Kaveri seems to at an interesting valuation post correction in the past few days (from almost 700 to 530 Rs - a 25% cut). This was in spite of superb results in 1Q18 (which is more or less 80-90% of full year profits). Excluding other income on cash on the books, the company generated business EBITDA of ~160 cr in 1Q18. Assuming they can add 20 cr more in the coming three quarters, that means a trailing PAT of almost 180 cr (as EBITDA and PAT are almost the same for the company as no major fixed assets except land, no debt and no income tax). They will also have almost ~500 cr cash on books post buyback. Now given the current market cap of just ~3500 cr, this means the market is valuing perhaps the only pure play seed company in the listed markets as just 3000/180 cr = trailing P/E of 16-17 times. I find this very low in a market where so many niche, much smaller, non-scalable B2B businesses are being valued at almost 1.5-2x of Kaveri’s P/E. While there are technology, cotton reliance risks etc. but it seems like a low-downside risk opportunity for a 50%+ RoCE, B2C company with arguably has an opportunity to grow even 10 times of its current size in the long term given abysmally low penetration of high efficacy high value seeds in India and given its track record to reach market leadership in multiple crops. Since the company has already shown where it has invested its cash (mf scheme wise disclosure) and given the large cash buyback etc. I don’t think forensic audit etc is going to come up with anything (don’t know what the heck are forensic audit guys anyways upto its been almost 2 years if I am not wrong).
Not a investor friendly management. two three years back they sold 7-8% share holding at high prices in open market citing reason as they wants to start some food processing business in personal capacity , After sometime , they told that they are keeping that project on shelf considering its viability. Seems it was just an excuse to reduce the stake.
Also they have lost the pricing power as well due to govt control on seed prices. Once it was trading around 1050 levels , never recovered after that. Whenever regulation comes in any industry , it just destroy the value. Pharma sector is one big example.
Disc : Invested since long time
23-May-2018 KSCL Kaveri Seed Company Limit THE PABRAI INVESTMENT FUND II LP BUY 7,79,800 487.29
His overall stake (incl PAC) is c5.25%
Q4 & FY 2018 Results ConJerence Call made on Friday the 25th May, 2018
- Company is planning another buyback @ 675 per share in FY2019
- Company expect Non-cotton to cotton revenue in future in ratio of 60:40
- Company is actively looking for M&A with cash chest of about 300-500 Cr
- Company intends to distribute 70-80% of PAT to shareholders every year
- Company is expanding in more geographies in India e.g. Bihar, UP etc which would drive growth
Kaveri Seed Ltd Highlights of Q4 FY18 and FY18 results
- Company had strengthened in Non-cotton segment , Contribution from new products continues to increase .
- Launched 3 new product in Maize , 2 in Cotton, 4 in Bajra, 1 in Hybrid Rice, 5 in Selection Rice and 12 in Vegetables.
- Initiation of GMS lines seed production concept on pilot basis which will cut down manual emasculation and thereby reduce the cost of seed production in the years to come
- Strengthened the distribution network beyond AP ,TS and Maharashtra . . Considerable growth was noticed in different states including Gujrat, Himachal, Uttrakhand and Haryana, Jharkhand, Odisha and West Bengal.
- Launched Kaveri Loyalty premier club program in which over 500 channel partners were engaged in different activities including overseas family conferences
o Revenue was up by 16 % to Rs. 819 Cr compare to last year
o EBITDA was up by 41 % to Rs. 246 Cr compare to last year
o PAT was up by 171 % to Rs. 211 Cr compare to last year
o Cost of Production was lower due to lower write off compare to last year
o Write off were of Rs. 23.6 Cr compare to Rs. 66.5 Cr last year
o Other income was also low as a result of lower redemption
o Company had sold 6.9 million cotton packets as compared to 5.4 million cotton packets last year , a growth of 28 % growth. Company has now become the No.1 cotton seed player in India excluding North region, with a market share of 15.5 %. This performance was enabled by significant gain in Gujarat, Maharashtra, and Karnataka. Company is progressively expanding footprint outside of Telangana, Andhra Pradesh and Karnataka; and have increased R&D effort in North.
o Contribution of new product went up from 7 % to 10 % of volume.
o Launched 2 new cotton hybrids and 2 new cotton hybrids are under demonstrations with farmers.
