Sowing success

IPO REVIEW

Although expensive in the short-run, Advanta is on solid ground.

India would have witnessed an all-round growth, if only agriculture had kept up its pace, and had grown at a slightly better rate. With about 3 per cent growth in agriculture, the sector became the primary concern of the government, and the budget brought in a number of sops and incentives for agriculture and related industries.

Along came an announcement of initiating another green revolution in the nation, in order to feed the increasing population and meet rising demand for food with ample supply.

The move hints not just at a potential revival of the sector from a policy point of view, but also lets one gauge the latent market waiting to be tapped. A number of irrigation equipment makers, seeds companies, agro-chemical and pesticide manufacturers and fertilizer companies stand to gain from this new green revolution.

Advanta India, one of the leading players in seeds market too, is looking to grab a greater share of this pie. Therefore, the company is coming up with an initial public offering of 3.38 million shares, in the price band of Rs 600 to Rs 650.

The object of the issue is to invest in technology and international expansion by leveraging its Indian operations and for selective acquisitions.

The issue will aggregate an amount between Rs 200-220 crore and amount to a post-issue stake of about 20 per cent in the company. After the issue, the promoter United Phosphorus' (UPL) stake will reduce from 62.43 per cent to 49.9 per cent.

Strong roots
Advanta is a leading supplier of seeds and seed technologies to major global and regional markets, and has a well-diversified product portfolio consisting of crops like rice, cotton, canola, corn, sunflower, sorghum and wheat. It was formed when Zeneca Seeds and Netherlands-based Royal Vanderhave merged.

Today, Advanta has operations in Australia, Argentina, Thailand and India. The Indian arm of the company, formerly known as ITC Zeneca, was made into the parent holding company, while Advanta Netherlands Holdings BV, the erstwhile parent company based in the Netherlands, was turned into a subsidiary.

In January 2007, UPL's group company Uniphos Seeds and Biogenetics was merged with the company.

Although the company has its principal operations in Australia, India, Thailand and Argentina, its Australian arm sells its seeds all over the world.

Further, the company also has strong research and development capabilities and owns proprietary germplasm, intellectual properties and bioscience tools integrated with its breeding activities.

Proprietary germplasm is a resource that forms the company's core competitive advantage in the commercial seeds business. It is an asset which is not easily replicable since it takes a long time "� usually decades, to develop and deploy commercially.

Gaining competence
Advanta is now focusing on research in the direction of increased speed and integrity of plant breeding and increased rate of genetic gain in order to differentiate itself on its products front.

The company is now focusing on research in molecular markers in crops of sunflower and sorghum, which constitute of about 25 per cent of sales, at its facilities in Argentina and Australia respectively. A molecular marker is a part of a genome, which is linked with specific characteristics of the crop.

Thus, it helps identify and select desirable characteristics in a crop, which would further help develop enhanced genetically modified seeds. Advanta's marker for sunflower seeds, SUNSAT will help in developing hybrid sunflower seeds with a healthy oil profile and therefore, represents a potential opportunity to commercialise seeds and oils using this technology.

Among existing products, the company has a leading presence in rice and sunflower in India, sweet and baby corn in Thailand, grain sorghum in Australia and sunflower in Argentina.

To add to its products, Advanta is now looking to strengthen its presence in hybrid wheat in India, in hybrid canolas in Australia, and in sweet sorghum for making bio-ethanol in India and Australia.

The market
Globally, the commercial seeds market amounted to about $34 billion in 2005, with leading organised seed companies controlling about half of it.

In comparison, the Indian seed market was estimated to be about Rs 4,400 crore in 2005, and about 46 per cent of the seed commercially sold in India is produced by private sector players. While the global market is estimated to grow at a compound rate of about four-five per cent until 2010, its Indian counterpart is expected to scale a compound rate of around 10 per cent.

Going further, the value added seeds market is expected to grow even faster and still bar many new entrants owing to the high gestation period involved with the business. 
 

A HEALTHY BREED
Rs crore	FY07E	FY08E
Revenues	407.85	449.53
Operating profit	57.10	80.92
Net profit	43.71	38.21
EPS (Rs)	25.97	22.70
P/E @ Rs 600	23.10	26.43
P/E @ Rs 650	25.03	28.63
Note: FY07E net profit includes one-off profit from sale of land @ Rs 23.31 crore

Valuation
For the seven-month period ended October 31, 2006, Advanta reported a revenue of Rs 237.91 crore, with an operating profit of Rs 52.3 crore "� about 22 per cent of revenues and a net profit of Rs 35.3 crore amounting to a 15 per cent margin.

Although it is expected to witness seasonality in its earnings with peaks in the second and third quarter, Advanta expects to maintain its operating margins at about 18-19 per cent annually.

With a leading presence in almost all major crops and a geographically diverse presence, there are ample opportunities for the company to scale up and grow. Last month, the company has made a pre-issue placement to a number of institutional investors of 1.67 million shares, for about Rs 104 crore, amounting to a price of Rs 625 a share.

The issue is valued at about 26 and 28.6 times its expected FY08 earnings at the lower and upper ends of its price band respectively.

Although it is not strictly comparable to its peers which are also into the business of fungicides and herbicides apart from seeds Syngenta is trading at 20.7 times its expected CY07 earnings and Monsanto trades at about 13 times its expected FY08 earnings.

This makes the issue appear a tad bit expensive, considering its dependence on nature and unpredictability in the business.

However, if one looks at other fundamentals, Advanta seems to be on solid ground over the longer term, considering its research focus and bioscience capabilities.

Issue Opens: March 26, 2007
Issue Closes: March 30, 2007