Stock Pick From The Other Agricultural Products sector

Here Is Why:

• Farmers’ shift from soya to cotton to benefit KSCL.
• Good financial full year result with expanding margins.
• Increasing institutional investors’ confidence in KSCL is a good sign.

Kaveri Seeds Company: REAPING GAINS

Agriculture is an important sector in India as the country’s almost 70 per cent population depends on the industry and allied industries. We are at the juncture where the farmers are waiting to sow the new crop in the next few weeks. With a weakness in soya prices last year, an increasing number of farmers are planning to shift to cotton this year. Here therefore is one of the largest hybrid cotton seeds producers – Kaveri Seeds Company (KSCL) – which is poised to benefit a lot.

KSCL’s products focus on yield optimisation, soil enrichment and crop protection. Along with cotton seeds, the company manufactures corn, sunflower, pearl millet, grain sorghum, rice, tomatoes, okra, chillies and watermelon seeds. Its operation is predominantly into two segments – seeds division and micro nutrients division. KSCL was incorporated in 1986 and listed in 2007 and since then the company has been on the path of green growth.

On the financial front, KSCL managed to expand its margin this quarter while its peers were struggling to maintain their profitability. Interestingly, the company’s sales revenues and net profit nearly doubled from 2013 to 2015. The net sales increased to Rs 1,161 crore in FY15 from Rs 1,011 crore in FY14, a growth of 14.85 per cent, mainly due to huge cotton seed sales. However, its total expenditure increased marginally by 7.4 per cent during the same period. Its EBITDA increased by 40 per cent to Rs 310 crore in FY15 from Rs 221 crore in FY14. The EBITDA margin expanded by 479 basis points to 26.67 per cent during the same period, predominantly because of products’ price hike and reduction in royalty payments. The net profit of the company stood up at Rs 301 crore in FY15 from Rs 209 crore in last year, rising by 44.03 per cent on a yearly basis.

Looking at KSCL’s robust financial performance, the company’s institutional holdings increased by 802 basis points to 28.94 per cent at the March 2015 quarter end as against 20.91 per cent at the March 2014 quarter end. Though domestic institutional investors’ (DIIs) shareholding decreased by 376 basis points to 6.68 per cent during the same period, the foreign institutional investors’ (FIIs) shareholding increased by 1,179 basis points to 22.26 per cent in March 2015 compared to 10.47 per cent in the same period last year. Recently, based on the stock selection criteria prescribed by SEBI, KSCL is included in the future and option segment of the NSE with effect from May 29, 2015.

KSVL has considerable business in Andhra Pradesh, Maharashtra and Gujarat regions. Recently, in the March 2015 quarter, the company launched two new seeds of high density plantation (HDP) hybrids variety named ‘3/1’ and ‘Super Duper’, which are being vigorously promoted in Maharashtra and Gujarat regions. These newly launched seeds are tolerant to sucking pests and the management is expecting good growth in the cotton business after this launch. Also, KSCL with its flagship cotton seed brands ‘Jackpot’ and ‘Jaadoo’ is well placed to capture the opportunities arising from the farmers’ shift from soya to cotton after weakness in soya prices last year.

The strong performance of existing products, newly launched HDP hybrids seeds, strong financial results, increasing institutional investors’ confidence, and virtually debt-free status make KSCL a good investment opportunity at the current market price.