The Reserve Bank of India’s (RBI’s) decision to hike the foreign investor holding limit in Kaveri Seed Co. Ltd helped the stock rebound on Monday.

In the two weeks prior to Monday, the stock lost 16%, hit by the Maharashtra government’s decision to reduce the prices of Bt cotton seeds in the state.

The government decision came as a nasty surprise.

Due to a rise in production costs, the seed industry group had been lobbying for a price hike.

Instead, the state government reduced prices by 100 per packet. While it has to be seen how the increased foreign shareholding limit will help, the seed price cut can have larger implications for Kaveri.

For one, the price cut can put pressure on other state governments to follow suit.

“(It) could lead to more such demands in states such as Seemandhra and Telangana, which are key revenue contributors for Kaveri," Ritesh Gupta, associate vice-president-research, Ambit Capital Pvt. Ltd said.

Second, the decision can have an impact on Kaveri’s business plans.

From less than 20% now, the company aims to increase its marketshare in hybrid cotton seeds to 25%. Maharashtra is central to this plan as it is the biggest market for hybrid cotton seeds in India.

With marketshares in Andhra Pradesh and Karnataka already high, Kaveri is planning to increase its share in Maharashtra by pushing new products.

But with the state government reducing seed prices, it has to be seen if Kaveri will promote these new seeds with the same vigour as their volumes right now are low and have a different cost structure. “Price cuts at this stage can weigh on the company’s plans as they can hit realizations," said Mukesh Saraf, assistant vice-president-research, Spark Capital Advisors (India) Pvt. Ltd.

The third issue is realizations. The company may only have an 8% marketshare in Maharashtra at present, but the state contributed about 16% of Kaveri’s cotton seed volumes in the previous fiscal. A back-of-the-envelope calculation by an analyst who tracks the company says operating profit or earnings before interest, taxes, depreciation and amortization (Ebitda) on the Maharashtra volumes can halve if the reported price cut materializes fully.

It will be tricky to implement the price cuts as the company may already have placed seeds with dealers. But if the price cut message reaches the end-users in time, then the dealers will be forced to lower seed rates, which could impact Kaveri’s realizations.

An analyst with a domestic broking firm who did not want to be named said a 100 per packet reduction in prices in Maharashtra can lead to a 3% reduction in Kaveri’s earnings.

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