Global seed industry
The seed market is considered to be one of the most important segments of agriculturedue to the rising food demand. Consequently, biotech seeds are being seen as productswhich improve returns on investment while responding to consumer demands for healthier andeconomical agricultural products by increasing per unit seed production and per hectareproductivity.
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 largestmarket and Asia-Pacific stands third. The US drives the North American market while Indiaand China drive the Asia-Pacific seed market. France generated the maximum revenues inEurope, followed by Germany. The Latin American market is led by Brazil while the rest ofthe 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 nearlyUS$2.6 billion. It is also considered the fastest growing market for corn seed. The growthin seed demand is concurrent with a growing agricultural demand owing to the burgeoningpopulation of the country as well as the growing export market. Brazil's food commodityexports are considered critical sources of hard currency, resulting in growing importanceof 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 almost6% of the French population. The French seed sector can attribute much of its excellentinternational 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, awhopping 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 2012to 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 14state seed corporations and two national-level corporations, 20 large players includingmultinationals and around 500 small regional players. About 10 domestic and multinationalcompanies control over 80% of the market. The market has been growing at 15-20% annuallyover 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, standsat 1,026.60 lac hectares as compared to 1,049.47 lac hectares as on the same date in theprevious year. Subsequently, kharif output was sub-optimal as per the first advanceestimates of the Agriculture Ministry.
As per data released by the Directorate of Economics and Statistics, Ministry ofAgriculture, total area coverage under rabi crops moved to 576.73 lac hectareswhile last year's sowing area stood at 618.20 lac hectares. This was also a fallout of theinclement weather conditions in various parts of the country.
The hybrid seed sector is heading for its next round of consolidation as risingcosts and increased price regulation squeeze margins of companies. Several large seedproducers with deep pockets are hoping to acquire financially-strained or'technologically-rich' smaller firms with a sizeable geographical reach and a distinctproduct portfolio.
There has been a shift in the business model from agrochemicals to seeds. Asagrochemicals form the last component that goes into a farmer's investment chain, thereremains a lot of uncertainty. The largest advantage of selling seed is considerablepricing 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 inthe hybrid seeds space to offset a decline in turnover from agrochemicals.
Case for hybrid seeds
The food security legislation has put enormous pressure on India's agricultural sectorto produce more from a finite resource (land) without significantly impacting the waterbalance. This has only increased the need for increasing the use of hybrid seeds acrossvarious crops.
Geographically, the Company has registered robust growth in all areas of its presenceexcept 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 ofthe farmers which adversely impacted corn planting, resulting in lower numbers for theCompany. Europe slowed down due to uncertainty in the CIS region.
In the US, the Company's strategy of transitioning from a private label to a brandedone has resulted in incremental growth in the sorghum business. The Company has doneexcellent business in Mexico this year predominantly in Sorghum.
Business in South America experienced a heartening growth despite some fiscal anddevaluation challenges in Argentina, low commodity prices and issues regarding sowing.
India also achieved creditable numbers as the Company's forage business enjoyed astrong competitive position in some important markets. Some of its crops have emerged astrademarks 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 itswide adaptability and grain colour. Hybrid rice a legacy crop of Advanta is gainingits due share in the Eastern and Northern markets.
With the vision of increasing productivity and net income of the Indian Vegetablefarmers, UPL - Advanta group, with its flagship brand, Golden Seeds, is one of the majorplayers of the Indian Vegetable Seed Industry. From a turnover point of view it is amongthe 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 okrawith the introduction of novel hybrids.
The international business delivered strong growth with meaningful contributions fromthe 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 thefarmers. However, in other parts of Europe, sunflower seeds garnered sizeable revenues.The other satisfying development was that the Company received many product registrationsacross European countries, not only for sunflower but also sorghum. This should help theCompany strengthen its position in Europe and de-risk its business from a dependence on asingle crop as well as geography.
In Asia, we have doubled our volumes in the newly opened markets of Vietnam and grownin Indonesia despite supply chain limitations. Our dominance in the fresh corn segment inSE Asia continued in 2014. We work very closely with the provincial governments anddevelopmental agencies in different PPP projects to improve farm productivity and farmincomes of small and marginal farmers in Asia.
In Africa, grain sorghum has shown a significant revenue growth of 26%.Our cutting edgehybrids have yielded 2 to 2.5 times more compared to the local varieties. This crop hasone of the largest acreages in Africa and Advanta can provide Seed and Agronomic solutionsto improve the yields significantly. We are working closely with various AfricanGovernments for developing this crop. Canola in the Middle East and Africa, the otherimportant crop for this geography in which we have a leading position, has been asignificant 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 onein sorghum growth is expected to continue. This will be complemented by the launch of newproducts from the R&D pipeline in the coming years.
Moreover, an interesting trend is unfolding in the US. Most of the sorghum is plantedin the South East area of the US which is becoming increasingly dry. This is pushing upcorn penetration to the Northern area and leaving more available acreage for sorghum asthis crop requires less water than corn. Hence, there is an opportunity of incrementalacreage 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 believethat we have been capturing most of the opportunities because of our business structureand the way we enter the market. We have a very high competitive position in some of theimportant markets and some of our crops are becoming trademarks in the forage market. Weare continuing our investment in rice and our R &D group is focusing on itsdevelopment.
UPL - Advanta after its transformation, has just started the new growth story withinand outside the organization. With sound professional teams in place, we are all set tocapture high market share and are striving to have our place in the top three vegetableseed companies of India. Our vegetable research strategy is focused on in house breedingfor 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, tropicalcorn and pepper.
