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Jul. 10, 2013

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Jul. 10, 2013
Shares of India seed companies are surging. Kaveri Seed Co. Ltd’s stock has doubled in the past year. Advanta India Ltd delivered an enviable return of 56%. Driving investor interest is steady growth in the domestic seeds market, which is worth Rs.15,000 crore and is estimated to be growing by 15% a year.

Tracking the healthy growth of the industry, Kaveri more than doubled its sales over the last three years. While Advanta is going through a restructuring, shares of Bayer Cropscience Ltd, which also derives notable revenue from seeds, advanced 82% in the past one year.

Rallis India Ltd’s stock has, however, gained a mere 2% over the past one year, while the benchmark S&P BSE 500 index in the same period rose 7%. Both Bayer Cropscience and Rallis India are predominantly agrochemical companies, although they are aggressively diversifying into the seeds business. High market share, a robust product portfolio and a strong balance sheet have helped Bayer Cropscience fare better than Rallis India. The performance of Rallis India, on the other hand, has been hit by untimely rain and tough business conditions which weighed on earnings in the last fiscal year.

That said, the outlook for seed companies is getting brighter. Thanks to a good monsoon, crop sowing is happening at a brisk pace. As of 5 July, total crop sowing was 86% higher than last year, according to the agriculture ministry. Sowing of major seed consuming crops—rice, pulses, cereals, oilseeds and cotton—was substantially better than last year.

Kaveri derives most of its revenue from the sale of cotton and rice seeds. As seed usage per acre rises, it is aiming to boost its cotton seed market share from 10% to 15%, according to a report from Edelweiss Securities Ltd. The next growth driver for Kaveri and other seed companies is expected to come from hybrid rice seeds. The area under cotton cultivation is either stagnant or falling. With rice hybrids having lower penetration levels, companies are seeing greater business opportunities in this area.

“India has around 2 million hectares (of a total 40 million ha) under hybrid seed in rice crop, which is the next big opportunity for the industry as well as Kaveri. The company expects area under rice hybrid seed to grow to 4-5 million hectares over the following three‐to four years,” an Edelweiss Securities Ltd report said.

According to Espirito Santo Securities India Pvt. Ltd, many seed companies expect the rice seeds market to surpass the size of the cotton seeds market in four-five years. Increased usage of rice hybrids will boost the sales outlook for Kaveri and Bayer, which have a strong product pipeline.

Rallis, on the other hand, has greater presence in the cereals and fibre crop seeds. While the company also sells hybrid rice and cotton seeds, its seeds business is seeing strong growth because of new product launches and consumer connect initiatives such as “Grow more pulses.” Buoyed by strong growth at the seeds subsidiary—Metahelix—Rallis is aiming to increase the share of its non-pesticides business from the current 10% to 40% over the next few years.

The challenge for the seed companies is to keep up with technological innovations and changing crop patterns. While the acceptance of genetically modified crops continues to be a challenge, growing competition means companies have to step up spending on research and development.

Source: Live mint

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