Kaveri Seeds

 Kaveri Seeds

Kaveri Seeds

Kaveri Seeds

Kaveri Seeds

Kaveri Seeds

CCCL, Diamond Power Infrastructure, GSPL, ILFS, JB Pharma, Kaveri Seed, Kajaria Ceramics

CCCL, Diamond Power Infrastructure, GSPL, ILFS, JB Pharma, Kaveri Seed, Kajaria Ceramics

Kaveri Seeds

Kaveri Seeds

Kaveri Seed Company

A small-sized company with a sizeable portfolio of sunflower, maize, cotton, and paddy hybrids, Kaveri Seed has sustained strong financial performance since its IPO in September 2007. The per share earning for the past year now stands at Rs 18.5 (excluding one-off items) against Rs 8 at the time of the IPO.

Yet, the market meltdown has whittled down the stock’s valuation; its PE shrinking from about 16 times to its current 11 times (market price of Rs.209). Given the bright growth prospects for the seeds and micronutrients business, the company’s growth history and established presence, the stock deserves a better valuation. Kaveri’s larger rivals — Monsanto India and Rallis India — the only other listed companies which have a presence in seeds, have already seen a sharp re-rating and now trade at 17 and 12 times earnings respectively.
High entry barriers

With a two-decade presence in the seeds business, Kaveri Seed has a portfolio of about 40 certified hybrids in corn (12 hybrids), sunflower (5), cotton (6) and paddy (13). Building a product portfolio of this size requires a fairly long gestation period, as development of each hybrid strain usually takes four-six years.

Production of hybrid seeds also calls for access to proprietary germplasm (genetic material) with the required traits making for high entry barriers to the business. The company also sells crop micronutrients under the brand name Microtek; another business with good potential.

Kaveri Seeds’ IPO in 2007 raised Rs 68 crore to fund acquisition of farmlands, upgradation of seed processing plants and working capital requirements. The bulk (Rs 62 crore) of the proceeds have already been utilised.
Potential in seeds

The bright demand prospects for domestic seed companies arise from the huge shortfall in availability of quality seeds and increasing adoption of hybrids, given the need to improve agricultural yields on food and feed crops (Indian yields are far below world standards).

The Indian market has been seeing a substantial deficit in the supply of certified seeds over the past few years. Data put out by the Agriculture Ministry for kharif 2009 suggests that crops such as paddy (shortfall of 28 lakh quintals for the season), maize (2.2 lakh quintals), sunflower (0.59 lakh quintals) and cotton (1.15 lakh quintals) saw persistent shortfalls over the past four years.

All of these crops feature in Kaveri Seed’s portfolio. The policy regime for the sector is likely to be friendly over the next few years, given the incumbent government’s stated intention of improving seed availability.
High on growth

In terms of financials, Kaveri Seed has managed to deliver impressive and yet consistent growth over the past four years, with a compounded annual growth of 22 per cent in sales and over 100 per cent growth in profits in this period, albeit on a low base.

Operating profit margins over this period have expanded from the low single-digits to well over 25 per cent for the past three years; the bulk of this improvement coming from a backward integration move into foundation seeds in 2006-07.

That performance was sustained over the past year. For the nine months ended December 2008, net profits rose 46 per cent while net sales grew 23 per cent, driven by a higher contribution from the seeds business and overall margin expansion. The micronutrients division despite more sedate growth than seeds, managed improved margins.

Going forward, the company appears well placed to sustain margins at healthy levels, mainly due to pricing power. Focussed on lucrative cash crops such as sunflower, maize and cotton, the company may be comfortably placed to pass on any cost increases to consumers, given the strong demand.

The upward bias in farm product prices and the sharp hikes in the minimum support prices of key crops last year are likely to have lifted the purchasing power of farmers and may lend support to both volumes and pricing power for Kaveri’s target crops.

Kaveri’s balance sheet remains quite strong, with near zero debt (thanks to the IPO proceeds of Rs.68 crore), healthy ROCE and RONW (22 per cent and 16 per cent respectively).

This apart, the recent upward spiral in crude oil (and in tandem, ethanol) prices, if sustained, may lift export prospects for Indian which have been lacklustre since last year’s ban (lifted in October). The sharp spiral in freight rates may also make Indian corn exports more cost competitive for shipping to the South-East Asian markets.

The key risks to the business arise from the weather-related risks enedemic to any agri-business and relatively high working capital requirements, due to a long debtor cycle.

For investors, the stock’s small cap status would peg up volatility and render the investment quite vulnerable to any broader market decline.

via BL

Kaveri Seed Company

Kaveri Seed Company, which listed on the bourses Thursday, closed at Rs 226.15, premium of 33 per cent to issue price of Rs 170.

