Kaveri Seed Company Limited (KSCL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Kaveri Seed's Q2 and H1 FY '21 Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Rishab Barar from CDR India. Thank you, and over to you, sir.

Good afternoon, everyone, and thank you for joining us on Kaveri Seed Company Limited's Q2 and H1 FY '21 Conference Call. We are joined today by Mr. Mithun Chand, the Executive Director. Before we get started, I would like to point out that certain statements made or discussed on the conference call today may be forward-looking in nature and must be viewed in conjunction with the risks we face. The company does not undertake any responsibility to update them. A statement in this regard is available for reference in the presentation. We will begin the call with opening remarks from Mr. Mithun Chand, who will share updates on the market environment and take you through the strategic imperatives of the company. He will also share his thoughts on the performance of the company during the review period. We will then have the forum open for an interactive question-and-answer session. Now I would like to invite Mr. Mithun Chand to share his views. Thank you, and over to you, sir.

Thank you, Rishab. Good day, everyone, and very warm welcome to all of you. I hope all of you are safe and healthy as we battle across the pandemic together. We are happy with our progress in the quarter and half year under review. For first half '21, revenue stood at INR 853.5 crore against INR 745.23 crore in first half last year -- against first half last year, a growth of 14.53%. Operating EBITDA margins, excluding other income, stood at 35.57% in first half of '21 versus 34.27% in the corresponding 6 years -- 6 months. PAT at INR 319.82 crore is higher by 31.2%. Our balance sheet remains strong. Total cash on books as on September 30, 2020, stood at INR 481 crore, a INR 41 crore increase from INR 440 crores as on September 30, 2019. Almost all this cash is invested in mutual fund schemes of varying durations. The Board of Directors have recommended an interim dividend of INR 4 per equity share of face value INR 2. Moving on to our business performance. We have gained market shares in cotton in Gujarat and Haryana, while there have been some losses in Telangana and Andhra. Our new products, including KCH 111, Money Maker and VIPLAV had all performed encouragingly translating to an improvement year-on-year in new product contribution from 31% to 35%. Industry-wise, cotton acreages have been largely stable. Some states like Gujarat, Maharashtra, part of Tamil Nadu has seen some decline in the acreages due to the increasing attractiveness of other crops like soyabean, groundnut and chillies. In line with our business strategy, the growth in our non-quarter portfolio has been particularly strong at 35.58%. Volume growth in new hybrids combined with good price appreciation of our 3 products contributed positively. Maize volumes increased by 36.78% in the first half '21, with contribution of new products increasing to 8.34% of the volume. Overall, maize acreages have been stable. Heavy rainfall in October and fall in prices is, however, likely to see a decline in acreages in the Rabi season. Volumes of hybrid rice, selection rice and vegetables have all grown extremely strong on the back of successful product interactions. Hot pepper, okra and tomato all have driven this growth in vegetables. Kaveri Seeds has also featured in this year's edition of Forbes' Asia's Best Under a Dollar (sic) [ Asia’s Best Under A Billion ] being among 200 Asia Pacific public companies, which are less than $1 billion in revenue and consistent top and bottom line growth. Going forward, we expect our products in maize, millet to contribute to show good growth. We all are very positive about the prospects of our vegetable portfolio. Heavy rains in October, combined with usual commodity prices, may see pressure in cotton and maize though. On that note, I conclude my opening remarks. We would be very happy to give your perspective on any questions that you have. I would request the operator on this call to open question-and-answer session. Thank you.

[Operator Instructions] We have a first question from the line of Rohit Nagraj from Sunidhi Securities.

Congrats on good first half performance. Sir, the first question is on cotton. So in the commentary, we have suggested that there has been -- the prices have been lowered and the inventories have been higher. So what is your expectation for next Kharif season? And in terms of our seeds, how are we placed for the next season?

Particularly in terms of cotton, we see that the areas may remain same, not much decline. As of now, it's 25% plus or minus from this current levels. That should not be much of a difference for [indiscernible] and our forecast. But the other point what you need to understand here is that we have very limited options to replace cotton. So I think the cotton acreages will remain high around 5% next year annually. And in terms of the cotton, we are hoping that 10% growth in the cotton. For that, we have started producing it and we are in line with it.

All right. And the second question, again, pertaining to cotton. So you have mentioned that the HTBT sales have been about 50 lakh packets. So any action against that? And so next year, again, we would see a similar kind of intrusion from HTBT?

Our governments, both the central and state governments, have taken strict actions on that, but still we are seeing HTBT getting popular in the markets. I think, again, we must slightly see increase in the HTBT as of now, but it's too early to say because we have been shipping on an HTBT this year. So it should remain sideways.

Okay. And just one last question on guidance. So what is the updated guidance for FY '21 now?

Sorry, you are talking about this year?

