Kaveri Seeds' Q2FY20 results (Neutral) - Healthy margin expansion

Q2FY20 results

• KSCL reported revenues below our estimates, while EBITDA was marginally ahead of our est
• Standalone revenues increased by 3%yoy to Rs774m (below est. Rs827m) owing to drop in maize seeds volumes and acreage
• Gross margins improved significantly by 371bps to 55% (est 51%) driven increasing contribution of non-cotton seed segment, higher realisations in cotton seed segment and lower cost of production.
• Tight control on operating expenses led to further415bps improvement in EBITDA margins to 14.6% (est : 13%).EBITDA stood at Rs113m (slightly above est: Rs108m)
• Despite lower tax rate, lower other income (down 77% yoy) led to 42%yoy decline in PAT. Standalone PAT stood at Rs69m (est : Rs96m)

Key positives: gross margin expansion, healthy growth in hybrid rice volumes

Key negatives: Decline in maize seed volumes

Impact on financials: Marginally increase EPS by 1.2%/1.5% for FY20E/FY21E respectively to factor in higher margins

Valuation and view

KSCL’s performance in H1 benefitted from market share gains in Gujarat and Maharashtra along with 7% increase in cotton acreage driving cotton seed volumes (7.2m packets in H1FY20), while delayed monsoons led to 16% decline hybrid maize seed volumes. We believe, in the near term (FY20E), healthy 25-30% 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. Strengthening market share in cotton seed business (currently ~16%), increasing contribution from high margin non-cotton crop seeds sales (from 40% to 60% over the next 3 years) and expanding the geographic presence within India will be the key growth drivers in the long run. Besides higher contribution form exports will further boost revenue growth. We retain our neutral recommendation with target price of Rs573 (14x FY21E earnings).