Higher share of cotton seeds revenue to aid margins; ‘Buy’ retained with TP of `710
Crude oil prices are up 26% y-o-y and this will likely lead to higher prices of nylon, a major competing commodity to cotton. We note cotton prices (WPI) have also increased to 114 in Feb’21 from 92 in Oct’20. Higher cotton prices will boost cotton sowing. Kaveri generates ~50% of its revenues from cotton seeds, hence is likely to be a major beneficiary of cotton price rise. Higher revenues of cotton seeds is also margin accretive.
We remain positive on Kaveri given the success of its non-cotton seeds and market share gains in cotton seeds in Gujarat and Haryana, among other states. This is likely to de-risk Kaveri’s current business model centred around cotton seeds in South India. The stock is trading at an attractive valuation below mean P/E-1 SD and FCF yield of 9% on FY21E. Maintain Buy with a DCF-based target price of `710 (10x FY23E P/E).
Kaveri generates ~50% revenues from cotton seeds: Higher cotton prices are likely to increase cotton sowing leading to better demand for cotton seeds. Kaveri is likely to be the biggest beneficiary of this trend. Higher revenue share of cotton seeds is margin-accretive. Most other business segments of Kaveri (e.g. maize seed, selection and hybrid rice seeds) generate relatively lower margins than cotton seeds. Vegetable seeds are still in investment mode.
Multi-pronged growth approach: Kaveri is working towards the dual objectives of expanding both its product portfolio and global geographical presence. It has entered West and North India and has also commenced exports to five countries. We note Kaveri has launched multiple variants of rice (selection + hybrid), maize and vegetable seeds. Success of these initiatives will create new growth avenues and de-risk the current business model centred around cotton seeds in South India.
Maintain Buy: Kaveri has created strong value (FCF) over the past decade and we remain positive on its medium-term growth outlook. We model the company to report revenue and PAT CAGRs of 12.8% and 17.7%, respectively, over FY20-FY23e. We value the stock at DCF-based target price of Rs 710.