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

Ladies and gentlemen, good day, and welcome to Kaveri Seeds Company Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that 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.

Thank you. Good day, everyone, and thank you for joining us on the Kaveri Seeds Company Limited Q1 FY '22 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 risks 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 an interactive question-and-answer session. I would now like to invite Mr. Mithun Chand to share his views. Over to you, sir.

Thank you, Rishab. Good day, everyone, and thank you for joining us on the call. I hope all of you are safe and healthy during this pandemic. I'm glad to connect with you during the first quarter of this year, which is a very important quarter revenue-wise for the company. A majority of the revenues for the year are logged in during this quarter. Let me share some perspective with you regarding performance during the first quarter of the financial year '22. Quarter 1 '22 revenue stood at INR 629.77 crore versus INR 719.48 crores in quarter 1 last year, a degrowth of about 2.5%. This degrowth is primary a result of significantly lower cotton sales and no government sales of maize. EBITDA margin stood at 34.09% amounted to INR 204 crores versus INR 296 crores in quarter 1. Provision for bad debt against realized revenue for economic business in finance amounting to INR 14.9 crores impacted profitability as a whole. Cash on books as of -- as on June 30, 2021, stood at INR 560 crores. Moving on to crop-wise performance. The performance of our noncore business ended strong. Maize volumes decreased by 18.29%, but the revenue was down only by 8%. This decline is primarily a result of there being no government business in the quarter under review. Ex government sales, our revenues from maize are up 14% while overall acreages are largely in line with the previous year. Contribution of new products have also gone up significantly from 6.98% to 17.88%. Hybrid rice revenue grew by 43.28% in quarter 1 2022. The introduction of new hybrid 7299, 471 and 473 contributed well towards a strong growth with their contribution increasing from 64.42% to 74.55%. Selection rice revenues also grew by 14.88% in quarter 1 on the back of consistent performance across geographies. Here too our new products: Chintu, 828, Sampurna, KV99 did well, taking contribution of new hybrids went up from 16.5% to 18.12%. Vegetable sales revenue increased by 22.39%. Growth was driven by hot peppers, gourds and okra. In hot pepper, KHPH 1223, KHPH 206 and Kaveri Beauty and Kaveri Sony did well. We introduced new hybrids like Srimukhi, which enjoyed good commercial price in exports and export demand. We do think the hybrids got a good response in the market. Contribution of new hybrids -- vegetables went up from 74% to 96%. Moving on to cotton. It would not be an understatement to say that the current year has been one of the worst in close to 2 decades for the cotton and hybrid seed market. When cotton acreages are significantly lower than in previous years, the decline in sales of branded seeds have been even more steep. This is primarily driven by a much increased use of illegal seeds and HTBT. In total, about 15% of HTBT is estimated to have been used this season. The industry is in dialogue with government in an endeavor to rectify this and we are hopeful of things improving. The second wave of pandemic added to the challenge. We saw impact across supply chain primarily due to unfortunate events and casualties that in turn, saw lower absorption of cotton hybrids by dealers and distributors and consequently, unavailability for the farmers. Farmers resultantly shifted to other crops for the seeds that are more easily available. Again, unlike in the first wave where dealers built inventories in anticipation of shortages, during the second wave, there was minimal advanced stocking. The overall hybrid seed market too saw a -- too hybrid farmers preferring to use the locally available OP seeds rather than buying costly seeds this season due to COVID-related uncertainty. Our operations continue to progress, well-supported by a robust R&D and infrastructure backbone. We are delighted with the acceptance of our new launches. Our focus continues to be on leveraging our established strengths to drive growth and utilizing cash to enhance its position in the agri space, creating value for the stakeholders. With that, I conclude my opening remarks and I have the floor open for an interactive question-and-answer session.

[Operator Instructions] The first question is from [ Muridhala Reddy from Reddy and Family ].

Yes, can you hear me, sir?

Yes.

Yes, we can hear you.

I have 2 questions, sir. First question, with respect to the paddy and rice growth, so what are we expecting? Because you did show a very good improvement last -- before last year, this year is about 20%. So what is our outlook? I mean I'm not asking for a definitive outlook. I'm asking for a strategic outlook.

