agrochemical industry

Indian Agrochemical Industry

Imminent partner in achieving food security…

October 01, 2012

Tarun Surana [email protected]

Phone: +91-22-66318632

Jayant Sharma

Shyam Bhatt

Sunidhi Research | 2

Agrochemical Industry

Imminent partner in achieving food security…

Agrochemical Industry plays role of ‘Shiva – The destroyer’ in Agri-input chain Hindu mythology tells us about Brahma, Vishnu & Mahesh. All 3 play vital roles in world. Brahma is associated with creation or beginning, Vishnu is associated with life/existence/maintenance and finally Mahesh (Shiva) is associated with end or destruction. Agri-input industry’s value chain consists of mainly Seeds, Fertilisers and Agrochemicals. Brahma’s role can be associated with ‘Seed industry’ which creates a new plant, Vishnu – The Fertiliser industry as it helps in sustaining life of plants and Mahesh – The Agrochemical industry as it destroys/kills pests. It is thus very important part of Agri-input chain that saves crop losses due to pests and will continue to help in feeding ever increasing population in decades to come. Challenge of feeding the world… By 2050 the world’s population will reach 9.1 billion, 34 percent higher than today. Nearly all of this population increase will occur in developing countries. Urbanization will continue at an accelerated pace, and about 70 percent of the world’s population will be urban (compared to 49 percent today). Income levels will be many multiples of what they are now. In order to feed this larger, more urban and richer population, food production (net of food used for biofuels) must increase by 70 percent. Annual cereal production will need to rise to about 3 billion tonnes from 2.1 billion today and annual meat production will need to rise by over 200 million tonnes to reach 470 million tonnes. …has to be met with higher crop yields Some 90% of the growth in crop production globally (80% in developing countries) is expected to come from higher yields and increased cropping intensity, while the remainder coming from land expansion. Arable land will expand by some 70 million ha (or less than 5%), with the expansion in developing countries by about 120 million ha (or 12%) being offset by a decline of some 50 million ha (or 8%) in developed countries. On an average, annual crop yield growth rate over the projection period would be about half (0.8%) its historical growth rate (1.7% average; 0.9% for developed and 2.1% for the developing countries) according to FAO. This will require extensive use of agri-input chain including agrochemicals, which palys vital role in increasing yields by saving the crops from pest attacks. Food consumption to rise faster in developing countries like India with rising incomes and large populations Grain and oilseed consumption has been rising at a steady pace in the developed world for the last few decades. There is continuing rise in consumption in most developing regions with large populations and expanding economies. Millions of people in the developing world now have higher incomes and a strong desire to improve their standard of living especially quality of their diets. With the world’s food producers (farmers) working to increase production and get more crop from each unit of limited land, we see robust demand for solutions that help in this endeavor, Agrochemicals being one of the critical factor among them. Our top picks – Dhanuka Agritech & PI Industries Our top picks in the industry are Dhanuka Agritech & PI Industries with 49% & 26% upside respectively. We upgrade UPL to ‘Buy’ recommendation with upside of 31%. We find Rallis and Insecticides India expensive at current valuations, Initiate with ‘Reduce’.

Price target and recommendation

Company CMP* Target Upside (%) Recommendation

Dhanuka Agritech 98 146 49 BUY

Insecticides India 414 412 -0.5 REDUCE

PI Industries 542 685 26 BUY

Rallis India 145 140 -3 REDUCE

United Phosphorus 131 171 31 BUY

*As on 28th Sep 2012

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Agrochemical Sector


Financial Snapshot

Company Year Sales EBIDTA PAT EPS Adj P/E P/ Bv EV/ EBIDTA Net D/E ROaE

Dhanuka Agritech

FY13E 6108 901 639 12.8 7.7 1.9 5.6 0.0 26.7

FY14E 7051 1022 733 14.7 6.7 1.5 4.8 0.0 25.1

Insecticides India

FY13E 6737 741 423 33.3 12.4 1.8 8.1 0.2 17.7

FY14E 8382 964 523 41.2 10.0 1.5 6.8 0.4 16.4

PI Ind FY13E 10911 1893 1081 43.2 12.5 3.3 8.3 0.5 29.2

FY14E 13427 2420 1430 57.1 9.5 2.5 6.4 0.4 30.2

Rallis FY13E 15398 2618 1492 7.7 18.9 4.4 11.3 0.2 16.6

FY14E 17890 3086 1809 9.3 15.6 3.7 9.4 0.1 21.3

United Phosphorus

FY13E 86852 15199 6689 14.6 9.0 1.3 5.7 0.6 15.3

FY14E 95547 16721 7844 17.1 7.7 1.2 5.0 0.5 16.0

Average FY13E 25201 4270 2065 22.3 12.1 2.5 7.8 0.3 21.1

FY14E 28459 4843 2468 27.9 9.9 2.1 6.5 0.3 21.8 Source: Sunidhi Research Estimates

Dhanuka Agritech - Fair value of ` 146/share (Upside of 49%), Initiate with “Buy” DAL will continue to focus on launching new products and keep a diversified portfolio along with tie ups with innovator companies for marketing their products in India. It will continue to follow its strategy of following asset light model (manufacturing only formulations) and thus generate free cash flow and clock-in high return ratios. At CMP of `98, DAL is trading at P/E of 7.7x and 6.7x for FY13E and FY14E. We value DAL at P/E of 10x for FY14E earnings. Initiate with ‘Buy’. Insecticides India Ltd - Fair value of `412/share (Upside of -0.5%), Initiate with “Reduce” At CMP of `414, IIL seems fully valued and is trading at P/E of 12.4x and 10.0x for FY13E and FY14E. We value IIL at P/E of 10x for FY14E earnings (at a discount compared to Rallis and PI Ind due to lower return ratios, generic portfolio). We have factored in 15% dilution on account of planned QIP in our forecasts. Initiate with ‘Reduce’. PI Industries - Fair value of ` 685/share (Upside of 26%), Initiate with “Buy” With return ratios of ~30%, robust growth trajectory and lower tax rates after commissioning of Jambusar SEZ unit, PIL’s earn ings will continue to be in growth momentum. At CMP of ` 542, PIL is trading at P/E of 12.5x and 9.5x for FY13E and FY14E. We value PIL at P/E of 12x for FY14E consolidated earnings. Initiate with ‘Buy’. Rallis India - Fair value of ` 140/share (Upside of -3%), Initiate with “Reduce” Rallis will continue to focus on launching new products in domestic markets with reliance on strong brands. We expect revenue share of exports to grow further with potential for Dahej Phase 2 upon success in negotiating contracts with clients. It witnessed massive re-rating in FY10 and FY11. Though it has underperformed broader markets in last year, it is still priced to perfection with no margin of safety in our view. At CMP of `145, Rallis is trading at P/E of 18.9x and 15.6x for FY13E and FY14E. We value Rallis at P/E of 15x for FY14E earnings. Initiate with ‘Reduce’ United Phosphorus - Fair value of ` 171/share (Upside of 31%), Upgrade to “Buy” UPL is proxy play to global generic agrochemical markets. Weather is key risk to Its business with challenging season in USA due to draught, delayed monsoon in India and very wet season in Europe. UPL is banking very high on Rest of the World markets, especially Brazil. Any weather related issues in this market may threaten growth. UPL is being supported with ongoing Buyback. It is trading at attractive valuations though deterioration in margins. Rising debt on balance sheet is also a concern. It has Poor ROAE’s compared to smaller Indian peers due to asset heavy model with presence across the globe that includes markets with low margin, higher credit cycles. At CMP of `131, UPL is trading at P/E of 9x and 7.7x for FY13E and FY14E EPS. We maintain estimates and upgrade target price to `171 based on P/E of 10x for FY14E EPS (from `145 based on FY13E EPS earlier) as we roll forward valuations to FY14E. Upgrade to ‘Buy’ (from ‘Accumulate’ earlier).



Table of Contents

Particulars Page No

Global agriculture & food scenario 5

Indian agriculture & food scenario 7

Debunking some myths 15

Agrochemical industry basics 16

Global agrochemical industry 20

Indian agrochemical industry 22

- Porter’s 5 forces 28

- Comparison of long term sales & profit growth, average margins & return ratios 29

- 2nd Quarter is biggest quarter in the year for Indian agrochemical industry 31

- Sunidhi Agrochem & Seed Index jumps 6x from FY08 32

- Risk factors 34

Company Section

Dhanuka Agritech Limited 36

Insecticides India Limited 51

PI Industries Limited 64

Rallis India Limited 79

United Phosphorus Limited 94



Global Agriculture & Food Scenario World population to rise to over 9 billion, faster in ‘Less Developed’ countries Between 1960 and 2000, global population rose by 100% (3bn to 6bn), and global agricultural production rose by 150%. Over the same period, the global agricultural labour force rose by 60%, and the global agricultural land area rose by only 10%. In other words, food production significantly outpaced population growth. Food production measured in calories per capita per day has increased steadily since 1961. Agricultural production has risen steadily since 1961 due to advancement in technology and related factors (e.g. investment, education, institutions and improved farm management). Even then, almost 1 billion people remain hungry every day.

Exhibit 1: World population (In Millions)

812

1237 12751717

5671

7875

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7000

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9000

1950 2010 2050

More Devloped Less Developed

Source: UN, Bunge, Sunidhi Research

Rising population, limited land will continue to reduce per capita arable land In 1960, world had 3 billion people and had 4.3 ha arable land per person which reduced to 2.2 ha per person and is set to decline further to 1.8 ha per person by 2020. Exhibit 2: Per Capita Arable land will continue to decline

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1960 1980 2000 2020

Population (Billion) Arable land per person (ha)

Source: FAOStat, Sunidhi Research



World Is Urbanizing With rising population, interestingly, world is getting more urbanized. In 1950, rural population was 2.5x of urban population where as in 2010, both were almost equal. By 2050, urban population will be 2.3x of rural population. As world urbanizes, it reduces agricultural work force available in rural areas. In developed economies of Europe and America, agriculture workforce represents only 5% of total work force while estimates for Africa and Asia suggests that from 70% in 1980s, it will decline to 50% by 2015.

Exhibit 3: Global Population by Type of Community (millions)

1798

3412

2793

737

3495

6398

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3000

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7000

1950 2010 2050

Rural Urban

Source: UN, Bunge, Sunidhi Research

Growth in World Demand for Grains and Oilseeds Demand for grains and oilseeds come not just from food but also from feed and fuel. With every passing decade, demand is rising faster than previous one in CAGR terms. Exhibit 4: Demand for grains and oil seeds are rising faster

1.6%

2.8%

2.9%

2.7%

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All Uses Food Feed Fuel

1990 2000 2010 2020

Source: LMC, Bunge, Sunidhi Research



Indian Agriculture & Food Scenario India will need 355 mn tonnes of food grains to feed population of over 1475 million by 2030 The Indian population, which increased from 683 millions in 1981 to 1210 millions in 2010, is estimated to reach 1412 million in 2025 and to 1475 millions in 2030. To feed the projected population of 1.48 billion by 2030 India needs to produce 355 million tonnes of food grains. The expanded food needs of future must be met through intensive agriculture without much expansion in the arable land. The per capita arable land decreased from 0.34 ha in 1950-51 to 0.15 ha in 2000-01 and is expected to shrink to 0.08 ha in 2025 and to 0.07 ha in 2030. Globally, 10,000 years of historical food production must be matched in the next 50 years for feeding increased population. Exhibit 5: Domestic demand for food grains to reach 355 mn tonnes by 2030

Source: ICAR Vision 2030, Sunidhi Research

India is likely to witness massive shortages in pulses, edible oil and sugars by 2021 and 2026 as per ICRIER.

Exhibit 6: Supply-Demand Gap for selected foods

Source: ICRIER working paper - Mittal 2008



Food Security Bill raises need to enhance food production urgently National Food Security Bill proposes coverage of up to 75% of total rural population with at least 46% population belonging to priority households and up to 50% of the total urban population with at least 28% population belonging to priority households would have 7 Kg of foodgrain per person per month. Besides, general household would also have entitlement of 3 Kg of foodgrain per person per month. $20 bn worth crop is lost to pests Demand for food products will keep spiraling with the expected rise in population. But as overall land under agriculture keeps decreasing (with the rise in other uses of land), governments will focus more on increasing crop productivity/yields. With India’s crop losses – on account of inadequate and improper use of pesticides – exceeding $20 bn per annum (source: ASSOCHAM), we believe that higher penetration of pesticide usage will be an important factor for increasing farm productivity. Consequently, well entrenched pesticide players will benefit from the macroeconomic factors. The domestic agrochemical industry has shown healthy growth of over 12% CAGR in last few years. At present, the domestic agrochemical industry is worth ~Rs 84 bn and is expected to grow by at least 12% per annum till 2015. Low crop yields in India v/s World average The yield per hectare in India is amongst the lowest in the world - 2.9 mn tonnes per hectare as compared to 7.8 mn tonnes in the US, 6.2 mn tonnes in Japan, and world average of 4.0 mn tonnes per hectare. The government is making sustained efforts to improve per hectare yield which in turn necessitates increased usage of agrochemicals.

