Kaveri Seeds Shares: A Compelling BUY for Long-Term Growth

Kaveri Seeds Company’s shares has corrected significantly, dropping approximately 19% since our last review in August 2024, largely due to broader market weakness. This presents a favorable entry point for investors, given its current valuation at 1.2 times its five-year median P/E. Consequently, we are upgrading Kaveri Seeds to a **BUY** recommendation.

Why Kaveri Seeds Shares Deserves Your Attention

1. Hybrid Rice: A Game-Changer:

Kaveri Seeds is rapidly expanding its footprint in the hybrid rice market—a significant growth driver for the company. Currently contributing 24% of total revenue, hybrid rice is poised to outgrow BT cotton, which still accounts for 47% of revenues. Over the last five years, hybrid rice sales have grown at a compounded annual growth rate (CAGR) of 50%. Kaveri aims to dominate the hybrid rice segment within the next 5–7 years.

India, the world’s second-largest rice producer and consumer, offers immense opportunities. Hybrid rice currently grows on just 3.5 million hectares of India’s total 40 million hectares of rice acreage, leaving substantial room for expansion.

2. BT Cotton: A Stable Backbone

BT cotton remains Kaveri’s primary revenue driver. While its share of total revenue has declined from 60% to 47% over the years, sales volumes continue to grow, particularly in newer markets like Gujarat, Maharashtra, and Haryana. Additionally, opportunities in Telangana’s cotton market could provide a substantial boost, with the state planning to expand cotton acreage by 15–20 lakh acres.

3. Diversified Earnings Streams

Kaveri has successfully diversified its portfolio with fast-growing contributions from:

Maize: The third-largest contributor, though dependent on fluctuating corn prices.

Vegetables: Growing rapidly, with a target of generating ₹100 crore in revenue in five years.

Rice and Non-Cotton Hybrids: Higher margins and consistent demand provide stability and growth potential.

4. Strong Financial Metrics

High Margins: Non-cotton hybrids, which are not subject to government price caps, yield margins of over 30%, significantly higher than BT cotton’s ~20%.
Free Cash Flow (FCF): Over the last three years, Kaveri has maintained an impressive FCF-to-net-profit ratio of 62%, reaching 70% in FY20.
Share Buybacks: Regular buybacks have enhanced shareholder value, reducing outstanding shares by 12.6% between FY17 and FY20 and driving return on capital employed (ROCE) to 28%.

5. Attractive Valuations

At a price-to-earnings (P/E) ratio of just 11 times and a free cash flow yield of 7.3%, Kaveri Seeds presents a compelling investment opportunity.

Investment Action Plan

If You Own Shares: Stay invested and consider increasing your stake while the stock remains under the BUY rating. If You Don’t Own Shares: Initiate investments to capitalize on Kaveri’s growth trajectory.

Also Read: Why CMS Infosystem is a promising investment.

Risks to Monitor

Scaling Challenges in Hybrid Rice: Any inability to penetrate key markets could slow revenue growth.
Weather Dependence: Agricultural production is vulnerable to weather fluctuations, including dry spells and hailstorms.
High Exposure to BT Cotton: Despite diversification, nearly half of Kaveri’s revenue comes from cotton, leaving it exposed to potential risks like pest attacks or government intervention.

Long-Term Outlook

Kaveri Seeds’ ongoing success in hybrid rice, steady BT cotton revenues, and diversification into vegetables and other crops position it well for future growth. Over the last three years, earnings have compounded at 36.5% annually, with a 46% increase in the trailing 12 months alone. Margins, returns, and shareholder rewards are all on an upward trajectory.

Investing in Kaveri today is a bet on its ability to dominate hybrid rice and expand its revenue base. With attractive valuations and strong growth potential, Kaveri Seeds is a **BUY** for long-term investors.

Disclousre: The author, Ekramul Haque, owns shares in Kaveri Seed Company. Independent Advisors LLP and its associates do not own shares in the company as of this report’s publication.