Kaveri seeds company limited -- kscl


(Hitesh Patel) #1

KAVERI SEEDS

The company is in existence since three decades and is a leading player in the field of agri and seed business and producer of premium quality hybrid seed of food, fibre, feed and vegetable crops. Till date it has 8 seed processing plants located across the country with a processing and packing capacity of 58 tons per hour. During 09-10, company embarked upon expansion plan by building a huge processing plant at Pamulaparthy in dist Medak in AP, along with state of the art technology for warehouse and seed bank facility catering to the need for seed reserves. For effective supervision of seed production, the company owned land area of 120 acres has been brought under plough. Rain water harvesting and drip water irrigation is judiciously used to raise the crops.

MICROTEK division of the company made significant progress in the field of micronutrients, organic and Bio products. The company enhanced the product portfolio of Microtek division and marketed through a well knit network of dealers and distributors across the country.

The company is having very unique business model offering almost everyseeds. The product portfolio includes 12 maize, 6 cotton, 23 paddy,5sunflower and other vegetables and sorghum seeds verities.

High performing seeds include hybrids of cotton, pearlmillet, maize and sunflower.

CMP 333 MCAP 456 CRORES

DEBT 45 CR FOR FY 10

BV 110

EQ 13.7 CR FV 10 PROM HOLDING 63.71%(5.26% OF THIS 63.71 % PLEDGED)

PROMOTER HOLDING HAS BEEN CREEPING UP EVERY QUARTER SINCE PAST SIX QUARTERS HAS INCREASED FROM 61% TO PRESENT 63.71%

CASH AND BANK BALANCE 19 CR

JUNE QTR RESULTS

June is traditionally the best quarter for the company with bulk of the revenues and profits coming in this quarter.

Q1 FY 11 SALES 148 CR (Q1 FY 10 SALES 100 CR)

Q1 FY 11 NP 31.18 CR (Q1 FY 10 NP 23.13 CR)

EPS Q1 FY 11 22.75 VS Q1 FY 10 16.88

ROE FOR FY 11 LIKELY TO BE ABOVE 25.

BASED ON JUNE QTR RESULTS, THE COMPANY IS LIKELY TO POST EPS IN EXCESS OF 28-30 FOR FY 11.

LAST FEW YEARS SALES AND PROFITS

YEAR

05

06

07

08

09

FY10

Q1 FY11

Q2FY11

SALES

44

48

66

96

123

162

148

36

PBDIT

2.32

4.86

17.14

23.22

28.36

35.33

34.87

6.6

NP

1.29

2.9

10.16

13.4

22.9

29.07

31.17

3.71

cash

3.37

4.81

19.52

14

19.95

DPS

2

2

DEBT

10.36

14.42

11.9

5.67

21.38

45.52

LAST SEVEN QUARTERS RESULTS

QTR

MAR09

JUNE09

SEP09

DEC09

MAR10

JUNE10

SEP 10

SALES

18.4

100

26.78

22.6

12.7

148

36

NP

0.49

23.13

2.7

3

0.17

31.18

3.71

EPS

0.71

16.88

1.96

2.24

0.12

22.75

2.7

The top-line ofthe company was heavily contributed by Corn and sunflower but after2007 the company has shifted its focus to the BT cotton seeds and the

contribution of BT

cotton to the topline is 25% during FY 10 from 10% in

FY 07. Although the margins in cotton are lower, the volume potential is huge which can give good topline growth.

The company has invested more than Rs 60 Crs in recent past. This

capex is enough to take top line to Rs 400 Crs in years to come from the present 160 crores.

Looking at the results shown and prospects of the company especially in view of the expanded capacities and balance sheet strength, KSCL looks an interesting investment bet at cmp of around 330.


(Kiran) #2

Looks like a good business, but not currently at a good price in my opinion.

Apart from the usual price-multiples (which are slightly on the higher side), the profit margins are decent. I am worried about 3 things though -

  1. The SG&A expenses are above average…more than 35% as a percentage of sales over a period of 5 years. Is the management overpaying itself?

  2. Debtor days - increasing rapidly, as their sales increase. Are they collecting enough cash? (and on that point, FCF has been negative for more than 4 years - if this is a capex intensive company that constantly requires upgradation and new machines, are the returns sustainable?)

