The Hindu Business Line : Kaveri Seed Company: Buy

An established player with a strong product portfolio, the company is well-placed to ride the strong expansion the Indian market for hybrid seeds is likely to witness.

Mr G. V. B. Rao, CMD, Kaveri Seed Company Ltd.,

Aarati Krishnan

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The prices of food and feed products are on an upward spiral, stoked by rising demand, shortfalls in output and expanding export opportunities. This has put producers of agricultural inputs such as hybrid seeds in a sweet spot.

Kaveri Seed Company, an established producer of hybrid seeds for crops such as corn (maize), sunflower and paddy, may be one of the key beneficiaries of this trend. Investors can buy the stock (Rs 270), which is currently trading at about 19 times its trailing 12-month earnings.

The nascent Indian market for hybrid seeds is set to expand strongly, given the rapid rate of hybrid adoption and buoyant produce prices. This suggests that the company may be well placed to deliver a 20 per cent-plus annual growth over the next two-three years.

High entry barriers

Kaveri Seed Company Ltd…set to cash-in on strong demand.

Kaveri Seed is an established player with about two decades of experience in the domestic seed industry. Entry barriers in the hybrid seed business are high, as the production of each new strain requires access to proprietary genetic material (germplasm) with the desired traits, several cropping seasons of experimentation and field trials and regulatory procedures for registration of each variety.

In this respect, Kaveri Seed has a strong product portfolio that includes 12 hybrid varieties of corn, five of sunflower, six of cotton and 13 varieties of paddy. The company supplements products developed in-house with those licensed from companies such as Mahyco Monsanto Biotech (Bt cotton) and JK Agrigenetics.

Promising target crops

With hybrid seeds of corn and sunflower dominating its current product portfolio, Kaveri Seed has an established brand name and distribution presence in the key growing regions of Andhra Pradesh and Karnataka.

The demand prospects and the price environment for both hybrids are extremely strong now. Sunflower seed prices have doubled over the past year; the rising shortfall in edible oils also requires a sharp increase in sunflower acreage and yields from current levels. On the other hand, corn hybrids could find support from rising domestic demand for feed, record global prices and export opportunities for Indian corn due to bio-fuel related offtake.

Though corn and sunflower hybrids now dominate its revenues, the diversity in Kaveri’s portfolio offers room for a better balance between the kharif and rabi seasons as well as between crops and regions.

Armed with funds raised through an IPO last year, the company is sharply ramping up both the acreage and processing capacity for hybrid seeds and expanding geographically into new markets in the West, North and the remaining Southern states. This offers significant growth opportunities as the rate of hybridisation in the western and northern States sharply lags that in the South.

Margins improve

In terms of financials, the company has steadily scaled up revenues and profitability over the past four years. Sales registered a compounded annual growth of 15 per cent from 2003-04 to 2006-07, while net profit registered an 80 per cent annual growth in this period, helped by a sharp expansion in margins.

The company’s operating profit margins, which hovered in the single digits until 2005-06 have moved up to 25 per cent in the past two years, as the company integrated backwards into producing foundation seeds and earned higher realisations from recent product launches such as cotton, bajra and paddy.

For the first nine months of 2007-08 (March numbers are due by this month-end), while Kaveri Seed managed a 60 per cent growth in sales to Rs 84 crore, operating margins were at about 29 per cent, aiding an over two-fold growth in net profit.

As Kaveri’s business tends to be concentrated in the kharif months, the March quarter numbers may be muted, with a sharp improvement likely in the June quarter of 2008.

Kaveri Seed raised Rs 68 crore through its IPO (at Rs 170) last year to fund acquisition of farm land for research and field trials, marketing offices in select northern and western markets and the setting up of a corn drying plant and upgradation in seed production and processing facilities (from 18,000 to 30,000 tpa).

Of these, while the land acquisition and forays into new regions are nearly complete, the projects for upgradation of seed processing facilities and corn drying facilities are still under way. According to the company, the delays are on account of an increase in the scope of the expansion project.

Risks

This stock however is unsuitable for investors who aren’t comfortable with volatility. The risks to earnings arise from the company’s current crop and geographic concentration, agro-climactic risks and the stock’s low liquidity and small-cap status.

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