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Kaveri Seeds Company LTD: Retail Research
Kaveri Seeds Company LTD: Retail Research
Kaveri Seeds Company LTD: Retail Research
RETAIL RESEARCH
Kaveri Seeds Company Ltd
Industry CMP Recommendation Add on dips to Sequential Targets Time Horizon
Agriculture Products - Seeds Rs. 694 Buy at CMP and add on declines Rs. 622-628 Rs.771-867 2-3 quarters
HDFC Scrip Code KAVSEEEQNR Kaveri Seeds Company Ltd (KSCL) is one of the leading seed manufacturers in India. It has vast experience in seed production of
major agricultural crops backed by a very strong in-house R&D program for crops maize, cotton, sun flower, bajra, sorghum,
BSE Code 532899 rice and several vegetable crops. With over 600 acres of farm land owned by the company and 65000 acre for seed production
NSE Code KSCL across different agro- climate centers and dedicated team of researchers, the company is conscious of the changing needs of
farmers and consumers to design and develop productive hybrids that excel in market. It is consistently building a robust
Bloomberg KSCL IN
portfolio of field crops and vegetables to help enhance farm yield. It is also engaging more with farmers and educating them
CMP Aug 03 2017 Rs. 694 about its products and handholding those to implement agricultural best practices. It is also extending its brand presence
Equity Capital (Rs cr) 13.8 across India through aggressive marketing and branding initiatives.
Face Value (Rs) 2.0 Investment Rationale:
Equity Share O/S(crs) 6.91 • Cultivation of Cotton has increased in kharif 2017 supported by better monsoon and farmers’ shifting from pulses and soya
bean to cotton,
Market Cap (Rs.crs) 4792.4 • Diverse Product portfolio addressing crop rotation & reducing dependence on traditional crops,
Book Value (Rs) 146.8 • Aggressive focus on R& D helps product development and sustainability in farm practices,
Avg. 52 Wk Volumes 78462 • Investment in Biotechnology is accelerating the breeding program of cotton and rice,
• Focus on new products could help to garner revenue going forward.
52 Week High 706.2
52 Week Low 325.2 Concerns:
• Atmospheric / weather changes:
• Inventories write off could impact profitability,
Shareholding Pattern % ( June 30), 17) • Poor Monsoon and unsupportive commodity prices,
Promoters 54.4 • Regulatory diktats from the central and state governments in respect of distribution, prices, royalties etc
• Changes in Taxation law,
Institutions 28.1
View and Valuation:
Non Institutions 17.5
KSCL’s diversified products portfolio, superior R&D capabilities, pan India distribution network, efficient supply chain and strong
Total 100.0 relations with farmers are key rationale for long term earning visibility. Increase in cotton cultivation in kharif 2017 could bring in
enhanced revenues and margins for KSCL. The recent completion of Buyback could result in increased return ratios, by reducing
Fundamental Research Analyst the equity base resulting in long term increase in shareholder value. Even after the recent buyback entailing an outgo of
Abdul Karim Rs.200cr and paying healthy dividends year after year, KSCL could end up with cash per share of Rs.94 in FY19E.
abdul.karim@hdfcsec.com Government’s sharper focus on the seeds industry and the introduction of new hybrid seeds for Cotton, Rice and Maize by KSCL
would drive revenues for the company. Further, KSCL plans to increase its market share in Cotton Seeds by penetrating the
markets of Andhra Pradesh and Maharashtra and widening its overall presence in North India, Gujarat and Rajasthan.
Kaveri’s cotton seed volumes should rebound strongly in FY18-FY19 (due to higher acreage and higher cotton prices), its
growing footprint outside AP and Telangana could also help de-risk its business and bring new growth triggers, and its
improving operating leverage, should drive a sharp growth in PAT over the next two years.
We feel investors could buy the stock at the CMP and add on dips to Rs. 622-628 band (~19.5x FY19E EPS) for sequential targets
of Rs 771 (24x FY19E EPS) and Rs 867 (27x FY19E EPS). At the CMP of Rs 695 the stock trades at 21.6x FY19E EPS.
