Nice discussions taking place here. Hats off to Hitesh, for identifying it early and staying put.
I have also bot into the stock post Q1 results and I think given the past track record and other financial ratios, the co has actually done very well and deserves better valuations. But as of now my allocation is small as we need to understand the sustainability part.
The few major concerns from financial perspective are:
1). Low taxation - I was concerned earlier but came across a judgement wherein the outcome is in favor of seed cos. They don’t need to pay taxes if they are havingagriculturalfarms and the same is being used to produce seeds.
2). Increasing working capital - this needs attention
3). Low dividend pay-out - this needs to be increased to give confidence that cash flows are there and real
Also, like Donald mentioned - we should understand the relationship with Monsanto because this means thatcompetitioncan increase when the demand supply matches.
has anyone received a copy of the fy12 annual report for kaveri seeds? if yes, can one please post a link to that here? i am still waiting to get my hands on one.
I found these two things from interacting with a friend interested in kaveri.
1 andhra govt has put a ceiling on price of bt cotton at 750 rs per packet. (it went up all the way to 1800 per packet of 450 gram)
2). currently the royalty paid to monsanto is at rs 180 per packet flat. but post wto meed in 2012 this price can be increased by monsanto to 20% of sales.
these are views given while talking and i could not find any documentation to prove these.
1). company is bullish on the rice hybrids portfolio. according to the statement “the rice hybrid has now grown from being on fringes to to become strong contributor to kaveri’s business.”
2). net working capital is showing reducing trend. in last three years, it was 38 cr for fy 12, 68.8 cr for fy 11 and 85.3 cr for fy 10.
3). company has 95 strong portfolio of hybrid seeds.
4). for third year in a row company made it to the forbes best under a billion list.
5). company’s subsidiary kexveg india was launched in nov 2011 and aims to produce high value exotic vegetables like green capsicum, red/yellow bellpepper, cherry tomato, hybrid tomato, parthenocarpic cucumber , chives, and other herbs and vegetables.
5). some financial details – for fy 12, roe 24, roa 11, fixed assets turnover 3.47, debt to equity 0.09, cash and equivalents around 120 crores (current inv of 110 crores and cash of around 10 crores). lt debt 2.6 crores and short term debt at 19 crores.
6). executive directors’ (who include promoters as well) remuneration seems reasonable at around 2 crores.
all in all not anything amiss from a view at the AR.
Some answers I got from someone who has done extensive extensive work on Kaveri Seeds.
Disc:Kaveri seeds has the highest allocation in his/her portfolio, and his/her investment is significant. Its safe to assume there are vested interests and views may be biased.
RISKS
1).
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Ans: To produce and sell a BT Cotton Hybrid seed, you need 2 things
a) BT gene - resistance against bell-worm (provided by Monsanto-Mahyco JV)
b) Hybrid - is created by Kaveri using separate female & male lines from its germaplasm bank.
The BT gene tech for cotton has been provided by the Mahyco-Monsanto JV to 55 other companies in India. Not everyone has been as successful as Kaveri because the Hybrid quality can differ widely.
There are 6 different attributes that differentiate one hybrid from another:
a) better yield b) better quality of yield c) Requires less labour d) resistance form pests e) requires lesser water f) ability to withstand variance in weather conditions - both draught & flood (this is pretty critical)
The BT gene is licensed not by Monsanto, but by the Mahyco-Maonsanto JV, to avoid potential conflict of interest.
2).
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Ans: Royalty paid is Rs 180 per packet (sold at Rs. 930 per packet). Cotton is the only crop where there is state level capping.
As per WTO Norms, Monsanto can raise royalty by ?
3).
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Ans:Only Hybrid cotton is from licensed products. And that’s at 50% or so. They also have Corn, Paddy, Bajra, Sunflower hybrids.Cotton volumes & therefore topline value is high, but margins are lower;Corn sales low, but margins are high.
Cauvery was able to introduce BT Cotton Hybrid only by its 9th Year of development effort. It had been failing for the previous 8 years. 9th year it was successful and revenue contribution was 10 cr, 10th 20 Cr, 11th year 40 Cr,and has been roughly doubling every year.
4).
** arbitrary.
Any threats are posed by smaller competition on Seed IPRs? How much of pricing power does anyone with a quality hybrid enjoy?
Ans: Multiple regulations exist. None really followed. The regulations impact smaller companies, not so much the bigger players. In seeds industry, you have to grow your product in the field for selling; This brings in massive entry barriers. So small players even if they manage to steal a hybrid line…they cannot grow beyond a point.
