Buy This Small-Cap Agri-Input Sector Stock For 30% Potential Gains: Chola Wealth Direct

Chola Wealth Direct in its report on Kaveri Seed Company Ltd has given a buy call to the stock of the company for a target price of Rs 590/share. Considering the estimated target price and the current market price of the stock, it has a huge potential of 30% upside in 12 months.

Kaveri Seed Company is the largest producer of hybrid cotton seeds in India with a market share of ~15%. Kaveri Seed Company Ltd is a small cap Agri-input sector company with a market capitalization of Rs 2,671.13 crore.

Stock Outlook

The current market price of the stock is Rs 457/share at the time of writing. The stock's 52-week low is Rs 454.50/share recorded on 29 August 2022, and the 52-week high is Rs 629.30/share recorded on 19 April 2022, respectively.

Returns on investment

The stock has given 0.47% negative return in the past 1 week, 5.68% in the past 1 month and 20.38% in the past 3 months, respectively. Over the past 1 year, it has given a negative return of 21.08%, 3.07% in the past 3 years and 17.06% in the past 5 years, respectively.

Decent quarter: volume growth aids topline; outlook improves

Kaveri Seed Company's consolidated revenue increased 9% YoY to Rs 6.9bn led by higher cotton acreage and improved volumes. The EBITDA at Rs 2.5bn improved by 18.3% YoY while PAT grew 19.1% YoY to Rs 2.4bn. The EBITDA margin improved to 37.1% (+310bps YoY). Cotton volumes increased by 8.3% YoY while revenue by 3.8%. The cotton acreage improved YoY in the wake of higher cotton prices and market share gains. The non-cotton volumes improved by 9.8% while revenue grew by 10% YoY. The company projects improved volume & revenue performance for the rest of FY23 with double-digit growth in non-cotton segments.

The use of illegal cotton seeds has come down & organized players have gained market share in the cotton seed segment, which has also led to the increase in revenue. The new product launches continued in the quarter as company introduced newer products across seeds segment.

New products in North Market include KCH111, VIPLAV, Money Maker, and KCH 9333 (subjective upon Govt's permission). Selection rice volumes grew by 15.2% in FY23. Hybrid rice volumes increased by 6.1% and revenue by 1.0%. Introduction of new hybrids such as 425, 471, 729 and 473 led to the robust growth in the segment. The vegetable seed sales volume increased by 25.9% while revenue decreased by 2.5%.

The company is expecting a double-digit growth in Maize, sunflower, vegetables and rice in the second half of the year. The sentiment of farmers has also been impacted by the delay in onset of monsoon across India till mid-June. The company continues to see encouraging growth in vegetable seed acreage, revenue growth and volumes. The overall exports of Kaveri Seed Company has contributed to Rs 190mn in revenues. The management expects exports to contribute to significant share in the next year.

Concall highlights

High market shares and cotton prices drove increased cotton acreage during the current year. Increased competition in the cotton segment led to the muted growth due to smaller companies with low realizations crowding the market, which will eventually result in lower overall realizations and higher discounts given during the quarter. The process of cotton per packet were up by Rs 40 YoY. The company remains confident that discount reversals will happen next year due to lower illegal BT cotton share and overall better market sentiment despite not being able to realize prices.

Outlook

According to the brokerage, " Kaveri Seed Company's earnings seems to have normalized and likely to improve for rest of FY23. The contribution from non-cotton segment is improving and the division is expected to post the double-digit growth. The leadership position, R&D focus, healthy product pipeline, presence across crop categories and strong distribution network will act as key levers for growth over the long term. The increasing contribution from higher growth projected non-cotton segment will aid the performance."

 

Valuation

The brokerage said, "At the current market price the stock is trading at 9.7x/8.9x our FY23/FY24E estimates. We retain our rating on the stock at BUY with revise target price of Rs 590 (earlier ₹601). Risks: Decrease in acreage due to rain shortages. Higher prices are also expected to raise acreages in the cotton crop segment."

About- Kaveri Seed Company Ltd

Kaveri Seed Company is the largest producer of hybrid cotton seeds in India with a market share of ~15%. Kaveri Seeds has access to 60k acres under seed production, with farms in Karnataka, AP and across the country. The company has a pan-India presence with a strong distribution network of ~15k distributors (direct & in-direct) and retailers across 15 key states in India. Kaveri has 26 warehouses at strategic location with a combined storage space of ~600k sqft.

 

Disclaimer

The stock has been picked from the brokerage report of Chola Wealth Direct. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.