Financial Summary:
Particulars (Rs cr) Q4FY17 Q4FY16 YoY-% Q3FY17 QoQ-% FY16 FY17 FY18E FY19E
Net Sales 40.3 41.1 -1.9% 67.9 -40.6% 744.89 704.99 820.66 898.20
EBITDA -86.4 -6.5 -1239.5% 3.4 -2648.7% 185.91 139.55 205.99 220.51
APAT -29.2 -10.4 -179.9% 3.5 -921.7% 166.28 137.07 198.63 211.89
Diluted EPS (Rs) -12.6 -1.5 -736.4% 0.5 -2576.5% 24.08 19.85 30.05 32.06
P/E (x) 28.8 35.0 23.1 21.6
EV/EBITDA (x) 25.7 34.2 22.2 20.7
RoE (%) 17.9% 13.5% 22.1% 20.5%
(Source: Company, HDFC sec)
Company Profile:
Kaveri Seeds Company Ltd (KSCL) is one of the leading seed manufacturers in India. It has vast experience in seed production
of major agricultural crops backed by a very strong in-house R&D program for crops maize, cotton, sun flower, bajra,
sorghum, rice and several vegetable crops. With over 600 acres of farm land owned by the company and 65000 acre for seed
production across different agro- climate centres and dedicated team of researchers, the company is conscious of the
changing needs of farmers and consumers to design and develop productive hybrids that excel in market.
The Company is mainly into the business of production, processing and marketing of high quality hybrid seeds for Different
crops like corn, sunflower, cotton, paddy, grain sorghum, etc. and has recently forayed into micronutrientsandbioproducts.
The company produces non-hybrid seeds, primarily for paddy.The Company is a leading provider of crop solutions to the
farmer by supplying high yielding hybrid seeds and cropmanagement namely micro nutrients, bioproducts etc. The Company
is engaged in research and development in theareas of superior breeding programs and biotechnology tools that will enable
them to develop highly effective anddifferentiated hybrid seeds, micronutrients and bioproducts.
Kaveri is amongst the top three seeds companies in the cotton segment, and top five in the maize, paddy and pearl millet
segments. KSCL was incorporated in the year 1986 and company is one of the fastest growing seed companies in India with a
large network of 15000+ distributors and dealers across pan India. As on 30th June 2017, Company has 775+ employees.
Company has seven State-of-the-art seed technology, processing and storage plants.
Kaveri Microteck Pvt Ltd. is a 100% subsidiary of KSCL and it is a business division of division engaged in micronutrient
mixtures and bio-pesticides. Kexveg is a 100% subsidiary of KSCL and is involved in selling premium vegetables in theoverseas
markets. KSCL has already invested Rs.6.6 crore in Kexveg. Going forward, the company expects to investRs9 crore in this
subsidiary. This investment can help KSCL to increase its vegetable seeds portfolio.
Product Overview:
Vegetables:
KSCL is emphasizing on tomato, chillies and okra. Besides, its research efforts on brinjal, gourds, watermelon are still in
progress. Company is planning to have a dedicated team to focus on Vegetables sales and marketing activities.
KSCL made a major breakthrough in plant breedingwith the creation of genetic variation and thedevelopment and commercial
release of promising hybrids like Jaadoo and ATM in cotton, KMH 25K45,Kaveri 50, Ekka in maize.
Industry Overview:
The Agriculture sector commands the largest share of the country’s total land area at about 48% (or 156 million hectares)
compared to USA’s 18% (or 158 million hectares) and China’s 15% (or 106 million hectares). While India has more arable land
than China, its production is only half that of China The Indian Seed Industry is the 6th largest in the world in value terms
accounting for about 4.5% of global industry preceded by the US (27%), China (22%), France (6%), Brazil (6%) and Canada
(4.8%). The organized Indian seed industry has been in existence since 30+ years; however the last decade has witnessed
exponential and transformational growth.
Going forward, the industry is expected to grow significantly, owing to improved seed replacement rate (SRR) and increasing
adoption of high-yielding hybrid seeds. The Government of India’s favorable policy environment, aimed at supporting the
usage of seeds through the National Seeds Plan and bolstering agricultural productivity through the National Food Security
Mission (NFSM) also augur well for the industry. Multiple forecasts advocate that the Indian seed industry will grow twice the
average for the rest of the world for the years to come.
Farmers are moving towards branded seed instead of using seed saved from the previous harvestand upgrading to better
quality seeds to improve their yieldleading to growth in the seed industry. Further, the advent of genetically modified (GM)
cotton changed the landscapeof the Indian seed industry. As per ICRA, the Indian SeedIndustry is the sixth largest in the world
in value terms accounting for about 4.5% of global industry preceded by theUS (27%), China (22%), France (6%), Brazil (6%)
and Canada (4.8%).
