Hi Donald,
few questions from my side:
1). What is the usage of hybrid seeds in crops such as paddy and wheat?
2). If extensive then who are the players who have developed these & how does Kaveri compare to them
3). % breakup of sales in terms of various seeds ( don’t think AR captures it)
4). Any plans for CAPEX & if yes what will be the funding sources?
5). With monsoon playing truant are their stress on debtor payments ?
regards,
Saurabh
Sorry, Q1 to be reframed as what is the usage of hybrid seeds in crops such as paddy and wheat worldwide?
Apologies for very long post
Hi
Over the past 2-3 days did extensive reading on Kaveri Seeds. My view is that apart from management execution skill there are certain other factors like steep increase in cotton prices, drastic increase in area under BT cotton which helped Kaveri to post fantastic growth in the past. Now these factors can help them to post another good growth in FY13 but FY14 growth is definitely at risk unless and until they can scale up the sale of other seed varieties like Rice or Brinjal etc. Going by history of BT cotton approval hiccups in the past, it may not be smooth ride for company. Please find below my analysis in detail:
Risk
Need to check sustainability of growth going forward: I think following factors lead to drastic increase in sales of BT cotton in the past and these benefits may or may not be available to Kaveri seeds for its other varieties.
1) Over the last five years BT cotton has contributed to about 60% of the absolute growth in sales and I suspect a majority of it is driven by increase in selling price. Now I do not have the sales quantity of BT cotton separately. What I have done is to take the consumption (shown as issues in notes to account) of finished seeds for FY07-11. Now it is possible that these quantities include damage seeds, seeds issued as samples. But I think broadly it gives a ball park number which should be fine. Below table shows that between FY 2007-11, volumes increased only by 10% CAGR, so rest of the sales growth must be from price increase. But we can check further with the company on the volume growth in BT cotton seeds over the last five years. Another thing which puzzles me is that despite government control, how it was possible for Kaveri seeds to increase prices so drastically. So it is possible that I am missing some link somewhere.
|
10-12 |
07-12 |
|
|
Sales value CAGR |
||
|
BT cotton |
114% |
95% |
|
Others |
24% |
26% |
|
BT Cotton contribution to overall growth (Not CAGR, but absolute contribution) |
69% |
59% |
|
07-11 |
FY12 |
|
|
Total seeds sales |
37% |
64% |
|
Sales quantity CAGR |
10% |
14% |
Note: Share of BT cotton in total sales have increased from 10% in 2007 to 25% in 2010 to 50% in 2012 (Source 2007 & 2010 broker report).
2) Drastic increases in cotton prices (CAGR of more than 50% between CY 2008-11, though cotton prices had softened in 2012, put another way cotton prices of last three year average 2009-2012 (YTD) is 70-80% higher than 2000-09 average. These cotton prices are international prices IN USD, so there can be 10% +/- difference for India) have lead to additional area under cotton ((9% CAGR between FY 2008-11). It is quite possible that due to drastic increase in cotton prices, there was a mad rush by farmers to increase area under cotton which provided boost both to the volumes and selling price.
|
Area under cotton, production and yield |
||||||
|
Area |
Production |
Yield |
Cotton prices |
|||
|
FY |
CAGR |
CAGR |
CAGR |
Calendar. Y |
CAGR |
|
|
1950-2002 |
0.8% |
3.1% |
2.3% |
1975-2011 |
2.9% |
|
|
2002-07 |
4.5% |
19.8% |
14.6% |
2001-2006 |
4.1% |
|
|
2005-09 |
1.7% |
4.5% |
2.8% |
2004-08 |
3.9% |
|
|
2007-12 |
5.9% |
4.3% |
-1.6% |
2006-11 |
21.6% |
|
|
2007-10 |
4.1% |
2.9% |
-1.2% |
2006-09 |
2.3% |
|
|
2009-12 |
9.0% |
6.0% |
-2.8% |
2008-11 |
57.5% |
|
3) Area under BT cotton has increased from 40% in FY 2006-07 to about 90% by 2011-12 http://indiagminfo.org/wp-content/uploads/2012/03/Bt-Cotton-False-Hype-and-Failed-Promises-Final.pdf. Now whether the same can happen for other crops, may or may not be.
I do not think entire income can be treated as agriculture income under Income tax: I think Kaveri seeds entire income may not fall clearly under agricultural exemption. Letâs try and compare seed company income with the tea company. Not entire income of a tea manufacturer will fall under agricultural income. Only that part of income which directly relates to growing tea leaves is exempted but any part of income which relates to further processing of tea leaves into tea is not exempted. For this purpose, IT rules specify certain % of income which will be deemed to be agricultural income. Though for seeds company no such rules are there, but I think even they will be entitled to get exemption for only that part of income which relates to sowing of seeds and any income which relates to further processing of seeds in the plant is not exempted (Here I am presuming that Kaveri needs to further process the seeds it receives from farmers). See this link for cases pertaining to tea companies. http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2001ITAct/rules2001/mg029.htm.
