Seeds are procured before Monsoon. In the case of Corn & Sunflower there are Government subsidies which accrue after 4-5 months. In Cotton there are no government subsidies. The reduction in debtor days is a reflection of the increasing proportion of Cotton seeds in our product mix.

Inventory Buildup to cater to the huge demand in Q1? Please explain your inventory valuation policy?

Inventory Quantity decides. Valuation is based on Cost Incurred basis on actuals as paid to farmers (includes compensation).

What is the % of advance which customers need to pay at the time of order booking and by what time advance should be paid for availing delivery in the June quarter? Advance depends on credit profile of customers or its same for all? Advance only for BT Cotton or for all seeds?

For Cotton 30% Advance by Dec/Jan. Supply by May June. Sales continue til July 15.

Farmers buy 1 day prior to sowing. Pays 30% within 15 days of sowing. Another 35% within a month. 20% is the trade discount. Balance 15-20% is what shows as Debtors – carried forward as a Credit Note for Sep, Rabi season. The terms vary from crop to crop.

We have distributors mostly in the 5-10-20 lakh category. Very few 1 Cr plus distributors.

Is it correct to say the advances from dealers that show up in Kaveri’s balance sheet at March 31st every year is a good predictor of the following year’s revenue?

Advances vary between 25-30% but depends really on the demand supply situation. For example we had advances of 170 Cr as on 31st March 2012, but we did a business of 325 Cr in June 2012. Taking 30% advance level as the indicator would have been erroneous!

A better indicator could be the Inventory Levels as on 31st March. That may indicate our plans- we may or may not be able to execute on that! Could be 20% higher or lower. If we have planned for 100, Sales of 90 is considered very good performance. Below 80% Sales, there may be losses.

12.   ENTRY BARRIERS

~600 Cr land; 11000 Gene Bank; 159 filings; Which is the biggest barrier?

We have never mentioned any figures – how big our Germaplasm bank is.

Biggest barrier is TIME, supported by the Germaplasm/Success in R&D. You may have success in AP, but if you have to market in Punjab you got to spend time & effort before you can see success there.

Is it correct to say, once you have has success with one hybrid, chances of more successes are higher?

For new parental lines of course one has to go through the full hybrid success process. Once you have a successful hybrid, then the next successful hybrid can be with a slight change e.g. with “sucking pest” resistance. You may have a slight advantage there, as there may be higher chances of success with slight modifications.

We are usually not worried about competition hybrids. We are worried about making our successful hybrids work with slight changes. We are now seeing much better success than “Jadoo”, with “ATM” which we introduced 3 years back. We have introduced 3 new Cotton Hybrids.

13.   MEDIUM TERM OPERATIONAL OUTLOOK

CAPACITY. 62 MT/hour total average throughput; 8330 MT total cold storage capacity; 2,000 MT/cycle in-house drying capacity; 25 MT/day environment-friendly cotton delinting capacity; 30 MT/day ginning capacity. Please demystify this for us.

Dont worry about these figures. We have spent about 160-180 Cr in Capex so far. Fy12 Capex was about 8 Cr. We will be needing about 5-10 Cr Capex every year for the next 5-6 years. No big recurring Capex is envisaged.

The 60 crore capex in FY 10-11 was good enough to take the revenue to 400 + cr, what is the next growth plan ? The capex in FY12 was just 11 cr.

As mentioned before we are looking to double the turnover in next 3 years, with no big recurring Capex. 5-10 Cr additional capex every year.

TAXATION. How does the company view the tax rate it currently pays? Any chances of tax rate increasing going forward? Is there any litigation with tax authorities on the tax rate the company pays?

If you look at FY10-11, we have actually paid tax at 30%. Some amount was refunded adjudging our Income as Agricultural income, which we reflected back in “Other Income”. The company does not have any litigations on Tax issues.

Low tax rates by Seed Industry- disputed by Income Tax Department. Favourable judgement in lower courts face risk of being overturned in High Court/Supreme Court? How does the company view the latest judgement in favour of Advanta?

Yes, recently the High Court of Karnataka ruled in Advanta’s favour, classifying that as Agri Income. Infact all the cases filed so far has been lost by the I/Tax dept. The only case where I/Tax dept got a ruling in their favour was against a company in Karnataka – where I believe the company had flouted some Karnataka state norm on maximum lease holding. Even that case is on appeal.

