Saturday, December 15, 2007

Monsanto India - Great Stock, Cheap Valuations.

Monsanto India sells agro-chemicals (herbicides) and hybrid seeds in India. It's portfolio includes well-recognized brands such as - Leader (hived off recently), Machete, Roundup, & Fastmix (in the agro-chemicals segment) and Dekalb (corn/maize seed) and Bollgard Cotton (marketed through a JV with Mahyco).

Basic financials:

Sales (12M trailing) - Rs.338 crore
Net Profit (12M) - Rs.82.2 crore
3yr AVG RONW - 21%
P/E (TTM) - 16.6 times
Mcap - Rs.1,362 crore
Cash & Cash Equivalents (as of 31-Mar-07) - Rs.200 crore.
Approx Cash & CE (as of 30-Sep-07) - Rs.250 crore

Mcap_Net of Cash - Rs.1112 crore
P/E (net of Cash) - 13.5 times.

Listed peers Advanta and Kaveri Seeds are quoting at a P/E of over 25 times.

Investment Argument:

# BIG OPPORTUNITY - India is home to the world's largest tract of arable land, yet its farm's produce yields that are a fourth of the global average. This augurs well for companies offering agro-chemicals (especially herbicides) and hybrid seeds, which improve farm yields significantly.

Rising Consumption of Corn in India, thanks to increased consumption of western foods like Pizza, Sizzlers, and an increased usage of baby corn as a part of day-to-day cooking. Corn is also an important source of bio-diesel. Monsanto has a big winner in this category - 'Dekalb' (corn hybrid seeds). It is a global leader in corn seeds and has close to a 30% share in India.

# INCREASED AREA UNDER CULTIVATION - Higher crop prices, both in India and globally, and improving demand have resulted in a substantial shift from some of the other cash crops to corn. This year's Kharif crop pattern indicates this. Area under cultivation amounted to 74.6 lac hectares, as compared to the normal area of 62.2 lac hectares.

# STRONG PIPELINE - Monsanto India's parent company has a strong pipeline of new age hybrid seeds. R&D plays an important role in this industry with leaders such as Monsanto and Syngenta spending a significant amount of their revenues towards R&D.

# ROBUST RESERVOIR STATUS - Water levels in the 81 major reservoirs is healthy. They amounted to around 119% of the 10-yr average levels. Healthy water reservoir levels are an insurance against bad monsoons, and therefore render some predictability to the overall farming activity in India, which in turn determines the demand for farm inputs (such as herbicides and hybrid seeds, alongwith fertilizers).

At the current prices, the company can also be considered as a buy-back candidate. Infact, given that promoters hold close to 72.15% of the total equity, the cost of a buy-back will not be too high. Assuming, the company were to decide to undertake a buy-back, lets do some back of the envelope calculations -

Buyback price - Rs.3000 per share
Mcap at the aforesaid price - Rs. Rs.2,581 crore
Cost of the buy-back - Rs.718 crore (for a 27.8% share)
Current Cash & CE - Rs.250 crore
Actual cost of the buy-back - Rs.469 crore
Annual Cash Flow - Rs.92 crore
Pay-back period for the Company - 5.1 years. (Assuming 'NO' growth in cash flows, which is quite unlikely). Thus the pay-back period can be close to around 4-4.5 years.

Overall - At the current price, the Monsanto India scrip offers significant margin of safety with a healthy upside potential.

Points / Counter points ?????

Disclosure: Have a long position on this stock in the portfolios that I manage.


Black Swan said...

good analysis - company is doing great.

Company has Rs195 crs of C&CE. (you have rounded off to 200crs but used 250crs for analysis)

At Rs.3000 - buyback cost (net cash) will be Rs.523crs

Annual cash flows net tax - Rs.84crs (not 92crs)

Buyback period will be prolonged to 6.2 years.

Alpha Investor said...

Black Swan - Rs.250 crore is the cash and cash equivalent (includes a rough estimate of C&CE generated during the first two quarters of the current fiscal).

Annual cash flow (net of taxes) is again computed on a 12m trailing basis. (summation of the last four quarters ended Sep'07).

Anonymous said...

Syngenta India did a buy-back a couple of years a significant premium to mkt price.

Maybe, monsanto is headed that way too.....?????

Alpha Investor said...

Anonymous - Yes, Syngenta India did buyback & delist its shares. The buy-back price was set at around Rs.730 per share at a P/E of around 39 times.

Anonymous said...

This is a great investment. In addition to all your points I would like to draw ur attention to what Hugh Grant said in Monsanto USA 2005 annual report "The seeds-and-traits segment of the agriculutural industry is where the computer industry was in the 1950s". I think this should sum it up. Potential for exponential growth and only for the real investor