MOSL: KAVERI SEED CO. (Buy)-Expect cotton acreages to improve in FY18

​Kaveri Seed Co.: Expect cotton acreages to improve in FY18; Maintain Buy

(KSCL IN, Mkt Cap USD0.5b, CMP INR570, TP INR653, 15% Upside, Buy)

• EBITDA below estimate: KSCL reported revenue of INR403m (est. of INR482m) in 4QFY17, as against INR411m in 4QFY16, marking a decline of 1.9%. EBITDA stood at INR-272m (est. of INR-29m) v/s INR-64m in 4QFY16, with the margin at -67.4% (est. of -6%) v/s -15.7% in the year-ago period. A significant write-off of inventory, which was accounted as part of raw material cost, impacted profitability. Adj. PAT stood at INR-306m, as against INR-104m in 4QFY16. The write-off of inventory was primarily of cotton, which was carried forward from previous years for not meeting germination and trait purity standards. For FY17, revenue declined 5.4%, EBITDA margin contracted 540bp to 19.8% and adj. PAT fell 21.4% YoY to INR1,316m.
  
• Inventory write-off to be in check in FY18: FY17 saw a sharp increase in inventory write-off to INR666m from INR431m in FY16 – the major reason for this was lower-than-expected sales over past two years, leading to inventory build-up. Also, as Kharif production in FY15 was severely impacted by drought and pink bollworm, inventory from FY15 production had lower shelf life than usual, adding to write-off. However, write-off is expected to hover near industry average of 4-5% of sales (v/s ~10% in FY17) due to expectation of: a) better quality of Kharif production due to prediction of good monsoon and b) increase in cotton acreages, led by a rise in cotton prices across key states (avg. rise of 20% YoY in April 2017).