JK Agri Genetics - Is this the desi Monsanto/Bayer?


(Hrishikesh Kale) #1

This is an undiscovered gem. Let me start with a brief synopsis:
About the industry:
The seed industry lies at the very core of the agro industry and it is becoming an increasing lucrative proposition.

  1. Conventional type of agriculture was where the mother seed was kept by the farmer for the next season and he cultivated the seeds and used it. This practice has been followed from the time agriculture was invented. But with the advent of technology in all fields of life, agriculture too will be impacted. Computers have revolutionized medical research now is the time to change the seed growing methods. Hybrids and GM tech will change the way the seed industry works. Research in seeds will change the way agriculture will be done by 2030.

  2. Using conventional techniques the farmers used to face frequent crop failures due to seeds turning bad. This situation should change with the technological advances in this area.

  3. Farmers were suspicious of hybrid seeds and were misinformed about its benefits. Hence hybrid seeds business did not grow as expected. Now the scenario has changed considerably. As estimated by CIMB in its report, hybrid seed industry is worth Rs.12,000 crores in FY 18. If penetration in rice and other products increase to 60 % by 2030, then the organized seed industry in India would be Rs.1,00,000 crores. Just 8-10 companies as of now are worth mentioning: Kaveri, JK Agri, Monsanto, Rasi seeds, Nuziveedu, Nath bio genes, Ajit seeds and some regional players. If the theme is played well by these companies, they can have a blockbuster 20 year growth run as food will get scare with time.
    • Land productivity in the last 2 decades has gone up by 30-35 % (very less), whereas tech has changed the face of many industries during the same period. Smart phone has 100 times more computational power than a 286 desktop of 1999 make. Strides have taken place in surgeries, designing capabilities, etc. but the neglected child was SEEDS. Hybrid seeds were not easily accepted due to ignorance and illiteracy of farmers around the world. But due to information explosion and proactive attitude of Governments, farmers are adapting to new techniques of farming.
    • Feeding a huge population in the next decade has become a headache for the Governments. China has leased millions of acres of land in South America for securing food for its population.
    • Consolidation is happening in the seed industry worldwide: Earlier 6-7 major companies were present in seed industry. In last 3 years, DOW has merged with DUPONT, CHEM CHINA (Government co.) has purchased SYGENTA, BAYER has purchased MONSANTO. Now these 3 conglomerates are controlling 70% of the world seed market.
    • Technology has to touch the seed industry to increase the per acre productivity. Since the landmass is finite and population is growing, to feed more mouths there is no substitute other than by increasing productivity.
    • Research to market journey of one hybrid seed is a 5-6 year period. So if one starts working in 2012 on hybrids, it will be 20 -30 years before the hybrid say rice will give double the productivity. Thus a company having good quality germ plasm of different hybrids can have fabulous valuations going forward (Germ plasm is the IPR here).
    • Agriculture is a state prerogative. To acquire seed companies in different countries, permissions are needed. Hence home grown quality seed companies will have fabulous valuations.
    • Agriculture will be the biggest job generator in the period 2017-2027. By implementing correct policies, India has the potential to become the FOOD HOUSE OF THE WORLD.
    • Thus agriculture can be the next big theme for the next 10 yrs. Fertilizer companies, pesticide companies, farm equipment companies and seed companies will thrive.
    • Due to MNEREGA, farm labor has become very costly. Hence ancillary farm equipment companies will have a field day. Manufacturers of farm tillers, automatic pesticide sprayers and combine harvesters will have quantum growth.
    • Pesticide companies having research base in India will do very well. As a seed scientist has said ’ You need local police to deal with local goons. CIA of America cannot deal with them.’ - Thus for local pests, you need local pesticide companies doing research and sell effective products. We can expect manifold returns from them in the next 5-10 years.
    • Local seed companies having large research base, huge germ plasm, good marketing team can give huge returns in the next 10-15 years for companies like JK AGRI GENETICS, KAVERI SEEDS, NATH BIOGENES, NUZIVEEDU SEEDS, RASI SEEDS (if the last 2 list on the markets).
    About the company:

  4. Part of the Lakshmipath Singhania Group. They are the second richest family in Kolkata. They have companies with a combined turnover of close to $ 4 billion. These include JK Tyres, JK Paper, JK Sugar, JK Agri Genetics, Fenner India and JK Lakshmi Cement. JK group derives 95 percent of revenues from Agro based industries.