Okay. As we were saying in the previous years also, paddy is a crop for which we are focusing more. And if you see as a whole, India is a major economy for the paddy and the hybrid paddy asset mix is going up, leaving this year where we have seen a lot of issues in relating to seed availability and in terms of the farmers' sentiment in taking hybrid in. But overall, it looks very good, and we are very bullish on the hybrid paddy. And if you see the growth of hybrid paddy even in its first year, where the industry is down by 10% to 12% in hybrid seeds market, we have grown by more than 40% in that. So we are pretty confident that hybrid rice, going forward, will have a major contribution towards the revenue. And we will be -- the other segment, the selection rice, even that has not moved up well this year. But at Kaveri, we have by grown more than 15% in selection rice also. So both these rices will contribute well. And as going forward, definitely, we think that the contribution of the rice as a portfolio will go up.

Sir, my second question with regard to the vegetables. So right now, you are focusing on only about 3 varieties, if I'm right, 3 or 4 varieties, something like okra and et cetera. So is there any plan to add more vegetables? Because vegetables are generally about 3 to 4 crops a year. So how is that growth is going to be, sir, in the next few years?

To start with, we have picked up -- right at the start of the year, picked up 3 or 4 crops which are major contributors for the revenue, especially like tomato, okra and chili. These are the 3 major crops. After that, we have picked the gourds and eggplant. And slightly, we have added new portfolio also to the vegetable crops. Going forward in the next 2 to 3 years, these are the crops which will give more -- contribute more to the vegetable revenue. And if you see the vegetable growth from almost negligible, I mean to say 0 to INR crores, from there, we have moved up to INR 40-odd crores. And going forward, we think the huge growth -- so we see a huge growth in vegetables. So we are pretty confident about the vegetable business going forward. And going forward, definitely add some more crops in that, and that's a continuous endeavor and process to add few crops to the portfolio as we go big.

The next question is from the line of Nitin Awasthi from InCred CIMB.

Two questions from my side. Firstly, on -- and both of them relating to the cotton segment. Firstly, like you mentioned, 15% in illegal seeds this time around, but our drop in sales volume-wise, you're up almost 30%. So we're losing a lot of market share, not only because of the illegal seeds and also from the drop in the core business seeds side, right?

Your voice is cracking. Can you repeat the question, please?

One second. One second. Am I audible now?

Yes, it's much better. Yes.

So 2 questions from my side, both on the cotton segment. Firstly, there has been illegal -- penetration of illegal seeds is up to 15% of the total market, but our loss in cotton volume-wise is close to 30%. So we're losing considerable amount of market share. And how is that the smaller players in the listed space are actually gaining market share given that there's so much illegal seeds coming in? That's the first question. And the second one is what are we going to do about the illegal seeds? How is it ever going to be stopped? Because it's growing so rapidly that what are the possible steps to correlate?

To answer your first question, yes, if you see the overall acreage, cotton acreages are down by 10% compared to previous year. But if you see the branded seed segment, this is down by more than 30%. The main -- there are 2 things. One, the illegal seeds has gone up compared to the previous year. It has almost doubled when compared to the previous year and the unorganized sector as its low brand seeds moving for this year, because more illegal seeds and low-branded seeds are basically a local company with supply, and they are readily available as the farmer goes to their villages. They were not able to travel to nearest towns and markets where you get the branded seeds or our own seeds. So that's one which has impacted a lot in terms of the cotton seeds. And we need to set this, this year, as an exception. We cannot say this will be a base point. But definitely, in terms of the illegal issues, definitely we need to think of it. And as a seed industry, we already represented the government for the last couple of years. And this year after the COVID season and after the growth, we are continuously in dialogue with the government to see the matter. And this is even the government has faced few practical challenges in tackling the field because of they are impacting when the issue is because of the pandemic and they were not able to clearly move into the villages and sort it out. That's one point. But definitely, we are pretty confident that -- with the current status and with the farmer difficulties now after the -- taking after the -- sowing the field, definitely the -- I mean they've also taken proactive actions curbing the illegal seeds. Definitely, we will see a positive pickup going forward in terms of curbing the illegal businesses. But as I said, this year is one of the exceptional year and we couldn't use it as a benchmark for the going forward.

Sir, if you could just explain how is it on the recurring? Because what we understand is that the benefit that the farmer gets from illegal seed, how does the cost that he bores or the end of the expiry date to get in those seeds and use those seeds, because of which farmers using these seeds are going up rapidly. And what is the way that the government can curtail it? Because it's a very -- like it's so rampant right now and people are now saying it's going to spread to the Northern parts of India which it's not gone already.

