Kaveri Seeds' Q4FY19 results (Neutral) - Better times ahead

Q4FY19 results

• KSCL’s revenues in Q4FY19 largely in line with our estimates , however PAT was below our estimates
• Revenues increased by 7.5%yoy (on a low base) to Rs447m (est. Rs434m) led by high value product mix. Maize volumes were impacted due on lower acreage (fall army worm instances)
• Gross margins improved 900bps yoy to 46% vs 37% in Q4FY18. Negative operating leverage led to EBITDA loss of  Rs59m versus Rs133m loss in Q4FY18 ( est : Rs4m)
• Tax rate stood at 21.1% vs 6.5% in Q4FY18 on account of higher other income. Reported loss stood at Rs114m vs Rs184m loss in Q4FY18 (est:Rs52m)

Key positives: Healthy advance collection, growth in hybrid rice seeds sales

Key negatives: Decline in maize seed volumes

Impact on financials: Increase EPS by 4% in both FY20E and FY21E to factor in improvement in realisations

Valuation and view

KSCL’s performance in FY19 was impacted by lower maize seed and cotton seed volumes on account of decline in 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 ~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 revised target price of Rs564 (14x FY21E earnings).