kaveri seeds

8/12/2019 kaveri seeds

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l Equity Researchl

Important disclosures can be found in the Disclosures AppendixAll rights reserved. Standard Chartered Bank 2014 http://research.standardchartered.com

India lEmerging Companies 26 March 2014

Kaveri Seed

Ripening

We downgrade Kaveri Seed (KSL) to In-Line from

Outperform, as the shares have reached our price target

following the strong rise over the past month.

We continue to like the longer term structural story but

would advise investors to wait for a better entry point.

We believe the current share price adequately captures

recent news flow around genetically modified seeds.

In our view, the biggest near-term risk remains the potentialdevelopment of a strong El Nino and resulting poor

monsoons in India.

IN-LINE (from OUTPERFORM)

Downgrade to In-Line. We downgrade KSL to In-Line as the

shares are trading at our price target. We maintain our March 2015

price target of INR 600 and our estimates.

Structural story intact. We believe the structural story for KSL

remains strong, as highlighted in our SCout reportIndia agriculture

inputs Seeds of prosperity, published 26 February 2014.

However, we believe current valuations (c.16x 12-month forward

PER) adequately capture the positives and think the share price islikely to consolidate at these levels.

Genetically modified seeds major opportunity. We believe

recent government actions signal the increasing acceptability of

genetically modified (GM) seeds in policymaking circles. However,

we think commercialisation of GM seeds for crops besides cotton

is not likely in the immediate future given the outgoing government

has merely allowed field trials of GM seeds for other crops. That

said, we believe any eventual adoption of GM seeds for other

crops would be a material positive for KSL, providing it with a long-

term growth path over and above the current trajectory.

Monsoons biggest near-term risk.The biggest near-term risk

for KSL, as with all agro input companies, remains the increasing

possibility of a strong El Nino and the consequent impact on Indian

monsoons.

Source: Company, Standard Chartered Research estimates

Share price performance

Source: Company, FactSet

PRICE as of 25 Mar 2014

INR 592.75

PRICE TARGET

INR 600.00

Bloomberg code Reuters code

KSCL IN KVRI.BO

Market cap 12-month range

INR 40,610mn (USD 671mn) INR 224.81 - 628.70

EPS adj. est. change 2014E - 2015E -

Year-end: March 2013 2014E 2015E 2016E

Sales (INR mn) 7,120 9,956 12,390 14,991

EBITDA (INR mn) 1,393 2,153 2,858 3,511

EBIT (INR mn) 1,271 1,992 2,668 3,288

Pre-tax profit (INR mn) 1,319 2,088 2,822 3,534

Net profit adj. (INR mn) 1,267 2,026 2,596 3,181

FCF (INR mn) 592 1,118 2,053 2,647

EPS adj. (INR) 18.43 29.57 37.90 46.43

DPS (INR) 3.20 5.91 7.58 9.29

Book value/share (INR) 50.33 72.98 102.01 137.58

EPS growth adj. (%) 99.2 60.4 28.2 22.5

DPS growth (%) 300.0 84.8 28.2 22.5

EBITDA margin (%) 19.6 21.6 23.1 23.4

EBIT margin (%) 17.8 20.0 21.5 21.9

Net margin adj. (%) 17.8 20.3 21.0 21.2

Div. payout (%) 17.1 20.0 20.0 20.0

Net gearing (%) - - - -

ROE (%) 43.7 48.0 43.3 38.8

ROCE (%) 42.6 46.7 44.2 39.8

EV/sales (x) 1.8 3.9 3.0 2.3

EV/EBITDA (x) 9.1 17.9 13.0 10.0

PBR (x) 4.8 8.1 5.8 4.3

PER adj. (x) 11.0 20.0 15.6 12.8

Dividend yield (%) 1.6 1.0 1.3 1.6

200

425

650

Mar-13 Jun-13 Sep-13 Dec-13 Mar-14

Kaveri Seed BSE SENSEX 30 INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mth

Ordinary shares 16 70 162

Relative to index 9 62 122

Relative to sector - - -

Major shareholder G V Bhaskar Rao (25.1%)

Free float 36%

Average turnover (USD) 971,404

Sumit [email protected]

+91 22 4205 5916

C L I

I 5 . 5

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Equity Research lKaveri Seed