And sir, when you see the cotton seeds between the branded seed and the illegal or the unbranded seed, the difference of prices is very low, hardly few hundreds of rupees. And so the seed cost per acre is less than INR 1,500 cost. So the branded seed and the unbranded or the illegal, basically, difference front of the seeds for INR 100. Moreover there, rather than the rate difference, this year, as I said, the availability of the seed as did those steps, had made the farmer to pick up these seeds. And even when coming back to the illegal Bt, it's not approved by the government and the protein expression in these yields is not up to the standards. Definitely, the yield and the other things will definitely impact the farmers' productivity. So government is working on to ensure -- I mean to say, to curb this illegal thing. And as a farmer, it's always better to go for a good seed wherein you can expect a better rate.

The next question is from the line of Sumant Kumar from Motilal Oswal.

Yes. So my question regarding your cotton seeds. So you have given guidance 5% to 7% growth in Q4 FY '21. So what happened in between overall the significant decline, 29%, despite 7% acreage -- lower acreage in India? So overall, and we have seen overall, we are losing our market share in the seed market. So how are we going to retain and gain the market share?

So if you see our guidance for the year in the month of May, May is pretty early in terms of the growing activity. We have placed the stock in anticipation of the good season. If you recollect, we were saying that the cotton acreages is stable or slightly down by 5% or 4%. But this year, the cotton acreages are down close to 10%. And the illegal issue or what you say the branded seed sales are down by more than 30%. Usually, that it is not the case. Do we -- and nowadays, the sector have more because of the pandemic. And the nonavailability, I mean to say, because of the government's restrictions in terms of the lockdown or in terms of the partial restrictions across India. That and the second wave has impacted the dealers and the farming community a lot in terms of the near or dear got affected by this pandemic. So they were a bit reluctant to come down and go to the towns and take the seed. That's one which has impacted the branded seeds more. And most of the activities -- I mean it has been farmer mentality, we were able to see early this year. And in the last 2 decades, this was only year where we have seen that the branded seed sales have declined. Every year, it remains same, more or less, there was a narrow restriction, but it remained stable or same for the last 20 years. This is the first year where we are seeing that the unorganized sector move up. That's only in cotton. But if you take the entire year as such, entire year as such for the industry and market, these are only year where we have seen hybrid seed market across all profit down, because farmer use the readily available seed. So -- and this is the first time in the last 2 decades where we have seen this type of decline in the hybrid seed market. As I said in the previous question, this should not be taken as a benchmark year. This is one of the exception year where we have seen the entire thing contributing to the decline of the hybrid seed market.

So what are we taking the steps to gain our market share in AP, Telangana and Karnataka in terms of their...

If you see the market share, what we have in cotton, if you see the branded seeds market share, we have not lost any market share in the branded seed market. We have lost market share in the cotton market, not in the branded seed segment. And if we take the market share in the crops like maize and rice, we are growing much better than the industry. If you see the hybrid seed market, hybrid rice market, hybrid rice market, the market is down by 10% to 12%. We have grown by more than 40%. If you take in terms of the market share, we have gained. And if you take the market shares in the overall hybrid seed market, Kaveri Seed Company is the only company which has gained market share this year. It's for all crops, even cotton.

The next question is from the line of Abhijit Akella from IIFL Securities. [Operator Instructions]

Two questions from my side. One is, Mithun, if you could please help us quantify the sales returns and write-offs that you have taken in this quarter, maybe either the total amount or the excess amount compared to your normal provisioning for sales returns. And out of that, if you could also please just break it down between cotton and noncotton, just so we know which segment had higher amount of sales returns or write-offs.

If you take the sales returned, usually every year, we get close to 20% of the sales returned. But this year, we have provided for the more than 35% to 36% sales return. As we are aware, most of this stock went live in the market, it has not come back to the company as such. It will take some more time. It will take us a couple of weeks to come back to the company. We are just in the process of beginning a stock. But our internal estimates and what we have provided for the -- within the results, was we have factored is in the range of 35% to 36% of the returns. And the majority of the write-offs come from the noncotton crops. Cotton is a minimal crop -- I mean to say, returns are very minimal. I mean to say the write-offs are very minimal in cotton, but noncotton crops, the returns are pretty high. When -- I mean to say, write-offs are pretty high. When you compare to on a quarter-on-quarter basis, when compared to previous quarters, write-offs for the last year was INR 7 crores to INR 8 crores, but this quarter, the write-offs in the first quarter is close to INR 22 crores.

