Thanks for Mgt Q&A, Donald Sir.
Mgt seems confident of growing 20-25%even when total market is shrinking.
My question is how long will this continue?Even if they grow this year, next year it will be more difficult- higher base, lowertotal market.
Or the overall market will grow after this year?
Hi,
I was lucky to be part of this Management Q&A. Had a great time chewing Donaldâs brain in the train and was amazed at his passion to keep accumulating knowledge from various senior investors and share so willingly to all those who ask.
It waswonderful to watch Donald systematically and skillfully carry-on with the interviews of Management and Dealers. It was a great display of using tactful communication to probe and extract relevant information after some really methodical homework in which many of us contributed.
Meeting and knowing Om Prakash and Tirumal Rao was another great learning experience. These seasoned investors had lots to share in terms of their strategies and approach to equity investments.
All in all one great trip to Hyderabad! Urge everyone to make use of such opportunities to contribute, learn, share and meet some great people.
I am sure most of you would agree that the management Q&As of valuepickr are at a much higher level than most con-calls and research reports by brokers. Lets put in as much effortas we can to make this âcollaborative investment experimentâ a great success.
Cheers
Vinod M S
Hi Jatin,
If you look at last years performance - that too offers some clues. Cotton acreage declined by 10%. Kaveri more than doubled its sales 41 lakh packets vs 18 lakh packets. Almost everyone else lost market share. And there was carry over inventory of 2.5 Cr. There could have been only 1 reason - great performing hybrids - and word of mouth from those who witnessed it.
This year again there is a likely 10% lower acreage. Kaveri maintains they will do atleast 20-25% better - for the same reasons. Great performing hybrids and a 3x larger farmer base that has had direct/indirect experience with its products! (refer back to the Management Q&A).
The Advances and the Inventory situation too - are good pointers to where things may be headed, though these are no guarantees for the situation to play out as it may seem, since higher competitive intensity is at play.
If Kaveri again does superlatively well this year (that can only happen at the expense of the other biggies), actually it will mean next year will be much more easier for Kaveri. Reasons same as above, besides huge inventory pile-ups for others.
Thatâs the million dollar question? Ask any market participant, for the past 2 years everyoneâs been asking yes they have been doing well, but this year will be the real test. Can they repeat the performance?
Same question being asked all over again. Deja Vu:)
20-25%even ** how continue?Even ** lowertotal
seems AP govt started tinkering with seed industry:
Hi Donald and team,
Excellent work yet again. Good to know the ground work and that kaveriâs brand has got established and is gaining traction. However Iâm very concerned on the two points:
1). If there is such a huge supply (unsold inventory) and with everyone confident of growing selling more, then mathematically something is wrong. Something needs to get majorly corrected here.
Such kind of huge demand supply doesnât get easily corrected without inflicting pain.
2). After learning that some of the major players in the industry are paying taxes, Iâm very concerned as to why Kaveri is not paying the same. Monsanto has a different model. So a more comparable would be NuzividuâŚif the leader is paying, why not kaveri?
Iâm think we should try doing more homework and seek answers to the above by questioning some of their competitors. If indeed everything is right, then like you said, Kaveri has a long way.
Ayush
Hi Ayush,
Kaveri had paid tax till the IPO, Nuziveedu will probably pay till their IPO. So I am not sure comparing with Nuziveedu is right in that context.
Whatever tax they paid, Kaveri claimed a refund and got it too. So if the authorities refunded the tax I think the com has a strong case not to pay tax under the current law.
Since taxing might impact the cost of seeds, the gov may not amend the said laws keeping the interest of farmers in mind.
With regards to inventory, there are 2.5 Cr packets carried forward from last year. So there was huge over-supply last year too. Why did only Kaveri grow last yearâŚthat too by 90%+? From what we heard all 2.5 Cr packets carried forward are not un-branded seeds. I think the customer dynamics and nature of product are quite different here, so we cant just go by the supply-demand scenario.
For one, seed is the most important and critical input but costs only 10-15% of total cost of farming. Hence farmers may not take a chance. Secondly I think âword-of-mouthâ and âherd mentalityâ may play a much larger role than we can fathom in this industry. So âJaadooâ is a rising star like Chateswar Pujara and Kohli and more and more people might change loyalty 
The USPs of Jaadoo as mentioned by the management and Dealer seemed quite convincing. Since no other seed brand is in a fast growth phase I think it will be easier for Jaadoo to cause the shift. The advances received from dealers in a weak market point to the same fact. The icing on the cake could be the rising prices of cotton (4500 now from 3600 last season) and the same continuing in Q-1.