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Figure 1: KSL forward PER

Source: Standard Chartered Research

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18

Jan-0

9

Mar-09

May-0

9

Jul-09

Sep-0

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Jan-1

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Jan-1

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Mar-11

May-1

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Jul-11

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Nov-1

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Mar-12

May-1

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Jul-12

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Jan-1

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Mar-13

May-1

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Jul-13

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Nov-1

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Jan-1

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Mar-14

PERmultiple

Kaveri Seeds forward PER Average +1 SD -1 SD

Target PER 13x


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26 March 2014 3

Source: Company, Standard Chartered Research estimates

Income statement (INR mn) Cash flow statement (INR mn)

Year-end: Mar 2012 2013 2014E 2015E 2016E Year-end: Mar 2012 2013 2014E 2015E 2016E

Sales 3,724 7,120 9,956 12,390 14,991 EBIT 670 1,271 1,992 2,668 3,288

Gross profit 2,315 3,966 6,272 7,806 9,444 Depreciation & amortisation 100 122 161 190 223

SG&A (257) (325) (559) (685) (822) Net interest (7) 34 96 154 246

Other income - - - - - Tax paid (29) (38) (63) (226) (353)

Other expenses (1,389) (2,370) (3,721) (4,452) (5,334) Changes in working capital 401 (317) (769) (333) (356)

EBIT 670 1,271 1,992 2,668 3,288 Others (53) 13 0 0 0

Net interest (7) 34 96 154 246 Cash flow from operations 1,082 1,086 1,418 2,453 3,047

Associates - - - - -

Other non-operational - - - - - Capex (51) (494) (300) (400) (400)

Exceptional items (53) 13 0 0 0 Acquisitions & Investments - - - - -

Pre-tax profit 610 1,319 2,088 2,822 3,534 Disposals - - - - -

Taxation (29) (38) (63) (226) (353) Others (107) 82 0 0 0

Minority interests - - - - - Cash flow from investing (158) (412) (300) (400) (400)

Net profit 581 1,281 2,026 2,596 3,181 Dividends (55) (219) (474) (608) (744)

Issue of shares (7) (27) 0 0 0

Net profit adj. 634 1,267 2,026 2,596 3,181 Change in debt (61) (187) 0 0 0

EBITDA 770 1,393 2,153 2,858 3,511 Other financing cash flow 0 0 0 0 0

Cash flow from financing (123) (433) (474) (608) (744)EPS (INR) 8.48 18.69 29.57 37.90 46.43

EPS adj. (INR) 9.25 18.43 29.57 37.90 46.43 Change in cash 801 241 644 1,445 1,903

DPS (INR) 0.80 3.20 5.91 7.58 9.29 Exchange rate effect - - - - -

Avg fully diluted shares (mn) 69 69 69 69 69 Free cash flow 1,031 592 1,118 2,053 2,647

Balance sheet (INR mn) Financial ratios and other Year-end: Mar 2012 2013 2014E 2015E 2016E Year-end: Mar 2012 2013 2014E 2015E 2016E

Cash 96 143 786 2,232 4,134 Operating ratios

Short-term investments 1,106 1,290 1,290 1,290 1,290 Gross margin (%) 62.2 55.7 63.0 63.0 63.0

Accounts receivable 285 686 1,637 2,037 2,464 EBITDA margin (%) 20.7 19.6 21.6 23.1 23.4

Inventory 3,033 4,912 5,455 6,789 8,214 EBIT margin (%) 18.0 17.8 20.0 21.5 21.9

Other current assets 140 113 113 113 113 Net margin adj. (%) 17.0 17.8 20.3 21.0 21.2

Total current assets 4,661 7,143 9,281 12,460 16,216 Effective tax rate (%) 4.7 2.9 3.0 8.0 10.0

Sales growth (%) 59.4 91.2 39.8 24.4 21.0

PP&E 1,066 1,445 1,584 1,794 1,971 Net income growth (%) 36.8 120.4 58.2 28.2 22.5Intangible assets 7 11 11 11 11 EPS growth (%) 36.8 120.4 58.2 28.2 22.5

