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1 Kaveri Seed Company Limited 1

2 TABLE OF CONTENTS 1. Executive Summary: Kaveri Seed Company Limited 2. Business Overview Introduction Expertise Products Awards 2.1. Corporate Timeline 2.2. Key Developments 2.3. Ownership Structure 2.4. Kaveri Seed Company Limited Organisational Structure 3. Kaveri Seed Company Limited Products Portfolio 3.1. By Hybrid Seeds 3.2. By Micro-Nutrients 3.3. By Exotic Vegetables 4. Kaveri Seed Company Limited Financial Performance 4.1. Valuation Analysis and Financial Summary 4.2. DCF (Discounted Cash flow) Valuation and Upside Potential 5. Kaveri Seed Company limited Annotated Stock Chart and Analyst Recommendations 5.1. Annotated Stock Price Performance 5.2. Analyst Recommendations Expected Bullish Stock Performance Low Liquidity Implying High Investments Expectation of Earning Growth 6. SWOT Analysis Strengths 2

3 Weaknesses Opportunities Threats 7. Kaveri Seed Company Limited Operational Overview 7.1. Board of Directors Profile 7.2. Management Profile 8. Indian Hybrid Seed Industry Overview and Size, FY Fy Indian Hybrid Seed Industry Segmentation, FY Market Share of Major Players in the Indian Hybrid Seed Market, FY Competitive Analysis 9.1. By Products Offered/Revenue/Business Strategy 9.2. By Financial Performance (Topline/ Enterprise Value/ Multiples) 9.3. A Relative Valuation Analysis of Indian Seed and Agrochemical Industry 10. Kaveri Seed Company Limited Management Outlook and Future Projections Kaveri seed Company Limited Future Projections Ratio Analysis 11. Appendix Market Definition Abbreviations Research Methodology Data Collection Methods Approach Disclaimer 3

4 LIST OF FIGURES Figure 1: Kaveri Seed Company Limited Corporate Timeline Figure 2: Kaveri Seed Company Limited Ownership Structure in Percentage as on 30 September 2012 Figure 3: Kaveri Seed Company Limited Product Portfolio Figure 4: Kaveri Seed Company Limited Revenue Segmentation on the Basis of Contribution by Business Segments in overall Revenue in Percentage, FY 2012 Figure 5: Kaveri Seed Limited Hybrid Seeds Performance on the Basis of Revenue in INR Crore, FY 2008-LTM 31 st December 2012 Figure 6: Kaveri Seed Company Limited Micro-nutrients and Bio-pesticides Performance on the Basis of Revenue in INR Crore, FY 2008-LTM 31 st December 2012 Figure 7: Kaveri Seed Company Limited Annotated Stock Price Performance on the Basis of Volume Traded and Stock Prices in Thousand Shares and INR per Share, 25 th February th February 2013 Figure 8: India Hybrid Seed Industry Market Size and Contribution in the Overall Indian Seed Market on the Basis of Revenue in INR Crore and percentage, FY 2008-FY 2012 Figure 9: India Hybrid Seed Industry Segmentation on the Basis of Contribution in the Overall Hybrid Seed Industry in Percentage, FY 2012 Figure 10: Market Share of Major Players in Indian Hybrid Seed Market on the Basis of Contribution by Revenue in Percentage, FY 2012 Figure 11: Kaveri Seed Company Limited Future Projections on the Basis of Revenue, EBITDA Margin and Net Profit Margin in INR Crore and Percentage, FY 2013-FY 2017 Figure 12: Non-linear Regression Analysis and Scatter Chart Based upon Indian Hybrid Seed Industry Market size, FY 2008-FY

