India Seeds Sector - Credit Suisse

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21 January 2015

Asia Pacific/India

Equity Research

Agricultural Products & Agribusiness

India Seeds Sector THEME

Low penetration offers ample opportunity

■ Significant scope for growth. The India seeds sector is currently estimated to be a US$2 bn market or 4% of the global seed market, as per International Seed Federation (ISF) despite it having 11% of the global arable area. Increasing hybrid seed penetration driven by the food demand-supply mismatch may correct this anomaly somewhat. The India seeds industry is currently growing at 12% while the global seed industry growth is c5%.

■ Key hybrid/GM seeds in India. Penetration is high in cotton (>90%) but very low in paddy (<5%). Corn, paddy and vegetables should drive the next leg of growth. Despite high penetration, high-density planting should be a driver for cottonseeds.

■ Key factors for a seed company. A new successful hybrid takes eight to ten years and hence products introduced in the previous year or two determine growth for the next two to three years. R&D capability determines longer-term growth though this is very difficult to evaluate. Other success factors include distribution, branding and working capital management.

■ Initiating coverage on Kaveri Seeds with OUTPERFORM and a target price of Rs1,100, ~40% upside potential. The India seeds sector is highly fragmented with 200 players. However, some ten players control over 50% of the market. Kaveri is the largest listed pure play and has reported strong growth and financials. We expect Kaveri to register 20%/29% revenue/net income CAGRs over FY14-17. It had net cash of Rs3 bn (as at Mar-14) with strong operating cash generation, high EBITDA margins (~25%) and high returns (RoE and ROCE of 45%+). Our target price is based on 0.75x 2Y PEG or 17x FY17E earnings. Key risks are poor cottonseed demand in FY16 and the inability to replicate their current success with new seeds.

Figure 1: Major seed companies in India

Company Mkt cap ADTO Sales^ EBITDA Seed rev. RoE^ PE (x) EPS cagr

US$ mn US$ mn US$ mn margin^ contri.^ FY16 FY14-16E

Bayer 2,082 1.2 521 11% 1% 16% 28 29%

Kaveri Seed* 863 2.5 167 22% 96% 49% 14 35%

Monsanto In 881 3.9 95 25% 60% 35% 29 21%

Rallis India 684 1.4 286 15% 10% 23% 19 22%

Advanta In 492 0.4 206 14% 94% 9% na na

JK Agri Gen. 25 0.0 31 14% 97% 29% na na

^Data for FY14 / CY13; na: not available; Source: Company data, Thomson Reuters, *Credit

Suisse estimates

Research Analysts

Anantha Narayan

91 22 6777 3730

[email protected]

Akhil Kalluri

91 22 6777 3747

[email protected]

21 January 2015

India Seeds Sector 2

Focus charts and table Figure 2: India accounts for just 4% of the global seeds

industry, despite accounting for 11% of global arable land

Figure 3: Cotton—the largest category; paddy—with most

potential for growth

27%

22%

6% 6% 5% 4%3% 3% 2% 2%

11%

8%

1%5% 3%

11%

0% 1%3%

1%

0%

5%

10%

15%

20%

25%

30%

US

A

Chi

na

Fra

nce

Bra

zil

Can

ada

Indi

a

Japa

n

Ger

man

y

Arg

entin

a

Italy

Contribution to seed industry (%) Contribution to global arable land (%)

Cotton30%

Paddy8%

Maize10%

Vegetable14%

Others38%

Indian seed industry - Cropwise split

Source: International Seed Federation (Jun'13), World Bank (2012) Source: Nuziveedu Seeds, Industry, Credit Suisse research

Figure 4: Cottonseed growth driven by a sharp rise in

cotton acreage as well as Bt adoption

Figure 5: Paddy hybridisation at mere 5% in India

provides huge potential for growth

0% 0% 1% 1% 6%15%

42%

66%

81% 82%85% 88%

93%

0%

20%

40%

60%

80%

100%

0

2

4

6

8

10

12

14

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

(mn

hect

ares

)

Cotton production area BT as a % of total area (RHS)

0.25 0.3 0.4 0.60.9

1.31.6

2.1

2.8 2.93.2

3.6

4.4

5

0

1

2

3

4

5

6

0

10000

20000

30000

40000

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

(%)

(MT

)

Market size Hybridisation (RHS)

Source: ISAAA; Flemish Institute for Biotechnology Source: Nuziveedu Seeds

Figure 6: Key success factors for a seed company

Kaveri Nuziveedu Monsanto Advanta Metahelix JK Agri

Key crops Cotton, Corn Cotton Corn Cereal, Oilseeds Corn, Paddy Cotton, Vegetable

Popular brand Jadoo (Cotton) Mallika (Cotton) Dekalb (Corn) RIL - 019 (Corn) JKCH - 1947 (Cotton)

Number of seed varieties 90+ 350+ 20 300+ 30+ NA

R&D spend (Rs mn) 143 72 288 1,095 103 110

R&D as a % of sales 1.4% 0.7% 5.0% 8.7% 4.6% 5.8%

Number of dealers 15,000+ 55,000+ NA NA 30,000+ retailers 30,000 dealers

A&P spend (Rs mn) 346 NA 203 256 260 103

A&P as a % of sales 3% NA 3% 2% 12% 5%

Net working capital days 29 (2) 13 113 21 77

FY13 data for Nuziveedu; 2013 data for Advanta; Source: Company data, Credit Suisse research

Figure 7: KVRI's strong growth momentum to continue... Figure 8: …attractive financial metrics; likely to sustain

32 44

59

91

42

19 20 20 17

46 37

120

63

43

23 22

0

20

40

60

80

100

120

140

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(%)

Revenue growth Earnings growth

0

10

20

30

40

50

60

-1,000

0

1,000

2,000

3,000

4,000


(%)

(Rs

mn)

FCF RoE (RHS)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

21 January 2015


Indian seeds: Low penetration still Significant scope for growth

The India seeds sector is currently estimated to be a US$2 bn market or 4% of the global

seed market, as per ISF, despite it having 11% of the global arable area. We believe this

mismatch will be corrected somewhat with an increase in hybrid seed penetration in multiple

crops to address the rising food demand-supply mismatch. The India seeds industry is

currently growing at 12% while the global seed industry growth is c5%. High-density planting

in cotton, demand for corn, and higher seed penetration in paddy should be key growth

drivers of the industry.

Key hybrid/GM seeds in India

In India, hybrid seed penetration is high in cotton (>90%), corn (c60%), few cereals such

as sorghum, pearl millet, and oil seeds such as sunflower (hybridisation >80%). However,

penetration is very low in main cereals such as paddy and wheat (<5%). With cotton

hybridisation almost reaching saturation (Bt cotton is sown over 90% of the cotton area in

the country), corn, paddy and vegetables should drive the next leg of growth in the seed

industry in India.

Key factors for a seed company

Given that the process to develop a new seed takes eight to ten years and the success of

a new seed is gradual after being introduced in the market, near-term growth (two to three

years) is more likely driven by the products that have been introduced in the previous one

to three years and which are showing signs of success. A seed company needs to have a

continuous and high-quality pipeline of hybrids—a company's germplasm bank and its

R&D capability is an important source of differentiation. Unfortunately, we find it difficult to

judge this capability. The presence of a strong distribution network not only helps the

company in making its product available widely but also helps in incremental sales as end-

retailers sometimes act as financers to the farmers. Advertising and promotional activities

are essential to distinguish a particular company's seed from those of its competitors, to

educate farmers on best practices to ensure better productivity and to induce the farmers

to buy particular seeds. The ability to accurately assess demand is critical to avoid losses

of sale or significant inventory write-offs.

Initiating coverage on Kaveri Seeds

The India seeds industry is highly fragmented with the presence of over 200 players.

However, some ten companies control over 50% of the market. Some of the other key

players in India are Bayer, Monsanto, Pioneer, Syngenta among MNCs, and Ajeet, Ankur,

JK Agri Tech, Metahelix, Nuziveedu and Rasi among domestic players.

We initiate coverage on Kaveri Seeds with an OUTPERFORM rating and a target price of

Rs1,100, implying 40% upside potential. Our TP is based on 2Y PEG of 0.75x and implies

FY17E P/E multiple of 17x. Kaveri Seeds has a turnover of over Rs10 bn, a strong

distribution network of 15,000+ dealers and a significant market share in cotton, corn,

millet and paddy seeds. We expect Kaveri to register 20%/29% revenue/net income

CAGRs over FY14-17. Kaveri had net cash of Rs3 bn (as at Mar-14) with strong operating

cash generation, high EBITDA margins (~25%) and high returns (RoE and ROCE of

45%+). Given the likely strong earnings growth and low capex requirements (~Rs400-500

mn annual capex), we believe the company's strong financial metrics would sustain.

Key risks are poor cottonseed demand in FY16 due to falling prices and the company's

inability to replicate the current success with new seeds. The founders are also looking to

sell down their equity to fund another venture which could create a stock overhang.

11% of global arable land

but just 4% of the seed

industry

Corn, paddy and vegetables

should drive the next leg of

growth

Products introduced in the

past year or two determine

growth for the next 2-3

years; R&D capability

determines the longer-term

growth

21 January 2015


Significant scope for growth 11% of global arable land but just 4% of the seeds

industry

The International Seed Federation (ISF) estimates the global seeds market size at US$45

bn with the US and China accounting for about 50%. This is despite these two countries

having only about 20% of the total arable land in the world. On the other hand, the India

seeds industry is estimated to be a US$2 bn market or 4% of the global market as per ISF

despite it having 11% of the global arable area. We believe this mismatch will be corrected

somewhat with the increase in hybrid seed penetration in multiple crops to address the

rising food demand-supply mismatch. The India seeds industry is currently growing at 12%

while the global seed industry growth is c5%.