The company listed at Rs 204 on NSE and touched a high of Rs 263 intraday.

On BSE, it opened at Rs 201.15 and moved up to Rs 262 before closing at Rs 226.45.

The total volume on both the exchanges was around 1.8 crore equity shares.

The company is into research, production, processing and marketing of high-quality hybrid seeds for crops like corn, sunflower, cotton, pearl millet, paddy, grain sorghum and has recently forayed into micro-nutrients and bio-products.

Kaveri Seed raised Rs 68 crore through IPO for acquisition of farmland for research and development near Hyderabad, Alwar and Ahmedabad, setting up marketing offices and godowns in Delhi, Lucknow, Jaipur, Ahmedabad and Aurangabad, and a biotechnology lab near Hyderabad

Kaveri Seeds Listing

Kaveri Seeds will list on October 4 2007

Grey Market - Maytas, Kouton, Consolidated

Power Grid Corporation 44 to 52 22 to 23

Dhanus Tech. 280 to 295 70 to 75

Koutons Retail 370 to 415 75 to 80

Consolidated Construction 460 to 510 180 to 185

Supreme Infra 95 to 108 65 to 70

Saamya Biotech 10 6 to 7

MAYTAS Infra 320 to 370 150 to 155

Circuit Systems (India) Ltd. 35 3 to 4

Kaveri Seeds 150 to 170 12 to 14

Grey Market - Saamya, Consolidated, Koutons

Power Grid Corporation 44 to 52 21.50 to 22

Dhanus Tech 280 to 295 95 to 98

Koutons Retail 370 to 415 75 to 80

Consolidated Construction 460 to 510 205 to 208

Supreme Infrastructure 95 to 108 65 to 67

Saamya Biotech 10 3.50 to 4

Circuit Systems 35 3.5 to 4

Kaveri Seeds 150 to 170 15 to 17

Grey Market - Kouton, Consolidated, Circuit, Supreme

Power Grid Corporation 44 to 52 20 to 21

Dhanus Tech 280 to 295 95 to 100

Koutons Retail 370 to 415 70 to 75

Consolidated Construction 460 to 510 205 to 210

Supreme Infra 95 to 108 60 to 65

Saamya Biotech 10 3 to 4

Circuit Systems (India) Ltd. 35 3.5 to 4

Kaveri Seeds 150 to 170 5 to 7

Grey Market - Kouton, Consolidated, Circuit Systems

Power Grid Corporation 44 to 52 18 to 19

Dhanus Technologies 280 to 295 90 to 100

Koutons Retail 370 to 415 60 to 65

Circuit Systems (India) Ltd. 35 4 to 4.5

Consolidated Construction 460 to 510 100 to 110

Magnum Venture 30 2.5 to 3

Kaveri Seeds 150 to 170 6 to 8

Allied Computer 12 0

Grey Market - Power Grid, Consolidated, Dhanus, Kouton

Power Grid Corporation 44 to 52 18.5 to 19

Dhanus Tech 280 to 295 95 to 100

Koutons Retail 370 to 415 70 to 75

Consolidated Construction 460 to 510 120 to 125

Circuit Systems (India) Ltd. 35 4 to 5

Magnum Venture 30 2 to 3

Kaveri Seeds 150 to 170 8 to 10

Kaveri Seed Company Limited Subscription Details

Qualified Institutional Buyers (QIBs) - 5.5867 times

Non Institutional Investors - 5.0456 times

Retail Individual Investors (RIIs) - 3.2623 times

Employee Reservation - 3.2623 times

OVERALL - 4.51 times

Kaveri Seeds IPO

The initial public offer of Kaveri Seed Company was subscribed 4.51 times on the last day of its offer.

The issue received bids for 1.80 crore equity shares for the 40 lakh shares on offer, latest data available on the stock exchanges show.

The company is expecting to garner up to Rs 68 crore from issue for which the price band has been fixed between Rs 150 to 170 a share.

Besides, another IPO of Dhanus Technologies got subscribed 2.65 times on the second day of issue.

The issue received bids for 1.01 crore equity shares for the 38.35 lakh equity shares on offer, data available on the exchanges show.

The price band of the issue, which closes on September 12, has been fixed between Rs 280 to 295 a share.

Kaveri Seed proposes to utilise the net proceeds of the issue for acquisition of farmland for research and development near Hyderabad, Alwar and Ahmedabad, setting up marketing offices and godowns in Delhi, Lucknow, Jaipur, Ahmedabad and Aurangabad, and a biotechnology lab near Hyderabad.