Key Growth Factors:
Cotton Seed:
High market penetration of hybrids,
Growth - a function of market share gains,
High Density Planting and Mechanical Harvesting,
Investment Rationale:
Cultivation of Cotton increased supported by better monsoon and farmer’s shifting from pulses and soya bean to cotton:
According to Ministry of agriculture, Cotton production/planting in India has increased to 111.56lac hectares compared to
same period previous year at 92.33 lac hectares, as on July 27, 2017. Cotton cultivation has progressed to 91 percent of the
total normal area at 122.46 lakh hectares showing signs of positivity in planting. Cotton production has increased due to (a)
Comparatively better monsoon than past 3 years (b) Farmers are shifting away from pulses and soya bean to cotton as prices
of pulses and soya bean ruled below minimum support price (MSP) while cotton was one of the few crops that gave good
returns to farmers, and (c) farmer’s income from vegetables was badly impacted previous year due to demonetization,
therefore farmers are shifting to cotton production in FY17-18.
Cotton planting progress as on July 27, 2017 Cotton Seed Volume Break up - (FY17)
(Source: Agriculture Ministry of India, Company, HDFC sec) (Source: Company, HDFC sec)
Cotton seed contributes 65% of KSCL’s revenue. Maharashtra, Telangana, and Andhra Pradesh are key acreage areas,
contributing~ 89% of Sales. The industry has played down deficient rainfall in parts of cotton growing areas of Maharashtra,
Telangana and Karnataka, claiming it will not have major impact on the production estimates. Higher cultivation of cotton
could help to generate more demand of seeds. KSCL is one of the leading cotton seed producers in the areas that have seen
an increase in cotton cultivation and hence could benefit from this trend.
Diverse Product portfolio addressing crop rotation & reducing dependence on traditional market:
KSCL has focused consistently on building robust portfolio of field crops and vegetables to help enhancefarm yield since its
inception. Company is also engaging more with farmers and educating them about its productsand handholding to
implement agricultural best practices. Hybrid vegetable seed is one of the fastest-growing segments in India estimated to be
around Rs. 2,000 crore. For vegetables, Company has built an exclusive sales team of more than 20 dedicated employees,
launched new products, and built a focused distribution network and evaluating in-licensing opportunities.
Company plans to expand its presence in other states rather than key markets like Andhra Pradesh, Telangana, and
Karnataka. Lower acreages of Maize in Bihar and coastal Andhra Pradesh was compensated by higher acreage in Telangana,
Maharashtra and Gujarat, leading to growth in the maize seed sales in FY17.
with strong farmer relationship. Over 15,000 direct and indirect distributors across the country and around 350 highly
motivated marketing professionals drive market penetration. Company is expanding its marketing and distribution network
across agricultural belts. This expansion could significantly enhance business opportunities in future in untapped and growing
markets. Company is engaged with farmers through multiple engagement programs like brand awareness, agronomic
information to increase their productivity and profitability.
Market share by Crop (%)
Particulars FY11 FY12 FY13 FY14 FY15 FY16 FY17
Cotton 2% 4% 10% 16% 18% 14% 14%
Maize 9% 10% 12% 12% 10% 10% 11%
Hybrid Rice 2% 4% 6% 6% 4% 5% 4%
Pearl Millet 12% 10% 9%
(Source: Company, HDFC sec)
Aggressive focus on R& D helps for product development and sustainability in farm practices:
KSCL has continued investing in Research and Development activities to augment research facilities, farm infrastructure
development. On product developments, company is successful in developing several market competitive hybrids. Hybrid
technology offers considerable opportunity for increasing productivity of field crops and vegetables. It is an appropriate
technology for sustainable agriculture and thus, deserves to be promoted on a large-scale.
Cotton (Jaadoo& Jackpot) Jaadoo and Jackpot are Bt cotton hybrids with stacked genes, cry 1Ac & cry2Ab that help combat
the bollworm pest,
Sunflower (Sunkranti& Champ) - Champ and Sunkranti have built in resistance to SNV and DM,
Bajara (Boss 65): The bajra hybrid Boss 65 is high yielder with attractive grain and drought enduring,
Rice ( AK56 & KPH 9090)
Sorghum ( Colonel )
Several of pipeline maize hybrids (25K60, KMH 3669and KMH 2700) excelled in performance in All India Coordinated trials
The company has extended cropped area and diversified crops by adding newer ones for agri-seed business. Red gram, onion,
mustard and wheat are the additions to the crop cafeteria of the company. Furthermore, the company has successfully
launched several new hybrids of sunflower, cotton and bajra in the market. The product portfolio is also expanded for maize,
rice and vegetable crops inclusive of both-hybrids and OPVs (Open-pollinated variety).
