Advanta

Advanta

Advanta India

Advanta India

Geojit - Advanta IPO Analysis

Investment Rationale

Ø AIL, associate (post IPO) of United Phosphorus Ltd. (UPL), is major international agri hybrid seeds company with principal operation in India, Australia, Thailand and Argentina and presence in 18 countries.

Ø Combination of factors like high population growth, limited availability of land have raised concerns world over on issues of food security & affordability making this industry attractive with high growth potential; company is well placed to capitalize this opportunity.

Ø Company has de-risked business by providing variety of hybrid seeds globally which shelters it from seasonal fluctuations in revenue and cyclical crop patterns, typical to agriculture industry.

Ø AIL has proprietary germplasm and strong R&D capabilities. It is developing SUNSAT (has healthy oils without complication / cost of genetic modification), holding huge business promise (expected launch-2009).

Ø Company can benefit from vast pool of agricultural knowledge and support of UPL.

Investment Concerns

Ø Agriculture runs risks of weather conditions, pests & diseases, despite pest / disease resistant seeds presence.

Ø Genetically modified seeds, on getting requisite approval, represent a major substitution risk.

Ø Competition in industry and effect on customers’ ability to pay from commodity prices volatility.

Recommendation

Ø AIL is offering shares at P/E of 23 - 25 times FY 2007 expected EPS of Rs. 26.2 and 16 - 18 times FY 2008 expected EPS of Rs. 36.6 on fully diluted equity.

Ø Excellent future prospects in view of rising focus on sustained agriculture growth, strong parent and R&D facilities. Hence, we recommend to “Subscribe” issue.

Advanta: Invest at cut-off

Investors with a high-risk appetite can consider bidding for the initial public offer from Advanta India at the cut-off price. The pricing is stiff and the company has a limited track record of financial performance on consolidated operations.

However, earnings growth prospects for the seeds business appear bright in the light of its high growth and margin potential, as well as high entry barriers protecting the players.

Advanta India, by virtue of a strong research pipeline and entrenched presence across the global markets, offers a good proxy for this business. The offer is priced at 23-25 times the company's FY-07 consolidated earnings, in the price band of Rs 600-650. There are no direct comparables to the company in the Indian listed space, as players such as Monsanto India and Syngenta India, which have a presence in seeds, derive the bulk of their revenues from agrochemicals. Moreover, they are focussed mainly on the Indian markets.

The business

Advanta India (a spin-off from the erstwhile ITC Zeneca) is into research, development and production of hybrid seeds for a wide range of crops — corn, sorghum, canola, sunflower, rice, mustard, and vegetables. Apart from its India operations, the company has wholly-owned subsidiaries operating in Australia, Thailand and Argentina, apart from Pacific Seeds International, a subsidiary which markets Advanta's products across other geographies.

Advanta, through its subsidiaries, has dominant market shares for key crops in Australia (sorghum), Thailand (baby corn and sunflower) and Argentina (sunflower), apart from marketing rice, corn, Bt cotton and sunflower seeds in the Indian market. Though the global seeds business has been growing at 4-5 per cent annually, growth opportunities for the players arise from increasing adoption of hybrid seeds in the developing markets and premium pricing power for players (seeds with desirable traits are patent-protected in most countries, India being an exception).

Advanta India has a strong line-up of patent-protected products. It also has established research capabilities and access to proprietary germplasm, the crucial feedstock to research efforts. Globally, entry barriers to the seeds business are high, given the long gestations involved in development and field trials of new hybrids. As a result, the industry is dominated by a handful of players such as Monsanto, Pro-Agro (a Bayer Crop Science subsidiary), Pioneer Hi Bred (a DuPont subsidiary) and Dow AgroSciences.

Risks

Though Advanta has a global foothold in a business that offers good growth possibilities, there are several business and company-specific risks to this offer, that may make it unsuitable to a conservative investor:

The global seeds business is subject to high regulatory intervention, both in terms of market access and pricing of products.

The business is seasonal and cyclical. Poor climactic conditions, pest attacks or crop failure in a focus market can have a significant negative earnings impact.