Yes, this year. So earlier, we had, I think, 10% to 15% overall growth with about 15% to 20% bottom line growth. Now first half is done and the cotton has been slightly muted, so how do we look for the FY '21 now?

See, as we -- like we said, we are taking between 10% to 15% growth in the top line, that you've already witnessed in the first half. Second half anyhow is a lean quarter compared to the first half. Even in second half, we had a very good season last year. We had very good maize last year. This year by seeing the commodity prices and especially some state government are discouraging maize, so that may impact the maize acreages this year. And being -- at Kaveri, we have different portfolios, we have rice, wheat. Wheat is growing in some parts and we have vegetables. So I think we can do the same sales as last year. I don't think it should impact much as our top line, but growth we need to see. We have [indiscernible] we'll let you know. Anyways, it's a very big potential, not invest much on our profitability or top line and we're already improving this year.

We have next question from the line of Nitin Awasthi from East India Securities.

A number of questions from my side. I'll start with maize. So you -- like you said, many state governments are discouraging the cultivation of maize because of the lower prices of maize currently hovering in the market. So what do you expect? You expect to do the same number that we did last year in maize or actually lower because you will also suffer due to the market shrinking? Or will you actually gain market share and be equal to last year?

In terms of the maize, we have very good market share in the areas where we operate in Rabi. But definitely by seeing the last year to this year, the maize acreages are down, and we're really impacted by the downfall and maize sales will be impacted. But as a whole at Kaveri because we are doing very good in vegetables and rice and wheat, we have produce in our wheat, so that may compensate the losses in maize. So as a whole, we don't see much of an impact on our top line. If we are talking in particular about maize, definitely there is an impact.

Okay. And sir, secondly, on rice, have the realization sharply dropped? Or is there something which is a miss that we are missing? Have the realizations per kg, per bag or whatever, however, you calculate it compared to the previous quarter, has that dropped significantly?

No, it's in line, slightly the cost of production has gone up this year, and we were not able to increase the prices in rice segment. That's the reason we have to slightly increase the cost of goods. Otherwise, it all remained same.

Okay. But the selling price per kg, et cetera, is similar to last year?

Yes, yes, yes, slightly a INR 2 to INR 3 realization drop in some varieties of rice.

Okay. Okay. And this time around vegetables, this quarter, for the first half, it has seen an amazing growth. But for this quarter, we have been on the little downside on the vegetable front. Although we have launched a lot of varieties and et cetera, but any particular reason -- I mean, what I'm trying to get at is that because of the varieties that we have launched, will the growth be seen in the second half and was that launched at the later stage of the quarter?

If you see in the last quarter, last year to last year and last half to half; or last half to this half, and in particular, the second quarter to second quarter; even we have done better in vegetables on a quarter-on-quarter basis. But usually, the second quarter is a lean for vegetables and the second half is really good. So we see a similar type of growth in the second half also in vegetables.

Okay. And sir any -- Telangana and Andhra happen to be your strong foothold when it comes to the cotton market. And when you say that you have lost market share in these space, so have you lost it to HTBT or have you lost it to other competitors?

All -- some towards HTBT and some towards smaller companies. There was -- that's the main thing because we were realizing more, there was some price competition was also there. And if you see, in fact, in the last 5, 6 years, we are losing market shares in Andhra and Telangana, but we are gaining in other parts.

What is the reason for that, sir, if you could just shed some light on that, that why are you losing market share there, where you had a very, very strong foothold? And why are these smaller companies being able to take away the market share from a giant such as yourselves?

Basically, because of the price competition, and we have not introduced many new hybrids in these areas. That's one of the parts. And if you see in the last 3 years in terms of the overall sale, we all remain same. I don't say that we have lost heavily in Telangana or Andhra; we have remained there. In fact, we are slightly gaining in terms of the volume growth, slightly, but not in line with the overall sales.

Okay. And anything -- any steps being taken by the company to address this issue of not being able to launch new varieties in these areas?

Nothing. We are launching in hybrid, but we are not able to capitalize a lot that we were able to do because most of the varieties may not be suitable in most of the areas. For example, the hybrid which we have launched are doing very well in Maharashtra and Gujarat. We have gained market shares in Maharashtra and Gujarat. Even in Haryana, Punjab, we have increased our market share. Only in the part of Telangana, not even in AP, only in the parts of Telangana, that too in 1 or 2 districts, we are facing issues. Otherwise, it all remains same.

Okay. Sir, got it. Sir, just one last question, and this is from a strategic view on the company that if you look at some countries or some regions in the world which are adopting GMO technology and hybrid technology very rapidly and India doesn't happen to be one of them. So if you see places like Bangladesh, our neighbor, and countries in Africa, just going gung-ho over hybridization and GMO. So do you think it's not wise, as of now, to set up subsidiaries in these countries and capitalize on this opportunity?

