MOSL: KAVERI SEED CO. (Buy)-Maize was bitter – a miss on all fronts-Firm crop prices a silver lining for upcoming season
Kaveri Seed Co.: Maize was bitter – a miss on all fronts; Firm crop prices a silver lining for upcoming season
(KSCL IN, Mkt Cap USD0.4b, CMP INR468, TP INR582, 24% Upside, Buy)
- Disappointment at operating level: Revenue declined 5% YoY to INR672m (our estimate: INR714m) in 3QFY19. EBITDA fell 99% YoY to INR1m (our estimate: INR89m), with the margin shrinking to 0.2% from 13.8% in the year-ago period. Adj. PAT was down 33% YoY at INR36m (our estimate: INR47m). For 9MFY19, revenue and adj. PAT declined 1% YoY, with the margin down 250bp YoY to 29.2%.
- Maize disappoints; rice biz robust: The sluggish performance can be attributed to the fear of ‘fall armyworm’ in maize, which dampened sentiment and led to lower acreage (note that majority of third quarter revenue is contributed by maize, where volumes declined 22% YoY). However, the price of maize has increased by 24% YoY on average so far in 2019, and thus, acreage is expected to increase. In contrast, revenue growth in hybrid rice was robust (+10% YoY), led by strong growth in KPH468/KPH475.
- Valuation view: Management guidance for cotton volumes in FY20 was robust at 7.2m packets (our estimate: 6.9m). We, nevertheless, cut our FY21 cotton volume estimate by 3% (keeping it same as that of FY20) due to lower visibility, which translates into an 8% earnings cut for FY21. The downside to our estimate is the non-renewal of KSCL’s license by the Andhra Pradesh government (got suspended recently for a year), which can impact FY20 revenue by 6-7%. Given this uncertainty, which might restrict the company from taking advantage of a likely positive cotton season in FY20, we cut our multiple from 17x to 15x (~10% discount to its three-year average multiple). We, however, find comfort from the company’s reducing dependency on cotton business, with non-cotton share likely to rise up to 55% in FY21. Our TP of INR582 implies a 24% upside on FY21E EPS. Maintain Buy.
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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