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

Ladies and gentlemen, good day, and welcome to Kaveri Seed's Company Limited Q3 and 9M FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Gavin Desa from CDR India. Thank you, and over to you, sir.

Thank you. Good day, everyone, and thank you for joining us on Kaveri Seed Company Limited's 9-Month and Q3 FY Conference Call. We have with us today, Mr. Mithun Chand, the Executive Director. Before we begin, 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 risk the company faces. The company does not undertake 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 address updates on the market environment and take you through the strategic imperatives of the company. We will then have the forum open for interactive Q&A session. I would now like to invite Mr. Mithun Chand to share his views. Over to you, Mithun?

Thank you, Gavin. Good day, everyone, and a very warm welcome to all of you. I hope all of you are safe and healthy as we battle across this pandemic together. We are happy with our progress in the quarter and half year -- 9-month under review. For 9 months financial year '21, revenue stood at INR 972.05 crore as against INR 867.23 crore for 9 months financial year '20, a growth of about 12%. Operating EBITDA margins, excluding other income stood at 32.29% in 9 months financial year '21 versus 30.66% in the corresponding 9 months. PAT at INR 319.82 crore as -- is higher by 31.2%. Our balance sheet remains strong. Total cash on books as on December 31, 2020 stood at INR 455 crore. As you are aware, almost all this cash is invested in mutual fund schemes of varying durations. Moving on to our business performance. Cotton seed volumes are marginally lower by 2%. We have gained market shares in the quarter in Gujarat and Haryana, while there have been slight losses in the states of Andhra Pradesh and Telangana. The contribution of new products remained strong at 35%. Industry-wide cotton acreages have been largely stable. Growth of our non-cotton portfolio continues to be strong, improving by 34.18% for the 9 months under review. Hybrid rice and selection rice have both performed well, growing by 47.72% and 49.98%, respectively. Our new launches in selection rice, Chintu, Prize and Sampurna have all performed very encouragingly. Maize volumes are higher by 19.11% and revenue by 13.6%, again, well supported by new product launches, which contribution stood at 9.27% by volume. As we had earlier indicated in rabi, maize acreages have been lower by about 10% due to poor commodity prices. Vegetable sales, which is a key focus area for Kaveri Seed, saw strong volume growth of 150% for the year-to-date. The key growth drivers were hot pepper, tomato, gourds and okra. Going forward, we continue to be positive about the prospects of our hybrids in maize and millets and our vegetable portfolio. The vegetable market, in particular, is valued at INR 30 billion, and growing at 20%. Kaveri's market share is extremely low, giving us ample opportunities to grow and establish our presence. Further on the back of the successful launch of CLCV virus-resistant hybrids in hot pepper market, we have identified a few more CLCV virus-resistant hybrids and plan to introduce 2 new hybrids in the coming years. On that note, I conclude my opening remarks. We would be happy to give you our perspective on any questions that you may have. I would request the operator on this call to open question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Nitin Awasthi from East India Securities.

So I'd just like to understand what is happening on the maize front because as -- what -- I was looking at the numbers, what I realized was although the area under acreage is down by 10%, it seems like our volumes are down close to 30%. And maize being the major revenue driver this quarter last time around, that's what has impacted our margins -- I'm sorry, that's what has impacted our top line.

Yes. If you see the overall acreages for the rabi crop, the maize volumes are down. In particular for Kaveri, the maize volumes are down by more than 20% compared to previous year. Basically, the areas in like Bihar and the -- areas where we are strong like Bihar and Andhra have been impacted a lot. That's the reason you see more impact in terms of revenues for maize. But if you go as a crop, maize in a long-term view, it looks very good. Now the commodity prices have also improved. And we still are very bullish on maize crop going forward down the line.

Got it, sir. Secondly, sir, this time around, our employee expenses and other expenses were higher Q-on-Q. So could you shed some light on that?

Yes, as we are adding -- continuously adding employees for the growth, and we're investing a lot in the R&D programs, so that's why the employee cost is going up. And in terms of the other expenses, it almost remains slightly higher because we are doing some seed promotion activities for the further years, that is coming up. Otherwise, it's in line with our program. And if you see year-on-year, being a lean quarter as a percentage it might look higher, but it's in line with the overall 9 months figure.

All right, sir. Sir, lastly, on the rice front, we are doing extremely well, as indicated by the company earlier also, that rice will be the major focus and it will become the major revenue garner for the company. What I would like to understand is how much of this increase in sales has come in from the existing markets? And how much has come in because of addition of newer markets?

