Seed, pesticide firms’ margins under pressure after price cuts
The profit margins of seed and pesticide companies are likely to be squeezed by 1-2 per cent over the next few quarters because of their commitment to lower prices.
Producers agreed to lower prices during a recent meeting with officials of the agriculture ministry. Seed companies have agreed to a 10 per cent price cut and pesticides companies have agreed to roll back a recent price increase.
Moreover, most rural retailers are expected to face difficulties in shifting from excise duty to the goods and services tax (GST). During this period, pesticide sales are likely be affected. “With the GST setting in, companies will have to make good some of the retailers’ losses. All put together, this could squeeze margins in the farm input business by 12 per cent during initial periods of the GST,” said M K Dhanuka, managing director, Dhanuka Agritech.
Most seed companies have dispatched their produce to distributors as sowing of the kharif crop has begun. “The first fortnight of July will set the tone for the kharif output this year,” Dhanuka added.
The government has asked seed companies to reduce prices of all hybrid seeds, except Bt cotton, by 10 per cent with effect from June 19. The price cut is applicable on sales during the kharif season. “We do not see a major impact on the profitability of seed companies because purchases are almost nearing their end. We expect 1-2 per cent impact on earnings before interest, tax, depreciation and amortisation (EBITDA) for Bayer, Rallis and DCM Shriram,” said Sumant Kumar, an analyst with Emkay Global Financial Services.
Agrochemical sales are likely to remain subdued due to the GST rollout. A few agrochemicals companies are issuing credit notes for excise duty. The government last year lowered the royalty on Bt cotton seeds and this year hybrid seed prices have been reduced. The interventions did not bode well for seed companies, Kumar pointed out.