Also came across some case law which states that income of seed companies are not agriculture income. Not sure if this case law overruled by any subsequent judgement. http://taxguru.in/income-tax-case-laws/income-from-cultivation-of-parent-hybrid-seed-is-non-agricultural-income-and-taxable-as-business-income.html
Further Questions for management (in addition to volume and ASP details highlighted above for BT cotton)
Sales schemes expenses have increased from 9.3% of sales in 2008 to 17.5% of sales by 2012. Sales scheme expenses are in addition to advertisement and sales promotion. On the contrary, sales promotion expenses have declined from 5.8% of sales in 2008 to 3.5% of sales in 2012. We need to have clarity on what exactly all these expense are and how they are related to sales and moreover, reason for such a drastic increase in sales scheme expenses. Irrespective of the accounting treatment, if these are discounts or seed packets distributed free to distributors on achievement of some sales target rather than free samples to farmers than for our purpose, we should deduct these directly from sales.
More clarity on advance can help us to forecast the sales for next year better: Company make half-yearly disclosure of its balance sheet items sometime in Oct. So by looking at current liabilities (which comprise) mostly customer advances, we can forecast sales for next year. To do this better we need to understand customer advances in detail. A) What is the % of advance which customers need to pay at the time of order booking and by what time advance should be paid for availing delivery in the June quarter B) Is the advance payment depends on the credit profile of customers or all customers mandatorily have to pay in advance. C) Is the advance only for BT cotton or for all seeds.
Some minor issues, which gives some clue about the management quality and quality of auditor:
â Investments in shares and equity mutual funds, a small irritant: Company has invested around INR 15 crs in equity mutual fund indicating that it does not need that fund for next 3-5 years. Then why not to increase dividends. Moreover, company had made provision for diminution in value of investment of INR 3.5 crores which I presume is because of equity mutual funds. Similarly there are investments of INR 2 crs in equity and the company has already made provision for diminution of value of equity by INR 1.5 crs. I think it gives some clues for future capital allocation.
â Both bad debts and provision for doubtful debts are increasing over the years. From very nominal amount in 2010, they increased to 0.8 cr in 2011 and to INR 2.4 crs in 2012. Now going by history till date they have incurred around 2 Crs of bad debts, but this certainly points out that their accounting is not on the conservative side. Still they have INR 10 crs of receivables more than six months for which no provision is made.
â In 2011 when it was mandatory, they failed to disclose sales quantity. Secondly for 2010 and 2011 auditor failed to ensure disclosure of segmental details though mentioned that they have two segments (strangely upto 2009 they have disclosed segmental details). Further many details like disclosure of loan repayment, interest rate, etc which are required by revised Schedule VI are not disclosed. Now when the auditor fails to comply with basic minimum disclosure requirement, how much can we trust him to ensure that all liabilities and assets (more so cash) is stated accurately on balance sheet.
â Royalty as a % of sales increased from 3% of sales in 2008 to 10% of sales in 2011 and stayed at 10% for 2012. Need to understand what % of sales are payable as royalty and the reason for increase in royalty over the years. As per some articles in the newspaper I understand that Monsanto took the state government to court over increasing royalty.
â Need to understand why the short term loan of INR 19 crs not yet repaid despite surplus cash
Some points needs to be double check in stock story
â In the stock story section it was mentioned â Rapid market share growth, to 11% in FY12 from 5.5% a year back on the back of its differentiated BT Cotton Hybrid.â But according to annual report volume growth is just 14.4%. I doubt that market share can double merely on increase of around 14% volumes. Now what is possible that though overall volumes are less, volumes for BT cotton are quite high.
Phew .... I am done for now
Awesome! just one quick comment - Cotton Market has overall declined in FY13, but Kaveri has grown reportedly because of better-quality hybrid, with high demand and better pricing. We need to find out comparative pricing, for a better handle on questioning. This is become interesting!
Thanks Anil Kumar, for the much needed close scrutiny. These give us enough food for thought/ammunition to take this further and do a good job of the questioning:).
Now we know whom to go to for BS/Notes to Accounts P&L/Cash flow scrutiny!
When we attempt to do a quick job, we can & do lose sight of essentials. A close collaboration between folks with complimentary skills can make sure we do not miss essentials and probe/cross-check from Various angles.
Team ValuePickr - way to go!! Can some of the natural skeptics take this investigation further? Anil, take a breather and have a fresh go in a couple of days, I am sure you will find more probing questions.
Cheers
Donald
I have some basic question on their research for future growth.
