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Decline in sowing area due to delayed monsoon
The delayed monsoon has pushed the sowing by at-least 1-2 weeks. We note the overall sowing area has declined 9.5%, YoY and 25.5% compared to normal sowing area as on 28th Jun’19. Kaveri generates ~55% revenues from cotton seeds and cotton sowing has dropped 15.9%, YoY. Closer examination of cotton sowing in key states of Kaveri indicates 44% sowing deficit. While we expect improvement in sowing in Jul’19, possibility of double digit growth (as per management guidance) appears slim. Though near term earnings of Kaveri are under pressure, we remain positive on the company as the stock is at an attractive price given that valuations are near Mean P/E-1 SD. Maintain BUY with DCF-based target price of Rs640 (target P/E 14x FY21E).
* Delayed monsoon: Monsoon (as at 3rd Jul’19) is 28% deficient. We believe the shortfall to date has caused shifting of the sowing season by 1-2 weeks. If monsoon continues to be deficient even in Jul’19, it may impact kharif sowing and impact the revenues of seed companies such as Kaveri.
* Reduction in area sown: Sowing data (as of 28th Jun’19) indicates a shortfall of 9.5% YoY. Compared to normal sowing levels, the deficit stands at 25.5%. Excluding sugarcane crop, the sowing deficit stands at 12.6%. We note cotton sowing is down 15.9% YoY. Kaveri generates ~55% of revenues from cotton seeds.
* State-wise decline in cotton sowing: The state-wise sowing data indicates cotton sowing declined in Telangana, Maharashtra, Karnataka and Andhra Pradesh whereas it has increased sharply in Gujarat and Madhya Pradesh. It is stable in Haryana. Kaveri is strong in Southern states, Maharashtra and Gujarat. We note the cotton sowing in key states of Kaveri has declined by 44%, YoY.
* Higher cotton prices provide a boost: Cotton prices are up 5% YoY whereas prices of various other agri commodities are trading lower YoY. This is expected to result in farmers switching to cotton farming from other agri crops. This will boost the cotton seed companies such as Kaveri.
* Maintain BUY: We note Kaveri has created strong value (FCF) over the past decade and we remain positive on its medium-term growth outlook. We expect the company to report revenue and PAT CAGRs of 13.2% and 13.9% respectively over FY19-FY21. Over the past decade, the stock has traded at an average P/E of 20x. We value the stock at a DCF-based target price of Rs640, implying a target P/E of 14x FY21E. FCF yield is at an attractive ~7% on FY20E.
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