Brokerages trim Kaveri Seed’s target price on cotton seeds concerns

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July 04, 2015 MUMBAI: Brokerage houses have lowered Kaveri Seed Company's target price on concerns that revenues from cotton seed sales may take a hit.

Credit Suisse has maintained 'Outperform' rating on the stock and lowered target price to Rs 950 from Rs 1100 earlier.

According to the brokerage report, reduction of seed prices in Maharashtra can impact company's FY16 revenues.

Higher procurement prices in Telangana are also likely to impact revenues. Credit Suisse has lowered FY16/17 earnings by 12 - 13 per cent on lower cotton seed revenue and margins concerns.

Another brokerage house IDFC, is of the view that Kaveri Seed's performance in FY16E will be muted and rebound next fiscal.

"We expect growth to rebound in FY17E, driven by: (i) increase in cotton seed market share in Maharashtra and (ii) continuous growth of non-cotton seed sales led by hybrid rice and vegetable seeds," the report said.

"We maintain our Outperformer recommendation on the stock despite a downgrade in earnings by 10.3 per cent and 12 per cent for FY16E and FY17E," the report added.

According to IDFC Kaveri Seed seems inexpensive considering RoCE of ~35 per cent, free cash flow generation of ~Rs3 billion p.a. and strong growth opportunities in the Indian seeds space.

However, it has reduced price target to Rs 957 per share.

Motilal Oswal has downgraded the stock to 'Neutral' from 'Buy' on worries that lower cotton yield in FY15 have impacted production of seeds in FY16.

Kaveri Seed's production of cotton seeds was 12 million packets in FY15 but has come down to 10 million packets in FY16.

Of the 10 million production, 5-7 per cent is lost due to poor quality owing to unseasonal rainfall last year.

"Expect 2.5 per cent volume de-growth for Kaveri in FY16, driven by lower production of seeds, lower re-sowing and some loss of sales due to pricing issue in Maharashtra," the report said.

Motilal Oswal has a price target of Rs 840 on the stock.

Shares of Kaveri Seed have been on a steady decline since hitting all-time high of Rs 1077 on March 20, 2015. It has corrected 32.40 per cent in three months to close at Rs 736.05 in trade today.


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