Did anyone else find it odd that in the entire con-call, there was absolutely no mention of the SEBI forensic audit? Are they not allowed to talk about it / opine on the reasons why the audit was ordered etc??
News just came in that government is in the process of forming a panel with recommendation to reduce royalty on GM cotton seeds by 70%. Hence Kaveri stock has gone up by 14% today morning
The nine-member cotton seed price control committee, formed by the centre on 27 January, has recommended a maximum sale price of Rs.800 for a 450g packet of Bollgard II Bt cotton seeds.
The packets are currently sold for Rs.830 per packet in Maharashtra, Rs.930 in Telangana and Andhra Pradesh and Rs.1,100 in northern states such as Punjab and Haryana.
Further, the committee has suggested a 70% drop in royalty fees that domestic seed companies pay to providers of the patented genetically modified technology. The panel has suggested a reduction in trait fees from Rs.163 per packet to Rs.49 per packet, a person aware of the development said, requesting anonymity.Source
This would a good indication for Kaveri and the rest, but will raise serious concerns on IP protection in India, if implemented.
The decision to reduce the royalty though beneficial to farmers and the seed companies, sends out a very wrong signal to the world that IP laws are very weak and can be decided by public influence rather than the due course of law. The âsuit boot ki sarkarâ jibe is having some unintended consequences.
I am not sure if the agreement was bipartite between Monsanto and the seed producers or was it tripartite with Monsanto, the seed producers and the central/state govts. The Kaveri seeds management and the other seed companies seem to believe that the State/central govts are the ultimate authority to regulate the MRP and by that logic can determine the upstream prices of the seeds including the royalty being charged by Monsanto.
This would be an interesting legal case which can set the precedent for a number of similar IP issues and the consequent pricing of products.
It would be interesting what Monsantoâs reaction would be and if they would take the drastic step of walking away from the country. Seems unlikely given the size of the Indian market and also the time period that they would have committed to the seed technology companies for the transfer of the technology. We are hoping that one party will honour their side of the bargain whereas the other side is clearly not.
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So the threat is out in the open. I think that BT II has been amortised and any royalty that they get from this point on is a bonus. So a pull out doesnât seem to be very imminent here.
However, it can have serious repercussions on introducing BT III trait in India.
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@Donald I read in one of the other threads that you had exited Kaveri Seeds. Youâve updated the community in the past when there was bad news, and Iâm wondering if you can talk about the rationale for your exit? Given that the current stock price, prices in a lot of the negatives.
I had been raising this question at different platforms since the last few months., but never got clarity on it.
Common sense said that Kaveri was the loser on both sides of the litigation on royalty. If they win the case, they save royalty., but strain relations with Monsanto.
Thanks for prompting me back on this - something I meant to comment at leisure, but lost track
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There is no denying that Kaveri business model had in-built risks that many other VP Compounders do not. Driven by super business performance (and hence stock returns) over 2011-2014 and my mistaken over-reliance on Intellectual Property strengths, I was lulled into complacency and failed to re-look and re-assess critically (have mentioned these in a previous post in this thread), which should be the cornerstone of any serious practitioner
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Must acknowledge - this was/is the first significant mistake from me after a magical 5 years. One cant learn all the lessons vicariously; I didnât slacken in hard work or pushing others for the same- i had all the data points - Complacency/over-confidence might get you even if you otherwise stay true to the discipline; you gotta pay tuition fees sooner than later. Am glad I did
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My views from here
a) Kaveri had reached a near-dominant industry position, from where accelerating growth was a tough ask (maintaining itself proved a bigger ask)
b) With acreage not growing significantly, to regain back the dominant position looks much more difficult - with other top players consolidating their hold with price-cut strategies; 2016 will see high competitive intensity
c) Pricing situation continues to be uncertain/mired in further government/regulatory actions/litigation
d) Monsantoâs stand might harden/ on licensing BT tech because of non-payment of earlier dues, and the 70% licence fee reduction proposed by industry body
e) Alternative technology/hybrids might get pushed
f) Alternative crops pricing situation also queers the pitch
g) Managementâs inability to strategically bolster themselves with alternate revenue streams (cotton saturation limits were known from last 2-3 years; others have grown stronger in the vegetable (not exotic) seeds business, e.g. -
So whatâs changed Now (that did not exist before)
a) Government intervention
b) Monsanto BT Technology/Licence availability/relationship with seed players
c) Competitive intensity at a different level
This clouds the picture on sustainability of Kaveri sales/margins.
Price does not give me any comfort. A strong unclouded picture on growth visibility for next 2-3 years is missing for me.
Disc: No investments. Safe to assume my views are negatively biased
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Thanks for the write-up @Donald; Great to hear from you. I understand all the issues you mentioned above, and Iâm comfortable with the lack of visibility. Itâs good news for me, that your concerns are not around promoter integrity or cash on the balance sheet.
I present my basic thesis below and would greatly appreciate your critique. And @hitesh2710âs given that he introduced the idea.
The 10-year view seems much simpler than the near term, due to all the factors you mentioned. I also trust the management a lot, as theyâve always under-promised and over-delivered so far.
Cotton: 60% of revenue. 18% market share, management is confident of getting it to 25%; Additional positive black swans are: (a) The planned launches in âclosedâ density cotton; (b) Expansion to Africa.
Maize (Corn): 20% of revenue. KSCL is the pioneer. 50% hybridization rate. Grew at 40% CAGR so far! Gaining market share from 12% currently.
Paddy (Rice): 5% of revenue. 5% hybridization rate (compared to 50% in China); 35% CAGR expectation.
