Kaveri Seeds Company: Sprouting success

After underperforming the market for over three years, the recent rally in the stock of the country’s leading seed producing company Kaveri Seed Company (KSCL) has provided some respite to investors. The stock has almost doubled from its September 2016 low. A good monsoon in 2016 coupled with improvement in the domestic cotton outlook, steady cotton seed prices and product portfolio expansion helped the recovery in stock price. At the current price, the stock trades at about 16 times its 2018-19 estimated earnings, a 20 per cent discount to its peak valuation. The stock seems a buy from a three-year investment horizon on three counts.

First, the price outlook for cotton has improved over the past few months. For instance, the spot price of 29mm cotton on NCDEX has recovered from November 2016 lows of around ₹18,000 per bale to ₹20,000 levels currently. A stable domestic price outlook should also help increase cotton acreage in the current year. Also, the productivity for KSCL in terms of revenue per employee and field crop sales has increased by more than 25 per cent last year. This should enable improvement in KSCL’s cotton segment.

Further, the company has gradually been expanding its footprint in other States such as Maharashtra and Gujarat, thereby reducing its dependence on Andhra Pradesh and Telangana. The share of Andhra Pradesh in the company’s overall cotton sales has reduced from 63 per cent in 2014-15 to 54 per cent in 2016-17.

Second, the resolution of the legal issue between Monsanto and KSCL regarding royalty has removed the overhang around product pipeline and access to next generation of Bt cotton technology from the Monsanto stable. The company recently reached a settlement with the global agri biotechnology major regarding royalty payment for Bt Cotton and made a one-time payment of ₹59.23 crore to Monsanto.

This assumes significance in the light of concerns around resistance of pink bollworms to Bt cotton, and the possible reduction in the Bt cotton acreage in the medium term, which can have a significant bearing on the company’s prospects. The settlement has paved the way for the company to licence newer technology from the global biotechnology major and is a positive move.

Third, the company has also been expanding its product portfolio. In 2016-17, it launched eight products (three in maize, three in bajra and two in the rice segment). The company’s maize hybrids Jaadoo and ATM continue to perform well, and the new addition to the portfolio Moneymaker has been received well by the farmer community, according to the management. The company’s maize volumes grew to 10,900 tons last fiscal as compared to 9,200 tons in 2015-16. This is thanks to the increase in maize acreage across key states and the company’s ability to make the product available by achieving better supply chain efficiency.

KSCL’s market share in the maize segment has risen from 10.1 per cent in 2014-15 to 10.8 per cent in 2016-17. As a result, the revenue contribution from maize has also increased to ₹151 crore in 2016-17, compared to ₹138 crore in 2015-16. With an expanding product portfolio, the company is poised to grow over the medium term.

KSCL is also looking to capitalise on the opportunity in the fast-growing vegetable seeds market. It already has a dedicated sales team of 20 members, a strong distribution network and a pipeline of products ready to tap into the hybrid vegetable seed market which according to management sources is pegged at over ₹2,000 crore. Given the large market opportunity, the company has stepped up investment in this segment.

Besides these, the South West monsoon rainfall has been quite favourable, so far. Though seed sales typically happen before the onset of the monsoon, farm productivity and farmer incomes have a bearing on the ability to spend, particularly on specialised inputs such as hybrid seeds. Adequate rainfall during the current season may have a positive rub off on companies in the agri inputs space and KSCL, in particular.

While the prospects for the company seem to have improved in the past year, challenges exist. For one, the ramp up in the company’s non-cotton portfolio, though it is picking up, has not kept pace with expectations.

The company’s hybrid rice volumes declined to 1,600 tonnes last fiscal, a fall of about 6 per cent compared to 2015-16. As a result, KSCL’s market share in the rice seed segment has declined from 4.2 per cent in 2014-15 to 4.1 per cent in 2016-17.

Likewise, KSCL’s market share in the pearl millet segment has also fallen from about 12 per cent in 2014-15 to 9.2 per cent in 2016-17.

Improved penetration of rice and other non-cotton crops will be critical for the company to sustain strong growth over the medium to long term.

KSCL’s consolidated revenue declined 21 per cent in 2016-17. The decline was largely on account of weakness in the cotton segment, though the company managed to contain decline at 4 per cent vis-à-vis industry which fell by 7 per cent. Net profit halved to ₹87 crore, largely on account of inventory write offs (₹67 crore) and settlement made to Monsanto towards royalty.

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