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Buy Kaveri Seed Co; target of Rs 738: Motilal Oswal

October 12
22:41 2017

Motilal Oswal’s research report on Kaveri Seed Co

Kaveri Seed (KSCL) is highly dependent on the Cotton business, which contributes ~60% of its overall revenues. However, of late, management has increasingly shifted its focus toward the higher-margin Non-cotton business (target to take its share to 50% of overall revenues over FY18-20), especially the less-penetrated Vegetables segment. Vegetables business is poised for strong growth of ~200%, with revenues expected to increase from INR60m in FY17 to ~INR180m in FY18 (much of this growth is likely to materialize in 2HFY18). The company plans to introduce nearly 50 products in Vegetables over the next 2-3 years, taking the total tally of products in this segment to 65. Notably, margins in Vegetables are significantly higher at ~50% versus the company’s blended margin of ~20%.  Both the Cotton and Non-cotton businesses would be ramped-up by strengthening the distribution network (from 15,000 now to 20,000 by FY20).

Outlook

Increased cotton acreage, which has resulted in a significant rise in cotton seed packet sales in 1QFY18 – the impact of this is also likely to be felt in 2QFY18 on account of delayed monsoon in the southern region Huge growth potential in Vegetables, where margins (~50%) are relatively high, aiding overall margin expansion for the company Expected recovery in corn in Rabi post a decline in acreage in Kharif The company’s foray into the new markets of Orissa, Chhattisgarh and MP, apart from the expanding market share in the already penetrated markets  Significant growth in exports (expected at ~INR200m in FY18E) Focus on strengthening the leadership team – recruited R&D head from Monsanto; majority of breeders and markers recruited from leading MNCs  Over FY17-19E, we expect a CAGR of 14% in revenue and 43% in PAT. We value the stock at 18x FY19E EPS, arriving at a target price of INR738, 39% upside. Maintain Buy.

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