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?
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
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.
We did Corn sales of ~100 Cr; ~20% of Sales
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.
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.
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.
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
Tirumal Rao: No Holdings in the Company; ;
Davuluri Omprakash: No Holdings in the Company; ;
Donald Francis: No Holdings in the Company; ;
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