Monsanto India: Sell :: Business Line

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The stock of Monsanto India, the listed Indian subsidiary of crop protection giant Monsanto US, has doubled since our ‘hold’ recommendation six months back. Good performance in the June quarter and expectation of quicker regulatory approvals, after the new Government took charge at the Centre, kept investor interest intact in this stock.

However, weak performance in the September quarter has seen the stock shed some gains.

Even as good demand for its hybrid maize seeds and weedicide brand, Roundup, should help Monsanto India sustain the growth momentum in its business, this seems to have been factored into the stock price. Also, any potential benefit from genetically modified (GM) maize, whose trials have been delayed for want of approval from the State Governments, is unlikely to materialise over the next two-three years.

At ₹2,902, the Monsanto India stock trades at about 32 times its estimated 2014-15 earnings, higher than its historical band of 20-22 times.

Given the sharp rally in the stock over the last year, upsides may be capped in the near term. Investors can therefore consider booking profit.

Concentration risk

Monsanto India derives almost two-thirds of its revenue from hybrid maize seed varieties sold under its flagship Dekalb brand. Last year, the company launched four more variants of Dekalb to cater to the requirements of the country’s varied agronomic zones.

With this, Monsanto now sells 20 varieties of Dekalb across 18 States, and is the leader in the hybrid maize seed segment. It accounts for almost a fourth of the market. The demand for maize as poultry feed, which constitutes 50 per cent of the crop’s end use, is expected to grow at 8-9 per cent annually over the next few years, according to the company’s latest annual report.

However, Monsanto India’s market share in maize has remained at similar levels over the last few years, while other producers such as Kaveri Seeds have improved their share by expanding their distribution network.

Unlike competitors such as Kaveri Seeds and Mahyco, which have diversified their product basket by offering food and vegetable crop seeds, maize remains the key focus area for Monsanto India’s seed business. The company’s prospects are contingent on a single crop — maize; lower crop acreage is a risk to Monsanto’s performance in future.

The weedicide brand Roundup accounts for about a third of Monsanto India’s revenue. The company re-branded and relaunched the brand last year to sustain its growth pace. But increased competition from other players is a risk to growth.

It bears mention that Monsanto India will not benefit from an approval (when it is given) for the Bollgard II Roundup Ready Flex (BG-II RRF) variety. The beneficiary will be another company– Monsanto Mahyco Biotech (MMB) — an equal joint venture between Monsanto Holdings and Mahyco.

GM maize not soon

In 2013, Monsanto India had received the go-ahead from the Genetic Engineering Appraisal Committee to conduct field trials on its GM (transgenic) maize in Punjab, Andhra Pradesh, Gujarat and Rajasthan.

However, the trials have been delayed due to resistance from the State Governments, whose permission is required to commence field trials. Hence, the GM maize opportunity, which is expected to be the next big trigger for the stock, is unlikely to accrue over the next two-three years.

The company’s revenue grew 32 per cent in 2013-14. However, it moderated to 8.7 per cent for the first half of the fiscal, following weak performance in the September quarter (8 per cent decline), possibly due to higher sales returns.

Likewise, profit grew by a modest 4 per cent in the first six months of the fiscal.