Kaveri Seed Company: Buy

Limited arable land and the growing demand for foodgrains hold a big promise for the Indian seed industry. With a well diversified hybrid seed portfolio and strong reach in key southern States, Kaveri Seed Company is well poised to capitalise on this growth story.

Healthy market share gains in the cottonseed business, rising corn acreage and rapid hybridisation in rice should benefit Kaveri over the medium term.

At the current market price of Rs 1,658, the stock trades 11 times its 2014-15 earnings. This implies a 50 per cent discount to its competitor Advanta India, despite Kaveri’s superior margin profile.

Though the 99 per cent jump in stock price over the last one year may limit the near term upside, investors with a one-to-two year time frame may consider buying the stock.

Given the healthy fundamentals, any correction in the stock price may also be viewed as a good buying opportunity.

The overall market for Bt cottonseeds has grown 25 per cent annually in the last seven years. The market almost quadrupled from Rs 920 crore in 2007 to Rs 3,504 crore by 2013.

Cotton, the key driver

In 2012, even as most players struggled due to deficient rainfall and subsequent decline in the area under cultivation, Kaveri bucked the trend and continued to grow ahead of the competition.

The company doubled its market share in the hybrid cottonseeds segment from 5 per cent in 2011-12 to 10 per cent by 2012-13.

Its flagship brands Jadoo and Jackpot helped the robust growth in the cotton segment, enabling the company grow ahead of the market. These brands account for nearly 60 per cent of the company’s revenues. Given that hybrid adoption is the highest for cotton at nearly 90 per cent, the area under cultivation is not likely to increase significantly. However, higher usage of seeds could help Kaveri improve market share in future.

The company is the third largest player in the hybrid corn seed business with an 8.8 per cent share in the market currently.

A shift in the cropping pattern in favour of corn also aided Kaveri’s performance in the last few years.

Soaring demand for poultry and meat products and the shortage and rising prices of feed are expected to fuel Indian demand for corn, as also the demand for maize as an alternative sweetener.

Export demand too remains robust, given the demand for corn as animal feed and bio-fuel. With the demand expected to remain strong, Kaveri may continue to benefit from increasing corn acreage.

Rice, a game changer?

The next big wave of growth for Kaveri may come from higher adoption of hybrid rice seeds by the farming community. Currently, only 5 per cent of the total rice acreage of 44 million hectares uses hybrid seeds.

Kaveri, being the third largest player in rice with a 6.5 per cent share in the market, is well positioned to benefit from increasing hybridisation in rice.

With an extensive germplasm collection for developing potential hybrids for varied soil types and 5 variants of rice under development, the company targets doubling its share over the next few years.

De-risking via diversification

A diversified portfolio encompassing commercial crop cotton, food crops corn, rice, pulses and millets, puts Kaveri on a strong footing to meet challenges from changing cropping patterns.

An interesting pipeline of over 34 variants across corn, rice, bajra, jowar and vegetables under development will hold the company in good stead over the next 2-3 years.

The company spends 7-8 per cent of its revenues on research, developing new variants which are drought-resistant and disease-resistant with an ability to withstand extreme climatic conditions.

While south remains Kaveri’s stronghold, the company is gradually ramping up its presence in markets such as Chhatisgarh, Jharkhand, West Bengal and Orissa. Currently the company markets its brands through 15,000 retailers present across the country.

In addition to seeds, Kaveri also sells micro-nutrients such as soil enhancers and organic fungicides and pesticides through its Microtek division. Kexveg India Ltd which is a wholly owned subsidiary of Kaveri markets high value herbs and vegetables in India and European markets.

Kaveri’s revenues grew 90 per cent to Rs 711 crore in 2012-13. Strong demand in the corn and cotton segment helped this.

In 2012-13, its operating profit grew 95 per cent to Rs 140 crore compared to the previous year. Net profit more than doubled to Rs 130 crore during the same period.

The company has managed to grow its revenues by over 55 per cent annually in the last five years. Adjusted net profit grew by over 54 per cent during this period.

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