GameChanger - Agricuture - Report - Kotak Report

GAME
CHANGER
INDIAN AGRICULTURE
promise of plenty
INPUTS
capital and credit lead the way
CULTIVATION
seeds of opportunity
LOGISTICS
little movement
MARKETING
value-add attraction
GAMECHANGERS
better seeds, high-value crops,
processing
the
time
is
ripe
Akhilesh Tilotia
akhilesh.tilotia@kotak.com
Mumbai: +91-22-6634-1139
ABOUT GAMECHANGER
Gamechanger offers perspectives on ideas and developments that can potentially alter the
course of the markets.
The series explores and analyzes ideas, challenges conventional wisdom, plays advocate or
devil’s advocate depending on research conclusions. The factors that we identify as market
changers could come from anywhere – from policy or politics, from people or ideas, from
rain or from regulation. They could change the game for the better or for worse.
Gamechanger research has implications for macro socio-economics and for long-term
market behavior. Read it and stay ahead of the India story.
2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

GAME
CHANGER
Foreword
For those with scale and capital, Indian agriculture beckons. Finally, agriculture—the
mainstay of more than 600 million Indians—is emerging as a new road to prosperity.
This much beaten path is now being re-paved with price improvements reinvested
in technology upgradation. The growing promise is now being driven by higher-
income driven consumption and investment. This effect is already lifting farm income,
resulting in renewed investment in agriculture where we expect the big fillip to come
from the private sector. Benefits to rural India are beginning to trickle down.
From logistics to marketing, the food value chain abounds with opportunity. For the
most part, it is virgin territory, challenging for the trail blazer but equally promising.
This report looks at the varied and various gamechangers sprouting up in agricultural
processes and products. Some of the spaces we look at, cold chain management for
one, underscore the need for gamechanging intervention rather than celebrate it.
We highlight a few key indicators of the high returns on food:
` Farm incomes are rising and with it, re-investment in agriculture
` Shrinking agricultural labour (thanks to government schemes that pull farm

laborers into alternative employment) is likely to propel the move to technology
` Growing affluence is raising the demand for value-add food in general and protein
rich foods in particular
` Food processing is increasing the life and value of food
The time is ripe. Take the green road.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Key exhibits in this report
127 mn Exhibit 3 Agriculture value chain is very fragmented

cultivators + 107 Contribution of the various segments to the agriculture sector, March fiscal year-end, 2009
mn agricultural
= 5.7% of India’s
GDP...pg9
Source: Industry estimates, Vision-2015: Ministry of Food Processing
Exhibit 5 Significant boost to rural incomes over the past five years
Rural incomes
lifted by Computation showing the changing profile of rural incomes, March fiscal year-ends
agricultural
price rises and
government
schemes...pg10
Source: Kotak Institutional Equities estimates
Exhibit 6 Low yields in Indian farming—somewhat propped up by government intervention

Low-to-mid
single digit Current economics for the farmer assuming two-crops, none fail, March fiscal year-end, 2009
returns from
farming
staples...pg11
Source: Discussion with landowners, KIE calculations

GAME
CHANGER
Exhibit 16 Bt Cotton has gained significant traction, increasing yield and production
Bt cotton more
Increasing area cultivated with Bt Cotton (mn ha), yield improvement (kg/ha) than tripled yield
in less than a
decade...pg21
Source: KPMG, Indiastat, Industry analysis
Exhibit 24 Rural India wages have risen significantly, more than tractor costs, over the past few years
Technology will
Cost of labor (men, annual average, Rs/day) and tractor prices (Rs), March fiscal year-ends
undoubtedly
improve
productivity. But
where will labor
go if and when the
government pulls
back schemes like
MNREGS? ...pg27
Source: Wage rates in rural India, Labour Bureau, various issues; Industry estimates, KIE analysis
Exhibit 32 India has been storing well above its buffer requirements
India now faces
Buffer norms and actual stocks of staples, quarter ends, March fiscal year-ends, 2000-2010 (mn tons) the challenge
of storing 58
mn tons of food
grains...pg32
Source: Food Corporation of India, Kotak Institutional Equities

Contents
1. Agriculture: Promise of plenty 7
2. Inputs: Capital and credit lead the way 13
3. Cultivation: Seeds of opportunity 19
4. Logistics: Little movement 29
5. Marketing: Value-add attraction 35
6. GameChangers 41
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CHAPTER 1
AGRICULTURE promise of plenty
India ranks high in terms of total production of
various commodities. However, low yields highlight
a significant opportunity for improvement led by the
creation of favorable investment climate. Increasing
prices of commodities have doubled farmer incomes
over this decade. Thanks to the injection of funds by
the government through various schemes, the Indian
heartland is seeing a bout of prosperity. However, the
re-skilling of farmers is important in order to reduce
their dependence on agriculture, given its low returns.
The landscape
India is among the largest producers of food in the world. It ranks second to China in total production of
staples (like wheat and rice) and fruits and vegetables and India is the largest producer of milk. In livestock,
India is second only to Brazil (Exhibit 1).
India is among Exhibit 1 In broad terms, Indian agriculture is right up at the top
the largest Measuring India’s agriculture across various parameters, March fiscal year-end, 2007
producers of
food in the
world
Source: Agriculture Statistics at a Glance, 2009
We note that India’s arable area is 48% (159 mn ha/329 mn ha) of its total land area, one of the highest in
the world. In comparison, USA’s arable land is 18% of its total land area, while it is 15% for China. This is
A significant important from two perspectives:
part of
` The recent debate in India on converting agricultural land into industrial (and residential) use has
India’s land
been extremely contentious. If India is to move towards an economy that is not solely dependent on
will need to
move beyond agriculture but has a healthy mix of manufacturing and services—a significant part of India’s land would
agriculture need to move beyond agriculture.
` This also highlights the low yield of Indian agriculture. Despite such large land resources being devoted
to agriculture, India’s overall production is relatively low, which reflects poorly on its yield performance
(Exhibit 2). India has significant potential to increase its yield, which should also address worries about
food security in light of the increasing encroachment by industry and residence.

GAME
CHANGER
Exhibit 2 India has vast scope for improving productivity

Comparing productivity of Indian agriculture with the world, March fiscal year-end, 2007 (kg/ha)
Source: Agriculture Statistics at a Glance, 2009
Indian agriculture is highly fragmented. Exhibit 3 lays down the break-up of the value chain. We note that
127 mn cultivators and 107 mn agricultural laborers (according to 2001 census) put together produce only
5.7% of India’s GDP. Large parts of the sector are unorganized and fragmented and the use of technology
is low.
The value added by the processed food industry in India is almost equal to the total value of the raw food
produced in India. This is despite the low levels of processing in India compared to the developed world
(we look at this in greater detail in the section on marketing). Processing raw food can lead to higher
127 mn
realizations and lower perishability, thereby significantly enhancing incomes. cultivators
and 107 mn
Exhibit 3 Agriculture value chain is very fragmented
agricultural
Contribution of the various segments to the agriculture sector, March fiscal year-end, 2009 laborers together
produce only
5.7% of India’s
GDP
Source: Industry estimates, Vision-2015: Ministry of Food Processing
Second green revolution, led by price increases
India is in the midst of a revolution in farmer incomes. Its drivers are very different from that of its first
Green Revolution of FY1967-79, which was marked by sustained yield increases in staple crops like wheat
and rice. The impetus for the first Green Revolution came from high import dependency and a desire for
self-sufficiency.

The current revolution (taken from the triennium ending FY2003 to the year ending FY2010) has seen
limited traction in terms of yield increases but has witnessed massive price increases driven largely by
increased global prices for agricultural goods and also the policy of the Indian government to increase
Minimum Support Prices (MSPs) across the board. As we note in Exhibit 4, the increase in realization due to
price increases completely dominates the increase in yield.
Given the lower yield that India sees in its staple crops, there is significant leeway for increasing the
incomes of farmers and addressing the challenge of food security.
The increase
Exhibit 4 The second green revolution is being driven by price increments
in realization
due to price Comparison between first and second green revolutions, March fiscal year-ends
increases
completely
dominates the
increase in yield
Note:
(1) Triennium ending FY2003: average of FY2001-03
Source: Indiastat, “Supply Side Constraints in Production of Pulses in India”, Kotak Institutional Equities estimates
In the course of the past five years, rural incomes received a significant boost from both agricultural price
rises and government schemes (as we note in Exhibit 5). Income from staples like wheat and rice rose 2X
Rural incomes while the rise in milk income has been driven by higher production and price increases. Significant inflow
received a
of government money via the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS)
significant
and institutional credit (credit from banks) has created new-found liquidity and prosperity in the rural
boost
from both heartland.
agricultural
Exhibit 5 Rural incomes have risen significantly over the past five years
price rises and
government Computation showing the changing profile of rural incomes, March fiscal year-ends
schemes
Source: Kotak Institutional Equities estimates

