Adventurous pricing
A subsidiary of United Phosphorus (UPL), Advanta India, held by Advanta Netherlands Holdings, ITC-Zeneca, Syngenta, AgroTech Foods, and private equity investors at various stages, has developed a global portfolio of wide range of hybrid seed varieties including sunflower, rice, corn, rapeseed, mustard, sorghum, canola and oats.
Advanta India has three international subsidiaries in Australia, Thailand and Argentina. The international division of the Australian subsidiary caters to Asia, the Middle East, Africa and Latin America.
The subsidiaries outside India were earlier subsidiaries of Bio-win Corporation, a group company of the promoter group, United Phosphorous. Advanta Holdings B.V., a wholly owned subsidiary of Advanta India, acquired these subsidiaries from Bio-win at euro 95 million, or around Rs 556.52 crore, on 30 March 2006. Of this, Rs 227.44 crore is still outstanding. Advanta India will be using the IPO funds to pay off this liability.
Uniphos Seeds and Bio-Genetics Pvt Ltd (USBPL), one of the promoter group companies, got merged with Advanta India on 1 April 2006. Advanta India issued 33.77 lakh equity shares at par to the shareholders of USBPL: Jai Shroff and Vikram Shroff. USBPL was focused on developing, marketing and selling bio-engineered seeds for cotton crops licensed from Nath Seeds, an Indian company delisted by the stock exchanges.
Strengths:
- Advanta India has well-developed brands and distribution network in the markets where it operates. The company owns and has access to a broad portfolio of proprietary germplasm, which is necessary for any seed company to gain competitive edge.
- The company has been developing since the last 12 years a hybrid non-genetically modified sunflower variety in Argentina, named Sunsat. It will have the capability of lower bad cholesterol. Commercial production is slated to start in 2009.
Weaknesses:
- Advanta India operates in a seasonal industry and is exposed to risks related to weather, disease and pests. Moreover, technology advances (like genetically modified seeds) are changing the dynamics of the industry. Besides, operations in many countries and crops make the performance highly unpredictable.
- In the present form, the consolidated company has been in existence since March 2006. So comparable financial track record is not available for the past, except for the latest seven-month performance. The different consolidated entities have been growing individually at unexciting rates in the past few years. Not surprisingly, they have also changed hands often.
Valuation:
Advanta India has set a price band of Rs. 600 to Rs 650 per equity share of Rs 10 each, translating into a PE of 30.1x on the lower price band and 32.6x on the higher side of the price band, according to annualised EPS for the seven-month period ended October 2006 on post-issue equity of Rs. 16.83 crore. However, the actual EPS may be significantly different from the annnualised one due to seasonality in business (the impact of which is not ascertainable).
Monsanto India and Syngenta India, the listed Indian subsidiaries of MNCs, derive part of their revenue by selling hybrid and genetically modified seeds to Indian farmers. These companies are presently trading at PE of 21.6 on a trailing 12-month basis.
Hybrid seeds is not a high growth business and also prone to unpredictable fluctuations. Hence, the asking PE is very steep.