MOSL: KAVERI SEED CO. (Buy)-Lower write-offs boost profitability

​Kaveri Seed Co.: Lower write-offs boost profitability

(KSCL IN, Mkt Cap USD0.6b, CMP INR575, TP INR738, 28% Upside, Buy)

• Revenue marginally below estimates, significant beat on EBITDA and PAT: KSCL’s overall revenue increased 2.7% YoY to INR696m (est. of INR745m) in 2QFY18. EBITDA grew 337% YoY to INR147m (est. of INR43m), with the margin expanding 1,620bp YoY to 21.2% (est. of 5.8%) on account of a steep decline of 2,530bp in raw material cost (35.5% of net sales) due to significantly lower inventory write-offs. Consequently, adj. PAT increased 191.7% YoY to INR209m (est. of INR73m).
  
• Increased focus on expanding geographical presence bears fruit: The company’s focus on strengthening its distribution network in the northern, eastern and western markets has started to show results, with growth of over 50% in Bihar and Orissa, >100% in Jharkhand, >200% in West Bengal, and >50% in Maharashtra and Gujarat. The company is expected to further expand its network by improving penetration via new products launches, aided by increased investment in R&D (~4% in FY18).
  
• Building a strong non-cotton business: The season has witnessed highest acreage growth (+19.3% YoY) in cotton, resulting in volume growth of 28% (to 6.9m) in cotton seeds packets for KSCL in 1HFY18. Although the company is well placed to benefit from its efforts to expand the non-cotton business, as evidenced by 40% volume growth in selection rice and an 8% volume increase in hybrid rice in 1HFY18. Contribution from new products too has increased from 3%/1% to 12%/15% in selection/hybrid rice.