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.
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.
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.
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:
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.
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:
Huge R&D focus. Spends around 15 crores every year on R&D. Efforts are now coming to bear fruit (or rather vegetables)
Focus is on vegetable seeds segment which has 60% gross margins and where sales peak in Q3 and Q4 the leanest period.
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.
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.
They are paying taxes while Kaveri and Nath Bio are not paying.
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.
- 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.
- 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.
- 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.
- 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.
- Very low float. Just 36 lakh shares and 90% already cornered.
Disclosure: I am invested.