MOSL: KAVERI SEED CO. (Buy)-Non-cotton biz growing from strength to strength; Cotton volumes expected to revive in FY20

Kaveri Seed Co.: Non-cotton biz growing from strength to strength; Cotton volumes expected to revive in FY20 post muted FY19

(KSCL IN,Mkt Cap USD0.6b, CMP INR623, TP INR741, 19% Upside, Buy)

• Minor miss on revenue and EBITDA; PAT in-line: KSCL's revenue fell 1.5% YoY to INR5,819m (est. of INR6,166m) in 1QFY19. EBITDA declined 2% YoY to INR2,035m (est. of INR2,170m), with the margin coming in flat YoY at 35%. Adj. PAT grew 4.1% YoY to INR2,106m (est. of INR2,115m).
• Robust non-cotton covers up for muted cotton biz: The 12% YoY decline in cotton revenue in 1QFY19 was partly compensated by ~35% YoY growth in hybrid rice, ~18% YoY growth in maize and ~45% YoY growth in selection rice. The non-cotton business grew robustly by 25.4% YoY. We expect non-cotton business CAGR of 24% over FY18-20 v/s its five-year CAGR of 6%.
• Increasing valuation multiple; Maintain Buy: We earlier valued KSCL at 14x FY20E EPS (~20% discount to its three-year average one-year forward multiple), primarily on account of its high dependency on the cotton business, volatile RoE and an expected reduction in cotton acreage in FY19. However, we raise our earnings estimate for FY20 by 7% and valuation multiple to 17x (~5% discount to three-year average multiple), in line with the revival in KSCL's growth prospects - (i) Favorable cotton outlook for FY20, given the low closing inventory expected in FY19 on adverse conditions in the US and China (which is expected to trigger prices, and thus, acreage in FY20). (ii) KSCL is set to benefit from the likely higher acreage with two new product launches for south, and foray into north with two more launches. (iii) Reducing dependency on the cotton biz, with non-cotton share likely to increase to 53% in FY20 from 43% in FY18. (iv) Sustainable expansion in RoE from 20.9% in FY18 to 24.2% in FY20. Our TP of INR741 implies a 19% upside. Maintain Buy.