Kaveri Seed - How do you RIDE it in the short term- pre & post q1Fy14 results?

Stock Opportunities Techno-Funda Picks
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Following post (originally from Kaveri Seed thread) is copied here, for better segregation and discussion focus.

Posted byDonaldat Monday 19:13

The above post was from a long-term perspective on Kaveri. And I certainly invite views/critique on the same from all. However, would venture to say anyone who has invested in Kaveri post the call in August 2012 (and updated ValuePickr Scorecard Dec 2012) anywhere between 800-1200 levels, has a good margin of safety built-in, and can sit pretty for next 2-3 years, and keep enjoying the ride!!

But there are some more adventurous amongst us, who also have a quest to understand Markets better - how they operate & why they operate so - in a bid to keep getting better at the game - especially better Capital allocation. Where is the best bang for my buck?? I can only echo Hitesh's words -We must learn to RIDE different businesses, differently.

Kaveri is sure one unique business to have in our Portfolio to take advantage of. Q1 does anywhere between 65-70% of the whole year business. A High quality (intellectual Property) Business where you keep getting better (once you have 1 highly successful hybrid, chances of producing the next successful hybrid is much higher, 1 hybrid you can ride for 5-6 years) unless you goof up on execution - calculated-risks while scaling up production/marketing. Sure, its a very attractive bet for the long-term.

What amazes me (when I think about it) that it is also a very very good opportunistic bet, for 3 months every year:). just 2 months - May & June decide, what happens to the near term prospects for the company. What is even better, if you think long & hard about it, the Variables are only 2. a) Demand for its leading Hybrids, b) Production planning/execution by the company. All other factors - Monsoons, Competition intensity, etc do not affect performance by more than 5-10%, amazing, but that's how it is!!

So cutting the long story short, I would like Market Experts to comment on how they would play the stock from here on, in the Short-term. (neglecting any long-term allocations by you). Hitesh, Ayush, Nooresh, Hemant, Bala, Safir, Tony, Others??

What actions would you take pre and post Q1FY14 results?

a) Given the perceived high uncertainty over Sales, if your avg price is ~1200, and price crosses 1600 before results (we probably have a month for that), will you be happy to pocket a cool 33% (since this is in the bag, and you reckon this wont sustain if company does below company guideline of 20-25%

b) Would you do this for 50% of allocation, or more?

c) If instead of consolidating at CMP (~1500) for some time, price crosses 1600 very fast, what would change in a) & b) above

d) Say couple of more reports come out, and If it crosses 1800 before results?? What actions will change wrt above

e) Will your actions completely depend on the Technicals (that your read for next 3-4 weeks)

f) What if I told you (forget the Skeptics) the company will easily do 60 lakh packets this year (50% higher Sales)- our dealer survey has a margin of error of 5% or less, and you fall for that - would you allocate less sales pre-results? By how much?

g) How much minimum allocation, would you keep for post-results? or none at all, given above possible price actions?

Please feel free to substitute/add to my questions with those that make sense:),any that will enrich us in understanding Opportunistic Capital allocation, better!

Cheers. Keen for some insights from you guys:)

-Donald

Posted byDonaldat Monday 17:45

Hi Guys,

Long time ...on Kaveri:). Been pre-occupied last few weeks with health issues of elders in extended family.

Here's my quick take on valuations front. Revised upwards post the Q4 results, butfactoring in a 1% drop in OPM to 19% levels(higher competitive intensity).

Numbers Base Case Best Case
Sales (lakh pkts) 50 60+
OPM (%) 19 19
EPS 100-105 120-125
Valuation 15x 15x-20x
Fair Price 1500-1600 1800-2500

Feedback from the ground:

a) Kaveri may do very well in AP. While it dominates in Coastal region (20-25 lakh packets), it is reportedly equally in demand as Nuziveedu in most of Telengana (60 lakh packets) except Adilabad district.

b) Feedback from Maharashtra remains mixed. Hingenghat (Wardha region) reports lacklustre activity dealers fear Kaveri share may fall even, but Amravati (Wardha region) reports encouraging feedback for Jadoo, Jackpot, ATM. Yet to get through to Yavatmal, another very important region in Mahrashtra.

Maintain as before, that Maharashtra Sales is unlikely to impact overall Sales figures, either way. (2-3 lakh packets up or down may not matter).

Net Net, the investment premises haven't changed. Re-iterate Kaveri is a long-term story. If they do well this year, next year will be much easier ride for Jadoo-ATM-Jackpot which look good to continue for next 2-3 years.