Exhibit 7: Per Ha yields in India are lower than world

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10000

Yields (Kg/Hectare)

Source: FAO, Sunidhi Research



Exhibit 8: Crop-wise yields in India v/s world average (Tonne per Ha)

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4.2

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1.6

2.82.3 2.2

0.9 1.1 0.9

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Wheat Rice Corn Soyabean Rapeseed Peanuts

World India

Source: CIL, Sunidhi Research

Exhibit 9: Significant Yield-gaps exist within states (KG per Ha)

Source: Ministry of Agriculture, Sunidhi Research Exhibit 10: Trend of gross cropped area, net sown area, net irrigated area, and gross irrigated area

Source: Agricultural Statistics 2011-12



Agriculture has been losing land to other lucrative sectors which are growing slower Arable land in India is coming down over the last few decades as more sectors compete for land (such as industries, housing, and education) while agriculture has been losing it. Net Sown area has remained stagnated at ~141 mn ha over last 2 decades. Net irrigated area has gone up, thanks to government’s focus on bringing more land under irrigation by undertaking various projects.

Indian agriculture is dotted with small farmers without access to modern agricultural techniques Landholdings are fragmented in India. Over 80% farmers have less than 2 ha land under cultivation. That is India’s biggest challenge in increasing yields. The average size of the landholdings declined to 1.32 ha in 2000-01 from 2.30 ha in 1970-71, and absolute number of operational holdings increased from about 70 million to 121 million. If this trend continues, the average size of holding in India would be mere 0.68 ha in 2020, and would be further reduced to a low of 0.32 ha in 2030. This is a very complex and serious problem, when share of agriculture in gross domestic product is declining, average size of landholding is contracting (also fragmenting), and number of operational holdings are increasing.

Declining size of landholdings without any alternative income augmenting opportunity is resulting in fall in farm income, causing agrarian distress. A large number of smallholders have to move to postharvest and non-farm activities to augment their income. The research focus should be to evolve technologies and management options to suit needs of smallholders’ agriculture, and also to involve them in agri-supply chain through institutional innovations. In 1960, when global population was 3 bn, per capita arable land was 0.5 ha. Global population is now placed at 7 bn with available per capita around 0.2 ha.

Exhibit 11: India’s average farm size is just 1.2 ha

Source: FAI, Sunidhi Research

Area under food grains declined at annual rate of 0.02% during 1994-95 to 2009-10 Exhibit 12: Crop Wise CAGR

0.53

1.82

(1.29)

0.07

1.63

(0.51)

0.53 0.42

1.51

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Rice

Whe

at

Jow

ar

Bajra

Mai

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Cere

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Pulse

s

Food

grai

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Oil S

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CAGR

(%)

Source: Ministry of Agriculture, Sunidhi Research



Agriculture & allied activity credit rising in India Indian farmers are typically small with affordability issues. India has witnessed sharp rise in credit to agriculture & allied activities, which augurs well for higher agri-input usage, including agrochemicals. Exhibit 13: Outstanding Farm Credit (INR Billion)

2,3042,753

3,387

4,1614,603

5,225

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12

Source: RBI, Sunidhi Research

Government’s thrust on Agriculture Government has increased RKVY plan outlay from `78.6 bn to `92.2bn. Exhibit 14: Government’s thrust on Agriculture (INR Billion)

12.5

28.9

37.6

67.2

78.6

92.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Source: Ministry of agriculture, Sunidhi Research



Rising MSPs, higher rural incomes leading to better times for Agri-input industry MSP trend, higher rural income with resilient economic growth and income in hands of poor through MNREGA schemes augur well for Agri-input industry in the long run. Exhibit 15: Rising MSPs to drive up foodgrain sourcing by government.

0.5

1.0

1.5

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2.5

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3.5

4.0

4.5

2005-06 2008-09 2009-10 2010-11 2011-12 2012-13

INR

Th

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Paddy (grade A) Jowar/ Bajra Maize Arhar Moong

Urad Soyabean Groundnut in Shell Cotton (Med Staple)

Source: Ministry of Agriculture, Sunidhi Research Fruits & Vegetables are also rewarding farmers well Along with hikes in MSP in foodgrains, prices of fruits & vegetables are also rising which in turn is turning more attractive for farmers. Our analysis of WPI index for both from FY05 shows that inflation in fruits & vegetables is volatile compared to foodgrains, however over longer term, both are aligned.

Exhibit 16: WPI of Food grains, Fruits & Vegetables

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-12

FOOD GRAINS(CEREALS+PULSES) FRUITS & VEGETABLES

Source: MOSPI, Sunidhi Research



Rural Employment Guarantee Scheme Due to increased government thrust on making work available in rural India, labour costs are rising. This has led to higher usage of Herbicides as it is alternative to manual weeding which requires manual labour on fields. Herbicides growth is faster than industry in recent years.

Exhibit 17: MNREGS Allocation (` Billion)

117.5 122.2

310.2

408.0 418.8

320.0

0

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100

150

200

250

300

350

400

450

FY07 FY08 FY09 FY10 FY11 FY12

Source: Ministry of Finance, Sunidhi Research

Growth of horticulture and floriculture industries Buoyed by growth of the Indian floriculture industry in 3 years, India launched National Horticulture Mission. This augurs well for demand for agrochemicals (especially fungicides).

Exhibit 18: Horticultural Production India (Mn Tons)

Source: National Holtculture Mission, Sunidhi Research



Focus on productivity improvement in agricultural produce to drive growth of domestic pesticide industry Crop losses in India - due to insects, rodents, diseases and weeds - range from 10-30% annually depending on the severity of attack and climatic and environmental conditions. Consumption of pesticides in India is close to 0.57 kg/ha while in countries like Taiwan it is 17 kg/ ha; in the US it is 3 kg/ha, in the EU it is 3 kg/ha and in Japan it is 12 kg/ha.

Exhibit 19: India’s per ha Pesticide Consumption (FY09) is very low

Source: Industry, Sunidhi Research

Low penetration – only 35 – 40% of farmland is under crop protection There is great scope for increase in usage of agrochemicals with only 35-40% of the total farmland under crop protection chemicals. Per ha consumption of agrochemicals in India is very low compared to many developed countries and world average.



Debunking some Myths Pesticides = Poison in our food? The answer is - of course, yes! Pesticides are poisonous and there is no doubt about it. But does that mean, we are eating poison in our food plates when we eat food where pesticide has been used? The answer may well be ‘Yes’ if usage of pesticide is not restricted to prescribed level. Pesticides are poisonous for target pests and kill them but are safe for humans till the maximum permissible levels which is certified after extensive checks by regulatory authorities. Anything in excess is bad and so is the case with pesticides. It’s basically a medicine which saves crop from insect / pest attacks. We can understand this by example of sleeping pills or pain killers. If a human takes them rationally, it helps in bringing relief from a problem/disease, but if excessive doses are taken, it can even lead to death. That doesn’t mean that medicines per se had an issue and should be banned. It was its wrong usage which leads to unwarranted health hazards. Is Organic farming the way forward? World was growing food organically before the advent of chemical industry i.e. Pesticides and Fertilisers. Genetically Modified seeds are also a recent phenomenon and didn’t exist few decades back. One can compare the yields in recent years vis-à-vis yields few decades back when entire Agri-input chain was ‘Organic’. Land is limited and is increasingly getting more expensive due to competing usage from increasing industrialization, infrastructure projects and rapid urbanization. Organic farming may not be the answer to increasing need of food production as rising population demands more nutrition in developing world. Organic food will continue to remain expensive in our view due to lower yields and hence out of reach for majority of people. The way forward to satisfy billions of hungry people is maximization of crop yields to generate adequate food production. Globally, production of major crops has more than tripled since 1960. Yields for rice have more than doubled and yields for wheat have gone up about 160%. In the 1980s, one farmer produced one tonne of food, and one hectare of arable land produced 1.8 tonnes, annually on average. Today, one farmer produces 1.4 tonnes, and one hectare of land produces 2.5 tonnes. This has come about as a result of both an increase in yields and a reduction in post-harvest losses. In some regions, losses can be as low as 20%. Conversely, losses can amount to 100% of a harvest if no crop protection is available or unaffordable. Is organic food completely safe? Over 30 people were killed and thousands were affected due to E Coli outbreak after consuming Bean Sprouts from an organic farm in Germany. Organic farms do not use Agrochemicals, chemical fertilisers and put crops at greater risk of contamination from bacteria in manure.

http://www.guardian.co.uk/world/2011/jun/10/e-coli-bean-sprouts-blamed



Agrochemical industry basics Agrochemicals are broadly classified into two categories – basic (Technical grade) and Formulations. Technical grade manufacturers sell high purity chemicals in bulk (generally in drums of 200-250 Kg) to formulators. Formulators, in turn, prepare formulations by adding inert carriers, solvents, surface active agents, deodorants etc. These formulations are packed for retail sale and bought by the farmers. Based on application, agrochemical market can be segmented into insecticides, herbicides and fungicides. Herbicides - Save crops by controlling weeds and unwanted vegetation, such as thistles and nettles.

Fungicides - Protect plants by combating harmful crop diseases, such as potato blight and reduce fungal toxins.

Insecticides - Safeguard crops by controlling insect pests, such as aphids and improve human health. Some 20-40% of the world's potential crop production is already lost annually because of the effect of weeds, pests and diseases (FAO). These crop losses would be doubled if existing pesticide uses were abandoned, severely impacting food security. Exhibit 20: The Agrochemical Manufacturing Chain

Source: Industry, Sunidhi Research Most of the raw materials in industry are derived from various products which have linkages with crude oil. The above chart explains the journey of Natural gas / crude oil to final agrochemical product. Indian agrochemical industry is 2

nd largest market for agrochemicals next to China in Asia and

figures in Top 15 in the world. Compared to several developed countries, per hectare consumption of agrochemicals in India is very low at ~0.6 kg/ha. India produces 16% of the food grain in the world, while consumes only 2% pesticides of the world. The growth in industry in recent years has been rapid and agrochemical industry looks promising on account of the increasing need to protect food grains, vegetables and fruits from pests to feed increasing demand, higher farmer affordability, higher availability of farm credit and lucrative farm produce prices.



