Kaveri Seed Co. Ltd, dubbed by some as a one-trick pony, is stepping up efforts to shed that perception. The June quarter results presentation provides details about how the company is trying to reduce its dependence on the cotton seeds business.
In a nutshell, it is building the vegetables seeds business, expanding the rice and maize seeds portfolios and is strengthening its distribution network beyond south and central India to the northern, eastern and western parts of the country.
The diversification into more crops and regions, the company said in a conference call with analysts, should help it embark on a sustainable growth path.
The push was long awaited. As the company gained a foothold in the southern and central parts of the country, its fortunes also became intertwined with the region’s agricultural dynamics such as crop shifts, excess rains, droughts, government interventions, and competitive forces.
A case in point is the last two fiscal years, when the company’s revenue and earnings shrank on a reduction in cotton seed volumes. In comparison, Rallis India Ltd’s seeds business (Metahelix) held up rather well, thanks to its wider reach.
Of course, Kaveri’s business recovered this year thanks to the rise in cotton crop acreages. Revenues during the June quarter are up 20%.
Cotton seed volumes grew 27%. As margins improved, operating profit and net profit increased in the range of 29-31%.
On the face of it, the performance looks good. But if one compares it to earlier years, say Q1 of 2014-15, it leaves much to be desired. Revenue, for instance, is less than three-fourths of what Kaveri clocked in the quarter ending June 2014. Cotton seed volumes and profits are also less than what the company registered then.
That shows that things are not completely back to normal. The revenue gap can be partly explained by the drop in revenue from maize hybrids. It should be noted that prospects of different seeds businesses vary depending on market sentiments.
But the impact can be mitigated if the companies are well diversified. Business for maize seeds for instance was impacted in Telangana and Karnataka, Kaveri’s key markets. But Punjab did well this season. Similarly, the cotton seed market in Andhra Pradesh and Karnataka lagged national growth this season.
The trends reinforce the importance of diversification. They show that Kaveri could have recovered even faster if it had a bigger footprint, say in the northern market.
But results will not be easy to come by and it can be a time-consuming process. Cotton seed breeding for the northern market is expected to take more than a year from now. Similarly the vegetable seed plan for next year is being prepared now.
But if Kaveri succeeds in its diversification efforts, then it can provide the much required hedge against geographical concentration and provide growth stability for investors.