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Monsanto India: Buy

Aarati Krishnan

MONSANTO India has reported robust profit growth on flat revenues for the first half of the current financial year. While this has been a challenging period for crop protection companies, the outlook for the next couple of years appears brighter.

For one, the excess rains in this monsoon have substantially bolstered the storage position in major reservoirs; this should have a beneficial impact with a lag on offtake of select agrochemicals over the next couple of years. Second, stepped up investments in rural infrastructure and increased flow of farm credit is also likely to translate into higher demand for agricultural inputs.

Monsanto India is well-placed within the crop protection industry to capitalise on these opportunities. The company's focus on herbicides, an under-penetrated market, could drive revenue growth, at a time when insecticide offtake looks set to decline.

The hybrid seeds business is in the nascent stages and offers high growth potential. There is also considerable potential for the company to grow its earnings through cost savings. The company's rock-solid balance sheet, uninterrupted track record of double-digit profit growth and robust return numbers are other comfort factors associated with the stock.

Monsanto India derives the lion's share of its revenues from manufacture and marketing of crop protection chemicals and sales of (non-GM) hybrid seeds. Wheat, rice, soybean and corn are the key target crops.

The bulk of revenues from the genetically modified Bt cotton seeds accrue, not to Monsanto India, but to its 50 per cent joint venture Mahyco-Monsanto Seeds Ltd.

Monsanto India's numbers are unevenly spread between quarters on account of the seasonal operations; therefore evaluating the quarterly numbers in isolation may present an inaccurate picture. The half-year period ended September represents the kharif operations, busy season for crop protection companies. In the first half of 2005-06, the company managed a profit growth of 35 per cent to Rs 54.4 crore, despite almost flat revenues of Rs 215 crore.

This has been a challenging period for crop protection companies as the patchy monsoons of the previous year and the delayed onset of the 2005 south-west monsoon impacted agrochemical sales.

Monsanto has registered sober sales growth over this period but has managed a substantial improvement in profits, through operating margin expansion. Savings in material costs appear responsible for the bulk of the margin gains.

The outlook for crop protection companies appears brighter over the next couple of years. Excess rains in this monsoon have ramped up the areas under rice, corn and oilseeds crops. More important, the rains have recharged the major reservoirs and substantially improved the storage position across the country. This augurs well, not only for the coming rabi crop, but also for the following year.

The growing acreage under Bt cotton may reduce the offtake of insecticides catering to the cotton crop and companies focussed on this segment may have to deal with slowing sales.

The commonly used generic agrochemicals have also witnessed steadily declining margins on account of pricing pressures. However, Monsanto India will be well-placed to weather these trends.

For one, since it focusses on weed control products and targets non-cotton crops, Monsanto occupies a lucrative niche in the domestic crop protection market.

With unrestricted access to its parent's product portfolio, Monsanto's focus is on high-end formulations where it owns strong brand names. It is, thus, well-placed to capitalise on the shift in the domestic market from generic to specialty agrochemical products. Investments in extension services and brand promotions could help the company command a premium pricing for its products. Second, the seeds business, where Monsanto has brands for corn, oilseed and cotton hybrids is a nascent one with high growth potential.

The company also has room to grow its earnings through better sourcing strategies; with about 95 per cent of the basic material for formulations now sourced through imports from the parent company.

But even as it stands, the company has an enviable track record of sales and profit growth. Profits after tax have grown at double digits every year from 1999-00, helped by business integration efforts.

With the business generating substantial free cash flows, it has not had to expand its minuscule equity base (Rs 8.6 crore). The company has steadily stepped up its dividend payout from Rs 8 per share in 2001-02 to Rs 23 per share in 2004-05.

The per share earnings, based on the numbers for trailing 12 months, stand at about Rs 105. The stock, at Rs 1,584, trades at a trailing price-earnings multiple of about 15 times earnings.

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