What Ails Kaveri Seeds ?

On almost every financial parameter this is a solid scrip. The ROE is climbing steadily for the last three years and now stands at 39.75% If you break up the ROE, net margins are at 39 %, asset turnover has increased to 1.37 and the equity multiplier is at .73 vs .8 three years back. The Return On Capital Employed has climbed from 20 % five years back to 40% today. The Operating cash flow stands at 161 Crores vs 57 crores five years back. Total Debt has come down from 27 crores five years back to 1.4 crores today. On the revenues front, revenues have grown at a 5 year CAGR from 215 Crores to almost 760 Crores; and this is with a Net margin of 39%

Yet, the stock is languishing and is at INR 506 against a 52 week high of 1077. Yes, there have been quarterly misses; but given the company's strength and the long term sectoral up trend; is there some skeleton in the cupboard which is supressing this stock ?

It is well worth our while to understand the reasons for this. Any insights?

 

Hi Fun_Da_Mentalist

I found this article on Kaveri- hope this is of help

Vivek Kumar, agro chemical analyst with SBICap Securities, says that the dip in revenue by 20 per cent is a major disappointment despite the profits meeting estimates.

"The share is in weakness because revenues have fallen 20 per cent and the miss is very significant. The company has also not done provisioning of Rs. 64 crore royalty payment to Monsanto," he added.

For every bag of cotton seeds that Kaveri Seeds sells for Rs. 900-930, the company has to pay Rs. 120 to Monsanto as royalty, Mr Kumar said.

But Kaveri Seeds has been paying Rs. 20 instead as Telangana has issued a directive to cotton seed companies not to increase prices owing to weak monsoon, he added.

The Telangana government has called for paying Rs. 20 as royalty to Monsanto and a case in this regard is pending in the Telangana High Court, Mr Kumar added.

If court ruling goes adverse, then Kaveri Seeds will have to shell Rs. 64 crore for which the company has not done any provisioning.

Meanwhile, a deficit monsoon has hit cotton acreage which could hit Kaveri Seeds' business.

Regards

Amit

 

Thank you Amit. That was useful. If there are royalty issues then the larger problem would be Monsanto can close the tap when they want and offer it to someone else who does not have this problem. This is a red flag. But keep in mind that farmers buy seeds well before they know how the monsoon will au out so these companies are normally insulated from that problem. Trust the govt to screw things up. Again. Best to stay away is my sense.

 

Timely question! Kaveri declares its results on Nov 13 and the stock is further down to 480 levels. No doubt its a great company, but there have been fundamental changes to the business: [Mostly covered by Amit, Let me add mine]. The company currently faces several headwinds [ Royalty payments that was covered by Amit, MRP fixation by state governments, successive droughts that have not only affected cotton seed intake but also Rice and Maize seeds [second and third largest sales items] and then most importantly stake sale and pledge by promoters [ Understand they have pledged / sold certain percentage of stake to build other business in the agri space].

a. While Maharashtra has decreased its Price Per Packet from 890 to 790 levels, Monsanto has reinstated its royalty levels as mentioned by Amit
b. FY 15 and FY 16 look bleak since there is very little chance that State Governments will allow price increases in a drought like situation. Now that is a very politically sensitive move and most other Cotton growing and Rice growing areas will either go in for a election on the next 2 years or will come out of a drought - This implies that market pricing will be absent for cotton seed and Rice seed packets. The only saving grace is that, Kaveri has a few high yielding varieties - These seeds may be taken up by farmers by paying premium and this might actually be a competitive advantage that the company may derive in the long terms and hence the business sustainability will be there [ Political intervention will not mean a lost cause like what happened to MFI's in Andhra]
c. A large percentage of sale is derived from Telangana and UP [ Both known for political populism esp. with agriculturists]

Pro's:

a. 2018 will be a great year for cotton, globally you will see the lowest level of cotton stocks
b. Realization may increase due to new seeding varieties
c. Rice and Maize price may improve over the next 2 years
d. Hopefully Royalty payments may have been solved by them

I would love to enter at 400-450 levels keeping a 2-3 year time frame.

Would love to hear your views!

 

We can not rely on past data much as the key issue for the fall in share price was Maharashtra Government decided to reduce the maximum retail price of cottonseed by ₹100 a packet. And other states might also follow the same. Also there is that issue of monsanto. As there is uncertainty, its best to avoid it till the picture becomes clear.

 

The tempting thing for me is that this is a fundamentally rock solid company in a sector which has to grow. The earnings multiple are low due to political interference and weather. Neither of these two factors can be modelled with any degree of certainty. This will always mean that the earnings multiple will be capped at most in the early twenties. The interesting aspect is this firm makes 60 percent of annual sales and 65 percent of annual profits in the June quarter. I am seriously contemplating playing this as a regular trading stock. Buy it around Nov - Dec and sell it around July next year. The imponderables of politics and weather make me increasingly think I will stay away as a long term investor. Which is a pity because the valuations are mouth watering and the firm is really well managed with good numbers

 

@ Rishi and @ Fun_Da thanks for your comments. I concur with your points. Its such a shame that investors have to stay away from this stock owing to Govt Interference.

