Even as a royalty payment case drags in court, another uncertainty has cropped up for Kaveri Seed Co. Ltd. The capital market regulator, the Securities and Exchange Board of India (Sebi), has ordered a forensic audit of the company. It is not yet clear what made Sebi seek a forensic audit, but the development certainly raises the risks on the stock. Also, earlier this month, the Union government issued a notification, saying it will control cotton seed prices from the next fiscal year. A committee will recommend a price after consultations with stakeholders.
Kaveri is confident the new Act will be beneficial for the seeds industry as it will bring uniformity in prices and put an end to royalty disputes. It believes the central government will take into consideration the investments made by the seed industry before deciding on the selling price, which will help ensure its profitability.
But investors are not convinced. The stock fell sharply after the government's announcement. The Street is worried the price control may not only cap profitability but will also cut the scope for structural improvement. "Our understanding of agri-inputs industry suggests that government will leave reasonable profit on the plate for seed companies but not allow them to make windfall gains. While Kaveri argues that the new Act might be profitable for it and they may make higher than current margins of Rs 200/packet, however we are sceptical on whether they will make more than the current margins," B&K Securities India Pvt. Ltd said in a note.
According to the brokerage firm, the government would either leave the maximum retail price (MRP) unchanged or cut prices, if it lowers the royalty (to be paid to the technology provider).
In either case, the seed firms' margins will come under government scrutiny, which can lead to unintended consequences. "If government reduces royalty, it will reduce cottonseed MRP also. Case in example is the nutrient-based subsidy policy on complex fertilizers which was introduced in April 2010. While in the initial two years leading companies made Rs 3,500-4,000/mt (metric tonne) margins on DAP, their margins came to reasonable levels of Rs 2,000-2,500/mt post 2012 as government realized they were making high margins and hence cut subsidy," the B&K Securities note added.
Of course, much depends on the market dynamics and the price government fixes. The year gone by has not been good for the industry. Unfavourable climatic conditions and shift in acreages have hit cotton seeds demand last season. But as the situation improves, the price control can be a hindrance. Overall, while price control can be a long-term headwind, the stock direction in the meantime will be influenced by the court verdict on royalty payments and forensic audit findings.
In arrangement with HT Syndication | MINT
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