india seeds sector - credit suisse
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21 January 2015
Asia Pacific/India
Equity Research
Agricultural Products & Agribusiness
India Seeds Sector THEME
Low penetration offers ample opportunity
■ Significant scope for growth. The India seeds sector is currently estimated to be a US$2 bn market or 4% of the global seed market, as per International Seed Federation (ISF) despite it having 11% of the global arable area. Increasing hybrid seed penetration driven by the food demand-supply mismatch may correct this anomaly somewhat. The India seeds industry is currently growing at 12% while the global seed industry growth is c5%.
■ Key hybrid/GM seeds in India. Penetration is high in cotton (>90%) but very low in paddy (<5%). Corn, paddy and vegetables should drive the next leg of growth. Despite high penetration, high-density planting should be a driver for cottonseeds.
■ Key factors for a seed company. A new successful hybrid takes eight to ten years and hence products introduced in the previous year or two determine growth for the next two to three years. R&D capability determines longer-term growth though this is very difficult to evaluate. Other success factors include distribution, branding and working capital management.
■ Initiating coverage on Kaveri Seeds with OUTPERFORM and a target price of Rs1,100, ~40% upside potential. The India seeds sector is highly fragmented with 200 players. However, some ten players control over 50% of the market. Kaveri is the largest listed pure play and has reported strong growth and financials. We expect Kaveri to register 20%/29% revenue/net income CAGRs over FY14-17. It had net cash of Rs3 bn (as at Mar-14) with strong operating cash generation, high EBITDA margins (~25%) and high returns (RoE and ROCE of 45%+). Our target price is based on 0.75x 2Y PEG or 17x FY17E earnings. Key risks are poor cottonseed demand in FY16 and the inability to replicate their current success with new seeds.
Figure 1: Major seed companies in India
Company Mkt cap ADTO Sales^ EBITDA Seed rev. RoE^ PE (x) EPS cagr
US$ mn US$ mn US$ mn margin^ contri.^ FY16 FY14-16E
Bayer 2,082 1.2 521 11% 1% 16% 28 29%
Kaveri Seed* 863 2.5 167 22% 96% 49% 14 35%
Monsanto In 881 3.9 95 25% 60% 35% 29 21%
Rallis India 684 1.4 286 15% 10% 23% 19 22%
Advanta In 492 0.4 206 14% 94% 9% na na
JK Agri Gen. 25 0.0 31 14% 97% 29% na na
^Data for FY14 / CY13; na: not available; Source: Company data, Thomson Reuters, *Credit
Suisse estimates
Research Analysts
Anantha Narayan
91 22 6777 3730
Akhil Kalluri
91 22 6777 3747
21 January 2015
India Seeds Sector 2
Focus charts and table Figure 2: India accounts for just 4% of the global seeds
industry, despite accounting for 11% of global arable land
Figure 3: Cotton—the largest category; paddy—with most
potential for growth
27%
22%
6% 6% 5% 4%3% 3% 2% 2%
11%
8%
1%5% 3%
11%
0% 1%3%
1%
0%
5%
10%
15%
20%
25%
30%
US
A
Chi
na
Fra
nce
Bra
zil
Can
ada
Indi
a
Japa
n
Ger
man
y
Arg
entin
a
Italy
Contribution to seed industry (%) Contribution to global arable land (%)
Cotton30%
Paddy8%
Maize10%
Vegetable14%
Others38%
Indian seed industry - Cropwise split
Source: International Seed Federation (Jun'13), World Bank (2012) Source: Nuziveedu Seeds, Industry, Credit Suisse research
Figure 4: Cottonseed growth driven by a sharp rise in
cotton acreage as well as Bt adoption
Figure 5: Paddy hybridisation at mere 5% in India
provides huge potential for growth
0% 0% 1% 1% 6%15%
42%
66%
81% 82%85% 88%
93%
0%
20%
40%
60%
80%
100%
0
2
4
6
8
10
12
14
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
(mn
hect
ares
)
Cotton production area BT as a % of total area (RHS)
0.25 0.3 0.4 0.60.9
1.31.6
2.1
2.8 2.93.2
3.6
4.4
5
0
1
2
3
4
5
6
0
10000
20000
30000
40000
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
(%)
(MT
)
Market size Hybridisation (RHS)
Source: ISAAA; Flemish Institute for Biotechnology Source: Nuziveedu Seeds
Figure 6: Key success factors for a seed company
Kaveri Nuziveedu Monsanto Advanta Metahelix JK Agri
Key crops Cotton, Corn Cotton Corn Cereal, Oilseeds Corn, Paddy Cotton, Vegetable
Popular brand Jadoo (Cotton) Mallika (Cotton) Dekalb (Corn) RIL - 019 (Corn) JKCH - 1947 (Cotton)
Number of seed varieties 90+ 350+ 20 300+ 30+ NA
R&D spend (Rs mn) 143 72 288 1,095 103 110
R&D as a % of sales 1.4% 0.7% 5.0% 8.7% 4.6% 5.8%
Number of dealers 15,000+ 55,000+ NA NA 30,000+ retailers 30,000 dealers
A&P spend (Rs mn) 346 NA 203 256 260 103
A&P as a % of sales 3% NA 3% 2% 12% 5%
Net working capital days 29 (2) 13 113 21 77
FY13 data for Nuziveedu; 2013 data for Advanta; Source: Company data, Credit Suisse research
Figure 7: KVRI's strong growth momentum to continue... Figure 8: …attractive financial metrics; likely to sustain
32 44
59
91
42
19 20 20 17
46 37
120
63
43
23 22
0
20
40
60
80
100
120
140
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(%)
Revenue growth Earnings growth
0
10
20
30
40
50
60
-1,000
0
1,000
2,000
3,000
4,000
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(%)
(Rs
mn)
FCF RoE (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
21 January 2015
India Seeds Sector 3
Indian seeds: Low penetration still Significant scope for growth
The India seeds sector is currently estimated to be a US$2 bn market or 4% of the global
seed market, as per ISF, despite it having 11% of the global arable area. We believe this
mismatch will be corrected somewhat with an increase in hybrid seed penetration in multiple
crops to address the rising food demand-supply mismatch. The India seeds industry is
currently growing at 12% while the global seed industry growth is c5%. High-density planting
in cotton, demand for corn, and higher seed penetration in paddy should be key growth
drivers of the industry.
Key hybrid/GM seeds in India
In India, hybrid seed penetration is high in cotton (>90%), corn (c60%), few cereals such
as sorghum, pearl millet, and oil seeds such as sunflower (hybridisation >80%). However,
penetration is very low in main cereals such as paddy and wheat (<5%). With cotton
hybridisation almost reaching saturation (Bt cotton is sown over 90% of the cotton area in
the country), corn, paddy and vegetables should drive the next leg of growth in the seed
industry in India.
Key factors for a seed company
Given that the process to develop a new seed takes eight to ten years and the success of
a new seed is gradual after being introduced in the market, near-term growth (two to three
years) is more likely driven by the products that have been introduced in the previous one
to three years and which are showing signs of success. A seed company needs to have a
continuous and high-quality pipeline of hybrids—a company's germplasm bank and its
R&D capability is an important source of differentiation. Unfortunately, we find it difficult to
judge this capability. The presence of a strong distribution network not only helps the
company in making its product available widely but also helps in incremental sales as end-
retailers sometimes act as financers to the farmers. Advertising and promotional activities
are essential to distinguish a particular company's seed from those of its competitors, to
educate farmers on best practices to ensure better productivity and to induce the farmers
to buy particular seeds. The ability to accurately assess demand is critical to avoid losses
of sale or significant inventory write-offs.
Initiating coverage on Kaveri Seeds
The India seeds industry is highly fragmented with the presence of over 200 players.
However, some ten companies control over 50% of the market. Some of the other key
players in India are Bayer, Monsanto, Pioneer, Syngenta among MNCs, and Ajeet, Ankur,
JK Agri Tech, Metahelix, Nuziveedu and Rasi among domestic players.
We initiate coverage on Kaveri Seeds with an OUTPERFORM rating and a target price of
Rs1,100, implying 40% upside potential. Our TP is based on 2Y PEG of 0.75x and implies
FY17E P/E multiple of 17x. Kaveri Seeds has a turnover of over Rs10 bn, a strong
distribution network of 15,000+ dealers and a significant market share in cotton, corn,
millet and paddy seeds. We expect Kaveri to register 20%/29% revenue/net income
CAGRs over FY14-17. Kaveri had net cash of Rs3 bn (as at Mar-14) with strong operating
cash generation, high EBITDA margins (~25%) and high returns (RoE and ROCE of
45%+). Given the likely strong earnings growth and low capex requirements (~Rs400-500
mn annual capex), we believe the company's strong financial metrics would sustain.
Key risks are poor cottonseed demand in FY16 due to falling prices and the company's
inability to replicate the current success with new seeds. The founders are also looking to
sell down their equity to fund another venture which could create a stock overhang.
11% of global arable land
but just 4% of the seed
industry
Corn, paddy and vegetables
should drive the next leg of
growth
Products introduced in the
past year or two determine
growth for the next 2-3
years; R&D capability
determines the longer-term
growth
21 January 2015
India Seeds Sector 4
Significant scope for growth 11% of global arable land but just 4% of the seeds
industry
The International Seed Federation (ISF) estimates the global seeds market size at US$45
bn with the US and China accounting for about 50%. This is despite these two countries
having only about 20% of the total arable land in the world. On the other hand, the India
seeds industry is estimated to be a US$2 bn market or 4% of the global market as per ISF
despite it having 11% of the global arable area. We believe this mismatch will be corrected
somewhat with the increase in hybrid seed penetration in multiple crops to address the
rising food demand-supply mismatch. The India seeds industry is currently growing at 12%
while the global seed industry growth is c5%.
Figure 9: India accounts for just 4% of the global seed
industry…
Figure 10: …despite having 11% of global arable land
USA27%
China22%
France6%
Brazil6%Canada
5%
India4%
Japan3%
Germany3%
Argentina2%
Italy2%
Others20%
Market size US$45bn
United States11% China
8%
France1%
Brazil5%
Canada3%
India11%
Japan0%
Germany1%
Argentina3%
Italy1%
Others56%
Data as of Jun-13, Source: International Seed Federation, Credit
Suisse research
Source: World Bank (2012), Credit Suisse research
Multiple levers for growth
Agriculture plays a very important role in India, contributing to 14% of India's GDP (global
average of 3%) and accounting for about 50% of employment. Due to a stagnant arable
land and a constantly increasing population, the per capita arable land has been declining.
