Kaveri Seed Company Ltd.| Q3FY15 Result Update | Upgraded to BUY with increase in TP to Rs.908 from Rs.795 :: IndiaNivesh

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KSCL’s Q3FY15 result was below street estimate on all fronts. In Q3FY15, revenue went down 31.6% Y/Y to Rs.907 mn (v/s Bloom Est. Rs.1,505 mn). The key reason for lower than expect performance on revenue front was due to absence of lint and Microteck sales (Rs.491 mn), which was present in Q3FY14. (Rs Mn) Q3FY15 Q3FY14 Y/Y Seed 829 835 -0.7% Lint - 400 NM Microteck - 85 NM Others 78 - NM Total 907 1,320 ‐31.3% Source: Company Filings; IndiaNivesh Research ■ During the quarter, EBITDA went down 5.6% Y/Y to Rs.361 mn (v/s Bloom est: Rs.444 mn) led by lower revenue base. EBITDA margin expanded 10.9% points Y/Y to 39.8% (v/s Bloom est. 29.5%) due to higher realization per pack in Maize & Sunflower seeds. The total operating expenditure (as % of revenue) stood at 60.2% (v/s 74.4% in Q3FY14) led by lower material and other expenditure, partially offset by higher employee cost. ■ Depreciation during the quarter stood at Rs.22 mn (v/s Rs.43 mn in Q3FY14). The company reported other income of Rs.25mn (v/s Rs.32 mn in Q3FY14). Tax rate stood at 1.4% (v/s 1.7% in Q3FY14) leading to tax outgo of Rs.5 mn (v/s Rs.6 mn in Q3FY14). PAT for the quarter went down 2.0% y/y to Rs.358 mn (v/s Bloom est Rs.429 mn). Key Conference Call Takeaway Robust Outlook… ■ The company reported revenue de-growth of 31.6% Y/Y to Rs.907 mn (v/s Rs.1,326 mn in Q3FY14). During the quarter, Maize de-grew by 9.2% Y/Y to Rs.690 mn (v/s Rs.760 mn in Q3FY14) due to 20% decline in Maize acerage. The others (Sunflower, Wheat & Others) segment also decreased 61.7% Y/Y to Rs.217 mn (v/s Rs.566 mn in Q3FY14). Key markets for hybrid Maize would be Bihar, Karnataka, Maharashtra, and Andhra Pradesh. Further, management expect huge growth in hybrid Paddy demand on back of under penetration and new product launch. Management intend to start the commercial sales of genetically modified cotton seed by Jun-2016. In FY15, the management expect 15-20% y/y increase in BT-cotton packet sales (1Pack = 450 grams) and 18-20% growth in Maize. On back of strong growth and lower inventory in the system management also expect increase in the realization during FY16. Favourable Cotton Scenario… ■ On account of significant decline in commodity prices like Soya (down 40%) & Maize (down 37%) relative to Cotton (down 30%), the overall agronomics looks positive for BT-cotton. In our view, the condition of cotton is much better than other crops; hence, the demand for BT-Cotton seed is likely to remain robust in the medium-term. The key reason for lower decline in BT -Cotton price (v/s other soft commodity) was higher export demand from China. Post the new Chinese policy which is favourable more for the imported yarn rather than local production of BT-Cotton. According to KSCL management, maximum acreage growth in BT Cotton crop could be seen in Maharashtra, Andhra Pradesh, & Kerala. Other conference call highlights ■ Management expects corn seed industry volumes to increase to 150,000 MT within the next five years from 100,000 MT currently. The hybridization rate in corn still stands at only 55-60%, leaving ample opportunity for growth. KSCL expects to increase its own market share from 12% currently to 15-16% over this timeframe. Accompanying this volume growth with increases in corn prices could further boost the revenue growth. ■ The market for hybrid paddy is seen growing multi-fold from 2.5m hectares currently to 5-7m hectares within the next five years. The hybridization rate in paddy remains only ~5%, indicating a vast growth opportunity. KSCL is very confident of increasing its market share in hybrid paddy, and projected 30%+ growth in this segment for FY15. ■ Management sees a fair chance of an increase in cotton seed prices by FY16, as major general elections are done and the inventory position in the market has eased. KSCL itself is cutting down its own production substantially for next year (considering its inventory balance), and measures like these could help reduce the inventory overhang in the industry. The company’s management expect to increase in cotton market share from 17% (8.5 mn pack) to ~25% (12.5 mn pack) in next three years. ■ Management forecast Rs.1500 mn of capex (Rs.400-500 mn /yearly) for next three years on following: (1) construction of warehouse for paddy in AP, and (2) R&D investment in Bio-technology (Rs.200-250 mn/yearly). The company has total cash balance as on 31st Dec. 2015 was Rs.2450 mn. Valuation At CMP of Rs.759, the stock is trading at P/E multiple of 17.1x FY15E, 13.9x FY16E, and 11.1x FY17E based on Bloomberg consensus earnings. On back of solid industry fundamentals like - (1) low hybrid seed penetration (c25%), & (2) lesser private players participation (c30%) in seed market, the macro outlook for the hybrid seed industry looks attractive. Additionally, KSCL’s strong industry position, wide distribution network, diversified product range, superior R&D capabilities places well to benefit from large macro opportunities in sector. We upgrade our rating to BUY from HOLD with increase in target price to Rs.908 (13.3x FY17E earnings) from Rs.795 on stock

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