Exhibit 21: Agrochemical & Seed market globally in last decade


Industry is highly consolidated Almost 85% of industry is controlled by large global players and there is intense competition. Large global players are increasingly turning their focus on developing new molecules and investing in biotech seed research. This often presents attractive acquisition opportunities of generic products where innovator is still dominant, but the product no longer fits in long term product portfolio strategy. India is the 4th largest manufacturer of crop protection chemicals behind USA, Japan and China. India is also one of the most dynamic generic pesticide manufacturers in the world though highly fragmented in nature. According to industry data, more than 60 technical grade pesticides are being manufactured indigenously by 125 producers including 60 large and medium scale enterprises. Most Indian technical manufacturers are focused on off-patent pesticides, which account for c. 70% of the domestic market. Further, there are over 1,200 pesticide formulators across India. The industry landscape includes multinational companies, medium sized Indian Companies and hundreds of regional formulators. Exhibit 22: Global Agrochemical players

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High entry barriers Agrochemical industry has inherent entry barriers because of its highly regulated structure. Innovator companies on an average take 10 years to bring a new active ingredient to the market. Over 140,000 synthesis are tested in R&D phase to come out with 1 active ingredient. R&D costs for bringing 1 active ingredient to market is over $250 million. For generic companies too, entry barriers exist in form of registrations. Each country has its own regulations regarding approvals of agrochemicals. Any formulation needs to go through registration process before taking it to market in any country, and takes anywhere between 2-4 years. Exhibit 23: Typical expense in development of new molecule




Exhibit 24: Timeline of development of new molecule

Year 1 2 3 4 5 6 7 8 9 10 Costs In €

CHEMISTRY

Active ingredient

Formulation

BIOLOGY

Research

Development

TOXICOLOGY

Mammals

Environment

ENVIRONMENT

Metabolism

Residues

Substances 50.000 500 10 5 2 1 1 1 1 1 ~ 150 mill ion

Official evaluation of

registration

documents /

registration / first

sales

~ 60 mill ion

~ 40 mill ion

~ 50 mill ion

Synthesis Process

Synthesisoptimisation

Pilot plantproduction

Formulation / Packaging

Laboratory /greenhouse

Pilot trials

Field trials for development and registration

Acute, sub-chronic, chronic toxicity / mutagenicity /carcinogenicity / teratogenicity / reproduction

Algae / daphnies / fish / birdsmicro-organisms / bees / non-target organisms

Plants / animals / soil / water / air

Plants / animals / soil / water / air

Production

Optimisationof

application

Source: Croplife, Sunidhi Research

Exhibit 25: Market size by 2015

Crops Herbicides Insecticides Fungicides Others Total CCP AgBio TOTAL $ Mn

Cereals 4184 592 2464 249 7489 0 7489 Maize 3293 957 491 8 4749 7757 12506 Rice 1873 1374 867 92 4206 60 4266 Soybean 2340 983 1251 3 4577 5332 9909 Rape 912 198 350 16 1476 390 1866 Sunflower 450 45 25 3 523 0 523 Cotton 559 1289 87 315 2250 1224 3474 Sugarbeet 556 70 58 1 685 63 748 Sugarcane 1048 357 0 38 1443 0 1443 Potato 316 412 796 40 1564 0 1564 Vine 268 259 1076 38 1641 0 1641 Pome Fruit 175 475 597 46 1293 0 1293 Other F&V 1623 2570 2169 202 6564 0 6564 Fruit & Vegetable 2382 3716 4638 326 11062 0 11062 Others 1753 1235 1017 212 4217 0 4217 Total 19350 10818 11248 1263 42679 14826 57505 Source:Phillips McDougall, UPL, Sunidhi Research



Global agrochemical industry Globally, herbicides account for largest value within agrochemical industry followed by insecticides and fungicides. Indian market however has largest value from insecticides due to tropical warm weather which is conducive for higher insect attacks on crops. Share of herbicides is growing fast now due to sharp rise in labour costs. Exhibit 26: Global Crop Protection Market by Product ($ Billion)


Exhibit 27: Region wise break-up of Agrochemical sales (2010)




Innovator companies invest in R&D to discover new molecules and they get patent for normally 20 years during which they get exclusive right to manufacture the product. As patent expires, it throws opportunity for generic agrochemical manufacturers to enter the market and launch product in the market. Exhibit 28: $9.3 bn worth Agrochemicals will go off-patent in this decade

Source: Phillips McDougall, MAI Analysis, Sunidhi Research

Exhibit 29: Global Crop-wise Market Distribution - 2008

Source: FICCI, Industry, Sunidhi Research



Indian agrochemical industry Exports now account for ~40% of the industry Last few years have witnessed sharp growth rates in exports as India is attractive destination for low cost manufacturing with ample talent pool in complex chemicstry. We expect export growth to be more than domestic industry’s growth as existing players leverage their ralationships with clients and more players enter in attractive CRAMS opportunities. Exhibit 30: Indian Pesticide industry is over $3.5 billion


India’s 5 year CAGR in among the fastest in world Indian agrochemical market is groing among the fastet in the world along with Brazil, Russia and Thailand. Exhibit 31: India’s growth among the fastest in the world

-5 0 5 10 15 20 25 30 35

Colombia

Japan

France

Korea

USA

UK

Germany

Spain

Poland

Canada

Mexico

Australia

China

Italy

Thailand

India

Russia

Brazil

Argentina

Ukraine

CAGR in Home Currency (2006 - 11) Source: Industry, Sunidhi Research



Exhibit 32: Crop Protection Market YoY real Growth

-8.0

-6.0

-4.0

-2.0

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Return on Investment in high for farmers using Pesticides By using pesticides, farmers can avoid up to 90% crop losses in various crops. Benefit in terms of saving of crop output is multifold compared to expense borne by farmers for buying agrochemicals.

Exhibit 33: Avoidable crop losses & Cost-Benefit ratio

Crop Avoidable Losses Cost: Benefit Ratio

Cotton 49 - 90% 1:07

Rice 21 - 51% 1:07

Mustard 35 - 75% 1:12

Sunflower 36 - 51% 1:08

Groundnut 29 - 42% 1:28

Maize 20 - 25% 1:03

Sugarcane 8 - 23% 1:13

Pulses 40 - 88% 1:04

Vegetables 30 - 60% 1:07

Fruits 20 - 35% 1:04 Source: Industry, Sunidhi Research

Market share of generics going up 25% of the market is controlled by patented products, while ~25% comes from proprietary off-patent products. Generic players (products with companies other than original patent holders) have grown their revenue share very fast as product patent keeps on expiring and currently account for 50% market share. Products worth $9.3 billion are set to expire in this decade (2010 – 2020) which is almost ~20% of current industry size. Lower price sensitivity We have observed lower price sensitivity among farmers towards agrochemicals. When crops suffer due to fungis or pest attacks, the primary goal in farmer’s mind is to save the crop and get the best possible solution, even if it costs 10-20% higher within competing products. In generics, where products are exactly similar to that of various players, brand recall and goodwill plays important part in decision making.



Distribution ‘push’ is critical Agrochemical industry has thousands of products available in market with several companies offering as high as 100 products. A typical Agri-input shop resembles that of a medical shop with products from different companies for different crops and several possible diseases to plant or various pest attacks. It is therefore almost impossible for a farmer to know what should be bought for a particular problem just as it becomes difficult for us to know what medicine can be taken in case of any disease. Retailers have to opt for the role of a ‘Doctor’ who suggests farmers after hearing the description of issues with crops, often checking plant samples brought by farmers to shops. Thus, Retailer too is a very important link in the chain and often less educated farmers in general rely on advice of retailers and go home with solution suggested by them. This leads to fierce competition among industry participants and hence for better product ‘push’, industry participants offer best possible margins to them.

Strong regulatory framework There are serious implications of pesticide use on safety as well as crop protection, therefore there is a need for strict enforcement of pesticide regulations. The Pesticides Management Bill incorporates provisions for more effective regulation with punishment commensurate with the severity of offence. However, the Department of Agriculture and Cooperation has taken action against domestic as well as multi-national companies found flouting the existing regulations governing registration, import, manufacture and sale of pesticides, by cancelling certificates of registration of the products in question.

Indian market is dominated by generics The agrochemical industry in India is dominated by generics manufacturing with over 90% of the molecules being non-patented. Most competitors offer similar products and generic formulations. This industry has low entry barriers, with very little capital requirement which leads to few factors being critical to success such as –

1) Strong distribution networks, 2) Pricing 3) Brand recall 4) Dealers Push (higher commission)

Losses Caused by Different Pests Exhibit 34: India losses over `900 billion of crops every year as per govt. estimate in 2002




Exhibit 35: Top Molecules - Global

Product Category Herbicides Glyphosate, Triazines, Sulphonyl Urea

Insecticides Pyrethroids, Organophosphates, Neonicotenoids

Fungicides Triazoles, Strobillurin, Dithiocarbamates Source: FICCI, Industry, Sunidhi Research

Exhibit 36: Domestic Crop Protection market – major products

Segment Major Products Main Applications

Insecticides Acephate, Monocrotophos, Cypermethrin Cotton, Rice

Fungicides Mancozeb, Copper Oxychloride, Ziram Fruits, Vegetables, Rice

Herbicides Glyphosate, Isoproturan, 2, 4-D Rice, Wheat

Bio-Pesticides Spinosyns, Neem Based Rice, Maize, Tobacco

Others Zinc Phosphide, Aluminium Phosphide Stored Procude

Source: FICCI, Industry, Sunidhi Research Exhibit 37: Pesticide Consumption in India (Techinical Grade in Tonnes)

2000

12000

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32000

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Source: DACNET, Sunidhi Research

Exhibit 38: New molecules requires less usage, leading to lesser volumes

Segment Conventional Molecules New Molecules

Insecticide Dose/ha Insecticide Dose/ha

Sucking Insect Pests

Monocrotophos 625-750 ml Acetamiprid 50-150 g

Dimethoate 1250-1500 ml Imidacloprid 100-150 ml

Acephate 625-750 g Thiomethoxam 100-150 g

Caterpillar

Endosulfan 1250-1500 ml Indoxacarb 450-500 ml

Quinalphos 1250-1500 ml Spinosad 188-200 ml

Profenophos 1500-2000 ml Novaluron 375-500 ml

Chlorpyriphos 1500 ml Thiodicarb 500 g Source: Industry, Sunidhi Research



Exhibit 39: New molecules requires less usage, leading to lesser volumes

Segment Conventional Molecules New Molecules

Name Dose/ha Name Dose/ha

Wheat

Isoproturon 1250 g Sulfosulfuron 33 g

2,4-D 1250 g Clodinofop 400 g

Metsulfuron Methyl 20 g

Paddy

Butachlor 2500 ml Metsulfuron Methyl +

Chlorimuron Ethyl

Pyrazulfuron

Paddy

Pendimethlin 2500 ml Imazethapur 750 ml

Trifluralin 2500 ml Quizalofop Ethyl 1000 ml

Fluchloralin 2500 ml Fenaxoprop-p-ethyl 750 ml

Chlorimuron Ethyl 25 g

Source: Industry, Sunidhi Research Exhibit 40: Leading Agrochemical Exporting Countries by Sector, 2009 ($ Mn)

Insecticides Fungicides Herbicides

USA 609 Germany 951 USA 1165

France 545 France 917 France 1096

India 500 UK 578 Germany 1092

China 438 Spain 460 Belgium 943

Germany 423 Switzerland 341 China 758 Source: FICCI, Industry, Sunidhi Research

Paddy & cotton account for almost half of Indian agrochemical market

For Indian agrochemical industry, Paddy & Cotton are two most important crops. Un-remunerative price of these two, lower area under sowing and abnormal weather in key regions where these crops are prominent are key risks to domestic agrochemical industry. Exhibit 41: Indian Crop wise Market Distribution – FY09




Agrochemical consumption on cotton has reduced after adopting Bt cotton

From 33% of total pesticide consumption in 2005, consumption of it for cotton crop has fallen to 20% of total usage in India. This reflects the effect of adoption of Bt-cotton where seeds are genetically modified to tackle major issues with pests. Exhibit 42: Pesticide consumption pattern ( 2005 - 2009)

33

2421

8 86

20

28

20

6

10

16

Cotton Paddy Fruits & Vegetables

Wheat Pulses & Oilseeds

Others

2005 2009


7 states in india account for over 70% of agrochemical usage Andhra leads with 24% of indian agrochemcial consumption and far ahead than any other state in India. Maharashtra & punjab are pther key state with over 10 of overall usage. Top 7 states account for over 70% of indian agrochemcial usage.

Exhibit 43: 7 states account for over 70% of consumption




Rabi outlook improves as Reservoir levels climb to 108% of the last ten year's average Despite a late monsoon 84 reservoirs monitored by Central Water Commission (CWC) are holding volumes which are 108% of the last ten year's average. They are holding water of 114.8 billion cubic meters which is 74% of the storage capacity of reservoirs in different parts of the country. This is about 87% of last year's volume. As many as 11 reservoirs are full to their brim. There are two reservoirs each in North and East India that are 100% full, while three each in West and Central zone are full. One in South India is full. About 13 reservoirs are holding water levels that vary between 91% and 99%, while another 14 have water level between 81% and 90%. Nine reservoirs are holding water levels ranging between 71% and 80% of their capacity. As many as 29% water reservoirs are holding water that is less than 50% of their full capacity. According to basin wise storage position water levels in Ganga, Indus, Narmada, Tapi, Mahi and Sabarmati is better than normal as per CWC. Godavari and West flowing rivers of South have a storage position that is close to normal. Krishna, rivers of Kutch and Cauvery had deficient water position.

Exhibit 44: Porter’s 5 forces for industry

Product registrations, extensive datasubmission to regulatory authorities,compliance with strict environment lawsand other regulations serve as entrybarriers for new players. Entry intoFormulations is relatively easier thanTechnicals. With very low capitalrequirements

Potential New Competitors Customers

Farmers can’t dictate prices to industry.However, consumption gets affected byaffordability which is key for volumegrowth and dependent on the prospectsof Agriculture in India, Governmentdetermines MSP of key crops after takingaccount of cost of inputs.