GAME
CHANGER
Agriculture return on investment is low—but better than cost of funds
We calculate that returns from agriculture (especially if the farmer sows staples or commodities) are in low-
to-mid single digits. In Exhibit 6, we calculate the return on investment that a new farmer can expect (if he
were to acquire land at market prices today). The return on investment for such a farmer who grows two
crops and none fail (typically one crop in three years, or six sowings, fails) will be around 7% if he farms in
the rural hinterland. As one gets nearer to the cities, the return on investment falls significantly as the land
has many competing usages, including industrial and residential. Land close to cities is unviable for general
agricultural purposes.
However, if we compare the low returns from agriculture with the cost of funds for the farmer (especially
the small farmers), the cost of debt for them is typically low. Since agricultural operations generally require
working capital financing (except for investment in assets like tractors), the cost of debt is essentially the
cost of funds for the farmers. Under various schemes of the central and state governments, the cost of
funds to the farmers (in the state of Madhya Pradesh) can be as low as 3%.
If we compare the cost of funds with the expected return on investment, agriculture is worth its while.
Of course, there are no loans available for investment in agricultural land and hence for a new farmer the
Returns from
investment can be a challenge if he grows only staples.
agriculture are
in low-to-mid
Exhibit 6 Low yields in Indian farming—somewhat propped up by government intervention
single digits if
Current economics for the farmer assuming two-crops, none fail, March fiscal year-end, 2009
a farmer grows
only staples
Source: Discussion with landowners, KIE calculations
Wealth effect?
The price of land has increased significantly (2-5X) over the past 5-7 years, driven by two factors:
` Increased prices and realizations: Capitalization rates (cap rates) have remained roughly constant
across the country and over the decade, which means that the value of land has risen significantly as
the realizations have increased. Also, as we explore later in the report, the realization per unit of land is
higher in states where the yield is higher.
` Increasing urbanization and infrastructure creation is leading to the increased value of the land
as either industrial or residential. Urbanization is a natural process (also driven by the low yields that
agriculture saw in the earlier part of the decade), while infrastructure projects, especially related with
roads (like the Pradhan Mantri Gram Sadak Yojana), have created positive externalities.

In states where the yields are higher (for example, Punjab and Haryana), or where there has been significant
Many farmers
from Punjab and urbanization or industrialization driven developments, many farmers have found it expedient to sell their
Haryana have lands and acquire cheaper lands in areas which currently have low yields or lesser development. A visit to
come to Madhya the rural hinterlands in Rajasthan and Madhya Pradesh clearly shows that many farmers from Punjab and
Pradesh and Haryana have come and acquired larger tracts of land than they sold. This also feeds into the increased
Rajasthan and
prices of land seen across the country.
acquired larger
tracts of land
than they sold Sell and do what?
Unless there is a program of significant reskilling of farmers, a small and marginal farmer who sells out or
is bankrupted due to failed crop(s) ends up as a landless labourer either in his own village or in a large city.
With the increasing mechanization of agriculture (as we explore later), one-time farmers inreasingly head
for the cities. As unskilled laborers, they end up surviving on daily wages. A program of reskilling farmers
would empower such farmers to choose alternative careers pro-actively rather than being condemned as
daily wage labourers.
Will pan-India yields converge?
India enjoys 20 agro-climatic zones and has 46 different types of soils. With differing irrigation techniques
(monsoon, ground-water, surface irrigation) and differing techniques of agriculture, we expect yields
in India will continue to have inter-regional variations. However, there is enough scope to increase yield
and close the gap within India and vis-a-vis global benchmarks. As we explore in this report, changes
in mechanization, wiser choice of fertilizers, improved logistics and reduced wastage can contribute
significantly to the uptick in agriculture productivity.

CHAPTER 2
INPUTS capital and credit lead the way
Agriculture is becoming an economically viable
proposition. Increased prices for produce are seeing
a concomitant increase in rural prosperity. Capital
formation in this sector is improving, though it is still
considerably short of taking growth to 4% levels.
Credit to the agriculture sector is increasing. Prosperous
farmers are consolidating land holdings – the fallout of
which is the further marginalization of small farmers
for whom it may be more attractive to sell out than to
hold – if only they knew what else to do.

Increasing viability
We calculate (in Exhibit 7) the profitability of cultivation from the perspective of a cultivator. We note that
the estimates are made at an all-India level and hence the calculations would vary significantly from region
to region. However, the objective of this exercise is to get a sense of how realizations have improved over
time.
We note that the cost of inputs has remained reasonably stable (relative to the increase in the prices of the
outputs) and that has created significant profitability for the farmers. The cost of inputs typically include
seeds (if not saved), fertilizers and pesticides, and irrigation equipment. We also note that the cost includes
Farming is
the imputed cost of family labor and rent and hence the landed farmer would not necessarily have made a
now becoming
loss on a cash basis.
a business
proposition
Exhibit 7 Profitability has improved significantly
as opposed to
Estimated profitability at the start and end of the decade, March fiscal year-ends
just a way of
life for farmers
who had no
other choice of
occupation
Note:
(1) Triennium ending FY2003: average of FY2001-03.
(2) Costs include the imputed cost of family labor and rent.
(3) We have used market prices wherever higher than MSP.
(4) One qtl equals 100 kgs.
Source: Agriculture Statistics at a Glance, 2009, Agricultural Economics Research Review, Vol. 23, Jan-Jun 2010
This indicates that farming is now becoming a business proposition as opposed to a legacy vocation for
farmers who had no other choice of occupation. The estimated profit, as indicated in the exhibit above, is
still fairly low.
Concentrated profitability
As we note above, profitability is significantly different across regions, depending on yield (which derives
from the intrinsic nature of the soil, water availability and the application of fertilizers and pesticides). This
happens because while costs across the country are similar (or don’t increase proportionately with yields),
India sets the MSPs at an all-India level (this is done on the recommendations of the Commission for
Agricultural Costs and Prices).
For states with high yields like Punjab, this leads to significantly higher realization per unit of land than
for states with lower yields like Bihar and Madhya Pradesh. The farmer in Punjab benefits from significant
reserves of ground water (and free electricity to pull out the water). We have noted earlier how this is
possibly leading to a wealth effect even in other places.

GAME
CHANGER
Exhibit 8 Profitability differs according to location as the price is common

Estimation of profitability across states, March fiscal year-end, 2009
India sets all-India

MSPs for states
with high yields
like Punjab,
this leads to
significantly
higher realization
than for states
with lower yield
like Bihar and
Madhya Pradesh
Note:
(1) Costs include the imputed cost of family labor and rent.
(2) One qtl equals 100 kgs.
Source: Agriculture Statistics at a Glance, 2009, Commission on Agricultural Costs and Prices, Kharif 2009-10
Land holdings are fragmenting…

Small (1-2 ha) and
We note that land holdings in India are increasingly fragmenting. The chart in Exhibit 9 shows that the semi-medium
number of cultivators has increased to 120 mn in FY2001 from 71 mn cultivators in FY1971. (2-4 ha) farmers
A large part of the increase (39 mn) in the number of cultivators came at the marginal farmer level (who have increased
own less than one hectare each), whose ranks swelled to 75 mn from 36 mn. The small farmer community their land holdings
(that owns 1-2 ha) increased by 9 mn to 22 mn from 13 mn. by a cumulative
14 mn and 10 mn,
Looking at the same equation differently, we note that the land controlled by the marginal farmers has respectively, to
remained constant at around 23 mn ha, which implies that at the marginal farmer level, average land 34 mn and 42 mn
holding has fallen from 0.65 ha to 0.30 ha. Small (1-2 ha) and semi-medium (2-4 ha) farmers have
increased their land holdings by a cumulative 14 mn and 10 mn, respectively, to 34 mn and 42 mn.
The land in control of medium (4-10 ha) and large (>10 ha) farmers decreased by 10 mn ha and 16 mn ha,
respectively, to 46 mn and 15 mn ha.
This fragmentation has two significant implications:
` Contiguous commonality. Typically contiguous land areas grow similar crops as it makes it easier to
share knowledge and there is usually some infrastructure to absorb the crop grown. For example, the
sugar belt requires sugar mills and potato farms requires cold storage units. Hence, if the cropping
pattern of an area has to be changed, it requires the buy-in of a larger number of individuals.
` Contract farming is a challenge. Contract farming requires managing a large number of farmers.
Companies prefer to manage a small number of farmers as the cost of training and standardization is
lower. Managing different farmers (with different types of yields and quality) becomes difficult.