Okay. So INR 22 crores written off?

And those are write-offs.

And that is primarily in noncotton?

Basically noncotton. Cotton is very minimal, but basically noncotton, because noncotton, see, if you send to market and if it comes back, usually that will need to be discarded. Even though the seed has not come to the plant, but we have provided for that in anticipation of the -- as a regular thing. Historically, what is the percentage of the write-off we get, that's how we provide for the write-off. As I said earlier, in terms of the anticipation, if you recollect the discussion, what we had in the concall in the month of May, as I said that we are very much prepared for the pandemic. That's the reason by seeing the last -- the first wave, we thought that transportation, as we see, is very difficult if we have any lockdowns or anything. That's the reason aggressively, we have positioned our stock in the market. But due to many reasons, the consumption of seeds was very low when compared with normal seasons. And that has resulted in more returns and more write-offs. That is one of the factors which are reflected in the bottom line. And if you see in terms of the margins, we are a company which operates at 37%, 38% in the first quarter. And we have the highest EBITDA margins in the industry because of the scale. On the scale, when the size is impacted, there will be margin drop mostly for the revenue.

The next question is from the line of [ Nitin Agarwal from Elidel Limited ].

My first question is -- I'm not sure for this. Are you looking or are you -- do you have own land, 1 lakh acre of land? Is it correct or not?

No, we enter into lease agreements with the farmers who take that land and the lease are busy for production activity. It's not on our own land.

Okay. So all the land that you have are leased land? Or some of land you own also?

We have some own land also, which is mentioned in the annual report. We have own land, but the acreage that we use for the research purpose and our own internal bidding activity. But majority of the land, when you're talking about this 1 lakh acre which we have taken on production, basically the majority of the land is on the leaseback.

Okay. So this land is for the production of cotton or hybrid seeds or something?

It's production of all seeds, all the ranges of seeds, both hybrid and the branded seeds. But as it is, majority of the crops in hybrid, majority of the production activities is on hybrid seeds, so...

Right, sir. Okay. Yes. So my second question is are you expecting any -- last time, you have given the guidance of 5% to 7% in the cotton, and your cotton segment, it reaches to 45% from 37% over Q1 FY '21. So are you expecting any change? Or is this for the Q2 FY '22, are you expecting it to remain 45%? Are you expecting to remain increasing as it evolves?

We were always saying that the dependence of the cotton should come down at the company level. From 75% at the peak level last year, it was close to 45% as an overall basis. And we see it will be much lower than last year percentage because effectively, contribution of the cotton in the first quarter, usually, it should be around 60% to 65%. But this year, it is between 45%, 47%. And going forward, definitely, in the second -- 2, 3, 4 quarters, it's only the noncotton segment. The cotton percentage will further fall below the previous year levels. And going forward also, what we see is that being, I don't say this year as a benchmark, the cotton percentage will be much lower than the anticipated one. But going forward, noncotton costs will definitely be more than the cotton segment.

The next question is from the line of V.P. Rajesh from Banyan Capital.

Yes. My question was regarding the cash we have on the books. We have been doing buybacks in the past. So what is the current game plan to utilize that cash?

The policy remains same in terms of the company level. We want to spend the cash in -- for the growth of -- to the wider shareholders. We are exploring some options. So for that, we are held back that. If something material, definitely, we'll get back to you. Otherwise, that will be returned back to the shareholders.

So are you suggesting that you are looking for some inorganic growth opportunities?

Yes. We are looking for some opportunities, which we are seeing it. But once it's material, I'll let you know. But as of now, nothing concrete.

[Operator Instructions] The next question is from the line of Nishith Shah from Aequitas Investments.

Sir, I want to understand that there was some delay in sowing. So do we see any spillover of revenues from Q1 to Q2 for any of our crops?

Yes, not much. We have definitely seen a delay in the monsoon arrival in most of the parts, and we will see a spillover sale also across industry. But not to February, March because usually the spillover sales come from the quarter. But cotton acreages are down. We don't see much of a spillover in the next quarters.