  5. JK agri genetics (JK seeds) has a wide range of products both Field crops and Vegetables - 3 cotton hybrids, 3 Jowar hybrids, 6 tomato hybrids, and 16 hybrids in all types of gourds.
    Why JK Agri is so lucrative:

  6. Huge R&D focus. Spends around 15 crores every year on R&D. Efforts are now coming to bear fruit (or rather vegetables) :blush:

  7. Focus is on vegetable seeds segment which has 60% gross margins and where sales peak in Q3 and Q4 the leanest period.

  8. They are focusing big time on Africa where cotton cropping season starts from November. There is no price cap on cotton seeds in Africa unlike in India where it is capped at Rs. 800 per packet. Exports to Africa have already started.

  9. Last year they achieved break even in H2. This year they should be in profits. Operating leverage play. Very low capital base magnifies the EPS figures.

  10. They are paying taxes while Kaveri and Nath Bio are not paying.

  11. Peer set valuation is very lucrative especially if you factor in that they are paying taxes due to which they are losing on EPS front.

JK Pass Pass has been very well accepted in the markets. Since it takes 3 years for a good seed variant to be commercially successful Q1 2018 should be very good for JK Pass Pass as market reports has given it a big thumbs
.
If we go by the trade data of Rasi 659 which is a BT cotton variety:
2015: 8 lakh packets
2016: 15 lakh packets
2017: 45 lakh packets

Jk AGRI’s PASS PASS :
2016: 2 lakh packets
2017: 5-6 lakh packets
2018: 10-15 lakh packets (?)
7. The reputation of many firms has been tarnished for selling Spurious BT cotton seeds


These include Kaveri , Monsanto, Ankur, Nuziveedu and Raasi.
Risks:

  1. The vagaries of the nature:
    Poor monsoons and unsupportive commodity prices are the bane of Indian agricultural sector and will continue to be so for the foreseeable future.
  2. Regulatory risks:
    This sector is susceptible to regulatory risks. Regulatory changes from the Central and State Governments in respect of prices, distribution, royalties, taxation etc. have a high impact on the sector.
  3. Storage infrastructure:
    Since seed is a perishable item, it is subjected to death depending upon its genetic potentiality to remain viable and storage conditions. Storage for longer period shows negative effect on productivity.
  4. Climate pest and disease related problems:
    Seed production is a seasonal activity. Variations in temperature, heavy or low rainfall leads to huge losses through crop failure. Flowering in most of the vegetables is highly temperature sensitive. Generally seed production is done over larger area with same variety to avoid contamination, but it is favorable for outbreak of pest and diseases epidemics.
  5. Very low float. Just 36 lakh shares and 90% already cornered.

Disclosure: I am invested.


(Hrishikesh Kale) #2

Peer set valuation

This i missed in my original post = Peer set valuation matrix


(Hrishikesh Kale) #3

As per directions of the moderator putting in more insights on the financials:

  1. Sales have been pretty stagnant.

  2. The balance sheet is stable.
    What is changing:

  3. If you see with any seeds co H1 is the most lucrative (corresponds to the kharif season).

  4. Vegetable seeds is their main focus area now. Most of vegetable seeds is in H2. This year 40% of their sales should be in the vegetable seeds segment which is the fastest growing segment and with the highest margins. Now operating leverage effect should happen.

  5. In H2 last year they have broken even. In H2 2017 they did around 67 crores of turnover (about 20 crores more than H2 2016) and achieved break even. Now if they repeat this feat in H2 profits will have a classical J curve effect.

  6. They have started exports to Africa. There are no price caps there on the cotton seed packets. The cropping season there starts from November. So H2 should do well going forward and add to the profits of H1 which is a killer.
    http://allafrica.com/stories/201710110695.html

  7. They have paid almost 20 crores of taxes till date. The question of whether BT cotton seeds breeding and sale classifies as agricultural income is still in the courts. Kaveri and Nath do not pay taxes.