Having said all this the big doubt is - doesnât competitors know about Jaadoo and its exploits? Why did they build up such inventory this year to fight a losing battle? According to management this is the first instance of branded cotton seeds being in such oversupply in cotton industry!
One reason I can think of is Seeds can be stored for 3 years+. Due to over-supply last season many small players did not produce this time. Hence the limited land (1.3 lac acres is currently suitable for cotton seed production) was available for branded players in abundance this time and having faced production issues earlier they might have all wanted to exploit this opportunity. Their cost of production might have decreased this time.
Another reason I can think of is that their existing hybrids are in declining phase, so as more and more time passes by, they may have lesser opportunities to sell these established seeds and might want to milk the same before new hybrids like Jaadoo completely wipe them out. Its like a vehicle platform being milked as the fixed costs on R&D and establishing the brand are already incurred. In this case the low seed production cost may justify this kind of strategy.
Anyway its going to be a âwarâ b/w the top 5 in Q-1. I think the odds are favoring Pujara and Kohli
Cheers
Vinod
Pls read âlast yearâ as âlast seasonâ in all the places in the above post.
Discl: Kaveri is in my top 4 holdings and I am planning to increase the allocation further. My views might be biased.
âSecondly industry.â
This is the peculiarity of Indian agri segment, more so for seeds wherein in addition to herd mentality, the stickiness plays the crucial roleâŚa farmer seldom shifts to any other seeds provider come what aggressive promotion done by the peer for its seedsâŚThis same thing works the other way round wherein in case of one failure, farmer never returns back to the seeds company for many years despite it having benefited from its seeds since last many years.
Rgds.
Couple of questions:
Out of the 2.5 cr inventory, how much could be attributed to the ban on Mahyco in Maharashtra?
What is the current status of this ban?
Ayush,
1). Taxation - donât think this is that big an issue, if you look objectively. Company has got refund from the Income Tax dept itself in 2011. If a reversal has to happen I donât see it happening before 2-3 years. Especially there has been recent court rulings in favour of zero tax cf. Monsanto. The law has not changed. Any new enforcement will also entail the legal process for ratification. We can ignore this aspect easily for th immediate foreseeable future. If it does get enforced in the future the impact will be for that base year. Next year will get normalised on new base.
2). Excess inventory - obviously this is not a happy thing for the Industry. But again an opportunity as Hitesh said, for the Men to get separated from the boys. Those with the bat hybrids will naturally do well. Kaveri hybrids were no 2 last year. Jadoo hybrid response seems exceptional this year. We are trying to ascertain this firmly through field data.
Exhort everyone to put energies to collect field data from AP and Maharashtra
-Donald
Hi Akbar,
The 2.5 Cr seed packets pertain largely to under-performing seeds. The Mahyco issue does not seem to have any effect on that. Mahyco has also increased its inventory this year and should not face any problems.
Vinod
Thanks Vinod.
Akbar,
Mahyco could not produce enough quantity last year due to scalability and production issues with some top hybrids. They produced and sold only 25 lakh Pkts. This led to big shortfall in Warangal dist where Mahyco products are in huge demand. These folks wanted Mahyco hybrid at any cost and bought from other states in black market at Rs 2000 per pkt (normally Rs 930). This black market led to big hue and cry and the Maharashtra Assembly in itâs wisdom decided to ban Mahyco.
Ban has no relation to the carry over. Mostly non-performing hybrids comprised the 2.5 cr carryover inventory. All the big guys had zero or near zero inventory left over. This year most big guys will carry over inventory as everyone has produced 2x or 3x including Mahyco.
The ban stays as of now. But management has answered this in latest Q&A. Farmers will buy at the border!! They are the ones who will suffer if the ban is not revoked (which was purely political) . Market will find its own way for sure.
This time there are better hybrids than Mahycoâs and anyone who had bought at 2000 knows there is no additional benefit buying in black at 2x the price.
-donald
Thanks Donald⌠this really clarifies the demand supply scenario.
Akbar,
Thanks Donald, Vinod and team Hyderabad! Itâs such a top-notch fieldwork and so much to learn from this.
