Q1FY24 Review: Kaveri Seed: Volumes disappoint

17 Aug 2023 , 12:18 PM

Kaveri’s Q1 performance is critical to its annual performance, as the quarter contributes >95% of annual Ebitda, and the quarterly performance places KSCL on track to deliver a ~10- 12% PAT growth in FY24 (guidance is ~15-20%). Ebitda grew ~13% YoY, primarily driven by better pricing of cotton. Maize and vegetable volumes were subdued during the quarter. While management continues to present a bullish outlook, analysts of IIFL Capital Services remain conservative, as acceptance of new product launches could take some time. Analysts of IIFL Capital Services cut their FY24-26 EPS by 3-5% because of the subdued volumes of maize and vegetable seeds. Analysts of IIFL Capital Services TP, rolled forward to Sep’24, comes down to Rs660 (10x 1YF PE). They downgrade the stock to ADD. 

Improvement in cotton pricing leads to margin expansion: 

Ebitda margins expanded ~180bps YoY, on the back of better pricing for cotton seeds. While the menace of illegal seeds remains at levels similar to FY23, management attributed the improved pricing to low inventory levels. 

Sharp decline in maize volumes: 

Maize volumes declined ~25% YoY, as the company reduced subsidy seed sales. Management expects the base-business sales to catch up through the rest of the year. Management is targeting exports of ~Rs2-3bn in ~4-5 years (currently ~Rs300-400mn). Over the next 2-3 years, revenue from vegetable seeds is also expected to grow at ~25-30%. 

Valuations likely to remain cheap in near term: 

The Company seems to be on track to deliver ~10-12% growth in PAT in FY24. However, growth post that is dependent on acceptance of products in export markets and new products in domestic markets. While management remains bullish on near- and medium-term performance, analysts of IIFL Capital Services would await recovery in volume growth. Return ratios, cashflows and balance sheet remain strong, but they believe valuations will remain suppressed until growth visibility improves; which, given the high level of seasonality, is unlikely till Q1 next year.