IGI Logo

Healthy revenues; weak margins

Highlights: (1) Non-cotton portfolio i.e. hybrid rice seeds, maize seeds, selection rice and vegetable seeds reported 107.8%, -38.3%, 29.2% and -32.1% YoY revenue growth in Q2FY22, respectively, (2) Cotton business reported revenue growth of 87.4% in Q2FY22 and (3) Kaveri continues to launch new products. Sales of cotton seeds were affected by a likely increase in usage of counterfeit/ illegal seeds and reduction in acreage. We cut FY22-23 earnings estimates by 8-9% due to weak revenues and higher inflation. Maintain BUY with a revised DCF-based TP of R610 (implying 9x FY24E EPS; earlier TP: Rs706). The stock is currently trading close to its 1-year forward ‘mean P/E – 1SD’.

* Q2FY22 result: Kaveri reported revenue growth of 10.1% YoY. However, EBITDA and PAT declined of 61.5% and 69.8% YoY, respectively. EBITDA margin declined 809bps YoY due to higher input prices and other expenses. During Q2FY22, the hybrid rice and maize volume declined 81.5% and 51.5% YoY, respectively. However, cotton seed volumes grew strongly by 108.3% YoY.

* Segmental performance: Revenues of cotton seeds and hybrid rice were up 87.4% and 107.8% YoY in Q2FY22, respectively. Selection rice revenues were up 29.2% YoY. However, revenues of maize and vegetables seeds declined 38.3% and 32.1% YoY, respectively.

* Impact on cotton volumes: The H1FY22 sales declined due to (1) 6% YoY reduction in acreage of cotton, and (2) HTBT/ illegal seeds occupied at least 18-20% of the total cotton acreage. Cotton prices are as high as 1.5x of MSP currently; we believe it will likely attract farmers interest and result in higher sowing.

* Steady launch of new products: Kaveri continues to launch innovative hybrids in rice and vegetables. Rising contribution of new products across segments also demonstrates farmers’ acceptance. The company targets non-cotton portfolio to contribute 60% of revenues in medium term.

* Maintain BUY: Kaveri has created strong value (FCF) over the past decade, and we remain positive on the medium-term growth outlook. We model the company to report revenue and PAT CAGRs of 5.9% and 9.3%, respectively, over FY21-FY24E. We arrive at a revised DCF-based TP of Rs610 (implying 9x FY24E EPS). Key risks are sharp increase in competitive pressures and steep increase in input prices.

To Read Complete Report & Disclaimer Click Here

or More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer