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Company Report | Stock Idea

LONG TERM INVESTMENT CALL

Camson Biotechnologies Ltd. 16 May 2011 BUY

Industry Agri Biotech Company Description


CMP (INR) 116
Target (INR) 156 Camson Biotechnologies Ltd (CBL), a Bangalore based BSE listed agri-company
is India's first and the only wholly integrated agriculture biotech company
Upside (%) 34.5
covering hybrid seeds, biocides (bio-pesticides) and bio-fertilizers. It aims to
52 week High/Low (INR) 252/89
provide zero-residue vegetables and fruits to the society.
Market Cap (INR BN) 1.9
3M Avg. Daily Volumes 44,794
P/E (FY12E) 9.7x
Investment Rationale
INR mn
Key Financials FY10 FY11E FY12E FY13E Focus on vegetable hybrid seeds to drive revenue growth for CBL
Net Sales 800 947 1,160 1,417
As hybrid seeds on an average account for only 20% of the total vegetable seed
EBITDA 177 214 273 348 market, there is 80% or INR 20 bn unexplored market which hybrid seed
EBITDA margins (%) 22.1 22.6 23.6 24.6 companies can tap in the years to come. CBL has presence in 12 vegetables and
Adj Net Profit 151 191 239 302 are estimated to give at least 30-40% higher yields than its closest competitors
Net Profit margins (%) 18.9 20.2 20.6 21.3 along with a longer shelf life. CBL is well positioned to tap this unexplored
Adj. EPS 8.5 10.5 12.0 15.1 market.

Globally available opportunities in biocide segment with CBL’s competitive


Shareholding Pattern (%) advantage to drive long-term growth

Global biocide market is expected to touch USD 3.3 bn by 2014 from USD 1.6bn
Promoters
31% in 2009. Decision to phase out 200 different chemical pesticides by European
Union, suggests that there is an increasing concern of long-term negative impacts
Others of using crop protection chemicals. With its decade and half R&D efforts and an
FII
61% DII 5% existing and pipeline product base of 45 biocides, CBL is well positioned to tap
3%
the growing demand in this segment.

Expansion plans and diversification to support the growth initiatives

CBL is expanding its biotech capacities by 167% to 4mn litres p.a. at a cost of
1 - Year Stock Performance ~INR 250 mn. Further, it is scouting for partners in Brazil and Indonesia for
setting up manufacturing facilities where CBL will transfer technology on a
CBL BSE Sensex
300
royalty/license basis. Its subsidiary Camson Green Valley Products Pvt. Ltd. is
250 entering contract farming business for growing water melons across the country.
200 CBL is expecting the total acreage under this segment would reach 2500 acres in
150 the next one year.
100

50
Outlook & Valuation
0
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Source: Ace Equity, Company, Unicon


At CMP of INR 116 the stock currently trades at 9.7x our FY12e EPS , which is
comparable with valuation given to Indian peer companies on PE parameter.
However, we believe the market is yet to value its investments in next-generation
bio-technologies such as biocides and intragenic GMO where only a selected
few companies are operating. Though CBL is small in size, it is the only integrated
player in the agri-input space with a focus on zero-residue products. On this
backdrop, we expect it to trade at 13x its FY12E earnings and recommend BUY
on the stock with a price target of INR 156.

Analysts:
Ravikanth Kanamarlapudi | kanamarlapudi.ravikanth@unicon.in

1
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@unicon.in
Camson Biotechnologies Ltd.
Company Description

Segment revenue break-up CBL was started in 1993 by Shri. Dhirendra Kumar, a first generation
Hybrid Seeds Biotech Others entrepreneur and technocrat. It came with a public issue in 1995. Initially, CBL
was also into floriculture and waste water management businesses before
100.0%
0.3%
25.4%
0.7%
19.2% focussing on agri-products such as hybrid seeds, biocides and bio-fertilizers.
80.0%
60.0%
80.1%
The company is equipped with two R&D centres located at Dodaballapur,
74.3%
40.0%
Karnataka and Aligarh, U.P., and production units at Dodaballapur and Nangal,
20.0%
HP. Its marketing division has a team of 300 in-house professionals supported
0.0%
FY10 9MFY11 by a network of 300 distributors and 2600 dealers across India. To tap the global
Source : Company, Unicon Research opportunities it has set-up marketing offices in Mauritius and Singapore. It is
planning a NSE listing during FY12.

