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Monsanto: Sowing seeds for growth

Dec 10, 2003

Monsanto India is a 74% subsidiary of Monsanto Company, USA, a global leader in agricultural solutions. Monsanto India is engaged in the business of production and sale of agricultural inputs, i.e., chemicals and hybrid seeds. In FY03, while agrochemicals business contribute 68% to gross revenues, seeds business made up for the rest. The major segments in the agrochemicals business are herbicides and traits. Monsanto India has been able to perform strongly in FY03 despite poor monsoons on account of a change in its sales mix in favour of seeds. Monsanto's increased focus on seeds business has helped the company improve its seed quality. The company is now recognized as one of the most reliable provider of high quality seeds throughout South East Asia. In FY03, Monsanto notched annual seeds production of 19,000 tonnes. However, the company's herbicide business continues to be under pressure due to the introduction of new molecules and competition from generics.

In the seed business, innovative advertisement and farmer communication helped Monsanto India improve its brand image. Resultantly, the company's maize and sunflower seeds business recorded strong growth. Given Monsanto India's brand image and strong pipeline, the company is likely to further improve its performance in this segment. Good monsoon has further improved the prospects of this industry.

In the agrochemicals business, poor monsoon and a consequent reduction in the farm area under cultivation coupled with severe competition from spurious materials has resulted in a reduction in the prices of agrochemicals, higher inventories and has affected the performance of the company in this segment.

Geographical revenue break up
(Rs m) FY02 FY03 Change
Indian Sub Continent 2,878 2,818 -2.1%
South East Asia 419 319 -23.9%
Rest of World 6 19 198.6%
Total 3,303 3,155 -4.5%

A YoY comparison of geographical distribution of revenues reveals that during FY03, while the Indian sub continent recorded stagnant sales, the company's sales in South East Asia suffered. However, Monsanto India's sales to the rest of the world more than trebled during the period.

(Rs m) 1HFY03 1HFY04 Change
Net Sales 1,486 1,600 7.7%
Operating Profit (EBDIT) 260 297 14.4%
Operating Profit Margin (%) 17.5% 18.6%  
Profit after Tax/(Loss) 224.6 285 26.9%
Net profit margin (%) 15.1% 17.8%  
Earnings per share (Rs)* 52.0 66.0  
P/E (x)   18.0  

For 1HFY04, while Monsanto has reported a marginal 7% topline growth, sharp reduction in other expenditure as a percentage of sales has helped the company report a 110 basis point improvement in operating profit margins. Resultantly, Monsanto registered a 27% growth in bottomline.

At Rs 1,191, Monsanto India is trading at a P/E of 18x annualised 1HFY04 earnings. Monsanto depends heavily on imports for most of its technical material. Hence, volatility in exchange rates and import duties could affect the performance of the company going forward. Monsanto operates in an industry, the success of which heavily depends on good monsoons. However, in FY03 although India had suffered the worst drought in three decades, better cost and receivables management had helped the company increase its profits. With monsoon seemingly good this year, Monsanto's performance could see a sharp rise going forward. In the long term, increased awareness of technological advances in crop protection and techniques to generate higher yield per acreage, could play a major role in Monsanto's success.

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