As mentioned before Cotton Hybrid is the only seed where there is price capping.
Please note that Kaveri has increased its Hybrid Corn pricing 15.9% on a compounded basis over last 22 years. Monsanto’s Corn hybrid - Dekalb - is 100 years in existence. This is the Power of a good hybrid!!
5). **
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Ans:Cotton Hybrid is the main reason for the growth. Cotton is still in a growth phase for this company. This year the cotton market actually declined by 10% but Kaveri’s mshare doubled to 11% (from ~5.5% in FY11). Largest player Nuziveedu Seeds has 40% market share . Kaveri has been able to take away market share from the others.
Farmers shift crops pretty aggressively in India dependingon their expectations of realisations…usually there is a 5 year cycle…in the next 2 years Kaveri may reach peak sales on Cotton Hybrids. They have made good progress on Corn Hybrids…currently in development process…should reach commercial status in 2years time. (Check the company’s FY12 AR)
Also paddy is the largfest market in the country. The hybvrid seeds market for Paddy is 20 times bigger than cotton.
Do any of the other crop seeds have a BT connotation?
No. Other than cotton, no other crop has any BT connotation in India.
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6).
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Ans: The MNCs can attempt to kill Kaveri ONLY by acquiring it. In which case we as shareholders may not have much complaints
7).
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Ans:Kaveri is unique. Among its listed peers, Monsanto has only Corn to0 sell. Advanta has crops based on bio-fuels story. Camson is only in Vegetables. Nath seeds have corporate governance issues(?). The only one truly diversified company in Hybrid Seeds is Kaveri.
Among unlisted players, Nuziveeduis 90 % cotton, Vibha is again 90% cotton; Rasi is 100 % cotton.
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8).
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Ans:Cotton - very high Sales and lower margins. The right metric to look at is Return on Capital which has gone up every year.
9). There are other private players bigger than Kaveri?
Ans: Nuziveeduis bigger than Vibha. 3-4 or companies bigger than Kaveri. Size is not that material, now. Return on Capital is. In next 3 years, Kaveri will rise in size as well.
10). What about the low taxes paid? Is everything reflected on Books?
Ans: The way I look at this is they need to pay180 Rs of royalty to Monsanto per pack - and they collect Rs. 930 per pack. So Tax arbitrage and fraudulent things are probably remote, in such a scenario.
POSITIVES
1).
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Ans: Its ~9000 cr market in India growing at 12-15% per year.
Cottonhashowever declined by 10%in June 2012 i.e for FY13.
We heard there is some shortage of Cotton Seeds?
OnlyMahyco seedshas shortage. Theirs is the best hybrid. But they cant produce in very big volumes because of the nature of that hybrid (a production challenge).
2). companies?
Ans:Cheapest as compared to others. Others have grown because of riding on crop shifts. Indian farmers shifts crops very aggressively. Kaveri is the only realdiversified player.
Metahelix(Dhanya seeds) expects to capture 10% market share in Bt Cotton mkt of 4000cr i.e. 400cr revenue from Bt Cotton which is same as Kaveri seeds total revenue … there are many seed reasearch going on in Metahelix(Rallis India Subsidary)
Thanks for shaking me out of my usual passiveness:)
As I see it, ValuePickr is evolving into a well-rounded Team - comprising hardworking folks with complimentary skills. As prolific generators of ideas, your job (& Ayush’s, and hopefully many more …) is to excite me about your most promising ideas (failing which, you just have to ORDER me to DROP everything else like you did this time)!.
My job is to get to the bottom of the main issues in quick-time:) in a few stocks. I just cant do what you guys are so good at…that’s why we value each other’s contribution, right. That’s Team ValuePickr, and key to our happiness in working with each other, and reasons for some of our successes.
There is good conviction to take this forward now and investigate deeper. Most probably I will be attending the AGM in Hyderabad - Sep 25?
as far as i know rice has to be planted during monsoon and transplanted after plants grow to a small size. but i think sale of seeds occurs mostly during june quarter only bcos farmers will obviously buy seeds before rains start and hence be better prepared for sowing.
please find my answers and educated guesses in bold.
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1). What would it take to create a new comparable seed company?
seed business takes time to build because building up a collection of germplasm takes a lot of time and research.
2). What is the source of it’s moat?
seed/germplasm bank, distribution channels, research facilities, customer faith.