CBL has a proprietary technology platform which is highly efficient and


economical in isolating the desired microbes against specific pests/pathogen.
After years of patient research, its first biocide product was launched in 2000.
Since then, there is no back footing for CBL with net revenues expected to near
INR 1 bn in FY11 from INR 20 mn in FY2000. As its R&D centre is approved by
the Department of Scientific and Industrial Research (DSIR), CBL is also eligible
for tax exemptions on profits up to 200% of R&D expenditure. In the last three
years ended FY10, CBL had spent ~19% of its revenue towards R&D investments
and plans to allocate anywhere between 15-20% of revenue going forward.

Hybrid Seeds

For the 9MFY11, hybrid seeds business grew at 33% and contributed for ~80%
of total revenues. In this segment, CBL is mainly into vegetable and fruit hybrid
seeds where the margins are considered very high. CBL's present product range
includes 50 varieties covering 12 vegetable and fruit types such as tomato, brinjal,
ridge gourd, bitter gourd, bottle gourd, chillies, sweet corn, water and musk
melon. Further, it has a research pipeline of another 70 varieties. Over the years,
CBL has launched many hybrid seeds for the 1st time in India such as freezer
water melon, yellow skin water melon, yellow tomato, pink tomato and cherry
tomato.

Biotech (Biocides & Bio-fertilizers)

For the 9MFY11, biotech segment de-grew by 4.2% and contributed for ~20% of
total revenues. CBL was an early entrant in the biocide market. Unlike chemical
pesticides which may affect all the living organisms when applied, biocides are
pest specific. It means these biocides do not harm anything else other than the
targeted pest or pathogen and decompose quickly leaving zero-residue in food,
fibre and fodder. These biocides are secondary metabolites which are naturally
occurring chemical compounds secreted by a large variety of micro organisms
when put under stress. Further, CBL's biocides are different from products
manufactured by other biocide manufacturers as the latter depend largely on
plant extracts such as neem seeds as primary input.

2
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@unicon.in
Camson Biotechnologies Ltd.
Industry overview

India seed market break-up Seeds


Hybrid Other
Crops
11% Indian seed industry is the sixth largest in the world with an estimated size of
Open
Pollinated INR 50 bn at the end of FY09. It is projected to grow at 12-13% p.a. as against an
Hybrid
Cotton
Seeds
estimated ~5% growth globally. As per a 2009 report published by National
47%
32% Seeds Association of India (NSAI), vegetable hybrid seeds constitute for INR 5
Hybrid
vegetables bn. The average hybrid seeds penetration levels (hybridization) in the vegetables
10%
are still low at ~ 20% with 3% for Cucumber as the lowest and 85% for cabbage
as the highest.
Source: 2009 NSAI report
Ever increasing food demand along with declining acreage under cultivation is
building pressure on the nation to increase the crop yields. One can achieve the
The average hybrid seeds penetration levels in the veg- increased crop yields by using better seeds and better irrigation system. Seeds
etables is still low at ~ 20% are classified as open pollinated, hybrid (artificially pollinated) and genetically
modified (GMOs) seeds. The success of Bt cotton (a GMO seed) in India which
Total Market Hybrid Market (%) account for at least 80% of total cotton grown has opened up the markets for
Vegetable
Size (in MT) Size (in MT) Hybridization other expensive commercially viable seeds such as hybrid seeds.
Cucumber 833 25 3
Water Melon 175 70 40
GMO seeds have their genes altered using molecular techniques to make it
Egg Plant 313 25 8
Gourds 867 130 15
resistant to specific pests or drought tolerant. These GMO seeds are further
Cabbage 59 50 85 classified as 1) intragenic - seeds produced from genes of two closely related
Cauliflower 364 40 11 vegetable species 2) transgenic - seeds produced from both animal and plant
Chilli 286 40 14 genes (ex. Bt Cotton). Though there is an unproven concern of using transgenic
Okra 3913 900 23
seeds globally with long-term negative consequences, there are no such
Tomato 250 50 20
controversies surrounding intragenic seeds.
Source: 2009 NSAI report

Pesticides & Biocides (Bio-Pesticides)

Indian pesticide segment is estimated at INR 70 bn and The global pesticide (crop protection chemicals) market is estimated at USD 43
projected to grow at 2-3% in the next few years bn in 2009 and with a projected CAGR of 3.6% is estimated to reach USD 51 bn
by 2014 (Source: BCC Research). Of the total pesticide market, biocides account
for 4% of the global pesticide market.