One more point: I just reviewed the B/S for 2015. There is one red flag though. Revenue was up over 100 Cr but at the same time receivables (> 6 months) went up from 18 Cr in Mar-14 to 114 Cr at the end of March-15. This is pretty unusual! [Mgmt might have been pushing sales backed by aggressive credit in a drought like situation]. Lets watch provisioning numbers for Q2 [If any]. Telangana is a heavy credit market and this could be another spanner in the works going forward! [Bad debts, Royalty, Political Interference, Weather]

 

Here's the link to the Royalty Issue:

Monsanto, cotton seeds firms at war

 

I do not find royalty payment of rs 64cr will affect the health of its books of account. Though its a issue there was no clarity regarding the same. Company was complying with govt notification regarding the same matter.
On the other hand what bothers me is the intervention by govt. and high courts rejection to the petition filed by seed manufacturer challenging the govt. decision regarding the price cut.
However the same issue will be faced by every company in this business and this issue is not only related to kaveri seeds. Kaveri seeds can be a contrarian bet.
Disc: not invested.
Ps : In no way i am suggesting whether it is buy sell or hold. Do your own research before investing.

 

Very good discussion on Kaveri Seeds

 

Can we apply Theory of Refexivity of Soros suggesting negative bias and deteriorating fundamentalls acts self reinforcing cycle of the sector. Look at Sharda cropchem also

 

@shakti khanduri .. Can you explain this a bit more? (i.e. self reinforcing cycle). Just curious to understand.. Thanks for your comments.

 

Soros often talks about fallibility and reflexivity.

Fallibility being the argument that in a system made of individual thinkers, a single thinker will never have complete information and hence is forced to conclude thru the prism of personal experiences. This makes his conclusions open to mistake.

Reflexivity is the argument that views of the individual shape the collective view. But if individual view is incomplete and possibly incorrect then we open the possibility to collective being off the mark ( here he distinguishes between the cognitive and the thinking)

He finally goes on to say that the feedback can be positive loops or negative loops. A positive feedback will soon ensure the system moves away from reality ( ie every body thinks Kitex is the cats whiskers and this build up of expectation is the very reason it under performs)

A negative feedback on the other hand has the effect of adjusting to reality and hence setting the base for growth before it spirals into positive feedback which then starts the move into the negative loop.

By that argument, buying into Kaveri now is a good idea.

In simple words : there is merit in Buying solid but beaten down stocks while there is no merit in buying great stocks in the middle of its feeding frenzy

 

More detailed analysis around the Royalty issue published today on Capital Mind - Royalty Mess at Kaveri Seeds

 

This is a good factual article rich with historical perspective. Thanks so much for sharing this. Have been grappling with this over some time; but I think I am starting to conclude that there are other good stories out there with no cloud hanging over them. As kf now buying seems to be a leap of faith. Having said that, I see myself keeping a very close eye on this one.

 

what are your views on Aries Agro and Monsanto India

 

I guess it will be middle option that is monsanto wins - govt control msp but does not interfere in fixing trait value. Reason being trait value is contract between two parties i.e. monsanto and kaveri and govt/court cant interefere between the contract as long as it is a valid contract in definition of law.
However I may be wrong

 

If you don't mind, can you share what Ideas are you currently looking at?.

 

I am adding to existing positions of Shilpa Medicare, granules, IDFC bank once it lists, Kitex Garments, Camlin Fine. Note of caution : one must be extremely careful and patient when adding Kitex garments. It is a tricky one and one can slip on it or be carried away by its charismatic management and growth story.

All of them are stories of companies which will command market dominant positions, have a proven management and strong financials. Each of them ( except IDFC bank which is a pure india play ) can be in globally dominant positions a few years out.

Among the larger players I continue to add RIL and Infosys when there is a market adjustment. RIL still offers interesting entry points. Here is a company whose margins in core operations are climbing rapidly, who has embedded in it the largest retail business in the country - INR 18000 crores top line - and whose telecom initiative will consolidate industry. The eps implications a few years out is still not being factored in fully. Finally despite all these positives it is quoting at interesting discounts to historical 10 year PEs

Finally, I continue to add LIC Housing but not at the same pace as before Aug 24th this year.

So I am not actively researching new ideas. I continue to look at Kalahasthi pipes, Caplin point and Kaveri seeds.

 

i was looking at Monsanto India (bought some in October) and just read some of your Kaveri Seeds posts

came across this interesting read https://vandanashiva.com/?p=260 a couple of weeks ago, will help you understand how deep rooted a problem it is and how Monsanto has its way, almost always, even at the WTO
the link has a lot of information regarding the US/India business practices of Monsanto and the global evil that it is

do these Indian firms who use Monsanto's IP stand chance against Monsanto & Uncle Sam?
here's an excerpt "Second, since they do not have a patent for Bt-Cotton, Monsanto’s collection of royalties as “trait value” or as a “fee for technology traits” (IPR category that does not exist in any legal framework and was concocted by Monsanto lawyers to work outside of the laws of the land) is illegal. These illegal royalty collections have been collected from the most marginal farmers, pushing them to take their own lives."