The company plans to introduce nearly 50 products in vegetables over the next two-three years, taking the total tally of products in this segment to 65. Notably, margins in vegetables are significantly higher at ~50% versus the company’s blended margin of ~20%.
Kaveri Seeds (KSCL) is highly dependent on the cotton business, which contributes ~60% of its overall revenues. However, of late, management has increasingly shifted its focus toward the higher-margin non-cotton business (target to take its share to 50% of overall revenues over FY18-20, especially the less-penetrated vegetables segment). The vegetables business is poised for strong growth of ~200%, with revenues expected to increase from Rs 60 m in FY17 to ~Rs 180 m in FY18; much of this growth is likely to materialise in H2FY18. The company plans to introduce nearly 50 products in vegetables over the next two-three years, taking the total tally of products in this segment to 65. Notably, margins in vegetables are significantly higher at ~50% versus the company’s blended margin of ~20%. Both the cotton and non-cotton businesses would be ramped up by strengthening the distribution network from 15,000 now to 20,000 by FY20.
Although the overall area sown for kharif crops declined slightly by 0.8% y-o-y to 104.1 m ha in 2017-18 (as of September 8, 2017), we note that cotton acreage increased significantly by ~19% y-o-y to 12.1 m during the same period. The effect of better acreage was partly witnessed in Q1FY18, when KSCL sold 6.5 m packets of cotton seeds — 19% more than those sold in FY17. Despite being a seasonally-weak quarter, Q2FY18 witnessed better traction, as delayed monsoon in parts of Karnataka and other southern regions led to a rise in cotton seed sales. Overall, the number of packets of cotton seeds sold is expected to increase 28.4% y-o-y to 7 m in FY18. The company is set to recover from the impact of heavy inventory write-offs in FY17, Rs 660 m, primarily driven by higher sales return. However, given the strong cotton seed sales so far in FY18, we expect annual inventory write-off to be Rs 250-300 m in FY18, implying a reduction of over 60% y-o-y. KSCL’s cotton market share has expanded 3% so far in H1FY18 on account of increased penetration in Maharashtra and Gujarat, and also its foray into the newer markets of Orissa, Chhattisgarh and MP.