Stock Ideas: IDFC Securities has outperform call on Kaveri Seed, target price Rs 579

IDFC Securities has upgraded Kaveri Seed Company to outperform rating with a target price of Rs 579 based on 12 times FY21E PER (price to earning ratio).

During the fourth quarter of FY20, standalone revenues increased by 16 per cent year on year to Rs 519 million (marginally below the brokerage estimate of Rs 540 million) largely led by higher realisations in maize and volume growth in hybrid rice. Gross margins declined by 320bps to 48 per cent against an estimate of 43 per cent. Higher employee cost operating expenses led to 937 bps decline in EBITDA margins. EBITDA loss stood at Rs 118 million, below the brokerage estimate of Rs 5 million). Standalone PAT stood at Rs 93 million vs loss of Rs 114 million in the fourth quarter of FY19, against brokerage estimate of a Rs 54 million loss, driven by higher other income of Rs 315 million against Rs 24 million in Q4FY19.

Investment Rationale

The brokerage says Kaveri Seeds has managed an impressive turnaround from the BT cotton royalty / price caps fiasco over FY15-16 with 22 per cent CAGR EBITDA over FY17-20 accompanied by ~100 per cent distribution of annual profits through buyback / dividend. KSCL also continues to reduce its BT cotton dependence (48 per cent of revenue in FY20 versus 71 per cent in FY16) through accelerated faster growth in other crops like maize, hybrid paddy etc.

According to the brokerage, with predictions of a normal monsoon in FY21 along with steady crop realisations, the company’s FY21 growth outlook is reasonably robust and adds to its attractiveness. Indian hybrid seeds industry continues to be dominated by BT cotton hybrids and the seasonal variation in the cotton crop continues to add volatility to seed companies’ financials. IDFC Securities says Kaveri Seeds, one of the few pure-play listed seeds companies, is amongst the most competent players in the Indian hybrid seeds industry given its diversified portfolio and strong R&D capabilities.

At CMP, the stock trades at 9.8 times FY21E PER / 7.6 times FY21E EBITDA with estimated Rs 4.5 billion of free cash flow generation over FY20-22E. According to the brokerage, these valuations are at sharp discount to domestic crop-protection companies. Also, continuing with 100 per cent payout strategy may imply Rs 35-40/share dividend per annum (assuming no buyback). Given the favourable risk-reward, the brokerage has upgraded the stock to outperformer with a target price of Rs 579/ share.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 63.12 crore, down -48.26 per cent from last quarter sales of Rs 121.99 crore and up 18.30 per cent from last year's same quarter sales of Rs 53.36 crore. The company reported net profit after tax of Rs 7.61 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 55.52 per cent stake in the company as of March 31, 2020 while FIIs held 21.01 per cent, DIIs 10.60 percent and public and others 12.73 per cent.