By that time Rice Hybrid story will start kicking in, where again Kaveri Seed is one of the leading players. Our next Management meet with Kaveri (around AGM) will look to focus on the longer-term Rice Hybrid Story.

-Donald

Disc: Accumulated significant holdings in Kaveri Seed. Pre Q4 results, had completed all my buying till ~1200. Post Q4 results, revised estimates upward and continued accumulating till ~1400. My views are certain to be biased. Above data does not point to/recommend buying at CMP (~1500). Please do own due diligence.

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Hey Donald,

As they say - if you take care of the downside, the upside will automatically be taken care of.

In the case of Kaveri, I think timing has been superb on both times. Given, the good timing and indications of possibility of good performance, one shouldn’t be in too much of a hurry to book profits.

Ayush

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IIFL projectin an EPS of 120 n 150 for next 2 years. The analyst is a knowledgable one tracking co for long. So are we seeing at 3000rs in 1-2 years?

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hi donald,

you have raised several questions relating to technicals, fundamentals, capital allocation etc. with my limited knowledge, let me present my views

disc : i hold 29% of my PF at avg price 1250

Technicals

Today the stock has broken 52 week high and closed above prev resistence , this break is with strong volumes and wide ranging bar. now what would be the new top ? the stock has corrected from its recent top 1464 to 1130, so we can expect another 334 points from 1464 (roughly 1800). now 1460 will be the support. so my take profit level would be around 1800

Fundamentals

Unfortunately i couldnt accompany the team for the field trips, i am living on borrowed conviction from fellow hyd value pickers (tirumal rao garu, om, ramakrishna) and your detailed analysis in this forum. so i cant contribute much on this

Capital Allocation

This is a personal choice , since my PF size is small i try to restrict the number of stocks to few. right now 50% of my allocation is for summer stocks like kaveri, v-guard, symphony. so i will have to take out some money after july. based on my current conviction levels, i plan on keeping around 15-20% for long term (kaveri)

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Interesting points raised donald,

Key question is whether you want to take profits before the june qtr results or wait for it and see how it goes.

I think the best and the base case scenario for fy 14 eps estimates could be around 105-110 as base and 125-130 as optimistic scenario. Here I am not putting in a scenario of negative or no growth where since the base is quite high due to a great fy 13. But that too should be a possibility. Applying a PE of 15 to these projections takes the price projection to 1600 to around 2000.

Now if you are getting a price of 1600 plus within no time, and have bought somewhere around 1150-1200 levels, u are getting a cool 35% within no time and not incurring the risk of debatable june qtr results.

If one books out of kaveri then there has to be another idea which could fetch a definite 30% upside with no risk within one year time frame. — hdfc bank, page ???

Personally I would not be too hasty in booking profits. In weak markets people tend to flock to stronger stocks and keep pushing it higher. So we may not know how high the stock can go.

Kaveri has broken out of a small flag pattern formation and targets are close to 1630 plus. Lets see if and when that is achieved and whether the stock price overshoots this target or not.

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hi donald,

for me, its a simple strategy. if a stock is in long term bull market(consistently making higher highs and higher lows without overlapping waves),one should not exit the stock completely unless it closes more than 10% below the 200 dma or you start having doubts about stock’s fundamentals. for e.g., since early 2009 when kaveri started its bull run, it has not closed more than 10% below 200 dma for the last 4 years. it has tested 200 dma many times and bounced strongly from there. this is how leadership stocks behave and they continuosly surprise you on the upside(e.g. ajanta, astral, cera, sun pharma, gruh, lupin etc to name a few).one canbook partial profits from time to time but only when the stock is extremely overbought on weekly charts or has just completed a very significant wave.

In kaveri’s case i did make an exception of exiting the stock completely around 1400 after the run up after q1 results last year but that was because of my concerns about the sustainaibility of their growth. the stock duly corrected while i watched but never closed below 200 dma. this was a strong signal that the bull run was not over. after you/hyd team collected ground level feedback for this year and management seemed quite optimistic on rice hybrids, i considered the stock again and entered during the consolidation period around 1200-1250.

The stock is still not overbought on the long term charts and is still in the intial stages of this uptrend. Initial target would be 1800. long term targets are much higher but I would talk about them only after the Q1 results. for the record, i am not exiting now and would not consider exiting even at 1800 unless i see the results).

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Astral also seem to follow the same trend . Through some scuttlebutt but unconfirmed sales at Astral are also proceeding at brisk pace. Figures for first 2 months are at 250 Crores n target for Fy 14 are quite steep.

