Company Name – Kaveri Seeds Company Limited (Kaveri Seeds)
Current Share Price – INR 552 (January 28, 2022)
Market Cap – INR 3,173 cr
1. What is interesting about the stock?
Are you a fan of Bollywood, or for that matter even Hollywood, Tollywood, Kollywood or any other film hub? If you are, you may have heard of the three-act structure that is often used to divide a story into three acts, the Setup, the Confrontation, and the Resolution. It is highly likely that you have also seen a movie with the following acts:
Setup: The hero, a young adult that is ready to take on the world, starts training to be a super athlete in the sport of his choice. He works hard and is diligent. Initially he competes in the local competitions, and before you know is on the fast track to global fame with multiple international victories under his belt. The world begins to notice, and he is labelled the next superstar.
Confrontation: Out of the blue, a tragedy hits him. An event that he had not envisaged. He loses his prowess at the sport and so quickly fame deserts him too. The world now has lost faith in his ability to enthrall.
Resolution: Ageing but determined, the hero returns to his roots to rise from the ashes. He digs deep to find the resolve to succeed again and eventually does.
Kaveri Seeds might just be following the three-act pattern. In the 5-year period between FY10-15, the company’s revenue grew by 47% CAGR, EBITDA by 54% CAGR and PAT by 60% CAGR. Phew! Those are staggering numbers. A key contributor to this impressive growth was the market share in cotton seeds increasing from 2% in FY11 to 18% in FY15. And then came FY16. Revenues fell by 36%, EBITDA by 38% and PAT by 43%. Till date the company has not managed to achieve the highs of FY15, and growth has been average. Between FY16-21, the company delivered a 7% revenue CAGR, 10% EBITDA CAGR and 13% PAT CAGR. Is the company going to find its way to the Resolution act or like sometimes in real life, be an average performer for the rest of its journey?
Kaveri Seeds Company Limited is one of the leading hybrid seed manufacturers focusing on key Indian crops. It works with over 1 lakh production growers across 12 different agro-climatic zones with 65,000 acres of land for seed production. This allows the company to focus on seeds for varying climate and soil conditions. Seed portfolio includes cotton, maize, paddy, bajra, sunflower, sorghum, mustard, pulses, wheat, tomatoes, okra, chilies, brinjal, gourds and watermelon. R&D is done on 600 acres of dedicated research farms by 100 personnel, including ~20 scientists. To bolster sales, distribution is done via 15,000 customer touch points across 15 key states.
What went wrong in FY16?
Reasons provided by the management included:
Lower cotton cultivation in key states such as Karnataka and Andhra Pradesh due to drop in cotton prices.
Company staying away from credit in key states such as Telangana due to expectation of challenges in recovery.
Withdrawal from Maharashtra due to the state government-imposed reduction in price of Bt cotton seeds by INR 100 per bag from INR 930 per bag of 450 gram seeds to INR 830 per bag.
As a result, the stock price fell from ~INR 1,050 in Mar 2015 to INR 300 in Jan 2016. In Dec 2011, it was ~INR 90. This share price roller coaster highlights the challenges of investing in a cyclical business like agri-inputs.
Key competitive advantages of the Company are:
Diverse product portfolio that assists in farmer retention during crop rotation.
Pan-India operations with a well-established distribution network.
Extensive focus on R&D.
2. Key Historical Financials
The Company has delivered disappointing results for H1FY22 with revenue falling 9% and EBITDA falling 33% on YOY basis.
While TTM numbers are worrisome, in the past 3 financial years, the company has delivered healthy ROCE/ROE and has negative debt (cash balance of ~ INR 600 cr).
Company has poor cash conversion cycle due to very high level of inventory (~500 days)
3. What is my view on company valuation?
Kaveri Seeds is currently trading at EV/EBITDA (TTM) ratio of c. 13x and P/E (TTM) ratio of c. 15x. Given ~7% revenue CAGR between FY16-21 and a likely de-growth this year, the multiples seem to reflect optimism more than reality.
Why the optimism, you ask? Investors are probably hoping for the third act but it seems to be sometime away!
Cotton prices were on the rise in 2021 due to post COVID recovery of demand. Kaveri Seeds generates ~50% of its revenues from cotton seeds and is hence expected to benefit on account of greater demand by farmers. Also, the company has managed to acquire some market share in Gujarat and Haryana, thereby lowering its dependence on South India for cotton seeds sales. However, the cyclical nature of cotton prices makes it hard to predict certainty of sustained growth in seed sales.
The other challenge is sale of illegal HTBt cotton seeds. Seed manufacturers have claimed that sale of illegal seed packets has increased by 150% from 30 lakh in 2020 to 75 lakh in 2021. HTBt cotton variant has not been approved by regulators but is finding traction amongst farmers as it has an additional layer of modification, making the plant resistant to the herbicide glyphosate. Unless the matter is addressed, seed manufacturers will keep losing revenues to illegal seeds.
Stock could be a good play on the Indian agri-inputs story, but it needs to be deliver 10-15% growth on a CAGR basis (even if it is lumpy).
4. What are the risks to the investment analysis?
Risks to the analysis are:
Continued penetration of illegal seeds, in cotton or worse in other crops too.
Seeds is a state subject matter and hence regulatory intervention by the state like by Maharashtra in 2015, is a perpetual risk.
Agriculture has a big influence on our politics so it would continue to have repeated interference from populist measures
About the Author
I have over 14 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.