- Hybrid Rice volume increased by 10% in in spite of drop in government business. New product went up from 1% to 17% of volume.
- Selection Rice Volume grew by about 40% in FY18 on back of the decision to produce major quantity in Kharif season and additional plant capacity. Contribution of new products went up from 3% to 10%.
- Sunflower volume has doubled in FY18 compared to FY17.
- Bajra volumes are under pressure but it is worthwhile to note that new product contribution has gone up from 6% to 16% of volume.
- Coming to maize the market has been challenging where Karnataka de-grew by 12% and Telangana by 23% for Kharif Season. Another contributing factor for decrease in Maize volume was reduction in sales to government programs. In FY18, maize volumes declined from 10,900 metric tons to 9,500 metric tons. H2FY18 maize volumes declined due to lower exports and lower sales in Karnataka. Rabi exports impacted due to crop shift to Hybrid Rice in Bangladesh.
o Debtors stood at 86 Cr compare to 85 Cr last year.
o Total cash on book stood at Rs. 580 Cr compare to Rs. 649 Cr last year
o Company has approved a 200 Cr buyback at 675 Rs per share for FY19.
- Though the average rain fall pattern during the year was normal, however the rain fall distribution was uneven
- Central and North part of India received excess rain fall in September which impacted yield and quality of Cotton crop
- Dry spell prevailed during the month of August which is a crucial crop growth period affecting the rain fed crops like Cotton, Pulses, Bajra etc.
- Pink bollworm issues impacted yield as well as quality
- Downward price revision imposed by government impacted industry sentiment
- Hybrid rice outlook is positive due to good performance of Hybrids. Selection Rice prospects are also positive due to better commodity prices.
- The pink boll worm affected areas under cotton cultivation may shift to Maize
- Company will do well in cotton irrespective of flattish industry growth driven by market share gains in Maharashtra and Gujarat
- Strong growth is expected from Money Maker across markets. The classic warhorses like Jadoo, ATM will continue to consolidate position in the market.
- Non-Cotton push continues with addition of sales locations, expansion in North and new product initiatives.
- Cmpany expect Hybrid Rice to grow on the back of KPH 468 and several products launched and notified; expect Maize volumes to register growth driven by Drona and Profit. Further, strong Vegetable growth will be driven by new hybrids across Hot Pepper, Okra, Tomato, Sweet corn and Gourds.
- What were the reason for EBITDA loss in Q4FY18 ?
o Two reasons are there
One is little bit maize downfall
Write off was Rs. 10.5 Cr in Q4 and total write off for the year was Rs. 23.75 Cr compare to Rs. 66.55 Cr
- Why other expenses seems to be little high ?
o Other expense include buyback fee of Rs. 1 crore and other merchant bank fee, brokerage expenses, postal ballot expenses and all other expenses related to buy back are loaded around Rs. 2 crore and publicity material also company had spend bit more and it gone up by another 3 Cr. and field staff also, field assistant and sales team and all company increased, that is costing another Rs. 1.5 crore increase in expenditure.
o More cotton sale this year lead to increase in Royalty and, compared to last year, Royalty cost itself has increased around Rs. 7.5 crore.
o Going forward royalty may come down because the Royalty price has come down, from Rs. 49 to Rs. 39, there is a Rs. 10 deduction on Royalty
- In micro nutrient division , share some colour on how it has performed in FY ‘18 in terms of revenues and EBIT?
o Microtek net sales is around Rs. 24.15 crore then and profit is Rs. 2 crore
- What is the revenue mix of the company ?
o In FY18 Cotton is 58% and Non-Cotton is 42%.
