Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Kaveri Seed Company Ltd. Company Profile Kaveri Seed Company Ltd (KSCL) is one of the fastest growing seed company in India. It is engaged in production, processing and marketing of products and services in yield optimization, soil enrichment and crop protection areas in India. It offers its products in two categories field crops and vegetables. Its range of field crops includes corn, paddy, cotton, sunflower, mustard sorghum, pulses, bajra and wheat. Its range of vegetables includes tomatoes, okra, chilies, watermelon, gourds and brinjal. Presently, KSCL owns over 600 acres of farm land and has a large network of over 15000 distributors and dealers spread across the country. Investment Rationale Healthy Market share; dominant positioning KSCL has a dominant positioning in most of the key crops. It has a market share of ~14.4 in cotton, ~10.8 in maize, ~9.2 in Bajra and ~4.1 in Rice. KSCL is amongst the leading producer of hybrid seeds. It is amongst the top three seeds companies in the cotton segment and top five in the maize, rice and bajra segments. Cotton contributes the highest to KSCL s topline (55-60), followed by non-cotton crops that include maize, rice bajra, sunflower, sorghum which contributes around 35 in its topline. Its vegetables division contributed around Rs. 8 crores in its FY17 revenue. Best-in-class, Market adjacent, Scalable Operations KSCL enjoys with its Large production area across India with a loyal producer farmer network. It has ~100000 production growers across 12 different agro-climatic zones and ~65000 acres under seed production. KSCL owns 7 plants across key locations in India with a combined processing capacity of ~ 130 Particulars (in Rs Cr) FY16 FY17E FY18E FY19E Net Sales 892.8 705.0 885.8 1,012.1 Growth () -23.1-21.0 25.6 14.3 EBITDA 190.4 174.0 232.5 273.9 EBITDA Margin () 21.3 24.7 26.2 27.1 Net profit 172.7 119.3 218.1 257.0 Net Profit Margin () 19.3 16.9 24.6 25.4 EPS (Rs) 25.1 17.3 32.3 38.1 Source: Bloomberg Consensus August 01, 2017 Recommendation Buy Closing price Rs. 683 Target price Rs. 790 Potential upside 16 Company Information BSE Code 532899 NSE Code KSCL Bloomberg Code KSCL IN ISIN INE455101029 Market Cap (Rs. Cr) 4784.00 Outstanding shares(cr) 6.90 52-wk Hi/Lo (Rs.) 681.90/325.25 Avg. daily volume (1yr. on NSE) 79525 Face Value(Rs.) 2.00 Book Value 146.84 Relative performance chart (one year) 1100 KSCL 3 yrs Price Chart 1000 900 800 700 600 500 400 300 200 Share holding pattern as on June 30, 2017 17.52 54.53 6.79 21.27 Promoter & Group FIIs DIIs Others 1
Investment Rationale Cont tonnes per hour and it also has a Maize cob drying facility with a capacity of 2900 tonnes per cycle. KSCL is having warehouses across India with combined storage space of ~500000 square feet and storage godowns of ~135000 square feet (cold) and ~280000 square feet (ambient) with holding capacity of ~25000 MT. Effective New Product Development process KSCL, in its facility, come up with a seed which is given to grower. The grower uses it in his land in the kharif season. He/she will use it and review it for 2 years. If grower is satisfied then KSCL sells a smaller quantity to the market to check feedback from actual buyers. In total this is 5 year cycle for a new product to be established. R&D process for the seed development requires 2-3 years (which begins before this cycle). Grower helps KSCL in testing and then helps the company in producing seeds. Seed produced this kharif season would be sold in the next kharif season (thus inventory days are as high as ~250 days). Since KSCL produces its own seeds, it is not taxed (only selling seeds is taxed). KSCL sells to grower; where there is a grower, there would be a farmer. Since farmers are not taxed, KSCL is also not taxed. Shift towards branded seeds & High entry barriers in the seeds business makes a strong case for KSCL Farmers are moving towards branded seed instead of using seed saved from the previous harvest and upgrading to better quality seeds to improve their yield leading to growth in the seed industry. Further, the advent of genetically modified (GM) cotton changed the landscape of the Indian seed industry. There are several barriers present making the foray into the seed business quite challenging: The seed industry entails high investments in R&D where the average lead time from R&D to commercial introduction is 7-8 years. The process of developing an effective hybrid is a complex process. There is an inherent requirement of a wide distribution/production/marketing network across India for a diverse portfolio of seeds considering the varied agroclimatic conditions across India. The most important barrier is the need for high degree of credibility with farmers, as farmers will not jeopardise their year s worth of income on unestablished company seeds. Debt Free; Cash Rich Company KSCL is a fundamentally sound company with strong balance sheet, which is clearly reflected in its debt/equity ratio. As on March 31, 2017, KSCL total debt stood at Rs.1.64 crores and its cash and cash investments stood at ~Rs.650 crores. Hence, there is no issue of debt for the company. Technically, it s a debt free company. 2