Some new developments . Need to find if this impacts Kaveri ?
"The Maharashtra Government has recently issued an order cancelling the companyas(Mahyco) licence to sell and distribute genetically modified BT cotton seeds in the cotton producing states of Maharashtra.
Though India Ratingsa does not expect any immediate impact of the order on the overall credit metrics of the company, it has said for FYa12 (year-end March), revenue from Bt cotton in Maharashtra accounted for around 13.1 per cent of the total revenue and around 6 per cent of overall EBITDA."
http://www.thehindubusinessline.com/companies/article3910575.ece
Hi Donald,
A few observations and questions:
There is concern from everyone that June quarter maybe a one off. But wasn’t the com prepared for the huge sales? it couldn’t have suddenly produced more seeds when the Mahyco supply issue popped-up. From what I understand it takes time to build the inventory. Was it a case of inventory meant for 2013 being used-up now…I doubt.
From the scorching growth rate of BT cotton sales, it appears that the com has a superior product in BT cotton for sure and then there is reason to believe that this growth will continue for more than a few more years by eating into market shares of others. But it is mentioned that they have 6 cotton seeds. I presume this is meant for different regions with different soil and other conditions. Does the company have edge in all the 6 seeds/regions? For example if only 2 seeds are leading to the growth, then the it would be difficult to grow further after they garner the lion share in those regions especially if those regions are small. A regional break-up of sales of BT cotton over the last 4 years will help.
Looks like germplasm is a critical source of moat. How did they develop that better than others and how difficult is it for others to catch-up? Is the germplasm strength available across all plants - rice, maize etc. If the future of BT is bright for other crops too, does the com have R&D capability here?
Need to understand the rice hybridseed opportunity which the com is highlighting in the AR2012. How will it penetrate a market were “saving” seeds is the preferred way? Are the economics involved for farmer similar compared to cotton? Will debtor days and chances of write-offs increase for the rice segment?
Could we look at the innovator t/o index (mentioned in the rallis report uploaded earlier) - contribution of products introduced in the last 4 years to the revenue and compare with the competitors separately for cotton and non-cotton?
Q-1 Fy 13 Microtek showed a loss. Reasons for the same.
What exactly is the 600 acres land used for? I think it might be more for Kexveg’s cultivation.
Need to understand the dynamics involved in managing the 1 lac “growers” who produce seeds in 75000 acres. Will the margins get affected for rice “growers”? How price sensitive is this “grower” associates as they do have opportunity cost involved with their land.
Capacity of manufacturing unit - 62 Mt/hr. 25 MT/day for cotton deliniting, 30 Mt/day for ginning, 2000 MT/cycle for drying and 8330 Mt cold storage capacity. Are there bottle necks here? As per the Anagram report 400 Cr sales was the max possible with current infrastructure.
Hybrid seed industry is expected to grow at 12-15%, which all seeds?
What are the processes involved for approval of a new seed and the time required? Pipeline of Kaveri and competitors who have already filed for approvals?
The Kexveg opportunity - how will they scaleup? Margins? Will they get into retailing like Namdhari?
Cheers
Vinod
Hi, here is a must read article on seed industry in India. http://agrariancrisis.in/2011/06/29/seeds-of-change/
Here are some interesting facts taken from elsewhere in the web:
Domestic seed mkt value to reach 15000 Cr by 2015, 9400 Cr in 2011.
More than 600 BT cotton seeds of morethan 35 cos approved for commercial production!
There are 10 Large cos, 50 Medium cos and 350 small cos in the Indian seed industry! 5 MNCs.
About rice hybrids:
China has 60% of total rice cultivation under hybrids compared to 2% of India’s
Current production of rice is 94mt in India which should become 130mt by 2025 to feed the population then
The last 10 year CAGRin rice production is 1.6%. So 2.5% CAGRrequired to reach the 2025 target.
Telingana region in AP has favourable climate for rice seed production. 85% of hybrid seeds production in India happens in AP by 40 different cos!
The query about Germiplasm in the previous post assumes even for importance after the new round of research. How sustainable is the R&D edge? Also need to understand how the PPV & FR act will help the company in protecting this R&D edge.
And here is a news about “gene piracy” of Kaveri 
Cheers
VinodM S
Sorry, the link is herehttp://www.livemint.com/Companies/jqv91t167QkQdBFv4udfAL/DuPont-unit-accuses-Kaveri-of-gene-piracy.html
Hi Anil,
Some fantastic digging from you! Really appreciate these insights…it will help us in preparing counter/follow up questions to check data.
Ayush
Some queries from my side (though they mave have been covered):
Some discussion on the R&D team the company has and how they have been able to develop new hybrids. No of patents/registrations? Any conflict or court case? What if they loose case against the MNC?
