Kaveri Seeds' Q1FY20 results (Neutral) - Healthy performance

Q1FY20 results

• KSCL’s performance  in Q1FY20 was largely  in line with our estimates
• Standalone revenues increased by 12.6%yoy (on a low base) to Rs6.55bn (slightly above est. Rs6.5m) led by 13%  growth in cotton seed volumes , while maize seed volumes declined by 12%
• Gross margins remained flat at 46% (est: 47%). Despite higher provision for sales returns, tight control over employee costs and operating expenses led to 63bps improvement in EBITDA margins to 35.6% (est: 35.1%) Standalone EBITDA increased by 15% to Rs2.33bn (est RS2.28bn)
• Despite lower other income (down 74% yoy) , PAT registered 9%yoy growth to Rs2.29bn (est :Rs2.19bn)

Key positives: healthy growth in cotton seed and hybrid rice seed volumes

Key negatives: Decline in maize seed volumes

Impact on financials: EPS estimates maintained for FY20E/FY21E

Valuation and view

KSCL’s performance in Q1FY20 benefitted from market share gains in Gujarat and Maharashtra along with 5% increase in cotton acreage driving cotton seed volumes, while delayed monsoons led to 12% decline hybrid maize seed volumes. In the near term (FY20E), spill over of cotton seed sales to Q2 and healthy 20-25% growth in the non-cotton crop segment (hybrid rice, hybrid maize and vegetable segment) with pick up in acreage will drive 15-20% revenue growth. KSCL’s cotton seed sales volumes are expected to increase from ~6.1m packets in FY19 to ~7.2m packets in FY20E. In the long term, strengthening market share in cotton seed business (currently ~15%), increasing contribution from high margin non-cotton crop seeds sales (from 45% to 60% over the next 3 years) and expanding the geographic presence within India will be the key growth drivers. Besides higher contribution form exports will further boost revenue growth. We retain our neutral recommendation with target price of Rs564 (14x FY21E earnings).