Kaveri seeds company limited -- kscl

Stock Opportunities Not-so-Hidden Gems
1097

A statement by the management in the Q1FY16 result needs to be noted as well :

Royalty on sale of Bt cotton is provided at Rs.49/- (including service tax) per packet for the Quarter ended June 30,2016 as per the Cotton Seeds Price Control Order, 2015 (CSPCO) and the Notification dated 08th March 2016 (Price notification)issued by Ministry of Agriculture, Union of lndia. The selling price of Bt cotton seed is also reduced to Rs.800/- as per the CSPCO and Price Notification. To that extent sales values are affected for the quarter ended June 30, 2016

1099

Everything else is good about this company but this one point about SEBI audit is enough to stay away. Any negative development about accounting and audit can overshadow all positives.

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1100

guys any CA between us, who can read the financials and make an attempt to understand/ summarize red flags in their accounting?

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1103

Bayer clinches Monsanto with improved $66 billion bid

1104

The impact of the big ticket Bayer acquisition on the India biz of Monsanto & Kaveri is uncertain. Domestic price regulation, legal tussles, & anti-bt environmentalists complicate the matter further.

Safety of capital & assurance of returns are both at risk

1106

In my view, your comment was flagged because it was not responsive to the question whether there was a CA who can read the financials and spot accounting red flags. No where did he ask for a CA to analyze the stock or imply that they can make decent money, all he asked was for them to use their accounting expertise to spot red flags. Instead, you replied with a cryptic comment which added noise to this conversation. No wonder it got flagged. That said, following are the red flags in my view (All references to consolidated financials)-do note however that this being an agritech business with lots of assumptions and complexity, financials depend totally on the management integrity, without minimal cross checks like VAT/Income Tax.
Note 1(b)-Revenue is recognized on dispatch rather than receipt at distributor/WS place-this might lead to earlier revenue recognition
Note 1(f)(v)-It states ‘management has carried out physical verification of the stock’. This is their responsibility under internal controls matrix, and the auditors are supposed to independently check. Why this note in the first place???
Note 35-The Company, based on Notifications of the various State Governments, has provided Royalty of 3,809.14 Lakhs for the year ended 31st__March 2016 as against the Royalty Payable amount of 10,359.71 Lakhs as per the Agreement with service Provider and thus the expenses__are short provided by ` 6,550.57 Lakhs. While this is legally permissible, they may need to settle out of court if they wish continued access to the technology. So this is an exposure and not an accounting risk

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1108

Kaveri seeds is coming out of 18 month long correction / consolidation…a turnaround is indicated by all the three timeframes…monthly, weekly and daily…those interested may buy the stock with a weekly closing stoploss @400…

Slowly and steadily this stock can go a long way…

Disclosure: not invested in it now or in the near future…understanding too many variables is beyond me…

1109

My notes from investor ppt Q1 FY17

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Disc - I hold as contra bet, not a buy/sell reco

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1110
1111

Seems like company is thinking about using cash to give spl divided or buyback by q4 FY17 as per below latest CFO interview. No update on the outcome of the forensic audit though.

http://m.economictimes.com/opinion/interviews/expecting-a-10-12-productivity-gain-for-farmers-g-vijay-kumar-cfo-kaveri-seeds/articleshow/56079447.cms

Disclosure: no holding

1112

Kaveri Seeds – Q3FY17 Conf Call & Investor Presentation Notes

The acreage reduction in cotton are being offset by maize, pulses etc.

Cotton
The cotton industry size is estimated at 3.7 Cr packets which is a reduction of 11-12% compared to last year. Kaveri managed to sell 54L cotton packets compared to 55L last year on 9M basis, lesser reduction than industry average of 14%. The company regained market share in states such as AP, Telangana, Maharashtra, Gujarat. The company lost market share in Karnataka. Telangana & AP contributed 49% of cotton sales. The cotton acreages are down by 28% in these two states where as Kaveri sales are down by 20% resulting in increased market share. Company’s product Jadoo continued to perform well in AP & Telangana whereas ATM performed well in Gujarat & Maharashtra. These two products would continue to drive the growth. The company registered growth of 20% in Gujarat & Maharashtra in volume terms & company’s market share stands at 7% & 10% respectively.

The appeal of cotton crop is back amongst the farmers due to increased commercial price of the cotton (~20% hike) & it remains most profitable crops among others in current situation. Led by this, the company is hoping that overall cotton acreages would go up in Kharif season next year by 10-15% primarily led by AP & Telangana.

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For the current intake (production) of 50% of cotton seeds, the company expects lower production cost due to better quality & quantity of seeds. This has resulted due to favorable climatic conditions to grow & lesses infections caused by Pink Bollworm. The cost for entire intake would be known only when it is complete.

Maize
The company registered growth of 20% on 9M basis with volumes growing to 10449 MT from 8721 MT. The revenue for the same period grew to 188 Cr from 148Cr. The company is planning to change this portfolio to higher price & higher margin products.

Rice
Rice business performance moderated a bit due to decline in hybrid rice (1500MT). The total volumes were down down from 7080 MT to 6956 MT on YoY basis.

There are two fold reasons for subdued performance in rice business. Firstly, as an industry, rice is not growing as expected due to reduced government support. The model of subsidy program got changed in UP contibuting to this. Secondly, Kaveri lost due to high dependency on one hybrid. The company has already launched 1 new rice hybrid & plan to launch 1 more in the next few quarters. The other segment of rice business, namely selection(?) rice performed poorly because company had production, processing & packaging issues. Molangoor plant shall help to resolve some of this. The company has also consiously shifted varietal rice production in kharif season & it did well this quarter. Company expects rice business to do better coming years.