This, coupled with poor crop productivity, should lead to pressure on food supply, in our
view. Crop productivity should improve due to a gradual improvement in the seed
replacement rate, usage of better quality seeds resulting in higher yields, saving crop loss
because of weeds, pests and insects, and improvement in irrigation. Thus, hybrid seeds
should play an important role.
The adoption of Bt cotton is currently driving most of the sector growth. Going forward, the
higher adoption of cotton through techniques such as high-density planting, higher
demand for corn, and greater hybrid seed penetration in crops such as paddy would be
the key growth drivers for the industry, in our view.
Increasing hybrid seed
penetration driven by food
demand-supply mismatch
may correct this somewhat
High-density planting in
cotton, demand for corn and
higher seed penetration in
paddy are key drivers
21 January 2015
India Seeds Sector 5
Figure 11: Per capita arable land in India lags the world
average
Figure 12: Significant scope for yield improvement in
India
0.84
0.49
0.37
0.21
0.15 0.13 0.12 0.08
0.20
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Rus
sia
Uni
ted
Sta
tes
Bra
zil
Eur
opea
n U
nion
Low
er m
iddl
ein
com
e Indi
a
Sou
th A
sia
Chi
na
Wor
ld
Arable land per capita (hectares)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Uni
ted
Sta
tes
Chi
na
Eur
opea
n U
nion
Bra
zil
Low
er m
iddl
ein
com
e
Sou
th A
sia
Indi
a
Rus
sian
Fed
erat
ion
Wor
ld
Cereal yield (Kg/hectare)
Source: World bank (2011), Credit Suisse research Source: World bank (2012), Credit Suisse research
Figure 13: The India seeds industry has been witnessing a
15% CAGR over the past three years
Figure 14: Cotton seed is the largest category in India and
paddy should see the most growth potential
60
75
96105
120
135
0%
5%
10%
15%
20%
25%
30%
0
20
40
60
80
100
120
140
160
FY10 FY11 FY12 FY13 FY14 FY15E
(Rs
bn)
Indian Seed Industry Growth (RHS)
Cotton30%
Paddy8%
Maize10%
Vegetable14%
Others38%
Indian seed industry - Cropwise split
Source: National Seeds Association of India, Nuziveedu Seeds, Credit
Suisse research
Source: Nuziveedu Seeds, Industry data, Credit Suisse research
21 January 2015
India Seeds Sector 6
Key hybrid/GM seeds in India Globally, hybrid/GM seed penetration is high in corn, soy, cotton and canola while crops
such as vegetables and paddy (rice) should drive the next leg of growth. Hybrid seed
penetration in crops such as wheat is very low.
In India, hybrid seed penetration is high in cotton (>90%), corn (c60%), few cereals such
as sorghum, pearl millet, and oil seeds such as sunflower (hybridisation >80%). However,
penetration is very low in major cereals such as paddy and wheat (<5%). With cotton
hybridisation almost reaching saturation (Bt cotton is sown over 90% of the cotton area in
the country), corn, paddy and vegetables should drive the next leg of sector growth.
Cotton has been the key driver for the sector
India is the second-largest producer of cotton in the world, accounting for more than one-
third of the global cotton crop area in 2012. Cotton productivity has increased by over 40%
over the past ten years, driven mostly by the adoption of Bt cotton (over 90% penetration).
The Bt cotton adoption has helped the industry improve yields and reduce the usage of
insecticides significantly, by 70-80% as per a report by ISAAA (International Service for
the Acquisition of Agri-biotech Applications). Cottonseed accounts for over 30% of the total
Indian hybrid seed market.
Cottonseed pricing
Cottonseed pricing in India is regulated with a 450 gm packet of BG-II priced at Rs930-
1,000, varying from state to state. Until 2005, Mahyco-Monsanto Biotech (MMB), the entity
that introduced Bt cotton in India in 2002, dominated the market either through direct sales
of hybrid seeds or through sub-licensing to private companies. In 2006, the price of a Bt
cotton seed packet was Rs1,600 (4x the price of non-BT hybrid), of which Rs1,250 was
MMB's charge. The state of Andhra Pradesh imposed a ceiling of Rs750 on Bt cotton in
2006 which was subject to change every year based on factors such as production cost of
seeds and trait value; gradually, other states imposed a similar ceiling. Currently MMB
charges a royalty of about Rs185 per packet, i.e., about 20%.
Farmer-level economics
The rapid adoption of Bt cotton in India (90% in ten years) has been mainly attributed to
the significant benefits achieved by the farmers due to seeds. A farmer, as per 12 studies
conducted by public institutes over 1998-2010, is estimated to enjoy an incremental
benefit of about US$75-250 per ha, effectively increasing profits per hectare by 70-135%,
mainly due to higher yields and a significant reduction in the cost of insecticides.
Growth drivers
As penetration is already 90%, there is little room for increasing hybridisation to drive
incremental growth for cottonseeds. Nonetheless, the cottonseed industry should continue
to see growth due to the following drivers:
■ New developments such as high-density cotton plantation under which the number of
cottonseeds sown per acre should be doubled resulting in higher output per acre.
Significant farmer education is required to achieve this.
■ The under-approval BGII RRF cottonseed (this is the third generation Bt seed from
cotton) should help solve the issue of weeds which in turn will help reduce the cost of
labour as weeding is primarily done manually in India.
Corn, paddy and vegetables
should drive the next leg of
growth
90% penetration and 30% of
the total seed market
Monsanto in India charges
20% royalty
Bt cotton has reportedly
doubled profits per acre
Penetration is already high
but high-density plantation
and the next-gen Bt seed
should help incremental
growth
21 January 2015
India Seeds Sector 7
Major players
While the industry is highly fragmented, Indian companies dominate the cottonseed
market. Nuziveedu and Kaveri Seeds are the two largest cottonseed companies in India
with a ~20% market share each on a pan-India basis and Ajeet and Ankur Seeds are other
large players with a ~10% market share each. However, MMB owns the Bt cotton trait and
all other seed companies source it from the company.
Figure 15: Sharp rise in cotton acreage as well as Bt
adoption over the past few years
Figure 16: India significantly lags global peers on maize
yields due to low hybrid adoption
0% 0% 1% 1%6%
15%
42%
66%
81%82%
85% 88%93%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
2
4
6
8
10
12
14
FY
01
FY
02
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FY
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FY
05
FY
06
FY
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FY
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FY
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FY
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FY
11
FY
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FY
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(mn
hect
ares
)
Cotton production area BT as a % of total area (RHS)
10
6.66
4.8
2.5
5.5
85% BT15% SCH
100% SCH 100% SCH 100% BT 30% SCH
0
2
4
6
8
10
12
US EU China Brazil India World
MT
/Ha
Source: ISAAA, Flemish Institute for Biotechnology * BT – GM seed; SCH – Single cross hybrid; Source: USDA, FICCI
Coarse cereals: Corn is driving growth
Coarse cereals comprise crops such as maize (or corn), millets, bajra, and ragi. While the
area under coverage of these crops has been constantly falling, productivity has been
increasing over the past few years across almost most coarse cereals. The most popular
of the coarse cereals is maize, accounting for more than 50% of the segment volumes.
India is the sixth-largest producer and the fifth-largest consumer of maize in the world. The
area under cultivation, production and productivity of maize has seen 3%, 6% and 3%
CAGRs, respectively, over the past ten years.
Farmer level economics
As per Monsanto, farmers in states such as Maharashtra, J&K, Orissa and UP have
enjoyed an incremental benefit of Rs5,000-7,000/acre or 40-60%, due to the adoption of
hybrid corn with benefits mainly accruing on account of higher yields.
Growth drivers
■ Maize in India is primarily used as a feed for poultry and cattle (accounting for 60% of
total corn demand) and in production of substances such as starch and ethanol. With
chicken as one of the primary sources of protein in India, demand for poultry is likely to
continue increasing. Poultry feed's share in maize demand has remained at ~40–50%
over the past four to five years. Maize starch is considered as a versatile raw material
with applications across multiple industries such as textiles, food, pharmaceuticals and
paper. Maize has 60-65% starch content and hence cannot be easily substituted by
other commodities. Demand for starch is likely another driver for maize demand.
■ India is the fourth-largest exporter of maize after the US, Brazil and Ukraine, with
exports doubling over the past five years. While China accounts for 22% of the world
maize production, it is also one of the largest importers of maize. Indian exports have
varied from 12-20% of corn production over the past five years and the export
Maize forms 50% of this
segment
Both, increasing maize
demand and production,
and increasing hybridisation
should help accelerate
growth
21 January 2015
India Seeds Sector 8
opportunity is likely to remain sizeable. Indonesia, Malaysia and Vietnam are the
largest export destinations for India accounting for 80% of exports. Exports to other
major corn importers such as Japan, Korea and China should drive maize volumes
going forward.
■ The government has been encouraging maize production in place of paddy due to the
significantly lower water consumption during production. The MSP (Minimum Support
Price) for maize was fixed at the same level as that for paddy for the first time in FY14
at Rs1,310/quintal as against the usual 5-15% discount over the past seven years. For
FY15, the government has set the paddy MSP at Rs1,360/quintal and maize at
Rs1,310/quintal, with a difference of about 4%.
■ Besides growth in maize demand and production, an increase in hybridisation is likely
to be another driver for the industry. India's maize hybridisation stands at 60% as
against nearly 100% in other large countries or regions such as the US, EU, China
and Brazil.
■ The adoption of single cross corn (used mostly in the rabi season when the crop is
dependent on irrigation), which has a ~50% higher yield versus other variants, is
expected to increase (currently, about 50% of hybrid corn seeds in volume terms are
single cross) with rising rabi corn crop and seed companies focused on developing
more robust kharif variants of such seeds.