Figure 9: India accounts for just 4% of the global seed

industry…

Figure 10: …despite having 11% of global arable land

USA27%

China22%

France6%

Brazil6%Canada

5%

India4%

Japan3%

Germany3%

Argentina2%

Italy2%

Others20%

Market size US$45bn

United States11% China

8%

France1%

Brazil5%

Canada3%

India11%

Japan0%

Germany1%

Argentina3%

Italy1%

Others56%

Data as of Jun-13, Source: International Seed Federation, Credit

Suisse research

Source: World Bank (2012), Credit Suisse research

Multiple levers for growth

Agriculture plays a very important role in India, contributing to 14% of India's GDP (global

average of 3%) and accounting for about 50% of employment. Due to a stagnant arable

land and a constantly increasing population, the per capita arable land has been declining.

This, coupled with poor crop productivity, should lead to pressure on food supply, in our

view. Crop productivity should improve due to a gradual improvement in the seed

replacement rate, usage of better quality seeds resulting in higher yields, saving crop loss

because of weeds, pests and insects, and improvement in irrigation. Thus, hybrid seeds

should play an important role.

The adoption of Bt cotton is currently driving most of the sector growth. Going forward, the

higher adoption of cotton through techniques such as high-density planting, higher

demand for corn, and greater hybrid seed penetration in crops such as paddy would be

the key growth drivers for the industry, in our view.

Increasing hybrid seed

penetration driven by food

demand-supply mismatch

may correct this somewhat

High-density planting in

cotton, demand for corn and

higher seed penetration in

paddy are key drivers

21 January 2015


Figure 11: Per capita arable land in India lags the world

average

Figure 12: Significant scope for yield improvement in

India

0.84

0.49

0.37

0.21

0.15 0.13 0.12 0.08

0.20

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Rus

sia

Uni

ted

Sta

tes

Bra

zil

Eur

opea

n U

nion

Low

er m

iddl

ein

com

e Indi

a

Sou

th A

sia

Chi

na

Wor

ld

Arable land per capita (hectares)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Uni

ted

Sta

tes

Chi

na

Eur

opea

n U

nion

Bra

zil

Low

er m

iddl

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com

e

Sou

th A

sia

Indi

a

Rus

sian

Fed

erat

ion

Wor

ld

Cereal yield (Kg/hectare)

Source: World bank (2011), Credit Suisse research Source: World bank (2012), Credit Suisse research

Figure 13: The India seeds industry has been witnessing a

15% CAGR over the past three years

Figure 14: Cotton seed is the largest category in India and

paddy should see the most growth potential

60

75

96105

120

135

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140

160

FY10 FY11 FY12 FY13 FY14 FY15E

(Rs

bn)

Indian Seed Industry Growth (RHS)

Cotton30%

Paddy8%

Maize10%

Vegetable14%

Others38%

Indian seed industry - Cropwise split

Source: National Seeds Association of India, Nuziveedu Seeds, Credit

Suisse research

Source: Nuziveedu Seeds, Industry data, Credit Suisse research

21 January 2015


Key hybrid/GM seeds in India Globally, hybrid/GM seed penetration is high in corn, soy, cotton and canola while crops

such as vegetables and paddy (rice) should drive the next leg of growth. Hybrid seed

penetration in crops such as wheat is very low.

In India, hybrid seed penetration is high in cotton (>90%), corn (c60%), few cereals such

as sorghum, pearl millet, and oil seeds such as sunflower (hybridisation >80%). However,

penetration is very low in major cereals such as paddy and wheat (<5%). With cotton

hybridisation almost reaching saturation (Bt cotton is sown over 90% of the cotton area in

the country), corn, paddy and vegetables should drive the next leg of sector growth.

Cotton has been the key driver for the sector

India is the second-largest producer of cotton in the world, accounting for more than one-

third of the global cotton crop area in 2012. Cotton productivity has increased by over 40%

over the past ten years, driven mostly by the adoption of Bt cotton (over 90% penetration).

The Bt cotton adoption has helped the industry improve yields and reduce the usage of

insecticides significantly, by 70-80% as per a report by ISAAA (International Service for

the Acquisition of Agri-biotech Applications). Cottonseed accounts for over 30% of the total

Indian hybrid seed market.

Cottonseed pricing

Cottonseed pricing in India is regulated with a 450 gm packet of BG-II priced at Rs930-

1,000, varying from state to state. Until 2005, Mahyco-Monsanto Biotech (MMB), the entity

that introduced Bt cotton in India in 2002, dominated the market either through direct sales

of hybrid seeds or through sub-licensing to private companies. In 2006, the price of a Bt

cotton seed packet was Rs1,600 (4x the price of non-BT hybrid), of which Rs1,250 was

MMB's charge. The state of Andhra Pradesh imposed a ceiling of Rs750 on Bt cotton in

2006 which was subject to change every year based on factors such as production cost of

seeds and trait value; gradually, other states imposed a similar ceiling. Currently MMB

charges a royalty of about Rs185 per packet, i.e., about 20%.

Farmer-level economics

The rapid adoption of Bt cotton in India (90% in ten years) has been mainly attributed to

the significant benefits achieved by the farmers due to seeds. A farmer, as per 12 studies

conducted by public institutes over 1998-2010, is estimated to enjoy an incremental

benefit of about US$75-250 per ha, effectively increasing profits per hectare by 70-135%,

mainly due to higher yields and a significant reduction in the cost of insecticides.

Growth drivers

As penetration is already 90%, there is little room for increasing hybridisation to drive

incremental growth for cottonseeds. Nonetheless, the cottonseed industry should continue

to see growth due to the following drivers:

■ New developments such as high-density cotton plantation under which the number of

cottonseeds sown per acre should be doubled resulting in higher output per acre.

Significant farmer education is required to achieve this.

■ The under-approval BGII RRF cottonseed (this is the third generation Bt seed from

cotton) should help solve the issue of weeds which in turn will help reduce the cost of

labour as weeding is primarily done manually in India.

Corn, paddy and vegetables

should drive the next leg of

growth

90% penetration and 30% of

the total seed market

Monsanto in India charges

20% royalty

Bt cotton has reportedly

doubled profits per acre

Penetration is already high

but high-density plantation

and the next-gen Bt seed

should help incremental

growth

21 January 2015


Major players

While the industry is highly fragmented, Indian companies dominate the cottonseed

market. Nuziveedu and Kaveri Seeds are the two largest cottonseed companies in India

with a ~20% market share each on a pan-India basis and Ajeet and Ankur Seeds are other

large players with a ~10% market share each. However, MMB owns the Bt cotton trait and

all other seed companies source it from the company.

Figure 15: Sharp rise in cotton acreage as well as Bt

adoption over the past few years

Figure 16: India significantly lags global peers on maize

yields due to low hybrid adoption

0% 0% 1% 1%6%

15%

42%

66%

81%82%

85% 88%93%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

2

4

6

8

10

12

14

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

(mn

hect

ares

)

Cotton production area BT as a % of total area (RHS)

10

6.66

4.8

2.5

5.5

85% BT15% SCH

100% SCH 100% SCH 100% BT 30% SCH

0

2

4

6

8

10

12

US EU China Brazil India World

MT

/Ha

Source: ISAAA, Flemish Institute for Biotechnology * BT – GM seed; SCH – Single cross hybrid; Source: USDA, FICCI

Coarse cereals: Corn is driving growth

Coarse cereals comprise crops such as maize (or corn), millets, bajra, and ragi. While the

area under coverage of these crops has been constantly falling, productivity has been

increasing over the past few years across almost most coarse cereals. The most popular

of the coarse cereals is maize, accounting for more than 50% of the segment volumes.

India is the sixth-largest producer and the fifth-largest consumer of maize in the world. The

area under cultivation, production and productivity of maize has seen 3%, 6% and 3%

CAGRs, respectively, over the past ten years.

Farmer level economics

As per Monsanto, farmers in states such as Maharashtra, J&K, Orissa and UP have

enjoyed an incremental benefit of Rs5,000-7,000/acre or 40-60%, due to the adoption of

hybrid corn with benefits mainly accruing on account of higher yields.

Growth drivers

■ Maize in India is primarily used as a feed for poultry and cattle (accounting for 60% of

total corn demand) and in production of substances such as starch and ethanol. With

chicken as one of the primary sources of protein in India, demand for poultry is likely to

continue increasing. Poultry feed's share in maize demand has remained at ~40–50%

over the past four to five years. Maize starch is considered as a versatile raw material

with applications across multiple industries such as textiles, food, pharmaceuticals and

paper. Maize has 60-65% starch content and hence cannot be easily substituted by

other commodities. Demand for starch is likely another driver for maize demand.

■ India is the fourth-largest exporter of maize after the US, Brazil and Ukraine, with

exports doubling over the past five years. While China accounts for 22% of the world

maize production, it is also one of the largest importers of maize. Indian exports have

varied from 12-20% of corn production over the past five years and the export

Maize forms 50% of this

segment

Both, increasing maize

demand and production,

and increasing hybridisation

should help accelerate

growth

21 January 2015


opportunity is likely to remain sizeable. Indonesia, Malaysia and Vietnam are the

largest export destinations for India accounting for 80% of exports. Exports to other

major corn importers such as Japan, Korea and China should drive maize volumes

going forward.

■ The government has been encouraging maize production in place of paddy due to the

significantly lower water consumption during production. The MSP (Minimum Support

Price) for maize was fixed at the same level as that for paddy for the first time in FY14

at Rs1,310/quintal as against the usual 5-15% discount over the past seven years. For

FY15, the government has set the paddy MSP at Rs1,360/quintal and maize at

Rs1,310/quintal, with a difference of about 4%.

■ Besides growth in maize demand and production, an increase in hybridisation is likely

to be another driver for the industry. India's maize hybridisation stands at 60% as

against nearly 100% in other large countries or regions such as the US, EU, China

and Brazil.

■ The adoption of single cross corn (used mostly in the rabi season when the crop is

dependent on irrigation), which has a ~50% higher yield versus other variants, is

expected to increase (currently, about 50% of hybrid corn seeds in volume terms are

single cross) with rising rabi corn crop and seed companies focused on developing

more robust kharif variants of such seeds.

