Kaveri Seed Company Ltd (Rs 215)
(BSE Code- 532899, NSE Code- KSCL)
(Equity - Rs13.7 cr, P/E - 10, Market Cap - Rs294 cr)
The prices of food and feed products are on an upward spiral, stoked by rising demand, shortfalls in output and expanding export opportunities. This has put producers of agricultural inputs such as hybrid seeds in a sweet spot. Kaveri Seed Company(KSC), an established producer of hybrid seeds for crops such as corn (maize), sunflower and paddy, may be one of the key beneficiaries of this trend. The nascent Indian market for hybrid seeds is set to expand strongly, given the rapid rate of hybrid adoption and buoyant produce prices. This suggests that the company may be well placed to deliver a 20 per cent-plus annual growth over the next two-three years A small-sized company with a sizeable portfolio of sunflower, maize, cotton, and paddy hybrids, KSC has sustained strong financial performance since its IPO in September 2007. With a two-decade presence in the seeds business, Kaveri Seed has a portfolio of about 40 certified hybrids in corn (12 hybrids), sunflower (5), cotton (6) and paddy (13). Building a product portfolio of this size requires a fairly long gestation period, as development of each hybrid strain usually takes four-six years. Production of hybrid seeds also calls for access to proprietary germplasm (genetic material) with the required traits making for high entry barriers to the business. The company also sells crop micronutrients under the brand name Microtek; another business with good potential The bright demand prospects for domestic seed companies arise from the huge shortfall in availability of quality seeds and increasing adoption of hybrids, given the need to improve agricultural yields on food and feed crops (Indian yields are far below world standards). The Indian market has been seeing a substantial deficit in the supply of certified seeds over the past few years. Data put out by the Agriculture Ministry for kharif 2009 suggests that crops such as paddy (shortfall of 28 lakh quintals for the season), maize (2.2 lakh quintals), sunflower (0.59 lakh quintals) and cotton (1.15 lakh quintals) saw persistent shortfalls over the past four years. All of these crops feature in Kaveri Seed’s portfolio. The policy regime for the sector is likely to be friendly over the next few years, given the incumbent government’s stated intention of improving seed availability In terms of financials, Kaveri Seed has managed to deliver impressive and yet consistent growth over the past four years, with a compounded annual growth of 22% in sales and over 100% growth in profits in this period, albeit on a low base. Operating profit margins over this period have expanded from the low single-digits to well over 25% for the past three years; the bulk of this improvement coming from a backward integration move into foundation seeds in 2006-07. That performance was sustained over the past year. For the year ended March 2009, net profits rose 64% to Rs 22.9 cr. while net sales grew 27% to Rs 123 cr., driven by a higher contribution from the seeds business and overall margin expansion. The micronutrients division despite more sedate growth than seeds managed improved margins. The FY09 EPS on a equity of 13.7 cr. (Promoters holding- 60.98%. FII/MF holding- 20%) stood at Rs 16.71 and the dividend declared was 20%. For the half year ended Sept. 2009, KSC has posted 26% growth in net profit to Rs 25.82 cr. on 50% rise in net sales to Rs 126.84 cr. Going forward, the company appears well placed to sustain margins at healthy levels, mainly due to pricing power. Focussed on lucrative cash crops such as sunflower, maize and cotton, the company may be comfortably placed to pass on any cost increases to consumers, given the strong demand. The upward bias in farm product prices and the sharp hikes in the minimum support prices of key crops last year are likely to have lifted the purchasing power of farmers and may lend support to both volumes and pricing power for Kaveri’s target crops. Kaveri’s balance sheet remains quite strong, with near zero debt (thanks to the IPO proceeds of Rs.68 crore), healthy ROCE and RONW (22% and 16% respectively).
The nascent Indian market for hybrid seeds is set to expand strongly, given the rapid rate of hybrid adoption and buoyant produce prices. This suggests that the company may be well placed to deliver a 20% plus annual growth over the next two-three years. At current valuations, the stock trades at 10.2 times its FY 2010E earnings (Rs 21) and 8.6 times its estimated FY 2011 earnings(Rs 25). Given the bright growth prospects for the seeds and micronutrients business, the company’s growth history and established presence, the stock deserves a better valuation. The risks to earnings arise from the company’s current crop and geographic concentration, agro-climactic risks and the stock’s low liquidity and small-cap status. Invest in small lots and accumulate on weakness linked to broad markets for decent returns over the medium-long term.