Research & Development
The R&D outgo of company reduced to 9.2Cr from 9.7Cr. R&D has been reduced in sunflower & realigned to cotton, pulse millet, rice, corn, vegetables. The company claims that its Sunflower portfolio robust enough to supply to market for many years & hence the reduction. There was 50% drop in volume on 9M basis, (10.77Cr last year). The sunflower business by itself is very profitable but company took a hit due to some returned orders this quarter.

Cash on Balance Sheet
Company is aware of 500+ Cr cash in balance sheet & plans to announce dividend/buyback policy on or before Q4 FY17 results

Write-offs
The write-off would be a recurring expense as & when seeds are discarded. The amount would be based on Monsoon, quality of seeds, rejection ratio etc. For non-cotton seeds, the ratio of write-offs to sales would be between 5% (good year) to 10% (bad year). The company had write-offs of 7.5 Cr in Q3FY17 (NIL Q3FY16) for non-cotton crops.

Subsidiray - Kexveg
The company has invested 6.6Cr till now & planning to invest 9Cr over next 2 years. The investment is primarily in the form of share capital. It is intended to be export oriented unit for premium vegetables.

Management Bandwidth
The company has hired new senior person as supply chain head. This person was working with Syngenta before & is very experienced in working with MNC. The company has also hired senior sales manager in 2016. Kaveri has carved out vegetable business separately, building a team focused on vegetable business (R&D, Sales etc.).

Disc - I hold as contra bet, 3% of portfolio at average price of 355, this is not a buy/sell reco.

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1113

Did they discuss SEBI forensic audit?

1114

Nobody asked management about forensic audit. Regarding the royalty dispute, the company said the matter is sub-judice & they continue to account ~66 Cr as contingent liabilities.

1115

on BSE Website - We hereby inform you that a meeting of the Board of Directors of the Company will be held on Monday the 27th day of March, 2017, to consider a proposal for Buyback of fully paid-up Equity Shares of the Company.

1116

Bad results by Kaveri -

Investor Presentation →
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/0017e480-0bf7-4508-9b3a-61e68662ab1d.pdf

Few points to note →

  • Cotton prices continued to inch up on monthly basis and this is expected to lead up to good seed demand and cotton acreages.

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  • In Q4FY17, 20 Cr of inventory was written off and for full year FY17, write-offs were around 67Cr (43 Cr in FY16). This caused company to report major loss in Q4FY17 compared to last year…

  • The company has settled case with Monsanto and made the payment of 59Cr. So this causes one less thing to worry about. But we need to see how future royalty payments are charged.

  • The company has announced buyback at the price of Rs. 675 for 2,962,963 shares (~4% of total number of shares).

Regards,
Rupesh

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1117

What is the rationale behind buying back at a premium price of Rs 675?
Isn’t it just rewarding existing shareholders who want to sell at the expense of the shareholders who decide to hold?
Is buying back shares at a premium to existing market price always a negative? Perhaps, the management thinks that the buyback price is lower than the intrinsic value? But why buy at a higher price when they can buy at a cheaper price? Are they trying to be fair to the shareholders wanting to sell (including the promoters)?

1118

I would like to think that this is not a “buyback” at all, this is actually “dividend” payment.
Since there is additional tax on dividend above 10L, this is the route promoters has been following. As KSCL promoters are participating in buyback, I don’t think one needs to read too much into it.

Regards,
Rupesh

1 Like
1119

They are giving “dividends” to only those who participate in the buyback. For those who choose not to participate, is it a bad deal?

Wouldn’t it be better for the company to buy back at whatever low price the market was offering the shares for, thus increasing intrinsic value?

This buyback offer at a premium forces existing shareholders to participate just to make sure they can get their share of the dividends as it might dilute their holdings if they don’t participate. Is this conclusion correct or am I mistaken?

1120

Yes, for those who do not participate in the buyback, there is some loss.

These buybacks are on pro-rata basis and in this case only 4% shares of the investor would be eligible for buyback. Also, generally shares are bought back at a premium to market value to represent two things -

  • Reward shareholders with some additional profits
  • To send a message that, management thinks the fair value of share price is higher.

e.g. eClerx announced buyback at Rs. 2000 when share price was trading at around 1600.

1121

Isn’t it better for a company to structure their buyback offer like Berkshire. Berkshire never committed to buying back at a premium price. They just committed to buy as long as the price was below a certain value. Following is an extract from a Fortune article,

Warren Buffett on Saturday said the odds were “extremely high” that his Berkshire Hathaway (BRK.A, +0.28%) would buy back “a lot” of its stock if the price fell below 1.2 times book value, a level it recently approached.

Here is an excerpt from Berkshire’s 2012 letter,

But never forget: In repurchase decisions, price is all-important. Value is destroyed when purchases are made above intrinsic value. The directors and I believe that continuing shareholders are benefitted in a meaningful way by purchases up to our 120% limit.

Also, following are a couple of excerpts from Michael Mauboussin’s article on buybacks

The value conservation in each of these scenarios belies a fundamental point: management’s objective should be to maximize the long-term value for ongoing shareholders.
…
Executives should follow the golden rule of share buybacks: A company should repurchase its shares only when its stock is trading below its expected value and when no better investment opportunities are available.

Eclerx now is trading at around Rs 1300. This would have been a better time for buyback. If they were willing to buy back at Rs 2000, assuming it is now more than 6 months since the last buyback, what is preventing them from buying back at the new lower price. Is it lack of excess cash or eroding of intrinsic value (contributed to a certain extent by the buyback at a premium)?

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