Recent Changes that you mentioned 4 (a) - © are issues for all players. It will lead to market share consolidation from the unorganized to the organized and is a tail-wind for Kaveri. Given that we like the return-on-capital in this sector, youâd have to expect the winner, in this winner-keeps-most to be KSCL or Nuziveedu. How do you like Nuziveeduâs position given that KSCL has been gaining market share every year except last?
Valuation: 2700 Cr market cap. 350 Cr cash. 300 Cr in peak profit. If we assume margins wont be impacted long term, PE = (2700-350)/300 = 8 PE; Returns on equity has averaged around 40% over the past 10 years.
Disclosure: KSCL is my largest position. Iâve suffered a 50% notional loss on my position so far and continued to add recently.
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Some words if they help some new investors:
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Do not average a steeply falling stock. NEVER. This will work more number of times than your disbelief that why itâs not stabilising. There is a difference between averaging Unitech and HDFC Bank. Unitech falls like thereâs no tomorrow while HDFC Bank corrects.
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HDFC bank does not know what a correction is, yet. The stock says, you gotta be kidding me. I fell only 15-20% while ICICI bank fell 55%. A correction ends when HDFC falls 50% from top, IF there is a monstrous correction. That IF needs a lot of analysis.
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There is nothing great in building up huge position for mental gratification imagining huge profits expecting the stock to reverse in price behaviour particularly when there are good compounders that corrected without much uncertainties in future.
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Do not fight the price behaviour coupled with volume. Collective wisdom of market participants is always superior than your individual view in long term.
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The long term should not be so long term that in that long term I spend more time at an orthopaedic rather than travelling or any personal hobby that gives you happiness. Happiness is SUPREME than anything.
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When in doubt, stay as far away from the stock, there are no prizes for winning a ânon-infidelity contest in stocksâ.
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Be in stocks where there are as less moving parts as possible even if they are available at a premium.
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Market has brought me down to earth many times!
Appreciate @Donald humbling experience on Kaveri.
P.S: Stocks quoted in this post are to drive my point home, they are not recommendations to sell/buy.
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@myprasanna
Like to re-iterate @richdreamz view - that there are better opportunities in the market with much clearer picture of sustained growth ahead.
The picture that you are drawing is building-in what we like to call a lot of âHopeâ versus actual strong visibility. A 50% fall needs a 100% rise to just make up.
As Hitesh says, bad news doesnât come alone. A multitude of factors are now creating severe headwinds for Kaveriâs business and industry.
Industry picture has worsened, competitive picture has worsened, pricing has worsened, relationship with the main technology supplier has worsened, its very difficult to build a strong case for even maintaining market share. Kaveri has lost market share, gaining that back will be extremely difficult, cannot be taken for granted (especially if farmers have a good experience with the switch). Competition may/will again undercut - Kaveri may have no better option but to sacrifice margins if it has to maintain market share. A better time to re-assess might perhaps be when the pricing situation/litigation/license fees issues are behind us.
At what stage of the growth life-cycle of the business/industry do we see Kaveri in? That might help us get more realistic more quickly about growth/profitability sustainability.
And think again on Management Quality - Operational/Tactical execution may still be rated high. Strategic execution may be rated down.
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prasanna,
I dont track the kaveri story too closely now having exited it much earlier bcos I spotted something better in canfin as compared to kaveri. For me it was a case of where were there lesser variables.
Coming to Kaveri, one has at some point of time accept the reality and move on rather than living on hope. Too many things need to fall in place for kaveri to go back to its glory days. This looks like a theme which might have run its course. It can still rise like the phoenix but I dont want to bet on such possibilities.
As Donald pointed out the current market correction has thrown up so many opportunities that I feel time for me is well spent looking at them rather than keep answering questions on ideas I put up. Just for the record I dont follow each and every idea I put up closely for ever.
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@myprasanna Nothing much left after what @Donald and @hitesh2710 bhai said, but just wanted to add one more point during stock selection. The market always looks for growth, business clarity, quality and earnings sustainability atleast two years from the now and in an absence of the same does not reward the shareholders adequately. Now let us say we are looking to hold a stock for next 2 to 3 years it becomes very important to visualize and have some brief idea about how the story will unfold in the 4th and 5th year. As time goes on we continue refining our subjective understanding more objectively. Just think about Kaveri in this manner and you might get a different perspective.
I have no position in Kaveri and my opinion can be negatively biased.
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has anyone heard any development relating to the forensic audit?
This looks like a theme which might have run its course - most veterans might echo similar views. Weighing where the ODDS lie, comes easier as we get better at being as objective (read ruthless) and as unemotional as Hitesh, naturally is. Others less gifted like me can learn to recognise, and admire these traits - then we may also reach there, someday.
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@hitesh2710 can you highlight some of the opportunities that the current market correction has thrown up
You can have a look at some of the recent ideas I have put up. Please dont consider them as recommendations. These are just starting points for any investor. After due diligence and proper digging one has to zero in on good investment ideas.
I dont want to spoon feed you.
But if u follow some threads at Valuepickr there is no dearth of investment ideas.
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@hitesh2710. The intention is not to get spoon fed.
The idea is to collate a set of ideas and then sift through them to figure out what suits my investment style. I did notice your positive inclination towards Torrent Pharma, PI Industries and Kitex Garments.
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What Hitesh is hinting at is for you to spend time at the various threads, and collate the list yourself, and then pose a better-formed, value-added query for Hitesh - that way his bandwidth is conserved. We need to respect everyones time, especially someone like Hitesh
VP Forum technology makes it very easy to prioritise scrolling through anyoneâs posts (clicking on posters link in any post, users section from top right navigation bar, next to logout), etc. I am sure you must be aware of these.
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