■ The approval of GM corn, while only a longer-term possibility, should result in
significant growth for the corn seed industry, similar to what was seen in Bt cotton.
Major players
International players dominate the India maize industry with Pioneer (a subsidiary of
DuPont) and Monsanto being market leaders with over 15-20% market share each and
Syngenta having about a 12-13% market share. Among the Indian companies, Kaveri
Seeds is a large player with about 12% market share.
21 January 2015
India Seeds Sector 9
Paddy should be the next big opportunity
India is the second-largest producer and consumer of rice in the world accounting for
~20% of global production. Rice would be the next big opportunity for the India seeds
sector, in our view, mainly due to low yields vis-à-vis the global average, and significantly
low hybridisation levels (5% vs. c65% in China).
Figure 17: Paddy—India contributes to 20% of global
production but has significant scope to improve yields
Figure 18: At mere 5%, hybridisation potential in paddy is
huge
4.4
6.7
3.6
5.1
2.9
5.6 29
21
10
5 6
0
5
10
15
20
25
30
35
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Wor
ld
Chi
na
Indi
a
Indo
nesi
a
Ban
glad
esh
Vie
tnam
(Con
trib
utio
n to
glo
bal p
rodu
ctio
n (%
)
(Ton
nes
per
hect
are)
Paddy
Yield Production (%)
0.25 0.3 0.40.6
0.91.3
1.6
2.1
2.8 2.93.2
3.6
4.4
5
0
1
2
3
4
5
6
0
5000
10000
15000
20000
25000
30000
35000
40000
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
(%)
(MT
)
Market size Hybridisation (RHS)
Source: ISAAA Source: Nuziveedu Seeds
Farmer economics
As per a report by the Directorate of Rice Research, hybrid seeds should result in a yield
advantage of 1-1.5 t/ha, which could translate into an incremental income of Rs8,000-
12,000/ha or 70-90%. As per Nuziveedu Seeds and Bayer CropScience, farmers will gain
up to Rs10,000/acre.
Growth drivers
■ Higher hybrid seed penetration: Current penetration is very low (5% of total seeds
used) mainly due to issues with the crop quality (issues such as difference in taste and
soggy rice). The hybrid seed adoption is higher in Bihar, Jharkhand, Chhattisgarh and
Uttar Pradesh and the seeds have reportedly resulted in average yields of 4.8 t/ha vs.
the national average of 3.6 t/ha. As per Bayer CropScience, hybrid rice has a 15-35%
higher yield versus conventional inbred varieties.
■ The adoption of alternate techniques such as Direct Seeded Rice (DSR) is increasing
in India to reduce water consumption. For paddy, initial seeds are germinated in a
nursery for up to four weeks and then the saplings are transplanted to the fields that
have standing water. With a gradual reduction in ground water availability and rising
costs of labour (transplanting is a labour-intensive process), the industry is adopting
DSR. While the methodology is likely to reduce water usage and labour requirement,
DSR results in a problem of increased weeds. However, the benefits outweigh the cost
of weedicides.
Major players
Globally, Syngenta and Bayer are the large players in hybrid seeds. Bayer is a major
player in the India rice hybrid seeds industry but almost all major seed companies such as
Kaveri, Nuziveedu and Rallis have a presence in this category.
Hybridisation in paddy is just
5%
Hybrid seeds should help
farmers earn an additional
Rs10,000/acre
21 January 2015
India Seeds Sector 10
Other crops
Vegetables
The global vegetable seeds market, estimated at about US$5 bn, as per Bayer
CropScience, is expected to witness a 7-8% CAGR over the next ten years, driven by
increased usage of hybrid seeds. As per Bayer CropScience, of the estimated increase in
the vegetable market size over 2011-25, China will account for 40% and India 7%. The
increase in acreage and higher hybridisation with increasing urbanisation are likely to be
key demand drivers in China and India.
Higher growth in the usage of fruits and vegetables is associated with improvement in
income. Besides higher yields, desirable characteristics from hybrid vegetable seeds
include resistance to pests and diseases, uniformity of the product in terms of colour, size,
shape, and taste, improved shelf life, and higher nutritional.
Figure 19: The global vegetable seeds market should
witness a 7-8% CAGR over 2011-25E
Figure 20: China will account for 40% of this growth and
India 7% (US$500 mn)
4.6
13.3
1.4
2.8
4.5
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2011E 2011-15E 2016-20E 2021-25E 2025E
Veg
etab
le s
eed
mar
ket s
ize
(US
$bn)
China41%
Rest of APAC10%
India7%
LatAm7%
North America9%
Europe26%
Share Of Projected Vegetable Seed Market Growth 2011-25E
Source: Bayer CropScience Source: Bayer CropScience
Wheat
As in the case of rice, India is the second-largest producer of wheat accounting for 14% of
global production. Wheat accounted for 10% of land sown in India in FY13. Yields of
wheat have improved at a 3.3% CAGR over FY08-12 despite the low hybrid seed
adoption. Improvement in irrigation facilities, seed treatment and management of optimum
time of sowing have resulted in the increase in production and better yields. The
government acknowledges the need to focus on areas such as improvement in seed
replacement rates and varietal replacement for sustaining production and productivity.
However, hybrid wheat in India is yet to prove commercial viability. Even globally, hybrid
seed penetration in wheat is low. Strong incremental growth from hybrid seed penetration
is unlikely in the near term, in our view.
Increase in acreage and
higher hybridisation are the
key drivers
Hybrid seed penetration is
low globally
21 January 2015
India Seeds Sector 11
Figure 21: Farmer level economics per acre of land
(Rs) Corn Cotton Paddy
Yield (quintals/acre) 30 10 30
Price (Rs/quintal) 1,400 4,000 1,500
Revenue 42,000 40,000 45,000
Total seed costs 2,000 1,860 1,000
Fertilisers, pesticides 9,450 7,200 12,000
Labour, tractor, others 19,000 19,500 19,500
Total costs 30,450 28,560 32,500
Profit 11,550 11,440 12,500
Source: Industry, Credit Suisse estimates
Hybrid seeds should
improve farmers' incomes
by 40-90%, making the
incremental seed cost
worthwhile
21 January 2015
India Seeds Sector 12
Key factors for a seed company The India seeds industry is highly fragmented with over 200 players. Some of the key
characteristics that differentiate the companies are as follows.
Success of existing products
Given that the process to develop a new seed takes eight to ten years and the success of
a new seed is gradual after being introduced in the market, near-term growth (two to three
years) is more likely driven by the products that have been introduced in the previous one
to three years and showing signs of success. Given the importance of seeds to a farmer
(source of livelihood for the entire year), the quality of seeds (in terms of yields and
consistency) is of importance. The cost of seeds is less than 10% of total costs for the
farmer and therefore the farmer would be willing to pay a premium for the right product.
While most seed companies have several hybrids—a handful of them contribute to a large
proportion of total revenue—these are the blockbuster seeds for the company.
R&D capability
A seed company needs to have a continuous and high-quality pipeline of hybrids. Seed
R&D is a time-consuming process and a company's germplasm bank and its R&D
capability is an important source of differentiation. This is extremely important from a
medium- to long-term perspective. Unfortunately, we find it difficult to judge this capability
given that there is no information available on the hybrids in the pipeline, the time left for it
to come to market and the possibility of success with farmers that the product may have.
In addition, there does not appear to be any other avenues through which the progress of
a hybrid can be judged. In a way, some leap of faith would need to be taken based on the
companies' past delivery of blockbuster seeds.
Given that the patenting process in India is not very robust, other companies replicate
blockbuster seeds in the marketplace quickly. However, the replication takes at least two
to three years (one to two years for discovery and then a year for replication) by which
time the incumbent gains significant a market share. In addition, the brand plays an
important role—given the relatively low proportion of seed costs in the total for a farmer,
comfort with the brand would play a very important role.
Figure 22: Seed development R&D process
Stage A
Product Concept
Stage B Stage C Stage D Stage EStage F
Pre Launch
New product for customer
Conventional Hybrids
Biotech Traits
Breeding & Testing
Discovery
Wide testing & Agronomy refinement
Trait characterization & development
Farmer Field testing
Regulatory science
Research Development Application
8 – 10 year process
Source: DuPont
Products introduced in the
previous one to two years
determine growth over the
next two to three years
This is a very important
source of differentiation but
is also very difficult to judge
21 January 2015
India Seeds Sector 13
Distribution network
The initial selling process is mainly through demonstrating the superiority of the product
versus non-hybrid seeds and hybrid seeds of competitors. However, the presence of a
strong distribution network not only helps the company in making its product available
widely but also helps in incremental sales as end-retailers sometimes act as financers to
the farmers and therefore influence the seed selection process.
Branding and promotional activity
Advertising and promotional activities are essential to distinguish a particular company's
seed from those of its competitors, to educate farmers on best practices to ensure better
productivity and induce the farmers to buy particular seeds. As per an ISAAA report, the
majority of farmers surveyed for Bt cotton seeds did not know the name of the company
making those seeds but were aware of the brand names. These farmers often paid higher
prices for popular hybrids due to heavy demand during the kharif season. Therefore,
investment in advertising and branding is a way to maintain some product differentiation.
Effective working capital management
Depending on the crop variety, seed companies need to assess likely crop demand almost
an year in advance to start producing seeds. So the ability to accurately assess demand is
critical to avoid losses of sale or significant inventory write-offs.
Large and dedicated network of seed growers/land
bank
After the discovery of a successful hybrid, seed multiplication requires many rounds of
sowing. Therefore, the availability of a large land bank or access to a large dedicated
network of seed growers acts as a major entry barrier for smaller seed companies as a
lack of such a network will delay the process of market expansion for them. Alternatively, it
also protects a large incumbent to garner a significant market share before someone else
introduces such a hybrid.
21 January 2015
India Seeds Sector 14
Some major players in India Internationally, the major seed companies—Monsanto, DuPont and Syngenta—control
over 50% of the seeds market. This strong industry concentration is a result of high
penetration of GM seeds (a 45% market share). While globally we expect the overall
seeds industry to witness a 5-8% CAGR, the biotech seeds market is likely to see a 6-10%
CAGR. The reason for concentration in biotech is the high R&D costs (up to US$150 mn)
and the long process for development and regulatory clearances, sometimes over ten
years. However, the hybrid seeds market is fragmented with multiple small regional
players.
