As per unauthenticated media articles, the Central Government panel on cottonseeds pricing has recommended lowering the MRP to 800/packet (versus 830-1,100 at present), mainly by cutting royalty payable to Monsanto. If accepted, this will vindicate the stance taken by Kaveri Seed management, remove uncertainty over its royalty-related dispute and lead to a 10% earnings upgrade for FY2017-18E. Maintain ‘buy’.
As per a Mint newspaper article citing anonymous sources, the government constituted panel to recommend the selling price of BT cottonseed for CY2016 kharif season has recommended a price of 800 per packet (current price at 830-1100). The panel has further recommended lowering the royalty payable to Monsanto to 49 per packet, from 166 per packet currently.
We note that the Central government had set up a panel in December 2015, to suggest the maximum retail price of cottonseed packets to farmers, on a pan-India basis. The panel was given the power to regulate all the cost components of cottonseed, while deciding upon the final price of cottonseeds.
If the government accepts the proposal of lower royalty rate for Monsanto, it will remove the uncertainty over Kaveri’s future margins on account of royalty related dispute.
Kaveri has paid Monsanto royalty at 70 on a per packet basis in FY2016, which the latter has disputed in the High Court. Pending settlement, we (and the Street, in our view) have been accounting for royalty at unchanged rates, adjusting Kaveri’s reported EBITDA and PAT for the unpaid royalty (660 mn in 9MFY16).