Kaveri Seed Company Overhang of Royalty issue to remain; cut target price: maintain BUY

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1 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 1QFY16 Result Review (Wholly owned subsidiary of Bank of Baroda) BUY Kaveri Seed Company Overhang of Royalty issue to remain; cut target price: maintain BUY Kaveri Seed Company Ltd. (KSCL) reported dismal 1QFY16 results with a consolidated revenue of Rs 6.6bn, de-growth of 19.7% YoY led by reduction in cotton acreages, uncertain monsoon and loss of revenue in Maharashtra while awaiting for court order. However, EBITDA margin stood at 34% an expansion of ~600bps mainly due to lesser royalty paid to Monsanto. Non provision of Rs 640mn royalty becomes the biggest worry: There is a case going between Maharashtra Govt. and Monsanto for the reduction in royalty. KSCL has not provided Rs 640mn for the royalty to be paid to the Monsanto for the pending outcome of the case (as management expect ruling to come in favour of state Govt.), which is a biggest worry. Revenue de-grew by 19.7% YoY: KSCL revenue stood at Rs 6.6bn, degrowth of 19.7% YoY led by reduction in cotton acreage due to uncertain monsoon. KSCL expects to sell 6.2mn cotton seed packets vs 8.5mn (~27% de-growth YoY), it has already sold 5.4mn cotton seed packets in 1QFY16. We are reducing our estimates for revenue by 33%/20% for FY16/FY17e respectively. EBITDA margins stood at 34%: KSCL s reported ~600bps YoY expansion (34% vs 28.1% in 1QFY15) in EBITDA margins led by lower royalty paid to Monsanto. Sector: AGRI 18 th August, 2015 Price Price Target Up/Down (%) 501 Rs Bloomberg Code KSCL IN Reuters Code KVRI.BO. Share Holding (%) Promoters As on 30th June FII DIIs 6.51 Stock Data Nifty 8,477 Sensex 27, week high/low 1077/486 Maket Cap (Rs. bn) 34.5 Price performance (%) 1M 3M 6M 1Y Absolute Relative to Sensex Valuation: 1Q contributes ~70% of total sales to Kaveri, FY16 will be dismal year for KSCL led by lower acreage in cotton seeds and maize. We are reducing our earnings by 27%/9% for FY16/FY17e respectively also we are reducing PE from 17x to 13x led by uncertainty over royalty paid to the Monsanto. We are maintaining our BUY rating with the reducing price target of Rs 683. (13x of FY17e EPS) Relative Performance Management Discussion: 1) Cottons seed packets to sell ~6.2mn in FY16, 2) KSCL market share reduced to 15-16% from 18% earlier due to reduction in cotton acreages, 3) management feel recovery to be difficult in FY16, 4) EBITDA margin expanded due to reduction in other expenses (KSCL did not paid Rs 640mn as a royalty to Monsanto, 5) maize can also see ~10% decrease in acreages due to weak monsoon 6) ~5mn packets volume lost in Maharashtra while awaiting for court orders, 7) exploring export markets like Indonesia for maize and African countries for cotton Source:-Bloomberg BSE Sensex Kaver Seed Co. Exhibit 1: Financial summary (Rs mn) Y/E March FY13 FY14 F Y15 FY16e FY17e Net sales 7,120 10,110 11,612 10,037 12,538 Growth (%) Operating margin (%) PAT 1,281 2,090 3,010 2,688 3,611 Adjusted PAT 1,267 2,090 3,013 2,688 3,611 EPS (Rs) Growth (%) P/E(x) ROE (%) ROCE (%) Net debt/equity (x) (0.42) (0.55) (0.40) (0.68) (0.69) P/Bv (x) Vaishali Parkar Kumar vaishali.parkar@bobcaps.in

2 Exhibit 2: Quarterly Financials (Rs Mn) 1QFY16 1QFY15 YoY (%) 4QFY15 QoQ (%) Net Sales 6,641 8,269 (19.7) Raw material consumed 2,366 2,883 (17.9) (%) of net sales Staff cost (7.3) (%) of net sales Other Expenses 1,940 2,979 (34.9) (%) of net sales EBITDA 2,258 2,324 (2.8) EBITDA Margin Depreciation Interest Other Income (44.8) PBT 2,219 2,339 (5.1) Less: Taxation Tax / PBT Recurring PAT 2,184 2,306 (5.3) Exceptional items Less: Minority Interest Reported PAT 2,184 2,306 (5.3) NPM EPS (Rs) Source: Company, BOBCAPS Equity research 2

