Kaveri Seeds' Q2FY19 results (Neutral) - Non-cotton business drives growth, profitability declines

Q2FY19 results

• Kaveri reported revenue growth ahead of our est ,however PAT was below our estimates
• Revenues grew by 8%yoy at Rs752m (est. Rs710m) led by higher contribution from non- cotton business
• Gross margins decline sharply by 1300bps to 51% vs 65% in Q2FY18 due to inventory write-offs of Rs30m, lower recovery in cotton and govt price control.
• Lower employee costs and other expenses restricted further decline in EBITDA margins which declined by 1070bps to10.5%. EBITDA declined by 46.6% to Rs79m (est :Rs156m)
• Despite lower depreciation, higher tax rate (26.2% vs 16.4% in Q2FY19) led to 43% decline in PAT to Rs120m (est: Rs145m)

Key positives: growth in hybrid rice seeds sales, lower operating expense

Key negatives: Decline in Gross margins

Impact on financials: Cut EPS in FY19E by 4.9% in FY19E to factor in lower gross margins.

Valuation and view

KSCL’s performance in Q2FY19 was impacted by lower cotton seed volumes and fall in gross margins, however healthy 25% yoy growth in non-cotton seed sales partially offset decline in revenues. In FY19E, growth in non-cotton crop segment led by new product launches and reduced inventory write-offs will further aid in improving performance. While KSCL’s cotton seed sales volume is expected to decline from 6.9m packets in FY18 to 6.3m packets in FY19E. In the non-cotton crop segment, hybrid rice, hybrid pearl millet and vegetable segment will drive revenue growth at 9-10% in H2FY19E. In the long term, strengthening market share in cotton seed business (currently ~20%), increasing contribution from high margin non-cotton crop seeds sales and expanding the geographic presence within India will be the key growth drivers. We retain our neutral recommendation with revised target price of Rs536 (14x FY20E earnings).