The India seeds industry, too, is highly fragmented with the presence of over 200 players.
However, some ten companies control over 50% of the market. Some of the key players in
India are Bayer, Monsanto, Pioneer, Syngenta among MNCs, and Ajeet, Ankur, JK Agri
Tech, Kaveri, Meta Helix, Nuziveedu and Rasi among domestic players.
Figure 23: Some major players in India (table 1/2)
Company Local Mkt cap ADTO Price Perf. (%) Sales (US$ mn) EBITDA margin (%) Sales mix
Cur. (US$ mn) (US$ mn) 1m 3m 12m FY14 FY15 FY14 FY15 Seeds Ag. Chem. Oth.
Bayer INR 2,082 1.2 21% 52% 103% 521 619 11% 14% 1% 95% 4%
Kaveri Seeds INR 863 2.5 -4% -15% 102% 167 202 22% 25% 96% 3% 1%
Monsanto In INR 881 3.9 16% 7% 275% 95 108 25% 26% 60% 39% 1%
Rallis India INR 684 1.4 0% -6% 23% 286 322 15% 15% 10% 89% 1%
Advanta In INR 479 0.4 -1% 10% 211% 206 na 14% na 94% 0% 6%
JK Agri Gen. INR 25 0.0 -16% -15% 30% 31 na 14% na 97% 0% 3%
E.I. du Pont USD 68,578 353 0% 8% 17% 35,575 34,991 19% 20% 23% 10% 67%
Monsanto USD 56,820 471 -4% 4% 4% 15,438 15,883 29% 31% 70% 30% 0%
Syngenta CHF 30,993 93 -9% 0% -18% 14,787 14,776 20% 19% 22% 74% 4%
Longpin CNY 3,288 60 -9% 19% 66% 316 283 19% 23% 100% 0% 0%
Denghai CNY 1,984 19 0% 7% 19% 251 360 41% 36% 100% 0% 0%
na = not available; Source: Company data, Thomson Reuters, the BLOOMBERG PROFESSIONAL™ service
Figure 24: Some major players in India (table 2/2)
Company EPS growth (%) PE (x) PB (x) RoE (%) Div. yield (%)
FY14 FY15 FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY14 FY15
Bayer nm 39% 47 34 28 7 6 5 16 19 0.2% 0.3%
Kaveri Seed 65% 45% 25 18 14 10 7 5 49 47 0.6% 1.0%
Monsanto In 93% 13% 42 37 29 16 13 11 35 39 2.8% 1.3%
Rallis India 28% 17% 28 24 19 6 5 4 23 23 1.1% 1.3%
Advanta In -16% na 57 na na 5 na na 9 na - na
JK Agri Gen. 32% na 13 na na 3 na na 29 na 0.6% na
E.I. du Pont 3% 4% 19 18 17 4 4 4 27 23 2.5% 2.6%
Monsanto 18% 13% 24 21 18 6 7 7 24 32 1.4% 1.4%
Syngenta -10% 1% 16 16 14 3 3 2 19 18 3.5% 3.6%
Longpin 21% 45% 81 56 44 11 7 6 15 15 0.3% 0.4%
Denghai 26% 16% 35 31 25 7 6 5 22 20 0.5% 1.1%
nm = not meaningful; na = not available; Source: Company data, Thomson Reuters, the BLOOMBERG PROFESSIONAL™ service
There are over 200 players
but ten companies control
over 50% of the market
21 January 2015
India Seeds Sector 15
Figure 25: Key success factors for a seed company
Kaveri Nuziveedu Monsanto Advanta Metahelix JK Agri
Key crops Cotton, Corn Cotton Corn Cereal, Oilseeds Corn, Paddy Cotton, Vegetable
Popular brand Jadoo (Cotton) Mallika (Cotton) Dekalb (Corn) RIL - 019 (Corn) JKCH - 1947 (Cotton)
Number of seed varieties 90+ 350+ 20 300+ 30+
R&D spend (Rs mn) 143 72 288 1,095 103 110
R&D as a % of sales 1.4% 0.7% 5.0% 8.7% 4.6% 5.8%
Number of dealers 15000+ 55000+ NA NA 30000+ retailers 30000 dealers
A&P spend (Rs mn) 345 NA 382 583 266 148
A&P as a % of sales 3.4% NA 6.6% 4.6% 11.8% 7.8%
Advances (Rs mn) 2,460 4,745 286 311 386 465
Advances as a % of sales 24.3% 47.3% 4.9% 2.5% 17.2% 24.7%
Net working capital days 29 (2) 13 113 21 77
FY13 data for Nuziveedu; 2013 data for Advanta; Source: Company data, Credit Suisse
21 January 2015
India Seeds Sector 16
Asia Pacific / India
Kaveri Seeds
(KVRI.BO / KSCL IN) INITIATION
Largest Indian pureplay seeds company
■ Initiating with OUTPERFORM. We initiate coverage on Kaveri Seeds with
an OUTPERFORM rating and a Rs1,100 target price, implying 42.6% upside
potential. Kaveri Seeds is the largest listed pure-play seed company in India.
The company has a turnover of over Rs10 bn, a strong distribution network
of 15,000+ dealers and a significant market share in cotton, corn, millet and
paddy seeds. It is the No. 2 player in cotton, No. 4 player in corn and among
Top 3-5 players in millets, paddy, sorghum and sunflower.
■ Attractive growth momentum to continue. We expect key drivers to be a
higher market share in cottonseeds in Maharashtra and Gujarat and strong
performance across other seeds such as corn, paddy and vegetables. While
corn and cotton are likely to drive the company's growth in the next three to
five years, any breakthrough in paddy and vegetables should drive strong
growth in the longer term. We expect Kaveri to register 20%/29%
revenue/net income CAGRs over FY14-17E.
■ Attractive financial metrics, likely to sustain. Kaveri had net cash of Rs3
bn (as at Mar-14) with strong operating cash generation, low working capital
requirement (30 days of working capital at end-FY14), high EBITDA margins
(~25%) and high return ratios (RoE and ROCE of 45%+). Given the likely
strong earnings growth and low capex requirements, (~Rs400-500 mn
annual capex), we believe strong financial metrics are likely to sustain.
■ Valuation. Our target price is based on two-year PEG of 0.75x, which implies
17x FY17E EPS. While valuations have re-rated over the past year, we do not
view them as excessive and that current valuations should sustain given its
strong financial metrics, likely strong earnings growth over the next few years
and a large market opportunity. Key risks are poor cottonseed demand in
FY16 and its inability to come up with new blockbuster seeds. The founders
are also looking to sell down their equity to fund another venture.
Share price performance
0
100
200
300
400
200
700
1200
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the S&P
BSE SENSEX IDX which closed at 28888.86 on 21/01/15
On 21/01/15 the spot exchange rate was Rs61.6/US$1
Performance over 1M 3M 12M Absolute (%) -4.2 -15.3 102.0 — Relative (%) -8.4 -22.9 66.0 —
Financial and valuation metrics
Year 3/14A 3/15E 3/16E 3/17E Revenue (Rs mn) 10,111.1 12,005.5 14,396.9 17,261.3 EBITDA (Rs mn) 2,212.4 2,995.5 3,608.8 4,345.8 EBIT (Rs mn) 2,048.2 2,906.2 3,503.5 4,224.5 Net profit (Rs mn) 2,089.6 2,997.4 3,675.3 4,493.3 EPS (CS adj.) (Rs) 30.40 43.60 53.47 65.36 Change from previous EPS (%) n.a. EPS growth (%) 64.3 43.4 22.6 22.3 P/E (x) 25.6 17.8 14.6 11.9 Dividend yield (%) 0.6 1.0 1.3 1.9 EV/EBITDA (x) 24.2 17.2 13.6 10.6 P/B (x) 10.4 7.1 5.2 3.9 ROE (%) 48.6 47.2 41.0 37.4 Net debt/equity (%) Net cash Net cash Net cash Net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates
Rating OUTPERFORM* [V] Price (21 Jan 15, Rs) 771.20 Target price (Rs) 1,100.00¹ Upside/downside (%) 42.6 Mkt cap (Rs mn) 53,608.1 (US$865.6) Enterprise value (Rs mn) 51,506 Number of shares (mn) 68.90 Free float (%) 42.34 52-week price range 1,019.3 - 379.0 ADTO - 6M (US$ mn) 2.5
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
[V] = Stock considered volatile (see Disclosure Appendix).