I think these twin stocks show common characteristics like

  1. Leadership or fast approaching leadership.

  2. 30- 40% sustainable CAGR

  3. Honest & Ethical promoters

  4. First generation entrepreneur

  5. Huge size of opportunity

  6. Superb ROCE in both cases

  7. Strong moat of Germplasm & unique Lubrizol CPVC n Pricing power.

All in all both stocks stare at great growth in years to come .

Thanks are due to Donald , Hitesh n the valuepickers team for discovering such gems.

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Hi Donald,

I will give figures which speak volumes of the company.

FUNDAMENTALS:

PARTICULARS 2010 2011 2012
FREE CASH FLOW (MILLIONS) -135 446 991
RETURN ON ASSETS % 10.81 12.34 12.03
RETURN ON EQUITY % 21.06 24.96 26.97
REVENUE GROWTH %
YEAR ON YEAR 31.76 44.13 59.38
3 YEAR AVERAGE 35.09 34.25 44.65
EARNINGS PER SHARE %
YEAR ON YEAR 16.80 46.16 36.77
3 YEAR AVERAGE 29.57 32.66


Source: Morning Star

TECHNICAL ANALYSIS:

This is one LEADERSHIP STOCK. It has been trading above its 200 EMA for the past one year. This shows the strength of the stock. A very safe bet in the long run too.

From the Point and Figure Chart given below I draw the following picture:

http://chartink.com/pointfigure/KSCL.html

The stock is in a strong uptrend and has been trading above its BULLISH SUPPORT LINE (marked in blue) for the past one year. It gave a triple top break out at 1300 and now it is close to its previous high of 1550 where it will make another double top. If it breaks out further then it will make a new high too.

On the down side it has support at 1340 and then 1300. This stock is worthy of buy on dips at every stage. A good entry point will be close to 1300.

Currently, the stock is over bought as per RSI, ( see chart below). So be patient and wait for some correction to enter the stock at every dip. This stock is a must for all portfolios at the right price.

http://chartink.com/stocks/kscl.html

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What I have done is, I have added to my position before the Q4 results, expecting a spurt in prices in the from May-Aug timeframe. Post Aug, I will sell the additional part that I added and retain the base position for the long term, probably after a 2-3 weeks of the Q1 results. Although my base position is around 75% of my overall position, which I intend to keep for longer term.

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vivek,

this seems interesting. what is your source of this 250 crore figure. if that is extrapolated for the 3rd month, that would mean a 43% QoQ and 106% YoY growth. i am not sure how is that possible. what kind of annual targets are we talking about here?

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Thanks for the quick responses.I want to pose a few more questions/thoughts:

1). Consensus seems to be for booking profits post results ONLY. Most respondents feel confident of good results (much above coy’s 20% ) else atleast some would have booked some profits at 1600 which is the 25% growth fair-value case.

2). If company does only 20-25%, prices may not sustain above 1600, there isn’t a case of re-rating, and actually will be a disappointment - because prices are already touching ~1600 (1587 CMP), a month and a half away from results, and thus factoring in much higher expected growth.

3). I have no experience in short-term bets (and am in listening mode now), but am surprised that except for Bala, no one is talking about booking some profits at 1800 - whenever that comes - especially if pre-results (a cool 50% upside in <3 months, then).

@Hitesh

a) No profit booking @1800 crossed before Results - knowing you I find that hard to digest. You are in danger of falling in love:) (for only the 2nd time in your life, if I may add:))

b) Btw, Thanks for your idea of deploying quick profits into a couple of perennially expensive stocks like Page…will extend it to others like Sun Pharma…HDFC Bank or HDFC (for sum of Parts)…or say more of ITC, Nestle. This is swell, because (since this is free money), it will help in boosting the compounding possibilities from perennially expensive stocks…appeals a lot to me…do this twice a year, and you are done!

@Bala

a) I like your CLEAR target. 1800 is a SIMPLE book (some) profits signal also for me I think:), ONLY if it comes pre-results. Hey I have got a cool 50% in the bag, which I will be eager to redeploy.

b) I didn’t ask any Fundamental Question:), but am going to nowin the next post, seeing the underlying CONSENSUS over-bullish sentiment

@Hemant

a) Yup, depending on Results - in-line, outperform, majorly outperform, agree this can soar anywhere, good to wait

b) But in absence of any Targets, You seem to be RULING OUT an under-performance or in-line performance scenario

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Vivek & Hemant ,

Thanks for the Astral note. Kindly make sure, this important piece of ASTRAL scuttlebutt is not LOST here. Please copy/post same in Astral thread, if not already done.