■ The approval of GM corn, while only a longer-term possibility, should result in

significant growth for the corn seed industry, similar to what was seen in Bt cotton.

Major players

International players dominate the India maize industry with Pioneer (a subsidiary of

DuPont) and Monsanto being market leaders with over 15-20% market share each and

Syngenta having about a 12-13% market share. Among the Indian companies, Kaveri

Seeds is a large player with about 12% market share.

21 January 2015


Paddy should be the next big opportunity

India is the second-largest producer and consumer of rice in the world accounting for

~20% of global production. Rice would be the next big opportunity for the India seeds

sector, in our view, mainly due to low yields vis-à-vis the global average, and significantly

low hybridisation levels (5% vs. c65% in China).

Figure 17: Paddy—India contributes to 20% of global

production but has significant scope to improve yields

Figure 18: At mere 5%, hybridisation potential in paddy is

huge

4.4

6.7

3.6

5.1

2.9

5.6 29

21

10

5 6

0

5

10

15

20

25

30

35

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Wor

ld

Chi

na

Indi

a

Indo

nesi

a

Ban

glad

esh

Vie

tnam

(Con

trib

utio

n to

glo

bal p

rodu

ctio

n (%

)

(Ton

nes

per

hect

are)

Paddy

Yield Production (%)

0.25 0.3 0.40.6

0.91.3

1.6

2.1

2.8 2.93.2

3.6

4.4

5

0

1

2

3

4

5

6

0

5000

10000

15000

20000

25000

30000

35000

40000

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

(%)

(MT

)

Market size Hybridisation (RHS)

Source: ISAAA Source: Nuziveedu Seeds

Farmer economics

As per a report by the Directorate of Rice Research, hybrid seeds should result in a yield

advantage of 1-1.5 t/ha, which could translate into an incremental income of Rs8,000-

12,000/ha or 70-90%. As per Nuziveedu Seeds and Bayer CropScience, farmers will gain

up to Rs10,000/acre.

Growth drivers

■ Higher hybrid seed penetration: Current penetration is very low (5% of total seeds

used) mainly due to issues with the crop quality (issues such as difference in taste and

soggy rice). The hybrid seed adoption is higher in Bihar, Jharkhand, Chhattisgarh and

Uttar Pradesh and the seeds have reportedly resulted in average yields of 4.8 t/ha vs.

the national average of 3.6 t/ha. As per Bayer CropScience, hybrid rice has a 15-35%

higher yield versus conventional inbred varieties.

■ The adoption of alternate techniques such as Direct Seeded Rice (DSR) is increasing

in India to reduce water consumption. For paddy, initial seeds are germinated in a

nursery for up to four weeks and then the saplings are transplanted to the fields that

have standing water. With a gradual reduction in ground water availability and rising

costs of labour (transplanting is a labour-intensive process), the industry is adopting

DSR. While the methodology is likely to reduce water usage and labour requirement,

DSR results in a problem of increased weeds. However, the benefits outweigh the cost

of weedicides.

Major players

Globally, Syngenta and Bayer are the large players in hybrid seeds. Bayer is a major

player in the India rice hybrid seeds industry but almost all major seed companies such as

Kaveri, Nuziveedu and Rallis have a presence in this category.

Hybridisation in paddy is just

5%

Hybrid seeds should help

farmers earn an additional

Rs10,000/acre

21 January 2015


Other crops

Vegetables

The global vegetable seeds market, estimated at about US$5 bn, as per Bayer

CropScience, is expected to witness a 7-8% CAGR over the next ten years, driven by

increased usage of hybrid seeds. As per Bayer CropScience, of the estimated increase in

the vegetable market size over 2011-25, China will account for 40% and India 7%. The

increase in acreage and higher hybridisation with increasing urbanisation are likely to be

key demand drivers in China and India.

Higher growth in the usage of fruits and vegetables is associated with improvement in

income. Besides higher yields, desirable characteristics from hybrid vegetable seeds

include resistance to pests and diseases, uniformity of the product in terms of colour, size,

shape, and taste, improved shelf life, and higher nutritional.

Figure 19: The global vegetable seeds market should

witness a 7-8% CAGR over 2011-25E

Figure 20: China will account for 40% of this growth and

India 7% (US$500 mn)

4.6

13.3

1.4

2.8

4.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2011E 2011-15E 2016-20E 2021-25E 2025E

Veg

etab

le s

eed

mar

ket s

ize

(US

$bn)

China41%

Rest of APAC10%

India7%

LatAm7%

North America9%

Europe26%

Share Of Projected Vegetable Seed Market Growth 2011-25E

Source: Bayer CropScience Source: Bayer CropScience

Wheat

As in the case of rice, India is the second-largest producer of wheat accounting for 14% of

global production. Wheat accounted for 10% of land sown in India in FY13. Yields of

wheat have improved at a 3.3% CAGR over FY08-12 despite the low hybrid seed

adoption. Improvement in irrigation facilities, seed treatment and management of optimum

time of sowing have resulted in the increase in production and better yields. The

government acknowledges the need to focus on areas such as improvement in seed

replacement rates and varietal replacement for sustaining production and productivity.

However, hybrid wheat in India is yet to prove commercial viability. Even globally, hybrid

seed penetration in wheat is low. Strong incremental growth from hybrid seed penetration

is unlikely in the near term, in our view.

Increase in acreage and

higher hybridisation are the

key drivers

Hybrid seed penetration is

low globally

21 January 2015


Figure 21: Farmer level economics per acre of land

(Rs) Corn Cotton Paddy

Yield (quintals/acre) 30 10 30

Price (Rs/quintal) 1,400 4,000 1,500

Revenue 42,000 40,000 45,000

Total seed costs 2,000 1,860 1,000

Fertilisers, pesticides 9,450 7,200 12,000

Labour, tractor, others 19,000 19,500 19,500

Total costs 30,450 28,560 32,500

Profit 11,550 11,440 12,500

Source: Industry, Credit Suisse estimates

Hybrid seeds should

improve farmers' incomes

by 40-90%, making the

incremental seed cost

worthwhile

21 January 2015


Key factors for a seed company The India seeds industry is highly fragmented with over 200 players. Some of the key

characteristics that differentiate the companies are as follows.

Success of existing products

Given that the process to develop a new seed takes eight to ten years and the success of

a new seed is gradual after being introduced in the market, near-term growth (two to three

years) is more likely driven by the products that have been introduced in the previous one

to three years and showing signs of success. Given the importance of seeds to a farmer

(source of livelihood for the entire year), the quality of seeds (in terms of yields and

consistency) is of importance. The cost of seeds is less than 10% of total costs for the

farmer and therefore the farmer would be willing to pay a premium for the right product.

While most seed companies have several hybrids—a handful of them contribute to a large

proportion of total revenue—these are the blockbuster seeds for the company.

R&D capability

A seed company needs to have a continuous and high-quality pipeline of hybrids. Seed

R&D is a time-consuming process and a company's germplasm bank and its R&D

capability is an important source of differentiation. This is extremely important from a

medium- to long-term perspective. Unfortunately, we find it difficult to judge this capability

given that there is no information available on the hybrids in the pipeline, the time left for it

to come to market and the possibility of success with farmers that the product may have.

In addition, there does not appear to be any other avenues through which the progress of

a hybrid can be judged. In a way, some leap of faith would need to be taken based on the

companies' past delivery of blockbuster seeds.

Given that the patenting process in India is not very robust, other companies replicate

blockbuster seeds in the marketplace quickly. However, the replication takes at least two

to three years (one to two years for discovery and then a year for replication) by which

time the incumbent gains significant a market share. In addition, the brand plays an

important role—given the relatively low proportion of seed costs in the total for a farmer,

comfort with the brand would play a very important role.

Figure 22: Seed development R&D process

Stage A

Product Concept

Stage B Stage C Stage D Stage EStage F

Pre Launch

New product for customer

Conventional Hybrids

Biotech Traits

Breeding & Testing

Discovery

Wide testing & Agronomy refinement

Trait characterization & development

Farmer Field testing

Regulatory science

Research Development Application

8 – 10 year process

Source: DuPont

Products introduced in the

previous one to two years

determine growth over the

next two to three years

This is a very important

source of differentiation but

is also very difficult to judge

21 January 2015


Distribution network

The initial selling process is mainly through demonstrating the superiority of the product

versus non-hybrid seeds and hybrid seeds of competitors. However, the presence of a

strong distribution network not only helps the company in making its product available

widely but also helps in incremental sales as end-retailers sometimes act as financers to

the farmers and therefore influence the seed selection process.

Branding and promotional activity

Advertising and promotional activities are essential to distinguish a particular company's

seed from those of its competitors, to educate farmers on best practices to ensure better

productivity and induce the farmers to buy particular seeds. As per an ISAAA report, the

majority of farmers surveyed for Bt cotton seeds did not know the name of the company

making those seeds but were aware of the brand names. These farmers often paid higher

prices for popular hybrids due to heavy demand during the kharif season. Therefore,

investment in advertising and branding is a way to maintain some product differentiation.

Effective working capital management

Depending on the crop variety, seed companies need to assess likely crop demand almost

an year in advance to start producing seeds. So the ability to accurately assess demand is

critical to avoid losses of sale or significant inventory write-offs.

Large and dedicated network of seed growers/land

bank

After the discovery of a successful hybrid, seed multiplication requires many rounds of

sowing. Therefore, the availability of a large land bank or access to a large dedicated

network of seed growers acts as a major entry barrier for smaller seed companies as a

lack of such a network will delay the process of market expansion for them. Alternatively, it

also protects a large incumbent to garner a significant market share before someone else

introduces such a hybrid.

