India-First-Global-Insights-Analysis -Sharing-PlatformIndia-First-Global-Insights-Analysis -Sharing-Platform

Kaveri : JADOO has become “ATM” for its shareholders!

, November 3, 2014, 0 Comments

kaveri kscl seed MarketExpress-in

Conventional wisdom would say the stock –KSCL has appreciated very much and may be overvalued, but in spite of this steep run up, the company continues to attract good quality long term FIIs.  For many emerging economies, especially those like India, agriculture is the engine of economic growth.

Agriculture in most of the developing economies is known for the larger contribution to national GDP, India’s seed market is the sixth largest in the world and is estimated at c. USD 2bn (INR 113bn) for 2012.

According to Assocham, the seeds market is expected to grow at a 15% CAGR over the medium term and we estimate the market to grow to INR 230bn by 2017.

Use of hybrid seeds increases crop yield by as much as 20%, given a rising population, better demographics and economic growth, agricultural yields need to improve much faster, thereby giving opportunities to agricultural companies likes KSCL.

JADOO and ATM are Cotton Seed Hybrids that the Company Kaveri seeds limited (NSE: KSCL) markets to farmers in India. Kaveri seeds has given stellar performance in last 5 Years to its shareholders. The stock was trading around Rs. 241 per share in September 2010, and today it trades at Rs. 900 Per Share ( Rs. 4500 on cum-split basis) giving a whopping 1867% Return in last 5 years

About Kaveri Seeds Limited

Kaveri seeds limited is a premium seed company engaged in the production and distribution of high quality hybrid seeds. Kaveri seeds is the second largest producer of hybrid cotton seeds in India with a y-o-y growth in its market share. Kaveri seeds has over 60,000 acres of seed production, in states of Karnataka, Andhra Pradesh, Maharashtra, and Gujarat and across other locales of the country.

The Company’s hybrid seed portfolio includes Cotton, Corn, Paddy, Bajra, Jowar, Sunflower, Tamato, Okra, Chilly, Gourds.

JADOO behind the Stock Price Appreciation

Stellar Sales Growth

kaveri net sales

Sales for Kaveri have grown from Rs. 162 Cr in 2010 to Rs. 1,002 Cr in 2014. The sales momentum is not expected to fade any time soon. With the world population growing @ 1% a year, an estimated 752 million people are going to be added by 2022 thus putting additional demand on food while the area for farming remains fixed.

 

Key Facts:

Indian seed industry is one of the vibrant ones in the world. In value India is estimated at 12154 Cr. With 179.9 m.ha. under plough, India has the second largest cropped area in the world.

Company will continue to enjoy strong sector tailwinds going forward. The main growth drivers for this sales growth are Cotton, Rice and Maize Hybrids.

Profit growth even faster then sales growth

kaveri PAT

What is more interesting is that the company has been growing its profits faster than its Sales. While sales grew 618.7% in Five Years, profits have grown 724% from Rs. 29 Crs to 210.56 Crs in last five years

Why FIIs are flocking to Kaveri like an ATM ?

Consistent Operating Margin

kaveri PBIDTM

Kaveri has been operating on near consistent margins, in around 22% for last 5 Years. The fact that they are able to increase their market share, increase their profitability and maintain margins is proof that they enjoy good and unique position in their market.

kaveri ROCE

Once of the most important ratios to gauge company’s operational efficiency is ROCE (Return on Capital Employed). The company has been increasing its ROCE year on year for last 5 Years, attracting good quality long term investors.

 

FII Interest in Kaveri

FII have continuously increased their stake in the company. The major one being in the last quarter hiking the stake by almost 6.76%.

kaveri FII Holdings

 

Valuation and Way Forward

Currently kaveri seeds trades at Rs. 918 which is appox 21X its TTM EPS of 43.88. The Current Market Cap of the company is Rs. 6308 Crs. The company enjoys a good position in this favorable sector. Due to regulations we will not be able to comment on whether company is attractively valued or not.

 

Takeaways

The seed industry is highly attractive with high barriers of entry and huge R&D Investments. So company’s like KSCL that has R&D infrastructure which includes a 600+ acres of owned as well as leased research farms should be able to keep its competitors at bay!

After cotton, the next growth phase could come by introducing hybrids for rice and maize.

Major risk factor to watch out for would be competition and adverse weather conditions.

Disclosures:
It would be safe to assume that me, my firm, my clients may have invested in the stock featured here. Data sources used for this analysis are Capitalline and Company’s Latest Annual Report.