3). What drives Kaveri’s growth/ ROE?
I think it will be attributable to management expertise and vision. Plus the capital that was used for setting up/expanding the facilities back in 09-10 is now paying rich dividends.
4.Why is Kaveri executing so well versus others in the business?
Again management expertise.
5). Can it continue delivering for long periods? Why?
Likely answer is yes. If you look at the progress of the company it has been fast to learn and adapt. It latched on to bt cotton boom in time. now it seems once bt cotton markets are likely to saturate in next two years, company is already in line to launch rice hybrids which has a much more addressable market.
plus the kexveg venture which is there to produce the exotic vegetables – if this succeeds then it can be a big push for company’s prospects. I think at current valuations not much earnings are expected out of that.
Over last 2-3 days I have been totally engrossed reading on this company and it has been a fantastic company and got good learning about this industry. The inputs shared by Donald are great and really help in understanding the picture and building confidence.
The latest annual report is fantastic and a must read for everyone. Clearly, the co seems to be getting traction form the rice & corn segment. The undertone seems quite positive. Another good thing is the investments of 100 Cr on Balance sheet, which shows cash generation is there.
One negative we should look into is - as per couple of articles shared above (which are quite informative), there was a massive shortage for seeds in this season of June and hence it is possible that the June results are more than normal earnings.
All in all, I really liked the story here and longer potential is also there. Have increased my allocation.
I have just been going through the AR, and have the following question.
1). Company’s net assets have remained at same level as 2010, roughly 100 crores. Whereas company owned land for R&D seems to have increased from 250 acres to 600 acres. Can the need for more land bank put a constraint on growth in future ? and how is this growth funded ?
2). AR pg. 11 “The bulk of India’s sowing happens in first quarter of the fiscal, Distributor/Dealers pay month in advance, which swells up our current liabilities at the end previous fiscal” - This line in the AR picked my interest, and i tried to do a exercise similar to what Prof Bakshi has taught in his recent post on float.
From 2012 AR- (All figures in crores)
First on asset side:
Non-Current investment - 6.95
current investment - 110
cash & cash equivalent - 9.6
Total financial assets - 126.55 (sum of above 3)
Operating assets - 461.95 (balancing figure)
Total assets - 588.5
On liability side:
Equity - 241
Debt - .55
FLOAT - 346.95 (balancing figure)
Total liability - 588.5
So, 75% of operating asset is funded by float.
The main contributors to this float are
trade payable - 110
current liabilities - 203 (Advance from dealer)
Total - 313
313 is very close to inventories(303) plus receivable(28) figure of 331.
Is my calculation correct? and this explains the super working capital management ?
One related question i can think of is; in Kaveri’s case, may be the float is available for only 3-4 months leading to first quarter. How does the inventory generation match with this floatavailability?
3). I think in a seed business, brand is a source of moat. A farmer will pick the more reliable brand over cheaper seeds as paying lesser and risking the next few month’s labor on it may be simply not worthwhile. I say this from my small time experience of gardening/growing vegetables for my own need (http://rajsmusings.wordpress.com).
Kaveri looks more and more interesting, as the information builds up, and doubts start clearing.
In all this I must acknowledge the quality of work Donald is putting into this. Digging out all this information ( how do you guys do it!?) And it’s a tribute to this quality of discussion, that I am spending more time here then in TED (which is a pioneer and still a great forum)
One query I know Hiteshji mentioned that the p/e of Kaveri has been over 15 but whenever I see an old post, the p/e mentioned has always been 10. Is it possible to know the time period when the p/e has been 15 and over consistently for longer periods of time?
Spoke to one of my Hyderabadi friends who knows the promoter n little bit about the co as well.
The promoters belong to Velama community which is an agricultural community concentrated in Telengana region of AP. This shows n explains the promoter passion for seed business.The company reputation is better when compared with fraud Hyderabadi cos.
The main promoter Bhaskara Rao is a first generation entrepreneur who founded the co in 1976 n will now be passing the baton to his son in law mr Mithun.in my view the cos where baton passes to son in law proves a better performer as son in law is carefully chosen by his Sasurji . Eg DLF when Mr KP Singh took over from Raghvendra Singh, Jubilant group when Bhartia married Shobhana Birla, Suriner Kapoor of Sona Stering who married Raunaq Singh of Apollo.
Now my friend is a classmate of Mr Mithun who has been showing great confidence in the growth of the co.
Any queries which can be discreetly raised are welcome.