In the question, there are 2 points. One is hybrid and the other one is a GMO. GMO is like the central government. It's a government issue. They need to give licenses that [indiscernible] committee will take the call on it. We don't have any call. But when you talk about the hybridization, India already has hybridized. For example, if you see cotton, more than 95% is hybridized; maize more than 70% is hybridized; sunflower is hybridized; rice is picking up. So wherever there's a possibility of hybridization, it's picking up in India as well. So I don't see any issue in terms of thinking about hybridization. We are in line with many countries. And in fact, far better with many other countries. But only in GMO, that's the government decision. Based on the government decision, we will adapt GMO. We have only 1 GMO that's in cotton because it's non-edible, that is the reason we are using it.

[Operator Instructions] We have next question from the line of Ayush Mittal from Mittal Analytics.

Sorry, it's not Ayush Mittal. It's Anish Agarwal from Mittal Analytics. I would like to ask a question first. There are some rumors flying around that the company is facing some tax-related issues from the past and some resignations might happen against the company. Would you like to throw some light on that?

As of now, we don't have any pending issues. If you have seen the annual report also, we clearly mentioned what's going on. We have -- there's no pending liability or pending notice which is there in combination. That [indiscernible] and we have filed a case on that, on the first [indiscernible] that stayed in the court. That's the only thing what -- that we have clearly mentioned in the annual report. Apart from that, we don't have any other issue.

Sorry, which one, sir?

We don't have -- what I was saying is that we don't have any pending litigation or I mean to say, like, pending orders or anything from the income tax department. We had a case-related search, that's pending in the court.

[Operator Instructions] We have next question from the line of Amit Vora from BCS Securities.

What is the update on buyback, Mithun, just wanted to understand?

These -- that again are subject to Board's decision, but anyhow, we were distributing the cash for the shareholders. And last buyback they have completed sometime in the last month of -- this month -- this year January. As per the rules, we only need to start after 12 months, so based on that, we will take a call.

So that's on track. I mean, either...

Our intention -- as of now our intention is to distribute it to shareholders. But again, as I said earlier, it's subjective to Board meeting. We'll have a discussion in the first 1 year of that.

Right, right. But other than that, because we have already intimated that we do not have any CapEx plan or neither we are looking for any strategic buyout to grow inorganically. So ideally, you will be looking to distribute that by way of buyback because dividend already you have announced.

No, as of now, our intention is stay impacted with what we had in earlier years, still it continues. We need to see.

Okay. And a few things on the working capital. So our inventories have gone up from last year September to this year and receivables also. So these inventories are pertaining majorly to paddy, cotton or what is it? Can you give some color here?

I think inventories even in cotton we are slightly up a bit to previous year, and we have produced more for this year. As you see, we have grown more in cotton, non-cotton -- and especially non-cotton segment inventory. In cotton, we were not able to sell as per the anticipation. So that is a pileup which is there in the September end but if you go back to -- go by the year-end also that we slightly increasing their inventory because we are anticipating more sales in the coming years. And most of the inventory is already empty. So we don't have much stock. So we are in line with it. Nothing of that sort.

Okay. And the receivables which have gone up from September last year to this year September also, that is majorly related to...?

Not much special impact. We had good collections before compared to full year close. Some sale had happened in the second quarter, that might be impacting it. Not much. So we don't see any of the bad debts for any of the write-offs in there.

Okay. Okay. And this quarter compared to last quarter also last year, we have booked a decent portion on other income. So what is it that we are looking for the full year in terms of booking other income? Because last year, second half, majority of the other income had come through.

So basically in the first half, second half -- basically, if you see historically in the last 3, 4 years or 5 years, we are getting another income between INR 30 crores to INR 50 crores. Even this year, that should be the range. Some might have matured in the first or second quarter. Based on the maturity, we book the vegetable income in the respective quarter. So it should be in the same line as last year, not much.

Right. And one investment we have in this Franklin plan that has no impact with the ongoing issues with Franklin Mutual Fund?

No, we don't have any. We have already disclosed every investment in the annual reports. We do do it in the quarterly reports. As of now, we don't have any investment.

Okay. And one last thing. Have we got any inventory write-off in this quarter, particularly?

That's for the same process. Every year, we have a write-off. Definitely, we will have some write-off. And going forward also, we'll have some write-off. It's all in line with the routine activity. Every year, we do it and this year also we will do it. Not anything significant.

No, what would be the number in this quarter because I remember last quarter you had given a number for the write-off that you do as a routine, prudent accounting fraction but what would be the number at this time?

So usually, what we will do is that for the entire year, it should be between INR 15 crores to INR 20 crores. Even this year, it should be in line with that.

We have next question from the line of Abhijit Akella from IIFL.