Europe. At the end of 2014, Europe will have mandatory labelling on the source ofvegetable oils. Hence, companies need to label the palm oil origin and palm oil is notvery well received by European consumers because the oil per se is not consideredvery healthy among the oils available in that region. This creates an interestingopportunity for developing sunflower oil (which is healthier) in Europe. To capitalise onthis opportunity, the Company is strategizing on the right capacity, right production andright logistics, among other details. The Company possesses a strong product portfoliocomprising high oleic, high stearic sunflowers which position it perfectly to carve out ameaningful share over the years. Additionally, the Company is working to establish astrong presence in Russia and Romania. Further, the Company expects to get some of itsmost important products registered in early 2015 which should help augment sales.
Asia: Our cutting-edge research and technology development will continue to help inmaintaining leadership position in South East Asia i.e. Thailand. Our focus markets beyondThailand would be Vietnam and Indonesia where we have been growing rapidly and investingin supply chain and market development.
South Asia: Bangladesh and Sri Lanka are the other corn markets where we willmaintain our leading position.
Africa: This is expected to be an important growth area as Africa stands on thethreshold of an agricultural revolution. The Company is working to realign its productportfolio 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 processshould enable us to expand rapidly across Africa.
Rest of the world: The Company expects Australia and Argentina among otherdeveloping nations to emerge as important growth drivers in the coming years.
UPL the trusted front-end
Advanta has decided to use UPL's 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 andinnovative research.
Research and development
Advanta believes that innovation is the cornerstone of sustainable development in anycorporate structure and a holistic means of ushering it is through continuous investmentin research and development.
The Company invests about 10% of its revenues into its R&D programmes in selectareas which represent important growth opportunities. Considering the efforts of itsR&D team, the Company expects new product launches in sorghum, canola, corn andsunflower.
The Company has strong products in the pipeline in India for the coming years. Forthis, the team is running extensive trials to assure the farmer of their performance. Inaddition to trials, the team is creating a management package for the growers - "hereis the new hybrid, this is the agronomic management you need to put in place in order toget the best of this hybrid". With this package, the Company hopes to increaseproduct acceptability among the farmers.
The R&D team focuses solely on products and regions with considerable scope and notpopulated by bigger players, allowing the Company to play to its strengths and expand inselected areas. It also continues to focus on the hybrid rice project which is a longgestation project (developing the parental line and then developing the hybrids) and hencewill take time to deliver results. The Company's wheat research programme also lookspromising.
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 Company's presence. TheEBIDTA grew by 30% from RS.19,447 lacs to RS.25,021 lacs over the same period and theprofit 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 variableexpenses and flat fixed costs. Consequently, the EBIDTA margin improved from 16% in 2013to 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 ason December 31, 2014 to fund the incremental business. The management converted asignificant portion of the rupee-denominated borrowings into dollar-denominated debt whichoptimised interest costs despite an increased reliance on external funds.
Risks, concerns and threats
Economic risk. Subdued demand, reduced farm credit, political uncertainty andsocial unrest could affect the business of the industry at large and the Company inparticular.
Currency risk. Exchange rate fluctuations between the dollar and the rupee couldimpact profitability.
Seasonality risk. The Company's operations, financial stability and businessprospects, results of operations and financial condition may be adversely affected by theseasonality 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 mayrestrict the acreage and possibility of second crop in the year affecting the offtake ofseeds.
Competition risk. Growing competition could result in a price war thereby reducingproduct offtake. The Company's inability to effectively match pricing could diminish salesvolumes.
Development risk. The capability of the R&D team to develop new and improvedproducts will determine the success of the Company.
Regulatory risk. The seed business is governed by multiple regulations namely TheSeeds Act, 1966, The Seeds Rules, 1968, The Seeds (Control) Order, 1983; The BiodiversityAct, 2002 and The National Seeds Policy, 2002. Non-compliance with the statutory norms ora delay in obtaining regulatory approvals, licenses, permits, certifications andregistrations could stymie business growth.
Cost risk. A rise in crude prices could materially impact business profitability.
Intellectual capital risk. The Company's success is pivoted on its ability toattract strong intellectual capital and retain its knowledge pool.
Logistical risk. The speed with which the Company is able to transport its productsto the consuming centres has a significant bearing on business performance and prospects.
Forecast risk. Miscalculations in forecasting seed demand could result in anunexpected 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 Boardof Directors and Management and provides reasonable assurance regarding the effectivenessand efficiency of operations, reliability of financial reporting and compliance withapplicable laws and regulations.
The Company's internal audit function comprises qualified and experienced personnel. Itappraises its activities and audit findings periodically to the audit committee, statutoryauditors and the management. The observations and suggestions of the internal audit arereviewed by the Audit Committee periodically. Adequate follow-up measures are taken toovercome reported weaknesses, if any. The Standard Operating Procedures (SOPs) put inplace by the company are in tune with the best global practices and have been laid downacross 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 thelong run and is committed to provide necessary human resource development and trainingopportunities to equip them with skills, enabling them to keep pace with ongoingtechnological advancements and evolve.
During the year, the Company has organised training programmes for all the categoriesof employees in different areas such as technical skills, behavioural skills, businessexcellence, general management, advanced management, leadership skills, customerorientation, 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 Company'sobjectives, projections, estimates and expectations may be 'forward-looking statements'within the meaning of applicable laws and regulations. Actual results could differsubstantially or materially from those expressed or implied. Important factors that couldaffect the company's operations include a downward trend in the domestic industry,monsoon, rise in input cost, exchange rate fluctuations and significant change inpolitical and economic environment in India, environment standards, litigations, changesin the Government regulations, tax laws, statutes and other incidental factors.