Will help other members take this up - cross verify, debate.

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Re: CONSENSUS Over-Bullish sentiment on Kaveri

Going by the responses so far from our Trading Experts, this can only mean everyone is SUPER CONVINCED of super-results from Kaveri. Guys, I can’t help but think our field-work may have unwittingly overly biased you/and anyone else who has accessed the field reports.

There IS that chance that Kaveri gets routed in Maharshtra!

Critics of our field-work point out that last year in Maharshtra was different. Mahyco and Ajeet could not supply, so Kaveri could step in and grab some share off them. This year both Mahyco (#1 in Maharashtra) and Ajeet (#3) as per current demand, have doubled the inventory and Nuziveedu (#2) also has higher inventory. Between them they will corner Maharashtra market and crowd out Kaveri.

Kaveri does not have a single region (in Mah) where it is dominant or within top 3 in farmer’s mindshare. Kaveri may fall back to 2011 levels - 5 lakh packets - half the Sales of 2012!!

Counter-views invited.

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**

@Hitesh

a) No profit booking @1800 crossed before Results - knowing you I find that hard to digest. You are in danger of falling in love:)) (for only the 2nd time in your life, if I may add:)))

b) Btw, Thanks for your idea of deploying quick profits into a couple of perennially expensive stocks like Page…will extend it to others like Sun Pharma…HDFC Bank or HDFC (for sum of Parts)…or say more of ITC, Nestle. This is swell, because (since this is free money), it will help in boosting the compounding possibilities from perennially expensive stocks…appeals a lot to me…do this twice a year, and you are done!

donald,

Personally I dont think stock is going to touch 1800 in a hurry. I think it can only do so post very good q1 fy 14 results sometime in july-aug.

About profit booking, I would be quite happy booking partial profits even at around 1600 odd but since the stock in a strong momentum I would like to see how high it goes.

The dictum comes again – a bird in hand is worth two in the bush. If I were to get risk free (pre q1 fy 14 results) profits of a sufficient magnitude, I would surely book them. Because I think one has to be cognisant of the possibility of underperformance and results not matching expectations.

The love affair with any particular stock is not there any more. Last one was with ajanta. What u could call infatuation is going on with unichem.

About shifting the funds from sale of kaveri to some other steady compounders, it is a strategy I have been pondering over recently and seems to be a good one. If I get a quick 25-30% returns from a stock and I get a steady 25% compounder like HDFC bank or some such other stock at attractive price, I would be glad to shift to the latter one as I am not too bothered about the stock not delivering expected results. Companies like hdfc bank with very high CASA and very high asset quality will always have a lot going for them in all kinds of markets.

I would not classify kaveri as a steady compounder as there are a lot of ifs and buts going with it if I were to consider the long term story.

**

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Kaveri delivery % age is consistently on the higher side. Even today it was 67% on higher volumes of 60 K in NSE. Due to strong hands coming in the scrip is going to next orbit IMHO.

The quality of callers in concal was impressive to say the least.some of the name I remember we’re

  1. GS 2) FT 3) Motilal Oswal 4) Wallfort 5) IDFC 6) IIFL 7) Phillips Capital

The research reports from IDFC n IIFL post concall are detailed n impressive.

They are stressing on long term sustainability of Kaveri business model , asset light, Moat, pricing power n it’s ability to snatch mkt share from competitors due to superior R& D. Product.it can reach its mktshare to 30% in cotton seed business in few years .

India can be supplier to whole of the world of excellent quality cotton. Can’t cotton be grown in states like UP , Bihar where earlier cotton was grown extensively. If this happens the demand n the co cam move to next orbit.

Views invited.

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Hitesh,

Thanks for your response. Makes sense about not touching 1800 in a hurry. Agree

BUT (please bear with me) I have been asking you guys to state at what levels will you book what % of allocation. You are not in love with Kaveri, you dont think its a steady compounder (lots of ifs & buts), so obviously you will start booking profits and completely exit - probably by Sep/Oct latest - this is what I thought, you would typically do.

So allow me to ASK more clearly. Assume a super duper result from Kaveri. (If it doesn’t we all know what to do). So we have agreed stock can go to 1800-2000-2500 who knows, we will ride and we will see.

