LKP Securities initiates coverage on Kaveri Seed Company, lists five major triggers

Brokerage LKP Securities initiated coverage on Kaveri Seed Company (KSCL) with a ‘buy’ rating and a 12-month target of Rs 806 per share. The addition to the brokerage’s coverage universe comes after the announcement of a fourth share buyback by the agricultural products manufacturer amounting to Rs 325 crore at a price of Rs 725 per share.  

LKP’s target implies an upside of 22 per cent in the Kaveri Seed shares, which have already rewarded investors with a 31 per cent return in the past year.  

The buyback price implies a premium of 9.7 per cent over the previous close.  

The brokerage has listed five key triggers for the small-cap stock:  

Diversification from cotton seeds well on track 

Through extensive R&D, the company has diversified into other crops as the hybridisation of cotton seeds has gained traction. According to the brokerage, the segment contributes 35 percent to its overall seeds business. 

LKP expects the agricultural products maker to continue improving its realisations in its non-cotton portfolio as hybridisation progresses. “We expect KSCL to post a Revenue/EBITDA/PAT CAGR of 11, per cent, 16 per cent and 14 per cent respectively over FY23-25E,” wrote analysts at LKP in a report dated xx. 

Wide product portfolio addressing crop rotation and reducing dependence on traditional market 

Hybrid vegetable seeds are one of the fastest-growing segments in the country, estimated to be worth Rs 2,000 crore, according to the brokerage.  

Aggressive R&D presents huge tailwinds 

The company’s R&D expenses have risen 300 per cent in FY22 over FY21, and were even higher, at 38 per cent, in FY23, indicating the company’s aggressive focus on newer products.  

High entry barriers 

The seed industry is characterised by quote a few entry challenges, such as:  

--Highly capital intensive industry due to huge allocation to R&D 

--Requires a wide distribution network required  

--Requires high credibility with farmers 

Government's focus on growth 

The Centre may earmark Rs 2 lakh crore for the agri ministry in the upcoming budget, which may enable it to increase the income support extended to farmers, according to the brokerage.  

What other analysts make of Kaveri Seed?

The stock has a consensus ‘buy’ call based on the views of three analysts, with a one-year target of Rs 698 per share, according to stock research portal Trendlyne.  Currently, the stock trades at a reasonable price-to-earnings multiple of 12.1 times on a trailing 12 months (TTM) basis, below industry median, according to Trendlyne.  

What does Kaveri Seed Company do? 

Kaveri Seed, one of the oldest seed companies with a pan-India presence, with a wide product line ranging from maize, cotton, rice, pearl millet, mustard, wheat, sorghum, sunflower, and various vegetable crops. Engaged in the production and marketing of hybrid seeds, Kaveri Seed Company also caters to international markets.