Research Analysts
Anantha Narayan
91 22 6777 3730
Akhil Kalluri
91 22 6777 3747
21 January 2015
India Seeds Sector 17
Kaveri Seeds KVRI.BO / KSCL IN Price (21 Jan 15): Rs771.20, Rating: OUTPERFORM, Target Price: Rs1,100.00, Analyst: Anantha Narayan
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside 1,400.0
0 81.54
25% revenue CAGR from strong market share gains leading to rerating
Central Case 1,100.0
0 42.63
20% revenue CAGR based on current seed portfolio
Downside 600.00 (22.20) 7% revenue CAGR due to weak cotton seed demand leading to derating
Key earnings drivers 3/14A 3/15E 3/16E 3/17E
Revenue growth (%) 42.0 18.7 19.9 19.9 Cotton seed revenue growth (%) 58.5 24.8 15.0 15.0 Corn seed revenue growth (%) 34.0 (4.0) 20.0 20.0 EBITDA margins (%) 21.9 25.0 25.1 25.2
Income statement (Rs mn) 3/14A 3/15E 3/16E 3/17E
Sales revenue 10,111 12,005 14,397 17,261 Cost of goods sold 3,751 4,202 5,039 6,041 SG&A 3,866 4,470 5,361 6,427 Other operating exp./(inc.) 281.6 337.9 388.6 446.9 EBITDA 2,212 2,995 3,609 4,346 Depreciation & amortisation 164.2 89.3 105.3 121.3 EBIT 2,048 2,906 3,503 4,224 Net interest expense/(inc.) (95.0) (171.0) (269.1) (387.3) Non-operating inc./(exp.) — — — — Associates/JV — — — — Recurring PBT 2,143 3,077 3,773 4,612 Exceptionals/extraordinaries — — — — Taxes 51.6 77.6 95.2 116.3 Profit after tax 2,092 2,999 3,677 4,495 Other after tax income — — — — Minority interests 2.1 2.1 2.1 2.1 Preferred dividends — — — — Reported net profit 2,090 2,997 3,675 4,493 Analyst adjustments — — — — Net profit (Credit Suisse) 2,090 2,997 3,675 4,493
Cash flow (Rs mn) 3/14A 3/15E 3/16E 3/17E
EBIT 2,048 2,906 3,503 4,224 Net interest (2.4) (1.1) (1.1) (1.1) Tax paid (54.1) (77.6) (95.2) (116.3) Working capital (119.4) (40.3) (63.9) (46.8) Other cash & non-cash items 157.6 89.3 105.3 121.3 Operating cash flow 2,030 2,876 3,449 4,182 Capex (351.0) (400.0) (400.0) (400.0) Free cash flow to the firm 1,679 2,476 3,049 3,782 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) 1.8 — — — Investing cash flow (349.1) (400.0) (400.0) (400.0) Equity raised 0.46 — — — Dividends paid (387) (604) (845) (1,208) Net borrowings (7.4) — — — Other financing cash flow 101.4 172.1 270.3 388.4 Financing cash flow (292.5) (431.8) (575.1) (819.3) Total cash flow 1,388 2,045 2,473 2,962 Adjustments — — — — Net change in cash 1,388 2,045 2,473 2,962
Balance sheet (Rs mn) 3/14A 3/15E 3/16E 3/17E
Cash & cash equivalents 2,849 4,894 7,367 10,329 Current receivables 653 776 928 1,115 Inventories 4,972 5,903 7,060 8,487 Other current assets 122.6 122.6 122.6 122.6 Current assets 8,596 11,695 15,477 20,054 Property, plant & equip. 1,425 1,733 2,025 2,301 Investments 0.43 0.43 0.43 0.43 Intangibles 11.9 14.4 16.9 19.2 Other non-current assets 247.5 247.5 247.5 247.5 Total assets 10,281 13,690 17,766 22,623 Accounts payable 4,831 5,736 6,860 8,247 Short-term debt 0.30 0.30 0.30 0.30 Current provisions 232.7 341.2 462.0 643.2 Other current liabilities — — — — Current liabilities 5,064 6,078 7,322 8,891 Long-term debt 9.1 9.1 9.1 9.1 Non-current provisions — — — — Other non-current liab. 48.2 48.2 48.2 48.2 Total liabilities 5,121 6,135 7,379 8,948 Shareholders' equity 5,155 7,549 10,379 13,664 Minority interests 4.0 6.1 8.2 10.4 Total liabilities & equity 10,281 13,690 17,766 22,623
Per share data 3/14A 3/15E 3/16E 3/17E
Shares (wtd avg.) (mn) 68.7 68.7 68.7 68.7 EPS (Credit Suisse) (Rs) 30.4 43.6 53.5 65.4 DPS (Rs) 4.8 7.5 10.5 15.0 BVPS (Rs) 75 110 151 199 Operating CFPS (Rs) 29.5 41.8 50.2 60.8
Key ratios and valuation
3/14A 3/15E 3/16E 3/17E
Growth(%) Sales revenue 42.0 18.7 19.9 19.9 EBIT 61.2 41.9 20.6 20.6 Net profit 64.9 43.4 22.6 22.3 EPS 64.3 43.4 22.6 22.3 Margins (%) EBITDA 21.9 25.0 25.1 25.2 EBIT 20.3 24.2 24.3 24.5 Pre-tax profit 21.2 25.6 26.2 26.7 Net profit 20.7 25.0 25.5 26.0 Valuation metrics (x) P/E 25.4 17.7 14.4 11.8 P/B 10.3 7.0 5.1 3.9 Dividend yield (%) 0.62 0.97 1.36 1.95 P/CF 26.1 18.4 15.4 12.7 EV/sales 4.97 4.02 3.18 2.48 EV/EBITDA 22.7 16.1 12.7 9.9 EV/EBIT 24.6 16.6 13.1 10.1 ROE analysis (%) ROE 48.6 47.2 41.0 37.4 ROIC 92 114 120 129 Asset turnover (x) 0.98 0.88 0.81 0.76 Interest burden (x) 1.05 1.06 1.08 1.09 Tax burden (x) 0.98 0.97 0.97 0.97 Financial leverage (x) 1.99 1.81 1.71 1.65 Credit ratios Net debt/equity (%) (55.0) (64.6) (70.8) (75.5) Net debt/EBITDA (x) (1.28) (1.63) (2.04) (2.37) Interest cover (x) (21.5) (17.0) (13.0) (10.9)
Source: Company data, Thomson Reuters, Credit Suisse estimates
0.0
5.0
10.0
15.0
20.0
25.0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
12m forward PE
-
2.0
4.0
6.0
8.0
10.0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
12m fwd PB
Source: IBES
21 January 2015
India Seeds Sector 18
Largest listed pure-play seed company in India Kaveri Seeds is one of the largest seed companies in India with a turnover of over Rs10
bn in FY14 and a network of 15,000 distributors and dealers across 15 states. It is the No.
2 player in the cottonseeds market (an 18-19% market share, and cotton is the largest
seed category in India), the No. 4 player in the corn market (a 13% market share) and is
among the Top 3-5 players in other seeds such as millets, paddy, sorghum and sunflower.
Figure 26: Kaveri's presence in different crop categories
Crop Market size
(Rs bn)
Market
share (%)
Rank % of FY15E
revenue
Key
competitors
Cotton 40 18-19% 2 66% Nuziveedu,
Ajeet, Ankur
Corn 12 13% 4 14% Monsanto,
Pioneer
Paddy 12 6% Top 5 6% Bayer, Syngenta
Metahelix
Vegetables 17 <1% na <1% Monsanto,
JK Agri
Source: Company data, Credit Suisse estimates
The company boasts of a strong focus on R&D and claims to have one of the largest
germplasm pools in India. Kaveri has 600+ acres of owned and leased research farms
covering different agro climatic conditions. It has close to 100 different varieties of hybrid
seeds in the market although a large proportion of revenue is driven only by a handful of
seeds. It has consistently incurred R&D spends of ~Rs100 mn p.a. since FY07 (~15% of
sales on R&D in FY07) and over time has developed a R&D infrastructure. KVRI has
incurred an R&D expense of Rs140 mn in FY14 (1.4% of sales), but management has
indicated that it is likely to step up its R&D spending, mainly due to its foray into
biotechnology-based research (molecular marking technology). It expects R&D spending
to up to 3-4% of sales (~Rs400 mn).
The company also claims to have one of the largest distribution networks among Indian
seed companies with 15,000+ dealers and 40,000-50,000 retail touch points. Its
distribution network is well spread out, mainly due to its presence across multiple crops
such as cotton, maize, millets, sorghum and paddy, which are grown in different parts of
India. While the efficacy of the hybrid is the single most important factor that determines
the success of a seed, a strong distribution network is extremely important as well for the
timely supply to the market.
Figure 27: Comparison of R&D and distribution spending
Kaveri Nuziveedu Monsanto Advanta Metahelix JK Agri Genetics
R&D spend (Rs mn) 143 72 288 1,095 103 110
R&D as a % of sales 1.4% 0.7% 5.0% 8.7% 4.6% 5.8%
Distribution network 15,000+ 55,000+ NA NA 30,000+ retailers 30,000 dealers
A&P spend 345 NA 382 583 266 148
A&P as a % of sales 3% NA 7% 5% 12% 8%
Advances (Rs mn) 2,460 4,745 286 311 386 465
Advances as a % of sales 24% 47% 5% 3% 17% 25%
FY13 data for Nuziveedu; 2013 data for Advanta; Source: Company data, Credit Suisse research
It has a 20% market share
in cottonseeds and 13% in
corn
It has a significant
distribution network with
nearly 15,000 dealers and
50,000 retail touch points
21 January 2015
India Seeds Sector 19
Attractive growth momentum to continue We estimate a 20% revenue CAGR over FY14-17
Kaveri has delivered a 52% revenue CAGR over the past five years, driven by the success
of its blockbuster seed Jadoo, a hybrid cotton variant popular in the Andhra Pradesh market
(accounts for 22% of cotton production in India). Started in 2009 with a production of 15,000
packets, Jadoo's sales rose to about 5 mn packets in FY15. The seed has helped the
company scale up its market share from less than 1% in 2007 to 18-19% in FY15.
Due to the long lead time for developing and marketing a new hybrid, revenue for a seed
company over the immediate two to three years is mainly dominated by the portfolio of
existing hybrid seeds in the market. Consequently, we expect Kaveri to deliver a 20%
revenue CAGR over FY14-17 on the back of:
■ Stable-to-marginal improvement in the market share in its core AP cotton market,
■ strong improvement in the market share in Maharashtra on account of the launch of its
new hybrid, ATM (currently having an 8-9% market share in this market),
■ growth in corn seed revenue due to overall growth in the market (estimated to see a
15%+ CAGR over next few years), and
■ higher penetration of single cross maize hybrid and gradual improvement in the
market share, especially in Bihar and Maharashtra.
Paddy should theoretically be the next big growth opportunity in India due to the high
acreage for this crop and very low hybrid seed penetration. However, we have not built in
any significant upside from hybrid rice in our numbers given the uncertainties around a
new successful hybrid launch by any seed company.
From a medium- to long-term perspective, growth for seed companies is driven by not just
existing hybrids in the market but also by the pipeline of hybrids likely to be launched in the
next three to four years. In addition, in cotton Kaveri expects high growth in the medium term
stemming from (1) the adoption of new hybrids suitable for close density planting aiding
mechanised harvest; (2) likely approval of BG2RRF by 2016 (another GM technology in
cotton with which plants become immune to a herbicide Roundup thereby reducing labour
cost for manual weeding); and (3) the launch of new hybrids in the Gujarat and North Indian
markets. Kaveri targets a 25% market share in cotton in the next three years (from the
current 18-19% market share). In corn and paddy, the company hopes to increase its market
share to 17% and 10%, respectively, over the next five years from the current 13% and 6%.