Suppliers

Low supplier concentration (especially forformulators who buy Technicals), reducesthe bargaining power of suppliers. In case

of sales through tie ups , supplier powerfor in-licensing products is higher. Formanufacturers of Technicals, suppliers aretypically passing-on prices ofintermediates which is linked to distantderivatives of crude oil and are volatile.

Substitutes

Threat of substitutes is low in newmolecules as product development is anexpensive and time consuming process,which can only be afforded by largeplayers. A formulator with tie-ups withinnovator companies is well placed as itcan leverage its existing sales network tomarket niche products while genericshave high threat of substitutes.

Competitors in the Industry

Industry rivalry is high, especially in case of formulators. The Indian agrochemical industry is fragmented, with the five largest players accounting for less than 40% of the market share. Globally, market is dominated by Big-6 with high competition among the companies.

Source: Sunidhi Research



Comparison of long term sales & profit growth, average margins & return ratios

All agrochemical companies in our coverage universe have done well on sales, EBIDTA and PAT CAGR. PI industries stands out with PAT CAGR of 101%. This is partly due to 278% growth in PAT in FY09 from lower base of `64 million in FY08. Our top pick, Dhanuka delivered 2

nd best PAT CAGR

of 36% over last 5 years. Exhibit 45: 5 year CAGR sales & Profit growth (FY08 – FY12)

21

%

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21% 28

%

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%

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%

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UPL Rallis PIL IIL DAL

Sales EBIDTA PAT

Source: Company, Sunidhi Research Rallis wins by a wide margin as far as working capital management is concerned with Net Working Capital of only 13 days (5 year average). Dhanuka looses out due to lower payable days (reflects supplier power in in-licensing of products) which is compensated well by need of lower investments in fixed assets. Exhibit 46: 5 year average working capital days (FY08 – FY12)

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102

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Receivable days Inventory Days Payable days NWC

Source: Company, Sunidhi Research



Dhanuka & Rallis are best at generating ROCEs Dhanuka tops the list among the companies under our coverage with ~37% average ROE and ROCEs. PI industries is also impressive with high average ROE. UPL ranks lowest due to its diversified and asset heavy model. Exhibit 47: 5 year average return ratios (FY08 – FY12)

16.8

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ROE ROCE


UPL & Rallis are best at operating margins

As evident from exhibit below, UPL & Rallis generate best operating margins in our coverage universe. Rallis stands out as far as PAT margin is concerned as it is debt free

company and relatively higher asset turnover ratio (consequently lower depreciation). Our

top pick Dhanuka also delivers stron PAT margins despite relatively lower operating margins due to its asset light model and debt free status.

Exhibit 48: 5 year average EBIDTA & Profit margin (FY08 – FY12)

19.618.3

13.3

9.6

13.4

8.810.8

6.4 6.78.1

0

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EBIDTA Margin PAT Margin




Quarterly revenue trend – Q2 is biggest for domestic markets We analysed quarterly trends for last 5 years and conclude that Q2 is the most important quarter for Indian agrochemical industry. It is clearly visible from quarterly trend of companies like Rallis, Dhanuka, Insecticides India which are more focussed on domestic markets. Companies with large export revenues such as UPL and PI Industries show less tendency of a loaded Q2 in revenue terms. For Seeds, Q1 is the biggest season as reflected from analysis of Kaveri Seeds while Advanta being a global seed company is more diversified across quarters. Exhibit 49: Quarterly Revenue Trend

Company Q1 Q2 Q3 Q4

Bayer Crop 34.7% 29.6% 22.4% 13.4%

Rallis India 22.4% 31.3% 25.5% 20.7%

Dhanuka Agritech 18.7% 30.9% 24.4% 26.0%

United Phos. 27.9% 23.0% 22.1% 27.0%

P I Inds. 23.7% 26.4% 23.9% 25.9%

Sabero Organics 24.7% 27.2% 24.5% 23.6%

Excel crop care 28.3% 28.8% 21.6% 21.3%

Insecticides India 25.9% 33.6% 22.3% 18.2%

Advanta India 27.3% 23.8% 24.5% 24.4%

Kaveri 61.6% 19.9% 10.9% 7.5%

Average 28.7% 25.9% 22.5% 22.9% Source: Company, Sunidhi Research

Exhibit 50: Long Term (5 Year) Correlation of Agrochem & Seed companies’ stock prices

Correlation with UPL Rallis PI IndDhanu

ka

Insecti

cides

Ind

Excel

CropSabero

Bayer

Crop

Kaveri

Seeds

Advanta

IndiaSensex

Sunidhi Agro

Chem & Seed

Index

Sunidhi Agro Chem

& Seed Index -0.02 0.96 0.97 0.98 0.96 0.40 0.92 0.91 0.82 -0.67 0.54 1.00

Sensex 0.68 0.59 0.39 0.58 0.47 0.64 0.48 0.68 0.45 -0.03 1.00 0.54

Advanta India 0.29 -0.73 -0.65 -0.64 -0.62 -0.37 -0.60 -0.65 -0.32 1.00 -0.03 -0.67

Kaveri Seeds -0.16 0.67 0.84 0.77 0.85 0.06 0.75 0.67 1.00 -0.32 0.45 0.82

Bayer Crop 0.20 0.96 0.81 0.93 0.83 0.68 0.83 1.00 0.67 -0.65 0.68 0.91

Sabero -0.01 0.87 0.85 0.88 0.83 0.30 1.00 0.83 0.75 -0.60 0.48 0.92

Excel Crop 0.55 0.59 0.22 0.49 0.28 1.00 0.30 0.68 0.06 -0.37 0.64 0.40

Insecticides Ind -0.12 0.89 0.98 0.92 1.00 0.28 0.83 0.83 0.85 -0.62 0.47 0.96

Dhanuka 0.05 0.96 0.93 1.00 0.92 0.49 0.88 0.93 0.77 -0.64 0.58 0.98

PI Ind -0.19 0.89 1.00 0.93 0.98 0.22 0.85 0.81 0.84 -0.65 0.39 0.97

Rallis 0.09 1.00 0.89 0.96 0.89 0.59 0.87 0.96 0.67 -0.73 0.59 0.96

UPL 1.00 0.09 -0.19 0.05 -0.12 0.55 -0.01 0.20 -0.16 0.29 0.68 -0.02

Average 0.20 0.64 0.59 0.65 0.61 0.40 0.59 0.65 0.53 -0.33 0.54 0.65 Source: Company, Sunidhi Research



Sunidhi Agrochem & Seed Index jumps 6x from FY08 Sunidhi Agrochem & Seed Index (10 companies, equal weight) has risen ~6x from FY08 led by strong returns from PI industries, Sabero, Rallis India, Bayer Crop and Dhanuka Agritech and Kaveri Seeds. Exhibit 51: Sunidhi Agro Chem & Seed Index

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Exhibit 52: Comparative Performance of Agro Chem Companies

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UPL Rallis PI Ind Dhanuka Insecticides Ind Excel Crop Sabero Bayer Crop Kaveri Seeds Advanta India




Exhibit 53: Long Term stock price performance (FY08 – Sep’12)

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Key Risk factors Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Delay in increase of MSP Agrochemical consumption gets affected by government’s decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to farmers. Regulatory risks The Agrochemical industry is highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court. Threat from GM seeds Genetically modified crops are made with inbuilt immune system that reduces dependence on usage of agrochemicals. We understand that plants require protection at various stages of lifecycle of plant and it may be difficult for even genetically modified crops to keep control on pests. Adaption of Bt Cotton in India has resulted in lower application of pesticides over last few years, however, Bt Cotton is reported to be affected from pests in some parts of Gujarat. Pests too become resistant to human intervention and gain power to attack crops despite being genetically modified, resulting in usage of agrochemicals.

http://articles.timesofindia.indiatimes.com/2010-03-06/india/28121027_1_bollworm-bt-cotton-monsanto-s-bt



Company Section

Dhanuka Agritech Ltd (DAL)

Asset light model with focus on return ratios

Dhanuka Agritech Limited is engaged in manufacturing a wide range of pesticides (mainly branded formulations) covering herbicides/weedicides, insecticides, fungicides, miticides, plant growth regulators / stimulants in various forms – liquid, dust, powder and granules. It has technical tie-ups with 3 US & 4 Japanese companies. It has ~80 brands in their portfolio and keeps adding new brands every year with focus on specialty molecules. International tie-ups ensure a bigger, better basket of products Since its first international collaboration with Du Pont in 1992 (First ever such tie-up with MNC by any Indian company), for manufacturing formulations, DAL has entered into collaborations with various MNCs in the US and Japan. The foreign collaborator typically supplies active ingredients as well as the exact combination in which the chemicals are to be mixed and in turn is allowed to market its products in India. Vast distribution network and effective marketing strategy Dhanuka Agritech currently has over 80 products and 400 SKUs (stock keeping units). The company markets its products through over 7,000 distributors/dealers that reach 70,000 retailers across all the major farming states which touch over a million farmers. Strong pipeline of new products It has launched 4 new products in FY12 while 2 products have been launched in Q1FY13. 2 more product launches are scheduled in rest of FY13. Further, DAL is working on 8-10 products currently and provides visibility for revenue growth in coming years. Focus on tie-ups rather than backward integration to maintain asset light model While Dhanuka compares well with its peers in terms of profitability, its lack of backward integration into technicals has historically resulted in higher raw material costs. The company has been able to tide over this by focusing on tie-ups with global pesticide majors to procure technical pesticides and specialty molecules. Dhanuka exclusively markets some of these molecules, which gives it the first mover advantage in introducing these products in India. For example, Targa Super, (which contributes ~20% to Dhanuka’s revenue) is exclusively marketed by the company in India. While on one hand, this helps Dhanuka to compete with larger players in the domestic market, on the other hand, it is able to maintain an asset light business model. Fair value of ` 146/share (Upside of 49%), Initiate with “Buy” DAL will continue to focus on launching new products and keep a diversified portfolio along with tie ups with innovator companies for marketing their products in India. It will continue to follow its strategy of following asset light model (manufacturing only formulations) and thus generate free cash flow and clock-in high return ratios. At CMP of `98, DAL is trading at P/E of 7.7x and 6.7x for FY13E and FY14E. We value DAL at P/E of 10x for FY14E earnings.

I

nit

iati

ng

Co

ve

rag

e

15.4%

13.5%

15.8%

13.3%

11.5%

12.0%

12.5%

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13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

Sales EBIDTA PBT Adj.PAT

CAGR Growth (FY12-14E)

Recommendation Buy

CMP (`) 98

Price Target (`) 146

Upside (%) 49

52 Week H / L ` 115 / 80

BSE 30 18694

Key Data

No.of Shares, Mn. 50.0

Mcap, ` Mn 4901.0

Mcap,USD Mn @ `55 89.1

2 W Avg Qty (BSE+NSE) 51538

Share holding, June'12

Promoters 75.0

FII 8.3

DII 1.3

Public & Others 15.5

Performance 1 M 3 M 6 M 12 M

Stock Return % 8.3 2.5 19.3 -3.5

Relative Return % 1.7 -7.9 9.9 -18.4

-25.0%

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Dhanuka Agritech NIFTY

Financials Revenues EBIDTA Net Profit EPS P/E EV/EBIDTA ROAE

` mn ` mn ` mn ` x x %

FY11 4910 759 511 10.2 9.6 7.2 30.0

FY12 5292 794 571 11.4 8.6 6.6 29.7

FY13E 6108 901 639 12.8 7.7 5.6 26.7

FY14E 7051 1022 733 14.7 6.7 4.8 25.1 Source: company, Sunidhi Research

Agrochemicals Sector Outlook- Positive

DAL


Investment Thesis: Broad portfolio of 80 products, 2/3

rd of revenue comes from specialty molecules

DAL has a wide portfolio of over 80 brands and keeps adding new brands every year. The Company has a wide range of agrochemicals to protect all major Indian crops from most of the pests, insects and diseases that affect them. Though it has strong generic portfolio, its focus is on specialty molecules where it has tie-up with MNCs for marketing their products. This reflects in its revenue mix as well where 2/3

rd of the Company’s sales comprise of specialty molecules and the

remaining one-third comprises of generics. Plans of launching new specialty molecules Dhanuka is working to launch six speciality molecules during 2013-15 – two molecules each year from 2013 onwards. Two of these products (of which one is patented) will be launched in collaboration with Nissan Chemicals of Japan. It will also launch a fungicide in collaboration with Du Pont. These molecules will be introduced in India for the first time and Dhanuka will exclusively sell most of these products in India. Post introduction, these molecules are expected to have 8-10 years of dominating life cycle. Focus on tie-ups rather than backward integration While Dhanuka compares well with its peers in terms of profitability, its lack of backward integration into technicals has historically resulted in higher raw material costs. The company has been able to tide over this by focussing on tieups with global pesticide majors to procure technical pesticides and specialty molecules. Dhanuka exclusively markets some of these molecules, which gives it the first mover advantage in introducing these products in India. For example, Targa Super, (which contributes ~20% to Dhanuka’s revenue) is exclusively marketed by the company in India. While on one hand, this helps Dhanuka to compete with larger players in the domestic market, on the other hand, it is able to maintain an asset light business model. International tie-ups ensure a bigger, better basket of products Since its first international collaboration with Du Pont in 1992, for manufacturing formulations, Dhanuka Agritech has entered into collaborations with various MNCs in the US and Japan. The foreign collaborator typically supplies active ingredients as well as the exact combination in which the chemicals are to be mixed and in turn is allowed to market its products in India. Dhanuka’s collaborating partners include:

E. I. du Pont, US Dunet, Hook, Qurin, Dhawa Gold, Hi-Dice, Cursor

FMC Corporation, US Aatank, Markar, Brigade

Dow AgroSciences, US Wrap-up, Zargon, One-up

Sumitomo Chemical Co., Japan Caldan, Sheathmar

Mitsui Chemicals, Japan Nukil, Bombard

Hokko Chemical Ind. Co., Japan Kasu

Nissan Chemical Industries, Japan Targa Super

Yara International, Norway Samadhan

Chemtura, US Omite, Vitavax, Dimilin, Banmite

Bayer AG Fluid Source: Company, Sunidhi Research

Currently, Dhanuka’s sales through international tie-ups are more than 60% of total revenue. In most cases, the product is marketed under the brand name of Dhanuka. The company is, therefore, able to offer a large number of products addressing crop protection needs across different kinds of crops, type of pests, various soil types and weather conditions.

DAL


Exhibit 54: Top 3 products of DAL

Product MNC Segment Active Ingredient Revenue share

Targa Super Nissan Chemical Weedicide Quizalofop ethyl 18-20%

Caldan Sumitomo Chemical Insecticide Cartap hydrochloride 8-10%

Markar FMC Corp Insecticide Bifenthrin 3-5% Source: Company, Sunidhi Research

In case of speciality molecules sourced through tie-ups with MNCs, the active ingredient is supplied by them to Dhanuka under purchase contracts. Dhanuka receives the product know-how as well as the right to formulate and market the product in India. In our opinion, tie-ups with foreign partners enable Dhanuka to offer a large number of products addressing crop protection needs across different kinds of crops, type of pests, various soil types and weather conditions. Looking Beyond 1000 DAL management has set its ambitious vision to achieve topline of `1000 crore in 3 years time. DAL’s product pipeline will lead to continuous expansion of its product portfolio which will help DAL in reaching closer to this target in our view. Farmer connect initiative - Dhanuka Doctors The structure of the Indian crop protection market makes it necessary to be in close contact with customers i.e. farmers. The products have to, therefore, necessarily be bundled along with services such as awareness campaigns regarding periodicity and quantity of usage, product demonstrations, counselling and after sales support. Sales is made through distributors who are present at the village/district level. The company’s contact person who liaises with the farmer is called the Dhanuka Doctor; the Doctor’s job is to ensure the company’s brand recall and encourage the use of Dhanuka’s products through farmer engagement. Nearly 2,000 locally-recruited (on contract basis) Dhanuka Doctors work across villages, conducting product demonstrations and providing counselling for the right product based on the type of pest infestation and soil.

DAL


Exhibit 55: Agrochemical Sales (` million)

632 928 11721755 1824353

499583

684 6581594

20432238

2418 2606

227

268349

508628

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Herbicides Fungicides Insecticides Others


Exhibit 56: Geographical break-up of Sales (` million)

725 947 1007 1119 1160653

919 11301453 1533

438

541602

733 841

944

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Exhibit 57: Focus on Branded Formulations (` million)

27443632 4072

4738524844

73185

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18

33

85

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DAL


Exhibit 58: Concentration of top products (INR Million)

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Top 3 Products Top 5 Products Top 10 Products


Exhibit 59: Category wise Sales break up (INR Million)

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Class Ia (red triangle) Class Ib (yellow triangle) Class II (blue triangle)

Class III (green triangle) O Hazard unlikely


Exhibit 60: New Product Launches

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DAL


Exhibit 61: Dhanuka’s product basket caters to wide variety of crops


Exhibit 62: DAL’s key products

Insecticides Media, Dunet, Caldan, Omite, Aaatank, Adfyre, Brigade,

Bombard, Dhanpreet, Dhawa Gold, Markar

Herbicides Targa Super, Barrier, Craze, Qurin, Weedmar Super, Noweed,

Ozone, D-Era, Hook WG, Nabood

Fungicides Vitavax Power, Sixer, Kasu-B, Hi-Dice, Cursor, Hexadhan Plus,

Dhanteam, Sheathmar, Vitavax Ultra

Plant Growth Nutrients / Others Dhanuvit, Dhanzyme Gold, Samadhan, Wetcit


DAL


What makes Dhanuka our top pick? Dhanuka has been clocking higher than industry average revenue growth – Dhanuka’s revenue has grown by 25% CAGR over FY08-11, as compared to 15% revenue CAGR by Rallis and 16% revenue CAGR by United Phosphorus, over the same period. Dhanuka’s growth slipped to just 9% in FY12 due to erratic monsoon in 2HFY12 which impacted entire domestic agrochemical industry. Dhanuka’s RoE is one of the best in the industry (next only to PI Ind in our coverage universe). Deep discount compared to Rallis Dhanuka is trading at a significant discount (around 50%) to Rallis in spite of better financial performance and RoE. Rallis’ PE multiples got re-rated got re-rated from 6-7x in 2009 to 16-18x currently due to a significant jump in RoE. Rallis posted RoaE of around 24% in FY12 compared to 29.7% for Dhanuka in FY12. Exhibit 63: Comparative ROaE

Source: Sunidhi Research estimates

Free cash flow due to asset light model We strongly believe that there is a case for DAL’s earnings multiple to improve given better return ratios, free cash flow generation and asset light model. DAL is the only large player in domestic agrochemical industry without being present in technical manufacturing. Even though it procures technicals for manufacturing formulations, it’s operating margins are in-line/better than its peers. This is possible through higher sales of specialty molecules which represents 2/3

rd of its revenues.

Exhibit 64: Free Cash Flow generation

-300

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Opearting Cash Flow Cash used in Investments Free Cash Flow

Source: Company, Sunidhi Research estimates

DAL


Price Target Derivation

Fair value of ` 146/share (Upside of 49%), Initiate with “Buy” DAL will continue to focus on launching new products and keep a diversified portfolio along with tie ups with innovator companies for marketing their products in India. It will continue to follow its strategy of following asset light model (manufacturing only formulations) and thus generate free cash flow and clock-in high return ratios. At CMP of `98, DAL is trading at P/E of 7.7x and 6.7x for FY13E and FY14E. We value DAL at P/E of 10x for FY14E earnings.

Exhibit 65: Comparative valuation table


Dhanuka FY13E 6108 901 639 12.8 7.7 1.9 5.6 0.0 26.7

FY14E 7051 1022 733 14.7 6.7 1.5 4.8 0.0 25.1

Insecticides India

FY13E 6737 741 423 33.3 12.4 1.8 8.1 0.2 17.7

FY14E 8382 964 523 41.2 10.0 1.5 6.8 0.4 16.4

PI Ind FY13E 10911 1893 1081 43.2 12.5 3.3 8.3 0.5 29.2

FY14E 13427 2420 1430 57.1 9.5 2.5 6.4 0.4 30.2

Rallis FY13E 15398 2618 1492 7.7 18.9 4.4 11.3 0.2 16.6

FY14E 17890 3086 1809 9.3 15.6 3.7 9.4 0.1 21.3

UPL FY13E 86852 15199 6689 14.6 9.0 1.3 5.7 0.6 15.3

FY14E 95547 16721 7844 17.1 7.7 1.2 5.0 0.5 16.0

Average FY13E 25201 4270 2065 22.3 12.1 2.5 7.8 0.3 21.1


DAL


Exhibit 66: Valuation Bands - P/E

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Exhibit 67:Valuation Bands - P/BV

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Exhibit 68:Valuation Bands - EV/EBIDTA

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Exhibit 69:Valuation Bands – MCap/Sales

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Mcap 0.25x 0.5x 0.75x 1x


DAL


Risks to our Price Target

Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Dependence on domestic markets Larger players such as UPL, Rallis and PI Industries have a presence in the technicals segment, with revenues from exports. Dhanuka is completely focused on domestic markets and erratic whether conditions in India affects its revenue growth much more than it does for diversified companies with multiple continents as markets.

Regulatory risks The Agrochemical industry is a highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court. Threat from GM seeds Genetically modified crops are made with inbuilt immune system that reduces dependence on usage of agrochemicals. We understand that plants require protection at various stages of lifecycle of plant and it may be difficult for even genetically modified crops to keep control on pests. Adaption of Bt Cotton in India has resulted in lower application of pesticides over last few years, however, Bt Cotton is reported to be affected from pests in some parts of Gujarat. Pests too become resistant to human intervention and gain power to attack crops despite being genetically modified, resulting in usage of agrochemicals. Delay in increase of MSP Agrochemical consumption gets affected by government’s decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to them.


DAL


Financial Analysis

Exhibit 70: Revenue (`Million) and Revenue Growth Trend


Exhibit 71: EBIDTA (`Million) and EBIDTA Margin


Exhibit 72: PAT (`Million) and PAT Margin


DAL


Exhibit 73: ROA and ROACE


Exhibit 74: Leverage Ratios


DAL


Company in Depth Dhanuka Agritech Limited is engaged in manufacturing a wide range of pesticides covering herbicides/weedicides, insecticides, fungicides, miticides, plant growth regulators / stimulants in various forms – liquid, dust, powder and granules and reaching out to more than 10 mn farmers. The Company has a pan-India presence through its marketing offices in all major states in India, with a network of more than 7,000 distributors/ dealers selling to over 70,000 retailers across India. The Company has technical tie-ups with 3 US & 4 Japanese companies. The Company is managed by a good blend of both experienced and young team. The founding promoters, Mr. R.G. Agarwal and Mr. M.K. Dhanuka oversee the whole operations as the Chairman and Managing Director respectively and have been involved with the Company since inception (for more than 25 years). They are ably supported by young team of professionals including Mr. Rahul Dhanuka who heads marketing, Mr. Mridul Dhanuka who heads production and Mr. V K Bansal who is the CFO. The Company has three manufacturing units located at Gurgaon (Haryana), Sanand (Gujarat) and Udhampur (J&K). Two-third of the Company’s sales comprises of speciality molecules and the remaining one-third is generics. The product having highest turnover is Targa Super and is in technical tie-up with Nissan Chemical Industries Ltd., Japan. The Company’s Gross Sales were Rs. 576.16 crores in 2011-12 and Net Sales were Rs. 529.19 crores, which were higher by 6.5% & 7.8% respectively, over the previous fiscal. The Company has achieved a CAGR of over 20% for the last 5 years. For the last 3 years it has been constantly reporting very healthy ROCE’s of well above 25%. The company expects its Top-line to grow by 15-20% and Bottom-line by 20- 25%, over the next two years. The target customers of Dhanuka are farmers, planters and pest control operators. Growth drivers would be the potential to intensify the marketing network and reach the country’s interiors, increased farm income due to increase in MSP, increased awareness in rural India about usage and cost-benefit tradeoff of pesticides, edge over the competitors in the diverse product range and widespread market reach, increased customer base, marketing strategies and technical tie-ups. The Company keeps adding new products every year and entering into new technical collaborations. Dhanuka has an aggressive marketing strategy with a sales team of more than 500 full time employees and more than 1000 Dhanuka Doctors. For getting best results, it is very important for farmers to have knowledge about using the right product in right quantity at the right time. For this, DAL conducts training programs for them by giving product demonstrations, providing technical advice on right use of products and about specific crop related problems at their door-step through Dhanuka Doctors. The Company has mobile soil and water testing laboratories in Public Private Partnership. Dhanuka has around 80 brands in their portfolio and keeps adding new brands every year. The Company has a wide range of pesticides to protect from most of the pests, insects, diseases that affect crops and these products are used in all major crops produced in our country.

DAL


Key Management Personnel

Designation Name

R.G. Agarwal Chairman

He started pesticides business more than 30 years ago; a philanthropist; mentors and provides strategic leadership; also served for two terms as Chairman of “Crop Care Federation of India”.

M.K.Dhanuka Managing Director

co-founded the Company; has 36 years of experience; re-elected as President of HPMA (Haryana Pesticide Manufacturers Association) consecutively for the 4th year; oversees the overall operations of the Company

Rahul Dhanuka Director (Marketing)

Masters in Business Administration from S.P. Jain, Mumbai; oversees the entire marketing function of the company; leads the large marketing team from the fore-front & maintains cordial relations with International collaborators.

Mridul Dhanuka Director (Operations)

Masters in Business Administration (Operations) from NITIE, Mumbai; oversees the manufacturing and supply chain functions across the Company’s three production facilities; spearheads expansion projects; brought technological and managerial excellence in the company’s operations

V.K.Bansal CFO

Chartered Accountant, experience of over 20 years with Dhanuka, controls entire financial division and has been one of the key contributors in the success of Dhanuka

DAL


Valuations Summary

Balance Sheet (` mn)

Year End-March FY11 FY12 FY13E FY14E Year End-March FY11 FY12 FY13E FY14E

Per share (`) Equity and Liabilities

EPS 10.2 11.4 12.8 14.7 Share Capital 100 100 100 100

CEPS 11.2 12.3 13.7 15.8 Reserves and Surplus 1605 2046 2539 3111

BVPS 34.1 42.9 52.8 64.2 Total Shareholders funds 1705 2146 2639 3211

DPS 2.0 2.2 2.5 2.8 Minority Interest 0 0 0 0

Payout (%) 19.6 19.3 19.6 18.8 Non-Current Liability

Valuation (x) Long Term Borrowings 174 57 54 51

P/E 9.6 8.6 7.7 6.7 Deferred Tax Liabilities (Net) 28 26 26 26

P/BV 2.9 2.3 1.9 1.5 Long Term Liab/ Provisions 115 133 151 174

EV/EBITDA 7.2 6.6 5.6 4.8 Current Liabilities

Dividend Yield (%) 2.0 2.2 2.5 2.8 Short Term Borrowings 402 338 304 273

Return ratio (%) Trade Payables 522 543 669 773

EBIDTA Margin 15.5 15.0 14.8 14.5 Other Current Liabilities 496 564 669 773

PAT Margin 10.4 10.8 10.5 10.4 Short Term Provisions 136 150 165 180

ROAE 30.0 29.7 26.7 25.1 Grand Total 3576 3956 4677 5460

ROACE 30.4 29.5 29.4 28.3 Assets

Leverage Ratios (x) Non Current Assets

Long term D/E 0.1 0.0 0.0 0.0 Fixed Assets 391 393 446 491

Net Debt/Equity 0.3 0.1 0.0 0.0 Deferred Tax Assets 0 0 0 0

Interest Coverage 11.4 13.8 20.1 25.1 Non-Current Investments 0 0 0 0

Current ratio 2.0 2.1 2.2 2.4 Long Term Loans and Advances 128 182 167 193

Growth Ratios (%) Other Non Current Assets 0 0 0 0

Income growth 21.5 6.5 16.5 15.4 Current Assets

EBITDA growth 31.6 4.6 13.4 13.5 Current Investments 0 153 153 153

PAT growth 40.7 11.8 11.9 14.6 Inventories 1419 1388 1674 1932

Turnover Ratios Trade Receivables 1377 1377 1512 1757

F.A Turnover x 12.8 13.6 13.8 14.4 Cash and Cash Equivalents 50 87 229 373

Inventory Days 105.5 96.8 91.5 93.3 Short Term Loans and Advances 212 242 251 290

Debtors Days 102.4 99.6 97.7 98.0 Other Current Assets 0 0 0 0

Payable days 45.9 43.2 42.5 43.7 Grand Total 3576 3956 4677 5460

Income Statement(` mn) Cash flow Statement (` mn)


Revenues 4910 5292 6108 7051 PBT 673 700 820 940

Op. Expenses 4151 4498 5207 6028 Depreciation 49 45 48 56

EBITDA 759 794 901 1022 Interest Exp 65 55 43 39

Other Income 26 6 10 12 Others -8 -5 0 0

Depreciation 49 45 48 56 CF before W.cap 777 795 911 1034

EBIT 737 755 863 979 Inc/dec in W.cap -765 -76 -262 -349

Interest 65 55 43 39 Op CF after W.cap 13 720 649 685

PBT 673 700 820 940 Less Taxes 150 131 180 207

Tax 161 129 180 207 Exceptional & Prior Period Adj 0 0 0 0

PAT 511 571 639 733 Net CF From Operations -138 589 468 479

Minority 0 0 0 0 Inc/(dec) in F.A + CWIP -54 -52 -101 -101

Prior Period Adj 0 0 0 0 others 10 -145 0 0

Sh. of Associates 0 0 0 0 CF from Invst Activities -44 -198 -101 -101

Ex. ordinary 0 0 0 0 Loan Raised/(repaid) 12 -182 -37 -33

Adj Pat 511 571 639 733 Equity Raised 339 0 0 0

Source: Company, Sunidhi Research Dividend -75 -117 -146 -161

Interest Paid -65 -55 -43 -39

CF from Fin Activities 211 -353 -226 -233

Net inc /(dec) in cash 29 38 141 145

Op. bal of cash 20 50 87 229

Cl. balance of cash 50 87 229 373

Insecticides (India) Ltd (IIL)

Aggressive generic play, fully valued…‘Reduce’

Insecticides (India) Ltd (IIL) manufactures formulations and technicals. It has also acquired off the shelf products and turned them around to achieve higher growth. IIL’s product mix is skewed mostly towards generic formulations.

Gaining market share amidst intense competition in domestic generic market IIL is gaining market share in intensely competitive domestic market of Generics. It has grown at a rapid pace with Sales CAGR of 24%, EBIDTA CAGR of 30% and PAT CAGR of 23% over FY08 – 12. It has launched new products on a sustained basis, acquired off-shelf brands and turned them around with aggressive marketing campaigns. Diversified portfolio of over 100 products to offer one stop shop solutions IIL manufactures over 100 products led by insecticides (~61% of total revenues), herbicides (~28% of total revenues), fungicides (~7% of total revenues) and plant growth regulators. The rice crop insecticides constitute ~1/3

rd of revenues; cotton,

wheat and other vegetable crops account for the rest. The wide basket of products with various applications not only ensures risk diversification but also provides a complete one-stop-shop solution to the farmers. This enables IIL to easily push its products in the small retail farm outlets, in contrast to an MNC player who will be able to provide the retailer only few crop-specific usage pesticides. 7 New products launched during FY12 contributed ~7% of FY12 revenues During FY12, IIL launched 7 products –Metro, Rambo, Super Star, Monocil, Ultra, Dynamite Plus and Lethal Super550. These brands in first year of launch itself contributed ~7% to IIL’s FY12 revenues. Monocil, Victor, Lethal and Thimet are prominent amongst its top contributing products. Top 5 products in its portfolio account for 30 % of the revenues, while share of Top 10 products stood at 42% of revenues. Backward integration, lower tax rates to kick in margin expansion IIL has added massive capacities during FY12. Total capex over FY11-12 is ~`1 bn. The Udhampur formulations plant will enjoy 100% excise duty exemption and 100% income tax exemption for the first five years from the date of commissioning and 30% income tax exemption for the subsequent five years. We expect IIL to manufacture most of its high margin molecules at this plant to take maximum advantage of lower effective tax rates. Technicals form base for manufacturing raw materials. Dependence on sourcing Technicals will be lower due to expansion of its Active Ingredient (AI) manufacturing capacities. Fair value of `412/share (Upside of -0.5%), Initiate with “Reduce” At CMP of `414, IIL seems fully valued and is trading at P/E of 12.4x and 10.0x for FY13E and FY14E. We value IIL at P/E of 10x for FY14E earnings (at a discount compared to Rallis and PI Ind due to lower return ratios, generic portfolio). We have factored in 15% dilution on account of planned QIP in our forecasts. Initiate with ‘Reduce’.

I

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CAGR (FY12-14E)

Recommendation Reduce

CMP (`) 414


Upside (%) -0.5%

52 Week H / L ` 477/311

BSE 30 18763

Key Data


Mcap, ` Mn 5249.5

Mcap,USD Mn @ `55 95.4



Promoters 74.7

FII 5.9

DII 2.3



Stock Return % 6.7 0.8 1.0 11.9

Relative Return % 0.4 -9.8 -7.4 -5.7

-10.0%

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Insecticides India NIFTY


` mn ` mn ` mn ` x x %

FY11 4501.0 436.3 322.2 25.4 16.3 12.7 20.8

FY12 5217.6 563.6 330.2 26.0 15.9 11.7 19.6

FY13E 6737.0 741.1 422.9 33.3 12.4 8.1 17.7

FY14E 8382.0 963.9 523.1 41.2 10.0 6.8 16.4 Source: company, Sunidhi Research

Agrochemicals Sector Outlook- positive

IIL


Investment Thesis

Monocil – a blockbuster addition into product portfolio Historically, IIL has acquired off-shelf brands and successfully launched them through aggressive promotion. It acquired a popular generic brand Monocil from Nocil Ltd in March’11. Monocil is an insecticide which controls a broad spectrum of pests in various crops and is one of the largest selling molecules (Monocrotophos). This brand was also off-shelf (5-6 years prior to acquisition by IIL) as the product did not fit into Nocil’s product strategy. However, IIL sensed opportunity as Monocil continued to have a high brand recall among farmers. Post acquisition, its aggressive promotion and reach helped in getting ~9% of market share of Monocrotophos sales in India leading to ~6% contribution to IIL’s topline in first year itself (FY12).

Lethal – Successful revival of off-the-shelf brand

Lethal is one of the top selling brand in IIL’s product portfolio, which was acquired from Montari Industries in 2003 and contributed ~7% to its revenues in FY12. Montari Industries ceased operations in 2004 and went in BIFR. IIL acquired all the brands of Montari Industries for ~Rs 6 mn after being off-the-shelf for 3-4 years as brands of Montari continued to have high brand recall. After acquisition, IIL invested on advertising to revive the brands and successfully launched them in domestic market. Lethal has grown at a CAGR of 7% over FY08-12 and contributed ~7% of IIL’s topline in FY12 and is one of the largest brands in its segment i.e. chlorpyrifos.

IIL too starts adding products in collaboration of MNCs

IIL’s management has been focusing on increasing its tie-ups with global Agro-chemical companies to source specialty and generic molecules. During FY12, IIL announced tie-up with Nissan Chemicals, Japan with exclusive marketing rights for its patented product Pulsar which was launched in May 2012. It is Rice fungicide that prevents sheath blight. The Active Ingredient for this is Thifluzamide which is both preventive and curative in nature. Sheath blight is responsible for up to 20-25% of total yield loss in paddy crops and, therefore, Pulsar finds a big market in India as the country is one of the biggest rice producers. The product is already established in several key markets such as Japan, Brazil, China, Vietnam etc. According to IIL’s management, Pulsar is estimated to have Rs 2 bn market potential in India. IIL also announced collaboration with American Vanguard Corporation (AVC) to manufacture and market AVC’s generic insecticide brand Nuvan (dichlorvos) in domestic market. IIL already has relationship with AVC since 2003 for manufacturing and marketing Thimet (Active Ingredient - Phorate) in India. For Thimet, it pays US$175,000 or 5% of Thimet’s sales, whichever is lower to AVC as royalty. The initial agreement was valid till 2011 and has been renewed till 2016. Thimet added ~7.5% to IIL’s topline in FY12 and is its largest selling brand. IIL has entered into another tie-up with Nissan Chemicals to co-market Nissan’s popular weedicide quizalofop-ethyl in India, under the brand name Hakama. This is not an exclusive tie-up and the product will be manufactured by another player but will be marketed by IIL under the brand name Hakama.

Tax rate to remain lower on account of tax benefits with recent capacity expansions

IIL has added massive capacities during FY12 by setting up one formulation plant each in Dahej (Gujarat) and Udhampur (J&K) and a Technicals plant in Dahej. Total capex over FY11-12 is ~Rs 1 bn. The Udhampur formulations plant will enjoy 100% excise duty exemption and 100% income tax exemption for the first five years from the date of commissioning and 30% income tax exemption for the subsequent five years. We expect IIL to manufacture most of its high margin molecules at this plant to take maximum advantage of lower effective tax rates.

