A Growth Stroy : Kaveri Seed Company Ltd

Note : SOLD My Holding in Dec 2014 with avg price of 870 (equivalent 4350 without split )

Kaveri Seed Company Ltd has produced a very good set of number for Q1FY13 . PAT is increased by almost 110 %  and Kaveri Seed Company Ltd is all set to achieve new highs . I have not written any post on this counter but it is my portfolio from level of 350 . Kaveri Seed Company Ltd  is now trading around 800 and it is still a good bet to get around at least 40-50 % return within one year.

Reason to buy @ CMP of 800 :- Kaveri Seed Company Ltd  is quite uniquely  poised to reach new highs with very minimum downside risk. Yesterday , the investors were booking profit after result announcement and I was buying this stock of Kaveri Seed Company Ltd . Mr Market may prove me wrong in the short term but I was having my own reasoning to buy Kaveri Seed Company Ltd  at around 800 . My reasoning is simple , company has shown standalone EPS of 73.80 and consolidated EPS of 73.42  for  Q1FY13 .  So , consolidated EPS comes to 81.33 for last 12 trailing months .

               Kaveri Seed Company Ltd  is trading at a PE of 9.8 on price of 800 and EPS of 81.33 .  Kaveri Seed Company Ltd  is quality company , which has 3 year high PE of 28.76 and 3 year low PE of around 9 . If this company goes and trade on a PE of 9 then I will be at a loss but same time it turned into compelling buy at a PE of 9 . Just before the result Kaveri Seed Company Ltd  was trading on a PE of 19 . I don’t say that it will again trade on a PE of 19 within one month but over the one year it will again try to touch a PE of at least 15 (Price 1200 ) .  Return of capital employed is also increased from 21.5 to around 28 which will also lure many investors.

               This counter is held  by 5 mutual fund houses and around 8 MF schemes. There are not many companies which are showing growth of 100 % .   There are quite good chances of increase in stake in Kaveri Seed Company Ltd  by these mutual fund houses . Generally , mutual fund houses do not take the decision to invest in hurry in mid cap stock, they do take their own time. I believe more mutual fund houses will buy Kaveri Seed Company Ltd  in coming years.

Positive Point :

1.      Low PE valuation .

2.      High growth stock .

3.      Kaveri Seed Company Ltd has good moat , it has a competitive advantage and entry barrier by developing new seeds and patenting them.

4.      ROCE around 28 % also looks good .

5.      Recession proof business , Indian farmers can compromise on food and other consumptions but do not compromise on seed quality.

6.      Non Cyclic Business , even deficit monsoon not affected the performance of the company .  If rain is not sufficient during sowing season , then farmers have to resow it that increases demand.

7.      Kaveri Seed Company Ltd has good future plans , it will interesting to go through the upcoming annual report of FY11-12.

8.      Promoter holding is 65% and no pledge shares by promoters

9.      Very good balance sheet and ratios.

10.   Advances against sales of 110 crores against sale of 233 crores in FY10-11 annual report . It shows demand of products in the market . Indian great value investor Prof Sanjay could be happy to see these figures but “Advances against sales” is a bit different than “Advances from Customer” .

11.   The agriculture sector is backbone of India . The government promotes seed sector by schemes like “National Seed Project”.Agriculture income is tax fee in India that’s why   Kaveri Seed Company Ltd  has to pay very little tax. Income derived from “sale of seeds” is also considered as Agriculture income. Please refer http://taxguru.in/income-tax/income-tax-treatment-taxability-of-agricultural-income.html for more details.

You can also refer judgment in case of HIGH COURT OF MADRAS, Commissioner of Income-tax Vs Soundarya Nursery.

Judgment cleary says “The seeds were clearly a product of agriculture and the income derived from the sale of seeds, was agricultural income. We answer the question referred to us in favour of the assessee and against the Revenue”  Please refer following link for this judgment http://law.incometaxindia.gov.in/DitTaxmann/incometaxacts/2007itact/%5B2000%5D241ITR0530(Mad).htm

Concern / Risk :

1.      I have not figured out any red flag in annual reports but any corporate governance issue is the risk which is applicable to all the stocks including HDFC bank and Infosys.

2.      If the company is not able to produce new seeds which are better than competitors.

3.      Any regulatory changes related to BT.

4.      Government stops support/ tax benefits to seed sector which is quite unlikely.

5.      Government companies / agency like BARC developed new seeds and distribute free or nominal rate to farmers.

click here for subscription. It is absolutely free.

Disclaimer :  Please treat this post as starting point of your research and not conclusion to invest in it. As always , please take the advice of a financial adviser . As I mentioned , I already have my holding in this stock.