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Kaveri Seeds: Prepared for challenges? - Views on News from Equitymaster
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Kaveri Seeds: Prepared for challenges?
Dec 31, 2015

Our recommendation on Kaveri Seeds in November 2015, was on the grounds of the company's R&D focus, strong presence in the key cotton belts across 19 states, good visibility amongst farmers and network of over 20,000 dealers and distributors. These made Kaveri a force to reckon with in Indian hybrid seed industry.

The recent correction in the stock price is primarily due to uncertainties arising out of three aspects. Here is our take on them.

Litigation on payment of royalty to Monsanto: The seed manufacturers in India pay royalty to Monsanto for the technology to manufacture such seeds - as the gene is sourced from the company. As per contract, the seed companies are expected to pay a certain amount to Monsanto from their final sales - on per kg basis.

However, since the price of cotton seeds is regulated by the government, the latter is allowed to fix the cost components as well as per the Cotton Seed Act. The governments across states cut the royalty on cotton seeds on the back of the drought this year, which led Kaveri (along with the entire industry) to pay less royalty to Monsanto in year so far. However, as there was no contractual agreement with Monsanto regarding the same, the matter went into litigation. This is the key reason why Kaveri's margins in fact shot up during the year so far. This development makes it difficult for us to gauge the outcome and thus can throw up surprises - negative or positive - on our estimates.

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