Revenue has seen a 52%
CAGR over the past five
years
Based on the current
visibility, we expect Kaveri
to deliver a 20% revenue
CAGR over FY14-17
Paddy should be a very
significant growth
opportunity but there is
uncertainty around it
21 January 2015
India Seeds Sector 20
Figure 28: While growth rates may come off from
historical highs, we expect attractive growth
Figure 29: Cottonseed accounts for a significant portion
of the company's revenue
32%44%
59%
91%
42%
19%
20%
20%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000F
Y10
FY
11
FY
12
FY
13
FY
14
FY
15E
FY
16E
FY
17E
(Rs
mn)
Net Revenue
56%
18%
4%
5%
2%1% 10%
4%
Cotton Corn Paddy Millet Sunflower Vegetables Others Microtek
Note: Data points above bar indicates revenue growth; Source:
Company data, Credit Suisse estimates
Data for FY13; Source: Company data, Credit Suisse research
High margins likely to sustain
We expect Kaveri's EBITDA margins to sustain at current 25% levels, with some potential
for positive surprises, mainly on the back of a change in the revenue mix away from lower
margin cottonseeds, and higher operating leverage. EBITDA margins for cottonseeds are
20-21% while those in other seeds vary between 25% and 28%. Cotton margins are lower
despite higher gross margins due to the royalty that needs to be paid to the Monsanto arm
in India (the royalty amounts to about 20% of cottonseed revenue). Management expects
EBITDA margins to expand, at best, by 100-150 bp.
Consequently, we expect a 29% earnings CAGR over FY14-17E on the back of revenue
growth and some slight margin improvement. The company claims its revenue as
agricultural income and therefore does not pay any taxes. Management does not see any
significant risk to this tax status.
Figure 30: We estimate a 25% EBITDA CAGR between
FY14 and FY17…
Figure 31: …and a 29% net income CAGR during the
same period
15
17
19
21
23
25
27
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15E
FY
16E
FY
17E
(%)
(Rs
mn)
EBITDA EBITDA margin (RHS)
17%46%
37%
120%
63%
43%
23%
22%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15E
FY
16E
FY
17E
(Rs
mn)
Net income
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
EBITDA margins are at an
attractive level of 25% and
should improve with a
changing product mix
We expect a 29% earnings
CAGR over FY14-17
21 January 2015
India Seeds Sector 21
Attractive financial metrics, likely to sustain Return ratios are likely to remain high
Due to high fixed asset turns (~5x in FY14), low net working capital requirements and high
profitability (~25% EBITDA margins), Kaveri has very strong return ratios (49% RoE and
46% RoCE in FY14). The success of its cotton hybrid seed, Jadoo, has resulted in
reductions in working capital and asset turnover. The popularity of Jadoo has resulted in
reductions in company's debtors and higher advances from customers and, given low
capital-intensive nature of the business, a significant boost to asset turnover.
We expect the company's return ratios to remain high over the next three years on the
back of strong 29% earnings growth and planned capex of just ~Rs400 mn p.a. However,
returns are likely to come off their peak levels over the next few years, mainly due to high
cash accumulation—we have not assumed a significant increase in payouts.
Figure 32: Low net working capital and high asset turns… Figure 33: …have driven high returns
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0
20
40
60
80
100
120
140
160
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15E
FY
16E
FY
17E
(x)
(Day
s of
sal
es)
Net working capital Fixed asset turnover
0%
10%
20%
30%
40%
50%
60%
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15E
FY
16E
FY
17E
(Day
s of
sal
es)
RoCE RoE
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Company to remain net cash positive
Kaveri had net cash of ~Rs2 bn as at September 2014, due to the low capital-intensive
nature of the business, low working capital and high operating cash generation.
Working capital management is crucial in the seeds business as companies need to plan
for likely demand almost a year in advance. This typically results in high inventory on the
books of the seed companies. Kaveri maintains 1-1.2 years of peak inventory. However,
given the popularity of the company's product, Kaveri receives advances from dealers until
January for seeds to be provided during April-June. Over the past three years, the
company has received advances of about Rs2-2.5 bn (90-180 days of sales). The fall in
advances last year as a proportion of sales was due to the 25% fall in advances in Andhra
Pradesh owing to the high level of cotton inventory in the system. Over the past three
years, the company has maintained 20-30 days of net working capital at the end of March.
We expect the company to maintain 30 days of working capital investment.
We expect the company to remain in a net cash position as it is likely to generate OCF of
Rs10 bn over FY15-17 while incurring a capex of ~Rs1 bn during the same period. Its
current dividend payout ratio is 16-18%.
45%+ ROE and ROCE in
FY14
We expect OCF of Rs10 bn
over FY15-17 and capex of
Rs1 bn
21 January 2015
India Seeds Sector 22
Figure 34:The company will likely remain net cash… Figure 35: …on the back of strong free cash generation
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15E
FY
16E
FY
17E
(Rs
mn)
Net cash
-1,000
0
1,000
2,000
3,000
4,000
5,000
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15E
FY
16E
FY
17E
(Rs
mn)
OCF CAPEX
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Quarterly financials
The company's annual financials are largely skewed towards the first half. The kharif crop
accounts for 75-85% of the company's revenue and about 80-90% of profitability. With
maize being the only rabi crop currently for the company and given the company's focus
on increasing penetration of single-cross kharif corn, the company's financials will likely
remain skewed towards the first half.
Figure 36: Seasonally skewed towards 1Q; 1H accounts for over 80% of company's revenue and PAT
Rs mn 1Q FY13 2Q FY13 3Q FY13 4Q FY13 1Q FY14 2Q FY14 3Q FY14 4Q FY14 1Q FY15 2Q FY15
Total Income 4,796 637 1,032 746 7,361 1,032 1,326 392 8,269 2,037
Revenue growth YoY 99% 31% 149% 79% 53% 62% 28% -47% 12% 97%
EBITDA 1,042 97 126 128 1,643 126 382 61 2,324 328
EBITDA growth YoY 85% 12% 80% 150% 58% 30% 203% -53% 41% 160%
EBITDA margins 22% 15% 12% 17% 22% 12% 29% 15% 28% 16%
Depreciation & amort. 28 29 39 35 35 39 43 45 22 22
Net interest -7 -6 -12 -9 -37 -12 -32 -14 -37 -46
PBT 1,021 74 99 115 1,645 99 371 30 2,339 352
Effective tax rate 1.5% 17.6% 8.4% 6.8% 1.5% 8.4% 1.5% 42.4% 1.4% 4.3%
PAT 1,006 61 89 94 1,620 89 365 18 2,304 337
PAT growth YoY 91% 17% 207% 225% 61% 46% 312% -81% 42% 281%
Contribution by quarter:
Revenue 67% 9% 14% 10% 73% 10% 13% 4%
EBITDA 75% 7% 9% 9% 74% 6% 17% 3%
Net profit 81% 5% 7% 8% 77% 4% 17% 1%
Source: Company data, Credit Suisse estimates
1H forms 80%+ of full-year
revenue and PAT; 1Q forms
the bulk
21 January 2015
India Seeds Sector 23
Initiating with OUTPERFORM 40%+ upside potential over the next 12 months
We initiate coverage on the stock with an OUTPERFORM rating and a target price of
Rs1,100 based on two-year PEG of 0.75x—this implies 17x FY17E EPS. While our target
multiple is at the higher band of the company's historical multiples, owing to the its larger
scale and demonstration of its ability to introduce successful products into the market, its
strong balance sheet strength, high return ratios and likely strong earnings growth, we
believe that historical multiples may not be relevant. While the Indian seed companies
cannot be compared to their US peers such as Monsanto due to the higher proportion of
income from GM seeds and strong R&D capabilities, Chinese seed companies trade at
much higher multiples—for example, companies such as Longpin and Denghai are trading
at multiples of 20-40x with 15-20% return ratios and 20-35% earnings growth. We expect
the company to generate earnings growth of 22% over FY16-17.
Figure 37: While the valuation is high compared to the historical average, it has come off from its peak
0.0
5.0
10.0
15.0
20.0
25.0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
12m forward P/E
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
12m forward PB
Source: Thomson Reuters, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research
Figure 38: Kaveri is trading at a significant discount to peers adjusting for growth
Local Mkt cap ADTO P/E (x) P/B (x) RoE (%) 2y EPS PEG
Company Ticker currency (US$ mn) (US$ mn) FY15E FY16E FY15E FY16E FY14 FY15E CAGR (%) (x)
Kaveri KVRI.BO INR 863 2.5 18 14 7 5 49 46 35 0.4
UPL UPLL.BO INR 2,533 9.7 13 11 2 2 21 20 17 0.7
Bayer BAYE.BO INR 2,082 1.2 34 28 6 5 16 19 29 1.0
Monsanto Ind. MNSN.BO INR 881 3.9 37 29 13 11 35 39 21 1.4
Rallis RALL.BO INR 684 1.4 24 19 5 4 23 22 22 0.9
Dupont DD.N USD 68,578 353 18 16 4 4 27 23 9 1.9
Monsanto MON.N USD 56,820 471 21 18 7 7 24 32 14 1.3
Syngenta SYNN.VX CHF 30,993 93 15 14 3 2 19 18 5 2.9
Longpin 000998.SZ CNY 3,288 60 56 44 7 6 15 15 35 1.3
Denghai 002041.SZ CNY 1,984 19 31 25 6 5 22 20 20 1.2
Source: Company data, Thomson Reuters, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates
21 January 2015
India Seeds Sector 24
Founders may sell down a bit
The company's founders plan to venture into the food processing business, a capex-
intensive business, which could result in an investment of ~Rs15 bn. On possible
shareholder concerns about moving Kaveri's business model from an asset-light, high
cash flow generation model to a capital-intensive one, the founders are taking up the
project in their individual capacity. To fund this venture, the founders plan to reduce their
stake in the firm over the next few years from the current 58% stake. They do intend to
keep their stake in Kaveri to at least 40%.
About 20% dividend payout
The company pays out dividend of only about 16-18% despite high cash generation.