Exhibit 9 Average land holding has been falling steadily
Distribution of agricultural plots by size across India (mn), March fiscal year-ends, 1971-2001
Note:
(1) The total arable area has remained broadly same at 160 mn ha.
Source: Agriculture Census Division, Ministry of Agriculture, Planning Commission
…but credit is expanding
The Government of India has mandated that a certain portion of bank advances has to be allocated to
the ‘priority sector’, in which agriculture gets a major share. This has led to significant credit expansion in
agriculture over the past decade (Exhibit 10), driven by the business growth of commercial banks.
Exhibit 10 More than double-digit growth rates in credit for Indian agriculture
Agency-wise credit flow to agriculture in India, March fiscal year-ends, 1999-2009 (Rs bn)
Source: Department of Agriculture and Cooperation

GAME
CHANGER
If we slice the data to see the recipient of the credit, the focus on small and marginal farmers becomes
clear. Overall credit from the commercial banks has gone up 4.4X between FY2001 and FY2007, the credit
to farmers owning less than five acres has grown 5.2X and for those above five acres, credit has grown
3.8X (Exhibit 11). Farmers owning less than five acres have 18 mn accounts at the end of FY2007, up from
9 mn at the end of FY2001, clearly showing increased penetration as well as financial inclusion.
Exhibit 11 Credit is increasing to the marginal farmers at a higher pace

The focus on
Number of accounts and amounts outstanding by land owned by farmer, March fiscal year-ends
small and
marginal
farmers has led
to increased
penetration
and financial
inclusion
Note:
(1) One acre equals 43,560 sq. ft or 0.41 ha
Source: RBI
With increased
returns now
Capital formation picks up in agriculture becoming
visible in the
During the Green Revolution (FY1967 to FY1979), total capital formation in the agriculture sector averaged agriculture
28% of the GDP (12% from the public sector, 14% from private), it has since fallen to 16% (7% from the sector, we
expect to see
public sector, 9% from private) in this decade (FY2001 to FY2008). We note that of late, the public sector
increased
has started contributing more to capital formation than the private sector, driven by the government’s focus
capital
on irrigation. formation
Given the increasing returns now becoming visible in the agriculture sector, we expect the trend to reverse
in the future. Note that to achieve 4% growth in the agriculture sector (the plan set out by the Planning
Commission and one of the professed objectives across the political divide), capital formation needs to rise
to be in the region of 20-24% of GDP (as the incremental capital-output ratio is 5X-6X).

Exhibit 12 Public sector is stepping in to create capital in the sector
Trend of investments in agriculture in India, March fiscal year-ends, 1961-2008
Source: Indiastat

GAME
CHANGER
CHAPTER 3
CULTIVATION seeds of opportunity
Achieving scale and using the right technology can
produce significant yield enhancement: Seeds and
fertilizer companies are in the best position to lead
the revolution. Soil and water quality is deteriorating,
which presents opportunities for seed and sprinkler
companies. The impact of NREGA is being felt in higher
labor costs, which is speeding up mechanization.
With weather forecasting still erratic, there is scope to
enhance crop insurance.
As you sow...
Of all the inputs, seeds are at the forefront of significant technological advances. Traditionally, farmers
saved the seeds from their crops for cultivation in the following year (“saved seeds”). Such seed varieties,
which have been turned over for generations, get weaker over time (as they do not cross-breed), making it
more susceptible and less resistant to diseases and insect attacks. There are two levels of development here:
Hybridization and genetic modification.
Hybridization requires cross-breeding seeds to get the desired characteristics (more drought-resistant, more
The global
pest-resistant, increased yield or quality, etc.). Unfortunately, hybridized seeds are unable to transfer their
seeds industry
is estimated to qualities from one generation to the next and hence the farmer cannot save the seeds but has to approach
be US$34 bn in the company again in the following sowing season.
FY2008 while
Similarly, in genetically modified (GM) food, the desired changes are brought about by altering the genes of
the Indian seed
industry’s size a species—the natural process of hybridization is replaced with manual intervention. GM seeds also need to
is around be purchased every sowing season.
US$1.2 bn
Both hybridization and GM seeds, hence, create a business opportunity in the seeds sector. The global
seeds industry is estimated to be US$34 bn in FY2008 while the Indian seed industry’s size is around
US$1.2 bn. The argument for paying for seeds revolves around the better yield that a farmer can expect
(even though the overall irrigation and fertilizer costs typically go up, along with the cost of the seeds).
Seeds move from the germplasm stage (research) to the breeder stage. The breeder seeds are then multiplied
as foundation seeds, which are further multiplied to get certified/quality seeds, which are sold to the farmers.
The seed companies typically do not own the land for growing the certified seeds and hence rely on land-
owners to grow the seeds for them. As we note in Exhibit 13, India has been increasingly using certified seeds.
India has taken a shine to hybrid seeds, especially in cash crops like cotton and sunflower (Exhibit 14). The
levels of hybridization in food crops vary significantly from 4-5% in paddy and wheat to 20-50% for coarse
grains like jowar, bajra and maize. Given the large land area devoted to paddy and wheat and the current
low hybridization, these crops can yield significant bounty for the companies that are able to successfully
create and market the right products.
Exhibit 13 Use of hybrid seeds increasing rapidly

Production of various types of seeds in India, March fiscal year-ends, 1992-2010 (‘000 tons)
Source: Department of Agriculture and Cooperation, Planning Commission

GAME
CHANGER
The private sector now dominates seed sales (see Exhibit 15). Public sector seed distribution companies
were set up during the Green Revolution to distribute high quality seeds to the farmers, but after
liberalization of the seeds sector in the late 1980s, a large number of private and foreign companies
have come in. Private sector companies have focused on cash crops primarily on account of the lower
distribution reach required to be set up and the possible higher margins.
Unfortunately for India, research on staples like rice has not taken off. Research in India is concentrated
with the Indian Council of Agricultural Research and the State Agricultural Universities—institutions that
have suffered from poor implementation (the expected seed output based on the research institutes’
estimates and the actual on-the-ground yield vary significantly). There has been some breakthrough in
Chinese and Japanese varieties of rice, but acceptability in India is low due to the short grain and its starchy,
sticky quality. Scope for growth therefore is significant in basic crops like rice and wheat, or in higher value
items like fruits and vegetables, which are now seeing increased demand.
Exhibit 14 Low penetration of hybrid seeds in staples Exhibit 15 Private sector increasingly playing a larger
Crop area and use of hybrid seeds in various crops, March role in seeds industry
fiscal year-end, 2008 Market shares of private and public sector companies,
March fiscal year-ends, (%)
Source: Industry estimates, Kotak Institutional Equities Source: Planning Commission, Kotak Institutional Equities
Introduction of Bt cotton has yielded significant yield enhancements (see Exhibit 16). We note that India
saw its cotton productivity roughly double to 186 kgs/ha from 100 kgs/ha over the course of 50 years.
Since the introduction of Bt cotton in the past decade, yield has more than tripled to 591 kgs/ha from 186
kgs/ha. It is this promise of productivity that the hybrid seed manufacturers tout when introducing new
varieties of hybrid crops. The Indian farmer has clearly chosen to side with the hybrid seeds as is evident
from the almost complete domination of the hybrid seeds in the sown area.
Since the
Exhibit 16 Bt Cotton has gained significant traction, increasing yield and production introduction of
Increasing area cultivated with Bt Cotton (mn ha), yield improvement (kg/ha), March fiscal year-ends Bt cotton, the
yield has more
than tripled
to 591 kgs/ha
from 186 kgs/
ha in less than
a decade
Source: KPMG, Indiastat, Industry analysis

...so you reap: Improved fertilizer policy
With the aim of helping small and marginal farmers, the Indian government has created policies to keep
the prices of fertilizers low. This policy has taken various forms, from allowing private companies to earn a
fixed return on their investment (which not surprisingly led to gold-plating of their costs) to undercharging
for some products relative to others (case in point being urea) to maintaining the prices that the companies
could charge farmers (this has led to prices being held in check even though input costs of feedstock have
spiraled globally).
Fertilizers represent the largest component of input costs for cultivators (other than labor, or rent if the
land is not owned) and is the most organized sector (chemical fertilizers are made in large-scale units). This
sector has seen significant government intervention. The government’s attempts at regulating supply, access
and affordability are not always successful in terms of its overall objectives.
Price controls have kept retail urea prices low, relative to other fertilizers, leading to significant overuse.
The three main nutrients required in agricultural supplements are nitrogen (N, provided by urea),
phosphorous (P, provided typically by di-ammonium phosphate - DAP) and potassium (K, provided by
murate of potash - MOP). The typical/recommended ratio of usage between N:P:K is 4.0:2.0:1.0. Given the
lower prices of urea (and also for its ability to show significant leafy vegetation), it has been the favorite
fertilizer of Indian farmers, which has skewed the ratio to 4.6:2.0:1.0 in FY2009 (Exhibit 17).
A better way of providing nitrogen to the soil is to alternate a leguminous crop (like pulses) which enhances
nitrogen in the soil as it produces more protein for itself. However, there are several risks associated with
pulses—the crops are sensitive to high temperatures and rain variation and lack marketing support as they
have no Minimum Support Price. Indian farmers have relied on urea to meet their soil’s nitrogen needs.
Given the increasing import dependency of pulses (as we explore later) and increased prices, this change
may come about through market forces rather than through government intervention.
Exhibit 17 Consumption of nutrients has been skewed, this is expected to change

A better way
of providing Chart showing the actual and recommended usage of fertilizers, March fiscal year-ends, 1992-2015E (mn tons)
nitrogen to the
soil is to alternate
a leguminous crop
(like pulses) which
enhances nitrogen
in the soil as it
produces more
protein for itself
Source: Department of Fertilizers, Planning Commission, Crisil research

