Kaveri Seed Company (NSE:KSCL)
About the company
Kaveri Seed is among the largest crop seeds producers in India with a pan India distribution network of 40,000+ retailers and distributors, and over 1 lakh producers totalling 65000 acres of land area for seed production. It has a cumulative warehouse capacity of over 10 Lakh sq. ft and over 600 acres of dedicated research farms. It has a cold storage capacity of more than 15000 MT.
The company derives close to half of its revenue from cotton crops but has emphasised an intention to increase revenue from non-cotton crops and vegetable seeds such as tomato, rice and maize to over 60%. It is among the top 3 producers for the major crop seeds.
Peculiarity of financials
My reasons for investing lie mostly in the nature of the company's earnings. The June quarter alone accounts for around 70% of its annual revenues. As a result, the company’s share goes through yearly cyclicality, peaking at or around the June quarter earnings results. To profit off the stock, one needs to just enter into the position during the dull quarters and hold till results of the peak season.
Recent events have made the stock even more attractive to me.
Looking back at the last 5 years, the company’s June quarter earnings peaked at 748cr in FY 21 then dropped to 682cr in FY22 and back up to 732cr this past quarter (higher than FY22 but lower than FY21 peak). The reason given was that the company is struggling with revenues and margins from its cotton crop, its highest earner. The situation was the worst in FY22 and has shown slight improvement in this last quarter. Another bright sign is that the company is targeting a revenue shift towards non-cotton crops and vegetable seeds that offer better margins.
Looking at financial years as a whole, FY21 was the company’s highest ever EBITDA and PAT year while FY22 saw the first drop in these metrics in 4 years. Replacing FY22s June quarter with this June quarter just gone, TTM earnings are just 10% off the FY21 levels, so a slightly better than average performance in the remaining ‘dull’ quarters could possibly take us to fresh new highs in these metrics.
The poor earnings show in FY22 brought the stocks price down to 52w lows and recent macro uncertainty have brought it down even further. As a result, the stock sits within 10% of its fresh 52w low and is below pre-covid levels. This situation offers a great entry point with low risk and high reward potential.
If one were to buy at these levels, there is a high chance of at least a 20% return come peak season and possibly a lot more if results turn out better than expected.
Valuations