What about the analogy being highlighted of the Tea Industry where companies are taxed at different rates for “ tea production” and higher rates for “tea processing”.

Yes for “Processing” the analogy could perhaps be made with a) Rubber and b) Tea Industry. In natural rubber the processed output is distinctly different in size and shape. In Tea also the size and shape of processed Tea is different from the Leaf. However in the case of Seed processing, the Input/Output is the same. Saleable product is not changing shape.

REGULATIONS. Does the company need any regulatory approval before launching seeds in a new state once it has been successfully launched in another state? Is there Price capping in any other state than AP?

Once a state has capped the price at 930, why would anyone buy at a higher rate from any other state. They can all come to AP to buy at that rate, right. So the price cap effectively is pan-india! Prices vary from Rs 930 to 1000.

The Maharashtra Government has recently issued an order cancelling the company’s(Mahyco) licence to sell and distribute genetically modified BT cotton seeds in the cotton producing states of Maharashtra. How much of your BT Cotton Sales come from Maharshtra, and from Andhra Pradesh?

This is an unfortunate development. And the Government Order is inconsistent with the facts of the case. Mahyco Seeds had a production/multiplying challenge. If supply drops from 33 lakh packets to 2-3 lakh packets what can happen? There are some farmers, esp in the Warangal belt, who wanted only that product and would go to any lengths to procure that product. The black-market pushed prices up from Rs 1100 to 2000 to 2500.

The company did not get any benefit! The company’s price to the Dealer remained the same. All seed manufacturers are opposed to this arbitrary move. It should get reversed through court decision.

But the judicial process does take it’s time?

There is 1 year time! Till the next season. We are pretty confident.

QTRLY RESULTS/ SEASONALITY MITIGATION

3.4 Mn Cotton packets. Total market 38-40 Mn packets? So a 10% market share? Was Q1FY13 an extraordinary quarter in terms of demand supply mismatch for BT Cotton seeds?

We should do a 20% growth.

Any effort by management to make the 2nd, 3rd and 4th quarter of financial year more productive in terms of sales and profits?

What can we do here! (Smiles).

25-30% annual growth sustainable for next 2-3 years?

We are confident of a 20% growth for next 2-3 years, or a turnover of 850-900 Cr

14.   LONGER TERM VISION

To become the No #1 Seed Company in India

15.  BRAND BUILDING. PROMOTIONS

Mainly Sales promotions/demos. We have 10 Tata Aces going around doing local promotions in local languages. We don’t do any aggressive promotions/brand building. The products need to perform.

16.   RISKS? ANY NOT DISCUSSED SO FAR?

For sure not Monsoon!! Cotton Seeds have

a) longer time frame, affects only if say rainfall is below average -90%

b) initial 2 showers are enough for sowing, doesn’t need huge rainfall

c) can always transfer for next season sales; we have cold storage facilities

d) delay in monsoon can cause shift in crop patterns – we have a diversified seed basket

In any case the shifts are 5-10%; we need to be worried if only there is a 20% plus shift.

17.   DIVIDEND POLICY

Esp now as there is surplus funds and are investing it in mutual funds. 100 Cr CASH. Company made provision for diminution in value of investment of INR 3.5 Cr. Similarly there are investments of INR 2 Crs in equity and the company has already made provision for diminution of value of equity by INR 1.5 Crs.

The way we see it, the Promoters will be the biggest beneficiaries of a hefty dividend payout. We have been increasing Dividends for the last 3 years, in line with our profits growth. Yes Dividend Payouts are currently on the lower side.

But please see this in the context of the nil/low debt situation. At this stage of our growth and in our kind of business we need to maintain enough Cash on the books. When we are comfortable on that front we will look to improve things on this front. Infact we might actually prefer a buyback of shares to increase shareholder value


Disclosure(s)

Tirumal Rao: No Holdings in the Company; ;
Davuluri Omprakash: No Holdings in the Company; ;
Donald Francis: No Holdings in the Company; ;
: ; ;

Kaveri Seed Company

Background

Kaveri Seed Company is in the business of producing and selling of hybrid seeds, micro-nutrients, and premium vegetables/herbs (Kexveg new initiative in FY12). Incorporated in 1986, the company completed 25 years in the Indian market. Listed in 2007, it is one of the fastest growing seed companies in India.

Kaveri seeds has invested in an extensive R&D facility with a company owned land bank of ~ 600 acres and a Germplasm gene bank exceeding 11,000.

