Global seed industry
The seed market is considered to be one of the most important segments of agriculture due to the rising food demand. Consequently, biotech seeds are being seen as products which improve returns on investment while responding to consumer demands for healthier and economical agricultural products by increasing per unit seed production and per hectare productivity.
The global seed market can be sub-divided into the following categories:
Oilseeds - soybean, sunflower, cotton, canola, mustard among others;
Grain seeds - corn, sorghum, wheat, rice, millet crops, among others;
Fruits and vegetables - tomato, cauliflower, melon, carrot, onion, pepper, lettuce, among others;
Other seeds - alfalfa, turf, clover, forage plants and flower seeds, among others.
North America generates the maximum revenues globally. Europe is the second largest market and Asia-Pacific stands third. The US drives the North American market while India and China drive the Asia-Pacific seed market. France generated the maximum revenues in Europe, followed by Germany. The Latin American market is led by Brazil while the rest of the world has received a boost following growth in certain African countries.
Brazil is the fourth largest market in terms of domestic seed demand, valued at nearly US$2.6 billion. It is also considered the fastest growing market for corn seed. The growth in seed demand is concurrent with a growing agricultural demand owing to the burgeoning population of the country as well as the growing export market. Brazils food commodity exports are considered critical sources of hard currency, resulting in growing importance of agriculture.
France is the 4th largest exporter of agriculture and agrifood products. Agrifood business is of great importance for the French economic growth and employs almost 6% of the French population. The French seed sector can attribute much of its excellent international reputation to good climatic conditions, crop diversity and ample output. During the 2012-2013 campaign, the sector exported US$1.9 billion worth of seeds, a whopping 15% increase from the previous year.
Optimism. According to the report, Seeds; Market By Type (Oilseed, (Grain, Fruit & Vegetable, Turf, Forage & Other Seeds), Seed Trait (Herbicide Tolerant, Insecticide Resistant & Other Stacked Traits) & Geography - Global Trends & Forecast To 2018, the seed market is pegged So grow from US$44,122.2 million in 2012 to US$85,237.6 million by 2018 with a CAGR of 12.1% from 2013-18.
Indian seed industry
The Indian hybrid seed sector, estimated to be worth RS.12,000 crore comprises some 14 state seed corporations and two national-level corporations, 20 large players including multinationals and around 500 small regional players. About 10 domestic and multinational companies control over 80% of the market. The market has been growing at 15-20% annually over the past several years and is projected to reach around RS.18,000 crore by 2018.
Seed business in India in 2014
Erratic rainfall in India during the year affected crop sowing and the seed market.
The total sown area for kharif crops as on 10th October, 2014, stands at 1,026.60 lac hectares as compared to 1,049.47 lac hectares as on the same date in the previous year. Subsequently, kharif output was sub-optimal as per the first advance estimates of the Agriculture Ministry.
As per data released by the Directorate of Economics and Statistics, Ministry of Agriculture, total area coverage under rabi crops moved to 576.73 lac hectares while last years sowing area stood at 618.20 lac hectares. This was also a fallout of the inclement weather conditions in various parts of the country.
The hybrid seed sector is heading for its next round of consolidation as rising costs and increased price regulation squeeze margins of companies. Several large seed producers with deep pockets are hoping to acquire financially-strained or technologically-rich smaller firms with a sizeable geographical reach and a distinct product portfolio.
There has been a shift in the business model from agrochemicals to seeds. As agrochemicals form the last component that goes into a farmers investment chain, there remains a lot of uncertainty. The largest advantage of selling seed is considerable pricing power to the company. Farmers have to buy new seeds every season. As a result, agro chemical companies are adopting various business models to establish a presence in the hybrid seeds space to offset a decline in turnover from agrochemicals.
Case for hybrid seeds
The food security legislation has put enormous pressure on Indias agricultural sector to produce more from a finite resource (land) without significantly impacting the water balance. This has only increased the need for increasing the use of hybrid seeds across various crops.
Geographically, the Company has registered robust growth in all areas of its presence except in Thailand and Europe. Thailand suffered a severe nine month-long drought. Besides, a change in the government policy on purchasing prices affected the liquidity of the farmers which adversely impacted corn planting, resulting in lower numbers for the Company. Europe slowed down due to uncertainty in the CIS region.
In the US, the Companys strategy of transitioning from a private label to a branded one has resulted in incremental growth in the sorghum business. The Company has done excellent business in Mexico this year predominantly in Sorghum.
Business in South America experienced a heartening growth despite some fiscal and devaluation challenges in Argentina, low commodity prices and issues regarding sowing.
India also achieved creditable numbers as the Companys forage business enjoyed a strong competitive position in some important markets. Some of its crops have emerged as trademarks thereby positioning the Company as a favoured choice among its customers.
PAC-740 hybrid is gaining a lot of popularity in the rain fed markets of India for its wide adaptability and grain colour. Hybrid rice a legacy crop of Advanta is gaining its due share in the Eastern and Northern markets.