Investment Rationale Cont Rewarding Shareholders KSCL has been consistently rewarding its shareholders in terms of divided. From last several years, the company has given dividend continuously from the last several years. Moreover, recently, it has announced Buyback of its 2962963 equity shares at a price of Rs.675 aggregating to an amount of Rs.200 crores. Strong financials expected going forward too KSCL plans to scale up Non-cotton (Rice & Maize) hybrids segment. In maize, the company plans to scale up 1 hybrid in FY18. For bajra, KSCL would scale up all the 3 hybrids. In the rice portfolio, 1 new hybrid would be scaled up. KSCL is focusing a lot on vegetables segment. It expects significant growth of its business going forward on the back of increased investment in R&D, Supply chain and Sales & Marketing. On the back of these initiatives, cotton segment would grow comfortably by 15+ in the current financial year; non-cotton growth segments would grow by 5-10; its vegetables segment is expected to rise to Rs.100 cr in the next 3 years thus driving the overall revenue growth in the range of 15-20. KSCL s net cash position on books is robust at Rs.400 cr [650-200 (buyback) - 59 (royalty write off) = Rs.400 crores]. Every year, it would be able to generate Rs.100-150 cr worth of free cash flow. Royalty issue settlement has secured KSCL s position & relationship with Monsanto Earlier royalty was paid by cotton seed companies for procuring BG II technology from Monsanto to state government. Every state had a different royalty structure. But KSCL didn t used to pay royalty as per state government royalty structure; they used to pay what Monsanto demanded. Monsanto used to demand a higher royalty. In 2016, Govt. decided to cap the selling price & royalty for cotton. Accordingly, all seed companies including KSCL decided to pay as per state government directions. Hence, KSCL for FY16 had short provided royalty by ~Rs. 65 cr [Royalty of (Rs.180-49) * 5.4 mn packets]. The same had been included in contingent liability. Recently, KSCL decided to go for arbitration with Monsanto and pay Rs.59 cr to settle contingent liability which was on their books. With this settlement, Kaveri has secured its position and strengthened its relationship with Monsanto and has ensured continued access to future technologies. Key drivers keep sector outlook strong India witnessed consecutive draught like situations in numerous parts of the country in FY15 & FY16 owing to below normal rainfall. However, in normal rainfall in kharif season of FY17, India s consumption is set to rise. Furthermore, better interest rates, implementation of seventh pay commission, increase in rural & urban per capita income will give a boost to the overall economy. Various government initiatives will aid the crop harvest leading to increased demand for better quality seeds by the farmers which will eventually improve yields. 3
Industry Overview and Forecast Crop Segment 40 35 30 25 20 15 10 5 0 13 16 36 9 8 5 4 3 2 3 1 Global Vegetable Seed Market Indian Seed Market Forecast (USD Bn) Latin America, 7 North America, 9 India, 7 Rest of APAC, 10 China, 41 Europe, 26 Source: - Company, Ashika Research Valuation The seed industry is expected to register robust growth in FY1r also owing to prediction of above-normal monsoon and higher commodity prices. Improvement in seed replacement rate (SRR) and farmers opting for hybrid seeds is further expected to fuel the growth. The favourable policy environment aimed at supporting the usage of seeds through National Seeds Plan (NSP) and boosting agricultural productivity through National Food Security Mission (NFSM) augurs well for the industry players. A transparent and unambiguous regulatory environment would be critical to aid the growth of the industry. Moreover, with demand for crops rising and arable land available in India remaining limited, increased productivity is the natural path forward making quality of seeds an indispensable component of all agricultural production in the coming decades. At CMP of Rs.683, KSCL is trading at FY17 PE of 39.5x. The current valuation of 21.2x FY18E and 17.9x FY19E P/E look attractive. Hence, we recommend a BUY on the stock with a Price Target of Rs.790 (20.7x FY19E EPS) with an upside potential of ~16 from the current level with an investment horizon of 12-15 months. 4
Research Team Name Designation Email ID Contact No. Paras Bothra President Equity Research paras@ashikagroup.com +91 22 6611 1704 Krishna Kumar Agarwal Equity Research Analyst krishna.a@ashikagroup.com +91 33 4036 0646 Partha Mazumder Equity Research Analyst partha.m@ashikagroup.com +91 33 4036 0647 Arijit Malakar Equity Research Analyst amalakar@ashikagroup.com +91 33 4036 0644 Kapil Jagasia Equity Research Analyst kapil.j@ashikagroup.com +91 22 6611 1715 Tirthankar Das Technical & Derivative Analyst tirthankar.d@ashikagroup.com +91 33 4036 0645 Ashika Stock Broking Limited ( ASBL ) or Research Entity has started its journey in the year 1994 and is engaged in the business of broking services, depository services, distributor of financial products (Mutual fund, IPO & Bonds). This research report has been prepared and distributed by ASBL in the sole capacity of a Research Analyst (Reg No. INH000000206) of SEBI (Research Analyst) Regulations 2014. ASBL is a wholly owned subsidiary of Ashika Global Securities (P) Ltd., a RBI registered non-deposit taking NBFC Company. Ashika group (details is enumerated on our website www.ashikagroup.com) is an integrated financial service provider inter alia engaged in the business of Investment Banking, Corporate Lending, Commodity Broking, Debt Syndication & Other Advisory Services. There were no significant and material disciplinary actions against ASBL taken by any regulatory authority during last three years. Disclosure ASBL or its associates, its Research Analysts (including their relatives) may have financial interest in the subject company(ies). However, the said financial interest is not limited to having an open stock market position in /acting as advisor to /having a loan transaction with the subject company(ies) apart from registration as clients. 1) ASBL or its Research Analysts (including their relatives) do not have any actual / beneficial ownership of 1 or more of securities of the subject company(ies) at the end of the month immediately preceding the date of publication of this report or date of the public appearance. However ASBL's associates may have actual / beneficial ownership of 1 or more of securities of the subject company(ies). 2) ASBL or their Research Analysts (including their relatives) do not have any other material conflict of interest at the time of publication of this research report or date of the public appearance. However ASBL's associates might have an actual / potential conflict of interest (other than ownership). 3) ASBL or its associates may have received compensation for investment banking, merchant banking, and brokerage services and for other products and services from the subject companies during the preceding 12 months. However, ASBL or its associates or its Research analysts (forming part of Research Desk) have not received any compensation or other benefits from the subject companies or third parties in connection with the research report. Moreover, Research Analysts have not received any compensation from the companies mentioned herein in the past twelve months. 4) ASBL or their Research Analysts have not managed or co managed public offering of securities for the subject company(ies) in the past twelve months. However ASBL's associates may have managed or co managed public offering of securities for the subject company(ies) in the past twelve months. 5) Research Analysts have not served as an officer, director or employee of the companies mentioned in the report. 6) Neither ASBL nor its Research Analysts have been engaged in market making activity for the companies mentioned in the report. Disclaimer The research recommendation and information herein are solely for the personal information of the authorized recipient and does not construe to be an offer documents or any investment, legal or taxation advice or solicitation of any action based upon it. This report is not for public distribution or use by any person or entity, where such distribution, publication, availability or use would be contrary to law, regulation or subject to any registration or licensing requirement. We will not treat recipients as customer by virtue of their receiving this report. The report is based upon the information obtained from public sources that we consider reliable, but we do not guarantee its accuracy or completeness. ASBL shall not be in anyways responsible for any loss or damage that may arise to any such person from any inadvertent error in the information contained in this report. The recipients of this report should rely on their own investigations. 5