Kaveri Seed Company Limited (KSCL) June 2021

Seed Industry Overview

Seed is the most important part of the agri input value chain which determines the quality of output and
yield to large extent and forms less than 5% of the total farming cost. Unlike other agri input segments
like fertilizer, irrigation equipment, tillers and small tractors, seed sector is not driven by govt subsidies.
Once the farmer is convinced about higher yields, he is willing to spend on better quality seeds.

In India, the share of organized seed market is estimated to be around USD 2.5bn. In terms of crops,
Cotton is the biggest segment followed by Maize and Paddy. Vegetables roughly account for USD 0.5bn
of value. Cotton is dominated by Indian players while crops like Maize, Rice and Millets is dominated by
MNCs with significant market share.

In India, commercial seeds only account for a minor share (25%) of the seed market and huge demand is
expected for good quality, branded seeds to drive the yields higher which are lagging the world averages.

Yields are lagging world averages

Key Competitors in Seeds Market

Crop wise Seed Market in India

Crop Key Players

Vegetables BASF, Seminis, Syngenta, Mahyco, VNR, Namdhari, Indo American, Accen HyVeg, Advanta
Cotton Rasi, Kaveri, Nuziveedu, Mahyco, Ajit, Shriram Bioseed, Ankur, Seedworks, Tierra, Metahelix
Maize Corteva, Bayer Monsanto, Syngenta, Shriram Bioseed, Kaveri, Limagrain, Rasi
Paddy (Rice) Bayer Monsanto, Corteva, VNR, Mahyco, Syngenta, Savannah, Metahelix, Rasi, Kaveri
Others Advanta, Crystal, Corteva, Bayer Monsanto, Metahelix

HITESH PATEL 1
Opportunities in seed industry are mostly driven by

 Increasing adoption of Hybrid Seeds

(Cotton 95%, Vegetables 70%, Maize 50%, Rice 8%)
 Enhancement in Seed Replacement Rate (SRR)
 High entry barrier due to long duration of R&D commercialization (7/8 years)

Seed Replacement Rate (SRR)

SRR is a measure of how much of the total cropped area was sown with certified seeds in
comparison to farm saved seeds. In simple terms it is a measure of cropped area covered with
quality seed. A better seed replacement rate shows a better utilization of the Certified / Quality
Seeds. Since certified seeds are better in productivity, the SRR is directly proportional to
productivity.

SRR for Major Crops - 2018 100%

100%
85%
79%
80%
57% 60%
60% 53%
40%
40% 33%
23% 24%
20%

0%

There is a large scope to increase the SRR in most of the crops which presents long runway for
growth.

High entry barrier

One of the prominent feature of the seed industry is the high entry barrier arising out of long
duration of R&D commercialization. Players with strong R&D will always be enjoying some sort of
MOAT.

 Lead time from R&D to commercial production is 7/8 years

 Requirement of wide area of network for diverse portfolio of seeds due to varied agro
climatic condition in India
 Seed production undertaken post comprehensive market trialing
 Complex process of developing an effective hybrids

HITESH PATEL 2
Is there any investment case for Kaveri Seed Company Ltd (KSCL) ?

KSCL is one of the few pure play listed seeds player in the agri input sector in India. It is mostly engaged
into research, production, processing and marketing of various high quality hybrid seeds like cotton,
paddy, maize, pearl millets, vegetables etc.

The story of the KSCL can be divided in two parts, pre and post FY15.

Between FY09-15, KSCL grew its revenue by 45% CAGR powered by Bt Cotton. There was a massive
tailwind for the seeds industry where Bt Cotton adoption was driving the volumes for the entire industry.
Companies with good R&D took the advantage and gained the market share on the back successful
product launches. KSCL entered this segment in FY07 and by FY15 it garnered around significant market
share of 18% with the help of its block buster brands like Jadoo and Jackpot, followed by Moneymaker
and ATM. Penetration of hybrid Bt cotton increased from 1% in FY02 to 95%+ around FY15.

KSCL - Revenue Trend

1,400 FY15-21 CAGR = -2%
1,159
1,200 1,036
1,010
1,000 929
818 808
711 743 703
800
600
372
400 234
123 162
200
-
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Revenue from Ops (Rs Crs)

KSCL - Bt cotton market share

20.0%
18.0%
16.5… 17.0%
16.0% 15.5%
14.4%
15.0%
15.0%
13.8%
10.0%
10.0%

5.0%
5.0% 3.0…
2.0%

0.0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

HITESH PATEL 3
In FY16 the dream run came to a halt driven by multiple issues

 FY16 was a second consecutive draught year after FY15 which caused lower cotton acreage, shift
from cotton to pulses, farmer down trading seeds, lower commodity prices specially cotton.
 Since the industry was carrying high inventory, lower cotton acreage led to severe competition to
liquidate inventory which led to credit sales and heavy discounts by many companies where KSCL
did not participate (in anticipation of bad debts) and lost market share.

