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Aarati Krishnan

The company has a first-mover advantage in the GM seeds business.

INVESTORS can consider adding the Monsanto India stock to their portfolio, as it offers the prospect of healthy appreciation linked to steady earnings growth. After the recent decline, the stock trades at a price-earnings multiple of about 18 times its trailing 12-month earnings. Though this seems stiff, it is justified by the company's strong balance-sheet and consistent record of double-digit profit growth through agricultural and climactic cycles.

The fourth quarter numbers for Monsanto, which are not yet out, are not material, as this represents a lean season for its operations. Monsanto usually reports a marginal net loss in the March quarter, with the essence of its financial performance for the fiscal already captured in the nine-month numbers.

Monsanto India has entrenched brands, drawn from its parent's portfolio, in herbicides business, targeted at the foodgrains, cotton and soyabean crops. Brands such as Leader, Machete, Avadex and Fastmix are well-recognised in the farming community. In the high-potential hybrid seeds business, Monsanto markets sunflower, maize and cotton hybrids. Bollgard cotton, a patented brand of genetically-modified pest-resistant cotton seeds, is marketed through a joint venture with Mahyco.

Though the crop protection business as a whole is monsoon-dependent, Monsanto has, in the past, been resilient in the poor monsoon years. Over the past five years, despite patchy monsoons in two, the company has registered consistent double-digit profit growth, with the compounded annual growth rate at a robust 42 per cent. The year 2004-05 saw a deficient monsoon in the kharif season that reduced the output of foodgrains and oilseeds. But the rabi season has been much better, with a recovery in output of foodgrains and oilseeds.

This, combined with a sharp improvement in oilseed and cotton yields and firm trends in farm product prices, points to reasonable offtake of crop protection products in the coming year. A normal monsoon has been forecast for 2005-06. This could further aid offtake of crop-protection products.

Monsanto's hybrid seeds business appears to offer substantial opportunities for a ramp-up in revenues, given the increasing adoption of high-yielding varieties by the farmers. The Government's thrust on improving the infrastructure and the flow of credit in the rural areas should also yield long-term dividends for players in the agri-inputs business.

Bollgard cotton, which Monsanto distributes through Mahyco Monsanto Biotech Ltd, appears to have delivered good results so far, resulting in increasing adoption of this technology by farmers. The company retains the first-mover advantage in this high potential segment. Though three new players were recently allowed to conduct trials in Bt cotton, these seeds are likely to be available for commercial cultivation only by 2007.

The new patents regime may not result in substantial benefits to multinational players such as Monsanto India. But with the domestic crop protection market dominated mainly by off-patent molecules, a substantial change in the market dynamics was not expected, in any case. However, this may not deter the company from furthering its growth prospects some of the older, entrenched products from its parent's portfolio to further its growth prospects.

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