  3. Inventory days - I am not too sure of the perishability part of it, but if the inventory > 100 days and increasing y-o-y, I am not even sure they are worth the book value.

Good business, decently safe business, but is it at the right price to get in?


(Hitesh Patel) #3

Coming to the concerns raised by you,

1). About the management overpaying itself, the AR lists five directors who are paid a total of 1.34 crores as remuneration. Selling expenses might be higher because the company has its own brands of seeds and sales of these might need the initial push.

2). Coming to debtor days, according to an anagram report, debtor days have come down from 116 in fy 09 to 92 in fy 10 whereas inventory days have gone up from 147 to 227 days. This could be thought of as a key monitorable.

Company has recently completed a capex of 60 crores which will help it ramp up its revenues to more than 400 crores from current level of 200-220 crores expected in fy 11 without too much further capex.

Coming to free cash flow, company generated free cash (although low amount) during four of the last five years. March 06 and March 07 it was positive around 1 crores whereas for March 08 it was 14 crores. For March 09 it was negative to the tune of 5.52 crores and again back in March 10, around plus 6 crores. ( I dont know where you got FCF negative figures for last four years)

3). Inventory days as you mentioned have gone up to 227 days but I guess seeds if stored properly would not perish. Plus the company has a seed bank at its new facilities where it stores seeds and germplasm from which it generates hybrid seeds. I dont know if that too is included in inventory.

Coming to pluses and minuses in this company:

Positives

1). Company has currently only 2% market share in cotton seeds and it contributes around 25% to topline. So if it can increase its market share, the revenue potential looks huge.

2). If you look closely at the sep qtr results, the micronutrient division has started contributing to the top and bottom line and this could be another trigger going forward. Plus it would help the company in pushing revenues in lean quarters – June is traditionally the best quarter for the company and other quarters mostly are lacklustre.

3). Management seems to be good looking at the way they have steered the company and handled their expansion. With most of the capex done, if things go according to plan, the company can ramp up their revenues without too much capex. Always an ideal situation to be in.

4). Regarding valuations, you can compare its valuation with other seeds companies like monsanto, Advanta, camson bio etc which are in peer group. Most of these quote at much higher valuations.

Negatives:

Weather plays an important role in the demand for seeds and hence to that extent the company is dependent to some extent on weather.

Any kind of govt intervention in seeds policy can create problems.

June qtr is usually best quarter and to that extent there can be some price fluctuations. March is usually the worst quarter.

Inventory days are high and need to be monitored.

Valuation is different from person to person so it is difficult to decide ideal valuation to enter a scrip. But according to my perception, for fy 11, since the best quarter is behind, there are less chances of negative surprises in next two quarters. So at around 11 PE for a low debt company with lots of scope to grow having completed its capex, this looks attractive.

Technically, the scrip broke out of multiple tops in the region of around 310-330 during Sep 10 and since then has hit a high of around 450 and now come down to test the earlier resistance zone of 310-330 (which according to change of polarity principle is likely to be a support zone now-- Any stiff resistance zone if crossed by a scrip tends to be a support zone on subsequent declines-- We are observing similar pattern in Mayur uni where earlier resistance of 270-280 now is acting as support zone.) Now it would be intersting to see if scrip can take suppport of this 310-330 zone and can move up from hereon.


(Harsh Kabra) #4

What is the difference in the business models (if any) of Kaveri Seeds and Camson Biotechnologies?


(Hitesh Patel) #5

kaveri seeds has come out with fantastic results for q1 fy 13.

period q1 fy 13 q1 fy 12 fy 12 (12M)

sales 479 241 372

np 101 52.55 63.4

quarterly eps is around 73.

at cmp of 815, i think stock offers good upsides inspite of the sharp run up as it still is avaialble at only 10 PE considering full yr estimates for fy 13 at around 80-85. (in kscl, first quarter is usually the best quarter contributing max to sales and profits.)


(hemant gupta) #6

Hi hitesh, do you know why Kaveri’s tax rate is so low? They paid 1.5 crores tax on 102 crores profit. Also, what kind of pe do you think kscl can command given its growth?


