I read through the transcript of the management’s conference call. Management claims that the planting for new seedlings is done in Feb to May and the harvesting is done post Oct. Now, this con-call took place before the recent heavy rains in Chennai and also AP. So I am wondering what is the impact of the rains on the new seedlings. If they are washed away then KSCL has lost its entire or bulk of raw-material?
I haven’t tracked any previous cases, where seed companies have been asked to compensate for suspected defective seeds. So this case might set a precedent ?
Disc: I have exited KSCL around 500 levels.
Central government heeds to demands of cotton seed sellers. The royalty issue may be settled in favour of seed companies. Could this be a savior for Kaveri in this distressed times of bad weather.
I believe the main question currently is the visibility for FY 17, knowing that FY16 earnings can be considered given. Do we have more pointers from the field what are we really looking at? Any more data points available?
PS- Management Interview from Chand: http://www.moneycontrol.com/news/business/poor-rains-low-acreage-to-weighcotton-seed-vol-kaveri_4231621.html
Again this can be a certain pointer :
Discl : interested, but not invested.
I dont think it would have such a severe impact as they have been procuring seeds from various geographies and not just Tamil Nadu.
Disc: Not invested. Tracking.
Central Govt approaches CCI to probe MMB Royalty agreement.
Down 8.5% today with huge volumes. Also interview of C Mithun Chand on Moneycontrol today:
Disclosure: Interested but not invested.
Multidisciplinary analysis on Kaveri seeds:-
All Bad things happening at the same time.
1.Monsanto incident of paying 66 cr if only 2015 is considered and more than 100 cr if royalty is revised and paid from 2010.
2. Bad monsoon in 2016.(~40- 50%)
3. China crash caused further fall.(~17%)
What is the probability if all this incidence can happen in the same time again and built so much pessimism in the stock:-
Q:-If we look the business prospects for next 5 years, will all this problems will be ironed out?
Monsanto problem:- It has cash reserve of ~3 billion so it can solve the problem even in worst case.
Monsoon:- It was bad this year can be good next year not sure of this but with reversion of mean it is quite possible it can be good in coming years.
China crash:- Not possible again to happen with above incidences.
What are the forces/ variables which are working together which can help the stock price to rise?
- Cultural dominance:- GMO crops has been adopted rapidly in all advanced nations and it will be as well be adopted in India. The portfolio of corn/rice/maize etc of kaveri seeds can help it grow it further. The government has started to work on second green revolution and implement policies to do the same.There were certain news which were in that direction.
2.Surfer Wave Theory:- GMO crops under cultivation has increased by 100 times starting from 1996. kaveri seeds are riding the surf with good business economics and fundamentals.It is quite possible it can create wealth for investor who surf rides early on that.
3.There are many macroeconomics principles or force which help the company to use their product as we can see it in advanced nations like America where I believe if not wrong 96% crops under cultivation are GMO. They have definitely building their moat of crops along way with surf and maintain their earnings.Just as a side node value investor Kahn also invested in Monsanto in 2000 time frame some time.
4.Companies expansion to North India. New portfolio of crops like rice is making less dependence on cotton.
Moat in the company which is not destroyed currently :-
1.Economics of scale.
2.Habit with farmers.
3.On supply side is Portfolio of crops.
1.Promoters Focus shifting to other initiatives and if they destroy above mentioned moat.
Kaveri Seed Block Deal on BSE, Qty: 200,000, Deal Price: 352.00, Value (cr): 7.04, Time: 12:55pm Dec 22, 12:58
Mayhco Monsanto has decided to cancel Bt Cotton license of Nuziveedu and its group companies. This is first of the many steps taken by MMB against the companies who have not paid royalty for FY16. Sooner or later knife is going to fall over other companies as well.
Discl: Holding with ~10% of portfolio.
This is my first post here after discovering the forum just a week back. First of all let me complement everyone here on what an amazing forum all of you have built and the amazing work all of you have been doing. I have learnt so much and has only deepened my belief in value investing. I feel I have currently only 10% of competence of most of you guys around here and I am definitely hooked on to the learning path.
On Kaveri I have been fascinated by this thread and have been read this top to bottom. It reads like an exciting novel and I feel currently we are at a perfect cliffhanger. This feels like a point of inflexion and what happens next will probably determine the Kaveri story.
This is probably a good time to go back to basics and re-evaluate some of the strengths and source of competitive advantages that has drawn us to this story. Pardon me for my in-experience but I am hoping some of you will correct my views and add to the analyses.
(Disc. not invested definitely interested)
According to the some of the key points that contributes to a Moat for Kaveri are
- Strong Supply chain and ability to scale up supplies through their investment in land and other facilities
- R&D capabilities that helps to develop a pipeline of portfolio of seeds in different categories (cotton, maize, rice, etc.) that can give top yield
- Brand strength and relationship at ground in few of the regions in AP that provides it top mindshare.
What has happened to the company performance can be called a lollapalooza as someone rightly pointed out above. Confluence of 2-3 three adverse factors like Fall in cotton prices globally, govt. interventions and IP related disputes.
Can we now analyse how we stand on the above sources of economic moats vs. these external factors?
