KSCL (KSCL IN) - Higher cotton acreages and lower write-off led to higher profitability - CSEC Research

- In 2QFY18, Standalone Revenues grew by 2.7% YoY to INR 696mn. In 1HFY18, Cotton volume grew by 28% YoY to 6.9mn packets and cotton revenue grew 32.3% YoY to INR 4.62bn (~70% of 1HFY18 total Revenue) owing to higher cotton acreages in AP & Telangana. Although, cotton volume increased, it is still 19% below its peak sale of 8.5mn packets in 1HFY15.

- In 1HFY18, Maize revenue stood at INR 940mn down 10.5% YoY and volume dropped 12.2% YoY to 7,200 tons due to acreage drop in Key states such as Karnataka (-12% YoY) and Telangana (-22.9%) which accounts for 2/3rd of company's Maize seed sales and down trading. Hybrid Paddy revenue were INR 310mn up 6.9% YoY, while selection paddy volumes grew 42% YoY and the contribution from the new products went up from 3% to 12% in 1HFY18.

- In 2QFY18 / 1HFY18, Company reported an EBITDA of INR 147mn / INR 2,216mn up 336.6% / 37.1% YoY respectively; inventory writeoff in 1HFY18, were down 51.3% YoY to INR 190mn, mostly in cotton seeds which did not meet the germination and trait purity standards. Management has highlighted that the inventory write-off for FY18, would be much lower than FY17. EBITDA margin expanded 16.2pps YoY to 21.2%. Depreciation expense de-grew 16.4% YoY INR 61mn and other income de-grew by 3.8% YoY to INR 164mn. Net Profit stood at INR 209mn in 2QFY18.

Valuation: At CMP of INR 561, the stock is trading at valuation of 18.4XFY18E and 14.3XFY19E earnings. We arrive at a target price of INR 647 based on a target P/E of 16.5XFY19EPS and maintain BUY rating. Risks: Kaveri has high concentration risk and derives ~65% of its revenue from cotton seeds and lint. Most seed companies including Kaveri report their earnings as agricultural income; hence they don't pay corporate tax. Any change in tax law could adversely affect the company's profitability and the return ratio.

Shares of KAVERI SEED COMPANY LTD. was last trading in BSE at Rs.560.75 as compared to the previous close of Rs. 563.45. The total number of shares traded during the day was 23077 in over 527 trades.

The stock hit an intraday high of Rs. 570.75 and intraday low of 558.8. The net turnover during the day was Rs. 13001100.

Source : Equity Bulls

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