21 January 2015


Some major players in India Internationally, the major seed companies—Monsanto, DuPont and Syngenta—control

over 50% of the seeds market. This strong industry concentration is a result of high

penetration of GM seeds (a 45% market share). While globally we expect the overall

seeds industry to witness a 5-8% CAGR, the biotech seeds market is likely to see a 6-10%

CAGR. The reason for concentration in biotech is the high R&D costs (up to US$150 mn)

and the long process for development and regulatory clearances, sometimes over ten

years. However, the hybrid seeds market is fragmented with multiple small regional

players.

The India seeds industry, too, is highly fragmented with the presence of over 200 players.

However, some ten companies control over 50% of the market. Some of the key players in

India are Bayer, Monsanto, Pioneer, Syngenta among MNCs, and Ajeet, Ankur, JK Agri

Tech, Kaveri, Meta Helix, Nuziveedu and Rasi among domestic players.

Figure 23: Some major players in India (table 1/2)

Company Local Mkt cap ADTO Price Perf. (%) Sales (US$ mn) EBITDA margin (%) Sales mix

Cur. (US$ mn) (US$ mn) 1m 3m 12m FY14 FY15 FY14 FY15 Seeds Ag. Chem. Oth.

Bayer INR 2,082 1.2 21% 52% 103% 521 619 11% 14% 1% 95% 4%

Kaveri Seeds INR 863 2.5 -4% -15% 102% 167 202 22% 25% 96% 3% 1%

Monsanto In INR 881 3.9 16% 7% 275% 95 108 25% 26% 60% 39% 1%

Rallis India INR 684 1.4 0% -6% 23% 286 322 15% 15% 10% 89% 1%

Advanta In INR 479 0.4 -1% 10% 211% 206 na 14% na 94% 0% 6%

JK Agri Gen. INR 25 0.0 -16% -15% 30% 31 na 14% na 97% 0% 3%

E.I. du Pont USD 68,578 353 0% 8% 17% 35,575 34,991 19% 20% 23% 10% 67%

Monsanto USD 56,820 471 -4% 4% 4% 15,438 15,883 29% 31% 70% 30% 0%

Syngenta CHF 30,993 93 -9% 0% -18% 14,787 14,776 20% 19% 22% 74% 4%

Longpin CNY 3,288 60 -9% 19% 66% 316 283 19% 23% 100% 0% 0%

Denghai CNY 1,984 19 0% 7% 19% 251 360 41% 36% 100% 0% 0%

na = not available; Source: Company data, Thomson Reuters, the BLOOMBERG PROFESSIONAL™ service

Figure 24: Some major players in India (table 2/2)

Company EPS growth (%) PE (x) PB (x) RoE (%) Div. yield (%)

FY14 FY15 FY14 FY15 FY16 FY14 FY15 FY16 FY14 FY15 FY14 FY15

Bayer nm 39% 47 34 28 7 6 5 16 19 0.2% 0.3%

Kaveri Seed 65% 45% 25 18 14 10 7 5 49 47 0.6% 1.0%

Monsanto In 93% 13% 42 37 29 16 13 11 35 39 2.8% 1.3%

Rallis India 28% 17% 28 24 19 6 5 4 23 23 1.1% 1.3%

Advanta In -16% na 57 na na 5 na na 9 na - na

JK Agri Gen. 32% na 13 na na 3 na na 29 na 0.6% na

E.I. du Pont 3% 4% 19 18 17 4 4 4 27 23 2.5% 2.6%

Monsanto 18% 13% 24 21 18 6 7 7 24 32 1.4% 1.4%

Syngenta -10% 1% 16 16 14 3 3 2 19 18 3.5% 3.6%

Longpin 21% 45% 81 56 44 11 7 6 15 15 0.3% 0.4%

Denghai 26% 16% 35 31 25 7 6 5 22 20 0.5% 1.1%

nm = not meaningful; na = not available; Source: Company data, Thomson Reuters, the BLOOMBERG PROFESSIONAL™ service

There are over 200 players

but ten companies control

over 50% of the market

21 January 2015


Figure 25: Key success factors for a seed company

Kaveri Nuziveedu Monsanto Advanta Metahelix JK Agri

Key crops Cotton, Corn Cotton Corn Cereal, Oilseeds Corn, Paddy Cotton, Vegetable

Popular brand Jadoo (Cotton) Mallika (Cotton) Dekalb (Corn) RIL - 019 (Corn) JKCH - 1947 (Cotton)

Number of seed varieties 90+ 350+ 20 300+ 30+

R&D spend (Rs mn) 143 72 288 1,095 103 110

R&D as a % of sales 1.4% 0.7% 5.0% 8.7% 4.6% 5.8%

Number of dealers 15000+ 55000+ NA NA 30000+ retailers 30000 dealers

A&P spend (Rs mn) 345 NA 382 583 266 148

A&P as a % of sales 3.4% NA 6.6% 4.6% 11.8% 7.8%

Advances (Rs mn) 2,460 4,745 286 311 386 465

Advances as a % of sales 24.3% 47.3% 4.9% 2.5% 17.2% 24.7%

Net working capital days 29 (2) 13 113 21 77

FY13 data for Nuziveedu; 2013 data for Advanta; Source: Company data, Credit Suisse

21 January 2015


Asia Pacific / India

Kaveri Seeds

(KVRI.BO / KSCL IN) INITIATION

Largest Indian pureplay seeds company

■ Initiating with OUTPERFORM. We initiate coverage on Kaveri Seeds with

an OUTPERFORM rating and a Rs1,100 target price, implying 42.6% upside

potential. Kaveri Seeds is the largest listed pure-play seed company in India.

The company has a turnover of over Rs10 bn, a strong distribution network

of 15,000+ dealers and a significant market share in cotton, corn, millet and

paddy seeds. It is the No. 2 player in cotton, No. 4 player in corn and among

Top 3-5 players in millets, paddy, sorghum and sunflower.

■ Attractive growth momentum to continue. We expect key drivers to be a

higher market share in cottonseeds in Maharashtra and Gujarat and strong

performance across other seeds such as corn, paddy and vegetables. While

corn and cotton are likely to drive the company's growth in the next three to

five years, any breakthrough in paddy and vegetables should drive strong

growth in the longer term. We expect Kaveri to register 20%/29%

revenue/net income CAGRs over FY14-17E.

■ Attractive financial metrics, likely to sustain. Kaveri had net cash of Rs3

bn (as at Mar-14) with strong operating cash generation, low working capital

requirement (30 days of working capital at end-FY14), high EBITDA margins

(~25%) and high return ratios (RoE and ROCE of 45%+). Given the likely

strong earnings growth and low capex requirements, (~Rs400-500 mn

annual capex), we believe strong financial metrics are likely to sustain.

■ Valuation. Our target price is based on two-year PEG of 0.75x, which implies

17x FY17E EPS. While valuations have re-rated over the past year, we do not

view them as excessive and that current valuations should sustain given its

strong financial metrics, likely strong earnings growth over the next few years

and a large market opportunity. Key risks are poor cottonseed demand in

FY16 and its inability to come up with new blockbuster seeds. The founders

are also looking to sell down their equity to fund another venture.

Share price performance

0

100

200

300

400

200

700

1200

Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the S&P

BSE SENSEX IDX which closed at 28888.86 on 21/01/15

On 21/01/15 the spot exchange rate was Rs61.6/US$1

Performance over 1M 3M 12M Absolute (%) -4.2 -15.3 102.0 — Relative (%) -8.4 -22.9 66.0 —

Financial and valuation metrics

Year 3/14A 3/15E 3/16E 3/17E Revenue (Rs mn) 10,111.1 12,005.5 14,396.9 17,261.3 EBITDA (Rs mn) 2,212.4 2,995.5 3,608.8 4,345.8 EBIT (Rs mn) 2,048.2 2,906.2 3,503.5 4,224.5 Net profit (Rs mn) 2,089.6 2,997.4 3,675.3 4,493.3 EPS (CS adj.) (Rs) 30.40 43.60 53.47 65.36 Change from previous EPS (%) n.a. EPS growth (%) 64.3 43.4 22.6 22.3 P/E (x) 25.6 17.8 14.6 11.9 Dividend yield (%) 0.6 1.0 1.3 1.9 EV/EBITDA (x) 24.2 17.2 13.6 10.6 P/B (x) 10.4 7.1 5.2 3.9 ROE (%) 48.6 47.2 41.0 37.4 Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

Rating OUTPERFORM* [V] Price (21 Jan 15, Rs) 771.20 Target price (Rs) 1,100.00¹ Upside/downside (%) 42.6 Mkt cap (Rs mn) 53,608.1 (US$865.6) Enterprise value (Rs mn) 51,506 Number of shares (mn) 68.90 Free float (%) 42.34 52-week price range 1,019.3 - 379.0 ADTO - 6M (US$ mn) 2.5

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Anantha Narayan

91 22 6777 3730

[email protected]

Akhil Kalluri

91 22 6777 3747

[email protected]

21 January 2015


Kaveri Seeds KVRI.BO / KSCL IN Price (21 Jan 15): Rs771.20, Rating: OUTPERFORM, Target Price: Rs1,100.00, Analyst: Anantha Narayan

Target price scenario

Scenario TP %Up/Dwn Assumptions

Upside 1,400.0

0 81.54

25% revenue CAGR from strong market share gains leading to rerating

Central Case 1,100.0

0 42.63

20% revenue CAGR based on current seed portfolio

Downside 600.00 (22.20) 7% revenue CAGR due to weak cotton seed demand leading to derating

Key earnings drivers 3/14A 3/15E 3/16E 3/17E

Revenue growth (%) 42.0 18.7 19.9 19.9 Cotton seed revenue growth (%) 58.5 24.8 15.0 15.0 Corn seed revenue growth (%) 34.0 (4.0) 20.0 20.0 EBITDA margins (%) 21.9 25.0 25.1 25.2

