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MOSL: Kaveri Seed Co. (Buy)-Volume growth strong across segments-But weak cotton realization drags performance

Kaveri Seed Co.: Volume growth strong across segments; But weak cotton realization drags performance
(KSCL IN, Mkt Cap USD0.4b, CMP INR479, TP INR575, 20% Upside, Buy)

** Largely in-line performance: Revenue grew 13% YoY to INR6,555m (our estimate: INR6,588m). EBITDA increased 15% YoY to INR2,333m (our estimate: INR2,306m), with the margin expanding 60bp YoY to 35.6% (our estimate: 35%) led by operating leverage. Adj. PAT was up 9% YoY to INR2,289m (our estimate: INR2,367m).

** Non-cotton business drives revenues: Cotton revenue grew only 7% YoY to INR4,051m, despite volume growth of 13% YoY to 6.6m packets, due to lower realizations (-5% YoY to INR609/packet). Management expects volume spillover of 0.5-0.6m cotton packets into 2QFY20, which will likely support growth in the ongoing quarter. Non-cotton revenue grew 23% YoY to INR2,504m, led by a stellar improvement in hybrid rice (+73% YoY), partly offset by subdued maize revenue growth (+5% YoY). Notably, hybrid rice volumes increased 45% YoY owing to the introduction of new hybrid Paddy KPH 468.

** Valuation view: As mentioned earlier, despite strong volumes, Cotton revenue growth was restricted by lower realization. Moreover, the company has maintained its volume growth guidance of 15-20% for Cotton and 20-25% for Non-cotton for FY20. Taking the ongoing trend into consideration, we lower our cotton seeds realization and volume assumption (by 7% to 6.6m packets), leading to a 9% cut in our FY21 earnings estimates. We value KSCL at 15x FY21E EPS, arriving at a TP of INR575. Maintain Buy.