If you talk about rice, we are the -- one of the largest player. In fact, we are almost the second largest player in rice. We are almost present across all geographies. But to answer your question, we have increased our market share in the most of the areas where we are operating. So that's the main growth driver for rice. And if you see, as a portfolio -- rice is close to 25% of our overall portfolio and is second to cotton now. And going forward, also, we see a good growth in hybrid rice.

Got it. Lastly, sir, on the rice front, what would be the market share difference between you and the leader currently?

Right now, in terms of the hybrid rice, we are close to 11% to 12% of the market share -- 10% to 11% of the market share. The leader is close to like 27%, 28%.

Okay. Got it. And on the hybrid rice front -- if you could just -- last question, how -- what is the industry growth rate, hybridization in rice right now?

Right now, it's like 8% to 10% growth this year overall in hybrid rice. If you see in the last 10 years, it's growing at a pace of 5% to 7% year-on-year.

The next question is from the line of [ Chetan Doshi from Tulsi Capital. ]

Congratulations for the good numbers. I have 2 questions. One is the other income for the 9 months is shot up by almost 180%. And second question is, last con call, you promised that, yes, we are going to support small shareholders and there will be an announcement of buyback, but it has not come till in February. So how are you going to reward your shareholders in the current year when you are making such excellent profit?

To answer your first question regarding the other income. If you see the other income, most of the other income -- and not most -- the entire other income is generated by the investment activities in the mutual funds and what we have as the free cash flow. So some funds have matured in the earlier quarters and even this quarter. That has resulted in 9-month growth. So whereas in last year, the majority of the other income came in the fourth quarter. So if you see year-on-year basis, it should be in line with the last year numbers. And if you come back to the buyback point, yes, we have recently completed 1 year -- I mean only in this week, the entire procedure was completed. But as a management view, we are keen to distribute a reward to the shareholders. That will definitely -- in the mind of the good of Board of Directors, definitely that will -- we'll let you know of the plan in the coming quarters.

And how much you plan to end up this year? We'll cross...

Fourth quarter is a very lean quarter for us, not much sales are expected, but it should be -- in terms of the revenue, it should be in line with this year numbers and the other things will remain same. As we have seen, last year, only INR 45 crores or INR 50 crores of revenue came in the fourth quarter. So that's very insignificant number for us.

But this year, you're concentrating on new products like vegetables and also the growth will come from these new products...

But it's a very lean quarter. See, the other crops -- so it's a very lean quarter for us. So hardly we -- in terms of vegetables, we will be doing better than last year. But all other crops remain same. So not much impact on the top line.

The next question is from the line of Nishith Shah from Aequitas Investments.

Sir, I want to understand in our non-cotton side. So going forward, do we see our realizations moving up? Or everything would be from the volume side, the growth?

There might be a slight increase in terms of the margins. And also if you see compared to previous year to now, we have -- for the first 9 months, we are up by almost like 1.5% to 2% in terms of the EBITDA margins. So going forward, there might be a slight increase in terms of the margins also as we are moving in the non-cotton segment.

Okay. And coming, sir, particularly to the maize segment, so our volumes are up 19%, but the revenues are up only 14%. So do we see some competitive pressure over there? Or what are the issues over there?

Basically, the rabi crop contributes to the majority of the revenue. We were up in the kharif part. Kharif, the selling price -- average selling price is lower than the rabi part that -- we have increased volume in the kharif. That's the reason you see a slight impact in terms of revenues.

Okay. Sir, and going forward, what is our target for R&D spend? Are we planning to ramp this up significantly? Or it would be in a similar range of 3%, what we have been doing in the past?

If you see, in the last year, we are consistently increasing our spend on the R&D. At the same time, we are growing the top line also. That also we need to consider. So in terms of the spend, we are -- added many people. We have added new labs. And we are consistently increasing our spend on R&D. And going forward also, by seeing the size and this, we are spending much better than the industry, and it will be in line with that. And the other point, what we need to observe here is that most of these facilities are our own facilities. That's the reason you see a slight decline in terms of R&D expenditure.

The next question is from the line of Abhijit Akella from IIFL Securities.

Just a few questions related to some of the new products in some of the segments. So first of all, the new products you define as products launched in the last how many years? Is it 3 years or 4, 5 years? How is it defined?

It basically is the 3 years what we take as because from the time of the introduction, it takes at least 3 years till we consider the new product. 3 to 4 years based on the introduction of it.

Right. And this -- in rice, KPH468 seems to have done extremely well in the last maybe 3 years since it has been introduced. So if you could -- is it possible to share some sense of how much of the hybrid rice is from this particular hybrid? And how much it has scaled up in the last few years? And what do you see the potential of this product has? I believe the rice market overall is some 60,000, 65,000 tonnes overall in India. How do you see this product possibly scaling up once it -- before it reaches peak maturity?

