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Non-cotton biz shines in an otherwise muted quarter
* Operating performance disappoints: Revenue grew 8% YoY to INR752m (our estimate: INR849m) in 2QFY19. EBITDA declined 47% YoY to INR79m (our estimate: INR188m), with the margins shrinking YoY from 21.2% to 10.5%. Adj. PAT declined 43% YoY to INR119m (our estimate: INR261m).
* 1HFY19 performance: Revenue was flat YoY at INR6,571m, with the margin contracting 140bp YoY to 32.2%. Adj. PAT, too, was flat YoY at INR2,225m.
* Cotton biz subdued; Non-cotton showing promise: Cotton business revenue declined 44% YoY, with volumes down 25% YoY. This was partly due to the pink boll worm issue and partly because of a loss of volumes (as smaller brands adopted aggressive pricing strategy to lure farmers, particularly in south). On the other hand, Non-cotton business delivered volume growth of 27% in hybrid rice and 31% in selection rice (overall segmental growth of 23% YoY). Management expects Non-cotton’s contribution to gradually exceed cotton’s over the next three years.
* Valuation view: We cut our FY19/20 earnings estimate by 4%/6% on account of the significant miss on 2QFY19 estimates, the rise in production cost, and the reduction in price of cotton packet by the government (from INR800 to INR740). We continue valuing the stock at 17x FY20E EPS (~5% discount to its three-year average multiple), primarily because of (i) positive cotton outlook for FY20, given the low closing inventory expected in FY19, (ii) reducing dependency on Cotton biz (Non-cotton share likely to increase to 52% in FY20) and (iii) sustainable expansion in RoE from 20.9% in FY18 to 22.5% in FY20. Our TP of INR670 implies a 29% upside. Maintain Buy.
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