GAME
CHANGER
The policy of fixing final selling prices (while allowing the companies to make fixed returns) has led to two
developments:
` Indian manufacturing of urea has remained stagnant compared to the increased demand and India
is being required to import ever larger quantities (Exhibit 18). A similar story plays out in the DAP
segment. Given that India has no potash, it is anyway dependent on imports for MOP.
Urea manufacturing
Exhibit 18 Indian fertilizer consumption, imports expected to increase has remained
Consumption and imports of fertilizers in India, March fiscal year-ends, 2007-2015E (mn tons) stagnant despite
increasing
demand—India is
being required to
import ever larger
quantities. A similar
story plays out in
DAP
Source: Department of Fertilizers, Planning Commission, Crisil research, Kotak Institutional Equities estimates
` Since the companies have to be paid to make their promised returns, the government has been
footing ever larger subsidies (Exhibit 19). Instead of giving them cash, the government has been giving
them bonds (which end up selling at a discount), thereby creating working capital problems for the
companies. FY2009 had been an exceptionally challenging year with the fertilizer subsidy more than
doubling to Rs758 bn from Rs305 bn in FY2008. We note that the food subsidy primarily refers to
the amount spent by the government in the Targeted Public Distribution System (TPDS) to make food
available at low cost for the below-poverty-line citizens.
Exhibit 19 India’s food and fertilizer subsidy bill is ballooning FY2009 has
Food and fertilizer subsidy, March fiscal year-ends, 2001-2011E (Rs bn) been an
exceptionally
challenging
year with
the fertilizer
subsidy more
than doubling
to Rs758 bn
from Rs305 bn
in FY2008
Source: Ministry of Finance

However, recently (from April 1, 2010), the government of India has increased the farm-gate prices of urea
The amount of
by 10%. Prices of DAP and MOP have been decontrolled, where the subsidy will now be paid on a per-
subsidy per unit
nutrient basis (the amount of subsidy per unit of nutrient will be fixed and hence, fluctuations in the costs
of nutrient will be
fixed and hence, will be borne by the farmer). This is expected to lead to a more balanced use of the nutrients (of course,
fluctuations in the keeping urea prices under check will mean that urea will continue to remain cheaper, unless DAP and MOP
costs will be borne prices fall globally).
by the farmer
Improving the fertilizer mix can also help address (to some extent) the deteriorating soil situation in the
country. The other area to look out for in the fertilizer segment is the increasing use of micro-nutrients to
replenish the (small but essential) quantities of iron, zinc, manganese, copper, boron, molybdenum and
chlorine.
Soil quality is deteriorating….
The productivity of the land is critically dependant on the quality of the soil. India has a wide variety of soil,
making it one of the most agriculturally diverse countries. However, as we note in Exhibit 20, roughly half
of Indian soil is degraded. Water and wind erosion degrade more than 100 mn ha (primarily deriving from
the deforestation). India also loses valuable arable land to a lack of drainage (water logging) and over-
irrigation (which causes salinity/alkalinity) as the dissolved salts run out.
Exhibit 20 Soil problems affect almost half of India’s land area

Reasons for degradation of land in India, March fiscal year-end, 2005
Roughly half
of Indian soil is
degraded
Source: National Bureau of Soil Survey and Land Use Planning, Nagpur, 2005
According to The National Project on Management of Soil Health and Fertility, India has 517 static
soil testing laboratories (STLs) and 134 mobile STLs, which have an annual capacity to test 7 mn soil
samples. However, most of these are not equipped to check for micro-nutrient deficiency in the soils. The
government subsidizes the setting up of an STL, but there is limited private sector play currently.
…but there is improvement on the water front
In order to minimize the dependency of agriculture on the monsoon, India has concentrated on bringing
more land under irrigation, which has grown 4X since Independence (Exhibit 21). Half of India’s arable land
is now covered with irrigation, providing the farmer some fall-back in case the monsoons fail. Most of the
increase has been driven by wheat, rice and non-food crops, whose outputs have also increased as larger
areas get irrigated.

GAME
CHANGER
Exhibit 21 Irrigated area has grown 4X since the First Plan

Half of
Irrigated area under various crops, March fiscal year-ends, 1951-2007 (mn ha) India’s arable
land is now
strategically
irrigated,
providing the
farmer some
fall-back in case
the monsoons
fail
Source: Directorate of Economics and Statistics, Ministry of Agriculture, Planning Commission
As GameChanger noted in its May 2010 issue, “Water: Deluge of Opportunity”, if we dissect the picture
differently, irrigation is increasingly dependent on ground water (Exhibit 22). This increasing dependence
on ground water has meant that the burden of expenditure in getting the fields irrigated has shifted to the
farmers. Also, ground water irrigation has led to water mining, which is depleting the water table in some
areas of the country and also causing soil salinity.
Exhibit 22 Ground water use has been rising faster than surface water The increasing
Plan-wise irrigation potential utilized through surface/ground water in India (mn ha) dependence
on ground
water has
meant that the
expenditure
burden for
irrigation has
moved to the
farmers
Source: Lok Sabha Unstarred Question No. 28, dated 26.02.2007
For a farmer, surface water would be cheaper (price is fixed per acre and not on the basis of volume used
and typically not revised upwards for long periods of time), but this would make him dependent on the
local authority’s decision of timing of the water flow. As different crops have different watering cycles (and
timings are typically based on the requirement of staples), it is not necessarily the best method for the farmer.

For a farmer who has to pump out water, there is an implicit cost of the water (as we note in Exhibit 23). It
is important to get the pricing of surface and ground water right or else a public resource would have been
commandeered by a few who already have access to it. The right pricing of water will also yield income for
the water authorities, helping them maintain the infrastructure.
Water comes Exhibit 23 Paying for diesel to pump out water forms a substantial cost for a farmer
at a cost for a Calculating the fuel cost for a farmer growing wheat, March fiscal year-end, 2009
farmer who has
to pump it out
Note:
(1) Madhya Pradesh government gives a bonus of Rs0.5/kg over the national MSP.
Source: Ministry of Agriculture, discussions with farm-owners
Increasing wages leading to increasing mechanization

A collateral
effect of the As we noted earlier, government policies can have unforeseen and unexpected side effects. The Mahatma
scheme has Gandhi National Rural Employment Guarantee Scheme (MNREGS) has effectively increased the price of
been the labor in rural India. A collateral effect of the scheme has been the increase in mechanization as it becomes
increase in
more cost effective. The minimum-wage-rate law is now effectively implemented as the government stands
mechanization
as a buyer of labor at that price (of Rs100 per day).
as it becomes
more cost We calculate in Exhibit 24 that the rural wages have risen by 13% and 16% in FY2008 and FY2009,
effective respectively, such that skilled labor is now paid at rates higher than the minimum wage rate. We note that
the wages mentioned in the exhibit are all India year round averages. The wages increase significantly
during harvesting time and especially in high yield regions (for example, the average wage of a man
engaged in ploughing during the sowing season in April-May in Kerala and Himachal Pradesh would be
Rs320 and Rs205 per day, respectively).

GAME
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Exhibit 24 Rural India wages have risen significantly, more than tractor costs, over the past few years
Cost of labor (men, annual average, Rs/day) and tractor prices (Rs), March fiscal year-ends
Agriculture should
become less
labor intensive
to improve
productivity,
however, if the
Source: Wage rates in rural India, Labour Bureau, various issues; Industry estimates, KIE analysis
government
decides to scale
These increased wages, especially when compared to the increase in the cost of tractors (adjusted for the back on the
larger horse-power that Indian farmers are now buying), represent a significant divergence. Taking into MNREGS, the
account the fact that in its spare time a tractor can be rented out (to other farmers or to infrastructure laborer would
possibly find
companies making roads) or can be used as a mode of transport, buying it makes immense sense for the
himself with
cultivator. The flow of credit (typically secured against the tractor, which have six monthly EMIs coinciding
neither a skill nor
with the harvesting season) also makes the purchase decision easy. We see this in increased tractor sales a job
(Exhibit 25). Similar arguments hold for harvesters and tillers, which are also seeing a robust uptick in demand.
The question that remains to be answered some other day is whether India can afford to keep creating
MNREGS employment which is low on skill while also removing the laborer from the agriculture market.
Agriculture should become less labor intensive to improve productivity, however, if the government decides
to scale back the MNREGS (like it is now doing with another pro-farmer scheme—the fertilizer subsidy), the
laborer could find himself with neither a skill nor a job.
Exhibit 25 Tractor sales are up and so is the average tractor horse power
Indian tractor sales (#) and HP break-up (%), March fiscal year-ends, 2006-2010
Source: Industry estimates, Kotak Institutional Equities

Weather forecasting—foggy still
Despite the major investment that India is making on increasing the reach of irrigation in agriculture, almost
half the arable land is still dependent on the monsoons. One would expect that such large dependency on
the monsoon will mean that over the past six decades, India would have perfected the art of forecasting
the monsoon. Unfortunately, in 12 of the past 16 years, the forecast of Indian Meteorological Department
(IMD) has seen a ‘significant deviation’ – more than +/-5% error in the difference between the actual and
the forecast rains (Exhibit 26).
In 12 of the past Exhibit 26 IMD’s all-India forecast is error-prone

16 years, the Forecast and actual all-India rainfall, March fiscal year-ends (% of long-term average)
forecast of Indian
Meteorological
Department
(IMD) has seen
a ‘significant
deviation’ – more
than +/-5% error
in the difference
between the
actual and the
forecast rains
Source: Compilation from IMD data, Surinder Sud
Of a bigger concern is that this is an all-India, entire-period forecast and does not take into account micro-
markets or smaller time durations. The space-time distribution of the monsoon is more critical than the
overall average number over the four monsoon months. This lack of ability to predict the weather has
meant that the weather insurance market has also not picked up, leaving farmers completely at the mercy
of the elements.