IIL


Exhibit 75: Sales trend of key products (` million)

287316

416 416415

374

0

50

100

150

200

250

300

350

400

450

FY11 FY12

Victor Thimet Lethal


Higher Technicals capacity to be key growth driver with Increased domestic B2B sales & exports We expect IIL’s B2B business as well as exports to increase sharply on the back of 2x growth in technicals manufacturing capacity with the commissioning of the Dahej plant which started commercial production in current fiscal i.e. FY13. It had only 3800 tonne of technicals manufacturing facility at Chopanki, Bhiwadi (Rajasthan). IIL plans to manufacture 5-6 different products in Dahej, which will kick in advantage of higher backward integration with ~50% of production to be utilized for IIL’s formulation plants. IIL also plans to expand its footprint in export markets by supplying active ingredients to the Middle East, Far East, CIS, Africa, and South Asia. Currently, IIL exports small quantities to Nepal, Lebanon, Pakistan, Israel and Bangladesh.

For future growth, Management bets on CRAMS

Management is planning to tap opportunities emerging on Contract Research & Manufacturing in Agrochemical Space. As India is turning attractive destination with cost advantage and ample talent in understanding complex chemistry. IIL is planning to add dedicated facility for contract manufacturing for global agrochemical majors and R&D companies. It may entail investment of ~ `500 million during FY14-FY15. We are not building in this capex yet in our estimates as we would rather wait for more clarity on these plans. It is also planning to invest in R&D facilities at its Chopanki, Bhiwadi (Rajasthan) plant which will support not just IIL’s research but can also be used for contract research from potential clients mainly from Japan. This may entail capex of `250 million to be spent during FY14.

Expanding formulation capacities at Samba (J&K) and Chopanki (Rajasthan) Current formulation plant at Samba is eligible for Excise and Income tax benefits. Till FY10, the benefit was 100%, and currently it gets 30% benefit. With additional capex at plant, it will become eligible for income tax and excise benefits for nest 10 years. The capex requirement is likely to be ~`75 million. Capacity expansion at Chopanki will be required as IIL has announced several new products and plans to introduce several more in coming quarters. The capex is estimated to be Rs 150 million for this formulation plant.

IIL


Exhibit 76: Capex Plans

Plans ` mn Expected By Remarks

Chopanki - Formulation capacity Expansion

150 FY13 IIL will use the incremental capacity to

manufacture the new products announced recently.

Samba (J&K) - Formulation capacity Expansion

75 FY13

The plant currently receives income tax and excise duty benefits. Additional capex will make the plant eligible for tax benefits for

another 10 years

New R&D facility - Chopanki

250 FY14

The facility will not only support IIL’s in-house research but will also be utilised for player for

contract research. IIL is exploring possibility with Japanese companies for Contract

Research.

Greenfield Plant for Contract Manufacturing of Technicals at Dahej

500 FY14 / FY15 Dedicated facility for contract manufacturing operations.


Exhibit 77: Product Concentration as % of Agrochem Sales

18

2224

30

35

42

0

5

10

15

20

25

30

35

40

45

FY11 FY12

Top 3 Products Top 5 Products Top 10 Products


Red triangle accounts for 10% Though IIL sells mostly generic agrochemicals, it’s revenue contribution from Red triangle (highest risk of getting banned) products is just 10%. Yellow triangle accounts for 31% while Blue triangle too accounts for 31%. Green triangle products contribute 9% while rest 19% is from Category O which are not hazardous if used safely.

IIL


Exhibit 78: Agrochemical Sales (` Mn)

476 568

2246 1706

14241739

432 476

201 1051

0

1000

2000

3000

4000

5000

6000

FY1

1

FY1

2

Class Ia (red triangle) Class Ib (yellow triangle) Class II (blue triangle)

Class III (green triangle) O Hazard unlikely if used safely


IIL



Fair value of `412/share (Upside of -0.5%), Initiate with “Reduce” At CMP of `414, IIL seems fully valued and is trading at P/E of 12.4x and 10.0x for FY13E and FY14E. We value IIL at P/E of 10x for FY14E earnings (at a discount compared to Rallis and PI Ind due to lower return ratios, generic portfolio). We have factored in 15% dilution on account of planned QIP in our forecasts. Initiate with ‘Reduce’.



Dhanuka FY13E 6108 901 639 12.8 7.7 1.9 5.6 0.0 26.7

FY14E 7051 1022 733 14.7 6.7 1.5 4.8 0.0 25.1

Insecticides India

FY13E 6737 741 423 33.3 12.4 1.8 8.1 0.2 17.7

FY14E 8382 964 523 41.2 10.0 1.5 6.8 0.4 16.4

PI Ind FY13E 10911 1893 1081 43.2 12.5 3.3 8.3 0.5 29.2

FY14E 13427 2420 1430 57.1 9.5 2.5 6.4 0.4 30.2

Rallis FY13E 15398 2618 1492 7.7 18.9 4.4 11.3 0.2 16.6

FY14E 17890 3086 1809 9.3 15.6 3.7 9.4 0.1 21.3

UPL FY13E 86852 15199 6689 14.6 9.0 1.3 5.7 0.6 15.3

FY14E 95547 16721 7844 17.1 7.7 1.2 5.0 0.5 16.0

Average FY13E 25201 4270 2065 22.3 12.1 2.5 7.8 0.3 21.1

FY14E 28459 4843 2468 27.9 9.9 2.1 6.5 0.3 21.8 Source: Sunidhi Research Estimates, Bloomberg

IIL



0

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Price 3x 6x 9x 12x



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Price 0.5x 1x 1.5x 2x



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7000

8000

9000

Ap

r-0

8

Au

g-0

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EV 1x 4x 7x 10x



0

1000

2000

3000

4000

5000

6000

7000

8000

Ap

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Au

g-0

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g-1

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c-1

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Ap

r-1

2

Au

g-1

2

Mcap 0.25x 0.5x 0.75x 1x


IIL



Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Delay in increase of MSP Agrochemical consumption gets affected by government’s decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to farmers. Regulatory risks The Agrochemical industry is highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court. Threat from GM seeds Genetically modified crops are made with inbuilt immune system that reduces dependence on usage of agrochemicals. We understand that plants require protection at various stages of lifecycle of plant and it may be difficult for even genetically modified crops to keep control on pests. Adaption of Bt Cotton in India has resulted in lower application of pesticides over last few years, however, Bt Cotton is reported to be affected from pests in some parts of Gujarat. Pests too become resistant to human intervention and gain power to attack crops despite being genetically modified, resulting in usage of agrochemicals.


IIL


Financial Analysis


4501

.0

5217

.6

6737

.0

8382

.0

20.4

15.9

29.3

24.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

7000.0

8000.0

9000.0

FY11 FY12 FY13E FY14E

Revenue Growth


The high revenue growth is expected in FY12E as a result of high fertiliser prices. We don’t build in any price escalations in DAP/complex fertiliser business in FY13 in our estimates, which will moderate growth in FY13E.


436.

3

563.

6

741.

1

963.

9

9.7

10.811.0

11.5

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0


EBIDTA Margin



322.

2

330.

2

422.

9

523.

1

7.2

6.3 6.3 6.2

5.6

5.8

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

0.0

100.0

200.0

300.0

400.0

500.0

600.0


PAT Margin


IIL



20.8

19.6

17.7

16.4

21.9

20.3

18.3

19.3

15

17

19

21

23

25

FY11 FY12 FY13E FY14E(%

)

ROAE ROACE


Exhibit 88: Net D/E and Interest Coverage Ratio (RHS)

0.2

0.7

0.2

0.4

42.8

4.9 5.1 4.5

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8


Net D/E Interest Coverage Ratio (RHS)


Exhibit 89: Cash flow (`Million)

-1000

-800

-600

-400

-200

0

200

400

600

FY11

FY12

FY13

E

FY14

E



IIL


Company in Depth IIL manufactures branded formulations and technicals in India. Over 98% of revenues come from domestic markets, though institutional segment (B2B) accounts for ~20% of sales. IIL has three formulation units located in Chopanki, Udhampur and Samba. It’s technicals (active ingredients) plants are located in Chopanki and Dahej. In formulation products, IIL’s popular brands are Thimet (phorate), Monocil (monocrotophos), Lethal (Chlorpyrifos) and Victor (imidacloprid). IIL refers these as ‘MVLT’ that remains the focus for driving revenue growth. It was promoted in 1996 and commercial operations commenced in 2002 after the setting up of the Chopanki formulation unit. In 2007, the company came out with an IPO to fund its expansion plans and raised `369.2 mn at an issue price of `115 per share.

IIL has an experienced management headed by Mr H. C. Aggarwal, chairman, and his son Mr Rajesh Aggarwal, managing director. Mr Rajesh Aggarwal promoted the company in 1996. IIL has reported strong revenue growth in the recent years with 27% CAGR over FY06-12. Aggressive capacity additions, expansion of distribution network and focus on brand building have been the main drivers of IIL’s growth strategy. Mr H. C. Aggarwal has more than 30 years of experience in the agrochemical industry. He has been the president of Northern India Pesticides Manufacturing Association for over five terms and the director of Crop Care Federation of India (CCFI). He is currently on the board of CCFI. Mr Sanjeev Bansal (Mr H.C. Aggarwal’s son-in-law) is a whole-time director and heads administration. Mr Sandeep Agarwal heads finance and is designated as CFO. Exhibit 90: Agrochemical Sales (` mn)

3846

4383

9331158

0

1000

2000

3000

4000

5000

FY11 FY12

Formulations - Retail sales (B2C) Formulations - Institutional sales (B2B)


Exhibit 91: Insecticides contribute to 60% of topline, share of Herbicide ~30%

1171 1553

330372

3055

3374

223

242

0

1000

2000

3000

4000

5000

6000

FY11

FY12

`M

illio

n



IIL


Exhibit 92: AP, Punjab, Maharashtra & Haryana are largest markets for IIL

AP, 17%

Punjab, 16%

Maharastra, 11%

Haryana, 10%UP, 8%

TN, 6%

Karnatka, 6%

Bihar, 5%

Gujrat, 5%

Others, 17%



Designation Name

Chairman Mr. Hari Chand Aggarwal

Managing Director Mr. Rajesh Aggarwal

Whole-Time Director Mr. Sanjeev Bansal

Independent Director Mr. Navneet Goel

Independent Director Mr. Rajender Pershad Gupta

Independent Director Mr. Gopal Chandra Agarwal

Independent Director Mr. Navin Shah

Independent Director Mr. Anil Kumar Singh

IIL


Valuations Summary








Payout (%) 9.8 9.6 9.0 8.5 Non-Current Liability

Valuation (x) Long Term Borrowings 9 383 383 883



EV/EBITDA 12.7 11.7 8.1 6.8 Current Liabilities

Dividend Yield (%) 0.6 0.6 0.7 0.8 Short Term Borrowings 333 1152 652 602




ROAE 20.8 19.6 17.7 16.4 Grand Total 3435 5203 6297 7723

ROACE 21.9 20.3 18.3 19.3 Assets

Leverage Ratios (x) Non Current Assets





Growth Ratios (%) Other Non Current Assets 35 31 148 184

Income growth 20.4 15.9 29.3 24.4 Current Assets

EBITDA growth 19.7 29.2 31.5 30.1 Current Investments 0 0 0 0

PAT growth 14.2 2.5 28.1 23.7 Inventories 1258 2024 2215 2756

Turnover Ratios Trade Receivables 806 892 1200 1493





Income Statement(` mn) Cash flow Statement


Revenues 4501 5218 6737 8382 PBT 413 429 549 679



Other Income 1 1 1 1 Others 1 2 0 0


EBIT 422 541 684 872 Inc/dec in W.cap 40 -839 -216 -536

Interest 10 111 134 193 Op CF after W.cap 478 -273 526 429

PBT 413 429 549 679 Less Taxes 104 87 126 156


PAT 322 330 423 523 Net CF From Operations 374 -359 399 273


Prior Period Adj 0 0 0 0 others 53 6 0 0


Ex. ordinary 0 0 0 0 Loan Raised/(repaid) 161 1198 -481 450



Interest Paid -10 -111 -134 -193

CF from Fin Activities 122 1049 82 205

Net inc /(dec) in cash -49 140 132 -122

Op. bal of cash 87 37 177 309


PI Industries Ltd (PIL)

