Kaveri Seed Company: What’s irking Kaveri Seed investors despite decent Q1 results?

Last week, the stock of Kaveri Seed saw a smart 7-8 per cent rally, post the Q1 numbers. However, at Friday’s close of ₹463, the stock is still way below the levels at which it was trading a few months back. In February this year, the stock had tanked 30 per cent following news of the Andhra Pradesh government suspending the company’s licence, along with 13 others, to sell cotton seeds, as they were of the HT (herbicide tolerant) variety which uses BG-II RRF technology. This technology is not approved for commercial sale in India. The suspended licence got re-instated in a month, but the market did not cheer much. We look at some of investors’ concerns that are weighing on the stock.

Corporate governance issue

The government’s order to suspend Kaveri’s licence was out on January 29, 2019. This followed a show-cause notice issued earlier by the Commissioner of Agriculture; the licence was suspended when the company’s response to the notice was found unsatisfactory.

But the company did not report the development to the exchanges. Investors came to know of the event from media reports. In its subsequent call with analysts, the company had played down the event, stating that the impact of the suspension of cotton licence in Andhra Pradesh would be less than 5 per cent of its total revenue, and it was confident of getting the licence renewed in two to three weeks. This did not go down well with investors and the stock was beaten down, owing to poor disclosures and concerns over its corporate governance standards. However, in a surprise move, the AP government re-instated the company’s licence in about a month’s time of its suspension.

Investors, though, did not seem very enthused by the move and the stock rallied only marginally, post the re-instatement of the licence. Overhang of governance issues and weak outlook for the cotton seeds business, as a whole, have limited the upside in the stock.

Negative outlook

Kaveri Seed derives over 50 per cent of its revenue from cotton. But the outlook for the cotton seeds business is not very positive, owing to government price control policy.

Given that this is likely to continue, profit margins for the company may remain under pressure. While the company has been trying to diversify its revenue by selling hybrid seeds in maize, bajra, rice and vegetables, these have not picked up enough to reduce the share of cotton seeds significantly in its portfolio.

Also, given the push for zero budget natural farming by the Centre, one needs to see how the growth of the hybrid seed companies pans out in India.

The fact though remains that only hybrid seeds can provide a quick-fix to pest/disease attack and give higher yields to Indian farmers.

In the June 2019 quarter, on a standalone basis, the company’s net sales growth was 12.6 per cent Y-o-Y. This was better than the March quarter when sales grew by a lacklustre 7.5 per cent.

Profit growth in the June quarter was 8.7 per cent Y-o-Y versus loss in the March quarter.

Revenue contribution from cotton seed was ₹405 crore in the June 2019 quarter. The sales volume was 6.65 million packets, 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 reported a gain in the market share in cotton in key markets, including Gujarat and Maharashtra.

In maize though, it was not a good quarter for the company. The sales volume dropped to 4,988 tonnes (₹84 crore) in the June quarter from 5,594 tonnes in the March quarter. In April-June period of last year, the company had sold 5,396 tonnes of maize seeds.

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

At ₹463 a share, the stock discounts its one-year forward earnings by 12 times. A year back, the stock was trading at a forward multiple of 18-19 times.

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