Specific to Advanta: The company competes with some of the largest life sciences companies worldwide and may not be in a position to match the research spends and staying power of some of its competitors.

The major portion of offer proceeds will not be deployed in the business.

Since Advanta's operations were acquired and consolidated by United Phosphorus only in early 2006, financial results for the consolidated operations are available only for the seven-month period ending October 31, 2006. For this period, the company reported consolidated profits before tax (and exceptionals) of about Rs 28.9 crore on revenues of Rs 237 crore, translating into annualised per share earnings of about Rs 25 on the post-offer equity base.

Offer details: Advanta India is offering 33.8 lakh shares in the price band of Rs 600-650 through this book-built offer. Proceeds of this offer will go mainly to partly repay Bio Win Corporation — a promoter group company — for the initial acquisition of the seeds business from a private equity investor.

United Phosphorus, the promoter, will hold a 49.9 per cent stake in the company, post-offer.

Advanta India IPO analysis

Adventurous pricing

A subsidiary of United Phosphorus (UPL), Advanta India, held by Advanta Netherlands Holdings, ITC-Zeneca, Syngenta, AgroTech Foods, and private equity investors at various stages, has developed a global portfolio of wide range of hybrid seed varieties including sunflower, rice, corn, rapeseed, mustard, sorghum, canola and oats.

Advanta India has three international subsidiaries in Australia, Thailand and Argentina. The international division of the Australian subsidiary caters to Asia, the Middle East, Africa and Latin America.

The subsidiaries outside India were earlier subsidiaries of Bio-win Corporation, a group company of the promoter group, United Phosphorous. Advanta Holdings B.V., a wholly owned subsidiary of Advanta India, acquired these subsidiaries from Bio-win at euro 95 million, or around Rs 556.52 crore, on 30 March 2006. Of this, Rs 227.44 crore is still outstanding. Advanta India will be using the IPO funds to pay off this liability.

Uniphos Seeds and Bio-Genetics Pvt Ltd (USBPL), one of the promoter group companies, got merged with Advanta India on 1 April 2006. Advanta India issued 33.77 lakh equity shares at par to the shareholders of USBPL: Jai Shroff and Vikram Shroff. USBPL was focused on developing, marketing and selling bio-engineered seeds for cotton crops licensed from Nath Seeds, an Indian company delisted by the stock exchanges.

Strengths:

1. Advanta India has well-developed brands and distribution network in the markets where it operates. The company owns and has access to a broad portfolio of proprietary germplasm, which is necessary for any seed company to gain competitive edge.
2. The company has been developing since the last 12 years a hybrid non-genetically modified sunflower variety in Argentina, named Sunsat. It will have the capability of lower bad cholesterol. Commercial production is slated to start in 2009.

Weaknesses:

1. Advanta India operates in a seasonal industry and is exposed to risks related to weather, disease and pests. Moreover, technology advances (like genetically modified seeds) are changing the dynamics of the industry. Besides, operations in many countries and crops make the performance highly unpredictable.
2. In the present form, the consolidated company has been in existence since March 2006. So comparable financial track record is not available for the past, except for the latest seven-month performance. The different consolidated entities have been growing individually at unexciting rates in the past few years. Not surprisingly, they have also changed hands often.

Valuation:

Advanta India has set a price band of Rs. 600 to Rs 650 per equity share of Rs 10 each, translating into a PE of 30.1x on the lower price band and 32.6x on the higher side of the price band, according to annualised EPS for the seven-month period ended October 2006 on post-issue equity of Rs. 16.83 crore. However, the actual EPS may be significantly different from the annnualised one due to seasonality in business (the impact of which is not ascertainable).

Monsanto India and Syngenta India, the listed Indian subsidiaries of MNCs, derive part of their revenue by selling hybrid and genetically modified seeds to Indian farmers. These companies are presently trading at PE of 21.6 on a trailing 12-month basis.

Hybrid seeds is not a high growth business and also prone to unpredictable fluctuations. Hence, the asking PE is very steep.