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.

# HIGHER DEMAND - 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.

De-listing candidates: D-Link India

CMP: Rs.76
Mcap: Rs.226 crore
Non-promoters holding: 36.6%
Value of Non-prom. hldg: Rs.83 crore
Cash & Cash Equivalents for the year ended Mar'06: Rs.51.5 crore
Npat (12 mnths ended Mar'07): Rs.22 crore
Dividend paid out: Rs.6 crore
Retained Earnings for 06-07: Rs.16 crore
Cash & CE at the end of Mar'07 (approx): Rs.67.5 crore

Cost of a mgmt buyback -

@ 25% premium to the CMP - Rs.104 crore
@ 50% premium to the CMP - Rs.125 crore
@ 100% premium to the CMP - Rs.167 crore

Adjusting for the Cash & Cash Equivalents in the B/S:

@ 25% premium - Rs.36.6 crore
@ 50% premium - Rs.57.4 crore
@ 100% premium - Rs.98.9 crore

Based of last five years Cash Profits (Rs.28 crore), how much time will it take for the company earn the amount spent on the buy-back (net of the C&CE):

@ 25% premium - (36.6 / 28) = 1.3 years
@ 50% premium - (186 / 74) = 2.0 years
@ 100% premium - (320 / 74) = 3.5 years

A DEEP VALUE STOCK WITH GROWTH POTENTIAL....

D-Link India has been bearing the brunt of falling realisations in case of products like motherboards. It's margins have shrunk substantially over the past 3 yrs. However, the worst seems to be over for the company and over the next few years, growth in sales and profits will be driven by broadband and networking related products. Its only a matter of time before the CPE segment hits big in India.....the broadband sector in India is ripe for a growth seen in the telecom sector. What can be the potential size of this market:

Well here are some numbers to ponder:

1).One modem (cable or DSL) approximately costs Rs.1500-2000.

2).So if we hit 20 million broadband connections in the next few years with say 50% using DSL or Cable Modems, we are looking at 10 million modems and thats around Rs.1500 crore.

3).Even if the co. captures 20% of this, its looking at Rs.300 crore (same as its full year's turnover in FY07).

4). And as the number of broadband connections grow....so will D-Link's topline and therefore its stock price too!!

De-listing candidates - Abbott Labs

CMP - 486
Mcap - Rs.703 crore
Non-promoter holding: 34.86%
Value of Non-promoters holding - Rs.245 crore
Cash & Cash Equivalents as of the latest financial year - Rs.218 crore
Avg. Npat over the last five years - Rs.69 crore
Avg. Depcn over a similar period - Rs.5 crore
Avg. Cash Flow (a rough estimate) - Rs.74 crore per annum


Cost of a buyback -

@ 25% premium to the CMP - Rs.306 crore
@ 50% premium to the CMP - Rs.367 crore
@ 100% premium to the CMP - Rs.490 crore

Adjusting for the Cash & Cash Equivalents in the B/S:

@ 25% premium - Rs.88 crore
@ 50% premium - Rs.150 crore
@ 100% premium - Rs.272 crore

Based of last five years Cash Profits, how much time will it take for the company earn the amount spent on the buy-back (net of the C&CE):

@ 25% premium - (88 / 74) = 1.2 years
@ 50% premium - (150 / 74) = 2.0 years
@ 100% premium - (272 / 74) = 3.7 years

This ratio sounds more like our usual P/E ratio, and it actually is...in terms of the price the company will pay to acquire the remaining stake and time it will take to earn it back. The reason I am strongly in favour of a buy-back is the [USE OF CASH & CASH EQUIVALENTS]. There are neither being used for business purposes, since their current business barely requires any major CAPEX and nor is the mountain of cash being deployed for other purposes such as a OTS special dividend, acquisition, etc.

If the co. can't find any good reason for deploy its cash, it might as well give it back to the shareholders, instead of sitting on it for years. It only does one thing, destroys shareholder wealth, and plenty of it!!

A rising pile of cash, invested essentially in conservative mutual fund schemes (debt & liquid) can at best earn returns of 8-10% or in an exceptional case, a little more. Compare the same with the company's Return on Equity of over 35%!!

The stock remains a strong de-listing candidate despite repeated (1 & 2) buy-back offers from the Company.