  8. They have a dispute with the Rajasthan Government which is arbitration for about Rs. 20 crore. If this comes through their long term debt will be wiped off.

  9. The latest CRISIL upgrade in ratings exactly replicates what is mentioned above. http://www.moneycontrol.com/stocks/stock_market/corp_notices.php?autono=10141481


(Chandra) #4

Thanks Hrishikesh for starting this thread.
Had quick check for me Kaveri Seed looks better. Appreciate your views.


Kaveri Seed P/E 17.95 , CMP /BV 2.84
JK Agri P/E 38.36, CMP /BV 4.93
Net Profit of Kaveri Seed looks much better.


Promoter holding: JK Agri is better.
JK 65.40%, Kaveri 54.79%



(Hrishikesh Kale) #5

Let me answer your questions. But before that please study the comparison matrix i had posted.

  1. Net profit margin:

You are not comparing apples with apples. JK is paying taxes Tax to PBT is 24.58%. In case of Kaveri they are not paying taxes on agricultural income (just on other income)
Their tax to pbt ratio is 6.99%

JK agri is spending 13 crores on r & d on a turnover of 193 crores, kaveri is spending 12.45 crores on a turnover of 670 crores. JK is spending more on R&D with less than 1/3rd of
turnover of kaveri.

If you take these factors out jk npm is much higher.

Secondly there is an arbitration proceedings where jk is claiming 20 crores from rajasthan govt. If that comes positive then there will be a 3 crore interest saving (all long term
loan wiped out) and 3 crores translates to 12 EPS.

  1. Kaveri is a one horse show. They are kings of cotton seeds. Most of their revenues is in Q1. They have just started their journey in vegetable seeds which takes 7 years
    to commercialize. JK is ahead of the game in this area. They broke even in h2 last year and this year h2 should earn profits. Vegetable seeds has the highest margins
    because there are no price controls. It is the fastest growing segment in the seeds industry.

  2. Promoter holding is 65.4 percent. But indirect holding is 90 percent. There are many entities in the public holding which have only jk group shares if you observe.
    So hardly 3 lakh float is available.

  3. Kaveri is going to badly hit in cotton seeds next year due to the BG3 fiasco in maharashtra. This is along with nuziveedu and monsanto.
    JK and Nath will corner market share. JK sold just 6 lakh packets of jk pass pass which is a hit in its 2 nd year. 3rd year is normally the best. Hope they will touch 15 lakh packets in Q1 next year. And the big elephant in the room is the massive African cotton seed market. JK has made great strides there. There are no price caps there and the season starts in November. So now with Vegetables and Africa JK will have sales all around the year. With there low cap base and fixed costs already expensed imagine the impact on earnings per share if this pans out well.


(Hrishikesh Kale) #7

Yes,
The key to understanding this is the H2 numbers. If you see last year they did sales of 66.74 crores
(20 crores over the previous year). And they acheived breakeven in H2 2016. (Marginal loss of 1.16 crores). In H2 2015 they had done a loss of 5.26 crores. So a reduction in losses of around 4 crores or 12 EPS. If they achieve a 25 crore increase in sales in H2 this year they should achieve around 95 crores.
I hope so based on vegetable seeds and Africa cotton exports. In that case the fixed costs remain the same or marginally increase (e.g. pay hike for employees etc.) and they can achieve a profit of 10 crores in H2 this year.
Sales 95
Variable costs : 44 crores
Fixed costs : 38 crores
PBT 13-14 crores
PAT 10 crores
This should increase EPS by 30 in H2. In H1 they did 35 EPS so it soars to 65. Classical operating leverage play.
Now the big risk here is that they do not increase R&D much above 6.5 - 7 crores for the half year.
And if you add Q1 next year in cotton seeds (JK pass pass) and kaveri, nuziveedu raasi reeling
with a bad reputation, due to the BG3 fiasco the next 3 quarters are gonna be very interesting.

In my view R&D is an investment not an expense. Compared to their revenue the are spending huge in R&D. What does that mean?