GAME
CHANGER
CHAPTER 4
LOGISTICS little movement
Government initiatives in procuring (to maintain
price stability), warehousing (to create buffer against
uncertainties) and distributing (to alleviate hunger)
are largely inefficient. Minimum support prices have
helped buoy farmer incomes, but they do not cover the
entire country, or send the right price or quality signals
to the cultivator. The long distribution chain leads to
time and produce wastage, estimated at Rs580 bn a
year. Initiatives from the private sector are promising
and developments in this segment bear watching.
Market stability via government interventions
The government
has created
In order to insulate the cultivator from risk, the government has created an elaborate mechanism to
an elaborate
procure the produce at remunerative prices—the Commission on Agricultural Costs and Prices studies the
mechanism to
procure the cost of growing a crop and recommends a purchase price for the government. The price also incentivizes
produce at production in line with government demand. Having set in place the prices, the government has put
remunerative in place a mechanism to reach the farmers via the Agricultural Procurement and Marketing Committee
prices (APMC) mandis (wholesale transaction hubs). Procured material is stored at the warehouses maintained by
the central or state warehousing corporation and is distributed by TPDS shops.
I am a buyer at my price
The Food Corporation of India (FCI) implements price stability (or at least a pricing floor) by playing the
buyer’s role at prices indicated by the government as MSP. The MSP is effective primarily for wheat and rice
while the government has no MSP for fruits and vegetables or is an ineffective player in other commodities
(like pulses).
The government has stepped up the procurement of staples via FCI (Exhibit 27) and now buys around 30%
of both rice and wheat produced in India. Given the sustained increases in the MSP over the course of the
past few years, it makes economic sense for the farmer to sell to the government. Typically, during harvest
time, prices soften in the market and a firm buyer helps the farmer avoid selling at a depressed price.
Exhibit 27 FCI has stepped up procurement—it covers ~30% of the output
The government FCI’s procurement versus India’s production, March fiscal year-ends, 2000-2009 (mn)
has stepped up
the procurement
of staples via FCI
and now buys
around 30% of
both rice and
wheat produced
in India
Source: FCI annual reports, KIE calculations
However, in crops where there is no MSP, the farmer gets price indications based on the market. For
example, despite the absence of an MSP, the fruit and vegetable cultivation area has grown more than 50%
over the last decade (as we explore later) as the market prices have risen. Similarly, in pulses, for which the
government provides little support, India faced a glut in the mid-1990s when the prices rose steadily (after
which it has become more remunerative to grow staples).

GAME
CHANGER
We note that the MSP is implemented via APMC mandis, of which there are around 7,500, operated
On average, a
through principal markets and sub-yards (Exhibit 28). Given India’s area of 3.3 mn sq. km, one should farmer needs
expect an average APMC mandi to cover an area of 435 sq. km, which expressed as a radius of a circle, to transport
would be approximately 12 km. This implies that on average, a farmer would need to transport his goods his goods 12
12 km to reach the mandi. However, the average hides significant inter-region variations, ranging from 6 km to reach
the mandi. This
km in Punjab to 22 km in Himachal Pradesh to more than 50 km in the north eastern states (Exhibit 29).
average hides
This reflects in the overall procurement done by FCI which procures 42% of its wheat and 25% of all its
significant
rice from Punjab (FY2009). inter-region
variations
Exhibit 28 APMC mandis operate through principal Exhibit 29 APMC mandis are located far from farmers
markets and sub-yards Coverage area and implied radius of APMC mandis
Number of principal markets and sub-yards, March fiscal across states, March fiscal year-end, 2009
year-end, 2009
Source: MOFPI, Kotak Institutional Equities Source: MOFPI, Kotak Institutional Equities
Carrying the produce over such large distances causes a bulk of the enormous wastage across produce in
India. Two-thirds of the wastage takes place while the goods are being taken from the farm gate to the
Two-thirds of
mandi (Exhibit 30). This wastage, according to a report tabled by the government in Parliament, amounts to
the wastage
as much as Rs580 bn a year (in FY2005).
takes place
while the
Exhibit 30 More than a tenth of the produce is lost due to poor infrastructure
goods are
Break-up of wastage by location of waste, March fiscal year-end, 2009 (%)
being taken
from the farm-
gate to the
mandi
Source: Industry estimates
However, the APMC regime is being reformed across the country. States are now being encouraged to
allow private mandis to come up, which would allow private entities to set up their own yards where trade
can take place. This can address the challenge of deepening the penetration of the market yards. Almost all
the states have moved towards modifying the APMC Acts (Exhibit 31), in some cases going all the way to
allow contract farming.

Exhibit 31 APMC Acts being modified across the country
Status of reforms on APMC Act by states
Source: Economic Survey 2009-10
Maintaining buffer stock –where are the storage facilities?
Prior to the Green Revolution, India suffered from acute shortages of food which made it dependent on
Given the
increasing imports, making India susceptible to political wrangling by countries that exported food. Having achieved
procurement self-sufficiency, India wants to maintain a buffer so as not to be dependent on imports. Indian guidelines
by the FCI, India stipulate maintaining different buffers depending on the time of the year, ranging from 16 mn tons to 27
now faces the mn tons. Enhanced procurement by the FCI over the past three years poses India with the challenge of
challenge of
storing 58 mn tons of food grains (Exhibit 32).
storing 58 mn
tons of food Exhibit 32 India has been storing well above its buffer requirements
grains
Buffer norms and actual stocks of staples, quarter ends, March fiscal year-ends, 2000-2010 (mn tons)
Source: Food Corporation of India, Kotak Institutional Equities

GAME
CHANGER
However, the storage space is based on the expectations of filling up buffer numbers. Note also that
India faces
agriculture is a ‘state subject’ according to the Constitution of India and hence, a bulk of the investment in a peculiar
agriculture happens via states. This means that the states have more warehousing capacity than the center problem of
(Exhibit 33) and some states have higher capacities in proportion to their requirements than others. We overflowing
are comparing only government storage capacity to get a sense of why India faces a peculiar problem of granaries (and
overflowing granaries (and hence rotting grains) and malnutrition across different parts of the country. hence rotting
grains) and in
Exhibit 33 Government warehousing projects rely on the states parallel with
malnutrition
Capacity of the warehouses (mn tons)
across different
parts of the
country
Source: Ministry of Consumer Affairs, Food and Public Distribution
Private mandis To take

advantage
In order to resolve the issues thrown up by government intervention and to take advantage of the
of the
opportunities, some private players have started creating mandis around their warehouses. The mandi opportunities,
is a place for the farmer to bring his produce and the warehouse acts as a place to store it. Unlike the some private
traditional APMC mandis (which are not necessarily near warehouses), the farmer here can decide to only players
store the produce and not sell it on the same day. have started
creating
The warehouse operator also typically ties up with a financing company (typically, banks seeking to meet mandis
their priority sector norms) and provides the farmer financing against the produce in his warehouse. With around their
warehouse receipts becoming negotiable, the farmer need only endorse the receipt to complete the sale of warehouses
goods whenever he feels the price is right. The sale can be facilitated by the warehousing company, which
also acts a ‘procurement agent’ for a processor.
From the point of view of the private company operating a mandi, it can look forward to three sources of
income: (1) rentals from the warehouse, (2) financing commission and (3) procurement commission (Exhibit
34). Some are also considering putting up retail outlets to enhance income though such initiatives typically
do not take off as they tend not to offer credit to the farmer (which the local retailer in the village does).

Exhibit 34 Warehouses are supported by multiple income streams, subsidy and availability of credit
Capital costs, financing and income streams of a large warehouse, March fiscal year-end, 2010
Source: Industry estimates, discussion with warehouse operators
Cold storage
Having a strong infrastructure of cold storage is critical for any country to develop a processed food market.
Unfortunately, India's paltry cold storage facilities are focused mainly on one commodity: potato. The
sectors which demand cold storage facilities range from fruits and vegetables (total annual production of
close to 200 mn tons), dairy (110 mn tons), poultry, meat and fishing (15 mn tons), flowers (1 mn ton) and
processed foods.
India’s cold storage capacity is concentrated in a few regions and at about 24 mn tons, is a small fraction
of the requirement (Exhibit 35). There are various challenges relating to the cold storage industry, including
unviable economics, a lack of power supply and lack of specialized transport to carry the goods from the
warehouse to the consumer. To create favorable economics, the government does extend a subsidy but the
other two critical factors are yet to fully evolve (power and specialized transport).
India’s cold
storage Exhibit 35 63% of the cold storage is concentrated in three states
capacity is State-wise number and capacity of cold storages functioning in India, March fiscal year-end, 2009
concentrated in
a few regions
and at about
24 mn tons,
is a small
fraction of the
requirement
Source: Indiastat, Lok Sabha unstarred question no. 855, dated on 24.11.2009

