The Hindu Business Line : Monsanto: Buy

Investors with a long investment horizon can consider exposure to the Monsanto India stock at the current price levels of about Rs 1,400. Though the company's recent financial performance has been unimpressive, long-term prospects for the domestic seeds business, on which the company is now refocusing, are bright. Given that the business is research-driven and technology intensive, entry barriers to the business are high, translating into good growth prospects for entrenched players such as Monsanto India.

The recent listing of Advanta India, which has a global presence in the seeds business, is also likely to lend greater visibility to this business, on the bourses. The growth prospects for the conventional herbicide business, though modest in the near-term, also appear stable for players such as Monsanto, given the robust product pipeline and the focus on premium, less price-sensitive segments of the market. The Monsanto stock trades at about 14 times its trailing 12-month earnings per share.

Seeds business

Though crop protection, with a focus on herbicides, has traditionally been the key revenue driver for Monsanto India, the company has been increasing its focus on the hybrid seeds business over the past couple of years. The seeds business accounted for 53 per cent of Monsanto's sales in 2005-06, up from 21 per cent five years ago, while the contribution of the herbicides business fell from 65 per cent to 31 per cent. The increasing shortfall of key food and commercial crops, the rising pressure to step up farm productivity (Indian yields of most crops are far below global averages) and the economics of adopting high-yielding seed varieties for the farmer are the demand drivers for high-yielding seeds.

However, plant breeding (developing new seed varieties) is a specialised business that involves a fairly long gestation period and calls for considerable research strengths and access to proprietary germplasm. In this respect, the backing of Monsanto India's parent — Monsanto US, a global leader in the seeds and traits business, and the latter's strong product pipeline — is a strong positive for Monsanto India. Monsanto India currently markets seeds in India under the Dekalb brand name (a global brand) and focusses mainly on maize (corn).

The demand growth

The demand for maize in the Indian market has consistently raced ahead of available supplies. Going forward, the demand growth for corn is likely to be strong on the back of expansion in the organised poultry industry and the growth in corn-based snack foods and starch-based industries. Though adoption of hybrid maize seeds has sharply increased sharply in the Southern States, considerable potential for hybridisation exists in the Northern states, where about 70 per cent of the maize acreage is still under conventional varieties.

In the herbicides business, Monsanto has traditionally focussed on branded specialty products through well-recognised brands such as Leader, Roundup, Machete and Fastmix. However, price competition in this business is high, with several domestic players emerging as low-cost manufacturers of agrochemical formulations. Since the profitability of new products tends to wane quickly after the initial years, success in this business depends on a robust product pipeline and a steady stream of launches, apart from the company's brand equity.

Though Monsanto is well-placed on this front on account of its global product pipeline and focus on commercial crops and food grains, it is not immune to price competition. This appears to be the key reason for the company's recent sale of its Leader herbicide business to Sumitomo and its increasing focus on the seeds business.

These rationalisation efforts also explain the company's unimpressive financial performance in recent quarters, after a steady pace of earnings growth in earlier years.

However, only investors willing to wait for two-three years should invest in the Monsanto India stock now.

The final quarter of the financial year is usually a poor one for agrochemical companies such as Monsanto India, given the seasonality of the business. Moreover, though long-term prospects for its businesses are bright, the company's near-term financial performance could be modest on account of the ongoing shift in business focus and the restructuring efforts.

More Stories on : Stocks | Recommendation | Pesticides

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page