Good kharif prospects buoy Kaveri Seed Company’s stock

Cotton seeds business generates almost half of Kaveri Seed’s revenues.

MUMBAI: Shares of Kaveri Seed Co Ltd have gained 26% so far this week after the company maintained its healthy growth guidance for the current fiscal.

It expects 15-20% rise in revenue this fiscal, helped by 10-15% growth in its mainstay cotton hybrid seeds business and 20-25% growth in non-cotton seeds business revenues.

“With predictions of a normal monsoon in FY21 along with steady crop realisations, Kaveri Seed Co’s FY21 growth outlook is reasonably robust (major advantage in these covid-19 challenged times) which adds to its attractiveness,” brokerage firm IDFC Securities Ltd said in a note to its clients.

Cotton seeds business generates almost half of Kaveri Seed’s revenues. Last fiscal, cotton seed volumes grew 17%, generating about 48% of consolidated revenue. With conditions for kharif sowing season, when the cotton crop is grown, favourable, the management expects to maintain the growth tempo, helped by market share gains in Gujarat, Maharashtra, Karnataka and North India.

Further, with a cut in royalties for cotton seeds, healthy volume growth can result in positive operating leverage driving earnings.

“Cotton Ebitda/packet is likely to improve by ~Rs20 in FY21, as the government has scrapped the royalty payable to Monsanto. Management stated that production costs could also decrease marginally. Management indicated that most of this benefit would be kept within the company, which should help improve Ebitda margins,” IIFL Securities Ltd said in a note. Ebitda is earnings before interest tax depreciation and amortization.

The company reported mixed performance for the March quarter. Consolidated revenue increased 18% year-on-year. But, excluding other income, it reported an operating loss of 12 crore.

Even so, January-March is a seasonally a slow quarter for seed companies. Cotton is a major kharif crop and most of the sales happen in May-September. With cotton acreage expected to be stable and non-cotton seeds such as rice hybrids expected to retain growth momentum, investors are expectantly buoyant.

“At just 10 times FY21 P/E and a ~7% payout yield, valuations remain attractive,” added IIFL. PE is price to earnings multiple.

The forecast of normal monsoon rains is good but the spatial and the temporal distribution of rainfall is crucial given that most kharif crops are rain-fed. While stable cotton prices are important for farmers, competition and price realisations will determine earnings benefits for Kaveri Seed.

source: livemint

Related Posts