Congrats on a good quarter. Just to check about the employee cost increase in this quarter, there's quite a sharp increase. So any color you could put on that?

One, the headcount is also up. We have given increments this quarter. So some is loaded in the second quarter because we were not able to do in the first quarter so we are doing it in the second quarter. So that's something is there. And even the e-shops, cost is also added in the employee costs.

So this number should decrease from 3Q onwards on a quarterly run rate basis?

Yes. Because e-shop is also added. Definitely, it should go down next quarter, but marginally, INR 2 crores or INR 3 crores. Not much.

Okay. Got it. And the footnotes to the accounts mentioned about write-offs at one subsidiary, so I mean, what are the plans? Does Kaveri need to put more money into that subsidiary? And how much amount would be increased?

Nothing. Nothing. That was a very small subsidiary where we had a 50%, 50% joint venture with the other partner that we have stopped the operations in the last 2, 3 years, nothing there. The write-off is basically of the field more than 3 years, which is not recovered, so we have a procedure to take it as a write-off. [indiscernible] So still we are collecting the amount, but the operation is already stopped with that company for the last few years.

Your next question is from the line of Chetan Thacker from ASK Investments Managers.

Sir, the question was on market share gain in maize. Just wanted to understand where have you gained market share in maize? And also, is there some tender business and this maize revenue?

We have gained market share in most of the parts. For example, wherever we operate, especially in Karnataka, Maharashtra, Northern India, and some parts, we have gained market shares in those parts. And over and above that, we also participated in some tenders. Even tenders -- participation in tenders is also a working activity. So it's a combination of both.

Sir it's driving a large bit of the volume. That is not the case?

Sorry?

It is not the case that tender is driving a large bit of the volume growth. That is not the case, right?

No, no. Yes.

We have next question from the line of Vidit Shah from IIFL.

Just wanted some clarification on the tax rates for the company going forward. So this quarter, we had some benefit from the earlier years. So just want to understand what benefit that was? And what we should assume the tax rate for the year?

In terms of the business, we see it as an agriculture income, and we don't pay any tax on that. But the tax reversal what we have seen in the second quarter, basically on the mutual fund investment when we take out, we've provided for full taxation. But that's clearly the indexation we were supposed to materialize. So that came back in the second quarter, only on the returns, not on the business there.

So ideally, you would be paying tax only on the INR 40 crores, INR 50 crores of other income tax you...

Yes, yes. That we have covered at a higher tax slab. Based on the indexation benefits, it was a bit lower. So that's what we are...

Okay. Got it. And secondly, can you just show light on the performance of the subsidiaries? I mean I see that the revenue has grown sharply, but the margins have come down in the subsidiary financials. So what has led to that?

Basically, there are 2 subsidiaries. In fact, 2 subsidiaries, but majority of that is done in with the Aditya Agritech where we have 70% of the holding in that. So that, again, Kaveri is a company where we produce and most of the property is captured in Kaveri only. So that is basically a trading company. That's the reason we don't see much of margins in that.

Okay. But the revenue has gone 18%, 26% across the subsidiaries?

It's a small -- see, it's like INR 10 crores, INR 12 crores of revenue. Not much. So that number looks big, but in terms of that, it is very small, and the costs have also gone up in that. As we capture the majority of this profit in the main company, so saving profit will be there in that.

We have next question from the line of Prasanna Sankaranarayanan from Rippling.

So I didn't quite follow, sir, when you said guidance for the next year, not this year, the next year. So this year, we have sort of already done more than INR 50 in earnings per share. Next year, I saw that the outlook has mentioned poor cotton prices and maize prices. And like -- so what do you sort of guide now? I didn't catch that part.

Basically, the outlook what we have given is for the second half and the sentiment part. Maize, this year, declined in the second half. But for the next year, it's too early to predict about maize because the maize price has been impacted because of the pandemic condition. Once the export and everything goes on, which is the maize improving. And in terms of the cotton, we see expecting the prices going forward also. But in India, we don't have much of an option to replace cotton crop. So that's the reason we pay 5% plus or minus of the current cotton acreages. But very unlikely that it will go up. It will only come down as of now. But in terms of our products, we have launched new products in cotton. I think we'll be able to maintain our market share. In fact, we are hoping for a increase in the market share for the next year. We are not worried about that one. And even maize is too early. We are penetrating in other parts. We see a very good prospect for maize, especially for all non-cotton produce, including maize, rice and vegetables.

So for next year, it looks like, there's isn't like a major impact and the guidance is maintained. The 7-year guidance -- like, right now, we're doing something like INR 55 or something in net EPS. So is it like 15% to 20% on bottom line growth from there. We can expect, like, INR 65 or something, next year?

Yes, our long-term view on guidance looks same. There's no change in the guidance at all.