CHAPTER 5
MARKETING value-add attraction
As India grows richer, her needs are changing. Higher
incomes mean people demand higher protein food,
which requires a change in cropping patterns (pulses/
fruits and vegetables) and increased cultivation of
other protein sources (daily/poultry). The processed
food industry captures significant value and is expected
to boom along with the associated packaging and
retailing industry.
Diversifying into fruits and vegetables
Prices of fruits
and vegetables It is axiomatic that as any country gets richer, it demands greater protein and fresher and more exotic
have risen,
produce, and India is expected to be no different (and we take India’s growing affluence as a given). We
prompting
cultivators
note that prices of fruits and vegetables have risen at 6.5% p.a. over the past 15 years ending FY2009,
to devote which compares with a 5.8% p.a. rise in food grain prices. This has prompted cultivators to devote
increasing increasing areas to fruits and vegetables (Exhibit 36). Fortunately for India, in fruits and vegetables, the
areas to these productivity compares well with the world averages.
commodities
Exhibit 36 Fruit and vegetable production up by half over the past seven years
Area (mn ha), production (mn tons) and productivity (tons/ha) for India, March fiscal year-ends, 2002-2009
Source: National Horticultural Board
Over the next two exhibits (Exhibits 37 and 38), we size up the fruit and vegetable market and also
demonstrate the significantly higher realization per ha for a cultivator investing in fruits and vegetables.
Based on the average wholesale prices that prevailed in FY2009, fruits are a Rs965 bn market while
vegetables add up to another Rs782 bn.
Exhibit 37 Mango, banana and citrus dominate Indian fruit production

Various parameters of fruit production in India, March fiscal year-end, 2009

GAME
CHANGER
Note that from the cultivator’s perspective, the average realization per ha for fruits is in the range of
Rs260,000 per ha while the same is Rs120,000 per ha when vegetables are cultivated. We note that two
crops of vegetables can be grown in a year, making the annual realization comparable. Realization from
vegetables is comparable to realization from the fields that have the highest productivity in growing staples
(say a land in Punjab which will produce 10,000 kg of wheat per ha). Comparing this with other less fertile
states, the average realization in growing vegetables is significantly higher.
The reasons why farmers don’t shift to cultivation of fruits and vegetables from the staples ranges from
their lack of comfort with new crops (‘I should grow what my neighbor is growing/I should stick to what
I know best') to the lack of cold storage facilities. In the case of fruits, the crop cycle is typically longer
(more than three years) which requires significant working capital investment and patience. Returns are
expected to be higher, but the overall quantum of loss can be significant for a farmer in fruit cultivation in
case his crop were to fail. An integrated system of a fruit processor near the cultivation area can help fruit
production significantly.
Exhibit 38 Potato, onion and tomato account for a bulk of India's vegetables
Various parameters of vegetable production in India, March fiscal year-end, 2009

The overall
value of the
Milching the dairy sector raw milk
produced at
Dairy has always played a critical role in supplementing farm income. Note that at the current production Rs1.6 tn is
level of 110 mn tons a year and at wholesale prices of Rs15 per kg, the overall value of the raw milk more than the
produced at Rs1.6 tn is more than the combined value of raw wheat and paddy. With demand expected to combined value
of raw wheat
touch 180 mn tons by the end of the decade, the dairy industry has huge potential.
and paddy
The dairy model relies on the co-operative model flagged off successfully by the Gujarat Co-operative Milk
Marketing Federation (GCMMF). The model has been replicated with varying degrees of success in other
states. Even where private processors are involved, they do not typically own the milch animals—they
source it from milk shed areas in the villages at marginally higher prices than the state co-operative is
offering.

India is unique in its milk supply composition: About 55% of the milk consumed by Indians is buffalo milk
(higher fat content) and 40% is cow’s milk (equally split between hybrid and non-descript cows), the rest
is accounted for by goats, etc. The productivity of Indian milch animals is significantly below international
levels. This stems from the fact that there has been limited research globally on increasing buffalo yields
India has (as they don’t account for such a large proportion of milk anywhere else) and the cow-hybrids developed
significant globally have not produced the same results in hot Indian conditions.
potential
to convert
Note that two-thirds of the milk sold in India is unpasteurized and of the one-third that is pasteurized, two-
the dairy thirds are processed in the unorganized sector. Overall, only 13% of the milk produced in India is processed
opportunity in the organized sector. Of this, 8% is sold as milk for drinking while the rest 5% is processed into higher
into a value products.
processed food
opportunity From the perspective of a dairy owner, the higher the proportion of milk that can be processed into higher
value products, the better will be the realization. However, given the lack of storage and processing
facilities, India has significant potential to convert the dairy opportunity into a processed food opportunity
produce, which is reflected in the significant private equity deals in this space.
Processing of food important
Given the weak linkages between the field and the final consumer, India simply did not process its food
(Exhibit 39). Processing adds both life and value to food.
Indians are used to the concept of fresh food (whether it is in fruits and vegetables or in meat/poultry/
fishes or in dairy). Processed food has not been a part of Indian diets, even in urban areas, on account
of consumer resistance, a lack of options and the lack of storage capacity at home (refrigeration). With
increasing urbanization, better availability of cold storage at home and lifestyle changes (double income
families, nuclearization of families, etc.), the processed food market is rapidly evolving.
In its vision document laid out in 2005, the Ministry of Food Processing Industry had targeted that by
48% of the
FY2015E, 58% of the food sold in India will be processed. However, if we look at the current levels of food
food consumed processing, 48% of the food consumed in FY2010 is processed, up from 39% when the document was
in FY2010 is released (FY2005).
processed, up
from 39% in Exhibit 39 Large parts of the food chain are unprocessed
FY2005 Processing levels for key segments in the food processing industry, March fiscal year-end, 2005 (%)
Source: Vision document 2015, MOFPI

GAME
CHANGER
Imports are rising—both a threat and an opportunity
India has been increasingly spending on importing food—this raises the specter of losing self-sufficiency
(though as with all rhetoric, this is blown out of proportion). The most sustainable rise in imports is seen in
India has been
vegetable oils, wood and wood products, and pulses (Exhibit 40). Cyclically, India also imports wheat and
increasingly
sugar but those events are driven by one-off issues (like drought or cropping yield collapsing). spending on
importing food
Exhibit 40 India’s dependence on imports is rising in edible oils, pulses
This raises the
Import of agricultural products by India, March fiscal year-end, 2004-2009 (Rs bn) specter of losing
self-sufficiency—
though as with
all rhetoric, this
is blown out of
proportion
Source: Department of Agriculture & Cooperation
Broad-basing exports
India’s export basket consists primarily of cereals (dominated by rice—both basmati and non-basmati).
However, India has been making steady progress in exporting other products including processed food
(see Exhibit 41). India has lost some of its edge in floriculture, but fresh fruits and vegetables exports are
increasing at a healthy clip along with the increase in processed fruits and vegetables. As we have noted
earlier, processing food adds shelf life as well as value. The Rs37 bn garnered by the fresh fruits and
vegetables group is on the back of volumes of 2.7 mn tones (implying an average realization of Rs13,827/
ton) while the Rs32 bn sales of the processed fruit and vegetables comes from 0.8 mn tones (with an
average realization of Rs37,443/ton).
Exhibit 41 Indian agricultural exports have risen by more than 50% over the past three years
Indian agricultural exports, March fiscal year-ends, (Rs bn)
Source: Agriculture and Processed Food Products Export Development Authority (APEDA)

India’s corporate retail story
Final products of the raw and processed food industry are marketed locally by a large number of mom-
and-pop retail grocery stores (known as ‘kirana’ stores). In the blaze of India’s retail boom over the past
few years, scores of companies began to flirt with the ‘farm-to-fork’ model. Many have burnt their fingers,
while the more resilient continue to learn the nuances of the sector with newly-restrained ambitions. As the
model begins to stabilize – and if foreign players make a more direct entry – we could see a further push in
the retail corporatization story.

CHAPTER 6
G A M E C H A N G E R S
We believe that the opportunities in the changing
agricultural landscape in India lie across the chain:
From seeds, weather forecasting and insurance,
logistics (warehouse chains) and emphasis on higher
value crops (horticulture, pulses, dairy and poultry) to
processed food. Given the changing demand pattern in
the country, we expect market forces to pull agriculture
out of its current low growth rates.
The right seeds
Seeds will be at the forefront of the productivity increase that India will need to invest in, as its arable
area begins to decline due to an increasing population and rising demand from industry. We note the low
productivity of Indian crops compared to global peers and also highlight how the introduction of hybrids
has helped spur production in cash crops like cotton and sunflower.
India needs to invest in developing local hybrid varieties and in ensuring that the research done by Indian
Council of Agricultural Research (ICAR) reaches the farmers on the ground. India is witnessing an active
debate on the introduction of GM foods (with the recent moratorium on Bt Brinjal), even while hybrid
seeds have been readily accepted by the farmers. Companies which are able to crack the code on the
hybridization of staples seeds (rice and wheat) and in fruits and vegetables can benefit from a large captive
market.
Blackstone Invests $50 Mn In Hyderabad Seed Maker

VC Circle, December 30, 2008 Nuziveedu plans to use these funds to develop
Agro-based companies are turning out to be new and market seeds of rice, corn and vegetable
favourites with private equity funds as funding hybrids. It also plans to use the funds for further
seems to be drying out. expansion and adding a research and development
Private equity major Blackstone Group is picking unit. The firm currently has revenues of Rs 500
up a stake in Hyderabad-based seed maker crore, of which 80% are earned through selling
Nuziveedu Seeds Ltd, a part of the privately-owned hybrid cotton seeds. Nuziveedu Seeds has around
NSL Group. The US-headquartered fund is investing 1,000 employees.
an amount of $50 million, which can go upto $80 Nuziveedu Seeds claims to be the largest hybrid
million, for less than 25% stake in the company. seed company in India, and its distribution network
The deal is via a fresh issue of shares, and was includes nearly 25 stocking depots and 1,000
closed this week. NSL Group is a diversified group distributors. "India is focusing on improving its
and also has a presence in textiles, sugar, wind agriculture sector and is witnessing a significant
energy and infrastructure. increase in investments in it," said Akhil Gupta,
This is the second deal for Blackstone in as many Chairman and Managing Director of Blackstone
months. Last month, it agreed to buy out a division Advisors India Private Limited, in a release.
of CMS Computers. Both the investments are in
privately held companies.