5 LIST OF TABLES Table 1: Kaveri Seed Company Limited Financial Summary on the Basis of Revenue, Growth and Net Profit Margin in INR Crore and Percentage, FY 2008-LTM, 31 st December 2012 Table 2: Kaveri Seed Company Limited Key Developments Table 3: Kaveri Seed Company Limited Ownership Structure on the Basis of Share held as on 30 th September 2012 Table 4: Kaveri Seed Company Limited Promoters Stake on the Basis of Number of Share Held and the Percentage of Share Held in Shares Outstanding, as on 30 th September 2012 Table 5: Kaveri Seed Company Limited Top Mutual fund Investors stake on the Basis of Number of Shares Held and the Percentage of Shares Held in Shares Outstanding, as on 30 th September 2012 Table 6: Kaveri Seed Company Limited Seed Product Quality on the Basis of Breeding Objectives Table 7: Kaveri Seed Company Limited Financial Performance on the Basis of Revenue, EBITDA Margin and Net Profit Margin in INR Crore, and Percentage, FY 2008-LTM ending 31 st December 2012 Table 8: Kaveri Seed Company Limited Valuation Analysis on the Basis of Market Capitalization, Net Debt and Enterprise Value in INR Crore and Units as on 25 th February 2013 Table 9: Kaveri Seed Company Limited Valuation Multiples Ratios on the Basis of Revenue, EBITDA and Net Profit Multiples, FY LTM ending 31 st December 2012 Table 10: Kaveri Seed Company Limited Discounted Cash Flow Valuation on the Basis of Weighted Average Cost to Capital, Present Value of Company Valuation and Target Share Price Table 11: Kaveri Seed Company Limited Sensitivity Analysis of Discounted Cash Flow Analysis, Perpetuity Growth Rate and weighted Average Cost of Capital on the basis of Perpetuity Growth Rate Method in INR Crore and in Percentage Table 12: Kaveri Seed Company Limited Operational Overview on the Basis of Board of Directors Profile Table 13: Kaveri Seed Company Limited Operational Overview on the Basis of Management Profile Table 14: Competitive Landscape of Major Companies on the basis of Product Offered, Revenue and Business Strategies 5

6 Table 15: Company Comparable Analysis on the Basis of Financial Performance in INR Crore and Valuation Multiples as on LTM 31 st December 2012 Table 16: Company Comparables on the Basis of Revenue in INR Crore, FY 2008-LTM year ending 31 st December 2012 Table 17: Relative Valuation Analysis on the Basis of Deal Value, Deal Stake, Implied Enterprise Value and Multiples in INR Crore, Percentage and Multiples Table 18: Kaveri Seed Company Limited Fututre Projections on the Basis of Income Statement in INR, FY 2011-FY 2014 Table 19: Kaveri Seed Company Limited Future Projections on the Basis of Balance Sheet in INR, FY 2011-FY 2014 Table 20: Kaveri Seed Company Limited Fututre Projections on the Basis of Cash Flow Statement in INR, FY 2011-FY 2014 Table 21: Kaveri Seed Company Limited Ratio Analysis on the Basis of Liquidity, Asset Management, Profitability and Leverage Ratios in Multiple and Percentage, FY 2008-FY 2014 Table 22: Regression Coefficients of the Indian MSW market Table 23: Regression Intercepts of the Kaveri Seed Company Limited 6

7 EXECUTIVE SUMMARY: KAVERI SEED COMPANY LIMITED Recommendation: ~ Target Price: INR ~ Date: 25 th February 2013 Kaveri Seed Company is involved in the production of genetically modified hybrid seed for various vegetables and field crops. The company generates most of the revenue from the sale of these hybrid seeds. The company engages in the production of soil enhancing micro-nutrients, biopesticides and has a separate division for producing exotic vegetables. The company was listed on the Bombay stock exchange of India in 2007 and is headquartered in Hyderabad Key Differentiators Competition and Positioning Key Developments The company engages in the pre cleaning, grading, cob drying, packing and storage of hybrid seeds via ultra modern equipment The company is one of the leading hybrid cotton producer, contributing ~% in the INR ~ crore hybrid cotton market Established a new Subsidiary Kexveg India Private Limited for producing exotic vegetables and herbs to cater to the demand in both domestic and international market 7

8 Financial Summary Kaveri Seed Company Limited Financial Summary on the Basis of Revenue, Growth and Net Profit Margin in INR Crore and Percentage, FY 2008-LTM, 31 st December 2012 Particulars FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 LTM Revenue Growth% Net Profit% CORPORATE TIMELINE The company started its operations in 1976 with the production of different varieties of hybrid seeds such as corn, millet, sunflower and rice. In 1986, the company changed its structure to a private limited under the Companies Act, having registration No of The company established a seed processing unit in Bellary, Karnataka. In 1987, Kaveri Seed set up its first marketing office in Davangere in Karanataka. In 1997, the company established its first research and development facility and launched its first hybrid corn seeds in 1997 in South India. The company s hybrid corn seeds product were successfully commercialized as it was providing more yield than other existing variety of seeds. In 1999, the company increased its seed production capacity to meet the growing demand for the same by setting up a processing plant at Kandlakoi near Hyderabad. Subsequently, the company had added more hybrid seeds of other crops such as sunflower, pearl millet, sorghum and rice... 8

9 Kaveri Seed Company Limited Corporate Timeline The company had incepted its operation in the field of hybrid seed, at Gatla Narsingapur Village, Andhra Pradesh The company had expanded its structure to a private limited entity and developed a seed processing unit at Bellary, Karnataka The company had started research and development on the hybridization of seeds and thus initiated a seed processing plant in Biramulguda The company introduced its first corn hybrid seed The company had developed its first seed conditioning plant in Kandlkoi The company was given recognition from the department of science and industry research, for its research and development practices on hybridization of seeds The company entered into partnership for producing biopesticides and micro-nutrients The company had acquired license from Mahyco Monsanto Biotech (India) Limited for using Bt. Gene technology to produce hybrid cotton seeds The company had established a seed conditioning plant with cob dryers facility at Gundla, Pochampally and Eluru The company s revenue had inclined to INR 1.0 billion The company had established a new division for producing exotic vegetables and herbs named as Kexveg India Private limited The company was listed on the bombay stock exchange (BSE) The company had signed an agreement with Agri Jenetics for producing testing and marketing hybrid cotton seed products The company acquired Kaveri Agritek, a joint venture establishment which produces micro-nutrients 9

10 OWNERSHIP STRUCTURE Kaveri Seed promoters are the major stake holders of the company accounting for ~% stake in total shares outstanding of the company. Company promoters have increased their stake from ~% as of 31 st March 2012 to ~% as of 30 th September 2012, a ~% y-o-y increase. Foreign Institutional Investors (FIIs) have increased their share holding significantly from ~% as on 30 th June 2012 to ~% as of 30 th September 2012 an increase of ~%. Among the promoters, G.V.Bhaskar Rao and R.Venu Manohar Rao had the highest shares held. Together they held more than ~%. The institutional investors held ~% stake in the company, of these institutional investors, IDFC premier equity fund has the highest stake of ~%. Kaveri Seed Company Limited Ownership Structure on the Basis of Share held as on 30 th September 2012 Category No. of Share Holder as on 30 th September 2012 No. of Shares as on 30 th September 2012 Change in Share Held Percentage Change Promoters Mutual Funds Financial Institutions/ Banks Bodies Corporate FIIs NRIs Public Total 10

11 Kaveri Seed Company Limited Ownership Structure in Percentage as on 30 September 2012 Promoters Mutual Funds Financial Institutions/ Banks Bodies Corporate FIIs NRIs Public Kaveri Seed Company Limited Promoters Stake on the Basis of Number of Share Held and the Percentage of Share Held in Shares Outstanding, as on 30 th September 2012 Name of Shareholder G.V.Bhaskar Rao G.V. Bhaskar Rao (HUF) DR.C.Gopal Rao Gouthareddy Shanker Reddy G. Madhushree G. Pawan Padamaja C R. Venu Mahohar Rao G. Vanaja Devi No. of Share as on 30th September 2012 Percentage of Shares as on 30th September

