Regulatory risk rears its ugly head again for Kaveri Seed’s investors
Reports that the government may reduce the price of genetically modified Bt cotton seeds came as an unexpected jolt for the investors of Kaveri Seed Co. Ltd. Its stock fell 4% over the last three days, which isn’t surprising given that it derives more than half of its revenues from cotton seeds. If approved, this will be the second price cut in three years. The stock however rose 3% on Thursday.
The news comes in the backdrop of lacklustre results in the December quarter. Revenues rose just 4% last quarter. But Kaveri Seed’s guidance of healthy growth in the cotton seeds business in the coming fiscal year kept investor hopes alive. The company is planning an expansion in key cotton growing states such as Maharashtra, Andhra Pradesh, Telangana and Gujarat, and market share gains in these regions are expected to drive growth.
This assumption is under risk now. More so after a season of pest attacks, low yields and the improving appeal of non-cotton crops.
If the pink bollworm pest infestation problem weighs on the cotton crop acreages in the coming season, then Kaveri and the rest of the seeds industry will have to deal with a significant drop in demand. This can result in pricing pressure and can blunt the benefits of market share gains the company and its investors were banking on.
Further, cotton seed prices remain an area of concern. Ahead of the general election, the government may as well go for another price cut or at best maintain status quo for the next crop season (in 2019), virtually capping the prices for two years.
As such, there is hardly a case for pricing strength for seeds companies, especially with the possibility of lower crop acreage this year.
While the outlook right now is not that rosy, Kaveri Seed downplayed the development. In an interview to CNBC-TV18, the management said that the government is yet to decide on price cuts. Even if price cuts materialize, the impact may not be large as part of the burden will be shared by the distribution channel (retailers), it said.
Further, it alluded to the increasing share of non-cotton seeds business. The company has indeed stepped up focus on the non-cotton seeds business, such as maize, rice hybrids and vegetables seeds. Still, due to its higher contribution, the cotton seeds business remains core to Kaveri’s earnings and the price cut recommendation by the government committee does not augur well for earnings. Much now depends on the coming cotton crop season and how acreages shape up.
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