Kaveri Seeds' Q3FY18 results (Neutral) - Profitability improves
Q3FY18 results
- KSCL’s reported revenue growth in line with our expectation, however EBITDA and PAT was below our expectation
- KSCL reported revenue growth of 4.1% to Rs706m (est. Rs712m) Growth was led by favourable product mix and increase in rice seed sales, while maize volumes were impacted by lower acreage in Telangana and Karnataka.
- Gross margins declined by 100bps to 56.3%. However lower other expenses (down 41.2% yoy) led to 880bps improvement in EBITDA margins. EBITDA increased by 186%yoy to Rs97m (est :Rs121m) on a favourable base
- Despite lower tax rate (2.3% vs 45.9% in Q3FY17 ), lower other income (down 83.9% yoy) restricted PAT growth to 53% yoy to Rs54m (est:Rs 81m)
Key positives: Lower inventory write-offs, increase in rice volumes
Key negatives: Decline in hybrid corn volumes
Impact on financials: Earnings estimates for FY18E increased by 3.4% to factor in improvement in profitability. We introduce FY20E EPS of Rs38.9/share
Valuation and view
KSCL’s performance in Q3FY18 was impacted by lower hybrid corn seed sales, however favourable product mix, lower inventory writeoffs and tight cost control led to improvement in profitability. KSCL’s new product launches and geographic expansion initiatives helped the company capitalise on the increase in cotton acreage during the 9MFY18.In the near term (Q4FY18E), growth in non-cotton crop segment and reduced inventory write-offs will further aid in improving performance. KSCL’s cotton seed sales volume is set to increase from 5.4m packets in FY17 to 7m packets in FY18E. In the non-cotton crop segment, hybrid rice, hybrid pearl millet and vegetable segment will drive growth at 8-10% in FY18E. In the long term, strengthening market share in cotton seed business (currently ~15%), increasing contribution from non-cotton crop seeds sales and expanding the geographic presence within India will be the key growth drivers. We retain our neutral recommendation with reduced target price of Rs545 (14x FY20E earnings).
Kaveri Seed Company Ltd. Kaveri Seed Company Limited is an India-based seed company. The Company is engaged in the production, processing and marketing of hybrid seeds. It owns over 600 acres of farm land. It offers products in two categories: filed crops and vegetables. Its range of field crops includes corn, paddy, cotton, sunflower, mustard, sorghum, pulses, bajra and wheat. Its range of vegetables includes tomatoes, okra, chilies, watermelon, gourds and brinjal. Its range of corn seeds includes Kaveri 225, Kaveri 2288 (Ekka), Kaveri 244+, Kaveri 50 and Kaveri 25K55. Its range of paddy seeds includes Supreme Sona, Kaveri 9090, Kaveri 108 (Sampurna), KPH 412 and Chintu. Its range of cotton seeds includes Jaadoo, Jackpot, ATM and Singha. Its range of sunflower seeds includes Kaveri 678 (Leader), Kaveri 618 Extra, Kaveri 7049 (Champ), KSFH 7032 (Sunkranti) and Kaveri 9004. Its range of mustard seeds includes Kaveri AK47 and Kaveri 36.
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