Seed is the only part of the agricultural chain that is growing at 20% a year and is insulated from both government subsidies and weather vagaries. And, in the clamour for higher yields and greater farmer acceptance, seed companies are hitting a sweet spot in innovation, reports Nidhi Nath Srinivas
Economic Times (New Delhi), 28th June, 2011.
At his plush Banjara Hills office in Hyderabad, India’s seed-industry capital, M Prabhakar Rao, chairman and managing director of Nuziveedu Seeds, is drawing up plans for an IPO next year. Whatever the timing, he knows it will be a cinch. “It’s a recession-proof business,” he says with the quiet confidence of a CEO who found private equity firm Blackstone on his doorstep with Rs 200 crore in 2008. In nearby Jubilee Hills, Dr Paresh Verma, director of research at Shriram Bioseed, has signed off his company’s 2010-11 numbers with a 44% jump in turnover, to Rs 292 crore. His target this year is 42%. “We will see similar growth for the next four years,” he says. A 20% growth rate and a 50% gross margin have become routine because of the opportunity, says M Harish Reddy, the dapper managing director of Ganga Kaveri Seeds, who chose this over his family’s other business of bottling Budweiser beer. There’s an unmistakable buzz in and around the $1.5 billion Indian seed industry. “It has the potential to grow to $2.5 billion in the next five years,” says Adityendra Kumar, analyst at Rabobank India. The last two-and-a-half years have seen six equity deals worth $153 million being signed. “For us, it’s a play for the next 20 years, not the usual five,” adds Manish Jain, whose private equity fund Axis Holdings has invested $5 million in Kaveri Seeds and is preparing to sew up two more deals. Multinationals are hunting for Indian players with research skills in cash crops like cotton, corn and vegetables. As are cash-rich homegrown companies like the Rs 900 crore Nuziveedu, India’s largest seed company. Also, fertiliser and agro-chemical companies, like Rallis India of the Tata Group, are diversifying here. “Acquirers have paid high premiums,” says Kumar. Investors and companies are buying the macro story: the growing demand to feed a billion mouths, millions of whom transit to a superior diet every year; rising food prices; the world’s second-largest arable area; and the $150 billion Indian agriculture sector. But that’s not all they are buying into. If so, any agricultural business would pass muster. But most in India don’t because they are either out of bounds, or are plagued by government subsidies or weather vagaries (See graphic: The One Attractive Link…). By comparison, seeds is a free market for all practical purposes; it is breaking new ground in adoption and innovation; and, no matter what the weather, a farmer will sow.
SEED OF LIFE
A pivotal change is in the offing in how farmers sow. About 70% of the seeds sown in India are those saved from the previous year. Compared to new seeds, they yield less and are more disease-prone. The government has set a seed replacement rate—percentage of new seeds in a year—target of 40%. “If that happens, the industry will grow three times,” says Dr Verma. While the government is using policy to increase consumption of new seeds, companies are improving product quality. The industry is, today, at a point where cuttingedge technology meets high finance and industrial farming. The main challenge is to increase yields. Agricultural land is finite. So, to feed a population that is growing and eating more, that means drawing more output from the same land. That means losing less to the three giant killers: heat, thirst and pests. That means withstanding floods. That means lowering farming costs. A tiny seed, which has greater potential for innovation than anything else in the agri chain, can deliver all these. “Seed is the agent for change,” says Dr Gyanendra Shukla, director at Mahyco Monsanto Biotech India. “From farmers and industry to scientists and government, everybody understands that change is faster and cheaper by leveraging seeds.”