India is the fourth largest producer of pesticides with an estimated size of INR
70 bn. Of this, ~50% market share is held by MNCs and the rest by Indian
companies who are largely into off-patent generic formulations. Biocides
presence in Indian crop protection market is miniscule, however is witnessing
increasing interest from farmers. Today, nearly 50% of the total pesticide
produced is consumed by only two crops i.e. paddy and cotton. According to a
Rabobank India report, pesticide consumption is expected to grow at 2-3% in
the next few years.

3
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@unicon.in
Camson Biotechnologies Ltd.
Investment Rationale

Focus on vegetable hybrid seeds to drive revenue growth for CBL

CBL's hybrid seeds are commanding premium as their CBL has developed high margin high yielding vegetable and fruit seeds where the
output is at least 30-40% higher than its nearest yields are at least higher by 30-40% its closest competitor yields. For example, CBL
competitors' claims that its watermelon seeds such as “Netravati” and “Vedavati” varieties are
giving an output of 25 and 35 tonnes per acre respectively. Whereas it’s nearest
competitor Namdhari Seeds is delivering an output of 15-20 tonnes. With the
advantage of high yields, CBL is able to price its seeds at a premium to its
competitors. Though CBL’s seeds look expensive, due to their relatively smaller
size, the intake per acre is lower than the competitor’s. Added advantage is that the
shelf life of these watermelons as claimed by the company is one month as against
10-12 days with competitors’. CBL is also assisting the farmers in distributing the
produce to large retail outlets such as Reliance Fresh.

Even a 5% market share in watermelon seeds could As hybrid seeds on an average account for only 20% of the total vegetable seed
fetch CBL INR 250 mn or 25% of its expected FY11 market, there is 80% or INR 20 bn unexplored market which hybrid seed companies
revenues can tap in the years to come. For example, total market for watermelon seeds in the
country is estimated at 175 MT in 2008, of which 40% seeds are of hybrid with the
rest contributed by open pollination variety. With the advantages that CBL seeds
provide, even on a conservative 5% market share would derive INR 250 mn, which
is ~25% of expected FY11 total revenues. As their other vegetable seeds too have
witnessed impressive output, we expect CBL’s hybrid seeds segment to grow at a
faster rate in the next few years.

In addition to hybrid seeds, CBL is keen on launching its first GMO vegetable seeds
developed through a non controversial intragenic route. It is expecting to market
tomato and watermelon in a year’s time.

Globally available opportunities in biocide segment with CBL’s proven product


base to drive long-term growth

Increasing awareness of long-term hazards on hu- In early 2009, European Union has voted to phase out the usage of more than 200
man health is leading to banning of some of the different pesticides. In April 2011, the international convention held at Geneva had
pesticides banned on using Endosulfan internationally. Endosulfan is widely used in India as
pesticide in many crops such as paddy, vegetables, fruits etc. and accounts for over
70% of global consumption. India with the extensions given is expected to phase
out the usage over a period of next 11 years.

Bio-pesticides market is projected to grow at 15.6% Increasing public awareness of serious long-term health hazards posed by chemical
in the next few years pesticides and considering very low penetration levels (of ~3.5% based on global
pesticides market) biocide companies are looking at better future prospects. Global
bio-pesticides market is estimated at USD 1.6 bn in 2009 and with a projected
CAGR of 15.6% is expected to touch USD 3.3 bn by 2014 (Source: BCC Research).

CBL has been a pioneer in the biocide segment in India. With more than a decade
in-house research efforts, it has 15 products in the market and 30 more in the
pipeline. CBL is also going for patenting these products. In addition, it has an in-
house library of 3700 selected and characterised microbes which found to be very
effective in fighting various pests. Further, as it takes anywhere between 9-12 years
for any biocide product to develop, CBL is way ahead its competitors in this
segment.
4
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@unicon.in
Camson Biotechnologies Ltd.
Expansion plans and diversification to support the growth initiatives

Post expansion capacities are expected to increase by CBL has recently commissioned a new plant for its biotech segment at Nangal, HP
167% to 4mn litres in Biotech segment with a capacity of 10 lac litres p.a. Further it is doubling the existing Dodaballapur
plant by the end of FY12. Together, these investments would increase the capacities
by 167% to 40 lac litres p.a. Its internal accruals would be sufficient to fund these
expansions and so we expect CBL to continue as a debt free company. These facilities
put together to add INR 400 mn to the revenues at 100% utilisation. Further, it is
scouting for partners in Brazil and Indonesia for setting up manufacturing facilities
where CBL will transfer technology on a royalty/license basis.