159 lines/hybrids registered with PPV&FR, of which 39 have undergone DUS test and 15 are in line for certification.


Main Products/Segments

Kaveri Seed has a diversified portfolio of Corn, Pearl millet (Bajra), Sorghum (Jowar), Rice, Cotton and Sunflower premium hybrid seeds with genetically superior traits for high yield, pest resistance, and drought tolerance. [FY12 Sales 349.5 Cr ~93% Sales]

BT Cotton Hybrid forms over 50% of Sales. The BT Cotton gene is licensed from Mahyco-Monsanto JV (to which it pays royalty of Rs 180 per bag) with which it has produced a highly successful BT Cotton Hybrid by using separate male & female lines form its Germaplasm gene Bank.

Started in 2002, the Microteck division provides micro-nutrients and organic bio-pesticides /fungicides to increase crop yield. Foliar sprays, Soil applications, Plant defense, Bio-pesticides & Bio-fungicides. [FY12 Sales 23.5 Cr ~7% of Sales.]


Main Markets/Customers

Kaveri Seeds has a well established distribution network catering to the farmers. Over 60% of the company’s revenue is recorded in Q1. Karnataka and Andhra Pradesh contribute highest sales.

The Indian seed market is among the top ten largest in the world, estimated to be about US$1 billion in 2005. (Source: ISF Secretariat).  Aside from Kaveri, the notable seed companies in India include Pioneer, Mahyco, Monsanto India, ProAgro, Syngenta and Nuziveedu Seeds. Total Market size in 2012 is estimated to be ~8000-9000 Cr in India.
The Company’s major competitors are Monsanto and its subsidiaries, Pro-Agro (a Bayer Crop Science subsidiary), Pioneer (a Dupont subsidiary), Syngenta, Nuziveedu, Vibha and Rasi Seeds.
Brand conversions in crops like corn, cotton and sunflower are very high. Companies which develop effective hybrids are able to garner market share. BT Cotton has been the primary driver in the Indian Seeds market for the last few years. Nuziveedu Seeds reportedly has the largest 40% market share [Product Mix 90% Cotton]. Reports suggest Kaveri Seeds has been ramping up market share rapidly from 5.5% in FY11 to 11% in FY12.

Bullish Viewpoints

  • Huge potential for Hybrid seeds – because of lower acreages & requirements of higher yields, pesticide/herbicide resistance, lower water consumption, drought resistance
  • BT Cotton led volume growth – Rapid market share growth, to 11%  in FY12 from 5.5% a year back on the back of its differentiated BT Cotton Hybrid. BT Cotton forms 50% of Revenues
  • Corn led margin growth – Corn is the next highest segment, with higher margins
  • Paddy Hybrids – Future growth driver

Bearish Viewpoints

  • Weather-Related risks
  • Longer debtor days
  • Low tax rates by Seed Industry- disputed by Income Tax Department. Favourable judgement in lower courts face risk of being overturned in High Court/Supreme Court
  • Regulatory Risks – Agri sector
  • Political Interference – Price capping. AP Govt has capped price of BT Cotton in AP
  • Aggressive shift in Crop patterns by Farmers

Barriers to entry

  • Big Germaplasm Bank – Kaveri has amassed a huge breeder base ~11000 over the years for producing hybrids with required traits for local market. It has also established cold storage and Seed Bank facilities at Gowaram to now preserve these as “Gene Bank”.
  • Huge Land Bank – The Seed business needs huge land banks for experimentation and commercial production for Sales. Kaveri Seeds has ~600 Cr land bank
  • Long development time – Coming up with a differentiated effective hybrid usually takes 5-6 years
  • Diversified Portfolio – 50% of revenues come from BT Cotton. Corn, Bajra and Sunflower are other major contributors. Jowar & Rice are the other premium hybrid seeds
  • Strong Distribution Network – ~750 distributors across the country
  • Intellectual Property –  159 lines/hybrids registered with PPV&FR India, of which 39 have undergone DUS test and 15 are in line for certification.

Interesting Viewpoints

Monsanto’s Corn hybrid – Dekalb –  is 100 years in existence. This is the Power of a good differentiated hybrid!!  Kaveri also has good hybrids in Corn. It has reportedly increased its Hybrid Corn pricing 16% on a compounded basis over last 20 year


Disclosure(s)

Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years