MOSL: KAVERI SEED CO. (Buy)-Holistic growth on the cards-Attractive play of balanced growth in Cotton and Non-cotton businesses

Kaveri Seed Co.: Holistic growth on the cards; Attractive play of balanced growth in Cotton and Non-cotton businesses

(KSCL IN, Mkt Cap USD0.6b, CMP INR532, TP INR738, 39% Upside, Buy)

Non-cotton business to flourish driven by Vegetables

• Kaveri Seed (KSCL) is highly dependent on the Cotton business, which contributes ~60% of its overall revenues. However, of late, management has increasingly shifted its focus toward the higher-margin Non-cotton business (target to take its share to 50% of overall revenues over FY18-20), especially the less-penetrated Vegetables segment.
• Vegetables business is poised for strong growth of ~200%, with revenues expected to increase from INR60m in FY17 to ~INR180m in FY18 (much of this growth is likely to materialize in 2HFY18). The company plans to introduce nearly 50 products in Vegetables over the next 2-3 years, taking the total tally of products in this segment to 65. Notably, margins in Vegetables are significantly higher at ~50% versus the company’s blended margin of ~20%.
• Both the Cotton and Non-cotton businesses would be ramped-up by strengthening the distribution network (from 15,000 now to 20,000 by FY20).

Strong foothold in cotton seeds owing to high acreages

• Although the overall area sown for Kharif crops declined slightly by 0.8% YoY to 104.1m ha in 2017-18 (as of 8 September 2017), we note that cotton acreage increased significantly by ~19% YoY to 12.1m during the same period. The effect of better acreage was partly witnessed in 1QFY18, when KSCL sold 6.5m packets of cotton seeds – 19% more than those sold in FY17. Despite being a seasonally weak quarter, 2QFY18 witnessed better traction, as delayed monsoon in parts of Karnataka and other southern regions led to a rise in cotton seed sales. Overall, the number of packets of cotton seeds sold is expected to increase 28.4% YoY to 7m in FY18.
• The company is set to recover from the impact of heavy inventory write-offs in FY17 (INR660m, primarily driven by higher sales return). However, given the strong cotton seed sales so far in FY18, we expect annual inventory write-off to be INR250-300m in FY18, implying a reduction of over 60% YoY.