Kaveri seeds company limited -- kscl


(Chintan) #882

Margin improvement came from Other expenses itself as COGS has increased from 35% of Sales last year qtr to 36% this qtr. While Other expenses declined sharply to 29% of sales vs 36% yoy. Any idea why such an improvement??

Board declared interim divided of 2.5/sh vs 2.4/sh which they declared last year Q1


(Aman Vij) #883

My educated guess for lower other expenses would be lower margins for dealers which they clearly stated will be the new norm going forward ( they talked about lesser advances in last concall so per packet realisation should be higher in this quarter (removing effect of Maharashtra sales) and thus better cash flows)


#884

Sales degrowth in an important qtr is not taken lightly by the markets. It will not get rerated till next June 16 unless they show improvement in the coming qtrs. ( which is not possible if one analyses the performance for last so many years) . We need to dig deep for reasons behind a sales fall. If it had been any other company, we could have ignored a quarter but not in case of KSCL. Since there is a huge market, we need to find convincing answers for a sales de-growth.


(Chintan) #885

i agree with @sethufan …Q1 is the biggest qtr for the company

· As per quarterly numbers, Company reports c70% of sales and c75% of profits in Q1 itself

Quarterly Financial Snapshot (Consol)

In Rs Crs

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

Q2FY15

Q3FY15

Q4FY15

Net Sales

480

64

94

75

736

103

133

39

827

204

91

40

EBITDA

104

10

13

13

164

13

38

6

232

33

36

8

Ebitda Margin

21.7%

15.2%

13.4%

17.2%

22.3%

12.2%

28.8%

15.4%

28.1%

16.1%

39.8%

20.3%

Avg Yearly Margin

16.9%

16.9%

16.9%

16.9%

19.7%

19.7%

19.7%

19.7%

26.1%

26.1%

26.1%

26.1%

APAT

101

6

11

9

162

9

37

2

230

34

36

1

EPS

14.60

0.88

1.55

1.36

23.49

1.29

5.30

0.26

33.44

4.87

5.19

0.19

Q1 contributes c70% of yearly Sales for the company

Q1 contributes c75% of yearly PAT for the company

Quarterly Ebitda Margin trend and Yearly average – Company has been able to improve its margin year-over-year

Disclosure: no holding, tempted to buy once get some hold on Fy17 outlook. Interesting to see what mgmt says in tomorrows call on volume guidance for fy16 and as @Rokrdude has pointed out on margins…need to confirm its sustainability…


(Amit Aggarwal) #888

Kaveri Seed Company Ltd’s Q1 FY16 Conference Callon Friday, August 14, 2015 at 2.00 pm IST

http://www.kaveriseeds.in/images/conference_call.pdf


(Anindya) #890

You got this absolutely right :smile:
This year they had only about 83-84 L packets available to sell copared to 1.2 cr last year.
One article from ET - seed companies demanding payback of royalty money from monsanto.

http://economictimes.indiatimes.com/news/economy/agriculture/hybrid-seed-companies-want-mahyco-monsanto-biotech-to-return-excess-royalties/articleshow/48462714.cms


(anil) #891

Q1 2016 presentation link
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/413E9EE7_34CD_48D7_B49C_CCD37FFB7FB1_102047.pdf


(Anindya) #893

Summary of Q1 results as per the PPT.
Revenue growth impacted by volume moderation in cotton and maize - acerages impacted in Kaveri dominated markets. Hybrid rice reported healthy growth.

One point i could not understand, they mentioned one reason of EBITDA margin increase as
"Lower royalty payments – calculated on the prices submitted by recommended institutions to relevant state governments".Is it calculated only for Q1 result purpose and may need to be changed in Q2/Q3 if monsanto does not agree/court case unfavorable?


(Chintan) #895

Quick update on concall

• Lower royalty led margin gain this qtr – Margin gain this qtr was on account of lower royalty payable of Rs 64cr this qtr to Monsanto as directed by Government. Monsanto has filed the case against the Govt order and it will take time to sort out. State Govt has all the rights to fix the all the components in seed prices so they have the strong case here.

