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Monsanto: Inflection time? - Views on News from Equitymaster
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  • Nov 20, 2000

    Monsanto: Inflection time?

    Monsanto is a global leader in seeds and agro–related biotechnology markets. Internationally, it is a subsidiary of pharma major Pharmacia Corporation (formerly Pharmacia & Upjohn) which holds an 84% stake in the company. Monsanto provides a wide array of integrated solutions to help meet the needs of farmers who need to control unwanted vegetation safely and effectively. The company also provides products to the dairy industry to increase the efficiency of milk production and seeds for several cropping systems.

    Till last year, the company had four entities operating in India viz. Monsanto Chemicals, the listed company which was a manufacturer of herbicides, Monsanto Enterprises a 100% subsidiary of the parent which was into the marketing these products. Another 100% subsidiary Monsanto Technologies was engaged in the manufacture of seeds and finally, Monsanto Holdings, a third 100% subsidiary, which was holding the equity in Monsanto Chemicals!!

    Last year, the company merged the three unlisted companies into the listed company. These subsidiaries were valued at Rs 3,420 m and their shares were exchanged for the shares of Monsanto Chemicals (renamed as Monsanto India). The shares of the listed company were valued at Rs 1,480 per share. Consequently, the stake of the international parent has gone up to 72% (from 40%) in the increased equity of Rs 43.2 m.

    (Rs m) 2QFY00 2QFY01 Change 1HFY00 1HFY01 Change FY00
    Sales 171 239 39.8% 859 1,335 55.4% 1,132
    Other Income 1 8 700.0% 2 15 770.6% 13
    Expenditure 156 233 49.4% 731 1,191 63.0% 996
    Operating Profit (EBDIT) 15 6 -60.0% 128 144 12.5% 136
    Operating Profit Margin (%) 8.8% 2.5%   14.9% 10.8%   12.0%
    Interest 5 6 19.2% 20 13 -35.5% 25
    Depreciation 2 11 430.0% 4 25 488.1% 7
    Profit before Tax 9 (3) -131.8% 106 122 14.7% 117
    Other Adjustments   27     27   3
    Tax - (2)   3 1 -83.3% -
    Profit after Tax/(Loss) 9 27 201.1% 103 148 43.8% 120
    Net profit margin (%) 5.1% 11.1%   12.0% 11.1%   10.6%
    Earnings per share* 17.60 24.65   102.90 68.84   60.15

    The mergers have however, thrown up unexpected surprises (as far as the financials are concerned) with the operating margins in the second quarter collapsing from 8.8% last year to 2.5% in the current year despite a 40% growth in the topline. If it were not for the extraordinary items, which comprise the valuation of the inventory of parent seeds and write back of excess depreciation, Monsanto has actually ended up with a loss. The company has explained that the staff cost, depreciation and other expenses have increased as compared to the previous periods due to the acquisition of agriculture business of Monsanto Enterprises and agriculture business related assets of Monsanto Holdings.

    If one were to check out the half yearly results, the operating margins have come down from 14.9% in the first half of last year to 10.8% in the first half of the current year. Not surprisingly, the stock has come off from its yearly high (recorded pre–merger) of Rs 1,955 to the current level of Rs 885. With agriculture not doing as well in the current year, the third quarter is not expected to be any better.

    However, if one were to overlook these short term concerns and focus on the fact that internationally, the company is one of the pioneers in the biotech business and the fact that the interests of both the majority and minority shareholders are more closely aligned now, long term investors could take a relook at the stock at its current valuations.



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