With the vision of increasing productivity and net income of the Indian Vegetable farmers, UPL - Advanta group, with its flagship brand, Golden Seeds, is one of the major players of the Indian Vegetable Seed Industry. From a turnover point of view it is among the top 6 players in the industry. It has a dominant market share in tropical cauliflower, beet root, peas and is geared up to take a quantum leap in the high- value segment of okra with the introduction of novel hybrids.
The international business delivered strong growth with meaningful contributions from the various countries of our presence.
Business from Europe remained subdued primarily due to the political crisis in Ukraine. The devaluation of the Ukraine Hryvnia prevented the Company from moving its seeds to the farmers. However, in other parts of Europe, sunflower seeds garnered sizeable revenues. The other satisfying development was that the Company received many product registrations across European countries, not only for sunflower but also sorghum. This should help the Company strengthen its position in Europe and de-risk its business from a dependence on a single crop as well as geography.
In Asia, we have doubled our volumes in the newly opened markets of Vietnam and grown in Indonesia despite supply chain limitations. Our dominance in the fresh corn segment in SE Asia continued in 2014. We work very closely with the provincial governments and developmental agencies in different PPP projects to improve farm productivity and farm incomes of small and marginal farmers in Asia.
In Africa, grain sorghum has shown a significant revenue growth of 26%.Our cutting edge hybrids have yielded 2 to 2.5 times more compared to the local varieties. This crop has one of the largest acreages in Africa and Advanta can provide Seed and Agronomic solutions to improve the yields significantly. We are working closely with various African Governments for developing this crop. Canola in the Middle East and Africa, the other important crop for this geography in which we have a leading position, has been a significant contributor to our revenue and margin growth in 2014.
Sorghum continues to be the biggest earner for the Company followed by canola, corn, sunflower and sweet corn, among others.
What are the growth drivers of tomorrow?
The US: In the US, due to the transitioning from a private label to a branded one in sorghum growth is expected to continue. This will be complemented by the launch of new products from the R&D pipeline in the coming years.
Moreover, an interesting trend is unfolding in the US. Most of the sorghum is planted in the South East area of the US which is becoming increasingly dry. This is pushing up corn penetration to the Northern area and leaving more available acreage for sorghum as this crop requires less water than corn. Hence, there is an opportunity of incremental acreage for sorghum.
India: India will be one of the major growth areas in the next five years or so. Corn, forage and some of the rapeseed business is going to grow in India and we believe that we have been capturing most of the opportunities because of our business structure and the way we enter the market. We have a very high competitive position in some of the important markets and some of our crops are becoming trademarks in the forage market. We are continuing our investment in rice and our R &D group is focusing on its development.
UPL - Advanta after its transformation, has just started the new growth story within and outside the organization. With sound professional teams in place, we are all set to capture high market share and are striving to have our place in the top three vegetable seed companies of India. Our vegetable research strategy is focused on in house breeding for tomato, okra, eggplant, hot pepper, cauliflower, gourds, watermelon and sweet corn; and the rest through strategic tie-ups to capture high market shares in okra, tropical corn and pepper.
Europe. At the end of 2014, Europe will have mandatory labelling on the source of vegetable oils. Hence, companies need to label the palm oil origin and palm oil is not very well received by European consumers because the oil per se is not considered very healthy among the oils available in that region. This creates an interesting opportunity for developing sunflower oil (which is healthier) in Europe. To capitalise on this opportunity, the Company is strategizing on the right capacity, right production and right logistics, among other details. The Company possesses a strong product portfolio comprising high oleic, high stearic sunflowers which position it perfectly to carve out a meaningful share over the years. Additionally, the Company is working to establish a strong presence in Russia and Romania. Further, the Company expects to get some of its most important products registered in early 2015 which should help augment sales.
Asia: Our cutting-edge research and technology development will continue to help in maintaining leadership position in South East Asia i.e. Thailand. Our focus markets beyond Thailand would be Vietnam and Indonesia where we have been growing rapidly and investing in supply chain and market development.
South Asia: Bangladesh and Sri Lanka are the other corn markets where we will maintain our leading position.
Africa: This is expected to be an important growth area as Africa stands on the threshold of an agricultural revolution. The Company is working to realign its product portfolio to suit the agricultural and geographical factors.
Key crops and offerings for Africa include sorghum, sunflower, corn (white & yellow), canola, forages, rice and vegetables. The robust technology development process should enable us to expand rapidly across Africa.
Rest of the world: The Company expects Australia and Argentina among other developing nations to emerge as important growth drivers in the coming years.
UPL the trusted front-end
Advanta has decided to use UPLs robust distribution bandwidth to market its seeds. This allows the Company to provide the common customer base with a comprehensive solution. The Company continues to not only retain but enhance its intellectual property, brands and innovative research.