Okay. And sir, second thing, I would like a clarification. So you said that this year, we have already provided for 35% write-back and 42% you have written off in Q1. Is that right?

No. What I said is that usually, the returns are 20%. So the percentage of returns what we get back to the company is 20%. But this year, as we have -- as the season is bad, we are getting close to 35% of returns. Out of the returns, we add a percentage we have provided for the write-off.

Okay. So INR 42 crores is provided?

Not INR 42 crores, I said INR 22 crores.

Next question is from the line of [ Hitesh Sharma from White Sky ].

If we see that the gross margin is going down and employee cost is going up, even other expenses are going up.

So if you see the margins, basically, we operate with a high margin percentage in the first quarter because of the scale. The revenues are down, that's the reason you see a margin impact. But the employee costs year-on-year definitely the industry -- the growth is there in the industry, employee costs will definitely go up. The other point which we have been seeing is the other expenses, which you rightly pointed out, is much higher than the previous year. One, because we have provided for INR 15 crores of bad debts, which we need to receive from the government end, because as a policy, anything more than 2 years of -- more than 2 years, they provided bad debts, because they have probably have sold some stock to government, Madhya Pradesh government, but the money was not -- we were not able to realize money because of the pandemic, they couldn't see a good way. So that's the reason we have provided extra INR 15 crores, which comes in the other expenses. That's one of the factors which has also impacted the profitability. But if you see, there are -- what we have provided as the Madhya Pradesh government of INR 15-odd crores in terms of the bad debt, but definitely, we are pretty confident that it will come from -- before this year.

See, inventory level, the point is like we are regularly closing the market share in cotton.

As I said, it's been a year. We have not lost any market share this year in terms of the branded seed segment. Overall, we might have lost the market share, but we have not lost any market share in the branded seed segment and even in the previous year, we have not lost any market share as much. It remains stable for the last 3, 4 years.

Next question is from the line of Samay Sabnis from PARETO CAPITAL.

So for the quarter 1, you had a PAT of INR 205 crores, where the addition of cash on books have increased from INR 533 crores to INR 560 crores, about INR 27 crores more. So where is a cash being blocked?

You are comparing from 31st March to 30th June?

Yes, that's right.

Basically, we get cash after the month of June, between June and after the month of June. But there are many payments which we do in the month first quarter. And whatever production we receive in the first quarter, the payment we do in the first quarter for the inventory of what we have received in the last -- in first quarter of this year.

Okay. And your hybrid rice sales have reached INR 162 crores, and the growth has been very high in hybrid rice. But at what number do you see that the growth will stabilize in value?

We said that we would say that -- we have said that the hybrid paddy will grow in between 20%, 25%, but our hybrid was very much accessible. That's the reason we have grown at 43% compared to previous year, and we are almost in the -- close to second position now in hybrid rice. So going forward, 40%, 45% growth may not be possible. That will be 25% gross sales, but we need to see a good base on the market size.

[Operator Instructions] The next question is from the line of [ Kamlesh Patel ], individual shareholder.

Hello, sir. Can you hear me?

Yes, sir. You are audible.

Yes, sir. My question is that, have you planned in your organic farming in the future?

Organic farming?

Yes, organic farming and organic trees. Have you planned to add this as well?

We are in the hybrid seed segment. We don't look into those matters. We don't operate in those segments.

So you have not planned anything in it?

No. We don't work on that segment. We'll just work on the hybrid seed segment. We are working on that. We don't have an interest in organic.

And I want a clarification. I read that you own -- your own land is 600 from this time, this period. Is it right, 600 acres?

Yes, yes, roughly around 600 land -- acres.

So you are not going to add any more land in this, because from here, it is only 600 acres?

That is more than sufficient to operate, and we have the -- if required, we'll definitely add based on our requirements. And if required, as we are taking land on deal, if we start get that land on deal and if it is necessary for us to buy, definitely we can buy. But that is not a constraint for us. Based on that facility and based on our requirement, this land is more than sufficient for us.

Next question is from the line of Amit Vora from PCS Securities.

Just one question. Mithun, you mentioned that there is some INR 16 crore write-off due to the receivable from MP government. Are we looking for any other material write-off that we are expecting and that might take some time from any other state governments?