On tangential note:
(tl;dr: How to develop skills to source random product data of any industry)
(TL;DR: Too long did read read below)
Donald, youâve been exhorting here and elsewhere us to collect more data from AP/Maha. Iâm wondering how does one develop skills to get contacts/distributors on some totally alien product (I bet none of us cityzens know where/how seeds are sold) and how does one convince them to share correct data freely? Who am I, this guy from Bombay, to call up some distribr in Solapur, Nasik wherever and asking faltoo stupid Qns and why should they bother to reply?
small eg: wrt Ajanta/Unichem. We all come across medicines. So I thought it shd be easy to get data. I started with top5-8 chemists in my area and started poking them with Qns. With some guys while buying I just casually asked and with some I was explicit that Iâm researching from stk POV. I felt the quality of their answers couldnât be relied upon. Most of them just give a casual reply. If I asked them abt Ajanta, response wd be âYes, Ajanta is doing good, Cipla, Ranbaxy, DrReddy - sabhi badhiya companies hainâŚinka maal tau aate rehta haiâ Then I ask UnichemâŚâhaan haan kitna purana co hai woh bhiâŚiska bhi maal aata hai⌠Unichem, FDC, Pfizer, Glaxo, Glenmark sab chalte hainâ
You see how this kind of data doesnât tell us anything
(*Iâm giving the exact response in Hindi, as that casualness will be lost in translation)
Finally I did the unthinkable. I collected several prescriptions of relatives/neighbors together, went to the biggest pharma in my suburb. This is where I hit jackpot. One because I gave them big business (~INR 1500 one shot), and promise/hope of such repeat bulk biz.
Secondly, more than that, I told them Iâm a bit of pharma nut (faking it like a boss!!!) who liked to keep track of industryâŚthrew around a few names of generics, abt abbott/piramal dealâŚjust to indicate to him that Iâm more knowledgeable than the Crocin buyer nxt to me.
Third and more imp. I was lucky to find the owner of the shop at the time, who turned out to be a Gujju, not much older than me. So there was some kind of age-connect when we started discussing. And hence he was more measured with his statemts and forthcoming with answers. I think this social aspect is sometimes lost when we are playing with numbers. (I imagine, if I was a gujju capable of speaking his lang, Iâd be probably sitting on goldmine of data right now. Not sure).
Only when he confirmed the uptick in Ajanta products/sales + ofcourse solid conviction of Hitesh bhai and his excellent notes in that thread, all this together convinced me to add more Ajanta during last fall to 540-550 to cover my PPBed qty sold at higher levels. Otherwise I wouldâve kept waiting for Ajanta to crack in this meltdown and ofcourse itâs just running past all resistances.
Even then I wouldnât say my data is even 5% quality of what you and team Hydbad have done here. Excellent job! For one, I still donât have any meds names. I still have no indication abt Unichem turnaround. Maybe Iâm not asking right Qns. Or should be prepared with better qns. How? And lastly what incentive do they have to share such data?
Moreover, like auto sales are published monthly by all cos, is it possible from some industry association to glean monthly pharma/<$anyIndustry> sales? Reading Lynch can put crazy things in yr head 
Apologize for the long comment. I just wanted to get to the nuance of my query, and maybe if other newbies like me can learn something from my experiences.
Kaveri Seedâs management is confident of at least a 20% Cagr in
revenue from cottonseed, driven by continued market share gains.
It also expects revenue from other seeds to grow at least as fast,
driving strong earnings growth for the company. Valuations
remain undemanding at 10-11x potential FY14 EPS.
â According to the company, advance receipts from cottonseed dealers
for the upcoming kharif season are up c10% YoY despite challenging
industry conditions. Management also expects Kaveriâs year-end
inventory of cottonseed to increase at least by 25-30% YoY, indicating
that the company is prepared for at least that much growth.
â The cottonseed industry faces a massive overhang of leftover
inventories (>50% of annual sales). However, Kaveri itself has no
inventories, thanks to the exceptional success of its Jadoo hybrids that
has helped it double market share in FY13. In addition, Kaveriâs new
cotton hybrid, branded âATM,â reportedly offers even higher yields than
Jadoo and will support Kaveriâs thrust for further market share gains.
â Among other seeds, Kaveri expects continued healthy growth in: 1)
corn, in which it already has a significant presence; and 2) in paddy in
which its hybrids have topped ICAR trials ahead of MNC competitors.
