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Better maize and selection rice volumes drive performance Operating performance better than our expectation

* Kaveri Seeds (KSCL) reported in-line sales in 3QFY22 with higher sales growth in selection rice (+44 % YoY) and maize (13% YoY). Its operating performance was better than our estimate.

* We largely retain our FY22E/FY23E/FY24E earnings for KSCL. Its 3QFY22 revenue contributed to just 13% of its total annual revenue. We value the stock at 11x FY24E EPS to arrive at our TP of INR635. Reiterate BUY with a 24% potential upside.

Non-cotton seeds continue to drive sales

* Consolidated revenue rose 6% YoY to INR1.3b (est. of INR1.3b) in 3QFY22. EBITDA declined 28% YoY to INR74m (est. of INR65m). EBITDA margin contracted 270bp YoY to 5.9% (est. of 5.0%). Gross margin stood at 51.8% (- 10bp YoY). As a percentage of sales, employee cost was at 20.9% (v/s 20.7% YoY), while other expenses stood at 25.1% (v/s 22.6% YoY). Adjusted PAT stood at INR76m, down 16% YoY (est. of INR87m).

* Revenue/EBITDA/PAT declined 7%/32%/32% YoY to INR9.0b/INR2.1b/ INR2.2b in 9MFY22, respectively.

* Cotton seed volumes dropped 26% YoY to 5.2m packets in 9MFY22, leading to a 24% decline in revenue to INR3.3b. KSCL gained cotton seed market share in Gujarat, Maharashtra and Haryana, while it lost share in Andhra Pradesh and Telangana. The contribution from new products in Maize rose to 25.49% from 9.55% of volumes. Maize seed volumes dipped 24% YoY to 7,649MT and revenue declined 13% YoY to INR1,630m in 9MFY22.

* Hybrid rice volumes rose 22% to 6,834m packets in 9MFY22, leading to a revenue growth of 32% YoY to INR1,730m. Introduction of new hybrid 7299, 471, and 473 led to strong growth in this segment. Selection rice volumes grew 7% at 15,685MT in 9MFY22, while topline increased 21% YoY to INR1,150m in 9MFY22.

* Revenue from vegetable seeds rose 8% YoY to INR330m in 9MFY22, driven by a 2% growth in volumes to 183m packets.

Highlights from the management commentary

* The management expects a 10% growth for cotton seeds in FY23 over FY22. 1HFY22 was impacted by increasing unbranded cotton seed sales. The management believes that margins would reach normalized levels in FY23.

* Despite a decline in volumes and revenue, KSCL gained market share in cotton seed in Gujarat, Maharashtra and Haryana. The company reported a drop in sales in Andhra Pradesh and Telangana.

* Adding new crops such as mustard and wheat, which have a great potential in the years to come, would be the next growth engine for the company.

Valuation and view

* KSCL is well on track to diversify from cotton seed sales by increasing the share of higher margin rice and vegetables, which are growing at a faster pace.

* KSCL’s operating performance was better than our estimate.

* We largely maintain our FY22E/FY23E/FY24E earnings for KSCL. Its 3QFY22 revenue contributed to just 13% of its total annual revenue. We value the stock at 11x FY24E EPS to arrive at our TP of INR635. Reiterate BUY with a 24% potential upside.

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