12 Madhavi Chennamaneni C Mithun Chand Vamsheedhar Chennamaneni Total Kaveri Seed Company Limited Top Mutual fund Investors stake on the Basis of Number of Shares Held and the Percentage of Shares Held in Shares Outstanding, as on 30 th September 2012 Name of Institution No. of Share Percentage of Share IDFC Premier Equity Fund Religare Finvest Ltd. Bengal Finance & Investment Private Limited Bodhivrishika Advisors LLP Ashish Kacholia Bodhivriksha Advisors LLP Total BY HYBRID SEEDS The company had introduced 4 hybrid paddy seeds namely KPH 216, KPH 371, KPH 272, and KPH

13 The company has a market share of more than ~% in the overall hybrid seed industry of India and is primarily involved in the production of hybrid cotton, corn/maize and rice in the segment of field crops. The company s revenue from the hybrid seed has increased at a CAGR rate of ~% from FY 2008-FY The company produced ~ tonnes of seeds in FY 2012 up by ~% y-o-y. The segments generated an overall net profit of INR ~ crore in FY 2012 up by ~% y-o-y. The company s product for hybrid cotton and corn seeds contributes the highest in the overall revenue from the hybrid seed segment. The product is estimated to contribute 47.3% in the overall revenue from hybrid seed in FY 2012 and the company has a market share of 5.5% in the hybrid cotton market in FY The company has been giving emphasis on the development of herbicide tolerance (HT) and draught tolerance (DT) while BT cotton has been the main focus of the company. The company s sales of the BT cotton seeds had increased because of the increase in the demand for the company s premier BT cotton hybrid products namely, jadoo and jack-pot. Kaveri Seed Limited Hybrid Seeds Performance on the Basis of Revenue in INR Crore, FY 2008-LTM 31 st December INR Crore FY'2008 FY'2009 FY'2010 FY'2011 FY'2012 LTM 13

14 Kaveri Seed Company Limited Seed Product Quality on the Basis of Breeding Objectives Seed Product Category Corn Sunflower Pearl Milet Sorghum Cotton Rice Breeding Objectives To ensure high yield To provide for medium to full maturity seeds Medium harvesting duration Maturity ranging from early to medium Medium height Suitable for rain fed and irrigated condition To provide for 30% more yield Source: Company Reports 14

15 VALUATION ANALYSIS AND FINANCIAL SUMMARY The company has witnessed a revenue growth of 39.6% from FY 2008 to FY This was due to an increase in the sales of hybrid seeds and micro nutrient over the years. Hybrid cotton seeds have been major source of revenue for the company Though the expenses incurred on sales has increased on account of an increase in the cost of raw material from INR ~ crore in FY 2008 to INR ~ crore in FY 2012 at a CAGR of ~% however, the increase was offset by a more than a proportional increase in the revenue of the company. Additionally, the increase in the compensation to the employees at a CAGR of ~% for the same period led to the further expansion in the cost of sales. The net profit margins had also declined at a CAGR of ~% from FY 2008-FY 2012 at a CAGR of ~%. It represents the percentage of gross sales which is being transformed into the profit after tax Kaveri Seed Company Limited Financial Performance on the Basis of Revenue, EBITDA Margin and Net Profit Margin in INR Crore, and Percentage, FY 2008-LTM ending 31 st December 2012 Particulars (in INR Crore and Percentage) FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 LTM* Revenue y-o-y Growth% EBITDA% Net Profit% 15

16 Kaveri Seed Company Limited Valuation Analysis on the Basis of Market Capitalization, Net Debt and Enterprise Value in INR Crore and Units as on 25 th February 2013 Particulars (in INR Crore and Units) Share Price (INR)* Share Outstanding (in Million) Market Value Net Debt Associates/ Minority Interest Enterprise Value Kaveri Seed Company Limited Valuation Multiples Ratios on the Basis of Revenue, EBITDA and Net Profit Multiples, FY 2008-LTM ending 31 st December 2012 Particulars FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 LTM* EV/Revenue EV/ EBITDA EV/Net Profit DCF (DISCOUNTED CASH FLOW) VALUATION AND UPSIDE POTENTIAL The DCF Valuation of the company showcases that the company stock price has an upside potential of ~% for the future period. The company is expected to grow at a perpetuity growth rate of ~% in the future, leading to a terminal value of INR ~ crore. This implies that the company s stock price is undervalued and is expected to increase in the future. The present value of the company s future cash flows has been discounted by ~% which represents the weighted average cost of capital for the company. Assuming a risk free rate of return of ~% and an unlevered beta of 0.81, the weighted average cost of capital has been computed for a debt to equity ratio of ~%. The company comprises equity of ~% and debt of ~% 16