Income statement (Rs mn) 3/14A 3/15E 3/16E 3/17E

Sales revenue 10,111 12,005 14,397 17,261 Cost of goods sold 3,751 4,202 5,039 6,041 SG&A 3,866 4,470 5,361 6,427 Other operating exp./(inc.) 281.6 337.9 388.6 446.9 EBITDA 2,212 2,995 3,609 4,346 Depreciation & amortisation 164.2 89.3 105.3 121.3 EBIT 2,048 2,906 3,503 4,224 Net interest expense/(inc.) (95.0) (171.0) (269.1) (387.3) Non-operating inc./(exp.) — — — — Associates/JV — — — — Recurring PBT 2,143 3,077 3,773 4,612 Exceptionals/extraordinaries — — — — Taxes 51.6 77.6 95.2 116.3 Profit after tax 2,092 2,999 3,677 4,495 Other after tax income — — — — Minority interests 2.1 2.1 2.1 2.1 Preferred dividends — — — — Reported net profit 2,090 2,997 3,675 4,493 Analyst adjustments — — — — Net profit (Credit Suisse) 2,090 2,997 3,675 4,493

Cash flow (Rs mn) 3/14A 3/15E 3/16E 3/17E

EBIT 2,048 2,906 3,503 4,224 Net interest (2.4) (1.1) (1.1) (1.1) Tax paid (54.1) (77.6) (95.2) (116.3) Working capital (119.4) (40.3) (63.9) (46.8) Other cash & non-cash items 157.6 89.3 105.3 121.3 Operating cash flow 2,030 2,876 3,449 4,182 Capex (351.0) (400.0) (400.0) (400.0) Free cash flow to the firm 1,679 2,476 3,049 3,782 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) 1.8 — — — Investing cash flow (349.1) (400.0) (400.0) (400.0) Equity raised 0.46 — — — Dividends paid (387) (604) (845) (1,208) Net borrowings (7.4) — — — Other financing cash flow 101.4 172.1 270.3 388.4 Financing cash flow (292.5) (431.8) (575.1) (819.3) Total cash flow 1,388 2,045 2,473 2,962 Adjustments — — — — Net change in cash 1,388 2,045 2,473 2,962

Balance sheet (Rs mn) 3/14A 3/15E 3/16E 3/17E

Cash & cash equivalents 2,849 4,894 7,367 10,329 Current receivables 653 776 928 1,115 Inventories 4,972 5,903 7,060 8,487 Other current assets 122.6 122.6 122.6 122.6 Current assets 8,596 11,695 15,477 20,054 Property, plant & equip. 1,425 1,733 2,025 2,301 Investments 0.43 0.43 0.43 0.43 Intangibles 11.9 14.4 16.9 19.2 Other non-current assets 247.5 247.5 247.5 247.5 Total assets 10,281 13,690 17,766 22,623 Accounts payable 4,831 5,736 6,860 8,247 Short-term debt 0.30 0.30 0.30 0.30 Current provisions 232.7 341.2 462.0 643.2 Other current liabilities — — — — Current liabilities 5,064 6,078 7,322 8,891 Long-term debt 9.1 9.1 9.1 9.1 Non-current provisions — — — — Other non-current liab. 48.2 48.2 48.2 48.2 Total liabilities 5,121 6,135 7,379 8,948 Shareholders' equity 5,155 7,549 10,379 13,664 Minority interests 4.0 6.1 8.2 10.4 Total liabilities & equity 10,281 13,690 17,766 22,623

Per share data 3/14A 3/15E 3/16E 3/17E

Shares (wtd avg.) (mn) 68.7 68.7 68.7 68.7 EPS (Credit Suisse) (Rs) 30.4 43.6 53.5 65.4 DPS (Rs) 4.8 7.5 10.5 15.0 BVPS (Rs) 75 110 151 199 Operating CFPS (Rs) 29.5 41.8 50.2 60.8

Key ratios and valuation

3/14A 3/15E 3/16E 3/17E

Growth(%) Sales revenue 42.0 18.7 19.9 19.9 EBIT 61.2 41.9 20.6 20.6 Net profit 64.9 43.4 22.6 22.3 EPS 64.3 43.4 22.6 22.3 Margins (%) EBITDA 21.9 25.0 25.1 25.2 EBIT 20.3 24.2 24.3 24.5 Pre-tax profit 21.2 25.6 26.2 26.7 Net profit 20.7 25.0 25.5 26.0 Valuation metrics (x) P/E 25.4 17.7 14.4 11.8 P/B 10.3 7.0 5.1 3.9 Dividend yield (%) 0.62 0.97 1.36 1.95 P/CF 26.1 18.4 15.4 12.7 EV/sales 4.97 4.02 3.18 2.48 EV/EBITDA 22.7 16.1 12.7 9.9 EV/EBIT 24.6 16.6 13.1 10.1 ROE analysis (%) ROE 48.6 47.2 41.0 37.4 ROIC 92 114 120 129 Asset turnover (x) 0.98 0.88 0.81 0.76 Interest burden (x) 1.05 1.06 1.08 1.09 Tax burden (x) 0.98 0.97 0.97 0.97 Financial leverage (x) 1.99 1.81 1.71 1.65 Credit ratios Net debt/equity (%) (55.0) (64.6) (70.8) (75.5) Net debt/EBITDA (x) (1.28) (1.63) (2.04) (2.37) Interest cover (x) (21.5) (17.0) (13.0) (10.9)

Source: Company data, Thomson Reuters, Credit Suisse estimates

0.0

5.0

10.0

15.0

20.0

25.0

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

12m forward PE

-

2.0

4.0

6.0

8.0

10.0


12m fwd PB

Source: IBES

21 January 2015


Largest listed pure-play seed company in India Kaveri Seeds is one of the largest seed companies in India with a turnover of over Rs10

bn in FY14 and a network of 15,000 distributors and dealers across 15 states. It is the No.

2 player in the cottonseeds market (an 18-19% market share, and cotton is the largest

seed category in India), the No. 4 player in the corn market (a 13% market share) and is

among the Top 3-5 players in other seeds such as millets, paddy, sorghum and sunflower.

Figure 26: Kaveri's presence in different crop categories

Crop Market size

(Rs bn)

Market

share (%)

Rank % of FY15E

revenue

Key

competitors

Cotton 40 18-19% 2 66% Nuziveedu,

Ajeet, Ankur

Corn 12 13% 4 14% Monsanto,

Pioneer

Paddy 12 6% Top 5 6% Bayer, Syngenta

Metahelix

Vegetables 17 <1% na <1% Monsanto,

JK Agri

Source: Company data, Credit Suisse estimates

The company boasts of a strong focus on R&D and claims to have one of the largest

germplasm pools in India. Kaveri has 600+ acres of owned and leased research farms

covering different agro climatic conditions. It has close to 100 different varieties of hybrid

seeds in the market although a large proportion of revenue is driven only by a handful of

seeds. It has consistently incurred R&D spends of ~Rs100 mn p.a. since FY07 (~15% of

sales on R&D in FY07) and over time has developed a R&D infrastructure. KVRI has

incurred an R&D expense of Rs140 mn in FY14 (1.4% of sales), but management has

indicated that it is likely to step up its R&D spending, mainly due to its foray into

biotechnology-based research (molecular marking technology). It expects R&D spending

to up to 3-4% of sales (~Rs400 mn).

The company also claims to have one of the largest distribution networks among Indian

seed companies with 15,000+ dealers and 40,000-50,000 retail touch points. Its

distribution network is well spread out, mainly due to its presence across multiple crops

such as cotton, maize, millets, sorghum and paddy, which are grown in different parts of

India. While the efficacy of the hybrid is the single most important factor that determines

the success of a seed, a strong distribution network is extremely important as well for the

timely supply to the market.

Figure 27: Comparison of R&D and distribution spending

Kaveri Nuziveedu Monsanto Advanta Metahelix JK Agri Genetics

R&D spend (Rs mn) 143 72 288 1,095 103 110

R&D as a % of sales 1.4% 0.7% 5.0% 8.7% 4.6% 5.8%

Distribution network 15,000+ 55,000+ NA NA 30,000+ retailers 30,000 dealers

A&P spend 345 NA 382 583 266 148

A&P as a % of sales 3% NA 7% 5% 12% 8%

Advances (Rs mn) 2,460 4,745 286 311 386 465

Advances as a % of sales 24% 47% 5% 3% 17% 25%

FY13 data for Nuziveedu; 2013 data for Advanta; Source: Company data, Credit Suisse research

It has a 20% market share

in cottonseeds and 13% in

corn

It has a significant

distribution network with

nearly 15,000 dealers and

50,000 retail touch points

21 January 2015


Attractive growth momentum to continue We estimate a 20% revenue CAGR over FY14-17

Kaveri has delivered a 52% revenue CAGR over the past five years, driven by the success

of its blockbuster seed Jadoo, a hybrid cotton variant popular in the Andhra Pradesh market

(accounts for 22% of cotton production in India). Started in 2009 with a production of 15,000

packets, Jadoo's sales rose to about 5 mn packets in FY15. The seed has helped the

company scale up its market share from less than 1% in 2007 to 18-19% in FY15.

Due to the long lead time for developing and marketing a new hybrid, revenue for a seed

company over the immediate two to three years is mainly dominated by the portfolio of

existing hybrid seeds in the market. Consequently, we expect Kaveri to deliver a 20%

revenue CAGR over FY14-17 on the back of:

■ Stable-to-marginal improvement in the market share in its core AP cotton market,

■ strong improvement in the market share in Maharashtra on account of the launch of its

new hybrid, ATM (currently having an 8-9% market share in this market),

■ growth in corn seed revenue due to overall growth in the market (estimated to see a

15%+ CAGR over next few years), and

■ higher penetration of single cross maize hybrid and gradual improvement in the

market share, especially in Bihar and Maharashtra.

Paddy should theoretically be the next big growth opportunity in India due to the high

acreage for this crop and very low hybrid seed penetration. However, we have not built in

any significant upside from hybrid rice in our numbers given the uncertainties around a

new successful hybrid launch by any seed company.

