Investors with a high-risk appetite can subscribe to the Initial Public Offering from Kaveri Seed Company, a producer of hybrid seeds. Long presence in the Indian market, a healthy product pipeline focussed on cash crops such as corn and sunflower and attractive growth prospects for the hybrid seeds business make this offer a reasonable investment.
However, the relatively stiff pricing and the possibility of cyclical and seasonal blips in earnings, suggest that the investment be considered only by those with a high risk appetite.
The offer is being made in the price band of Rs 150-170. At Rs 170, the offer price would discount the company’s foward earnings (estimated FY-08) by about 16 times, on the post-offer equity base. Though the company may be able to deliver to the growth expectations reflected in these valuations, the pricing appears expensive in relation to listed players in the agri-inputs space. This may cap short term gains in the stock, especially under current market conditions.
Seeds market
The Indian market for hybrid seeds has seen annual growth rate of 12-15 per cent. Certain segments have grown at a faster clip, as good yield performance from certain hybrids and the rising prices for commercial crops have contributed to rapid adoption of hybrid seeds.
The acreage under Bt Cotton, a bollworm-resistant genetically modified seed has, for instance, risen from 6 to 39 per cent of the total planted area over the past three years.
Adoption of hybrids has also been high in the case of corn at about 40 per cent of planted area. While hybrid seeds have made significant inroads into the southern states, there exists potential for penetration of the northern markets. The attractive growth potential has, in fact, prompted multinationals such as Monsanto and Syngenta to enter the domestic seeds business.
The seeds business however, carries fairly high entry barriers and therefore supports relatively few established players. Apart from R&D capabilities, production of hybrid seeds calls for access to proprietary germplasm (the genetic feedstock for creating hybrid seeds) with the required traits (qualities such as higher yields, pest resistance and drought tolerance ).
Development of each hybrid strain also requires a fairly long gestation period, usually 4 to 6 years. Hybrid strains with desirable traits command a significant pricing premium in the market.
Product pipeline
Kaveri Seeds, has a healthy product pipeline, with 40 certified hybrids in its portfolio and a few more paddy and horticultural strains under development. Kaveri’s portfolio is now tilted towards corn and sunflower hybrids, some of which command prices that are on par with the brands sold by multinational competitors.
Demand prospects for both these crops appear bright given the growing domestic deficit in sunflower oil, rising demand for corn from the biofuel and food industries and the firm price outlook for both agro products.
Supplementing its portfolio, Kaveri Seeds also has sub-licensing arrangements with Mahyco Monsanto Biotech and JK Agrigenetics for insect-resistant cottonseeds; commercial launch of its Bt cotton strain, Encounter, is slated for later this year.
The company has an established dealer network in Karnataka, Tamil Nadu, Maharashtra and Andhra Pradesh, but is attempting to expand into the northern and western markets which are under-penetrated.
The company’s net sales have witnessed a significant increase from Rs 39 crore to Rs 66 crore over the past four years; profits rose from less than Rs 1 crore to Rs 10.5 crore over the same period.
A ramp up in operating profit margins (due to product launches and backward integration into foundation seeds) and the merger of a group company have both contributed to a sharp improvement in financials.
Recent numbers may be more indicative of sustainable earnings prospects for the company. The company’s per share earnings for FY-07 stood at Rs 10.85 on the pre-offer equity base and at Rs 7.7 adjusted for the offer.
Offer details: The offer, which seeks to raise Rs 60-68 crore at the two ends of the price band, will mainly fund acquisition of farmland for seed research and production, setting up of marketing offices and expansion of seed proce ssing facilities. It closes on September 11.