Fairval

Notes on Indian equities, sectors and economy

BT Cotton: A costly failure of Indian Agri Research?

Posted by fairval on June 8, 2014

Was going through some data on Nuziveedu Seeds and Kaveri Seeds, India’s 2 largest private sector seed companies. Kaveri is listed, and the stock has done phenomenally well. Its current market cap is around Rs 4500 crore, or $750mn. Kaveri went public in Sep’07, at a price of Rs 170 for a Rs 10 share. At current face value of Rs 2, this becomes Rs 34. The current share price is around Rs 650, or about 19x the IPO price, a return CAGR of 52% not counting dividends.

For both companies, BT Cotton is the biggest part of their revenue. For Kaveri, BT Cotton is around 55% of revenue. Its FY14 revenue was around Rs 1100 crore, so BT Cotton may have been around Rs 550 crore. Nuziveedu, i understand, is fairly identical to Kaveri in revenue mix. I haven’t seen FY14 revenue of NSL, but in FY13 it was about 40% larger than Kaveri.

Now the main issue. Both these companies (and there are a few others) are licensed by Monsanto. For this, they pay royalty to Monsanto. The royalty paid has averaged around 11% of the revenue for both companies in the last 3-4 years (so it could be 18-20% of BT Cotton sales). NSL paid a royalty of Rs 104 cr in FY13, while Kaveri paid Rs 114 crore in 1HFY14. (This works out to ~11% of their annual FY14 sales, so perhaps all the royalty goes in the first half.

Kaveri says it has 15% of BT Cotton market in India. This gives a sense of how much Monsanto could be earning from BT Cotton in India. Dividing Rs 114 crore by 0.15, we get Rs 760 crore or ~$125mn. So Monsanto could be earning $125mn from BT Cotton sales in ONE YEAR. 

That to me sounds like a seriously large figure. Why can’t  a R&D outfit of the Indian govt come up with some good variety of GM (genetically modified) cotton, if given sufficient funding? The institute are there. There is something called Indian Council for Agriculture Research (ICAR) which is the nodal govt body, under which there are several smaller outfits like Indian Agricultural Research Institute (IARI) commonly known as Pusa Institute. There is even something called Central Institute for Cotton Research, in Nagpur.

The government has to do it, because here does not look private sector is ready to do it yet. NSL and KSL are the 2 largest companies. They are quite profitable. KSL reported net profit of Rs 210 crore, NSL would be more than this. So it is not that these two companies don’t have the resources, but there seems to be no plan to spend much on R&D. Their annual R&D spends are in the Rs 7-8 crore. They are happy to pay royalties of over Rs 100 crore, but spend a fraction of that on R&D. It probably makes economic sense for them, they are very profitable despite paying large royalties.

If in situations like this government’s R&D will not step up, then when? If the government was to say spend even Rs 1000 crore on developing a better GM cotton, there would be larger collective good for Indian farmers.

Some quick google search seems to say that India lags in Agri research. An article says we spend 0.4% of Agri GDP on R&D, whereas China spends 0.5% and Brazil 1.8%. There are 167 public agencies which carry out agriculture research in India.

The budget for for the Department of Agricultural Research and Education, the R&D department of Ministry of Agriculture (ICAR comes under this department) was Rs 12,558 crore for the 11th plan, or about Rs 2500 crore per year. This is clearly too less. India should have spent Rs 500 crore just on cotton in the 11th plan, maybe we would have a GM cotton by now.

We are now in the 12th plan (2012-17). Found one planning commission document (for 12th plan) which says: India’s expenditure on agricultural R&D and education is currently about 0.6 per cent of the GDP from agriculture and allied activities and this definitely needs to be raised at least to 1.0 per cent. Could not find what was the final figure for the 12th plan.

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3 Responses to “BT Cotton: A costly failure of Indian Agri Research?”

  1. Kyle said

    Monsanto owns the gene pool for cotton and various other crops. In some cases, Monsanto must have owned the pool for more than 7-8 decades. I am not sure how they keep rolling the patents to keep licensing it to other seed companies. You can relate seeds to chicken where parent stock is owned by one of the large multinationals and domestic companies adapt/fuse for local climactic conditions.

    • fairval said

      Thanks for your comment, Kyle, and the analogy with chicken lines. I do remember meeting could of broiler supplies ages ago, they mentioned there are 4 cell lines in broilers and eggs in India. I suppose they get their source material from some international firms which control the entire market. Quite a few people in India prefer to eat ‘country’ chicken and eggs, which are not these lines. But my knowledge on this is quite limited. Will aim to check further.

      • Kyle said

        Glad to hear from you.

        I have been doing some more research on Indian seed industry. In addition to Monsanto, IIT Kgp and Nath Seeds also have their own BT strains. However, Monsanto rules when it comes to licensing. Most Indian seed companies who have a cotton hybrid have a license from Monsanto, at least for first two generations. However, strains also have product life cycle. It seems the second generation strain is on the top of the life cycle. For third generation, Monsanto has competition from other global companies like Bayer, Pioneer, and Syngenta. However, the government has not allowed wider roll-outs yet. It will be great to see who wins this time. As Monsanto has significant relationships and strong name in Cotton, there is a high probability that they would benefit the most from third generation.

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