- Why does cost of production increase in FY18 ?
o There was little bit increase because of unseasonal rain affected the production, October rains affected the quality of production and some of the crops like cotton and maize and all. This year may be to all the seed companies cost of production may increase 2% to 3%
o Due to unseasonal rainfall recovery percentage was affected a little
- What is the current capacity of cotton seed in India at maximum level ?
o Last year 47 million packets were sold
o In current year 5-10 % reduction is expected
- How will company grow to 22-25 % and is it sustainable ?
o In next 3-5 year company will definitely do growth of 15-20 % because of focus more on non-cotton and company is also expanding to the northern parts. In the past company had strongly concentrated on AP, Telangana and Karnataka. Now company is doing well in Maharashtra, Gujarat. Company have now expanded business to Jharkhand , Uttar Pradesh, Bihar, West Bengal, Orissa, Madhya Pradesh, Chhattisgarh etc.
o Now company is launching new products which suits to those areas, those are all giving lot of contribution and the new product sales also increasing, company is also growing in cotton in Maharashtra and Gujarat . Also launching new product which will suit to Rajasthan, Haryana, and Punjab . Company is also planning to grow aggressively in exports and vegetable seeds. These all will give sustainable growth of 15% to 20% between four to five years
o This all will be favourable with average monsoon
- What is the acquisition company is looking at with 500 Cr of budget ?
o Company have cash reserves and sitting on Rs. 500 crore of money at any point of time, so company is seriously looking for any good value-added M&A, that has a very good R&D base or very good germplasm. Company is not looking for top line company is looking for good R&D base or very good germplasm.
- What is the difference between margins in cotton seed ans not cotton seed ?
o 5 to 7 % more in non-cotton business
- How the ratio between Cotton and Non-Cotton revenue will change in next 4-5 years ?
o It will become 60 :40 . 60 % will be Non-cotton and 40 % will be Cotton.
- Which crop will be the fast growing crop for company for fast geographical expansion ?
o One is geographical expansion that is going to give lot of growth to company for non cotton
o Secondly, varietal rice will grow at least 30% to 35%, hybrid rice will grow around 20%, and maize will grow 15% to 20%.
o Other all vegetable seeds will grow at least year-on-year 35% to 40%.
- Last three years, hybrid paddy growth would have been just an average of 10% right, last three years?
o Yes , Now the acceptancy started and also launched lot of new products that is the reason company is confident that newer markets, newer products will give 20% to 25% growth in hybrid paddy, more than 30% in the varietal Paddy.
- What would have been the average growth in maize in last two to three years?
o Last year market declined by 4.5 % and as a result company also declined and this year maize will grow because there is maize shortage in the market
- What is going to change so significantly over the next three years that will help company achieve in roughly 30% to 40% growth in these kind of products?
o With newer products , newer states company expanded and launched suitable products to respective areas. Company is also doing lot of trial runs.
o Company is exploring new business from Bangladeshi hybrid paddy , research okra, in Pakistan maize and okra hybrids are exploring , Nepal registration trials are completed for both hybrid maize and paddy products and reports are at compiling stage and final results expecting by year end, Zimbabwe good performance observed in pearl millet and sorghum hybrids and trial runs taken up for tomato. In Malawi tomato hybrids are given for trials and waiting for results, Egypt, hybrid Sorghum is given for trails Kenya vegetable seeds, trials are going on. And in Myanmar four hybrids of maize products initiated,
o Growth will come from exports down the line after two to three years and the vegetable seeds also two years down the line good growth expecting and in this segment , next two to three years we are launching 50 new hybrids and apart from that, company will also grow strongly in varietal Paddy and hybrid paddy. These are all efforts will give lot of growth for the non-cotton business.
o Overall margin will also increase by 300 basis points as company start shifting from cotton seeds to non-cotton seeds
- Company is looking actively on M&A and with mainly on the technical side like germplasm connection, so does company installing about domestic or looking at the global opportunities?
o As on date domestic and any good opportunity comes globally also company will took part in it.
- What is the thought process behind looking for a company with good R&D in germplasm because there is not much opportunity to acquire any company who have a good collection of germplasm in the country because there is no such company focusing on R&D and having germplasm collection in India ?
o Recently Monsanto sold their cotton business to an Hyderabad company, like that some of the companies wants to carve out any segment and want to sell In similar way, anybody wants to sell their R&D or any strong product line, company is ready. On international also, Company is exploring lot of international business by exports if any good company comes for the sale, company will look at it .
o Company is strongly strengthening the R&D by recruiting many people and spending lot of money in many locations, now R&D location expanded into northern parts, trial runs are going on in northern parts in seeds , so company is not depend on M&A, irrespective of that R&D is going well.