17 leading to a levered beta of ~. The company s cost of equity has been estimated at 14.8% and the cost of debt is estimated to be ~%... The sensitivity analysis showcases how the company s valuation will be affected, given a change in the weighted average cost of capital and in the perpetuity growth rate of the company. The company s enterprise value is expected to show a nominal change, given an upside or downside 0.5% change in the weighted average cost of capital and 1.0% positive or negative change in the company s perpetuity growth rate. Kaveri Seed Company Limited Discounted Cash Flow Valuation on the Basis of Weighted Average Cost to Capital, Present Value of Company Valuation and Target Share Price Particulars Value (in INR Crore, Percentage and Units) WACC Revenue CAGR over E Present Value of Cash Flow till 2017E Terminal Growth Present Value (PV) of terminal cash flow Present Value (PV) of firm Less: Current Debt Total present value of the Equity Number of Equity Shares Outstanding (in Units) DCF - Target price (INR) 17

18 Kaveri Seed Company Limited Sensitivity Analysis of Discounted Cash Flow Analysis, Perpetuity Growth Rate and weighted Average Cost of Capital on the basis of Perpetuity Growth Rate Method in INR Crore and in Percentage Enterprise Value (in INR Crore) Weighted Average Cost of Capital Perpetuity Growth Rate MARKET SHARE OF MAJOR PLAYERS IN THE INDIAN HYBRID SEED MARKET, FY 2012 As per the historical trend, the revenue of the seed companies has been inclining. However, despite expansion in demand and favorable crop economics, EBITDA margins of most domestic seed companies declined in FY 2012 over the previous year, due to high competition intensity, maturation of growing cotton seed market leading to stagnant growth and significant increase in labor cost due to shortage in labor supply. For Monsanto India, corn hybrid was the single biggest focus in seed business. Through its Project Golden Rays project the company has signed a public-private partnership with Rajasthan state government for increasing the maize hybrid yields by two folds. The project involves ~ lakh tribal farmers. The company has a share of ~% in the overall hybrid seed market 18

19 Market Share of Major Players in Indian Hybrid Seed Market on the Basis of Contribution by Revenue in Percentage, FY 2012 Nuziveedu Seeds Private limited Maharashtra Hybrid Corporation (Mahyco) Monsanto India Limited (MIL) Bayer CropScience Ltd. - India Pioneer Seeds Syngenta India Ltd. Ankur Seeds Pvt. Ltd. Vibha Agrotech Ltd Rasi Seeds Private Limited Kaveri Seed Company Limited Others BY FINANCIAL PERFORMANCE (TOPLINE/ ENTERPRISE VALUE/ MULTIPLES) Company Comparable Analysis on the Basis of Financial Performance in INR Crore and Valuation Multiples as on LTM 31 st December 2012 (INR Crore, unless Stated) Last Twelve Months (LTM) Year Ending December 2012 Company Market Cap Net Debt Enterprise Value (EV) EV/Revenue EV/EBITDA P/E JK Agri Genetics Ltd. Advanta India Limited Monsanto India Ltd. Nath Seeds India Limited 19