CBL is diversifying into contract farming for grow- CBL through its 100% subsidiary Camson Green Valley Products Pvt. Ltd. is
ing watermelons across the country entering contract farming for water melons across the country wherein the farmer
will get the technical advice at the cost of the company. The farmer will also get
the hybrid seeds and other inputs such as biocides and fertilizers at a discount to
the market price from it. Post harvesting the company will also help in marketing
the produce for a better price at a commission of 20% on the profits. CBL has
already tied up for 300 acres and is planning to increase it to 2500 acres in the next
one year or so. CBL is planning to market these produce to Middle East, Singapore
and other Asian countries under its brand. The contract farming when
implemented successfully will be a win-win situation for both the farmers and
CBL.

Risks & Concerns

Adverse weather conditions to impact CBL negatively

As CBL is into business of seeds, biocides and bio-fertilizers, adverse weather


conditions such as low and uneven rainfall in the country will have a negative
impact on the sales of its products.

Peer Comparison
CMP Mkt Cap EBITDA Margins (%) PE (x) PB (x) EV/EBITDA (x) ROE (%)
(INR) (INR Mn) FY11e FY12e FY11e FY12e FY11e FY12e FY11e FY12e FY11e FY12e
Kaveri Seeds 368.0 5036 22.0 23.0 13.3 10.8 2.8 2.3 11.2 9.4 22.7 22.6
Advanta India 245.0 4150 15.0 15.0 14.2 8.9 0.9 0.9 8.6 7.2 6.2 8.6
Monsanto India 1744.0 15061 17.0 18.0 24.1 21.0 3.9 3.5 19.9 17.7 16.9 17.5
CBL 116.0 1862 22.6 23.6 11.0 9.7 1.8 1.4 8.4 6.4 19.0 17.7
Source: Bloomberg, Unicon Research

5
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@unicon.in
Camson Biotechnologies Ltd.
Outlook & Valuation

CBL is the only Indian private sector company that is doing research on GMO
intragenic seeds. Further, it is also working on metagenomics, a relatively new
field where genetic material is directly taken from environmental samples. Funding
of these long-term projects is entirely done through internally generated cash
flows. With the success of CBL's hybrid seeds business which itself has a huge
potential to grow, it has no constraints in funding these long-term projects. First
of these R&D investments is expected to test the market in a year's time with the
launch of tomato and watermelon seeds.

We estimate a revenue and EPS CAGR of 21% and 21.1% respectively for the three
year period ending FY13. CBL may continue to be a debt free company, as the
projected cap-ex requirement of INR 150-200 mn per annum are comfortably met
by the internally generated cash flows, a 25% equity capital dilution by the end of
FY12 and current cash and cash equivalents.

As the company is in the growth phase, it is likely that the dividend INR 1 per
share would be maintained and may not be increased in the near future. At CMP
of INR 116 the stock currently trades at 9.7x our FY12e EPS , which is comparable
with valuation given to Indian peer companies on PE parameter. However, we
believe the market is yet to value its investments in next-generation bio-
technologies such as biocides and intragenic GMO where only a selected few
companies are operating. Though CBL is small in size, it is the only integrated
player in the agri-input space with a focus on zero-residue products. On this
backdrop, we expect it to trade at 13x its FY12E earnings and recommend BUY on
the stock with a price target of INR 156.