- What amount of expenses company has planned for outside India ?
o In trial runs, license fees and for marketing efforts expenses increase is there but not very huge, but marketing cost was steadily increasing and other expense will also increasing at least Rs 4-5 Cr expenses will be increasing
- In hybrid rice front why the industry has not grown even through these years and what has changed that is giving confidence that company will be able to grow hybrid rice over the next two to three years at a very high rate?
o In the past, a lot of apprehensions were there on the people about the hybrid rice because historically they were habituated for varietal rice, so suddenly changing they felt like some risk. Now, lot of awareness is coming generating to the farmers by lot of mandi-level workshops, field-level workshops, village-level workshops are going on about hybrid seeds impact and how it will give more yield and comfort, so now the change is happening
o Company expanded to be Bihar, UP, West Bengal and other states where a lot of hybrid rice cultivation is going on, that also will enable more growth in hybrid rice
- What was the 2017-18 exports as a part of the business and at what percentage company expecting to do it?
o In FY18 company exports sales was Rs. 15 Cr it is coming around 1.8% to 1.9% of total net sales and next year it will grow around 20%. The actual growth potential will start from FY:2020-21 These things will crystallize by next year then more exports will start from year 20-21.
- In which countries company is mainly focused ?
o Mainly focused in south-eastern countries because they are all close to Indian condition, so company products need only bit of improvement in R&D. The soil , monsoon , geographical conditions are very close to Indian continent, so those countries as on date company is exploring. Also planning to explore certain crops in Africa in near future
- Is there any CAPEX required in coming years ?
o CAPEX for next three years expecting for Rs. 30 to 40 crore per annum for any replacement or any improvement there is no big expansion required for the expected growth for next three yea rs.
- Is the price of buyback is upto RS. 675 per share or Fixed to Rs. 675 ?
o It is fixed .
- What kind of advances does company get from dealers for the quarter ?
o Cotton and non-cotton put together this year company received around Rs. 215 crores as advances
- Will be there margin pressure because of cotton seed growing cost will go up and price cut which has happened by the Government ?
o Yes in the margin there is Rs.10 to 12 crore impact will be there in the margin due to cotton price reduction
- What the result of raid done by income tax on company office ?
o They had come and check all the accounting records and methods adopted. Post that, nothing has happened
- What is the revenue growth expecting in FY19 ?
o About 15-20 %
- What is the growth rate expected in cotton portion of the revenues ?
o Expected flat to 5 %
- Does company will generate money in the first half only despite the expansion ?
- What is the CAPEX for the year expecting for FY19 and how much was it for FY18 ?
o FY18 the CAPEX was 23 crore and for FY19, capex set up is Rs. 35 crore
- What was the update on forensic audit done by SEBI ?
o It was done in 2015 and completed in August 2016 post that no update from SEBI-appointed auditor
- What was the vegetable sales for FY18 ?
o It was Rs. 11 Cr
- What is the reason for high employee cost ?
o One is lot of recruitments happened in R&D and Sales & Marketing many personnel have joined in middle management and top management levels
o Second is there is a Rs. 3.10 crore turn back provisions made for gratuity and leave encashment and incentives and bonuses also impacted around Rs. 160 lakh , apart from the annual increments, these all impacted the increase in employment benefit expenses
- What led to increase in the write off in FY17 ?
o In the normal industry scenario, seed industry 4% to 5% write-offs will be there on top line and last year because of prior to that continuously three years back-to-back drought was there, so certain products shelf-life was expired, that is the reason FY:2016-17 write-off were very high, at Rs.66.55 crore and whereas last year is in line with normal write-off expectations
- What will be the stable EBTDA for next three years ?
o Next three years EBITDA margins will be 30% to 32%.
- Till now almost two months have gone, so how has been the trend going forward ?
o Monsoon starts from June, already company is well placed. Only in Gujarat the business has started, seeing a lot of positive response and expecting at least 25% growth in Gujarat and still monsoon has to start from May or June first week only.
