Kaveri Seed Company - Non-cotton seed portfolio doing well - ICICI Securities

Highlights from Kaveri Seed Company's Q2FY21 earnings: (1) Non-cotton portfolio i.e. hybrid rice seeds, selection rice seeds and maize seeds reported 44.9%, 32% and 33.5% revenue growth, YoY, respectively, (2) cotton business reported revenue decline of 1.1% and (3) Kaveri's revenues were largely unaffected post Covid-19 outbreak. We remain positive on Kaveri with the success of non-cotton seeds and its market share gains in cotton seeds in some states like Gujarat and Haryana. Success of these initiatives will de-risk the current business model centred around cotton seeds in South India. The stock is at an attractive price with its valuation below mean P/E-1 SD, and FCF yield of 9% on FY21E. Maintain BUY with DCF-based TP of Rs710 (12x FY22E).

- Q2FY21 result: Kaveri reported revenue and PAT growth of 13.9% and 72.1%, respectively. However, EBITDA declined 13.8% due to higher input prices. Cotton reported volume decline of 0.8% in H1FY21, YoY. Hybrid rice, maize and selection rice seeds reported volume growth of 40.6%, 33% and 36.8%, YoY respectively, in H1FY21. Vegetable seeds reported volume growth of 146% YoY.

- Segmental performance: Revenue of cotton declined 1.1% YoY. Revenue of hybrid rice, maize and selection rice seeds were up 44.9%, 32% and 33.5%, YoY, respectively. Higher sowing during kharif season as well as normal monsoon have helped Kaveri report strong growth. Higher revenue growth in premium products boosted realisations. Vegetable seed revenue was up 108%. The rise was largely driven by growth in seeds of hot pepper, tomato and okra.

- Lower prices of cotton and maize may hurt growth: Due to high carry-over of inventory, prices of cotton as well as maize are weak and may impact the sowing pattern in coming quarters. Heavy rainfall in Sept-Oct'20 has hurt the quality of cotton crop and it may again hurt the sowing next year. However, vegetables are performing extremely well.

- Multi-pronged growth approach: Kaveri is working towards the dual objectives of expanding product portfolio and geographical presence. It has entered West and North India to sell cotton seeds. It has also commenced exports to five countries. We note Kaveri has launched multiple variants of rice (selection + hybrid), maize and vegetable seeds. Success of these initiatives will create new growth avenues and de-risk the current business model centered around cotton seeds in South India.

- Maintain BUY: Kaveri has created strong value (FCF) over the past decade and we remain positive on medium-term growth outlook. We model the company to report revenue and PAT CAGRs of 12.8% and 16.4%, respectively, over FY20-FY22. We value the stock on DCF-based target price of Rs710, implying a target P/E of 12x FY22E. The stock is at an attractive FCF yield of 9% for FY21E.

Shares of KAVERI SEED COMPANY LTD. was last trading in BSE at Rs.516.5 as compared to the previous close of Rs. 510.35. The total number of shares traded during the day was 96213 in over 776 trades.

The stock hit an intraday high of Rs. 516.5 and intraday low of 504.1. The net turnover during the day was Rs. 48859083.

Source : Equity Bulls

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