Kaveri Seed Company IPO looks attractive

Kaveri Seed Company Limited (KSCL), the Secunderabad based maker of agriculture inputs, is entering the capital markets via the initial public offer (IPO) route to mobilise funds upto Rs 680 million with 40 Lakh shares.The IPO will open on September 6 2007 and closes on September 11 2007

Company Profile:

Kaveri Seed Company which was incorporated in year 1986  is engaged in the business of production, processing and marketing of high quality hybrid seeds for different crops like corn, sunflower, cotton, paddy, grain sorghum, etc. Recently the company forayed into micro-nutrients and bio-products,production of non-hybrid seeds. The production, processing and R&D facilities of the company are located in Andhra Pradesh and Karnataka.

Objectives of the issue:

Kaveri Seeds intends to used the IPO funds in setting up of marketing offices and godowns, corn cob drying plants, biotechnology lab and seed processing plant. In addition,the company plans to acquire farmland for R&D facilities, upgradation of existing seed processing plants and meeting the working capital requirements. The benefits of these plans are expected to contribute to the financials of the company from November 2008 onwards.

Financials:

KSCL delivered first-rate financial performance during fiscal 2007. The company registered substantial growth of 3.63 times in earnings during fiscal 2007 compared with the previous fiscal. It recorded earnings of Rs 105.40 million during fiscal 2007, as against Rs 29.02 million in fiscal 2006. The substantial rise in earnings was a result of the improved operating margins and higher realisation on hybrids of cotton, bajra and paddy. Earnings per share during fiscal 2007 jumped 81.76% to Rs 15.05 from Rs 8.28 in the fiscal year 2006.

KSCL reported a rise of 35.22% in total income to Rs 672.38 million during fiscal 2007, compared with previous fiscal. The operating margins during fiscal 2007 improved to 26.02% compared with 8.25% in fiscal 2006. In spite of healthy revenue growth, KSCL observed a decline in material cost which helped the company to report outstanding numbers.

Valuation:

At the issue price band, the shares of KSCL are available at price to earnings (P/E) multiple of 9.96x at the floor price and 11.30x at the cap price. The shares of its peers, Monsanto India and Bayer Crop Science are available at P/E multiple of about 17.87x and 21.67x respectively. On the other hand, the shares are available at price to book value (P/BV) multiple of 5.54x at the floor price to 6.27x at the cap price.

Based on the above stated valuations,Kaveri Seed Company IPO looks attractive and one can expect a good listing gains subject to the market conditions.