GAME
CHANGER
Summit Partners Makes Debut, Invests $30M In Krishidhan Seeds

VC Circle, April 27, 2010 Amit Chaturvedy of Summit Partners will join the
KSL plans to utilise the fund for research & Krishidhan board as director.
development, technology and product-related KSL develops, produces and distributes
acquisitions. proprietary hybrid seeds of cotton and rice. It
India's agriculture space continues to attract claims a pan-India presence and offers a diversified
deal action. Summit Partners, a US private portfolio of over 120 products including field
equity fund with $11-billion assets under crops, vegetable seeds and crop nutrition. It has
management, has made its debut in India with a over 30,000 seed growers under its fold, and has
$30-million investment in Krishidhan Seeds Ltd a strong distribution network, with about 1,600
(KSL), a commercial seeds manufacturer based distributors and 25,000 retailers throughout the
in Maharashtra. Summit Partners will be taking country, a press statement said.
a minority stake in the seeds firm. KSL plans to It has reported consolidated revenues of Rs
utilise the fund for research and development, 279 crore (about $61 million) for the year ended
technology and product-related acquisitions, September 2009, and is expecting over Rs 400
international expansion, and other infrastructural crore (about $88 million) for the current financial
development activities. Following the investment, year.
Weather and insurance
Despite the increasing area under irrigation, India remains dependent on the monsoons for almost half its
arable area. A lack of appropriate forecasting leads to significant losses for the farmers, who are not able to
plant the right crop based on the weather forecast. India has invested only in macro forecasts which look
at district and regional level rainfall without providing forecasts at the more micro level. This creates a gap
in the weather forecasting market and consequently, the crop insurance business cannot take off. Crop
insurance has remained a social sector scheme which only sees new avatars.
Logistics
With the dismantling of the APMC Act in various states, private enterprises are now allowed to start
operating their own mandis. Creating a network of such mandis along with warehousing, financing and
procurement hubs helps aggregate the supply from the farmers and demand from the processors.
Driven by the needs of the processors, we expect significant standardization of the produce to take place:
This market currently lacks this signaling mechanism as the processors and farmers are fragmented.
Significant investments in creation of silo warehouses (where grains are stored in one large silo, rather than
in the 50 kg bags currently), thereby also helping reduce the cost of handling the grains. With the increased
demand for processed food (including dairy and poultry), there will be a significant impetus to the growth
of cold chains.

Cold comfort
Business Today, July 21, 2010 not when a clutch of entrepreneurs is attempting to plug
In 2001, Dev Lall founded Bakers Circle to make frozen snacks various gaps that exist in the cold chain. Sample: MJ Logistics,
and desserts that would be sold through the country's fast a third-party logistics services provider, has created 25,000
food chains, restaurants and bakers. The business didn't tonnes of capacity for cold storage and distribution at Palwal
exactly begin with a bang; Lall needed truckers who would in Haryana. These facilities are part of a larger logistics hub.
deliver his frozen products at minus 20 degrees Celsius. Funded and 90 per cent owned by Eredene Capital, a UK-
The few who were ready to take up the challenge were just based fund house that invests in logistics projects in India,
not up to the task. "To take our dough from Kashipur (in MJ Logistics intends to provide storage facilities at 18 to -25
Uttarakhand, where the company has its production unit) to, degrees Celsius to processed food players and retailers.
for instance, Hyderabad would take 15 days," points out Lall. The business case for cold chains is doubtless sound, but it's
The solution: Lall invested in partially building his own cold not for those looking for quick returns. It guzzles cash, and
chain, which today consists of seven refrigerated vehicles the gestation period is long. Anil Arora, Managing Director,
— leased back to truckers with a minimum guarantee. "We MJ Logistics, says Rs 85 crore has been invested in the facilities
can now do the Kashipur-Hyderabad journey in 96 hours, since inception more than two years ago. The company earns
and spend just 15 minutes for both loading and unloading," revenues on a pay-per-use basis, and the game plan is to work
says the plucky hotelierturned-entrepreneur, who worked in with organised players in food processing or those looking
the Hyatt chain in North America for six years before starting for value addition and making MJ a permanent link in their
Bakers Circle. supply chain. "If one is lucky, the business can mature in seven
Lall's experience underlines the bitter truth about the Indian years, but 10-15 years is a realistic time frame to become an
foods business — along with its sheer opportunity. The lack of established player," adds Arora.
refrigerated facilities for chilling, freezing and storing — the What works in favour of such players is that the lack of
three key links of the cold chain taking frozen products from modern cold chain facilities ensures optimum utilisation. "We
producer to consumer — also results in a colossal wastage function at 110 per cent of our capacity," says Ravi Kannan,
of eggs, fish, milk, and meat, of which India is amongst the CEO, Snowman Frozen Foods, a joint venture between
world's largest producers (see The Weakest Link). Gateway Distriparks of India, Mitsubishi Corp., Nichirei
If India is the second-largest producer of fruits and Logistics Group and Mitsubishi Logistics Corp. of Japan.
vegetables in the world, why is it that its share of global Snowman, which claims to be the first company to set up a
exports is minuscule — some 0.5 per cent for fruits and 1.7 pan-India distribution system for frozen and chilled foods, has
per cent for vegetables? Answer: Roughly a third of the 180 cold stores across 22 locations, and runs a fleet of some 150
million tonnes of fruits and vegetables grown go to waste in refrigerated trucks.
the absence of infrastructure to store these items for a longer Plans are afoot to put up another four warehouses by
period. investing a little over Rs 20 crore by next March. It may appear
The value of this post-harvest wastage was estimated at a lucrative opportunity, but the cold chain business is no walk
over Rs 45,000 crore by a Task Force Report on Development in the park. Industry observers reveal that giants like Reliance
of Cold Chain in India prepared by the government and the Retail and Aditya Birla Retail, who are attempting to set up
Confederation of Indian Industry in 2008. Another way to their own cold chain infrastructure, are going slow because of
look at it: The quantity of fruits and vegetables that go to the complexities of the business.
waste is more than the consumption of these food items in Sandeep Sabharwal, Managing Director of Sohan Lal
the United Kingdom. Commodity Management, a logistics and procurement firm
And then, whatever cold storage capacity exists in the that manages 70 warehouses, knows this and has moved
country is inadequate for most food items. Points out Atul away from managing cold storages. So while Sabharwal is
Khanna, Director, Global Cold Chain Alliance (India Chapter), bullish about growth in warehouses, he is wary of the cold
an international association of cold chain investors: "Most of chain infrastructure.
the capacity (nearly 80 per cent) is configured for potatoes "The issue is that the cold storages are often a single man
and there is not much value addition that they provide."
The good news is that it can't get any worse from here —

GAME
CHANGER
show or a family-owned facility and they do not want to let us too. "Cold storages, warehousing... are also attracting private
manage it. We might do dry-green units (that is, cold storages equity investments... There is a lot of development waiting to
in regions that have a naturally cool climate and so, do not take place," adds Mathur.
need cooling facilities for certain items) someday where due to Gagan Seksaria, Associate Director for transportation and
the climate we do not need a cold storage," Sabharwal says. logistics, at consulting firm KPMG, divides the cold chain into
Another problem with the cold chain initiatives is that they two segments — one that caters to businesses that need a
are fragmented, with hundreds of small players doing their temperature of 10-18 degrees Celsius; and the other that
own thing. Just one such entrepreneur is Gagan Pal Singh needs freezing capabilities of below zero, up to minus 20
Anand, Proprietor, Anand Frozen Food Carriers, who owns degrees Celsius. He feels that the first, which can be used
34 10-wheel trailers and does an annual turnover of Rs 5 to carry items like chocolates, is easier to manage: a slight
crore. He hauls frozen peas, meat, dairy products, cheese and change in temperature en route will not destroy the products.
chocolate, medicine, menthol oil, and yeast across the country. That may be one way to begin, but the big bucks are
Of late, Anand has hit a rough patch. "Road infrastructure is clearly at the colder end. Seksaria points out that large
still poor. Tyre companies have increased prices by 40 per cent, food processing and food retail companies (like McCain,
tolls have increased, and our freight prices do not go up in McDonalds and Domino's) are assisting entrepreneurs in the
tandem," he explains. sector through incentives and captive volume to develop their
From an investor's point of view, this might be the best time indepedent cold chain networks comprising warehousing and
to back a player and help him build that much needed scale. distribution of their products under required conditions. There
Gaurav Mathur, Managing Director of private equity fund is money to be made in cold chains, but only for those with an
India Equity Partners, explains that while scale was being built appetite for risk, and a hunger for quality and precision.
up at the front end (processed foods, quick service restaurants
et al) for some time, of late there is action at the back end,
Higher-value crops
As India becomes richer and demands higher-value food products, dairy, poultry and fruits and vegetables
will see a spike in demand. We have noted the sustained increase in prices of the above products over and
above the inflation in grains. We expect the trend to continue, as more and more consumers demand these
products.
The business in dairy will involve moving from trading in milk to increasing the proportion of milk consumed
as a value added product (like yoghurt or cheese). The poultry and the meat industry will benefit from the
increased demand (and ability to pay) for protein as also the creation of the supporting infrastructure of
cold chains. Increased fruit and vegetable consumption will propel food processing units to add value and
life to the products (juices, purees, etc.) The big push for indigenization will come from growing pulses as
the costs of imports soar.

