Kaveri Seeds Company Limited: Strong R&D division and Focus on Exports Should Support Financial Strength

Summary

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• Strong P&L record, cash rich nature of the business and consistency in paying dividends should act as key growth enablers.
• Pan- India operations with comprehensive distribution network, unmatched processing and storage capabilities and high entry barriers should help revenue and profit growth for foreseeable future.
• The company fosters strategic partnerships within its supply chain so that easy and timely availability of seeds can be ensured.

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Introduction:

Kaveri Seeds Company Limited is among largest crop seeds producers in India and was incorporated in 1986. The company provides farmers with seeds meeting constantly evolving customer demands. It has developed seeds using modern biotech innovations so that yield can be improved and farmers can earn more on their produce. It operates in single principal geographical area which is India. The company has its headquarters in Hyderabad, and has 7 state-of-the-art seed processing plants and quality control lab along with pan India distribution of network and marketing offices across 22 cities in India.

Growth Enablers of Kaveri Seeds Company Limited:

 

• Strong Product Pipeline: For 1Q21, Kaveri Seeds has delivered strong sales of INR719.48 crores, exhibiting a rise of 14.64% on year-over-year basis. PAT was INR295.29 crores as compared to INR229.57 crores for 1Q20, exhibiting growth of 28.62%. Results were achieved because of its unique business model, comprising more than 40,000 distributor touchpoints, continuous addition of new products, strong product pipeline and inventory. The company has made investments in R&D and built new infrastructure and processing plants by keeping in mind evolving environment. Strong operational performance resulted in gross margins of 47.59%. Business of Kaveri Seeds was running well from an operational perspective, despite pandemic as it was in essential services.

 

• Sound Financial Results: During FY20, revenue from operations grew from INR768.99 crores in FY19 to INR883.26 crores in FY20, exhibiting 14.86% growth. Impressive PAT of INR251.27 crores in FY20 was seen against INR214.73 crores in previous year, exhibiting 17.02% increase, owing to growing portfolio of value-added products.

 

• Competitive Strengths: Strong R&D division, strong presence & distribution network in India and diversified product portfolio are some competitive strengths to act as growth enablers for Kaveri Seeds. It has focused on building strong portfolio of field crops and vegetables to help enhance farm yield. Kaveri Seeds successfully launched best quality hybrid seeds and diversified offerings. The company also has strong distribution network having ~40,000 dealers/distributors.

 

• Eyeing Exports Market: Market for agricultural seeds should grow, in India and abroad, and India’s contribution is only 9% of overall market. Kaveri Seeds has been eyeing exports market and increase market share globally. Innovative and advanced product designing should be future of the industry. To ensure higher yield across agro-climatic regions, the industry will be designed to face biotic and abiotic stresses. Strong R&D programs of Kaveri Seeds are perfectly suited to potential opportunities.

 

• Minimal COVID-19 Impact: Indian government imposed lockdown to curb virus spread. Nationwide lockdown temporarily impacted operations as the company saw non-availability of labour, transportation, and disruption of its supply chain. However, seed business was termed as “Essential Commodity” and certain relaxations were granted. Major portion of the company’s production, processing, and supply chain facilities operated during most of lockdown period. Thus, impact of Covid-19 was minimal.

 

• Supportive Industry Dynamics: Agriculture is primary source of livelihood for ~58% of the country’s population. Gross value added by agriculture, forestry and fishing was estimated at INR19.48 lakh crore (US$276.37 billion) in FY20(PE). Indian food industry should see huge growth, increasing contribution to world food trade every year because of immense potential for value addition. Active participation of public and private sectors played significant role in laying strong foundation for the industry. Given farmer-centric product pipeline, brand salience and diverse product portfolio, Kaveri Seeds should capitalize well on industry dynamics. India is potentially strong and can produce large amount of hybrid seeds, especially high value vegetable seeds. These can be produced at cheaper costs compared to other countries. Kaveri Seeds, with innovation focused R&D division, is capable of producing hybrid vegetable seeds and offer them at very competitive prices. Share of agriculture in India’s total exports was 11.76% for FY18-FY19. In FY20 (till November 2019), agricultural export was USD22.69 billion.

 

• Focus on Export Markets Should Help Growth in FY21: The company has compounded its revenues at ~4.27% over FY16-FY20, with growth coming from strong R&D division and strong presence & distribution network. The company should compound its net sales at ~10.3% over FY18-FY22E and most of this growth is likely to stem from launch of new products, stable cash position, newer geographies and product diversification. The company’s EBITDA should compound at ~9.78% over FY18-FY22E and growth is likely to come from royalty payment savings, acceleration of exports and new product development.

 

• Attractive Valuations: As business activity in several economies gradually resume, the company has fully adapted to “new normal.” Execution of operations in last few months has been seamless. The company’s unique business model comprises of more than 40,000 distributor touchpoints, addition of new products and strong product pipeline. At current price of INR519.7, stock currently trades at 12.9x of FY20 EPS which is at a discount to sectoral average of 14.12x. Kaveri Seeds has compounded its EPS at ~12.62% over FY16-FY20. The company should be able to compound its EPS at ~16.6% over FY18-FY22E. Given the sectoral average of 14.12x, target price comes out to be INR755.42, exhibiting rise of ~45.4% from current price.

 

Conclusion:

Kaveri Seeds Company Limited has a market capitalization of ~INR3,13,530.50 lakhs and stock is trading at ~31.33% below its 52-week high. Stock price increase should vastly be supported by opening up of new geographies, cost savings, healthy product diversification and market presence. Additional growth is likely to stem from export markets. Irrespective of COVID-19 situation, Kaveri Seeds should be able to run efficiently given essential nature of business. The company has gained market share in falling and stable market, exhibiting leadership position. In 1Q21, maize & rice contributed significantly to profitability. Growing adoption of hybrid seeds, investment from public and private sector and government support should act as core factors supporting growth in seed industry.

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Exclusivity:

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Stock Disclosures:

The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Author Disclosures:

This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.