Kaveri Seed Firm Score: Purchase; Enhance in cotton costs augurs nicely


Kaveri generates ~50% revenues from cotton seeds: Larger cotton costs are more likely to improve cotton sowing main to higher demand for cotton seeds.

Crude oil costs are up 26% y-o-y and this may possible result in increased costs of nylon, a serious competing commodity to cotton. We word cotton costs (WPI) have additionally elevated to 114 in Feb’21 from 92 in Oct’20. Larger cotton costs will increase cotton sowing. Kaveri generates ~50% of its revenues from cotton seeds, therefore is more likely to be a serious beneficiary of cotton value rise. Larger revenues of cotton seeds can be margin accretive.

We stay constructive on Kaveri given the success of its non-cotton seeds and market share features in cotton seeds in Gujarat and Haryana, amongst different states. That is more likely to de-risk Kaveri’s present enterprise mannequin centred round cotton seeds in South India. The inventory is buying and selling at a sexy valuation beneath imply P/E-1 SD and FCF yield of 9% on FY21E. Keep Purchase with a DCF-based goal value of `710 (10x FY23E P/E).

Kaveri generates ~50% revenues from cotton seeds: Larger cotton costs are more likely to improve cotton sowing main to higher demand for cotton seeds. Kaveri is more likely to be the largest beneficiary of this pattern. Larger income share of cotton seeds is margin-accretive. Most different enterprise segments of Kaveri (e.g. maize seed, choice and hybrid rice seeds) generate comparatively decrease margins than cotton seeds. Vegetable seeds are nonetheless in funding mode.


Multi-pronged development strategy: Kaveri is working in the direction of the twin aims of increasing each its product portfolio and world geographical presence. It has entered West and North India and has additionally commenced exports to 5 international locations. We word Kaveri has launched a number of variants of rice (choice + hybrid), maize and vegetable seeds. Success of those initiatives will create new development avenues and de-risk the present enterprise mannequin centred round cotton seeds in South India.

Keep Purchase: Kaveri has created sturdy worth (FCF) over the previous decade and we stay constructive on its medium-term development outlook. We mannequin the corporate to report income and PAT CAGRs of 12.8% and 17.7%, respectively, over FY20-FY23e. We worth the inventory at DCF-based goal value of Rs 710.

 

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