Motilal Oswal Venture invested Rs 600mn in Parag Milk Foods
moneycontrol, June 4, 2008 products. Its product portfolio includes liquid milk
Funds managed and advised by Motilal Oswal and various dairy products such as milk powder,
Venture Capital Advisors Private Limited cheese, ghee, butter, cream, curd, butter milk
(“MOVCAPL”) and its associates, have invested and gulab jamun mix. Parag has a state-of-the-
Rs. 600 million in Parag Milk Foods Pvt. Ltd art Bhagyalaxmi dairy farm spread over an area
(“Parag/ Gowardhan”), one of the fastest growing of 30 acres and equipped with the latest rotary
dairy in the country and selling under the brand parlour for milking cows. This has been a path
“Gowardhan”. breaking initiative by the company and will put the
Parag, based out of Maharashtra, is one of the Company in the league of global dairy companies
few players that use 100% cow milk for all their once scaled up.
Carlyle Invests Rs 110Cr in Andhra’s Tirumala Milk Products

Excerpts from VC Circle, June 3, 2010 Sourcing is a critical element as liquid milk
The global PE major takes minority stake in the operations are essentially commoditized plays with
Rs 600-crore firm, among the top three players in lower margins. It is estimated that profit margins
South. of most domestic dairy operations fall between
Private equity giant Carlyle, through its Asia 3-5% usually. One avenue to improve the margin is
Growth Capital, is investing Rs 110 crore into entering into value-added products such as sweets,
Andhra Pradesh-based Tirumala Milk Products, icecreams and other milk derivatives such as butter
said at least two sources familiar with the and cheese, which is what firms like Tirumala are
transaction. Carlyle will take a minority stake in attempting to do.
the Rs 600-crore company started by four rural Headquartered in remote Narasaraopet in Guntur
entrepreneurs nearly 10 years back. district of Andhra Pradesh, Tirumala Milk Products
Tirumala Milk Products, the flagship of Tirumala Private Limited is perhaps one of the fastest
Dairy, is among the top three private dairy growing dairy enterprises which clocked a turnover
operations in south India growing at a CAGR of of Rs 470 crore in 2008-09 against Rs 373 crore in
nearly 30%. The Rs 1,000-crore Hatsun tops the list the previous fiscal. Its products covers the entire
while Tirumala and Heritage Dairy, in which former basket of dairy items including sachet milk, sweets,
Andhra Pradesh Chief Minister Chandrababu flavoured milk, yoghurt cups, milk powder, butter,
Naidu's family is a promoter, vie for the second ghee and butter oil. It is present in the southern
slot. markets of AP, Karnataka and Tamil Nadu. The
firm handles 7 Lakh liters of milk per day in its
Tirumala, with plants located on the border of
packing stations and dairy plant, apparently the
Andhra Pradesh with Tamil Nadu, caters to liquid
single largest plant in Andhra Pradesh. According
milk market in these two states apart from parts
to information on its website, the firm is in the
of Karnataka. From a pureplay liquid milk brand,
process of implementing an expansion programme
Tirumala has expanded into milk derivatives
that would include new product launches. The
venturing into the ice-cream market as well. "The
firm is focused on growing its brands and value
four original promoters come from interior Andhra
added businesses as part of its growth strategy.
with expertise in the dairy sector. Hence sourcing
In November 2007, Tirumala Dairy Pvt Ltd and
the right quantity of milk at the right price is one of
Tirumala Milk Products Pvt Ltd, which were earlier
their proven strengths," said an industry observer
separate entities, were merged as a single entity,
who has tracked Tirumala Dairy for a while.
Tirumala Milk Products (P) Ltd, to achieve greater
efficiencies.

GAME
CHANGER
Processed food
With the proportion of processed food still low in India, we expect a significant uptick in its consumption.
The industry will be driven both by convenience as also by the increased availability of refrigeration at
homes. The primary components of the processed food market will be (1) fruits and vegetables, (2) meat
and poultry, (3) dairy and poultry products, (4) marine products and (5) grains. Processed food also fetches
higher and better margins when exported.
US confectionery maker Hershey to acquire 51% in Godrej Beverages

for US$54 mn
VC Circle, February 28, 2007 stake, while the remaining 6 per cent to be held by
Soon after Norway's Orkla Foods acquired Mahendran.
MTR Foods, here is another international food Godrej Beverages & Food was formed last year
biggie entering India. US' largest chocolate and when Godrej Industries transferred its foods
confectionery-maker Hershey is acquiring a 51 per division to another group company Godrej Tea. The
cent stake in the food and beverage business of combined entity was renamed as Godrej Beverages
the Godrej group, reports The Economic Times. & Food Ltd. The company has sales of around Rs
A 51 per cent equity stake in Godrej Beverages & 400 crore, and has presence in categories such as
Food will cost Hershey Rs 238 crore or about $54 tea, edible oils, health drinks including soymilk,
million, and this values the former at at Rs 466 tomato puree, fruit drinks and bakery fats.
crore or $106 million.
Apparently, Hershey's main attraction towards
The sellers in the company include financial Godrej was its confectionery business as it will
investor IL&FS which holds about 40 per cent become the largest confectionery player in
stake, Godrej Industries and an individual investor India through this acquisition. Last year, Godrej
and senior Godrej executive A Mahendran. Post Beverages & Food had acquired India's largest
acquisition, Hershey would hold 51 per cent equity confectionery maker Nutrine for Rs 250 crore from
while Godrej Industries would hold 43 per cent the South based Reddy family.
“I, Akhilesh Tilotia, hereby certify that all of the views expressed in this report accurately reflect my personal
views about the subject company or companies and its or their securities. I also certify that no part of my
compensation was, is or will be, directly or indirectly, related to the specific recommendations or views
expressed in this report.”

have you
read our recent
GAMECHANGERS?
April 2010
‘365 million’ analyses India’s
readiness for its forthcoming
demographic dividend
May 2010
Indian Household Savings’ highlights that
US$10 tn is up for grabs in the next 15
years
May 2010 June 2010

‘Deluge of Opportunity’ Our walk on the wild side pitted
examines pricing and GameChanger’s football forecasting
regulation changes that model against tea leaves and coffee
could make water a viable grounds. Read to find out how we fared
business proposition
GAMECHANGER VOL I.V - SEPTEMBER 2010
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GAME

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

` Farm incomes are rising and with it, re-investment in agriculture

` Shrinking agricultural labour (thanks to government schemes that pull farm

` Food processing is increasing the life and value of food

The time is ripe. Take the green road.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

127 mn Exhibit 3 Agriculture value chain is very fragmented

Source: Industry estimates, Vision-2015: Ministry of Food Processing

Source: Kotak Institutional Equities estimates

Exhibit 6 Low yields in Indian farming—somewhat propped up by government intervention

Source: Discussion with landowners, KIE calculations

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: KPMG, Indiastat, Industry analysis

Source: Food Corporation of India, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

1. Agriculture: Promise of plenty 7

2. Inputs: Capital and credit lead the way 13

3. Cultivation: Seeds of opportunity 19

4. Logistics: Little movement 29

5. Marketing: Value-add attraction 35

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Agriculture Statistics at a Glance, 2009

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 2 India has vast scope for improving productivity

Source: Agriculture Statistics at a Glance, 2009

Source: Industry estimates, Vision-2015: Ministry of Food Processing

Second green revolution, led by price increases

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

Source: Kotak Institutional Equities estimates

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Agriculture return on investment is low—but better than cost of funds

Source: Discussion with landowners, KIE calculations

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

Will pan-India yields converge?

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 8 Profitability differs according to location as the price is common

India sets all-India

Land holdings are fragmenting…

This fragmentation has two significant implications:

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

…but credit is expanding

Source: Department of Agriculture and Cooperation

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 11 Credit is increasing to the marginal farmers at a higher pace

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 13 Use of hybrid seeds increasing rapidly

Source: Department of Agriculture and Cooperation, Planning Commission

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: KPMG, Indiastat, Industry analysis

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21

Exhibit 17 Consumption of nutrients has been skewed, this is expected to change

Source: Department of Fertilizers, Planning Commission, Crisil research

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Ministry of Finance

KOTAK INSTITUTIONAL EQUITIES RESEARCH 23

Soil quality is deteriorating….

Exhibit 20 Soil problems affect almost half of India’s land area

…but there is improvement on the water front

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH