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Spark Capital - Kaveri Seeds: Well placed for a steep market share increase in Bt. Cotton; reiterate BUY




Spark Capital Advisors(India) Private Limited


24 May 2013





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Kaveri Seeds: Well placed for a steep market share increase in Bt. Cotton; reiterate BUY KSCL reported 77% yoy growth in 4QFY13 revenues to Rs. 740mn, driven by ~Rs. 400mn revenue from lint sales (by-product). The quarter also saw a write back of higher provision for discount created in earlier quarters resulting in steep fall in other expenses. EBITDA margin at 17.2% rose ~520bps yoy. Inventory at the end of the FY13 stood at Rs. 4.9bn from ~Rs. 3bn a year earlier. We believe the 62% increase in inventory gives us a fair indication of the probable growth in Bt. Cotton volumes. Furthermore, increase in other current liabilities to Rs. 2.54bn (of which ~2.1bn is advances received for cotton) reflects a growth from Rs. 1.8bn last year. The growth, although muted with respect to increase in inventory, is positive given that industry wide advances received per packet have declined yoy. The decrease in advances as a proportion of sale value per packet is on the back of high inventory and expected easy availability of the product rather than a shortage scenario. We also note the increase in sundry creditors (payment to be made to contract farmers) from Rs. 1.1bn to Rs. 2.4bn reflects significant increase in production of cotton seeds as management noted that cost of production (cultivation) has largely remained flat yoy. On the whole, we believe that these factors (inventory, advances and payables) reflect a much higher targeted growth in Bt. Cotton volumes than the guidance of a minimum 20% volume growth in FY14. We factor in 50% volume growth to ~6mn packets for cotton and a 20% blended growth in other seeds. We believe that the Microtek business would still take significant time to scale up given its regional focus and hence factor in a 10% growth. This growth in cotton would be driven by increase in market share as we expect cotton acreage to remain stagnant. We expect KSCL’s market share to increase to ~16% in FY14 (10% in FY13) and further to ~18% in FY15. The growth is driven by the success of its two key products ‘Jadoo’ and ‘Jackpot’ and our channel checks in AP suggest a strong pull for the product on the back of ~15% higher yields vs. most other Bt. Cotton hybrids available in the market. Although industry wide inventory stands at ~Rs. 60mn packets, the top branded products of companies like KSCL and Nuziveedu do not have any left over inventory of last year. And the pull for these products does not result in heavy discounting as seen in other products. Moreover, discounts are typically higher in the event of high advances, therefore with advances (per packet) declining we do not expect discounts to shoot up. From FY13 – FY15, we expect revenue and PAT CAGR of ~25% (to Rs. 2.0bn). EBITDA margin is expect to come in at 19.5% and 19% in FY14/FY15 respectively on the back of increasing Bt. Cotton proportion. We reiterate our positive stance with a BUY rating and a TP of Rs. 1,880 based on 13x FY15 EPS of Rs. 145. KSCL also hiked dividend to a total of Rs. 16 for FY13 taking pay-out to ~17% from 8.5% last year.

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