6
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@unicon.in
Camson Biotechnologies Ltd.
Summarised Financials and Ratios
INR mn INR mn
Income Statement FY09 FY10 FY11E FY12E FY13E Balance Sheet FY09 FY10 FY11E FY12E FY13E
Revenues 494.1 799.8 947.0 1160.3 1416.5 Net Assets 184.8 288.7 323.4 492.9 652.4
Other Op. Income 0.0 0.0 0.0 0.0 0.0 CWIP 0.8 55.2 200.0 200.0 200.0
Total Op. Income 494.1 799.8 947.0 1160.3 1416.5 Investments 0.1 8.4 8.4 8.4 8.4
Cost of Revenues 128.2 150.6 178.3 212.6 252.5 Current Assets
% to Total Op. Exp. 0.3 0.2 0.2 0.2 0.2 Inventories 149.7 223.0 265.2 324.9 396.6
Total Op. Exp. 397.7 622.7 733.3 886.9 1068.6 Sundry Debtors 73.1 117.3 236.8 290.1 354.1
EBITDA 96.4 177.1 213.7 273.4 347.9 Cash & Bank Balances 11.5 150.3 71.2 114.5 119.8
Other Current Assets 46.0 11.9 47.4 58.0 70.8
Other Income 0.1 3.5 5.0 5.0 5.0 Current Liabilities
Depreciation 10.3 16.6 20.5 30.5 40.5 Current Liabilities 36.6 57.8 66.3 81.2 99.2
EBIT 86.2 164.0 198.2 247.9 312.4 Provisions 18.5 28.1 37.9 46.4 56.7
Net Working Capital 225.2 416.8 516.3 659.9 785.6
Interest 1.2 2.0 1.0 1.0 1.0 Total assets 411.0 769.1 1048.1 1361.2 1646.4
PBT 85.1 162.1 197.2 246.9 311.4 Share Capital 137.0 160.5 181.3 200.0 200.0
Tax Provision 3.9 10.6 5.9 7.4 9.3 Reserves 262.9 533.2 825.5 1152.0 1434.1
PAT 81.1 151.5 191.3 239.5 302.1 Share warrants application money 0.0 61.1 35.0 0.0 0.0
Secured Loans 11.1 10.0 2.2 5.0 8.1
Unsecured Loans 0.0 0.0 0.0 0.0 0.0
Def. Tax Liabilities 0.0 4.2 4.2 4.2 4.2
Total Liabilities 411.0 769.1 1048.1 1361.2 1646.4

INR mn
Cash flow Statement FY09 FY10 FY11E FY12E FY13E Key Ratios FY09 FY10 FY11E FY12E FY13E
PBT 85.1 162.1 197.2 246.9 311.4 Profitability & Margins (%)
Add: Depreciation 10.3 16.6 20.5 30.5 40.5 EBITDA Margin 19.5% 22.1% 22.6% 23.6% 24.6%
Interest 0.5 0.3 1.0 1.0 1.0 EBIT Margin 17.5% 20.5% 20.9% 21.4% 22.1%
Less: Direct Taxes Paid -3.9 -0.5 -5.9 -7.4 -9.3 Pre-tax Margin 17.2% 20.3% 20.8% 21.3% 22.0%
Increase in Working Capital -64.7 -62.3 -178.7 -100.3 -120.4 PAT Margin 16.4% 18.9% 20.2% 20.6% 21.3%
Other Miscellaneous 0.0 -2.0 0.0 0.0 0.0 EPS 5.9 8.5 10.5 12.0 15.1
CF from Operations 27.2 114.2 34.1 170.7 223.2 Growth % -10.0% 43.7% 24.0% 13.5% 26.1%
RoE 20.3% 21.8% 19.0% 17.7% 18.5%
(Pur) / Sale of Fixed Assets -65.3 -179.3 -200.0 -200.0 -200.0 RoCE 21.0% 21.4% 19.0% 18.3% 19.0%
(Pur.) / Sale of Investments 0.0 -8.3 0.0 0.0 0.0
Other Miscellaneous 0.0 0.0 0.0 0.0 0.0 Leverage (x)
CF from Investments -65.3 -187.6 -200.0 -200.0 -200.0 Debt / Equity 0.0 0.0 0.0 0.0 0.0
Interest Coverage 74.1 83.2 198.2 247.9 312.4
Change in Networth 57.6 237.4 111.7 88.9 0.0 Current Ratio 5.1 5.9 6.0 6.2 6.0
Change in Loan Fund -6.2 -1.1 -7.8 2.8 3.1
Less: Interest Paid -0.5 -0.3 -1.0 -1.0 -1.0 Valuations (x)
Dividend Paid -15.8 -16.0 -16.1 -18.1 -20.0 EV/Sales 3.8 2.2 1.9 1.5 1.2
Other Miscellaneous 0.0 0.0 0.0 0.0 0.0 EV/EBITDA 19.3 9.7 8.4 6.4 5.0
CF from Fin. activities 35.1 219.9 86.8 72.6 -17.9 P/E 19.6 13.6 11.0 9.7 7.7
Net Change in Cash -3.1 146.5 -79.1 43.3 5.3 P/BV 4.7 2.7 1.8 1.4 1.1
Source : Company, Unicon Research

7
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@unicon.in
Camson Biotechnologies Ltd.
Research Recommendation 2010
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8
Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@unicon.in
Camson Biotechnologies Ltd.
Unicon Investment Ranking Methodology
Rating Buy Accumulate Hold Reduce Sell

Return Range >= 20% 10% to 20% -10% to 10% -10% to -20% <= -20%

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Wealth Research, Unicon Financial Intermediaries Pvt Ltd.
Email: wealthresearch@unicon.in