Stocks

Broker’s Call: Kaveri Seeds (Buy)

| Updated on March 24, 2021

ICICI Securities

Target: ₹710

CMP: ₹494.05

Crude oil prices are up 26 per cent y-o-y and this will likely lead to higher prices of nylon, a competing commodity to cotton. We note cotton prices (WPI) have rose to 114 in February 2021 from 92 in October 2020. Higher cotton prices will boost sowing.

Kaveri generates nearly 50 per cent of its revenues from cotton seeds and, therefore, it is likely to be a major beneficiary of cotton price rise. Higher revenues of cotton seeds is also margin accretive.

We remain positive on Kaveri, given the success of its non-cotton seeds and market share gains in cotton seeds in Gujarat and Haryana, among other states. This is likely to de-risk Kaveri’s current business model centred around cotton seeds in South India.

The stock is trading at an attractive valuation below mean P/E-1 SD and FCF yield of 9 per cent on FY21E.

Kaveri has created strong value (FCF) over the past decade and we remain positive on its medium-term growth outlook. We model the company to report revenue and PAT CAGRs of 12.8 per cent and 17.7 per cent respectively, over FY20-FY23. We maintain a ‘Buy’ with a DCF-based target price of ₹710 (10x FY23E P/E).

Published on March 24, 2021

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