Though the agricultural sector is becoming tech-driven, keeping intact the fertility of the soil has become a challenge. And this has resulted in the emergence of organic farming in maintaining the fertility of the soil over a long period. Various corporates have shown interest in this type of farming and have resulted in corporate farming. This, in the long term, will give a boost to agriculture growth to a large extent. In terms of crop production, wheat, corn, barley, gram and soyabean, groundnut, castor, paddy has seen the highest growth in the last five years with a decline seen in cotton and sorghum.

Business

Kaveri Seed, which is into production, processing, and marketing of seeds, is one of the seed manufacturers in India that is tapping the capital market for funds.

The company produces sunflower, cotton, paddy, grain and sorghum. It has recently forayed into micronutrients and bioproducts.

Micronutrients are essential elements to increase the performance of the plants and thus give rise to higher yield. Bioproducts are used to control the hazardous impact of pesticides and other agrochemicals on ecosystems. Micronutrients constitute 6% of the total sales in FY2006-07. It acquired M/s Kaveri Agritech, having microtek division, which is into biotechnology, for Rs 50 lakh.

Objects

Of the Rs 68 crore the company intends to raise, Rs 20 crore will be utilised for acquisition of farmland for R&D, followed by setting up marketing offices and godowns (Rs 12 crore) in various major cities, working capital requirements (Rs 10 crore), setting up of biotechnology lab (Rs 2 crore), corn cob drying plant (Rs 4 crore), new plant (Rs 6 crore) near Hyderabad and upgrading the existing seed processing plants (Rs 9 crore) from semi-automatic to fully automatic. Currently, the production capacity is 18,000 tonne. After the expansion, the capacity will enhance by 12,000 tonne to 30,000 tonne. The capacity utilisation in FY2006-07 was 73.63% as compared to 93.92% in the FY2004-05.

Financials

Majority of the products are sold in Andhra Pradesh and Karnataka. R&D, production and processing facilities are also located in the same states. Majority of its revenues came from corn at 42.39% followed by sunflower at 26.02%, bajra (10.55%), paddy (7.17%), cotton (5.62%). In the last nine years the company has grown at a CAGR of 23.955% from Rs 9.52 crore to 65.77 crore in FY2006-07. Net profit of Rs 10.54 crore for FY2006-07 was higher by 263% as compared to corresponding year.

Valuation

Production of seeds is a seasonal business. Majority of the sales happen in the first quarter from April-June. And this will work in favour of the company. The rest of the quarters are slack or may suffer loss because of higher overhead and marketing costs.

The company?s growth is completely dependent on R&D, marketing and distribution efforts. The most difficult task for any seed producing company is to innovate seeds for different states in India as the quality and fertility of the soil is distinct.

The promoters of the company are in the same line of business through a group company, and this can lead to a conflict of interest. On the valuation front, the company?s fully diluted earning per share during the FY2006-07 is Rs 7.69. Considering the lower and higher price band, P/E multiple is 19.49 and 22.09. Investors must consider the above factors before investing.