New initiatives progressing well
We remain enthused by the success of Kaveri Seeds (Kaveri) major growth initiatives i.e. 1) stronger growth of non-cotton seeds and 2) market share gains in new geographies of Maharashtra and Gujarat. We believe the company is on right path to craft new growth avenues via product and geographical expansion and de-risk the current business model of selling cotton seeds only in South India. Though the road ahead will be bumpy due to volatility in monsoon and Government regulations, moats in the business (Kaveri brand & distribution network) will help to smoothen the growth path. Considering market share gains in new geographies and progress in new product launches, we raise the target price from Rs556 (14x FY20E) to Rs613 (15x FY20E) and re-iterate BUY rating.
* Non-cotton portfolio doing well :
Kaveri’s strategy to focus more on the non-cotton seeds business is paying off. Maize and Hybrid rice seeds reported revenue growth of 35.3% and 2.8%, respectively in H1FY19 over H1FY18. Selection rice seed revenues grew 31%, YoY. Steady launches of new products and geographical expansion resulted in the company posting growth higher than the industry.
* Cotton business impacted in core region:
The cotton seed revenues were down 14.1% in H1FY19 over H1FY18. Volumes declined 10% and realization dropped 4.4%. Lower off-take in key regions of Andhra Pradesh, Karnataka and Telangana impacted cotton seed volumes. The company passed on benefits of lower royalty payments to farmers and hence, realizations corrected. The heartening factor to note is the company gained market share in new regions i.e. Maharashtra and Gujarat.
* Multi-pronged growth approach :
The company is working towards dual objectives of 1) expanding product portfolio and 2) expanding geographical presence. It has entered western India to sell cotton seeds and plans to expand in North India. It is also in process to export seeds to eight countries. We note Kaveri has launched multiple variants of rice (selection + hybrid) and maize. It is also investing to develop vegetable seeds. We believe success of these initiatives will help to create new growth avenues and de-risk current business model of cotton seeds in South India.
* Maintain BUY :
We note the company has created strong value over the past decade and we remain positive on the medium-term growth outlook. We expect the company to report revenue and PAT CAGRs of 8% and 9.3% respectively over FY18-FY20. Over the past decade, the stock has traded at average P/E of 20x but, considering the slower growth over FY18-FY20E, we value the stock at a DCF-based revised target price of Rs613, implying target P/E of 15x FY20E.
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