From a medium- to long-term perspective, growth for seed companies is driven by not just

existing hybrids in the market but also by the pipeline of hybrids likely to be launched in the

next three to four years. In addition, in cotton Kaveri expects high growth in the medium term

stemming from (1) the adoption of new hybrids suitable for close density planting aiding

mechanised harvest; (2) likely approval of BG2RRF by 2016 (another GM technology in

cotton with which plants become immune to a herbicide Roundup thereby reducing labour

cost for manual weeding); and (3) the launch of new hybrids in the Gujarat and North Indian

markets. Kaveri targets a 25% market share in cotton in the next three years (from the

current 18-19% market share). In corn and paddy, the company hopes to increase its market

share to 17% and 10%, respectively, over the next five years from the current 13% and 6%.

Revenue has seen a 52%

CAGR over the past five

years

Based on the current

visibility, we expect Kaveri

to deliver a 20% revenue

CAGR over FY14-17

Paddy should be a very

significant growth

opportunity but there is

uncertainty around it

21 January 2015


Figure 28: While growth rates may come off from

historical highs, we expect attractive growth

Figure 29: Cottonseed accounts for a significant portion

of the company's revenue

32%44%

59%

91%

42%

19%

20%

20%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000F

Y10

FY

11

FY

12

FY

13

FY

14

FY

15E

FY

16E

FY

17E

(Rs

mn)

Net Revenue

56%

18%

4%

5%

2%1% 10%

4%

Cotton Corn Paddy Millet Sunflower Vegetables Others Microtek

Note: Data points above bar indicates revenue growth; Source:

Company data, Credit Suisse estimates

Data for FY13; Source: Company data, Credit Suisse research

High margins likely to sustain

We expect Kaveri's EBITDA margins to sustain at current 25% levels, with some potential

for positive surprises, mainly on the back of a change in the revenue mix away from lower

margin cottonseeds, and higher operating leverage. EBITDA margins for cottonseeds are

20-21% while those in other seeds vary between 25% and 28%. Cotton margins are lower

despite higher gross margins due to the royalty that needs to be paid to the Monsanto arm

in India (the royalty amounts to about 20% of cottonseed revenue). Management expects

EBITDA margins to expand, at best, by 100-150 bp.

Consequently, we expect a 29% earnings CAGR over FY14-17E on the back of revenue

growth and some slight margin improvement. The company claims its revenue as

agricultural income and therefore does not pay any taxes. Management does not see any

significant risk to this tax status.

Figure 30: We estimate a 25% EBITDA CAGR between

FY14 and FY17…

Figure 31: …and a 29% net income CAGR during the

same period

15

17

19

21

23

25

27

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15E

FY

16E

FY

17E

(%)

(Rs

mn)

EBITDA EBITDA margin (RHS)

17%46%

37%

120%

63%

43%

23%

22%

0

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1,000

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3,000

3,500

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15E

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16E

FY

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(Rs

mn)

Net income


EBITDA margins are at an

attractive level of 25% and

should improve with a

changing product mix

We expect a 29% earnings

CAGR over FY14-17

21 January 2015


Attractive financial metrics, likely to sustain Return ratios are likely to remain high

Due to high fixed asset turns (~5x in FY14), low net working capital requirements and high

profitability (~25% EBITDA margins), Kaveri has very strong return ratios (49% RoE and

46% RoCE in FY14). The success of its cotton hybrid seed, Jadoo, has resulted in

reductions in working capital and asset turnover. The popularity of Jadoo has resulted in

reductions in company's debtors and higher advances from customers and, given low

capital-intensive nature of the business, a significant boost to asset turnover.

We expect the company's return ratios to remain high over the next three years on the

back of strong 29% earnings growth and planned capex of just ~Rs400 mn p.a. However,

returns are likely to come off their peak levels over the next few years, mainly due to high

cash accumulation—we have not assumed a significant increase in payouts.

Figure 32: Low net working capital and high asset turns… Figure 33: …have driven high returns

0.0

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Company to remain net cash positive

Kaveri had net cash of ~Rs2 bn as at September 2014, due to the low capital-intensive

nature of the business, low working capital and high operating cash generation.

Working capital management is crucial in the seeds business as companies need to plan

for likely demand almost a year in advance. This typically results in high inventory on the

books of the seed companies. Kaveri maintains 1-1.2 years of peak inventory. However,

given the popularity of the company's product, Kaveri receives advances from dealers until

January for seeds to be provided during April-June. Over the past three years, the

company has received advances of about Rs2-2.5 bn (90-180 days of sales). The fall in

advances last year as a proportion of sales was due to the 25% fall in advances in Andhra

Pradesh owing to the high level of cotton inventory in the system. Over the past three

years, the company has maintained 20-30 days of net working capital at the end of March.

We expect the company to maintain 30 days of working capital investment.

We expect the company to remain in a net cash position as it is likely to generate OCF of

Rs10 bn over FY15-17 while incurring a capex of ~Rs1 bn during the same period. Its

current dividend payout ratio is 16-18%.

45%+ ROE and ROCE in

FY14

We expect OCF of Rs10 bn

over FY15-17 and capex of

Rs1 bn

21 January 2015


Figure 34:The company will likely remain net cash… Figure 35: …on the back of strong free cash generation

-2,000

0

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FY

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(Rs

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(Rs

mn)

OCF CAPEX


Quarterly financials

The company's annual financials are largely skewed towards the first half. The kharif crop

accounts for 75-85% of the company's revenue and about 80-90% of profitability. With

maize being the only rabi crop currently for the company and given the company's focus

on increasing penetration of single-cross kharif corn, the company's financials will likely

remain skewed towards the first half.

Figure 36: Seasonally skewed towards 1Q; 1H accounts for over 80% of company's revenue and PAT

Rs mn 1Q FY13 2Q FY13 3Q FY13 4Q FY13 1Q FY14 2Q FY14 3Q FY14 4Q FY14 1Q FY15 2Q FY15

Total Income 4,796 637 1,032 746 7,361 1,032 1,326 392 8,269 2,037

Revenue growth YoY 99% 31% 149% 79% 53% 62% 28% -47% 12% 97%

EBITDA 1,042 97 126 128 1,643 126 382 61 2,324 328

EBITDA growth YoY 85% 12% 80% 150% 58% 30% 203% -53% 41% 160%

EBITDA margins 22% 15% 12% 17% 22% 12% 29% 15% 28% 16%

Depreciation & amort. 28 29 39 35 35 39 43 45 22 22

Net interest -7 -6 -12 -9 -37 -12 -32 -14 -37 -46

PBT 1,021 74 99 115 1,645 99 371 30 2,339 352

Effective tax rate 1.5% 17.6% 8.4% 6.8% 1.5% 8.4% 1.5% 42.4% 1.4% 4.3%

PAT 1,006 61 89 94 1,620 89 365 18 2,304 337

PAT growth YoY 91% 17% 207% 225% 61% 46% 312% -81% 42% 281%

Contribution by quarter:

Revenue 67% 9% 14% 10% 73% 10% 13% 4%

EBITDA 75% 7% 9% 9% 74% 6% 17% 3%

Net profit 81% 5% 7% 8% 77% 4% 17% 1%

Source: Company data, Credit Suisse estimates

1H forms 80%+ of full-year

revenue and PAT; 1Q forms

the bulk

21 January 2015


Initiating with OUTPERFORM 40%+ upside potential over the next 12 months

We initiate coverage on the stock with an OUTPERFORM rating and a target price of

Rs1,100 based on two-year PEG of 0.75x—this implies 17x FY17E EPS. While our target

multiple is at the higher band of the company's historical multiples, owing to the its larger

scale and demonstration of its ability to introduce successful products into the market, its

strong balance sheet strength, high return ratios and likely strong earnings growth, we

believe that historical multiples may not be relevant. While the Indian seed companies

cannot be compared to their US peers such as Monsanto due to the higher proportion of

income from GM seeds and strong R&D capabilities, Chinese seed companies trade at

much higher multiples—for example, companies such as Longpin and Denghai are trading

at multiples of 20-40x with 15-20% return ratios and 20-35% earnings growth. We expect

the company to generate earnings growth of 22% over FY16-17.

Figure 37: While the valuation is high compared to the historical average, it has come off from its peak

0.0

5.0

10.0

15.0

20.0

25.0


12m forward P/E

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0


12m forward PB

Source: Thomson Reuters, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

Figure 38: Kaveri is trading at a significant discount to peers adjusting for growth

Local Mkt cap ADTO P/E (x) P/B (x) RoE (%) 2y EPS PEG

Company Ticker currency (US$ mn) (US$ mn) FY15E FY16E FY15E FY16E FY14 FY15E CAGR (%) (x)

Kaveri KVRI.BO INR 863 2.5 18 14 7 5 49 46 35 0.4

UPL UPLL.BO INR 2,533 9.7 13 11 2 2 21 20 17 0.7

Bayer BAYE.BO INR 2,082 1.2 34 28 6 5 16 19 29 1.0

Monsanto Ind. MNSN.BO INR 881 3.9 37 29 13 11 35 39 21 1.4

Rallis RALL.BO INR 684 1.4 24 19 5 4 23 22 22 0.9

Dupont DD.N USD 68,578 353 18 16 4 4 27 23 9 1.9

Monsanto MON.N USD 56,820 471 21 18 7 7 24 32 14 1.3

Syngenta SYNN.VX CHF 30,993 93 15 14 3 2 19 18 5 2.9

Longpin 000998.SZ CNY 3,288 60 56 44 7 6 15 15 35 1.3

Denghai 002041.SZ CNY 1,984 19 31 25 6 5 22 20 20 1.2

Source: Company data, Thomson Reuters, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

21 January 2015


Founders may sell down a bit

The company's founders plan to venture into the food processing business, a capex-

intensive business, which could result in an investment of ~Rs15 bn. On possible

shareholder concerns about moving Kaveri's business model from an asset-light, high

cash flow generation model to a capital-intensive one, the founders are taking up the

project in their individual capacity. To fund this venture, the founders plan to reduce their

stake in the firm over the next few years from the current 58% stake. They do intend to

keep their stake in Kaveri to at least 40%.