• Lost market share in credit market but gained strongly in non-credit market – Overall, company to sell 60-62 lakh packets (54 lakh already sold) vs market size of 4.2-4.3cr packets i.e market share of 14.3% vs 15.5% yoy (last year company sale of 84 lakh packets of market sale of 5.4cr packets). Cotton Volume degrew -26% yoy to 54 lakh packets vs 73 lakh packets. Overall, market declined 18-20% yoy this season due to continued draught during the sowing season in cotton growing region. Company gained market in non-credit market like Maharashtra and Gujarat but lost market in credit market like Telangana (core market for Kaveri).

• Strategy and shorter selling period led volume lost – Company strategically focused on non-credit market and cash-carry dealers which led to volume degrowth this season. Reason being that situation will worsen at farm level given back-to-back years of draught leading to liquidity issue at farm economy. Also company lost around 5 lakh packets sales in Maharashtra post Price Cap as they stopped the supply, however, they gained in terms of market share even after volume lost. Another reason for decline in volume was on account of shorter selling period this season (only 10 days they got to execute the order) keeping in mind payment collection and execution of order. Due to cash-carry, company couldn’t get support from dealers also.

• Other products saw traction – Paddy saw sales growth of +9% yoy while hybrid paddy sales grew +18% yoy. Maize saw decline of -8.5% yoy.

• Going forward, company has flexibility to shift between credit-noncredit market. Company targets 1.1cr packet production and sales volume of 90 lakh packets for next year.

• Cash balance stands at Rs 350cr vs Rs 300cr in Mar’15. Debtors receivables stands at Rs 210cr.

Stock corrected c5% intraday. CMP Rs 600. This is a lost year for the company, might see more correction. Downside risk of Rs 64cr royalty will be there in case Monsanto gets favorable ruling – but as per management it is unlikely.


(Varadharajan Ragunathan) #896

Thanks chintan - did the management mention anything about newer better cotton types from competition eroding their competitiveness ?

Heard that in a group I am a part of


(Prashant Kulkarni) #897

Thanks Chnitan… another couple of points are:

  • they are planning to venture into South Asian markets such as Indonesia with Maize and Rice and in Africa with Cotton
  • no dividend

@varada: I joined 10 min late but later until end of the call, they didn’t mention anything abt losing market share. in fact they gained in Maharashtra and Gujarat


(Chintan) #898

Not specifically, as they reiterated that their products remained well received in the market which is reflected in good growth in Gujarat (70% vol growth they mentioned) and Maharashtra - non-core area. They did mentioned losing out to credit market in Telangana (names like nuzhiveedu spoken on the call)

missed out on venturing into other markets and dividends…

what about dividend Prashant?, they declared 2.5 this qtr, so no further dividend for the year?


(Amit Aggarwal) #899

My notes from the conference call today. Sorry if there is any duplication.

Situation:
Two back to back draught years.
Revenue decrease because of decrease in acreage, discount selling, MRP limit, crop shifting to pulses, soya etc.
Volumes moderated due to low acreages.
Market share 15-16%
Cash and cash equivalents 350 crores (30th June 2015)
Managed well in terms of receivables as two back to back draught years have high impact on receivables. Strategic decision not to supply to credit markets (Telengana) and rather focus on cash markets. As a result volumes are down in credit market. Couldn’t place the stock in advance at distributor/dealer level.
Demand of brand is very good. Acceptance in farming community is very good.
Most of the cotton areas are affected by drought, decided not to go with credit markets. 6-8% acreage reduction, 18-20% volumes reduction
5-6 L packets volume loss in MH as company did not participate during peak season.

Cotton Sales this quarter:
Volume: 54 L packets
Value: 480 crs

Total sales:
Last year 85L packets . Total market 5.3-5.4 crs
This year estimate 60-62L packets

Credit market Telengana, 7-8 lakhs packets this quarter as compared to 16L packets last year quarter.
High growth of ATM in Maharashtra from 3.5 L last year to 7 L this year.

Corn:
Strong 25-30% market share in Andhra
Grown in MH where our presence is low
20% down by sales in Andhra
Overall market is down more than 35%

Hybrid paddy: Grown more than 20-25% market share. Chattisgarh/U.P.

Sales Q1 FY16 Q1 FY15
Maize 65 crs 71 crs
Overall paddy 74 crs 68 crs
Hybrid paddy 45 crs 38 crs

Net inventory 1.1 cr left out and fresh inventory.
Next year sales target 90 L packets.
Production cost – no increase as compared to last year.
No decline in inventory YoY.