(sandeep) #7

Hi Hemant,

Its very difficult to arrive at a Probabale PE for this script. Market fancy will be more for these kind of scripts… more relative peer Advanta India is trading at an hefty valuation of around 35 PE. In the long run everything boils down to the Eps growth… Certainly the script is not overvalued at cmp and if they continue to deliver similar kind of growth then market will rerate the script and it can command PE in twenty’s atleast given script also has scarcity premium.

Hitesh,

Any more information that can provide insights on their Growth plans and sales figures???


(Hitesh Patel) #8

Seeds companies in general get benefits of lower tax from govt. I tried to look at other seeds companies like jk agri, advanta and it seems all of them are playing very low taxes.

Regarding PE they can command, this company can go up to around 20 PE is what I think. Plus it is a debt free net cash company.


(hemant gupta) #9

thanks hitesh. kaveri seems to have a fantastic historical record with a 5y revenue CAGR of 31% and 33% cagr on net profits. what do you think helps them maintain such a high growth given than monsoons in india have been erratic for the last2 years. also, other companies like advanta and jkagri haven’t shown such a growth over the last 5 years. also, do you think they have enough drivers to let them grow at similar rates over next 3-5 years?


(Hitesh Patel) #10

hemant,

in the seeds business for getting growth you either increase number of your offerings or increase goegraphical reach or ideally a combination of both.

I think kaveri is doing both these things. There were some reports of company going in for olericulture etc and exploring the exports markets. It has a big bank of seeds and germplasm and seems to be doing quite well in the research dept which is essential for seeds company.

Monsoon being erratic == I think people have to buy seeds much before monsoon come so that they remain prepared for the sowing. So I guess monsoon might not affect them too much max sales of this company comes in june quarter which is before 30 june by which time many a times no one has any idea how monsoon are.

Looking at the track record of the company it can keep growing at the same 25-30% rates going forward. Will have to go through the fy 12 AR when I can lay hands on it to get better idea about their strategy.

regarding advanta and jk agri, I dont have a clue why they are not growing. maybe the management is not up to the mark or maybe research lags behind.

Regarding prospects of the company simplest thing to do is to buy the stock around 800 or lower and then wait for it to get a PE of around 15 which it does atleast once in a year. You then have a cool 50% upsides from here.

Looks like a no brainer at 10 PE or less based on fy 13 expected figures.


(hemant gupta) #11

Thnx again hitesh. Have you ever looked arshiya international? Seems like an interesting story unfolding. If things unfold as per plan this could be a blockbuster. Ebitda margins have been expanding because of the increase of revenue share from ftwz. Revenue growth seems to be good despite the slowdown. Ofcourse this is a very capital intensive business and hence the company has taken huge debt and market seems to have punished them for that. Once the capital investment process Is over and the company gets into the debt repayment mode, earnings could jump and the return ratios may look very attractive. Management has executed well on the Mumbai and Khurja ftwzs. This seems like a very long term high risk high return story where if someone has enough patience, returns cold be manifold.


(Hitesh Patel) #12

FIGURES IN THE TABLES HAVE BEEN UPDATED TO SHOW THE SCORCHING GROWTH SHOWN BY KAVERI SEEDS.

LAST FEW YEARS SALES AND PROFITS

YEAR

05

06

07

08

09

FY10

FY11

FY 12

Q1FY13

SALES

44

48

66

96

123

162

233

372

480

% growth

10

37

45

28

31

37

60

PBDIT

2.32

4.86

17.14

23.22

28.36

35.33

54.87

77

104

NP

1.29

2.9

10.16

13.4

22.9

29.07

42.47

58.1*

101

% growth

77

241

32

71

26

46

36

Npm

2.93

6

15.4

13.95

18.6

18

18.22

15.6

YE CASH

3.37

4.81

19.52

14

19.95

40

100

EPS

10.87

10.19

16.38

20.88

30.6

42.4

73

BV

27

77

91

110

138

160

176

ROE

40

13.23

18

19

22.17

26

DPS

2

2

2.5

4

DEBT

10.36

14.42

11.9

5.67

21.38

45.52

61

21

High

390

319

313

430

744

price

177

111

140

235

301

* After extraordinary expenditure of 5.29 cr in first quarter.

