Kaveri Seed Co has been an investors’ delight. It has given incredible returns of 160% over one year, 363% over two years and 769% over four years. A real multi-bagger stock!
Gajendra Nagpal of Augment Financial Services had homed in on the stock in December 2013 and recommended a strong buy. Since then, the stock has doubled with a 110% gain.
You should read Gajendra Nagpal’s reasoning on why Kaveri is a great buy. It is very convincing.
Now, Daljeet Kohli of IndiaNivesh has thrown his weight behind Kaveri Seed. Lets look at what he says:
“Kaveri Seed Company Ltd. (KSCL) is a producer & marketer of seeds with focus on hybrid categories along with micro-nutrients. The company has recorded a revenue & EBITDA CAGR of 64%/58% from FY10 to FY13; growth has been primarily driven by KSCL’s BT.Cotton offering. On back of strong brand, high entry barriers and continuous new product launch, we expect KSCL to continue its growth trajectory. We recommend BUY with target price of Rs.754, based on 16x FY16 EPS.
Valuation
At CMP of Rs.646, the stock is trading at P/E multiple of 16.7x FY15E and 13.7x FY16E based on Bloomberg consensus earnings. On back of solid industry fundamentals like – (1) low hybrid seed penetration (c25%), & (2) few private players participation (c30%) in seed market, the macro outlook for the seed industry looks attractive. Additionally, KSCL’s strong industry position, wide distribution network, diversified product range, superior R&D capabilities places it well to benefit from large macro opportunities in the sector. We recommend BUY with target price of Rs.754 (16.0x FY16E) on KSCL.”
Click here to download the research report (pdf)
While Daljeet’s logic is compelling, there are three downsides to Kaveri that I can think of.
The first is the risk of El Nino affecting crop production in the Country. According to news reports, IMD has indicated in its forecast on southwest monsoon that the country would receive below normal rainfall from June to September period, due to developing El Nino across the Pacific. It is also stated that El Nino has a history of adversely impacting the rainfall in India during monsoon. In the last decade, 2002, 2004 and 2009 were drought years in India due to emergence of El Nino. Prevailing fear of El Nino impacting rainfall in India has raised concerns regarding lower agricultural yield says the report.
The second is the policy of the new Government towards hybrid seeds/ genetically modified seeds etc. The previous Govt. had a benign policy. We don’t know what the new Govt. will do.
The third risk is that of a taxation liability. Kaveri and the other seed companies presently pay no income-tax on their profits on the basis that they are engaged in “agricultural operations”. However, the income-tax department has contested this in some cases. If a legislative amendment is made (say, with retrospective effect) to tax the seed companies on their profits, all profitability calculations will go haywire. The risk of a legislative amendment is real because the amount at stake is several hundreds of crore.
Of course, these concerns have been there in the past as well but that hasn’t deterred Kaveri from becoming a super-duper multi-bagger. Sometimes, you just have to trust your instincts and dive into the stock!
Recent motilal oswal report says that el-nino will not impact Kaveri.
Hi Arjun,
What do you think about JB chemicals Q4 results? What is your view at CMP?
The turmoil in Russia appears to have taken its toll. However, the imp aspect is these are one-off issues. I remember, in the last Q results, the stock had tanked to Rs. 126. Then, it moved to a high of Rs. 156 or so.
Daljeet Kohli has issued a first-cut analysis (pdf) in which he has advised investors to accumulate the stock. He has promised to talk to the management and revert with a detailed report.
I am taking his advice and accumulating the stock, slowly and steadily.