About 20% dividend payout

The company pays out dividend of only about 16-18% despite high cash generation.

Management has indicated that it would be comfortable with about Rs3-4 bn of cash (it

had net cash of ~Rs3 bn as of Mar-14 and ~Rs2 bn as of Sep-14) for R&D purposes. The

company has guided for annual capex of about Rs400 mn over the next few years with the

majority being used for strengthening biotechnological research. In our view, given the

founders' foray into the food processing business, there is a possibility that the company

may step up its dividend payout.

Figure 39: Founders' holdings have come down and likely

to continue to slide

Figure 40: We have assumed a gradual pick-up in the

dividend payout ratio

62

64 64

65

64 64 64

62

58 58

52

54

56

58

60

62

64

66

Sep

-09

Sep

-10

Sep

-11

Sep

-12

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Pro

mot

er s

take

(%

)

0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200


(Rs

mn)

Dividend payout Payout ratio (RHS)

Source: BSE, Credit Suisse research Source: Company data, Credit Suisse estimates

Key risks

■ Founders' sale of shares. The founders are looking to sell down their stake to fund

another venture in food processing. This should potentially create a stock overhang in

the near term. The stock has corrected in recent months after a strong performance

through most of 2014 and we believe that this overhang could be a reason. There has

been no progress on the founders' attempts to raise money through this route so far.

■ High reliance on cottonseeds. Cotton accounts for about 60% of Kaveri's revenue.

Any adverse movement in cotton prices could result in farmers moving to other crops

and that could have a significant impact on the company's performance. In the near

term, cotton will be need to be a key revenue driver for the company, both in Andhra

Pradesh and Maharashtra. Any change in the growth expectations should hurt

earnings and sentiment adversely.

■ Lack of medium-term visibility. While the company has done very well with its

current hybrid cottonseed portfolio, given a lack of sufficient information about the

company's germplasm and pipeline, it is difficult to get comfort on the medium- or

The company's founders

plan to venture into the food

processing business on their

own

21 January 2015


long-term sustainability of growth. Thus, to some extent, a leap of faith needs to be

taken based on the company's past track record.

■ Tax rate. Kaveri does not pay any taxes as its revenue is classified as agricultural

income. While the company has been following this policy for several years and does

not see any significant possibility of this changing, any changes in taxation policy in

the future could impact its reported earnings.

■ Dependence on external factors. Factors such as monsoon, especially its timing,

impact the farmer's crop selection and the ultimate success of the crop. Therefore, the

timing and quantum of monsoons could result in fluctuations in the company's

business performance. News flows around such factors could create volatility in the

share price as well.

Company background

Established in 1986, Kaveri Seeds is a leading seed producer in India with presence

across multiple crops such as cotton, corn, rice, millet, and vegetables. The company's

founder, GV Bhaskar Rao, is a first-generation entrepreneur, ventured into the seeds

business in 1976 and later established Kaveri Seeds. The company has a network of over

15,000 distributors and dealers across the country. While Kaveri has little presence

outside India, it has plans to expand its presence in markets such as Africa.

Shareholding pattern

Figure 41: Shareholding

Promoter58%FII

20%

DII9%

Others13%

Dec-14

Promoter64%

FII9%

DII10%

Others17%

Dec-13

Source: BSE

21 January 2015


Key management personnel

Figure 42: Key management personnel

Director Status Description

Mr. GV Bhaskar Rao Chairman & Managing

Director

Founder and chief strategist of the company. Spearheads various strategic initiatives

and overseas R&D, production and business development

Mrs G Vanaja Devi Director Associated with the company since inception. Oversees the CSR activities and assists the CMD in overall functioning of the company

Mr R Venu Manohar Rao Executive Director Associated with the company since inception. Manages relationship with farmers,

dealers, and distributors and is instrumental in establishing pan-India marketing and

sales network

Mr. C Vamsheedhar Marketing Director Associated with Kaveri for close to 15 years. Responsible for marketing, sales and

distribution and spearheads the Agritech operations

Mr C Mithun Chand Director Associated with the company for close to ten years. Overseas finance function and

manages investor relations; also manages the Microtek division and was the initiator of

KexVeg.

Source: Company data

21 January 2015



Monsanto India

(MNSN.BO)

Play on corn and herbicide growth

■ Play on corn and herbicide growth in India. Monsanto India (MIL), the only publicly listed Monsanto entity outside the US, was established in India in 1949 and has transformed itself from being a chemical company to a pure-play agri-based company. The listed entity has just two products—maize seeds (sold under the brand name Dekalb) and a herbicide, Gylphosate (sold under the brand name Roundup)—these two products together account for about 70% of Monsanto International's revenue. Other businesses of Monsanto such as cottonseeds and vegetable seeds are either directly controlled by the parent or are part of other subsidiaries in India.

■ Corn—among the largest seed companies globally and in India. Monsanto is among the largest corn seed producer and globally competes with other seed majors such as Syngenta and Pioneer in different regions. In the US, as per Credit Suisse US research team, Monsanto has a ~35% market share. Even in India, Monsanto appears to have a market share of 15-20% in corn seeds, next only to Pioneer. This segment's revenue growth saw a 17% CAGR over FY12-14. MIL has a portfolio of 17 hybrid maize varieties, sold under the brand name Dekalb, to address farmer requirements in various parts of the country. The company has a presence across 18 states in India.

■ Roundup—play on rising herbicide penetration in India. Glyphosate, first commercialised in 1974, went off-patent in 2000. While globally, penetration of Glyphosate is very high, use of herbicides in India is relatively low mainly due to manual weeding. However, with rising cost of labour especially during the peak season, management expects the usage of glyphosate to increase in India. Another key driver for increase in Roundup usage, as per management, is the approval of Bollgard II Roundup Ready Flex (BG2RRF) cottonseed, which is expected in the next few years.

■ Stock trades at 29x consensus FY16E EPS. The company has delivered a 63% earnings CAGR over the past two years and is expected to deliver a 21% EPS CAGR over FY14-16 (consensus).


0

100

200

300

400

0

1000

2000

3000

4000






Performance over 1M 3M 12M Absolute (%) 15.6 7.4 275.1 — Relative (%) 11.4 -0.2 239.1 —


Rs mn FY10 FY11 FY12 FY13 FY14

Revenue 4,102 3,634 3,738 4,424 5,818

EBITDA 577 530 550 697 1,382

EBITDA margin % 14.1% 14.6% 14.7% 15.7% 23.8%

PBT 578 503 601 750 1,387

PBT margin % 14.1% 13.8% 16.1% 16.9% 23.8%

PAT 541 540 483 678 1,291

RoE 16% 15% 12% 17% 33%

Working capital days 106 94 65 34 13

Net debt to equity Net cash Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters

Rating NOT RATED Price (21 Jan 15, Rs) 3,144.90 Target price (Rs) NA Upside/downside (%) NA Mkt cap (Rs mn) 56,394.8 (US$911.6) Enterprise value (mn) 56,395 Number of shares (mn) 17.26 Free float (%) 27.86 52-week price range 3,392.8 - 820.5 ADTO - 6M (US$ mn) 3.9

Research Analysts

Anantha Narayan

91 22 6777 3730

[email protected]

Akhil Kalluri

91 22 6777 3747

[email protected]

21 January 2015



Rallis India

(RALL.BO)

Diversified agri input company

■ A diversified agri input company. The company's business is broadly

divided into two categories—crop protection (69% of revenue) and non-

pesticide portfolio (NPP). In crop protection, besides branded product sales,

the company is also present in the institutional business. Its NPP comprises

seeds (13% revenue contribution), plant growth nutrients and contract

manufacturing. Management is targeting 40% revenue contribution from

NPP over the next few years.

■ Metahelix—management expects it to be the growth driver for the

company. The company acquired a 53.5% stake in Metahelix, a seed

company established in 2000, in 2010 and over time has increased the stake

to 82% (it is likely to acquire 100% over the next two to three years). Over

the past three years, Metahelix has reported a revenue CAGR of 53%. The

majority of seed revenue is driven by maize and paddy. The company also

has strong positioning in millets but has very little market share in cotton and

vegetables. Management is confident of achieving 30%+ revenue growth in

seeds over the next few years driven not only by maize and paddy but also

increasing market shares in cotton and vegetables. While the company's

current margins are sub 10%, management is hopeful to improve them to

18-20% in the next few years on the back of operating leverage.

■ Margins likely to inch up. The company expects 15%+ revenue growth in

the overall business on the back of strong growth from both crop protection

and NPP divisions and higher margins on account of a shift in the revenue

mix towards the higher margin NPP segment.

■ Stock trades at 19x consensus FY16E EPS. The company has delivered

an 18% earnings CAGR over the past two years and is expected to deliver a

22% EPS CAGR over FY14-16E (consensus).