Management has indicated that it would be comfortable with about Rs3-4 bn of cash (it
had net cash of ~Rs3 bn as of Mar-14 and ~Rs2 bn as of Sep-14) for R&D purposes. The
company has guided for annual capex of about Rs400 mn over the next few years with the
majority being used for strengthening biotechnological research. In our view, given the
founders' foray into the food processing business, there is a possibility that the company
may step up its dividend payout.
Figure 39: Founders' holdings have come down and likely
to continue to slide
Figure 40: We have assumed a gradual pick-up in the
dividend payout ratio
62
64 64
65
64 64 64
62
58 58
52
54
56
58
60
62
64
66
Sep
-09
Sep
-10
Sep
-11
Sep
-12
Sep
-13
Dec
-13
Mar
-14
Jun-
14
Sep
-14
Dec
-14
Pro
mot
er s
take
(%
)
0%
5%
10%
15%
20%
25%
0
200
400
600
800
1,000
1,200
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
(Rs
mn)
Dividend payout Payout ratio (RHS)
Source: BSE, Credit Suisse research Source: Company data, Credit Suisse estimates
Key risks
■ Founders' sale of shares. The founders are looking to sell down their stake to fund
another venture in food processing. This should potentially create a stock overhang in
the near term. The stock has corrected in recent months after a strong performance
through most of 2014 and we believe that this overhang could be a reason. There has
been no progress on the founders' attempts to raise money through this route so far.
■ High reliance on cottonseeds. Cotton accounts for about 60% of Kaveri's revenue.
Any adverse movement in cotton prices could result in farmers moving to other crops
and that could have a significant impact on the company's performance. In the near
term, cotton will be need to be a key revenue driver for the company, both in Andhra
Pradesh and Maharashtra. Any change in the growth expectations should hurt
earnings and sentiment adversely.
■ Lack of medium-term visibility. While the company has done very well with its
current hybrid cottonseed portfolio, given a lack of sufficient information about the
company's germplasm and pipeline, it is difficult to get comfort on the medium- or
The company's founders
plan to venture into the food
processing business on their
own
21 January 2015
India Seeds Sector 25
long-term sustainability of growth. Thus, to some extent, a leap of faith needs to be
taken based on the company's past track record.
■ Tax rate. Kaveri does not pay any taxes as its revenue is classified as agricultural
income. While the company has been following this policy for several years and does
not see any significant possibility of this changing, any changes in taxation policy in
the future could impact its reported earnings.
■ Dependence on external factors. Factors such as monsoon, especially its timing,
impact the farmer's crop selection and the ultimate success of the crop. Therefore, the
timing and quantum of monsoons could result in fluctuations in the company's
business performance. News flows around such factors could create volatility in the
share price as well.
Company background
Established in 1986, Kaveri Seeds is a leading seed producer in India with presence
across multiple crops such as cotton, corn, rice, millet, and vegetables. The company's
founder, GV Bhaskar Rao, is a first-generation entrepreneur, ventured into the seeds
business in 1976 and later established Kaveri Seeds. The company has a network of over
15,000 distributors and dealers across the country. While Kaveri has little presence
outside India, it has plans to expand its presence in markets such as Africa.
Shareholding pattern
Figure 41: Shareholding
Promoter58%FII
20%
DII9%
Others13%
Dec-14
Promoter64%
FII9%
DII10%
Others17%
Dec-13
Source: BSE
21 January 2015
India Seeds Sector 26
Key management personnel
Figure 42: Key management personnel
Director Status Description
Mr. GV Bhaskar Rao Chairman & Managing
Director
Founder and chief strategist of the company. Spearheads various strategic initiatives
and overseas R&D, production and business development
Mrs G Vanaja Devi Director Associated with the company since inception. Oversees the CSR activities and assists the CMD in overall functioning of the company
Mr R Venu Manohar Rao Executive Director Associated with the company since inception. Manages relationship with farmers,
dealers, and distributors and is instrumental in establishing pan-India marketing and
sales network
Mr. C Vamsheedhar Marketing Director Associated with Kaveri for close to 15 years. Responsible for marketing, sales and
distribution and spearheads the Agritech operations
Mr C Mithun Chand Director Associated with the company for close to ten years. Overseas finance function and
manages investor relations; also manages the Microtek division and was the initiator of
KexVeg.
Source: Company data
21 January 2015
India Seeds Sector 27
Asia Pacific / India
Monsanto India
(MNSN.BO)
Play on corn and herbicide growth
■ Play on corn and herbicide growth in India. Monsanto India (MIL), the only publicly listed Monsanto entity outside the US, was established in India in 1949 and has transformed itself from being a chemical company to a pure-play agri-based company. The listed entity has just two products—maize seeds (sold under the brand name Dekalb) and a herbicide, Gylphosate (sold under the brand name Roundup)—these two products together account for about 70% of Monsanto International's revenue. Other businesses of Monsanto such as cottonseeds and vegetable seeds are either directly controlled by the parent or are part of other subsidiaries in India.
■ Corn—among the largest seed companies globally and in India. Monsanto is among the largest corn seed producer and globally competes with other seed majors such as Syngenta and Pioneer in different regions. In the US, as per Credit Suisse US research team, Monsanto has a ~35% market share. Even in India, Monsanto appears to have a market share of 15-20% in corn seeds, next only to Pioneer. This segment's revenue growth saw a 17% CAGR over FY12-14. MIL has a portfolio of 17 hybrid maize varieties, sold under the brand name Dekalb, to address farmer requirements in various parts of the country. The company has a presence across 18 states in India.
■ Roundup—play on rising herbicide penetration in India. Glyphosate, first commercialised in 1974, went off-patent in 2000. While globally, penetration of Glyphosate is very high, use of herbicides in India is relatively low mainly due to manual weeding. However, with rising cost of labour especially during the peak season, management expects the usage of glyphosate to increase in India. Another key driver for increase in Roundup usage, as per management, is the approval of Bollgard II Roundup Ready Flex (BG2RRF) cottonseed, which is expected in the next few years.
■ Stock trades at 29x consensus FY16E EPS. The company has delivered a 63% earnings CAGR over the past two years and is expected to deliver a 21% EPS CAGR over FY14-16 (consensus).
Share price performance
0
100
200
300
400
0
1000
2000
3000
4000
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the S&P
BSE SENSEX IDX which closed at 28888.86 on 21/01/15
On 21/01/15 the spot exchange rate was Rs61.6/US$1
Performance over 1M 3M 12M Absolute (%) 15.6 7.4 275.1 — Relative (%) 11.4 -0.2 239.1 —
Financial and valuation metrics
Rs mn FY10 FY11 FY12 FY13 FY14
Revenue 4,102 3,634 3,738 4,424 5,818
EBITDA 577 530 550 697 1,382
EBITDA margin % 14.1% 14.6% 14.7% 15.7% 23.8%
PBT 578 503 601 750 1,387
PBT margin % 14.1% 13.8% 16.1% 16.9% 23.8%
PAT 541 540 483 678 1,291
RoE 16% 15% 12% 17% 33%
Working capital days 106 94 65 34 13
Net debt to equity Net cash Net cash Net cash Net cash Net cash
Source: Company data, Thomson Reuters
Rating NOT RATED Price (21 Jan 15, Rs) 3,144.90 Target price (Rs) NA Upside/downside (%) NA Mkt cap (Rs mn) 56,394.8 (US$911.6) Enterprise value (mn) 56,395 Number of shares (mn) 17.26 Free float (%) 27.86 52-week price range 3,392.8 - 820.5 ADTO - 6M (US$ mn) 3.9
Research Analysts
Anantha Narayan
91 22 6777 3730
Akhil Kalluri
91 22 6777 3747
21 January 2015
India Seeds Sector 28
Asia Pacific / India
Rallis India
(RALL.BO)
Diversified agri input company
■ A diversified agri input company. The company's business is broadly
divided into two categories—crop protection (69% of revenue) and non-
pesticide portfolio (NPP). In crop protection, besides branded product sales,
the company is also present in the institutional business. Its NPP comprises
seeds (13% revenue contribution), plant growth nutrients and contract
manufacturing. Management is targeting 40% revenue contribution from
NPP over the next few years.
■ Metahelix—management expects it to be the growth driver for the
company. The company acquired a 53.5% stake in Metahelix, a seed
company established in 2000, in 2010 and over time has increased the stake
to 82% (it is likely to acquire 100% over the next two to three years). Over
the past three years, Metahelix has reported a revenue CAGR of 53%. The
majority of seed revenue is driven by maize and paddy. The company also
has strong positioning in millets but has very little market share in cotton and
vegetables. Management is confident of achieving 30%+ revenue growth in
seeds over the next few years driven not only by maize and paddy but also
increasing market shares in cotton and vegetables. While the company's
current margins are sub 10%, management is hopeful to improve them to
18-20% in the next few years on the back of operating leverage.
■ Margins likely to inch up. The company expects 15%+ revenue growth in
the overall business on the back of strong growth from both crop protection
and NPP divisions and higher margins on account of a shift in the revenue
mix towards the higher margin NPP segment.
■ Stock trades at 19x consensus FY16E EPS. The company has delivered
an 18% earnings CAGR over the past two years and is expected to deliver a
22% EPS CAGR over FY14-16E (consensus).
