Kaveri Seeds banks on research to reap success

Increasing competition & supply glut seen as key challenges for one of the largest seed companies in India

Prashanth ChintalaKrishna Kant Hyderabad/ Mumbai
Small experiments can sometimes yield big results. It certainly did for Gundavaram Venkata Bhaskar Rao, a graduate in agriculture science. An experimental breeding of public-bred varieties of corn on his family farm in Karimnagar district in Andhra Pradesh 30 years ago turned him into a seed entrepreneur and promoter of Kaveri Seed, one of the largest seed companies in India. In FY13, the company reported net sales of Rs 710 crore, up 91 per cent from the previous year, while net profit doubled to Rs 130 crore.

The big growth for Kaveri Seed came in 2007, when it raised equity through its maiden public issue and got listed on the bourses. It gave Rao the resources to go national and enter new seed categories such as vegetables. Rao credits his success to the company's diversified portfolio of products. "Farmers today switch from one crop to the other depending upon the climatic conditions and market potential and our wide product range gives an edge over other seed companies, which produce hybrids of just one or two crops," he said in an interview with Business Standard.

Kaveri produces hybrids of cotton, corn, rice, sorghum, sunflower and millets, besides vegetables and, thus, can meet the challenges of the changing cropping patterns. The company has already developed 100 hybrids of these crops, while 34 more are in the pipeline.

Analysts attribute Kaveri's success to investment in research and development (R&D) that gives it a product pipeline to beat competition. "Kaveri's recent launches have been a hit with farmers and it has been able to grab market share from competition. The shift has been aided by high prices of agri-commodity prices in the last few years that induced farmers to invest in high-yielding varieties of seed," says an analyst with a brokerage firm in Mumbai on condition of anonymity. Some analysts, however, say Kaveri will face challenges. The competition is increasing with the entry of deep-pocketed players such as Tata Chemicals, through its subsidiary Rallis. Besides, cotton seeds, Kaveri's biggest revenue driver, is witnessing a supply glut.

G Vijayaraghavan of Bativala and Karani that has an outperformer rating on the stock says in the longer term, Kaveri Seeds is well positioned to gain from increasing thrust on improving seed replacement and growth in hybridisation. However, he expects some pain in the short term. "Most cotton-seed producers, including Kaveri, overestimated the market and are now sitting on large unsold inventory. This will translate into slower revenue growth in FY15."

Rivals are not willing to comment on Kaveri's track record. "I don't want to comment" was the cryptic reply of Ramesh Viswanathan, chief operating officer of the NSL Group, when asked about Kaveri Seeds' performance.

In the past five years, Kaveri has cumulatively spent nearly Rs 50 crore on research and development (R&D) and in FY13, R&D expenditure accounted 2.2 per cent of its net sales. Five years ago, the ratio was a little over 12 per cent. Now, Kaveri has a 50-member R&D team and 600 acres of its own farm land dedicated to developing and testing new varieties. The company aims to create one of the largest collections of germ plasm - the genetic resources of plants - in India.

The investment has paid off handsomely. In the past five years, net sales are up nearly seven times growing at a compounded annual rate of 49 per cent. Operating profit during the period expanded at 42 per cent a year, while net profit jumped nine times to Rs 130 crore last financial year from Rs 14 crore in FY08. This provided the company internal accruals to fund growth. This made Kaveri one of the best mid-cap stocks, with price up nearly six times since listing in September 2007.

Rao said the future growth strategy included geographical expansion, higher sales and the hybrid vegetables business. The strategy involved an annual investment of about Rs 25 crore through internal accruals. In 2011, Kaveri had launched Kexveg India, a wholly owned subsidiary that produces high-value vegetables seeds for India and Europe. It is expanding its vegetable-seed portfolio from capsicum, tomato and cucumber to okra, bottle gourd, ridge gourd and bitter gourd.

Simultaneously, the company is focusing on rice hybrids. "Only three to four per cent of the paddy area in the country today is under hybrid-rice cultivation. Hence, we feel there is a good market potential for rice hybrids," Rao said, adding Kaveri already had four to five good varieties of hybrid-rice seed. The company is planning to expand operations in the country, besides entering Bangladesh Vietnam and some African countries.

First Published: Sep 04 2013 | 12:41 PM IST

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