LAST FEW QUARTER RESULTS (MAIN COMPARISION SHOULD BE DONE OF JUNE QUARTERS)

QTR

SALES

NP

EPS

MAR 09

18.4

0.49

0.71

JUNE 09

100

23.13

16.88

SEP 09

26.78

2.7

1.96

DEC 09

22.6

3

2.24

MAR 10

12.7

0.17

0.12

JUN 10

148

31.18

22.75

SEP 10

36

3.71

2.7

DEC 10

32.42

2.6

1.9

MAR 11

17.3

5

3.6

JUN 11

241

47

34.5

SEP 11

48.5

5.16

3.77

DEC 11

41.4

2.88

2.1

MAR 12

41.6

2.8

2.1

JUN 12

480

101

73.8

COMPANY IS LIKELY TO POST EPS IN EXCESS OF 80 PER SHARE AND HISTORICALLY TRADES AT A PE OF AROUND 15-20 TIMES. FIRST QUARTER IS USUALLY THE BEST QUARTER CONTRIBUTING AROUND 80-90% OF SALES AND PROFITS AND SUBSEQUENT QUARTERS ARE USUALLY LACKLUSTRE.

INVESTMENT POSITIVES

KAVERI SEEDS IS A COMPANY THAT HAS GROWN ITS SALES FROM 44 CRORES IN FY 05 TO AROUND 500 CRORES (EXPECTED) IN FY 13. NET PROFITS HAVE GROWN FROM AROUND 1.3 CRORES TO MORE THAN 100 CRORES IN SAME PERIOD.

THIS HAS HAPPENED WITHOUT ANY EQUITY DILUTION OR EQUITY DILUTION.

AT CMP OF AROUND 800 COMPANY IS AVAILABLE AT CLOSE TO 10 TIMES ITS EXPECTED FY 13 EARNINGS.


(Rohit) #13

Hi Hitesh,

It will be useful if you can share your thoughts regarding the following points. Thanks.

  • As per the company, the total value of seeds sold in India is about 8000 crores (pg 6 of fy11 ar). The company has already done a sales of 480 crores in q1 this year and lets say along with other three quarters will close fy13 at about 550 crores. At about 28% cagr in 5 years, revenues could grow to ~2000 crores or ~15% of the industry (assuming 10% cagr). Do you think they can achieve this market share in 5 years? If so, whom will they gain market share from? Or will they create new categories and capture large pie in such categories? Do they have building locks in place?

  • Also, how likely is it that the govt will increase the tax rate for such companies and in the process hurt the profits significantly?

  • Could you also throw some light on how does this company does 20-25% + roe which is significantly higher than other seed companies (is it brand, able management with good capital allocation skills or what?)

  • The dividend payout is quite low. Dividend yoeld is negligible. Of course they have been able to generate high roe on retained earnings but I am just wondering if the management has an intention to increase the payout in the time to come or not.

  • Working capital to sales looks high. Is it because of high inventory or something else? Is this a major concern?

  • “Our customer focus will always be in the back drop of stakeholder interest. Investors in Kaveri can look forward to robust and accelerated growth” I have no idea why a seeds company enjoying tax benefits from the govt will make such a statement multiple times in the annual report.

  • How much money and time would it take for a company to start from scratch and become like Kaveri?

  • Any reasons you can think of as to why the promoters are not taking the company private?

  • A quick comparison with Monsanto indicates significantly lower revenues/employee (46 vs 89) and pat/employee (8.5 vs 11.5) (source: edelweiss.in) What does this mean? Anything to do with technology and/or efficiency of employees or something?

Thanks,

Rohit


(Hitesh Patel) #14

rohit,

coming to ur queries:

regarding seeds markets in india, it is in a nascent stage with 90% of seeds being used being non hybrid. But now with good results of BT cotton coming through and hybrid seeds being sought in the vegetables like tomatoes, okra, chilly etc, the industry is poised to grow strongly. company has invested in capacity building and research in last two years and likely to reap the rewards for next few years. If u go thru AR they stress a lot on competency in R&D.

govt increasing tax on these seeds companies, I dont think it will make a huge difference to govt coffers by just taxing the seeds companies. how many tax paying seeds companies will be there in india? and ultimately there will be a big hue and cry about taxing agri sector if it does come about. I guess it doesnt make sense for govt to increase tax here.

Why this company generates higher ROE as compared to other seeds companies-- I guess one has to give management due credit for building up the business in such a manner.

Div payment – Company was in a capex phase and hence probably low div payout. I guess with eps going up to about 80 per share for fy 13, they can dole out around 20-25 rs per share just to make us shareholders happy.