RICE seems to be next growth area for them…what kind of volumes are they targetting?
They seem to be gaining market share in BT Cotton…so what are the key brands and how are they better to competitors? Any trade magazine etc to validate the industry figures and market share?
Which states are the biggestcontributers?
What kind of turnover etc are theytargetinggoing forward?
I think its very important the co pays a higher dividend now. Esp now as they have surplus funds and are investing it in mutual funds.
Nuziveedu - a respected competitor is coming out with an IPO and raising funds…some discussion on the same
What are the key risks going forward? What was the reason behind 100% growth in Q1? Is 25-30% growth possible from this base?
With the size they have reached…any plans to have more professional auditors?
Of the 600 Acre land…how much is owned by the co?
Ayush
Any views on the accusation of Gene Piracy by DuPont group against Kaveri seed .just google for article which appeared in yesterday’s Livemint.
Kaveri is going great guns
So should be seeds business of other companies
Has anyone looked into seed business of DCM shriram consolidated and zuari?
some 70 posts in 15 days, So i thought i should also look into the company
1). Firstly i visited there “http://www.kaveriseeds.in/” and find no attractive with valuation of 1000 Cr , No proper information no proper details.
2.Secondly i thought like checking the Quality of Employee ,so i searched inFacebook,and found some 40 Employees and too have no Excellent background.
3 Finally I did same searched for the peers like camson biotech,Zuari Industries , DCM and found better than this.
May be i am newbie and my thinking in looking into the company atinitialstep can’t be as matured as the seniors members.
Thanks,Vishal Kejriwal
Germplasm, my friend, is the name of the game. Germplasm, takes years to build, and make a strong moat for the business. You can’t find the same at looking for employee data at facebook.
The second being customer loyalty (my experience tells me that farmers usually stick with the seed which delivers).
The third being its historical valuation at around a pe of 18-19. Currently it is trading at a pe of 11-12.
Regards,
-Subash
1). http://www.kaveriseeds.in/ Link: http://www.kaveriseeds.in/ inFacebook,and atinitialstep
try to seperate wheat from the chaff.
Article is almost one year old. just look at the date of article-- 21 sep 2011.
**
**
**
Any views on the accusation of Gene Piracy by DuPont group against Kaveri seed .just google for article which appeared in yesterday’s Livemint.
try
** chaff.Article **
**
**
Correct Hitesh Bhai my apologies. Somebody mentioned during telecom about article appearing recently n I posted the query without checking the date.
Anyway as per article also this gene piracy theory itself is highily improbable n if Kaveri is capable of ruffling the feather of a big name like DuPont that itself is a big achievement of Kaveri. The corn product must be an outstanding one.
**
**Want to try and see if any of you can help us with any of the industry professionals you may know/have friends - who might have interacted before:)**Sorry for the short notice,but I see the Seed Industry action is very very strong - in and around Hyderabad. So, it may be time well spent in Hyd an extra day on 26th, provided some meetings/interviews can be arranged.
Thanks
-Donaldo
M Prabhakar Rao, chairman and managing director of Nuziveedu, or other company official - Banjara Hills, Hyderabad
Dr Paresh Verma, director of research at Shriram Bioseed, or other company official - Jubilee Hills, Hyderabad
Any dealer/distributor/industry Insider in the Seed business - in & around Hyderabad
Homi Bhedwar, Director at The DuPont Knowledge Centre at theGenome Valley near Hyderabad
KV Subbarao, country manager of Pioneer Hi-Bred India, a subsidiary of DuPont India
Dr KK Narayanan, co-founder and managing director of Metahelix
Vidya Sagar Parchuri, CMD of the Rs 650 crore Vibha Seeds.
Dr Gyanendra Shukla, director at Mahyco Monsanto Biotech India.
Amitabh Jaipuria, managing director of Monsanto India
Ramesh Chand, director at the National Centre for AgriculturalEconomics and Policy Research.
Hi Vivek,
No need to be apologetic. That was a super input, according to me. A very specific one this time - unlike your general fire-in the belly, father-in-law, son-in-law generics:)…just kidding!
Differing with Hitesh here, I loved your input about the Dupont accusation against Kaveri. Without going into the relative merits/demerits of the case, It alerts us to many things - not to assume everything may be hunky-dory, question critically and watch how Management reacts to such stuff; there may even be Litigation liabilities just like in Pharma.
Again - it was a very very important input. Please keep contributing stuff that runs contrary to our generally optimistic club - Hitesh, me included:)
Please keep posting specific contrary stuff. This counter-balance is much neede, and much appreciated.
-Donald
Prviously Vivek Gautam wrote:
to seperate wheat from the chaff.
Article is almost one year old. just look at the date of article-- 21 sep 2011.
