Buy Kaveri Seed Company- “sowing the seeds of growth”:: LKP

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Given the structural demographic issues of rising population and surging food demand which is exerting pressure to raise crop yields on the back of shrinking farmland, we believe that the structural shift towards hybrid seeds is now a reality. Seeds being sequentially amongst the initial inputs used by farmers are now witnessing a conscious shift towards hybrids after tasting success with GM cotton seeds and success of programs like NREGA. Cotton is the best example of how hybrids have not only improved productivity and incomes of farmers but has also led to a decline in consumption of pesticides. In line with this trend we expect Kaveri Seed Co. Ltd. (KSCL) to improve its volumes of cotton seeds by 50% to more than 1.8mn packets during FY’12 which on the back of a 25% rise in prices over last fiscal should ensure that KSCL would derive half its total revenues in FY’12 from cotton seeds in which it has half a dozen hybrids. We believe hybrid seeds would continue to remain the most profitable link in the agricultural value chain which should spur profits of pure hybrid seed companies like KSCL with a predominantly domestic focus and we expect 24% EBIDTA margins to be easily sustainable for KSCL.
Our pick to play the agricultural productivity theme in India
FY’12 & FY’13 should witness robust free cash flows since most of the capital expenditure is now behind KSCL. With 9 seed processing plants having cob drying and cold storage facilities along with transgenic containment units, gene bank & a Green House, we believe that KSCL which owns 600acres of farm land within the listed entity has completed most of its capital expenditure. With the investment phase behind it, KSCL in our view is now poised for robust free cash generation this fiscal and during FY’13 which bears testimony to the road map laid out by the management in building a sustainable growth oriented business model for KSCL with a presence across crops. Poised for a 35% CAGR growth in pre tax profits over FY-11-13 on the back of a 25% CAGR growth in revenues over the same period, we believe KSCL trading at 8.5xFY’13E earnings is the best available stock to play the agricultural productivity theme in India.
Valuation
KSCL over the past few years has clearly demonstrated its ability to grow in a highly competitive business environment across its product categories. We expect KSCL to continue the growth momentum and recommend a BUY on the stock trading at 11xFY’12E and 8.5xFY’13E earnings.