(BSE Code- 532899, NSE Code- KSCL)
(Equity - Rs13.7 cr, P/E - 10, Market Cap - Rs294 cr)
The prices of food and feed products are on an upward spiral, stoked by rising demand, shortfalls in output and expanding export opportunities. This has put producers of agricultural inputs such as hybrid seeds in a sweet spot. Kaveri Seed Company(KSC), an established producer of hybrid seeds for crops such as corn (maize), sunflower and paddy, may be one of the key beneficiaries of this trend. The nascent Indian market for hybrid seeds is set to expand strongly, given the rapid rate of hybrid adoption and buoyant produce prices. This suggests that the company may be well placed to deliver a 20 per cent-plus annual growth over the next two-three years A small-sized company with a sizeable portfolio of sunflower, maize, cotton, and paddy hybrids, KSC has sustained strong financial performance since its IPO in September 2007. With a two-decade presence in the seeds business, Kaveri Seed has a portfolio of about 40 certified hybrids in corn (12 hybrids), sunflower (5), cotton (6) and paddy (13). Building a product portfolio of this size requires a fairly long gestation period, as development of each hybrid strain usually takes four-six years. Production of hybrid seeds also calls for access to proprietary germplasm (genetic material) with the required traits making for high entry barriers to the business. The company also sells crop micronutrients under the brand name Microtek; another business with good potential The bright demand prospects for domestic seed companies arise from the huge shortfall in availability of quality seeds and increasing adoption of hybrids, given the need to improve agricultural yields on food and feed crops (Indian yields are far below world standards). The Indian market has been seeing a substantial deficit in the supply of certified seeds over the past few years. Data put out by the Agriculture Ministry for kharif 2009 suggests that crops such as paddy (shortfall of 28 lakh quintals for the season), maize (2.2 lakh quintals), sunflower (0.59 lakh quintals) and cotton (1.15 lakh quintals) saw persistent shortfalls over the past four years. All of these crops feature in Kaveri Seed’s portfolio. The policy regime for the sector is likely to be friendly over the next few years, given the incumbent government’s stated intention of improving seed availability In terms of financials, Kaveri Seed has managed to deliver impressive and yet consistent growth over the past four years, with a compounded annual growth of 22% in sales and over 100% growth in profits in this period, albeit on a low base. Operating profit margins over this period have expanded from the low single-digits to well over 25% for the past three years; the bulk of this improvement coming from a backward integration move into foundation seeds in 2006-07. That performance was sustained over the past year. For the year ended March 2009, net profits rose 64% to Rs 22.9 cr. while net sales grew 27% to Rs 123 cr., driven by a higher contribution from the seeds business and overall margin expansion. The micronutrients division despite more sedate growth than seeds managed improved margins. The FY09 EPS on a equity of 13.7 cr. (Promoters holding- 60.98%. FII/MF holding- 20%) stood at Rs 16.71 and the dividend declared was 20%. For the half year ended Sept. 2009, KSC has posted 26% growth in net profit to Rs 25.82 cr. on 50% rise in net sales to Rs 126.84 cr. Going forward, the company appears well placed to sustain margins at healthy levels, mainly due to pricing power. Focussed on lucrative cash crops such as sunflower, maize and cotton, the company may be comfortably placed to pass on any cost increases to consumers, given the strong demand. The upward bias in farm product prices and the sharp hikes in the minimum support prices of key crops last year are likely to have lifted the purchasing power of farmers and may lend support to both volumes and pricing power for Kaveri’s target crops. Kaveri’s balance sheet remains quite strong, with near zero debt (thanks to the IPO proceeds of Rs.68 crore), healthy ROCE and RONW (22% and 16% respectively).
The nascent Indian market for hybrid seeds is set to expand strongly, given the rapid rate of hybrid adoption and buoyant produce prices. This suggests that the company may be well placed to deliver a 20% plus annual growth over the next two-three years. At current valuations, the stock trades at 10.2 times its FY 2010E earnings (Rs 21) and 8.6 times its estimated FY 2011 earnings(Rs 25). Given the bright growth prospects for the seeds and micronutrients business, the company’s growth history and established presence, the stock deserves a better valuation. The risks to earnings arise from the company’s current crop and geographic concentration, agro-climactic risks and the stock’s low liquidity and small-cap status. Invest in small lots and accumulate on weakness linked to broad markets for decent returns over the medium-long term.
Source: Internet (Valuenotes by Sanjay Chhabria)
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