Current valuations do not seem to factor in managementâs expectation
of continued strong growth in earnings.
Strong growth expected despite industry-wide challenges
The cottonseed industry is passing through a turbulent phase with a
massive build-up of inventory in the aftermath of shrinking acreages
under cotton. The scramble to liquidate inventories will depress
pricing for the upcoming season. Yet, Kaveri is in a good position
because the blockbuster success of its Jadoo hybrids has ensured
that no inventories have spilled over from the previous season. In
FY13, Kaveri doubled its market share to 10% and it expects to be
the leader in the industry within the next 2-3 years. Nuziveedu, the
current market leader, has c25% market share. Kaveri expects its
Jadoo hybrids to continue to perform well in the near term. Further,
to widen its lead over competitors, it has introduced a new hybrid,
branded âATM,â which it claims offers even better yields than Jadoo.
Scale benefits should help protect margins
Owing to the sharp increase in its scale of operations, Kaveri is in a
good position to negotiate for discounts from its suppliers and
channel partners. Management expects these scale benefits to add
up to 100-150 bps of extra profit margin. However, in view of
looming pressure on pricing because of troubled industry conditions,
management refrained from guiding to any margin expansion in
FY14 and instead stated that the company is confident of
maintaining its margins, in the least, regardless of pricing pressures.
Besides cotton, other seed sales also seen growing rapidly
In FY13, Kaveri expects to record 20%+ revenue growth in all other
seeds except bajra. Corn seeds have done exceptionally well this
year because of higher acreages and are unlikely to perform as well
next year. Nevertheless, paddy remains a key long-term growth
opportunity owing to its low rate of hybridization. Kaveri is confident
of its own research capabilities in rice and cites the success of its
hybrids in trials conducted by the Indian Council for Agricultural as proof
Hi all,
One of my friends works in a FMCG which buys a lot of agri products including cotton seeds. I asked him to do a channel check on kaveri. Reproducing his feedback:
)â
Hi,
My channel check suggests that-
1). At this stage, there are clear indications that cotton acreage will decline by 8-10% in Maharashtra (all key growing districts are confirming individually) and that much more sowing will happen for soyabean which is a competing crop (higher yield and optimum rates in mandi for soya have improved the crop economics).
2). However in AP there may may higher sowing of cotton by 5-10% (we have limited presence in coastal AP and they are confirming), which augurs well for Kaveri as 40% of their sales is reported from this region and brands like Jadoo is doing very well there. I will also check for Karnataka/TN. Now, for this estimation, worst case market sizefor kaveri is stable, however saleswill depend on product performance of last year/channel schemes etc,
All said and done, actual sowing decision/seed purchase is done by farmer in May/June, our local traders are more bullish on cotton than soya, Also, have feedback from recently held cotton expo in China through some manufacturers who are our trade partners that outlook for cotton is bullish, outlook for soya on the other hand is flat. Farmer may go for cotton in case May sees decent upside in cotton (which is expected).
Another thing is that irrespective of sown area I ve personally seen cotton seed flying off the shelves like hot cake during may/june if the quality is good and monsoon is timely. So we need to watch out for cotton rates/monsoon forecasts in May.
**
**
My View- We can safely factor 10% increase in sales.
)-------
Still not able to decided where the odds lie, though getting inclined towards positive side.
regards,
saurabh
PS- have a holding, hence views may be biased.
Hi Kamikazi,
Sorry for the delayed reply. Am just back from and Advanced Course at AOL Ashram - was in silence for 5 days:))
It is no doubt hard work. There is no one way. There are so many folks who can find the contacts (not that difficult a job in todayâs world), but not everyone can extract quality information. More than anything else, it requires an open unbiased approach, you never know how even a casual conversation with a new person you meet can throw open new doors.