Broadly speaking, there are two types of seeds. The first are varietals, which pollinate by themselves; they can be reused, but with diminishing returns. The second are hybrids, which are developed through controlled pollination and cannot be reused. Barring wheat and soybean, other crops have both types of seeds. In 2010-11, hybrids accounted for Rs 5,000 crore of the industry’s Rs 8,000 crore turnover. “Farmers have understood that varietals appears cheap, but are more expensive in the long run,” says Reddy of Ganga Kaveri Seeds. “Seeds become tired, and lose yield potential and quality from onegeneration to the next.” Adds Amitabh Jaipuria, managing director of Monsanto India: “Conversion of area from varieties to hybrids will be the next big thing. As we saw in cotton, the availability of technologycan lead to faster adoption.” Monsanto transformed the Indian cotton market with Bt cotton, a hybrid introduced in 2002-03. Between that year and 2010-11, when 90% of cotton farms had Bt seeds, yields increased from 302 kg a hectare to 503 kg a hectare. And production from 13.6 million bales to 32.5 million bales, turning India from cotton importer to the world’s second-largest producer and exporter. Today, cotton accounts for half the hybrid seeds sold in India. Seed companies are looking to replicate that story in more crops. For them, hybrids promise growth and value, which varietals don’t. “Seed accounts for 5-15% of the cost of production,” says Jaipuria. “A farmer is willing to pay for value, performance and consistent quality. If you deliver this, you can recover value.” At present, hybrids are available for cotton, corn, pearl millet, sorghum, sunflower and vegetables. Greater adoption of hybrids means more seeds sold, which will mostly benefit the private sector. There are two central government companies and 13 state seed corporations. But their efforts are inadequate, says Ramesh Chand, director at the National Centre for Agricultural Economics and Policy Research. “Up to labs, government is good. But state seed corporations have become defunct.” Companies are reinvesting profits in research, expansion and asset creation, in that order. “R&D is the only differentiator to increase value for a farmer,” says Reddy. “With stronger IPR (intellectual property rights), companies are competing to show farmers a 15-20% increase in yields.”
Corn hybrids are a Rs 700 crore market, with Rs 70 crore being invested in R&D by Indian companies alone; investment in rice hybrids is a steady Rs 15-20 crore a year, says Dr Verma. The DuPont Knowledge Centre at the Genome Valley near Hyderabad has grown to 400 scientists in two-and-a-half years. “We were attracted by the quality of people available in India,” says director Homi Bhedwar. Companies need a large bank of germ plasm—the building block of a seed that houses traits—and capital. “It (germ plasm) is scarce, expensive and must be refined properly to meet breeding objectives,” says KV Subbarao, country manager of Pioneer Hi-Bred India, a subsidiary of DuPont India. Biotechnology is taking hybrids to another level, by tinkering with genes to alter traits of seeds. But launching a commercially viable hybrid is a slog, with a high risk of failure, which discourages smaller players. “The discovery of a new trait can take 2-10 years. From idea to dealer, it takes another 10 years, if all goes well,” says Subbarao. “It can cost up to $120 million in the US to develop a transgenic product with a good chance of becoming an industrial success.” Farm biotech is the fastest-growing segment of India’s biotechnology industry, says Dr KK Narayanan, co-founder and managing director of Metahelix, which developed an alternative technology for Bt cotton. Biotechnology brought with it a new business model. Monsanto India, through its joint venture Mahyco Monsanto, has licensed its basic Bt cotton technology, based on genetic modification, to 35 companies. Such tie-ups allow Indian companies to leapfrog several years of research, and enter the market cheaply and quickly.
Companies are making variants to be relevant in all eight agro-climatic zones of India. They are setting up shop in Africa and South-east Asia, where the climate is similar to India. They are venturing into new crops with untapped market potential. Monsanto, for instance, is investing in vegetable seeds, a Rs 800 crore market. It has to start from scratch because vegetables that are popular abroad, like broccoli and lettuce, don’t fly in India yet. Challenges will increase. The pool of scientists and researchers is limited. And expanding marketing and distribution calls for more spending. “Seed is a show-and-tell business,” says Vidya Sagar Parchuri, CMD of the Rs 650 crore Vibha Seeds. “Each year, we hold 10,000 demonstrations for 100,000 farmers. Village-night meetings, posters, hoardings and advertising are extra.” All this eats into the 50% gross margin that good companies typically earn. Technology has increased risk by shortening the product shelf life from 10-12 years to 7-8 years. “After introducing a new seed, it takes two years to scale it up. It sells for four years and then declines because new rivals enter the market,” says Subbarao, making a case for a strong pipeline of hybrids. As R&D costs increase, companies are expected to seek alliances with government research institutes and state agricultural universities, which can develop technology but need help to commercialise it. “The Green Revolution was driven by the public sector, the Bt cotton revolution by the private sector,” says Shukla. “The next push will come from public-private partnerships.” Companies say if policies encourage competition and innovation, promote a science-based regulatory regime and protect intellectual rights, investment and growth will continue. It’s why they decry the proposed Seed Bill 2008, which penalises companies for crop failure. “It can’t prevent the problem of counterfeit seeds,” says Rao of Nuziveedu. It’s why instead of subsidised seeds—which some states, including UP, Rajasthan, Gujarat and Bihar, offer—they suggest a cash subsidy. “Government subsidy takes away merit,” says Jaipuria. Adds Rao: “Give a cash subsidy against a bill to give farmer the freedom to buy.” Those are small issues, but the big story has been planted.