If you see 468, it's almost like 3 years where we are seeing a continuous growth of it. And close to 60% -- 50% to 60% of our hybrid portfolio is from 468. If you see the product, I mean, this is a hybrid potential. Still it has a potential to double. And it's much more than double going forward. So that's a very promising hybrid and still it will do well. And to support that, we are introducing some other hybrids in different segments in hybrid rice, which will also contribute for the growth going forward.

So I mean in terms of, say, volumes for your rice portfolio, would you have any target market share in the 60,000 tonne market, say, over the next 5 years or so? Where you expect to end up?

Definitely, we want to be leaders in the market -- hybrid rice market. And if you see the industry growth and our growth, our growth is much higher than the industry growth. And by seeing the product performance and by seeing the pipeline hybrid, we are pretty confident that we'll be leader in hybrid rice in the next 5 to 7 years.

And I mean any color you could give in terms of what differentiates your hybrids from what's already in the market? Why you are gaining share?

Basically, there are many attributes for that. One might be the yield. There is a disease resistant. And other, there is a value-added -- I mean to say like pest resistance or a virus resistance. So these are the factors which actually make the hybrid performance better. So we are developing hybrids, which are the resistance in most of the pests and giving a better yield. Not only yield, in terms of the grain and in terms of the other factors.

Okay. Got it. Just one last thing on the rice, and maybe I'll come back for more. You did INR 85 crores from hybrid rice last year in FY '20. This year, you seem to be on track for INR 135 crores or so, so about INR 50 crore increase Y-o-Y. Can we expect a similar kind of increase next year also, like INR 50 crores, INR 60 crores, at least, further growth in this?

We are anticipating at least 20% to 25% of growth in rice. That's what we said. And we should be slightly above that. But we are pretty confident about further 20%, 25% growth.

We'll move on to the next question, that is from the line of Viraj Kacharia from Securities Investment Managers.

Congratulations for a good set of numbers. First question was on the hybrid rice. So you said we've been growing our volumes much higher than the industry rate. So who are we gaining the market share from?

So we are gaining from most of the companies. There are many companies who are losing it. We can't name in specific. But as a whole, we are gaining it. If you see as an industry, we say that it has grown by 8% to 10%. But as a company, we have grown by more than 47%, 48%. So we are taking some of the market share in that, not specific to any one company.

Okay. So if you were to compare our gap versus the leader, has that kind of shrunk? I mean -- has there been a considerable market share change in the leader itself? Or is it the other peripheral or the smaller players that we've been able to kind of consolidate and gain from?

So as a leader, they are not able to grow in line in [ as the way we grew. ] That itself shows that our hybrids are performing better than most of the cases. So definitely that gives edge for us.

Okay. And just to dwell back on the strategy part. So apart from focus on non-cotton portfolio, a couple of years back, the whole idea was to kind of derisk from the core -- concentration we had in terms of the core territories for the AP, Telangana and the southern market. So how has that changed for us for major crops? So if you were to compare last 2, 3 years, how has that mix changed for us? And how has our market share moved in those new markets where we have...

Except for cotton in Telangana and Andhra, for all other products we have gained market share across India. Even Tamil Nadu -- sorry, even in Karnataka, we have gained market share for... [Technical Difficulty]

Hello? Hello? Hello.

Ladies and gentlemen, the lines of the management has got disconnected. [Operator Instructions] We now have the lines of the management reconnected. Over to you, sir.

So coming back to your question, like we have gained market shares in Karnataka, both in maize, cotton and in pearl millet also, even including sunflower. So we are -- in Andhra and Telangana, we were not giving credit to the farmer. That's the reason we have lost market share. Apart from that, nothing major to worry about it.

But the new market, so ex of AP, Telangana and Karnataka, how is our sales mix from those geographies? How has that changed? And what is our market share in those regions?

Basically, majority of the hybrid rice moves in Northern states only, North and Central states. So we have gained market shares there. And even in cotton, even though we are losing market shares here, but we have gained market shares in Gujarat, Maharashtra, Haryana. So that shows that we are growing across India, not restricted to South.

Okay. Okay. And what is the growth we have seen in rice in this particular quarter, in volume terms?

We have grown by at least 25% -- sorry, 35%, I think -- 35% to 40%.

And how does that compare with the market?

The market is just like 6% to 8%, not more than that.

Okay. Just 1 more question on rice. Typically, what we see is that whenever we launch any new product introductions, they come at a slightly better realizations. But when we look at our overall 9 months number as well for both volume and overall sales, we have not seen any major delta or change in the realization part and rice part. So just trying to understand, is it that the old legacy portfolio is kind of seeing more pressure or moderation in prices? Or how should one look at it?

