Kaveri Seed Company - Strong growth likely to continue - IIFL

Our recent meetings with Kaveri Seed's management and dealers in Hyderabad suggest that the company's Bt cotton seeds will likely remain a potent growth driver in the near term. Valuations are undemanding (c.10-11x FY13 P/E), leaving room for further upside in the event of sustained earnings growth.

- Kaveri's management is confident of increasing cotton seed sales at a 20% Cagr over the next three years, driven by continued market share gains through the Jaadoo hybrid. Our channel checks indicate that Kaveri's dealers too expect strong growth to continue in FY14.

- While cotton is the key near-term growth driver, corn and hybrid paddy are key longer-term drivers. Seed sales for these two crops grew 40-50% in FY12. Substantial scope to increase hybridization, especially in paddy, indicates good long-term growth potential.

- Kaveri is debt-free and will likely continue to generate substantial free cash flow (FY12 FCF of ~Rs1bn). Capex requirements are only Rs100-150mn per year, leaving room for dividend increases.

- After a strong 1QFY13 result (EPS +113% YoY to Rs73.4), FY13 EPS seems poised to approach Rs90, versus which the P/E is only c.10-11x. Earnings growth and a possible re-rating may lead to further upside in the stock price.

Source : Equity Bulls

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