Agri input firms' short-term margins to remain under pressure on price cut

Govt has asked seed companies to reduce prices of all hybrid seeds by 10% with effect from June 19

The profit margins of agri input companies are likely to get impacted by 1-2 per cent in the next few quarters due to their commitment to cut prices of key inputs like seeds and pesticides.

Both seeds and pesticides producers have agreed to cut agri input prices in a recent meeting with the officials of the Ministry of Agriculture. While seeds companies have obliged the government with 10 per cent price cut, pesticides companies agreed to roll back a recent price increase. This means they need to cut 15 per cent on maximum retail price (MRP) of a section of pesticides used in agriculture sector.

Apart from that most retailers at the village and taluka levels would face difficulties in shifting from excise duty to the Goods and Services Tax (GST) regime. The transition from the current excise duty to GST would take some time to become smooth. During this period, therefore, pesticides' sale would get impacted.

"The pesticides industry offers sale on credit basis also. So, with the GST regime setting in, companies would require to compensate some bit of retailers' loss in addition to return of some consignments. All put together might impact margins of agri input business by 1-2 per cent during initial periods of GST roll - out," said M K Dhanuka, managing director, Dhanuka Agritech Ltd.

Meanwhile, most seed companies have already dispatched their produce to distributors and then retailers as sowing of kharif agri crop started with the onset of monsoon rainfalls albeit two-week late.

While the IMD's (Indian Meteorological Department's) normal rainfall forecast for this monsoon season has raised hope for a bumper kharif output this year, agri input companies are keeping their fingers crossed for its distribution. "The first fortnight of July would set the tone for the kharif output this year," said Dhanuka.

Meanwhile, the government asked seed companies to reduce the prices of all hybrid seeds (except Bt cotton) by 10 per cent with effect from June 19. The move is aimed at providing relief to farmers whose profits are shrinking due to higher production costs while realizations have softened due to bumper harvest. As of now, the price cut is applicable on sales made during the kharif season and the seed industry is yet to decide whether to extend the reduced prices to the rabi season as well.

"From the seed companies' perspective, we don't see a major impact on profitability since the purchasing commenced few weeks ago and is almost nearing its end (as kharif sowing has begun). Also, with cotton seed prices static, major companies such as Kaveri Seed should not be significantly impacted. We expect 1-2 per cent impact on earnings before interest, tax, depreciation and amortization (EBITDA) for the companies like Bayer, Rallis and DCM Shriram," said Sumant Kumar, an analyst with Emkay Global Financial Services.

Agrochemical sales are likely to remain subdued in short term due to GST roll-out. A few Agrochemicals companies are issuing credit notes for excise duty due to its cumbersome process and also the involvement of cost. Hence, companies are placing orders as per requirement.

However, the major concern for the seed industry is the interference of the government in fixing seed prices. Last year, the government cut royalty on Bt cotton seeds and this year hybrid seeds prices have been reduced. Clearly, the government's continuous intervention does not bode well for the seed companies, Kumar said.