Associates and JVs - - - - - EPS growth adj. (%) 49.2 99.2 60.4 28.2 22.5

Other long-term assets 151 77 77 77 77 DPS growth (%) 60.0 300.0 84.8 28.2 22.5

Total long-term assets 1,225 1,533 1,672 1,882 2,059

Efficiency ratios

Total assets 5,886 8,676 10,953 14,342 18,275 ROE (%) 27.0 43.7 48.0 43.3 38.8

ROCE (%) 30.4 42.6 46.7 44.2 39.8

Short-term debt 192 23 23 23 23 Asset turnover (x) 0.8 1.0 1.0 1.0 0.9

Accounts payable 1,100 2,486 3,273 4,073 4,928 Op. cash/EBIT (x) 1.6 0.9 0.7 0.9 0.9

Other current liabilities 2,125 2,674 2,612 3,212 3,853 Depreciation/capex (x) 2.0 0.2 0.5 0.5 0.6

Total current liabilities 3,417 5,182 5,908 7,308 8,804 Inventory days 606.5 459.7 513.6 487.5 493.6

Accounts receivable days 31.7 24.9 42.6 54.1 54.8

Long-term debt 26 8 8 8 8 Accounts payable days 192.0 207.5 285.3 292.5 296.2

Convertible bonds - - - - -

Deferred tax 0 0 0 0 0 Leverage ratios

Other long-term liabilities 29 37 37 37 37 Net gearing (%) - - - - -Total long-term liabilities 55 45 45 45 45 Debt/capital (%) - - - - -

Interest cover (x) 20.5 84.3 nm nm nm

Total liabilities 3,472 5,227 5,953 7,353 8,849 Debt/EBITDA (x) - - - - -

Current ratio (x) 1.4 1.4 1.6 1.7 1.8

Shareholders funds 2,414 3,448 5,000 6,989 9,425

Minority interests - - - - - Valuation

EV/sales (x) 1.5 1.8 3.9 3.0 2.3

Total equity - - - - - EV/EBITDA (x) 7.3 9.1 17.9 13.0 10.0

EV/EBIT (x) 8.4 10.0 19.4 13.9 10.7

Total liabilities and equity 5,886 8,676 10,953 14,342 18,275 PER (x) 10.6 10.8 20.0 15.6 12.8

PER adj. (x) 9.7 11.0 20.0 15.6 12.8

Net debt (cash) (984) (1,402) (2,046) (3,491) (5,394) PBR (x) 3.3 4.8 8.1 5.8 4.3

Year-end shares (mn) 69 69 69 69 69 Dividend yield (%) 0.9 1.6 1.0 1.3 1.6


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Disclosures appendixThe information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, StandardChartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, SCB)and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.

Analyst Certification Disclosure:The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed andattributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or othersubject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or viewscontained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing p rice for the business day prior to thedate of the report, unless otherwise stated.

63.02

170.42

277.81

385.21

492.60

600.00

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14

INR Recommendation and price target history for Kaveri Seed

1

Date Recommendation Price target Date Recommendation Price target Date Recommendation Price target

1 26 Feb 14 OUTPERFORM 600.00 Source: FactSet prices, SCB recommendations and price targets

Recommendation Distribution and Investment Banking Relationships

% of covered companiescurrently assigned this rating

% of companies assigned this rating with which SCB has providedinvestment banking services over the past 12 months

OUTPERFORM 53.2% 14.5%IN-LINE 35.2% 12.8%

UNDERPERFORM 11.6% 8.3%

As of 31 December 2013

Research Recommendation

Terminology Definitions

OUTPERFORM (OP) The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months

IN-LINE (IL)The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next12 months

UNDERPERFORM (UP) The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months

SCB uses an investment horizon of 12 months for its price targets.

Additional information, including disclosures, with respect to any securities referred to herein will be available upon request. Requests should be sent [email protected].

Global Disclaimer: Standard Chartered Bank and/or its affiliates ("SCB) makes no representation or warranty of any kind, express, implied or statutory regardingthis document or any information contained or referred to in the document. The information in this document is provided for information purposes only. It does notconstitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does itconstitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in any illustration.The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price.While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein.The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situationof any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding theappropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statementsregarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections, and price target(s), if any, contained inthis document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The valueand income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested.Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject tofluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Pastperformance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to updateon a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so.

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