Increase in market share:
Adibabad, Warangal, Maharashtra, Gujarat (growth more than 70%)
Guntur – shifted to chilly this year
Riasima 40-45% acreage down

Royalty payment:
States INR
Maharashtra 20
Andhra and Telengana 50
Other states 90
North India states 180
Total effect 64 crs (including taxes). Deduction due to lower royalty, not in balance sheet no contingency. Royalty payments in the month of June-August
What if worst of both scenario

  1. Forced to pay royalty to Monsanto
  2. Forced to settle at low MRP
    Very low probability however risk remains

Realizations:
Overall realization INR 880-900
Net realization INR 790-800
Likely to gain market share next year

Maharashtra MRP INR 830, other states MRP INR 930
North India, billing close to INR 1000 (due to high royalty)
Different packing next year for MH

Market situation:
Branded players are affected who have not supplied to credit markets. Unorganized players gained market share in credit market however they may have big issues with recovery if drought situation persists longer. Nuziveedu actively participated in credit market this year.
Maharashtra, MP : branded players have gained
Cotton acreages:
Cash markets (Maharashtra, Karnataka, Riasima) – Down
Credit market (Telengana) – Up

Strategy:
Focus on increasing the realizations
No higher discount to distributors/dealers this year
Focus more on credit market next year. Comfortable on competing credit next year.

International markets entry
Indonesia for Maize & Rice
Africa for Maize & Cotton
May take 2-3 years


(anil) #900

Few points:

They did lose market share, I remember management saying this in call somewhere in between - reason being the selling window too small this season (10 days compared to 3-4 weeks). Not sure why window was small this season. Second reason was due to company following cash and carry model vs credit model. Smaller players gave discounts and gained bit of market share compared to Kaveri who sold on cash. This was my understanding.

Ups and down in business may come and go and we as investors should stick to good business and Kaveri do look like one. What is bothering me the most is the management integrity and actions - if one has followed Kaveri over last 3-4 years - one can point out many red flags or discomforting factors, relating to management actions

Few of them being:

Once management came on TV and said they are looking out for strategic partnership with global companies (possibly Bayer/Monsanto) - some stake sale can happen or related stuff. But nothing happened - this raised doubts on Kaveri’s competitive position - if they are so strong, why no one bought any stake? or if there were no plans why did management say such stuff? Normally prudent management would never say such statements.

More recent incident is the opening up of food park/processing business. In one qtr they had plans to do it and after announcement share price started to fall - come next qtr and all plans were kept aside (they said plans were in blue print stage, etc)

Lastly, the thing which pinches the most - Dividends!! where are the dividends? company has been maintaining since last 3-4 qtrs that once they have 300cr on balance sheet (for potential M&A) they will increase dividend or make formal policy. Now cash stands at 350cr+, still dividend increase is negligible. Last qtr they said buyback can happen instead of dividend. Today on call when an analyst asked about buyback - management said there is no update or its still in process/undecided.

If one hears Q4 con call - management is not clear what would be there capex going fwd - a capex question was asked as a standalone question they quoted a lower number, towards the end of the call same capex question was asked but relating it with dividend - they quoted a higher figure for capex.

I have been invested for more than 3 years now and am still not able to gain confidence on management. They might be all good, but they are surely sending out wrong signals to the investor community.


(Aman Vij) #902

First things first a bit of disclosure I may be negatively biased because I sold recently (some portion before the results) and remaining during the concall. There is a fair chance I may be under recency bias (Due to constant fall in price in last few days) so please do your own analysis before taking the final decision.

The main highlight of the concall was that 80% questions were directed on treatment of royalty payment. I don’t agree with the company’s decision of not including 64 cr expenses in contingent liability (even if the probability of the event is very low) and reducing the royalty payment when Monsanto has got a stay order against Telangana govts order of reducing royalty). The company has reduced the royalty payment from Rs 180 packet to 20 rs packet for Maharashtra, 50Rs for Telangana/Andhra and Rs 90-180 for ROI. The main question remains will Monsanto agree without a fight and can govt. actually put restriction on amount of royalty Monsanto gets. To give a brief idea about history the initial royalty was about 1600 /packet which have been reduced each year (Except last 2-3 years) because of significant improvements in volumes. But with total cotton packets (market size) remaining constant since last 2-3 years will it be financially viable for Monsanto to reduce it to Rs 20/50? Even if Monsanto is forced to agree there is a fair chance it will be introducing BT 3 version soon which according to management will mean royalty rising to even higher levels than previous Rs180 /packet.