20 Kaveri Seed Company Limited Mean Median Company Comparables on the Basis of Revenue in INR Crore, FY 2008-LTM year ending 31 st December 2012 Revenue (in INR Crore) FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 LTM JK Agri Genetics Ltd.* Advanta India Limited** Monsanto India Ltd. Kaveri Seed Company Limited Nath Seeds India Limited 7.1. A RELATIVE VALUATION ANALYSIS OF INDIAN SEED AND AGROCHEMICAL INDUSTRY The Indian seed Industry has witnessed a number of deal transactions in terms of mergers and acquisition between companies. Some of the company have transformed from a private limited to public limited by issuing equity stocks, one such company is R J Biotech Limited Relative Valuation Analysis on the Basis of Deal Value, Deal Stake, Implied Enterprise Value and Multiples in INR Crore, Percentage and Multiples Date Target Company Deal Type Deal Value INR (Cr) Stake % Implied EV/ Revenue Implied EV/ EBITDA Implied EV/ PAT 21-Feb-13 R J Biotech Limited IPO 10-Jan-13 Karnalyte Resources Inc Outbound Acquisition 20

21 6-Dec-12 Sree Ramcides Inbound Acquisition 24-Nov Jul-12 Century Seeds Private Limited Advanta India Limited Inbound Acquisition Private Equity Fund Raise 17-Jul-12 Agrichem Domestic Acquisition 21-May May Apr-12 2-Apr-12 5-Mar-12 9-Dec-10 Bisco Bio Sciences Private Limited NaanDanJain Irrigation Limited Zero Waste Agro Organics Private Limited Super Agri Seeds Pvt. Ltd Gold'N Chicks Limited Metahellix Life Sciences Inbound Acquisition Domestic Acquisition Domestic Acquisition Private Equity Fund Raise Inbound Acquisition Domestic Acquisition Mean Median 21

22 KAVERI SEED COMPANY LIMITED FUTURE PROJECTIONS Additionally, the farmers of rice are also expected to weigh the benefits of hybrid rice over its cost, thus providing growth opportunity for the company s revenue. The government will also help in the growth of company s revenue in the form of subsidies for production of quality hybrid seeds so as to raise the farm productivity and increase the demand for hybrid seeds Additionally, the company has ~ hybrid seed products in development stage. These products are expected to be ready for commercialization in the next three years. Kaveri Seed Company limited is expected to showcase a revenue growth of ~% from FY 2012-FY 2017 as the company is expected to focus on quality, product development, manufacturing efficiencies, productivity improvements and quicker reach to market Kaveri Seed Company Limited Future Projections on the Basis of Revenue, EBITDA Margin and Net Profit Margin in INR Crore and Percentage, FY 2013-FY , % INR Crore 3, , , , , % 15.0% 10.0% 5.0% in Percentage 0.0 FY'2013 FY'2014 FY'2015 FY'2016 FY'2017 Revenue EBITDA Margin Net Profit Margin 0.0% 22

23 Kaveri Seed Company Limited Fututre Projections on the Basis of Income Statement in INR, FY 2011-FY 2014 Income Statement (in INR) FY 2011 FY 2012 FY 2013 FY 2014 Revenues Expenses Financial Cost Depreciation EBITDA Net Profit Kaveri Seed Company Limited Future Projections on the Basis of Balance Sheet in INR, FY 2011-FY 2014 Balance Sheet (in INR) FY 2011 FY 2012 FY 2013 FY 2014 Application of Funds Fixed Asset (Net) CWIP Investments Other Assets Inventories Sundry Debtors Cash and Bank Balance Loans and Advances Miscellaneous Expenses not written-off Total Sources of Funds Share Capital Reserves and Surplus Other Liabilities 23

24 Total Debt Current Liabilities Provisions Total Kaveri Seed Company Limited Fututre Projections on the Basis of Cash Flow Statement in INR, FY 2011-FY 2014 Cash Flow Statement (in INR) FY'2011 FY'2012 FY'2013 FY'2014 Profit Before Tax Total Adjustments Change in Operational Expenses Direct Taxes Paid Cash Flow from Operations Net Investment in GFA Change in Investments Others Cash Flow from Investment Repayment of LT Borrowings Repayment of ST Borrowings Dividend Paid Interest Paid Cash Flow from Financing Net Cash Flows Openning balance of cash Transferred to Balance Sheet 24

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