Kaveri Seeds up sharply after Q1 results. Should you invest?

Rajalakshmi Nirmal | BL Research Bureau | Updated on August 14, 2019 Published on August 14, 2019

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Higher volumes in cotton help revenue go up; margins still under some pressure

Despite drop in acreage under key crops in 2019-20 due to delay in onset of monsoon, Kaveri Seed has reported good numbers for June quarter 2019. On a standalone basis, net sales reported growth of 12.6 per cent, Y-o-Y and profit growth was 8.7 per cent.

Given that the results were better than numbers reported for the March quarter, the market has given a thumbs up to the stock.

Also read: Cotton drives Kaveri Seed's revenues; PAT up at Rs 229 cr

The revenue contribution from cotton seed was ₹405 crore in the June quarter. The sales volume was 6.65 million packets, which is up 13 per cent from 5.86 million in the previous quarter, and 6.53 million packets in the same quarter last year.

The company has reported a gain in the market share in cotton in key markets including Gujarat and Maharashtra. This is significant as cotton continues to contribute over 60 per cent of revenues for the company.

In maize though, it was not a good quarter for the company. The sales volume dropped in the June quarter to 4988 tonnes (₹84 crore) from 5594 tonnes in the March quarter. In April-June period, the company had sold 5396 tonnes of maize seeds.The poor performance in maize could be explained by delay in onset of monsoon in Telangana.

At the operating level, margin pressure though continued. The profit margin for the June quarter was 36.25 per cent, down from 37.87 per cent in the same quarter last year.


Return to normal for cotton

In February this year, the Andhra Pradesh government had cancelled one company’s licence for producing cotton seeds and suspended licences of 13 others, including that of Kaveri Seeds. This move was done as the government found that these companies were selling HT (herbicide tolerant) cotton seeds, which use BG-II RRF technology that is not approved for commercial sale in India. The government order was out on January 29, 2019.

This took a toll on Kaveri Seed’s stock price. With the company not reporting details of license suspension during its quarterly results, further upset the market.

Between January and February, the stock price dropped from ₹600 to under ₹400. The company’s management had later in a conference call with analysts indicated that it did not report on the development as it was not material. The impact from the suspension of cotton license in Andhra Pradesh would be less than 5 per cent of the total revenue. Further, the company showed confidence in getting the license renewed in two-three weeks.

However, BusinessLine was cautious on the stock and advised investors to watch out for developments.

Surprisingly, the Andhra Pradesh government’s order re-instating Kaveri Seed’s license came out in March.

Given that the suspension of license followed a show cause notice issued by the Commissioner of Agriculture and it not being satisfied with answers given by the company, a sudden u turn on the suspension order, left investors puzzled.

After the re-instatement of its license, even though the company continued its cotton business in Andhra Pradesh, the stock has not managed to get back to levels of ₹600.  


Caution advised


While the outlook for seed companies in the country continues to be robust, with climate change and pest attacks becoming more prevalent, and farmers are looking at hybrid seeds to get better yields, regulatory risks persist.

The government’s price control on cotton seeds is a challenge. Investors with an appetite for risk may only consider exposure in the space. At the current market price of ₹461 per share, the stock discounts its estimated earnings for 2019-20 by 12 times.

On one year forward, earnings the stock was trading at a PE multiple of 18-19 times, just a year back.

Published on August 14, 2019
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