2nd red flag according to me was that when asked question whether the competitors were using the same accounting treatment, the management tried to evade the question of saying that they are not sure because most players are unlisted but all seed players are on similar terms. I am pretty sure with companies trying to capture market share from each year, they would be having a fair idea about what others are doing.

3rd red flag was the company’s claim of maintenance of overall market share looks dodgy as one of the analysts had asked the same question because they have lost 25-30% market share in their strongholds- Andhra & Telangana and in order to maintain the same market share they would need to gain significant market shares in other markets (which seem highly unlikely given they had taken deliberate step of reducing their sales in Maharashtra).

Lastly one of the main reason for me to remain invested was management had repeatedly said that they will be increasing the dividend and will have a formal dividend policy as soon as they have 300 cr as cash and cash equivalents. When asked the same question regarding increase in dividend/possible bonus now that already have built a kitty of 300 cr, the management completely side-tracked the question saying no such plans as of now. Now company might be preparing for a future fight in credit market and thus wanting to conserve cash flows but I have my doubts especially considering that there regular cash flow of close to 150-200 cr which are more than enough to cover any contingent liability (if and when it arises)

There is a fair chance that sector/company will be under serious litigation issues for next few months. Is it a lifetime opportunity for investors with company going through temporary problems; I am not quite sure about that? According to me for someone thinking of taking fresh entry it’s better to miss on some initial potential upside and wait till clarity emerges. My sincere advise would be to atleast listen to the concall twice before taking the final decision. I will still be tracking the developments and will renter at a higher price provided some of red flags get cleared.


(Chintan) #904

another point where i didnt like the answer was when asked whether they gained Rs 60/pac (180 earlier royalty - 100 price cut by govt - 20 what they accounted as royalty this qtr) royalty from Maharashtra…mgmt was clearly was in fix in replying the same…


#905

@Rokrdude

My 2 cents.

  1. It is wrong on KSCL’s part not to provide for Rs 64 cr. But there can be a legal angle when provision is made in the books. EBITDA is still healthy even after adjusting Rs 64 crs - 2% impact.

  2. It is prudent on KSCL’s part to reduce credit sales. We all know what happened to jain irrigation. What is the point in selling if you cant realise the sales.

  3. Looking at the huge market these temp blips can be ignored. Monsanto also needs somebody which a built in infrastructure already in place. They will not lose royalty which they are getting now without doing any work. How can they recover their R&D cost which they US$ 2-3 mln per day.

Rgds

will add more when there is a clear sky , there is enough time till next year as said in my previous post.


(Aman Vij) #906

Yes actually I was also quite positive on managements decision on not trying cover up the lost sales due to falling acreages and farmers moving to other crops by increasing credit sales and I also believe they would be in a better position if the situation doesn’t improve next year.

The reason for exit is way too aggressive accounting, nothing on increasing dividend (in a meaningful way) and too much government intervention into the sector.

I’ll wait for some more clarity from AGM/Mr Bhaskar Rao for whom I have tremendous respect along with seeing whether Kaveri management hypothesis is right that either the royalty will decease or govt. will have to deregulate the price.


(GreyFool) #908

I think what most investors are grappling with is the somewhat inconsistent(perceived?) actions by the Mgmt in recent qtrs. This has been a bad qtr for the industry going by the concal so results are perhaps not unexpected. Maybe some of the red flags in their commentary now are minor issues but on the whole it doesn’t instill confidence.

If for eg. mgmt did actually announce a buyback or increased payout now as guided 2 -3 qtrs back maybe we would be less negative. Also the fact that insiders sold in bulk again pre-results is in line with the unreliability of mgmt speak over the past yr.

Disclosure: I exited 2-3 months back after holding for 4 yrs.


(Varadharajan Ragunathan) #909

I added a few yesterday and hence my view may be biased.

if a claim is pending in court, unless one has received a judgement, there is no need to provide for contingent liability this quarter (there are exceptions of course). In a lot of times, it’s no a zero or one but the amount could change from what was originally contested.

I am worried that they have not increased dividend pay out. From the checks I did, the cash looks for real - the split of the cash is given across mutual funds.

The management is ethical but not gold standard. Said all of this its’ trading at 11 x FY 16 EPS ex-cash. For a 40 % ROCE biz, this is fantastic.