Kaveri Seed up 4% as Motilal Oswal sees 39% upside on cotton, non-cotton biz growth

Moneycontrol News

Kaveri Seed Company share price rallied 4.4 percent intraday Thursday as Motilal Oswal sees a sharp 39 percent upside in the stock, citing attractive play of balanced growth in cotton and non-cotton businesses.

While maintaining buy rating with a target price of Rs 738, the research house said over FY17-19, the research house expects a CAGR of 14 percent in revenue and 43 percent in PAT.

The company is highly dependent on the cotton business, which contributes around 60 percent 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 percent of overall revenues over FY18-20), especially the less-penetrated vegetables segment.

The brokerage house said vegetables business is poised for strong growth of around 200 percent, with revenues expected to increase from Rs 6 crore in FY17 to around Rs 18 crore in FY18 (much of this growth is likely to materialise in second half of FY18).

The seed producer 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 around 50 percent versus the company’s blended margin of around 20 percent, Motilal Oswal said.

Both its cotton and non-cotton businesses would be ramped-up by strengthening the distribution network (from 15,000 now to 20,000 by FY20).

Although the overall area sown for Kharif crops declined slightly by 0.8 percent YoY to 104.1m hectare in 2017-18 (as of September 8, 2017), the research house noted that cotton acreage increased significantly by around 19 percent YoY to 12.1m during the same period.

The effect of better acreage was partly witnessed in Q1FY18, when Kaveri Seed sold 6.5 million packets of cotton seeds – 19 percent more than those sold in FY17. Despite being a seasonally weak quarter, Q2FY18 witnessed better traction, as delayed monsoon in parts of Karnataka and other southern regions led to a rise in cotton seed sales.

Overall, the number of packets of cotton seeds sold is expected to increase 28.4 percent YoY to 7 million in FY18, Motilal Oswal feels.

Company's cotton market share has expanded 3 percent so far in first half of FY18 on account of increased penetration in Maharashtra and Gujarat, and also its foray into the newer markets of Orissa, Chhattisgarh and MP.

The research house noted that the industry had witnessed a decline of 17 percent YoY in corn acreage in Q1FY18, impacting Kaveri Seed's corn performance.

However, the Rabi season going forward is expected to register a rise in corn acreage, it feels.

The company has already launched three products in the Kharif season, three more launches are expected in Rabi and additional six products will be rolled out in FY19, helping it garner more market share.

Motilal Oswal feels the company is set to recover from the impact of heavy inventory write-offs in FY17 (Rs 66 crore, primarily driven by higher sales return).

However, given the strong cotton seed sales so far in FY18, the brokerage expects annual inventory write-off to be Rs 25-30 crore in FY18, implying a reduction of over 60 percent YoY.

To strengthen the leadership team, the company recruited R&D head from Monsanto; and majority of breeders and markers from leading MNCs.

At 10:49 hours IST, the stock price was quoting at Rs 542.75, up Rs 19.10, or 3.65 percent on the BSE.