The Hindu Business Line : 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.

More Stories on : IPOs | Recommendation | Seeds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page