Kaveri Seed Company: Wait and watch

The AP govt suspended the company’s cotton licence for a year

The Andhra Pradesh government recently cancelled one company’s licence for producing cotton seeds and suspended licences of 13 others, including that of Kaveri Seeds. This was following the companies being found selling HT (herbicide tolerant) cotton seeds which use BG II RRF technology that is not approved for commercial sale in India. The government order was out on January 29. 2019.

But Kaveri Seeds kept silent and did not disclose the details of the order when it reported its December 2018 quarter results to the exchange.

In a call with analysts on February 18, to a question raised by a participant, the company replied that it didn’t report the development as it was not material — cotton seeds sales in AP contribute only 5 per cent to the total revenue. The company’s Executive Director Mithun Chand went on to the say that the issue will be resolved in the next two to three weeks and the licence renewed before the start of the next season (in June).

This development however has irked the market and raised questions over the company’s corporate governance standards.

Suspension of Kaveri Seed’s licence follows a show cause notice issued to it a year back (29 January 2018). The recent order on suspension of licence issued by the Commissioner of Agriculture indicates that it was unhappy with the answers given by the company.

In the show cause notice issued to the company last January, a copy of which is with Business Line, it has been said that the AP State HT Task Force Committee visited the seed production plots on October 23 and 24, 2017 in different villages in Kurnool and Guntur districts and collected leaf samples. These samples tested positive for the HT trait. In the conference call, post-results, Mithun Chand said that it could be because of cross-pollination that the HT trait entered the cotton crop. One can’t be sure about this. Some experts Business Line spoke to said that cross-pollination is limited in the case of cotton.

However, in a detailed letter written by the National Seed Association to the Commissioner of Agriculture, AP, the Association has pointed out that only one or two lots of the several belonging to companies whose licences have been suspended, tested positive for the HT trait. It went on to say that with about 10-15 per cent of the area in the state with HT cotton, it is natural that there is contamination in a few seed lots.

However, now that the stock price has factored in the loss of revenue in AP, and the company is also confident about getting back the licence, investors can, perhaps, wait and watch. The company’s management has also gone on record to say that there has not been any problem with its cotton seeds in any other State.

Latest results

For the December 2018 quarter, sales were down 5 per cent and profit (before taxes) 3 per cent. Deficient rainfall and drop in acreage in cotton and other crops impacted sales. In cotton, it was also the fear of the pink bollworm that hit sales. For the nine months ending December 2018, sales and profit were down 1 per cent.

The company continues to diversify into rice, bajra and vegetables, thus reducing concentration risk. Over three years, non-cotton is expected to contribute 60 per cent to revenues, according to the management.

However, cotton still contributes 55 per cent of the company’s revenue and the company’s presence is growing in Maharashtra and Gujarat.

 

 

 

At the current market price of ₹404, the stock discounts its estimated earnings for 2019-20 (assuming AP cotton business resumes) by 11 times. Only five to six months back, it was trading at a PE of 18 times.

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