Research and development
Advanta believes that innovation is the cornerstone of sustainable development in any corporate structure and a holistic means of ushering it is through continuous investment in research and development.
The Company invests about 10% of its revenues into its R&D programmes in select areas which represent important growth opportunities. Considering the efforts of its R&D team, the Company expects new product launches in sorghum, canola, corn and sunflower.
The Company has strong products in the pipeline in India for the coming years. For this, the team is running extensive trials to assure the farmer of their performance. In addition to trials, the team is creating a management package for the growers - "here is the new hybrid, this is the agronomic management you need to put in place in order to get the best of this hybrid". With this package, the Company hopes to increase product acceptability among the farmers.
The R&D team focuses solely on products and regions with considerable scope and not populated by bigger players, allowing the Company to play to its strengths and expand in selected areas. It also continues to focus on the hybrid rice project which is a long gestation project (developing the parental line and then developing the hybrids) and hence will take time to deliver results. The Companys wheat research programme also looks promising.
Revenues (including other income) stood at RS.151,905 lacs in 2014 increased by 21% over 2013 on the back of business growth in key regions of the Companys presence. The EBIDTA grew by 30% from RS.19,447 lacs to RS.25,021 lacs over the same period and the profit for the year increased by 88% from RS.4,448 lacs in 2013 to RS.8,354 lacs in 2014.
Business profitability improved on account of better realisation, optimised variable expenses and flat fixed costs. Consequently, the EBIDTA margin improved from 16% in 2013 to 17% in 2014; the net margin stood at 6% in 2014 against 4% in 2013.
Debt (net) increased from RS.83,871 lacs as on December 31, 2013 to RS.93,713 lacs as on December 31, 2014 to fund the incremental business. The management converted a significant portion of the rupee-denominated borrowings into dollar-denominated debt which optimised interest costs despite an increased reliance on external funds.
Risks, concerns and threats
Economic risk. Subdued demand, reduced farm credit, political uncertainty and social unrest could affect the business of the industry at large and the Company in particular.
Currency risk. Exchange rate fluctuations between the dollar and the rupee could impact profitability.
Seasonality risk. The Companys operations, financial stability and business prospects, results of operations and financial condition may be adversely affected by the seasonality and cyclical nature of its business.
Climatic risk. Fluctuations in rainfall and its distribution affect crop acreage, pest incidence and overall productivity. This has a direct bearing on seed demand.
Infrastructure risk. Inadequate irrigation facilities in most parts of India may restrict the acreage and possibility of second crop in the year affecting the offtake of seeds.
Competition risk. Growing competition could result in a price war thereby reducing product offtake. The Companys inability to effectively match pricing could diminish sales volumes.
Development risk. The capability of the R&D team to develop new and improved products will determine the success of the Company.
Regulatory risk. The seed business is governed by multiple regulations namely The Seeds Act, 1966, The Seeds Rules, 1968, The Seeds (Control) Order, 1983; The Biodiversity Act, 2002 and The National Seeds Policy, 2002. Non-compliance with the statutory norms or a delay in obtaining regulatory approvals, licenses, permits, certifications and registrations could stymie business growth.
Cost risk. A rise in crude prices could materially impact business profitability.
Intellectual capital risk. The Companys success is pivoted on its ability to attract strong intellectual capital and retain its knowledge pool.
Logistical risk. The speed with which the Company is able to transport its products to the consuming centres has a significant bearing on business performance and prospects.
Forecast risk. Miscalculations in forecasting seed demand could result in an unexpected shortfall or a surplus of seeds - impacting business performance.
Internal control systems and their adequacy
Advanta has a robust internal audit and control system which is overviewed by the Board of Directors and Management and provides reasonable assurance regarding the effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations.
The Companys internal audit function comprises qualified and experienced personnel. It appraises its activities and audit findings periodically to the audit committee, statutory auditors and the management. The observations and suggestions of the internal audit are reviewed by the Audit Committee periodically. Adequate follow-up measures are taken to overcome reported weaknesses, if any. The Standard Operating Procedures (SOPs) put in place by the company are in tune with the best global practices and have been laid down across the process flow along with authority controls for each activity.
Human resource and industrial relations
The Company believes that the quality of the employees is the key to its success in the long run and is committed to provide necessary human resource development and training opportunities to equip them with skills, enabling them to keep pace with ongoing technological advancements and evolve.
During the year, the Company has organised training programmes for all the categories of employees in different areas such as technical skills, behavioural skills, business excellence, general management, advanced management, leadership skills, customer orientation, safety, values and the code of conduct and product training.
As on 31st December 2014, the employee strength stood at 667.
Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be forward-looking statements within the meaning of applicable laws and regulations. Actual results could differ substantially or materially from those expressed or implied. Important factors that could affect the companys operations include a downward trend in the domestic industry, monsoon, rise in input cost, exchange rate fluctuations and significant change in political and economic environment in India, environment standards, litigations, changes in the Government regulations, tax laws, statutes and other incidental factors.