3 Financials Exhibit 3: Income Statement Net sales 7,120 10,110 11,612 10,037 12,538 growth (%) (13.6) 24.9 COGS 3,154 3,751 4,384 3,212 3,887 Staff Cost R&D Cost SG&A Cost 2,283 3,742 3,681 3,638 4,469 EBITDA 1,393 2,213 3,097 2,786 3,680 growth (%) (10.0) 32.1 Depreciation EBIT 1,271 2,048 2,948 2,596 3,461 Other income Interest paid Extraordinary/Exceptional items 13 - (3) - - PBT 1,319 2,143 3,100 2,751 3,697 Tax Minority interest - 2 (2) 8 12 PAT 1,281 2,090 3,010 2,688 3,611 Non-recurring items (13) Adjusted PAT 1,267 2,090 3,013 2,688 3,611 growth (%) (11) 34 Exhibit 4: Balance Sheet Cash & Bank balances ,042 4,267 Other Current assets 5,754 5,731 6,904 5,524 6,852 Investments 1,382 2,783 2,950 3,687 4,609 Net fixed assets 1,354 1,540 2,218 2,588 2,869 Goodwill Other non-current assets Total assets 8,686 10,280 12,165 14,882 18,638 Current liabilities 5,180 5,108 4,608 5,003 5,771 Borrowings Other non-current liabilities Total liabilities 5,234 5,117 4,622 5,018 5,785 Share capital Reserves & surplus 3,315 5,021 7,403 9,717 12,694 Shareholders' funds 3,452 5,159 7,540 9,854 12,832 Minority Interest Total liabilities 8,686 10,280 12,165 14,882 18,638 Equity research 3

4 Exhibit 5: Cash Flow Statement Profit after tax 1,281 2,090 3,010 2,688 3,611 Depreciation Chg in working capital (332) (148) (1,551) 1,776 (561) Total tax paid Net Extra-ordinary income (13) Cash flow from operations 1,036 2,106 1,611 4,654 3,270 Capital expenditure (387) (350) (350) (1,037) (500) Change in investments (207) (1,400) (167) (737) (922) Acquisition of Goodwill (4) - 13 (13) - Cash flow from investments (599) (1,750) (504) (1,788) (1,422) Free cash flow ,107 2,866 1,848 Issue of shares Net inc/dec in debt (166) (44) Dividend (incl. tax) (256) (384) (528) (472) (634) Other financing activities 9 4 (104) Net Extra-ordinary income 13 - (3) - - Cash flow from financing (412) (424) (627) (367) (622) Inc/(Dec) in Cash & Bank bal. 38 (68) 476 2,499 1,226 Ratio analysis Y/E Mar FY13 FY14 F Y15 FY16e FY17e Per share data (Rs) EPS CEPS DPS BV Profitability ratios (%) Gross margins Operating margins Net margins Valuation ratios (x) PE P/BV EV/EBITDA EV/Sales RoE RoCE Equity research 4

5 Sales and Dealing Team Purvesh Shelatkar Senior Vice President & Head Equity Anil Pawar Senior Manager Dealing Sachin Sambare Manager Dealing /33 Ashwin Patil Executive Dealing Research Team Sectors Vaishali Parkar Kumar Analyst Agri, Auto, Defence Padmaja Ambekar Analyst Auto Ancillary, Infra, Midcap Akanksha Tripathi Analyst Footwear, FMCG Rishabh Mehta Associate Hareesha Kakkera - Associate hareesha@bobcaps.in Retail Dealing Team Kshitij Kelkar kshitij@bobcaps.in Kiran Sawardekar kiran@bobcaps.in Mohan Shinde mohan.shinde@bobcaps.in Debt Dealing Team Minaxi Tiwari minaxi.tiwari@bobcaps.in UTI Tower, 3rd Floor, South Wing, Bandra-Kurla Complex, Bandra (E), Mumbai India. Ph.: Fax: research@bobcaps.in Web: NSE SEBI No. (CASH): INB NSE SEBI No. (DERIVATIVES): INF BSE SEBI No. : INB Disclaimer BUY. We expect the stock to deliver >15% absolute returns. HOLD. We expect the stock to deliver 5-15% absolute returns. SELL. We expect the stock to deliver <5% absolute returns. Not Rated (NR). 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