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Kaveri Seed Company - Can it go even higher?

6/11/2014

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Kaveri (BSE:532899) develops hybrid seed of field and vegetable crops, which help farmers produce more under limiting natural resources and fragile ecologies ensuring their sustainable management. The company produces premier cotton hybrids like Jadoo, Jackpot, ATM and Singha, Bajra hybrids – Super Boss and Fouzi, Red gram varieties – Sampada and Tatkal; paddy varieties – Sampurna, Chintu and Sleek have created a niche market and are in demand.

The Kaveri Company began in 1976 when Mr. G V Bhaskar Rao, a young agriculture graduate, through his startup – GVB Rao & Co, developed a proprietary corn hybrid which was an instant hit with the farmers because of its improved yields. They later expanded into large scale value breeding and registered as Kaveri Seed Company in 1986 and subsequently got listed in the stock exchange in 2007. 
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The Indian seed industry is the fifth largest market in the world accounting for roughly 4.4% of global seed trade. The present size of the Indian seed industry is estimated at around 7,000 crore with (18 000 crore by 2018) a production of around 40 million quintals of various kinds of seeds (Source: ASSOCHAM report). The market is expected to hit 63 million quintals by 2015 from the current levels, growing more than 50%. In India, hybrid seeds account for around 20% of the total seed production; of which cotton has the biggest share followed by rice at 15%, wheat at 10% and vegetables at 10%.

Company financials
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The company has grown both profits and sales at an astounding rate, rising almost 6 fold in only 5 years. Margins have decreased a bit, but bounced back in 2013.

Valuation

I have done a three-stage DCF valuation using these assumptions:
- this year profit of 200 Rs. Cr.
- company will grow 20% in the next 5 years, 15% in years 6-10 and 4% thereafter
- discount rates used: 10%, 12%, 14%
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Kaveri Seeds stock seems to be fairly valued at these levels with limited upside (687 Rs.). Under very optimistic assumptions it's value would be 930 Rs. or more, implying 40% upside from current price. It all depends how fast the company can grow.

Risks

Competition risk
In the extremely competitive seed business, cut-throat competition from peers can impact the Company’s trade.

Climate risk
Changing climate conditions such as continuous dry spell, or excessive rainfall may drastically impact commercial seed  production of the Company.

Kaveri Seeds is a great company with a bright future, but it might be quite reasonably valued right now. I'm going to either wait for a dip or initiate a small position. The reason is, that some of the best stocks I have seen usually trade at high multiples even before they make huge advances in price. That's why I'm going to be careful with this one, as the risk/reward ratio is a bit worse at this point.
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