80

100

120

140

0

100

200

300

400






Performance over 1M 3M 12M Absolute (%) -0.3 -6.1 23.1 — Relative (%) -4.6 -13.7 -12.9 —


Rs mn FY10A FY11A FY12A FY13A FY14A

Revenue 8,787 10,863 12,749 14,570 17,451 EBITDA 1,486 1,947 1,884 2,128 2,636 EBITDA margin % 16.9% 17.9% 14.8% 14.6% 15.1% PBT 1,530 1,843 1,594 1,676 2,148 PBT margin % 17.4% 17.0% 12.5% 11.5% 12.3% PAT 1,018 1,259 1,092 1,143 1,522 RoE 26.3% 27.1% 20.6% 19.5% 22.7% Working capital days (15) 2 12 25 24 Net debt to equity (0.1) 0.2 0.3 0.2 0.1


Rating NOT RATED Price (21 Jan 15, Rs) 216.70 Target price (Rs) NA Upside/downside (%) NA Mkt cap (Rs mn) 42,540.1 (US$687.6) Enterprise value (mn) 42,540 Number of shares (mn) 194.47 Free float (%) 49.91 52-week price range 250.0 - 153.0 ADTO - 6M (US$ mn) 1.4

Research Analysts

Anantha Narayan

91 22 6777 3730

[email protected]

Akhil Kalluri

91 22 6777 3747

[email protected]

21 January 2015



Advanta In

(ADVI.BO / ADV IN)

Indian MNC seed company

■ An Indian MNC seed company. Advanta, established in 1996 through a

combination of Royal Vanderhave Group of the Netherlands and Zeneca

Seeds of the UK, has been present in the seed industry since the 19th

century. In 2006, the company's Asia Pacific and LatAm businesses were

acquired by UPL and the company was listed on Indian bourses in 2007. It

has operations across 25 countries with APAC, LatAm and NAFTA

accounting for 64%, 18% and 17% of revenues, respectively. In 2012, the

company entered into an agreement with UPL under which UPL produces

and markets Advanta's seed products in India and pays a royalty of 7% of

net sales of the licensed products subject to a minimum royalty of Rs70 mn

p.a. Advanta received a royalty of Rs93 mn from UPL in 2013. In addition,

the company received Rs71 mn from UPL for R&D activates carried out for

the licensed products.

■ Portfolio of multiple seeds. The company has a portfolio of multiple seeds

including sorghum, corn, sunflower, canola, vegetables, rice, wheat, mustard

and cotton. Cereals, oilseeds, forages and vegetables account for 49%, 25%,

15% and 9% of the company's revenue respectively. Advanta is the largest

sorghum seed supplier in the world. Of the total revenue, GM accounts for

only 7%; however, multiple traits are under development.

■ Acquisitions and investment in R&D—growth strategy. Since being

acquired by UPL, the company has delivered a 13% revenue CAGR. Growth

has been driven by its entry into new markets, increasing product portfolio,

multiple alliances, licences, and stepping up of R&D spend. During this

period, Advanta has acquired six companies for a total consideration of

~US$80 mn. The company spends 10-12% of revenue in R&D and

management plans to continue high R&D spends to improve its crop portfolio

and focus on developing markets.

■ The stock trades at 57x CY13A EPS and the company has reported a 17%

earnings CAGR over the past four years.


40

90

140

0

100

200

300

400






Performance over 1M 3M 12M Absolute (%) -1.0 9.9 210.7 — Relative (%) -5.3 2.3 174.7 —


Rs mn FY10 FY11 FY12 FY13 FY14

Revenue 6,984 7,092 9,486 10,642 12,551

EBITDA 527 74 1,293 1,594 1,703

EBITDA margin % 7.5% 1.0% 13.6% 15.0% 13.6%

PBT 166 (316) 238 678 480

PBT margin % 2.4% -4.5% 2.5% 6.4% 3.8%

PAT 283 (163) 133 617 521

RoE 6% -3% 3% 11% 9%

Working capital days 109 133 92 60 113

Net debt to equity 0.9 1.1 1.0 0.8 1.1


Rating NOT RATED Price (21 Jan 15, Rs) 349.50 Target price (Rs) NA Upside/downside (%) NA Mkt cap (Rs mn) 29,626.9 (US$ 478.9) Enterprise value (mn) — Number of shares (mn) 84.37 Free float (%) 34.24 52-week price range 380.4 - 100.6 ADTO - 6M (US$ mn) 0.4

Research Analysts

Anantha Narayan

91 22 6777 3730

[email protected]

Akhil Kalluri

91 22 6777 3747

[email protected]

21 January 2015


Appendix Seeds classification

Seeds are broadly classified into three categories: open-pollinated, hybrid and genetically

modified.

■ Open-pollinated seeds are those bred from naturally pollinated plants. These seeds

typically breed true to type, which means that the next generation seeds will have

characteristics similar to those of the parent plant.

■ Hybrid seeds are developed through controlled pollination of selected parents to

develop desired characteristics such as higher yield, faster growth, water efficiency,

and pest protection. Development of seeds with a particular characteristic requires

extensive germplasm and significant R&D. However, one issue of hybrid seeds for the

farmer is that the next generation of seeds do not possess the same characteristics as

the parent and therefore the farmer is forced to go back to the seed company for seed

purchase.

■ Genetically modified (transgenic) seeds: In this case, biotechnology is used to alter the

plant's genetic sequence to obtain the desired trait such as resistance to pests, and

chemicals. Instead of selective breeding of plants, specific traits can be sourced from

different species. One example is the most popular biotech seed in India – Bt cotton.

In this case, Bt is Bacillus thuringiensis, a bacteria which when incorporated in the

seed protects the plants from specific pests such as American Bollworm. Bt cotton is

the only GM seed allowed in India.

Globally popular GM seeds, too, focus mainly on insect and chemical resistance

across various crops such as corn, soy, and cotton. However, companies are also

investing in new technologies to boost other characteristics such as yield and growth

efficiency. GM seeds claim to have beneficial impact on environment due to a

reduction in the usage of pesticides, which in turn leads to cost benefits for the farmer.

Figure 43: Comparison of open pollinated vs hybrid vs GM seeds

OP seed Hybrid seed GM Seed

Yield vs OP 3 - 4x 3 - 4x

Seed replacement ratio 3 - 4 years 1 year 1 year

Seed cost vs OP 3 - 4x 3 - 4x

Cost of pesticides No change No change Lower

Note: Beneficial traits are shaded; Source: Industry, Credit Suisse research

Figure 44: Seed business value chain

Breeder seedParent seed

multiplication

Hybrid seed

production

Seed processing operations

C&F points Sales

Research station

Farms Fields WarehousesRegional offices

Channels

R&D Supply Chain Marketing & Sales

Source: ASSOCHAM, Credit Suisse research

21 January 2015


Companies Mentioned (Price as of 21-Jan-2015)

Advanta In (ADVI.BO, Rs349.5) Bayer (BAYE.BO, Rs3501.85) E.I. du Pont de Nemours and Company (DD.N, $74.36) Kaveri Seeds (KVRI.BO, Rs771.2, OUTPERFORM[V], TP Rs1100.0) LPHT (000998.SZ, Rmb20.51) Monsanto Company (MON.N, $117.57) Monsanto India (MNSN.BO, Rs3144.9) Rallis India (RALL.BO, Rs216.7) SDDSC (002041.SZ, Rmb35.03) Syngenta (SYNN.VX, SFr291.2) UPL (UPLL.BO, Rs363.95)

Disclosure Appendix

Important Global Disclosures

I, Anantha Narayan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for E.I. du Pont de Nemours and Company (DD.N)

DD.N Closing Price Target Price

Date (US$) (US$) Rating

24-Jan-12 49.41 50.00 N

19-Apr-12 52.61 57.00

24-Jul-12 47.74 54.00

30-Aug-12 49.58 R

01-Apr-13 49.01 53.00 N

23-Apr-13 52.49 55.00

23-Jul-13 57.12 59.00

22-Oct-13 60.17 62.00

06-Jan-14 62.96 70.00

06-Jan-15 70.89 77.00

* Asterisk signifies initiation or assumption of coverage.

N EU T RA L

REST RICT ED

3-Year Price and Rating History for Monsanto Company (MON.N)

MON.N Closing Price Target Price

Date (US$) (US$) Rating

04-Apr-12 80.58 82.00 N

25-Apr-12 77.51 NR

16-Jan-13 101.90 120.00 O *

26-Jun-13 100.84 121.00

09-Jan-14 111.89 134.00

25-Jun-14 126.73 148.00

25-Aug-14 117.51 141.00


N EU T RA L

N O T RA T ED

O U T PERFO RM

21 January 2015


3-Year Price and Rating History for Syngenta (SYNN.VX)

SYNN.VX Closing Price Target Price

Date (SFr) (SFr) Rating

08-Feb-12 291.80 322.00 N

27-Jul-12 338.40 340.00

21-Sep-12 343.90 R

17-Jan-13 399.20 450.00 O

24-Jul-13 371.00 420.00

17-Oct-13 360.90 400.00

05-Feb-14 306.20 335.00 N

08-Jul-14 331.30 355.00

16-Jul-14 328.70 365.00 O

08-Oct-14 290.70 350.00

17-Oct-14 289.00 340.00

21-Jan-15 291.20 330.00


N EU T RA L

REST RICT ED

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price a nd (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Ja panese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple se ctors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 46% (53% banking clients)

Neutral/Hold* 38% (50% banking clients)

Underperform/Sell* 14% (43% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other i ndividual factors.

21 January 2015


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Price Target: (12 months) for Kaveri Seeds (KVRI.BO)

Method: Our target price of Rs1,100/share for Kaveri Seeds is based on 2y PEG (P/E growth) of 0.75x, which implies 17xFY17 P/E (price-to-earnings).

Risk: Risks that could impede achievement of our Rs1,100 target price for Kaveri Seeds include: Significant crop rotation away from cotton; the company's failure to improve market share in cotton and corn seeds; founders' sale of shares; lack of medium-term visibility; tax rates; and dependence on external factors (eg, monsoon).

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (MON.N, SYNN.VX, DD.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

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Credit Suisse has managed or co-managed a public offering of securities for the subject company (SYNN.VX) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (SYNN.VX, DD.N) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (MON.N, SYNN.VX, DD.N) within the next 3 months.

As of the date of this report, Credit Suisse makes a market in the following subject companies (MON.N, DD.N).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (SYNN.VX).

Credit Suisse has a material conflict of interest with the subject company (DD.N) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Ei du Pont de Nemours & Co in connection with the announced sale of the DuPont Performance Coatings business to the Carlyle Group.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (KVRI.BO, MON.N, SYNN.VX, DD.N) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

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To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

21 January 2015


Credit Suisse Securities (India) Private Limited ..................................................................................................... Anantha Narayan ; Akhil Kalluri

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

21 January 2015


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India Seeds Sector - Credit Suisse

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