)-- this will be high in this kind of business where there is strong quarterly seasonality. It seems to be coming down though. Interest payment is very low which is quite comforting.

Regarding giving comfort to stakeholders, I should be happy if company is re iterating its stand by shareholders and stakeholders.

how much money etc for setting up a new company-- time is of more importance bcos u cant grow the germplasm library in too short a time. plus u need a good presence across the geography to really grow. these things i guess dont happen in too short a time and also comes at a cost.

why private?? No idea. Why would they want to do that? They already have 65% stake in a great business.

comparision with monsanto – i havent looked at monsanto. So no idea why the ratios you mention are as they are.

Investment theme here is very simple : With the blockbuster results in q1 fy 13, stock is again available after a long time at a PE of 10 or maybe less (depends on rest of the quarters)

I expect this one to trade atleast once in next 12 months at a pe of 15 or more. There is a comfortable 50% likely to be made here unless there is something hidden we dont know .

regards

hitesh.


(Shashi) #15

1.Scale of opportunity is huge.

2). Stock’s historical PE multiple is 15-16 now it’s available at 10.

3.Downside looks protected.

4.The resistance is 850 once crossed stock will be in free zone.

5.Good Management .

6.Was among top 200 forbes companies under a billion.

7 The stock’s main quarter is june quarter so it may happen that stock may consolidate for 3-4 quarters


(Shashi) #16

I mean next 1-2 quarters till next june


(Rohit) #17

Thanks Hitesh

Working capital to sales – promoters are not taking


(Vivek Gautam) #18

Hitesh Bhai it seems you were an extremely good student of Botany as well besides zoology.

This would have definitely helped you in discovering this story. Kudos once again.

KSCL seems to be that rare ethical Hyderabadi company where growth is good and promoters are ethical. Any idea about the promoters ? The Andhra co which fits the bill includes Dr Reddy, Avanti Feeds and may be Amara Raja batteries. But Galla of ARB seems itching to come into politics which wud be a big negative.

Mahyco is a big n old name in the seeds world whose products were banned by Mahahrashtra govt due to tem not following the dictates of the Neta log. This coul be a big threat from politicians catering to their Kisan vote bank which may result in low PE for this sector.


(Hitesh Patel) #19

I dont know about the mahyco situation. Heard about the company though.

Regarding PE well just before the results for q1 fy 13 were out, this was quoting at traling eps of – guess what?? 42
and stock price was around 800 back then also. So u get a PE of close to 18-19 for the stock.

Now when the company has delivered such robust results there is the disbelief among market participants and hence the shock and numbness and the range bound stock price.

Let Mr tulsian or someone else come on TV and announce his “multibagger pick” and then real fireworks will begin.

As I mentioned before, bet here remains simple. within next one or two quarters i expect this one to trade at a PE of 15 (based on fy 13 eps figures – eps at around 80 or more) atleast if not more. the current rangebound movement it seems is godsent opportunity for those with guts and patience to gobble this opportunity. The previous sharp run up in the stock needs some amount of consolidation which currently seems to be going on.

According to me, 10 PE for a company with atleast 25% CAGR in sales and profits with ROE for fy 13 slated to be above 40, with practically no debt is an unbelievable bargin. Currently its my top portfolio holding.

If you look at the figures for the company since fy 07, it has never grown its sales and net profit figures at less than 25% y-on-y and that includes the dreaded years of 08-09 amidst global turmoil. In fact since fy 07 it has multiplied its sales from 66 to around 500 plus crores – almost 8 times in six years and net profits from 10 crores to more than 100 crores which is more than ten times in six years. I think its absolutely rare to find such companies at these valuations and located in such lucrative sector as seeds business.


(Hitesh Patel) #20

Just to put up things in perspective last few years figures for sales and profits for last few years. Company got listed in oct 07 and hence eps figures from 08 are mentioned.

Col 1 Col 2 Col 3 Col 4 Col 5 Col 6 Col 7 Col 8 Col 9 Col 10
year 05 06 07 08 09 10 11 12 q1 fy 13
sales 44 48 66 96 123 162 233 372 480
np 1.3 2.9 10 13.4 22.9 29 42 58 101
eps 10.2 16.38 20.9 30.6 42.4 73