Share price performance
80
100
120
140
0
100
200
300
400
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the S&P
BSE SENSEX IDX which closed at 28888.86 on 21/01/15
On 21/01/15 the spot exchange rate was Rs61.6/US$1
Performance over 1M 3M 12M Absolute (%) -0.3 -6.1 23.1 — Relative (%) -4.6 -13.7 -12.9 —
Financial and valuation metrics
Rs mn FY10A FY11A FY12A FY13A FY14A
Revenue 8,787 10,863 12,749 14,570 17,451 EBITDA 1,486 1,947 1,884 2,128 2,636 EBITDA margin % 16.9% 17.9% 14.8% 14.6% 15.1% PBT 1,530 1,843 1,594 1,676 2,148 PBT margin % 17.4% 17.0% 12.5% 11.5% 12.3% PAT 1,018 1,259 1,092 1,143 1,522 RoE 26.3% 27.1% 20.6% 19.5% 22.7% Working capital days (15) 2 12 25 24 Net debt to equity (0.1) 0.2 0.3 0.2 0.1
Source: Company data, Thomson Reuters
Rating NOT RATED Price (21 Jan 15, Rs) 216.70 Target price (Rs) NA Upside/downside (%) NA Mkt cap (Rs mn) 42,540.1 (US$687.6) Enterprise value (mn) 42,540 Number of shares (mn) 194.47 Free float (%) 49.91 52-week price range 250.0 - 153.0 ADTO - 6M (US$ mn) 1.4
Research Analysts
Anantha Narayan
91 22 6777 3730
Akhil Kalluri
91 22 6777 3747
21 January 2015
India Seeds Sector 29
Asia Pacific / India
Advanta In
(ADVI.BO / ADV IN)
Indian MNC seed company
■ An Indian MNC seed company. Advanta, established in 1996 through a
combination of Royal Vanderhave Group of the Netherlands and Zeneca
Seeds of the UK, has been present in the seed industry since the 19th
century. In 2006, the company's Asia Pacific and LatAm businesses were
acquired by UPL and the company was listed on Indian bourses in 2007. It
has operations across 25 countries with APAC, LatAm and NAFTA
accounting for 64%, 18% and 17% of revenues, respectively. In 2012, the
company entered into an agreement with UPL under which UPL produces
and markets Advanta's seed products in India and pays a royalty of 7% of
net sales of the licensed products subject to a minimum royalty of Rs70 mn
p.a. Advanta received a royalty of Rs93 mn from UPL in 2013. In addition,
the company received Rs71 mn from UPL for R&D activates carried out for
the licensed products.
■ Portfolio of multiple seeds. The company has a portfolio of multiple seeds
including sorghum, corn, sunflower, canola, vegetables, rice, wheat, mustard
and cotton. Cereals, oilseeds, forages and vegetables account for 49%, 25%,
15% and 9% of the company's revenue respectively. Advanta is the largest
sorghum seed supplier in the world. Of the total revenue, GM accounts for
only 7%; however, multiple traits are under development.
■ Acquisitions and investment in R&D—growth strategy. Since being
acquired by UPL, the company has delivered a 13% revenue CAGR. Growth
has been driven by its entry into new markets, increasing product portfolio,
multiple alliances, licences, and stepping up of R&D spend. During this
period, Advanta has acquired six companies for a total consideration of
~US$80 mn. The company spends 10-12% of revenue in R&D and
management plans to continue high R&D spends to improve its crop portfolio
and focus on developing markets.
■ The stock trades at 57x CY13A EPS and the company has reported a 17%
earnings CAGR over the past four years.
Share price performance
40
90
140
0
100
200
300
400
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
Price (LHS) Rebased Rel (RHS)
The price relative chart measures performance against the S&P
BSE SENSEX IDX which closed at 28888.86 on 21/01/15
On 21/01/15 the spot exchange rate was Rs61.6/US$1
Performance over 1M 3M 12M Absolute (%) -1.0 9.9 210.7 — Relative (%) -5.3 2.3 174.7 —
Financial and valuation metrics
Rs mn FY10 FY11 FY12 FY13 FY14
Revenue 6,984 7,092 9,486 10,642 12,551
EBITDA 527 74 1,293 1,594 1,703
EBITDA margin % 7.5% 1.0% 13.6% 15.0% 13.6%
PBT 166 (316) 238 678 480
PBT margin % 2.4% -4.5% 2.5% 6.4% 3.8%
PAT 283 (163) 133 617 521
RoE 6% -3% 3% 11% 9%
Working capital days 109 133 92 60 113
Net debt to equity 0.9 1.1 1.0 0.8 1.1
Source: Company data, Thomson Reuters
Rating NOT RATED Price (21 Jan 15, Rs) 349.50 Target price (Rs) NA Upside/downside (%) NA Mkt cap (Rs mn) 29,626.9 (US$ 478.9) Enterprise value (mn) — Number of shares (mn) 84.37 Free float (%) 34.24 52-week price range 380.4 - 100.6 ADTO - 6M (US$ mn) 0.4
Research Analysts
Anantha Narayan
91 22 6777 3730
Akhil Kalluri
91 22 6777 3747
21 January 2015
India Seeds Sector 30
Appendix Seeds classification
Seeds are broadly classified into three categories: open-pollinated, hybrid and genetically
modified.
■ Open-pollinated seeds are those bred from naturally pollinated plants. These seeds
typically breed true to type, which means that the next generation seeds will have
characteristics similar to those of the parent plant.
■ Hybrid seeds are developed through controlled pollination of selected parents to
develop desired characteristics such as higher yield, faster growth, water efficiency,
and pest protection. Development of seeds with a particular characteristic requires
extensive germplasm and significant R&D. However, one issue of hybrid seeds for the
farmer is that the next generation of seeds do not possess the same characteristics as
the parent and therefore the farmer is forced to go back to the seed company for seed
purchase.
■ Genetically modified (transgenic) seeds: In this case, biotechnology is used to alter the
plant's genetic sequence to obtain the desired trait such as resistance to pests, and
chemicals. Instead of selective breeding of plants, specific traits can be sourced from
different species. One example is the most popular biotech seed in India – Bt cotton.
In this case, Bt is Bacillus thuringiensis, a bacteria which when incorporated in the
seed protects the plants from specific pests such as American Bollworm. Bt cotton is
the only GM seed allowed in India.
Globally popular GM seeds, too, focus mainly on insect and chemical resistance
across various crops such as corn, soy, and cotton. However, companies are also
investing in new technologies to boost other characteristics such as yield and growth
efficiency. GM seeds claim to have beneficial impact on environment due to a
reduction in the usage of pesticides, which in turn leads to cost benefits for the farmer.
Figure 43: Comparison of open pollinated vs hybrid vs GM seeds
OP seed Hybrid seed GM Seed
Yield vs OP 3 - 4x 3 - 4x
Seed replacement ratio 3 - 4 years 1 year 1 year
Seed cost vs OP 3 - 4x 3 - 4x
Cost of pesticides No change No change Lower
Note: Beneficial traits are shaded; Source: Industry, Credit Suisse research
Figure 44: Seed business value chain
Breeder seedParent seed
multiplication
Hybrid seed
production
Seed processing operations
C&F points Sales
Research station
Farms Fields WarehousesRegional offices
Channels
R&D Supply Chain Marketing & Sales
Source: ASSOCHAM, Credit Suisse research
21 January 2015
India Seeds Sector 31
Companies Mentioned (Price as of 21-Jan-2015)
Advanta In (ADVI.BO, Rs349.5) Bayer (BAYE.BO, Rs3501.85) E.I. du Pont de Nemours and Company (DD.N, $74.36) Kaveri Seeds (KVRI.BO, Rs771.2, OUTPERFORM[V], TP Rs1100.0) LPHT (000998.SZ, Rmb20.51) Monsanto Company (MON.N, $117.57) Monsanto India (MNSN.BO, Rs3144.9) Rallis India (RALL.BO, Rs216.7) SDDSC (002041.SZ, Rmb35.03) Syngenta (SYNN.VX, SFr291.2) UPL (UPLL.BO, Rs363.95)
Disclosure Appendix
Important Global Disclosures
I, Anantha Narayan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for E.I. du Pont de Nemours and Company (DD.N)
DD.N Closing Price Target Price
Date (US$) (US$) Rating
24-Jan-12 49.41 50.00 N
19-Apr-12 52.61 57.00
24-Jul-12 47.74 54.00
30-Aug-12 49.58 R
01-Apr-13 49.01 53.00 N
23-Apr-13 52.49 55.00
23-Jul-13 57.12 59.00
22-Oct-13 60.17 62.00
06-Jan-14 62.96 70.00
06-Jan-15 70.89 77.00
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
REST RICT ED
3-Year Price and Rating History for Monsanto Company (MON.N)
MON.N Closing Price Target Price
Date (US$) (US$) Rating
04-Apr-12 80.58 82.00 N
25-Apr-12 77.51 NR
16-Jan-13 101.90 120.00 O *
26-Jun-13 100.84 121.00
09-Jan-14 111.89 134.00
25-Jun-14 126.73 148.00
25-Aug-14 117.51 141.00
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
N O T RA T ED
O U T PERFO RM
21 January 2015
India Seeds Sector 32
3-Year Price and Rating History for Syngenta (SYNN.VX)
SYNN.VX Closing Price Target Price
Date (SFr) (SFr) Rating
08-Feb-12 291.80 322.00 N
27-Jul-12 338.40 340.00
21-Sep-12 343.90 R
17-Jan-13 399.20 450.00 O
24-Jul-13 371.00 420.00
17-Oct-13 360.90 400.00
05-Feb-14 306.20 335.00 N
08-Jul-14 331.30 355.00
16-Jul-14 328.70 365.00 O
08-Oct-14 290.70 350.00
17-Oct-14 289.00 340.00
21-Jan-15 291.20 330.00
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
REST RICT ED
O U T PERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
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Rating Versus universe (%) Of which banking clients (%)
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Restricted 2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other i ndividual factors.
21 January 2015
India Seeds Sector 33
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Price Target: (12 months) for Kaveri Seeds (KVRI.BO)
Method: Our target price of Rs1,100/share for Kaveri Seeds is based on 2y PEG (P/E growth) of 0.75x, which implies 17xFY17 P/E (price-to-earnings).
Risk: Risks that could impede achievement of our Rs1,100 target price for Kaveri Seeds include: Significant crop rotation away from cotton; the company's failure to improve market share in cotton and corn seeds; founders' sale of shares; lack of medium-term visibility; tax rates; and dependence on external factors (eg, monsoon).
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (MON.N, SYNN.VX, DD.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
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As of the date of this report, Credit Suisse makes a market in the following subject companies (MON.N, DD.N).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (SYNN.VX).
Credit Suisse has a material conflict of interest with the subject company (DD.N) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Ei du Pont de Nemours & Co in connection with the announced sale of the DuPont Performance Coatings business to the Carlyle Group.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (KVRI.BO, MON.N, SYNN.VX, DD.N) within the past 12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
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21 January 2015
India Seeds Sector 34
Credit Suisse Securities (India) Private Limited ..................................................................................................... Anantha Narayan ; Akhil Kalluri
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21 January 2015
India Seeds Sector 35
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AG0153