These factors led to KSCL reporting 35%+ de growth in cotton volumes and revenue in FY16. Market share
in cotton came down to 13.8% from 18%. This was just a temporary pause caused by industry dynamics
and inherent risk of weather related issues in agri input sector. However, what caused a lasting impact on
stock price, return ratios, valuation and investor perception of the stock was following

1. Govt regulation on cotton seed pricing and resultant dispute with technology provider Monsanto
over royalty payments.

In 2015, Govt slashed the royalty paid by hybrid companies to technology provider Monsanto by
70% in a bid to regulate the prices. This was followed by litigation between hybrid companies and
Monsanto and between Monsanto and Govt. With the help of Cotton Seed Price Control Order
2015, the govt has been regulating the selling price of Bt Cotton every year effectively capping
the margins of seed players.

Cotton seeds contributed more than 60% of the revenues of KSCL in FY15 and this regulation
effectively meant that
 cotton seed revenues had limited growth visibility due to saturation in Bt cotton
penetration
 govt regulation on prices
 Monsanto refusing to introduce newer technologies in Indian market citing excessive
regulation

Following two years were difficult for the company as the RoCE fell from 41% in FY15 to 8% in
FY17. This whole episode also failed the proposed IPO of one of the largest seed player Nuziweedu
which is backed by private equity firm Blackstone.

KSCL - RoCE trend

50.0%

40.0% 41.0%
41.6%
38.4%
30.0%

20.0% 18.6%

10.0% 8.3%

0.0%
FY13 FY14 FY15 FY16 FY17

HITESH PATEL 4
 2. Forensic audit initiated by SEBI
In December 2015, SEBI initiated forensic audit of the company by appointing independent
auditor. This spooked the investor sentiment and stock price followed. There was doubt about
the accounting policies followed by the company and actual cash on books. Over the years there
has been no update or comment by the SEBI on the findings of this exercise. The company started
publishing the cash investment details every quarter and also initiated buyback from FY18.

Post the FY15-16 fiasco over price caps and changed investor perception, the company is working to
address the issues of over dependence of cotton seeds revenue and returning the cash to shareholders.
Here’s how the company is trying to stage a comeback.

1. Rising share of non-cotton revenues.

It has guided to reduce the revenue share of cotton seeds to 40% in next few years and intends
to grow the non-cotton portfolio by 15/20% CAGR by focusing on hybrid paddy and vegetable
seeds. Management has been walking the talk by addressing the issue of over dependence on the
cotton seed revenue by focusing on hybrid paddy, maize and vegetable seeds. Non-cotton
portfolio commands high margin of 30%+ improving the margin profile of the company.

Cotton vs Non Cotton

100%

80% 39% 41% 46% 41% 48% 49% 55%

60%

40%
61% 59% 54% 59% 52% 51% 45%
20%

0%
FY15 FY16 FY17 FY18 FY19 FY20 FY21
Cotton Non Cotton

Cropwise Revenue Share

100%
13% 10% 11% 10% 7%
17%
26% 10%
80% 4% 8% 15% 17% 24%
13% 19% 19%
25% 20% 20%
60% 21%

40%
61% 59% 59%
54% 52% 51% 45%
20%

0%
FY15 FY16 FY17 FY18 FY19 FY20 FY21
Cotton Maize Rice (Hybrid + Selection) Others

HITESH PATEL 5
 2. Big opportunity in Hybrid Rice

Rice accounts for around 50% of the Indian agriculture GDP which makes it important for the
private sector in seeds and agri biotech industry. India is also second largest producer and
consumer of rice in the world along with 30% share in global rice exports which makes it important
commercial crop.

 The area under cultivation for rice is more than 3x of cotton at 43 mn hectares
 Out of this just 3.5 mn is the share of hybrid rice (8% of the total area under cultivation)

In this segment KSCL sells both hybrid and selection rice which contributed 8% of the revenue put
together in FY17 which increased to 24% in FY21.

Rice contribution
250.0 24% 25%

200.0 20%
17% 101.7
15%
150.0 15%
10% 65.8
100.0 8% 10%
64.5
132.5
50.0 42.7 5%
28.0 85.0
34.0 51.4
28.1
- 0%
FY17 FY18 FY19 FY20 FY21
Hybrid Rice Selection Rice Total Rice as % of Revenue

It launched hybrid rice KHP468 in FY18 which was instant success in the market and has been
driving the revenue (~50% of hybrid rice revenue in FY21) of the segment since then along with
other brands launched subsequently.

 Hybrid rice revenue has grown at 47% CAGR in last 5 years powered by KHP468
 Market share of company increased from 4% in FY17 to 10% in FY21

At the end of FY21, Rice portfolio contributed 24% of the revenues while Hybrid and selection rice
contributing 13% and 10% respectively.

HITESH PATEL 6
 Hybrid Rice 5 Years CAGR - 47%
150.0 132.5 80%
66%
56% 60%
100.0 51% 85.0
40%
21%
51.4 20%
50.0 34.0
28.1
0%
-12%
- -20%
FY17 FY18 FY19 FY20 FY21
Hybrid Rice Growth Rate

Hybrid Rice - Market Share

12.0%
10.0%
10.0%
8.0%
6.0%
4.1%
4.0%
2.0%
0.0%
FY17 FY21

Management is guiding for the revenue CAGR of 20/25% for next few years on the back of new
product launches and good performance of existing brands on small base. Management is
aiming for the top slot in next 5/7 years which is currently held by Bayer with 28% market share.