R&D Infrastructure:
Dedicated research farms of 700 acres (own & leased) land under varying agro-climatic conditions located in and around
Hyderabad.
Multi-location breeding and trial stations over 70 centres across India.
R&D program witnessed progress with increase in multi-location trials and more number of notifications.
Company received notifications of 2 hybrids in rice, 1 hybrid in maize, 1 hybrid in pearl millet and 1 hybrid in sunflower.
Apart from tie-up with Monsanto for pest technology for BT cotton, it has developed all the technology on its own.
State-of-the-art biotech quality check and seed technology laboratory enable crucial quality processes:
Gene bank maintains approximately 6,500 germplasm accession in field and vegetable seeds. It facilitates genetic
enhancement and multidisciplinary crop improvement research programmes. Vegetables business could grow significantly on
the back of increased investment in R&D, supply chain and S&M.
Investment in Biotechnology is accelerating the breeding program of cotton and rice:
Company’s investment in Biotechnology has started paying off in term of accelerating the breeding programs of cotton and
rice. Company’s focus and thrust of R&D biotech program is divided into two areas.
(i)Crop biotechnology (ii) Bio pesticides and Bio fertilizers
The on- going Biotech program involves (i)Introgression of BT gene (Bollgard incorporation in to parental lines of cotton (ii)
stacking two BT genes (Bollgard II) in to parental lines of cotton and develop BT cotton hybrids. The marker based DNA
technology is helping in fast track development of lines through back cross breeding. Through the conjunct use of
biotechnology and hybrid technology is the way forward for evolution of new generation Kaveri hybrids.
Better than average Monsoon shower could help to generate more demand in current fiscal:
With the El Nino phenomenon being ruled out this year, India is expected to get a normal monsoon as per Indian
Meteorological Department forecasts and analyses done by global weather agencies. The US Climate Prediction Center (CPC)
has ruled out the possibility of abnormal warming of waters in the Pacific Ocean (called the El Nino effect) happening before
August or September. Therefore, rainfall is expected to be 96% of the long period average (LPA). The nation receives 70% of
its rainfall from the South-West Monsoon that extends from June to September. Agricultural growth is expected to be 3-4%,
while overall GDP growth is likely to be 7% which augurs well for the agri-business industry. There were two continuous years
of drought before getting normal monsoon in 2016.
As on July 29, 2017 the cumulative countrywide rainfall still remains normal. Southwest Monsoon was vigorous over South
Rajasthan and Sub-Himalayan West Bengal. While active Monsoon was observed over Gujarat, West Madhya Pradesh, Assam,
Himachal Pradesh, Uttarakhand, Coastal parts of Telangana, Coastal Tamil Nadu along with West Coast.
As on July 28, the cumulative countrywide rainfall continues to stand at 4%. As far as the regional distribution is concerned,
Northwest India is surplus by 17% Central India continues to stand at 13% whereas, South, East and Northeast India are rain
deficient by 16% and 6%, respectively.
Focus on new products could help to garner revenue going forward:
KSL has added 8 new products in the portfolio and 3 new products launched in Maize, 3 in Bajra and 2 in Rice. Company has
increased number of demonstration of pre commercial products for promotions. Apart from this, company has introduced
sales productivity tool. For vegetables, company has built an exclusive sales team of more than 20 dedicated employees.
Company has also launched new products, built a focused distribution network and are evaluating in-licensing opportunities.
KSCL’s attempts to professionalize and institutionalize its business by inducting senior professionals across its key functions
and beefing up its internal systems and processes could result in value creation over the medium term.
Over the last few quarters, KSCL has employed COO, CFO supply chain head, R&D head and marketing head for its various
divisions from outside. This will bring greater professionalism and result in better performance for the company going ahead.
Kaveri’s cotton seed volumes should rebound strongly in FY18-FY19 (due to higher acreage and higher cotton prices), its growing
footprint outside AP and Telangana could also help derisk its business and bring new growth triggers, and its improving
operating leverage, should drive a sharp growth in PAT over the next two years.