Assume this RIDE is happening - this is the exact scenario getting played out slowly/fast - but stock keeps climbing from 1600-1800-2000+. This is my original question - assuming this plays out - how will someone like YOU and others ride the ride. When will you book profits on 25% allocation, 50% allocation, and when will you exit completely.

It’s like you are answering a hypothetical question on a hypothetical company )- forget Kaveri for the moment - if that is causing the distraction. There are many scenarios possible…Super results is one of the likely scenarios…how would you handle this scenario?

I hope this is not seen as putting anyone on a SPOT…just want to understand…how would the best Trading minds play this kind of a ride - when you have already put in a significant allocation, say.

Bala, Hemant, Nooresh, Ayush, Safir - hope this time it’s more clear - hoping to hear more comments from everyone. Ayush - your earlier answer was v v cryptic:)

-Donald

[under-performing/in-line results to 25% guidance is another scenario…I am pretty clear how to handle that:)]

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Hi Donald,

I agree with Hitesh that when a stock is in strong momentum, you just ride the journey. One cannot predict exactly where it will stop. It depends from person to person, when to take the profits. Suppose if one has 100 shares, then from 1600 onwards, one can start booking profits, increasing the quantity as one goes higher and higher. Eg. 10 at 1600, 20 at 1650, 50 at 1700 and so on. This will give you a good average sale price too.

In technicals you cannot predict the top nor the bottom. But one can read the charts with additional tools. I use the RSI and CCI. When RSI is below 70 and CCI is about to touch +100 (in red) its a good buy for trading. On the reverse, when the CCI reaches +100 its a good time to sell.

See chart below:

http://chartink.com/stocks/kscl.html

Currently the RSI is in over bought zone and CCI is 218 and moving up. So there is more steam left in the stock.

To know more on CCI watch this video below:

http://www.youtube.com/watch?v=sZQgsgDnLyU

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As some of you who I’ve met, chatted with or who have interacted through social media may have noticed, I’m no longer a firm believer in over concentration. In a universe of several thousand of listed companies in India we are still with a handful of companies that are showing consistent roi and balancing growth with value.

Globalisation has been a game changer with too many variables at play, far more than I ever expected.

To cut a long story short, unless there is something radically wrong with the company or its competition soaks up its future growth, I will let this one be. If would hardly interest me what the company will do in one quarter if the goi doesn’t mess up with some policy or there is a major patent piracy success against the co. I would not allow the co to go out of proportion in allocation and if it does cause of a big surge I will evaluate the effect having regard to my other cos

In other words if the markets surge and the portfolio value grows I won’t tinker much. If Kaveri surges with more than mkt moves and the surge is speculative on the face of it, I will crop only to balance it.

If the stock falls I won’t add unless the fall is other than for market returns. I usually don’t average on declines though I do add winners in proportion to liquidity and portfolio balancing.

Thus expect little or no action from me. Sometimes the best returns come from inactivity and just being invested.

Simple thoughts which may or may not meet your detailed analysis and fantastic efforts. However as I learnt from none other than Edward de Bono keeping it simple is the toughest part.

Cheers and happy investing.

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Thanks Tony for your detailed inputs. I guess my last question was not making much sense to the Trading veterans:).

As someone said before, we could keep a tab on things by keeping a tab on the charts. I am interested to see how you guys call the next moves. Hitesh did mention …sustaining above 1600 will need a period of consolidation…and that seems to be playing out!

Bala, Tony other chartists - please keep posting your observations on Kaveri charts periodically here, so I can attempt to atleast follow what you guys are reading:)

-Donald

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hi donald,

the way i am reading this chart in the short term is as follows:

kaveri completed the first leg of this new uptrend at 1600+ and is now correcting in the second leg. the all time closing high in thvi uptrend before this one was 1450. which means when stock broke out above that in the recent rally on a closing level basis, it confirmed a new uptrend and this level of 1450 should now act as a strong support for this correction. if the stock is a buy if it gets there to load for the next rally. every completed uptrend works in five waves(rally-correction-rally-correction-rally) before a bigger correction takes place. given that it has just completed the first leg, i would expect atleast three more waves(including two more rallies) to happen before this uptrend is over. this is one reason why i am looking to ride this one and can’t commit to my profit booking level becuase it would change depending on how the waves play out. i would usually start booking profit when the fifth wave takes out the top of the third wave. to me, right now that seems far and hence sitting tight and waiting to add more if it corrects to 1450. this analysis is valid only if kaveri doesn’t close below 186 on any day. if it does, analysis is invalid and the uptrend is over in my opinion.