3. Three consecutive buybacks in since FY18

Addressing the concern on the cash position of the company, the management has done 3
buyback in last 4 years returning close to 600 crs to shareholders and reducing the equity by 12.6%

FY18 FY19 FY20 Total

Buyback Amt (Rs Crs) 200 200 196 596
No of Shs 2,962,963 2,963,000 2,800,000 8,725,963
Price 675 675 700 683

Dividend Payout (Rs Crs) 24 23 23 70

Buyback + Dividend (Rs Crs) 224 223 219 666

PAT 211 217 259 688

HITESH PATEL 7
 Between FY18-20, the company has returned almost 100% of the profits in the form of buyback
and dividends. At the end of FY21, the company has 533 crs cash on books and hopes to come
out with policy to further utilize the cash by end of 1QFY22.

4. Success of a seed company depends on 3 things

1. R&D
2. Production
3. Distribution

R&D forms the backbone of the seed company as product pipeline determines the future success
of the products. The company has ramped up the investment in R&D from 1.6% of the sales in
FY16 to 3% of sales in FY21.

KSCL - R&D Spend

30 4.0%
3.0%
3.0%
20 2.3%
1.4% 1.7% 2.0%
1.6% 1.8%
1.4% 1.0%
10
1.0%

- 0.0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
R&D Spend As % of Sales

There are more than 500 companies active in the market but since the cotton price regulation in
2015, most of them are finding it difficult to invest in R&D since cotton profitability has taken a
hit. KSCL is one of the few who is able to hold the market share in cotton and kept investing time
and money in R&D activities to maintain the good quality germplasm and pipeline of products.

Ability to predict demand is extremely important so that company can pre order the seeds and
process the same for the market in peak season. Wrong assessment can lead to missing out on
good season or high inventory writeoffs depending on the situation at the time of sowing.

On the production front it has tied up with farmers for area upto 1 lac acres mostly in and around
Andhra Pradesh and Telengana. It also has around 120 trial centers pan India to conduct seed test
in different climatic conditions.

For efficient distribution the company has ramped up warehousing capacity to 10 lacs sq ft in FY20
from 5 lacs sq ft in FY16. This includes Dehumidified, climate-controlled storage facilities pan
India. Retail and distributor touch points across the country has increased from 25,000 to 40,000
in the same period.

HITESH PATEL 8
Important things to track

 Capital allocation policy since the company is holding significant cash balance of 500+ crs in
balance sheet and the business doesn’t require much reinvestment
 Progress on cotton to non-cotton shift in revenues
 New product launches in hybrid rice and market share (FY21 – 10%)
 Progress on maize and vegetable portfolio

Risks to consider while looking at KSCL

1. One of the most prominent risk to consider while looking at KSCL is that the company treats its
income as income from agriculture and doesn’t pay any taxes on it. It can run in problem with tax
authorities regarding the same. Its prudent to look their profit numbers after adjusting for
nominal tax rate.

2. Govt has introduced price control on Bt cotton seeds in 2015. If govt introduces the same in other
crops such as maize, rice or vegetables, it can hurt the profitability in meaningful way. Chances of
happening this is low considering the fact that seeds constitutes less than 5% of the total cost of
farming on an average and such measures can hurt the R&D investments by companies.

3. There has been no update regarding the forensic audit conducted by SEBI in 2015. Any negative
update on the same or fresh initiation of the audit can negatively affect the stock price. The
company post this episode (Q2FY16 concall) has promised to induct one of the big 4 as an auditor
which has not happened till date.

4. Agriculture dependent businesses gets impacted by adverse climatic condition from time to time.
This can negatively affect the area under cultivation resulting to lower demand and high inventory
writeoffs.

5. The companies with high cash on balance sheet always runs the risk of capital misallocation. Till
now the company has avoided the urge to do reckless M&A activities and preferred to do
buybacks. Future is always unpredictable.

HITESH PATEL 9
Data source and references / further reading

 Company annual reports, presentations, concalls, management interviews

 ISTAP – Presentation by RS Paroda
 Nuziweedu Seeds DRHP
 Agriculture Infographic – IBEF
 Q2FY16 Concall
 Kaveri Seeds: Sowing new seeds
 Price Policy for Kharif Season -2018/19
 Crop biotechnology to Ensure Food Security
 Screener.in
 Uncertainties galore at Kaveri seed
 Royalty mess at Kaveri seeds by Ravi Duggirala

Disclaimer

 This report is meant for Information purpose only. No part of this should be considered as
investment advice. I am not a SEBI registered Analyst
 Please do your own due diligence and consult your investment advisor before taking any
action
 Invested

hitesh@hiteshpatel.in

HITESH PATEL 10