India Ratings, a Fitch Group company, has downgraded India’s leading hybrid seed producer and retailer Maharashtra Hybrid Seeds Company (Mahyco) due to a recent ban imposed by the government of Maharashtra.
The rating has been lowered to “negative” from “stable” earlier.
The outlook revision reflects India Ratings’ view that continuation and possible proliferation of regulatory road blocks may disrupt Mahyco’s revenue cycle and pressurize its operating profitability, which in turn could negatively impact its credit profile.
The Maharashtra government has recently issued an order cancelling the company’s license to sell and distribute genetically modified Bt cotton seeds in the cotton producing states of Maharashtra. The government was acting on complaints by a number of farmers and state leaders who found Mahyco charging higher from farmers for lower grade seed and also indulged in unfair trade practices.
Mahyco was facing a blow when the Union Environment Ministry rejected the company’s proposal to allow commercialization of Bt brinjal. The company is actively doing a trial run on Bt okra and rice.
India Ratings’ does not expect any immediate impact of the order on the overall credit metrics of the company. For FY12 (year end March), revenue from Bt cotton in Maharashtra accounted for around 13.1% of the total revenue and around 6% of overall EBITDA.
The affirmation reflects Mahyco’s higher-than-anticipated growth in revenue and profitability in FY12. Also, its credit metrics in FY12 was broadly in line with India Ratings’ expectations. The ratings continue to factor in the company’s strong product portfolio, healthy pipeline of products backed by strong R&D capabilities, strong network of growers and overall robust credit profile.
For FY12, the overall revenue increased 8.8% yoy to Rs 655.84 crore and operating margins 200bps yoy to 26.4%, led by a higher dividend income from Monsanto Mahyco Biotech, the company’s 50:50 JV with Monsanto.
Core crop revenue registered marginal growth of 2.2% yoy to Rs 508.1 crore, led by higher average pricing despite a decline in volumes from poor agro-climatic conditions. Mahyco reported net financial leverage (adjusted net debt/op EBITDA) of 0.2x in FY12 (FY11: negative 0.9x).
The ratings are constrained by the working capital intensive nature of Mahyco’s business especially due to high inventory as demand is based on agro-climatic conditions. Poor agro-climatic conditions could impact overall demand for seeds from farmers and lead to inventory pile-up. Other associated risks include higher competition emanating from other competing seed companies with similar product profiles and other regulatory risks.