19 May 2014
Update | Sector: Others
Kaveri Seed Co
BSE Sensex
24,363
S&P CNX
7,264
CMP: INR545
TP: INR730
Buy
El-Nino – a non-event for Kaveri
Increase in acreages and market share gain to drive growth
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
KSCL IN
68.9
670/243
-20/58/96
37.5
0.6
El-Nino not to impact growth prospects of seed companies
Development of El-Nino conditions has led the India Meteorological
Department (IMD) to place its initial monsoon forecast at 95% of LPA. Even as
below normal monsoon risks FY15 growth prospects for agro-led businesses, we
believe seeds as a sector remains insulated from any such risks since seeding
comes at an advanced stage of the agricultural cycle. With rainfall expected to
hit the Kerala coast on June 5, we believe there is no risk for seed companies’
growth. Around 90% of Kaveri Seed’s (KSCL) cotton sales are concluded before
June, well ahead of any meaningful assessment of monsoon for the season.
Hence, we believe concerns over El-Nino for KSCL are overdone.
Financial Snapshot (INR Million)
Y/E March
2014E 2015E 2016E
Net Sales
10,548 13,575 17,424
EBITDA
Adj PAT
EPS (INR)
Gr (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
2,264 3,122 4,088
2,135 2,912 3,847
31.2
68.4
49.9
51.2
17.5
7.3
42.5
36.4
46.9
49.2
12.8
5.1
56.2
32.1
44.0
46.2
9.7
3.7
Increase in acreages to stimulate faster growth
Cotton acreages are expected to grow by 3-7% in FY15 due to higher prices of
cotton and lower profitability in alternate crops like soyabeans. Further, our
channel checks suggest that farmers are likely to purchase the best available
cotton seeds in the market to ensure strong yields, given higher selling price for
cotton. Due to acreage increases and market share gains, we believe KSCL is in a
sweet spot for higher growth in FY15.
74.5 106.6 148.8
Non-South markets to drive growth, margin expansion
KSCL has just 7% market share in Maharashtra and Gujarat (~50% of total
cotton market), where players like Nuziveedu, Ajeet and Mayco have more than
20% market share, providing huge opportunity for growth. We expect increased
penetration of KSCL’s ATM seed sales and thus expect revenue for ATM to
double in FY15E. We also expect an increase in share of single cross maize for
KSCL (50% currently), which should drive margin expansion.
Shareholding pattern %
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
63.6
10.4
10.9
15.0
63.6
10.5
9.6
16.2
65.0
10.4
6.4
18.2
BJP’s focus on agriculture sector, hybridization to give growth fillip
Highlights from BJP’s (the victorious party in general elections) manifesto
include: ensuring farmers get a minimum 50% profit over cost of production,
cheaper agriculture inputs and credit, and introduction of latest technologies
for farming and high yielding seeds. BJP government’s strong focus on
agriculture will additionally give fillip to growth.
Stock Performance (1-year)
Kaveri Seed
Sensex - Rebased
680
560
440
320
Valuation and view
We expect KSCL to post a revenue growth of ~29% and net profit growth of
~33% over FY14-16E. Given increase in cotton acreages in FY15 complimented
200
by market share gain we believe KSCL is on track to be the market leader in
cotton segment. Higher growth in corn segment driven by increase share of
single cross should drive margins higher. The stock trades at a PE of 12.8x/9.7x
FY15E/FY16E EPS. We believe the recent correction offers a buying opportunity.
Maintain
Buy
with a target price of INR730 (13x FY16E EPS of INR 56).
Niket Shah
(Niket.Shah@MotilalOswal.com); +91 22 3982 5426
Atul Mehra
(Atul.Mehra@MotilalOswal.com); +91 22 3982 5417
Investors are advised to refer through disclosures made at the end of the Research Report.