We reiterate ‘outperform’ on Kaveri Seed with a September 2015 price target of R1,010 (based on 18x 1-year forward P/E). We believe that clarity on the use of accumulated cash on Kaveri’s balance sheet could be a catalyst for the stock.
Additionally, clarity on an increase in cotton seed prices and a potential path to introduction of genetically modified seeds may be a medium-term upside.
According to reports, the promoters could be looking to lower their stake to enable them to fund a privately held food-processing venture. The promoter family has sold c.6% stake over the last 12 months. We believe that a further stake sale by promoters will be a key overhang for the shares.
Another key concern is the weakness in the cotton market and the implications for acreage in FY16. Kaveri’s stock has corrected 15% from its recent high owing to concerns regarding the promoter’s stake sell-down and cotton acreage.
Our analysis shows Kaveri offers an attractive risk-reward profile with a 24% potential base-case upside and 52% bull-case upside versus 12% downside in the bear case.
We assess the implications of weak acreage in its bear-case analysis. Based on its bear-case assumptions and a lower 15x P/E for Kaveri, our bear-case valuation is R715. Our bull-case valuation for Kaveri is R1,235. We use more liberal cotton acreage and pricing assumptions for cotton seed in the bull case to arrive at its bull-case valuation.
Standard Chartered