To me point 1 and 2 are related as its R&D capabilities arise from its backend strength and ability to experiment with wide varieties of seeds in its farms.
These are yielding hybrids that have performed well but question arises on can they really create breakthrough/blockbluster varieties regularly. Some of the ground level research does show that most of the top tier players have seeds which give good yields which are more or less in the same range. So the question here is that is the R&D capability and the moat it provides really that strong and sustainable?
The bigger Moat therefore maybe the Supply chain strength which can help Kaveri stay strong in the game and overcome this slow period. How do we say that this is a more sustainable advantage. We know that the opportunity is big (long term) and over time not more than 5-6 players have emerged as big names. So definitely this is a strong advantage for Kaveri.
But we need to evaluate if some other strong Agri player like Rallis is able to make a dent in Kaveri’s position.
welcome to group. In one of my discussions with Ashish Kila he gave an
interesting perspective on this idea.
R&D of seeds while a moat might be like a lottery ticket. While they
will spend money on it we can’t assume a success rate which is too far from
base rates of say pharma/agri companies (monsanto). This base rate is
pretty low. So the question then is, while a moat will this lead to higher
multiple for stocks?
Growth rates: In the light of low base rates of above and with around
95% of Cotton on BT hybrid, how easy is it to grow at 25%? Will competition
not react? I think this year they did and though short term it hurt Kaveri.
So this will also impact multiples.
External Factors: Monsanto issue, drought etc will also impact multiples.
PS- was one of my largest holdings (5%), sold a bit and is now around 3%.
Evaluating the idea again basis above thought process
When anybody invest in agri stock like Kaveri seeds, one is aware of variables which can impact the stock i.e. monsoon, farmers choice of crops, extended receivables etc. What has impacted Kaveri the most is the state government intervention on pricing. Now as per news, agricultural ministry has declared that it will control seed prices. This means from unregulated sector (read- pricing power) this suddenly became regulated business, capping the margin potential. This has re-rated the entire sector downwards as market do not like government regulated sectors.
So I feel Kaveri stock may not get back its past glory even if current hot issues like Royalty get resolved. Now I feel this sector will get treated like fertiliser stock.
Disc - invested from 500 levels.
I still can not understand one point, What management intend to do with cashflow? When stock is hammered so much why they are not announcing buyback/special dividend? At least that would so intent of management to share wealth minority shareholder and would give some support to price in my opinion.
Discl: I had invested and sold share a year back.
Its from my home district. Will check with someone.
Disc: Had invested for couple years…exited last month…now less than 1% of PF
I was going through the January 2015 issue of the Wealth Insight magazine published by Value Research (www.valueresearchonline.com). A particular article caught my attention. They have analyzed 258 Companies based on a modified version of the Montier C-Score (that helps identify companies which may be cooking their books).
Interestingly, Kaveri Seed figured among the worst 7 Companies based on this scoring. Shilpa Medicare and Alembic Pharmaceuticals were among the worst 25.
can u post more on this pls - methodology, reasons etc. for us to get a better understanding
Copied and pasted from Value research online
Can creative accounting be detected through a company’s financial numbers? As every accountant knows, it’s possible to paint a rosy picture without doing anything illegal
When their operational parameters worsen, and the stress starts showing in the financial numbers, a lot of businesses try to be a little creative with their accounts so that investors don’t take to their heels.
Can this creativity be detected through analysing the financial results that are released? Not with certainty, but as a probability, yes. What we have here is a probabilistic score that measures a company’s resemblance to other companies where the accounting has been creative.
We have developed the Modified C-score which tells the probability of financial manipulations based on the quantitative method. We have developed this score by modifying James Montier’s C-score using his six basic checks and further improving it by adding our own three points.
We give score a company based on these nine points by giving them zero or one in for each points based on qualification. Higher a C-score, the higher is the probability of financial manipulations.
James Montier’s C-score
Montier’s C-Score is made up of six red signals.These are scored in a simple way, with a 1 for yes and a 0 for no.
These are then totalled to give a final C-score ranging from 0 (no evidence of earnings manipulation) to 6.
The individual tests are:
Is there a growing divergence between net income and operating cash-flow? This is based on the simple observation that earnings can be inflated, but cash flows are hard to manipulate.
Are Days Sales Outstanding (DSO) increasing? When a company stuffs the dealer pipeline, this number increases.
Are days sales of inventory (DSI) increasing? A sign of slowing sales.
Are other current assets increasing vs revenues? Since managements know that DSO and/or DSI can be closely watched, they may use this to hide something.
Are there declines in depreciation relative to gross property plant and equipment? Companies may alter their estimate of useful asset life to enhance reported earnings.
Is total asset growth high? It has often been observed that high asset growth firms underperform.
Our additional checks
Are debtors as per cent to revenue increasing? This means that the company is selling more on credit and realising not cash.
Is assets quality improving or declining? Asset quality is measured as the ratio of non-current assets other than plant, property and equipment to total assets. Which means the company may have high non productive assets.
Is accrual ratio high or low? Total accruals calculated as the change in working capital accounts other than cash less depreciation. Accrual ratio gives the difference between the accrual accounting and cash actually made out of it. A high ratio means that there is high difference between the cash realised and earnings reported.