The proceeds would also be used for upgradation of existing seed processing plants at Kandalkoi, Gundla Pochampally, Gatla Narsingapur and Bellary and setting up of seed processing plant near Hyderabad.

Kaveri Seed Company is mainly into research, production, processing and marketing of high-quality hybrid seeds for crops like corn, sunflower, cotton, pearl millet, paddy, grain sorghum and has recently forayed into micro-nutrients and bio-products.

Dhanus Technologies proposes to utilise the proceeds to expand its infrastructural facilities and equipment base, and construct a new corporate office.

Kaveri Seeds (IPO): Invest at Cut-off

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.

Kaveri Seeds IPO

Kaveri Seeds produces, processes and markets high quality hybrid seeds for crops like corn, sunflower, cotton, paddy, and grain sorghum. Located in Andhra Pradesh, the company is one of the few recognised agri-input companies in India. The company has production, processing and R & D facilities in Andhra Pradesh and Karnataka. Its R&D mainly focuses on developing superior hybrids in different crops like corn, cotton, sunflower, paddy, and bajra. All the seed varieties developed are marketed under the brand, Kaveri Seeds.

Kaveri Agriteck, a partnership, was acquired by Kaveri Seeds for Rs 50 lakh in September 2006. Kaveri Agriteck was a venture floated to manufacture micronutrients and bio-products.

Kaveri Seeds has four seed processing plants with 11 processing lines in Andhra Pradesh and Karnataka. The company has a combined processing capacity of 18,000 tonnes per annum. It also has a cob drying plant (to improve the germination, vigour and viability of the corn seed and, in turn, improve the yield of the crop) at two different locations in Andhra Pradesh.

The R&D facilities of Kaveri Seeds are at six different locations in Andhra Pradesh. The one in the Ranga Reddy district of Andhra Pradesh is recognised by the Department of Science & Technology, government of India. The R&D infrastructure includes 273 acres of farmland and state-of-the-art lab facility. About 187 acres of it are owned by the company. The rest are on lease. This protects its germplasm and related operations against any misuse and biopiracy. Fifty-five employees including 13 scientists are engaged in full-fledged research.

The extensive network of loyal and committed distributors and dealers in Karnataka, Tamilnadu, Maharashtra and Andhra Pradesh include 736 distributors and 3,500 dealers across southern India.

Kaveri Seeds intends to aggressively expand its operation to other states to have a pan-India presence. The company intends to finance its Rs 63-crore expansion plan from the proceeds of the public issue. The expansion includes acquiring farmland for R&D, setting up a marketing network in north India, establishing corn-cob drying and seed-processing plants apart from a biotechnology laboratory. The expansion is scheduled to begin in October 2007 and complete by May 2008 in a phased manner. Besides, it also wants to upgrade its existing facilities by November 2008.

Strengths

1. Geographical expansion plans in north and east will result in volume-led growth.
2. Moving up the value chain by introducing better quality products yielding high margin. Reduced dependence on outsourced production of foundation seed has resulted in substantial expansion of operating margin in the year ending March 2007 (FY 2007).

Weaknesses

1. Mainly dependent on two crops – corn and sunflower – which contributed over 68% of the revenue in FY 2007. Similarly, has strong presence only in four states:. Andhra Pradesh, Karnataka, Tamil Nadu and Maharashtra.
2. Operates in the agri-inputs industry, which faces risks related to weather, pests and diseases.
3. The Indian seeds industry is highly competitive with a number of Indian as well as MNC players.
4. Has witnessed continuous reduction in debtors’ turnover due to rising credit periods. The debtors’ turnover has come down from 5.1 times in FY 2003 to 3.67 in FY 2007.

Valuation

Kaveri Seeds has set a price band of Rs 150 to Rs 170 per equity share of Rs 10 each, translating into a PE of 19.5x on the lower price band and 22.1x on the higher side of the price band, according to EPS for FY 2007 on post-issue equity of Rs. 13.70 crore.

Monsanto India, the listed Indian subsidiary of Monsanto, US, which also sells hybrid seeds and genetically modified seeds to Indian farmers is presently trading at PE of 22x based on FY 2007 EPS.

Another hybrid seeds player J.K Agro Genetics is currently trading at PE multiple of 13x based on FY 2007 EPS.

The seeds industry is not a high-growth industry as its operations are sensitive to agro-climatic factors and unpredictable fluctuations. Moreover, Kaveri Seeds has shown substantial profit only in FY 2007 and its plans to enter the northern markets will take time to bear fruits.

In view of these factors, the asking P/E of around 20 looks high.

Kaveri Seeds Company Limited

Kaveri Seeds Company Limited