My experience says, if you have a genuine unrelenting desire to get to the bottom of something, and sincerely systematically, unrelentingly go about it, you will find a way! As the saying goes 'Opportunity favours the Prepared". Circumstances come to your aid! Its true!! (Also More & more folks get inspired to contribute like you & Saurabh, etc. etcâŚ)
To substantiate - one of 4 room-mates in the AOL course turned out to be from Hinganghat in Maharashtra - a cotton centre (30 lakh packets of 160 lakh Maharashtra packets). Though he is not a farmer, he was a storehouse of info on BT Cotton for taht region. His village along has 25 ginning mills, major distributors, dealers are all located there. Neighbouring AP districts like Adilabad, Mahboobnagar, Warangal. Khammam - so these guys he says will have info about these AP districts as well. He gave me a rough idea of the breakups in diff regions - what he estimates - Wardha dist (50 lakh), Hinganghat (30-35 lakh), Yavatmal (25 lakh) Ralegaon+Pandharkawda (25 lakh) packets - but says his distributor friends will have correct info. **Ankur is the highest selling product there by far (Hinganghat), followed by Ajith (very high demand but poor supply last year), then Mahyco. **Nuziveedu and Kaveri come 4th & 5th respectively in Sales as per him. But one of his friends experimented with Jadoo - against the advise of dealers - and got 17 quintals per acre last year, where the average is usually 8-10 quintals per acre for good hybrids. But he said it depends a lot on the farmerâs cultivation practices/knowledge, etc.
He invited me to come to Hinganghat (70 Km from Nagpur) and said he will introduce me to his farmer friends, distributor and dealer friends:) One of them is the Secy of the District Association for Cotton Traders & Farmers APMC.
This will be a rewarding trip - for consolidating on - all kinds of data that is pouring in from AP & now Maharashtra. I am definitely planning a field trip soon. Vinod MS is getting busy preparing for his CFA level 3, will not be joining in this time. All the best to Vinod!
Anyone based in/around Nagpur? Most welcome to accompany & help us in taking this quest further. If anyone is wondering why take so much trouble for potentially 10-20% increase in Sales, my reading is the company will do far more:). And it is a high-quality company to have in your Portfolio - no other company in our universe has the kind of Intellectual Property (IP) that Kaveri seems to have. I value that a lot!
Disc: I have a small holding. Incrementally adding at every fall. My views can certainly be biased.
Hi Saurabh,
Excellent initiative from you. This kind of cross-checks from non-conventional channels are the most valuable as they can highlight the disconnects. Keep consolidating, ask if your friend can get data about the key players in different regions of AP & Maharshtra. AP & Maharashtra together constitute 60% of the total market.
Re: farmer purchase decision.From what I have learned so far, the dealer does have a big say in influencing farmers purchase. The dealer is the one who takes the RISKS (Advances to Seed Companies). Farmer only spot buys in May/June after the first showers (post 15th May usually). Most of the farmers are not that educated and rely primarily on a) hybrid performance of earlier year b) dealer advice on switching/new hybrids. Very clearly there are regional favourites - the dealer usually is reluctant to let in new claimants. Jadoo has done very well in most of AP with 30-70% higher yields, all the Maharashtra dealers know, but they are not keen to do experimenting/PUSH sales for a new potentially stronger hybrid; It takes time to percolate. Its much easier/safer to go with the prevailing opinion on the local favourite(s) - go with Ankur, Ajith and Mahyco, rather than NZ or Kaveri - the refrain - Utna chalta nahi hai )- AP soil/climate is different, ours is different. Even though someone in Hinganghat has two 5 acre plots side by side - one with Jadoo and one with Ankur - showing dramatically different results. Jadoo delivered 17 quintals per acre vs 10 quintals per acre in the adjoining field.
But still very few takers!! Deciding where the odds lay is tricky, so collecting more & more field information is key. I am just following my strong hunch that Kaveri must do well. There are strong counter-arguments to others doing as well -and in a shrinking market this is a big call.
Readers are advised to look objectively through the data. Our job is to supply more & more refined data for better-informed decision-making. My hunches are strong, but there is not enough data to back that up as yet. In my book, it is certainly worth attempting to get at the bottom of this - cause the upsides can be big.
Welcome more attempts by others at digging out data from different sources. AP, Maharashtra, KN & TN markets data can be key. Anyone with local contacts/friends please do what you can.
Cheers
Donald
I would like to confirm that the farmerâs decision to buy the seeds depends first on the previous yearâs performance of that seed and then the seed dealerâs recommendations comes second. They first try out the new seeds for the limited acreages and depending on the experience, they will go for higher acreages. Normally theysow atleast two types of seeds as they know that for different intesity monsoon, different seeds yield better.This is the ground level info I have from Vadodara district of Gujarat. It may vary for other parts.
Discl: I hold Kaveri Seeds.