(avneesh) #8

Hi Hrishikesh,

A lot of people don’t track Kaveri seeds thread. Can you please tell us what is the BG3 fiasco?
And as far as I know, the productivity yield from Kaveri cotton seeds is far greater as compared to other companies. So, why will a farmer prefer JK passpass over Kaveri?


(Hrishikesh Kale) #9

You may access this link

Do you have the productivity figures of JK pass pass against the jadoo or jackpot? From ground sources i have heard that JK pass pass is more conducive to mechanized farming.


(A. King) #10

Any idea why JK pays taxes when others don’t?

Report 30 Sept 2017 available at company web site suggests a loss of Rs 9.23 crores. Are using the same report or Annual Report?


(Hrishikesh Kale) #11

I was referring to H1 in total. Q2 is traditionally the worst quarter and from my info due to floods in Gujarat the vegetable cultivation got delayed so they took a hit.

About taxes whether cultivation of breeder seeds (There is a big process involved here) is classified as ‘agricultural income’ or not is in the courts in appeals. JK is taking a very conservative approach and paying all taxes, while kaveri and nath are not paying any taxes. In case there is an adverse reaction then these two might have to cough up taxes for the previous years retrospectively.


(Hrishikesh Kale) #12

As I had been saying on the tax front see this article. Kaveri will be affected in case of a contrarian ruling

JK is on safe grounds. If courts favor tax exemption it should get back 20 crores with interest back on taxes already paid, else they have always been paying taxes.


(spvk1) #13

Discussion going on rapidly in this forum and stock also moving rapidly in North direction . 2 days in Upper Circuit. Great thoughts and movements.


(Tekumani) #14

Basically , i liked this product very much, we used this in our farm !! Please check above videos …


(Bhavin_56) #15

Why this share is up in last month (approx 450 rs) ? Any particular reason? If we see Sep-17 results, not encouraging.

I am not invested in this stock.


(Hrishikesh Kale) #16

Bhai read the entire thread. A nice article

Its amazing they have missed this stock.

About Q2. It is traditionally the worst quarter as it lies between the kharif and rabi seasons. This year was bad because of floods in Gujarat due to which vegetable seeds sales were impacted


(Hrishikesh Kale) #19

Bhai mere,

Please read the entire thread before commenting. What I pasted was about the tax issue which was being discussed threadbare. This has direct impact on profits of all seed companies. The other was on the BG3 issue which was requested by another member. There cannot be a more relevant article for the cotton seeds market in India.
The last was on the upcoming agri bonanza in the budget to relieve agrarian distress.
You find them irrelevant? If so please enlighten me what I should post so that it cannot be termed as speculation.
In any case, I will henceforth stop sharing data lest this be taken as me promoting the stock as though people will buy just because i said so :grinning:


(James Sebastian) #20

Thank you Hrishikesh. I heard this as good stock from some of my investor friends about 2 months back, but did not get time to research further. This thread will help me to revisit this one. Please continue to write and I cannot see speculation in this thread.

Disc: Not invested yet. Studying


(Hrishikesh Kale) #21

Thanks, I have been invested here since before diwali. So waited patiently for 4 months without any price movement, while rockets were flying in other stocks. It is purely coincidental that the price spurt has happened post creating this thread. If this is how it going to be i will henceforth create a thread for all my picks hahahahahaha. On a serious note for those who think this is speculation let me throw out a fact. Long term ji please verify the data below yourself lest you think this is speculation:
Bayer bought seedworks India a vegetable seeds co in 2015 for roughly 450 crores. At that time it had sales of 101 crore. JK agri when I purchased at around 1100 had a mcap of around 400 crores and they should do roughly that much in vegetable seeds. The rest of the stuff around 100 crores in cotton and other field crops we get it free. That was the logic I used. Add to that the financial and distribution might of the 5000 crore jk group. Financials do not capture a R&D focussed co like this. It takes 8 years to commercialize a seed , do you know that? This stock is very hard to understand.


(Hrishikesh Kale) #26

Monsanto facing great flak over failure of BG2. Can desi players like JK and Nath which have home grown BT cotton make a dent? Lets see. Interesting things happening in the BT cotton space.


(tejas2677) #27

Bro…how did u arrive at the no of Rs 20 cr?