So the majority of the product. Majority of the rice market is from 468, which was introduced 3, 4 years back. So the realizations are same. And we realized one of the largest realizations in the market. So slightly it will improve. But in terms of the volume is the one which drives the majority of the thing rather than the realization part, as we are selling at one of the highest prices.

The next question is from the line of Rohit Nagraj from Sunidhi Securities.

Am I audible?

Yes.

Yes. Sir, the first question is in terms of the cotton seed placement. So if I remember, last year same quarter, we had indicated that to avoid giving any cash discount, we had slightly postponed the seed placement. So what is the current scenario in terms of the seed?

It is not in terms of the seed placements, but it might be in terms of the advances -- collection of advances. So we are following the same strategy as last year. We are not collecting much advances from the market. So it will continue like last year itself.

Yes. And then on cotton. So this year, we have a marginal 2% degrowth. How are we looking at for next year in terms of the cotton acreage and in terms of our growth from the lower base of this year?

I think the cotton acreages should remain stable this year itself. Initially, we thought that it should be negative for cotton this year. But by seeing the present commodity prices, it should be stable. And in cotton, as -- we see that as we are improving our market shares in Northern India, so we see a growth of like 5% to 10% in cotton next year.

All right. That's quite good to hear. Sir, the other question is in terms of the exports. So where are we currently in exports? I believe that currently our majority of exports come from Bangladesh. So what is your strategy in terms of expanding the geographical coverage over the next maybe 2 to 3 years?

We are -- we have sent samples to like almost like 9 to 10 countries, including Bangladesh, neighboring countries, African countries and Southeast Asian countries. And the results are encouraging. Slowly, we have done small shipments of that. But definitely, it will take another 2 to 3 years to get the initial breakthrough. And this year, because of pandemic, we faced some issues in terms of exporting the seed and other parts. That has also impacted to some extent of our exports. But on a longer-term view, exports is the one which we are focusing on and that should definitely add to the revenues going forward.

Sure. And sir, just last question on the guidance. So earlier we had guided on a long-term basis, top line will grow about 10% to 15%, and the bottom line more than that. So particularly talking about FY '22, in first 9 months, the bottom line has grown by almost 32%. So do we see us -- higher than top line growth in FY '22? So if I say 10% is top line growth, the bottom line growth on a higher base would be maybe 12%, 13%?

I mean to say, if you take out the PAT levels, the other income is also included in that. That's the reason it shows like 30%. But if you take out the other income, it's in and around the 20% growth of bottom line. Still for the next year also, we go with the same guidance of 10% to 15% of the top line and 15% to 20% of the bottom line.

We'll move on to the next question that is from the line of Anurag Jain from Green Lantern Capital.

I have a couple of questions. One was on next market opportunity...

Sorry to interrupt, Mr. Jain. Sir, your voice is breaking up.

Okay. Am I audible now? Is it better?

Yes, much better.

So one of the questions was on export market, which you briefly touched. Any sense how big this opportunity can be over 4, 5 years?

So right now, we are doing close to INR 20 crores of revenue in exports. Going forward, it can be definitely like close to INR 100 crores in the next 5 years, as the industry itself is growing and most of the countries are opting for Indian seed. So definitely, we might grow in those levels. But see, those are our plans, which are a bit aggressive, but we can -- looks like we can achieve it.

Fair enough. Similarly on vegetables market, what is your sense? How much market share can we gain in 4, 5 years' time? So you said it's a INR 3,000 crore market, 20% growth. What is the size possible?

To start the year, we said that we want to be INR 100 crore revenue in the next 5 years' time. But if you see the present revenue compared to previous year, we are almost like INR 30 crores compared to last year's INR 23 crores figure. And if you compare quarter-on-quarter basis, like till 9 months, we were like INR 14 crores in vegetable for the first 9 months, whereas we are close to INR 30 crores in the first 9 months. So we will be growing much better than what we said there. Like we said, that like 30% to 35% in vegetable, but we are almost like grown by, say, almost 100% this year -- for the first 9 months. Year-on-year, it should be like 70%, 80% growth than the -- compared to previous years. So vegetables, we are pretty sure that as we've given a guidance of INR 100 crores in the next 5 years, it looks pretty much achievable by the growth what we have achieved this year.

Okay. Sure. So one question on export markets I forgot to ask. How is the profitability there versus the domestic markets, pricing opportunity?

Right now slightly lower than what we realize in domestic market. But that's the initial stages of the marketing part of it, the costs are a bit higher. But going forward, we can definitely have a better margins than the local -- than the domestic one.