We feel investors could buy the stock at the CMP and add on dips to Rs. 622-628 band (~19.5x FY19E EPS) for sequential targets
of Rs 771 (24x FY19E EPS) and Rs 867 (27x FY19E EPS). At the CMP of Rs 695 the stock trades at 21.6x FY19E EPS.
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Quarterly Financials:
Particulars, Rs in cr Q4FY17 Q4FY16 YoY-% Q3FY17 QoQ-% FY17 FY16 YoY-%
Net Sales 40.3 41.1 -1.9% 67.9 -40.6% 669.9 716.5 -6.5%
Raw Material Consumed 82.0 74.3 10.4% 138.1 -40.6% 378.4 363.5 4.1%
Stock Adjustment -37.8 -53.8 29.7% -100.6 -62.4% 19.1 22.0 -13.3%
Employee Expenses 6.4 9.9 -35.2% 7.4 -13.7% 32.5 31.2 3.9%
Other Expenses 76.1 17.1 343.7% 19.5 290.0% 161.3 109.0 48.0%
Total Expenses 126.7 47.5 166.5% 64.5 96.6% 591.3 525.7 12.5%
EBITDA -86.4 -6.5 -1239.5% 3.4 -2648.7% 78.6 190.8 -58.8%
Depreciation 6.6 7.0 5.6% 6.9 -4.8% 28.5 25.0 14.1%
EBIT -93.0 -13.4 -593.7% -3.5 -2556.0% 50.1 165.9 -69.8%
Other Income 1.8 4.2 58.3% 10.1 -82.5% 34.4 11.7 194.4%
Interest 0.0 0.0 0.0% 0.0 0.0% 0.1 0.2 -29.4%
PBT -91.2 -9.2 -891.6% 6.6 -1490.7% 84.4 177.4 -52.4%
Tax -4.0 1.2 431.1% 3.0 -234.2% 5.9 5.1 16.1%
PAT Reported -87.2 -10.4 -736.8% 3.5 -2556.1% 78.5 172.3 -54.5%
EOI -58.0 0.0 - 0.0 - -58.0 0.0 -
PAT Adjusted -29.2 -10.4 -179.9% 3.5 -921.7% 136.5 172.3 -20.8%
EPS (Adj) (Unit Curr.) -12.6 -1.5 -736.4% 0.5 -2576.5% 11.4 24.9 -54.5%
(Source: Company, HDFC sec)
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Financials
Income Statement
Particulars, Rs in Cr FY16 FY17 FY18E FY19E
Revenue from Operations 744.9 705.0 820.7 898.2
Cost of Material Consumed 375.1 391.2 344.7 382.6
Changes in Inventories 23.1 18.1 24.6 29.2
Employee Benefit Expenses 39.9 39.9 48.4 54.8
Other Expenses 120.9 116.2 197.0 211.1
Total Expenses 559.0 565.4 614.7 677.7
EBITDA 185.9 139.5 206.0 220.5
Depreciation & Amortisation Exp 27.4 30.2 30.4 32.3
EBIT 158.5 109.3 175.5 188.2
Other Income 13.1 34.4 32.0 32.3
Finance Costs 0.2 0.2 0.2 0.2
PAT before Except- Item 171.3 143.5 207.4 220.3
Exceptional Items 0.0 59.2 0.0 0.0
PBT 171.3 84.3 207.4 220.3
Tax 5.5 7.0 9.3 8.8
PAT 165.9 77.3 198.0 211.5
Less: Minority Interest -0.4 -0.5 -0.6 -0.4
Pat adjusted 166.3 137.1 198.6 211.9
Earnings per share 24.1 19.8 30.1 32.1
Balance Sheet
Particulars FY16 FY17 FY18E FY19E
EQUITY AND LIABILITIES
Share Capital 13.8 13.8 13.2 13.2
Reserves & Surplus 913.4 1000.2 884.3 1022.1
Share Holders Funds 927.2 1014.0 897.5 1035.3
Minority Interest -0.2 -0.7 -0.6 -0.5
Long Term Borrowings 1.6 4.6 3.1 4.1
Deferred Tax Liability 0.0 0.1 0.1 0.2
Other Long Term Liabilities 8.5 8.7 9.1 9.6
Non Current Liabilities 10.1 13.4 12.4 13.9
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