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AP government re-issues license to sell seeds
Andhra Pradesh state government has re-issued license to Kaveri Seeds (Kaveri) to sell cotton seeds in Andhra Pradesh. We note the license was suspended in Jan’19 and there has been loss of revenues for ~50 days. We consider this a negligible impact as cotton seed sales in Andhra Pradesh are less than 5% of Kaveri’s net sales. Also, March quarter accounts for just ~5% of annual revenues. We believe the company’s long-term growth story remains intact and it is on the right path to craft new growth avenues via product and geographical expansion and de-risk the current business model of selling cotton seeds in South India. We maintain BUY rating on Kaveri with a DCF-based target price of Rs598 (Implied target P/E 16x FY20E).
* Andhra Pradesh government re-issues license to sell seeds:
The government of Andhra Pradesh, in Jan’19, had suspended the license of 13 seed companies (including Kaveri) to sell cotton seeds. However, post an appeal by the seed companies and after studying various representations, the government has re-issued their licenses. Kaveri’s only one variant of cotton seeds (KCH 707 BGII) which accounted for less than Rs2mn revenues in FY18 is still suspended.
* Negligible loss of revenues:
We believe cotton seeds in Andhra Pradesh account for less than 5% of Kaveri’s annual revenues. Also, the March quarter accounts for just 5% of the company’s annual sales. Hence, we believe the impact has been minimal. Also, as the company has got the license before the kharif season starts, it will be able to manufacture as well as distribute seeds before the sowing season starts in Jun-Jul’19. We expect negligible impact on Kaveri’s Q1FY20 revenues.
* Long-term growth story remains intact:
Kaveri is working toward the 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 the process of starting exports of seeds to eight countries. We note Kaveri has launched multiple variants of rice (selection + hybrid) and maize seeds. The company is also investing in development of vegetable seeds. We believe success of these initiatives will help de-risk the current business model for cotton seeds in South India.
* Maintain BUY:
We note Kaveri has created strong value (FCF) 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 7.6% and 9.4% respectively over FY18-FY21. Over the past decade, the stock has traded at an average P/E of 20x but, considering the slower growth over FY18-FY21E, we value the stock at a DCFbased revised target price of Rs598, implying a target P/E of 16x FY20E.
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