- Does company most of sales happen in June ?
o Yes, Kharif is India’s predominant crop season, Kharif comes in May and June only, and again Rabi will be there in October, November-December.
- What will be the contribution of geographical expansion and how will aid company growth and how new products will contribute to company growth ?
o In cotton
Company have launched many new products like Money Maker and all last two to three years back, those things are now market has accepted and growing a lot.
Few more products company is launching which suits to Rajasthan, Haryana, and Punjab.
o In Non-Cotton
Launched lot of products which suits to the Bihar , UP, West Bengal, Jharkhand, Madhya Pradesh, Orissa and Chhattisgarh.
o So these new products, the new locations, exports and vegetable seeds will give lot of increase in company top line going forward from FY:2020-21 onwards
- What is the growth expected in Maize in FY19 ?
o 15 %
- Currently cotton is growing at 5 %, so the rest of the business has to grow at least 35% to 40% band, so based on this does company will achieve the desired growth ?
o Rice will expand at least 20% plus, in hybrid rice and in varietal rice will be close to 30 to 35%. Vegetable business will grow at least double and exports also will grow another 15% to 20% these are all reasons for expecting 15% to 20% top line growth
- How big is the vegetable business right now ?
o At current level it is Rs. 11 Cr, next year it will be doubled
- How much business does varietal rice had given to company ?
o Rs. 43 Cr
Will the 28% increase in Cotton MSP price will boost the sales of cotton seeds ? Can we see its affect in Q1 which is the strongest quarter for Kaveri seeds.
I found about Kaveri Seeds Limited because Mohnish Pabrai invested in it. I didn’t know so much about the business, so i really wanted to know how the business work, so i did some scuttle butt. Let me know your thoughts. Most of what is posted below is based on my interactions with a friend in the same sector but a multinational company and another known person who is related to the company (KSCL) and has been with the company for more than 15 years.
First things first, i did some research so i spoke with someone in the domain… I mean who are in seeds or fertilizer s business.
Below is my reasearch
The product is not sticky. That means the end consumer(farmer) always switches companies. Lets say last time its Kaveri seeds so this time they will choose Nuzividu seeds or some other company.
What do most of the seed sellers in India do is they replicate the seed of some one else. That is almost every companies R&D costs.
Even though distribution exists he doesn’t have any influence on the selling it to consumer. why?
Because the same distributor/dealer will have many other seeds(of different companies). There are so many distributor’s nearby as well.
There is only one good PhD in KSCL. He joined in 2010 and left in 2016 or 17. During his tenure he did good amount of R&D, which paved way for better sales during this time frame. Now that he left the company doesn’t know how to handle. So it is scouting for companies in Europe so that the new R&D will add cushion. You can find prior posts which explains the same.
India is a place where at least in case of Farmers govt does everything during election season.
So it is most of the time to wipe the tears. The most general thing they do is control the seeds prices. So they make restrictions on the price. So the company doesn’t have pricing power.
Their core product is cotton and with almost no good R&D, except replication, they will face adverse competition from peers.
Either way who are their real competitors? Monsanto or many other multinational companies. Check their market share.
Like u said it takes years to get approvals. To circumvent that these companies unofficially release unapproved seeds of foreign origin and it is quite common. U can search on Google.
U have to speak with a field agent or district head to know this part. There are 3 layers in hiererchy. In the bottom most is field agents and district level heads.
Second layer is on top of these and third layer is at CEO,cfo… Top brass really.
Most of the second layer is not made of experienced people or exceptional people brought from bottom layer. They are mostly external hires and they leave the company in a very short span(2 or 3 years). Not exactly my liking, because experience matters and their thinking will always be to prevent short term pain.
Another important thing u can also remember is the company inability to retain talent(PhD which I am mentioning before).
Any thing said above is my personal view or information collected from sources, i might be fully wrong. Please do ur own due diligence before investing.
Discl: Not Invested.
Mutual Fund holdings of Kaveri seeds company limited has shown a decrease from the last 3 months ( i.e May’18 , June’18, July’18)
Mohnish pabrai Fund’s have acquired another 2% odd in the company. With this they hold around 9.5% in it