Kaveri Seed will bear fruits

Kaveri Seed Company Ltd, a Secunderabad-based seeds producer, provides high quality and cost-effective hybrid seeds and crop solutions derived from innovative plant genetics and technology.  Kaveri, which went public in 2007, utilised the IPO proceeds to fund acquisition of farmland for research and field trials, ramping up production and processing facilities, biotechnology and seed labs etc.

Business: The foundation of Kaveri was laid with the launch of first proprietary private corn hybrid in south India.

Its success led to the formation of the company in 1986 and subsequent diversification into other crops including sunflower, pearl millet, sorghum and rice. Today, it has a vast portfolio for the above-mentioned crops as well as for tomatoes, okra, chillies and watermelon.

The portfolio includes 12 hybrid varieties of corn, five of sunflower, six of cotton and 13 of paddy besides other supplementary products. Kaveri’s seed products segment contributes around 90% to revenues.

The rest comes from organic manures and micronutrients business under the brand name Microtec, which comprises products such as energy, fire products, micronutrients, microzyme, trichoderma, and ultymax.

The organic segment has operating margins of 10-12% whereas seed segment enjoy higher operating margins of 25-30%.

Research & development of seeds is vital in seed business. The hybrid varieties of seeds take around 8-10 years for development and then 3-4 years for market success. Kaveri had R&D facilities spread over more than 250 acres.

Grow-out tests and multi-season trials are conducted in these facilities, which have an extensive collection of germplasm and a cold storage for them.

Biotechnology labs and ultra-modern seed labs facilitate the development of new varieties.

Utilising the proceeds of the IPO, Kaveri has more than 450 acres of its own farmland near Hyderabad, Alwar and Ahmedabad for R&D besides more than 1,000 acres of lease land.

It uses land at various locations around India for developing seeds according to crop and climatic conditions requirements.

Investment rationale: The seeds market is growing 22-24% as the agricultural growth continues to remain robust.

Kaveri is a strong player in seed segment and is among the top three in sunflower, bajra and maize segments. Addition of new hybrids to the portfolio of these three is likely to drive further growth.

Rice portfolio has gained good market share while cotton portfolio is growing exponentially.

Cotton contributed Rs 3 crore to revenues in FY07 that grew to Rs 10 crore in FY08 and is likely to be around Rs 25 crore in FY09E.  Further, efforts are in place for expanding the portfolios of corn, sunflower, Bt cotton, paddy, jowar, and bajra.

Successful addition of new variety of hybrid seeds is being complemented by entry into new markets.

Penetration into West, North and remaining areas of southern India is now delivering results.

West and North offer major opportunities as the rate of hybridisation lags sharply behind that prevailing in South.

Entry into West Bengal, Orissa and Chhattisgarh of late will deliver results in the coming years.

On the international front, Kaveri is testing seeds in neighbouring countries as well as other geographies and process is on for achieving regulatory approvals and necessary clearances.

The company is likely to get growth of 10-12% from its product range in existing markets and 30% growth from newer markets, which will take overall growth in the range of 15-20% in coming years.

It plans development of other divisions including organic manures and micronutrients.
Kaveri has been aggressively improving its research & development facilities. Besides investment on procurement of more farmland, the company has spent heavily on biotechnology lab and seed-testing labs.

New gene bank for conservation of germplasm is in place and cold-room facility for storage of fungal and microbial culture has been established.

New seed-processing facility planned at an outlay of Rs 50 crore has already utilised Rs 40 crore and is likely to be complete by July 2009, said C Mithun Chand, whole-time director, Kaveri Seed Company.

Present capacity of 50 tonnes/hour will go up to 80-90 tonnes/hour.

Concerns: Seeds products business is seasonal in nature and raw material inputs as well as sales are seasonal.

Seeds market is also dynamic in nature and acceptability of a hybrid variety of seeds gradually decreases over a period of time.

Thus consistent introduction of different high quality seeds is necessary for sustaining sales and growth. Any inability to do so may have negative impact on revenues.

Valuations: Kaveri posted a robust topline and net profit growth of 57.6% and 82.11%, respectively, during third quarter of the last fiscal.

Topline grew from Rs 12.68 crore to Rs 19.99 crore and profits spiralled from Rs 1.54 crore to Rs 2.81 crore.

Both operating margins and profit margins grew handsomely by 217 basis points and 189 basis points, respectively.

The expanding product range with market-based research & development, expansions into new markets, improved production and processing facilities are all likely to push revenues up for Kaveri offering good upside visibility for investors.

Disclosure: The writer does not hold any shares in the company