Kaveri Seeds' Q3FY19 results (Neutral) - Better times ahead

Q3FY19 results

• KSCL reported revenues below our estimates owing to fall in maize seed volumes. Revenues declined  by 4.9%yoy to Rs672m (est. Rs756m)
• Gross margins declined 200bps yoy to 42% vs 44% in Q3FY18 due to lower contribution from high-margin non cotton business.
• Higher employee costs and other operating expenses led to sharp decline in EBITDA margins to 0.2% vs 13.8% in Q3FY18. EBITDA declined by 98.8% to Rs1m (est :Rs108m)
• Higher other income (Rs106m vs Rs16m in Q3FY18) restricted further decline in PAT. Tax rate stood at 31.9% vs 2.2% in Q3FY18 on account of higher other income. Reported PAT declined by  led to 31% yoy to Rs38m (est: Rs78m)

Key positives: growth in hybrid rice seeds sales

Key negatives: Decline in revenues and EBITDA margins

Impact on financials: Cut revenues by 2.4%/2% and PAT by 2.8%/16% in FY19E/FY20E respectively. Introduce FY21E EPS of Rs38.7/sh

Valuation and view

KSCL’s performance in Q3FY19 was impacted by lower maize seed volumes on account of decline in maize seed acreage. In the near term (FY20E), growth in non-cotton crop segment led by new product launches and reduced inventory write-offs will aid in improving performance. KSCL’s cotton seed sales volumes are also expected to increase from ~6.1m packets in FY19 to ~7.5m packets in FY20E. In the non-cotton crop segment, hybrid rice, hybrid maize and vegetable segment will drive revenue growth at 12-15% in FY20E. In the long term, strengthening market share in cotton seed business (currently ~20%), 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 revised target price of Rs542 (14x FY21E earnings).