Custom synthesis, In-licensing to drive robust growth

PI is manufacturer of agri-inputs and is present in custom synthesis of fine chemicals (Contract Research and Manufacturing Services: CRAMS). It undertakes crop protection and manufacture of specialty products and plant nutrients. Respect for IP helps in driving in-licensing of products PIL has uniquely positioned itself with its non-compete and IP driven business model to leverage its strong reach and brand with millions of Indian farmers on one side and chemical process research & manufacturing capabilities to partner global innovators on the other side. It doesn’t aggressively launch new products by reverse engineering of products that turn off-patent. This helps in building trust with innovators who can see respect for IP and PIL’s commitment. Focus to remain on adding & growing topline from in-licensing molecules PI has adopted a strategy of in-licensing MNC molecules for marketing and distribution in India rather than competing in the generics formulations market, which is likely to help it sustain growth and margins in a highly competitive industry. We expect margins to improve led by PI’s strategy of in-licensing molecules for marketing and distribution in India and of building leadership in select sub-product segments instead of competing in generic market Custom synthesis business to remain key growth driver Growth in past few years has been driven by custom synthesis business. We expect this business to continue to grow faster than domestic Agri-input business as strong order book provides visibility. It currently stands at ~$310 mn which is ~4.5x of FY12 revenue from CSM business. Over 80% of the revenues from CSM business are derived from patented products. Profitability to improve further with changing revenue mix, low tax rates We expect PI to maintain high return ratios on improved margins which will be led by fast changing product mix with higher growth in the more profitable custom synthesis business, Lower tax rate on account of commencement of operations in the Jambusar SEZ unit during Q3FY13 where PI has tax benefits for first 10 years of operations. In last 3 years, PIL has grown its revenue by 2x and PAT by 3x. Ramp up in CSM business and higher scale of domestic agrochemical sales has led to Operating margin improvement from ~13% in FY09 to 16.3% in FY12. Fair value of ` 685/share (Upside of 26%), Initiate with “Buy” With return ratios of ~30%, robust growth trajectory and lower tax rates after commissioning of Jambusar SEZ unit, PIL’s earnings will continue to be in growth momentum. At CMP of ` 542, PIL is trading at P/E of 12.5x and 9.5x for FY13E and FY14E. We value PIL at P/E of 12x for FY14E consolidated earnings.

I

nit

iati

ng

Co

ve

rag

e

23.6%

29.9%

16.1%

41.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%


CAGR Growth (FY12-14E)

Recommendation Buy

CMP (`) 542


Upside (%) 26

52 Week H / L ` 627/424

BSE 30 18763

Key Data


Mcap, ` Mn 13576.0

Mcap,USD Mn @ `55 246.8



Promoters 63.7

FII 8.6

DII 0.9



Stock Return % 0.7 8.9 4.2 -0.1

Relative Return % -5.9 -1.5 -5.2 -15.1

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Se

p-1

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Oc

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No

v-1

1

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c-1

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Jan

-12

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b-1

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Ma

r-1

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Ap

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Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Se

p-1

2

PI Industries NIFTY


` mn ` mn ` mn ` x x %

FY11 7200.1 1151.8 651.0 29.1 18.6 12.3 30.5

FY12 8791.1 1433.7 714.9 28.5 18.9 11.0 38.4

FY13E 10910.7 1893.3 1081.3 43.2 12.5 8.3 29.2

FY14E 13426.8 2420.0 1430.0 57.1 9.5 6.4 30.2 Source: Company, Sunidhi Research


PIL


Investment Thesis: Custom Synthesis – the big differentiator Custom Synthesis is used for the production of organic drug compounds to the specification of the client for the their specific development and research needs PI provides Contract Research (CR) and Contract Manufacturing (CM) services. Having pioneered this business in India for last 15-16 years, PI is one of the leading companies in this space and the largest in the Agrochemical Sector. Having built an outstanding reputation with the leading multinationals in Europe and Japan PI today has long term contracts for key Agrochemical active ingredients and intermediates for both the newly launched and to be launched products across the globe. In its Custom Synthesis business, PI provides services in the areas of Contract Research, Process Development, Analytical Method Development, Synthesis of high purity Product and Impurities for analytical reference standards, 5 batch analysis under GLP conditions, Scale up studies, Process detailed engineering and Commercial scale production.

The strength of this business has been developed through years of experience in this business and the in depth of understanding of customer requirements. All this is backed by defined business processes, state of the art R&D centre, kilo lab, pilot plant and manufacturing & analytical facilities, excellent and well experienced stable and dedicated team. PIL’s Product focus is on patented, high value, complex chemistry and early stage molecules that grows from almost zero base and leads to high growth rates on successful commercialization across geographies. PI has created a knowledge database in the custom synthesis business over several years to enable it to provide value added services and build trustworthy relationships with its key customers. It is associated with the leading innovators in the fine chemical industry in Europe, Japan and some segment in America. A key attribute of PI is its process research expertise and its ability to quickly scale up to commercial manufacturing. It has over the years proven these capabilities by developing more than 300 molecules at various stages of process development with up to 15 step chemical reactions. Unique position of PIL in CSM business Global innovators typically are hesitant in sharing patented molecules with other big Indian players. The reason for the same being Indian agrochemical majors had been exporting the reverse engineered patented products till 2005 as India had not signed WTO patent & IPR treaty. On the other hand, India’s competitor in outsourcing of manufacturing i.e. China is not regarded well for protection of Intellectual property, thus it loses out in opportunities emerging in non-generic products. European players offering CSM business to R&D companies have significantly less risk as far as IP protection is concerned, however these are not cost competitive due to higher operating costs (mainly high labour rates). Scope of Custom Synthesis

Research including conducting clinical trials, bioequivalence studies, drug library generation & screening etc on contract

Process research on new chemical process for synthesis and production scale up

Custom manufacture of special chemicals in small quantities

Contract manufacture of chemicals including fine chemicals, intermediates, cGMP intermediates, APIs, agrochemicals and specialty chemicals.

PIL


12 – 14 products commercialized, Jambusar Phase-1 to commission during Q3FY13 PIL’s current portfolio of commercialized products is 12 to 14, and this number is scheduled to improve with more products in the pipeline R&D scale up in the next two years. The first phase of the new manufacturing facility in Jambusar is expected to get commissioned during Q3FY13. The investment of this location will be made in the phases according to additional capacity requirements, for new products getting commercialized.

Committing Capex on Strong revenue visibility The Custom Synthesis business is now in a growth phase. As a result, all capital expenditure being planned is only against assured revenues for which contracts are either signed or being negotiated. Contracts are negotiated to ensure minimum risk for PI on account of commercial, raw material & currency. Thus, PIL enjoys strong revenue visibility and predictability at lower investment risk.

Global CSM opportunity is whopping $85 billion The Global Fine chemical Industry is estimated to be ~ $ 300 billion by the year 2015 having a growth rate of 7-8 % with strong anchors in Asia. Of this, the addressable portion of Custom Synthesis and Manufacturing (CSM) is estimated at ~$ 85 billion.

Although India currently accounts for less than 5% of the CSM business globally, this share is expected to grow substantially over the next 5-7 years. The Indian CSM industry is expected to grow at much faster pace than the ~12% CAGR of the global CSM market. India already has the highest number globally of USFDA and UK MHRA approved plants for pharma products. With 170 approved plants, India has become a natural outsourcing destination for global companies seeking to achieve accelerated time to market and superior cost efficiencies. CRAMS Pharma companies can be potential competitors in manufacturing of the agro chemical space; globally competition comes from companies like Saltigo, Lonza and DSM.

Weakness in global economy augurs well for outsourcing The recent global economic slowdown has further catalysed the adoption of the contract manufacturing model with both innovators and generic makers searching for optimal quality and cost options. These factors augur well for the Indian CSM players that are well equipped to capitalise on opportunities in global outsourcing. These companies have strengthened presence in the market by acquiring better technologies and developing expertise in niche segments that have high entry barriers and present attractive margins. Traditionally, India has been the outsourcing destination for Intermediates and Active Pharmaceutical Ingredients (c. 60% of total outsourcing has been in this segment). However, the outlook is changing rapidly as many Indian companies have expanded their offering under contract manufacturing and have also built capabilities in the areas of contract research for discovery and development.

Non-Compete business model attracts more customers PI does not compete with the innovator by reverse engineering of molecules and hence attracts innovators from not just Agrochemical, but pharmaceutical sector as well. PI strictly focuses on IPR chemistry – as a result its involvement with client is from an early stage throughout the grant of a patent on the molecule, client comfortable with sharing technology. Agro-chemical sector has been a starting point and now PI is working on pharmaceuticals and performance chemicals too. PIL is creating a diversified Custom Synthesis business across the Custom Synthesis delivery chain, addressed at the patent life cycle.

Operational efficiencies to aid in margin expansion The manufacturing unit has also taken up a special project with the support of a reputed consultant towards operational excellence. These initiatives would result in substantial operational efficiencies and hence margin expansion going forward.

PIL


Europe leads CSM orderbook In CSM business, 65-70% of orderbook comes from Europe while Japan accounts for 15-20%. The top molecule doesn’t account for more than 20% of topline in CSM business. Top 5 molecules have revenue of 55-60% while Top 5 client concentration is not more than 2/3

rd of the CSM

revenues. It thus have diversified business in terms of clients, products and geographies.

Take or Pay contracts to avoid risks PIl enters into ‘Take or Pay’ contracts with MNCs for CSM business to avoid any risks that may arise from failure of any product to take off in global markets. It normally passes on raw material and forex risks to clients and works on reasonable conversion margin basis.

Very high entry barriers

Registration of a new outsourcing partner as a source normally takes 2–3 years and meanwhile existing trustworthy sources continues to corner substantial share of production of newly commercialized molecules. Every successful molecule offers potential opportunity varying from US$ 5mn to US$ 15mn p.a. for PIL depending on the type and scope of the molecule.

As complex chemistry is involved from Lab to scalability at plant, a steep learning curve in the process engineering business ensures that the innovator continues to source from the partner who has the expertise built over the years. Thus, manufacturing contracts are generally long term (3-5 years) or renewed every year.

Concentrated Product portfolio in domestic Agri-inputs PIL has focused on small no. of products (less than 30) as the strategy is to develop strong market positions where a majority of its brands are among Top 2-3 in their respective categories. As a result, it can successfully create premium positioning for its brands. In-licensed products dominate in revenue mix Most of the new and big potential launches by PIL has been for in-licensed products from innovators. It is driving robust growth rates in Agri-inputs division. While over 50% of revenues came from generics with backward integration into Technical, remaining ~45-50% came from in-licensed products which are typically bought from innovator companies. PIL buys these products, Formulates, manufactures and packs them under its own brand to sell in Indian markets. Most of these deals have an exclusive license lasting minimum 5 years. 22% topline growth in Agri-inputs in challenging year Agri-input revenues grew 22% in FY12. The growth was achieved despite several challenges for the industry during the year. These include increasing costs of production due to increased input costs (manpower, fuel etc.) and the inability of the farmers to realize Minimum Support Prices (MSP) in many parts of the country (this impacted crop economics for farmers). Further a change in subsidy system for fertilizers, export restrictions on leading crops, crop holidays in certain areas and unfavorable rains for crops such as pulses and soybeans posed further challenges.

4 new products in FY12, Expect 2 launches in FY13 As a part of its strategy to provide complete crop solutions, PIL introduced two broad spectrum modern fungicides: CLUTCH and SANIPEB, one wheat herbicide: WICKET and a broad spectrum Insecticide: OVAL during FY12. PIL has also reached the penultimate stages of registration approval for two new broad spectrum insecticides. Both these molecules are expected to be launched in FY13. Signup 6 new product agreements PIL continues its quest for new molecules and has signed 6 new agreements with their patent holders in insecticide / herbicide / fungicide segments to evaluate their potential in the domestic market. These products further add to the Company’s product pipeline and strengthen our product portfolio for the coming years.

PIL


Synergies between CSM & domestic Agrochemicals PIL has shifted its focus from generics to newer patented products due stagnancy & low margins in the domestic generics. There are successful products the company has been able to clinch deals with clients to launch in Indian markets leading to synergies across businesses.

Nominee Gold’ becomes Rs 1 billion product Nomini Gold is a shining example for potential of in-licensed product, which is a rice herbicide, launched in FY10 in a tie up with Kumiai Chemicals - the innovator of bispyribac-sodium and has become a blockbuster in just two years and generates over ~`1bn revenues per year. Management indicates that Nominee Gold has reached ~5% of rice under acreage in India and thus presents an immense opportunity by entering in more areas. What drives Nominee Gold’s success? Rice is typically cultivated either by transplantation method or direct seeding. In transplantation method, rice seeds are planted in a nursery and normally saplings are left to grow for few weeks before planting them in farms. This method is labour-intensive (Alternatively Transplanter machines can be used) and also requires a lot of water in the field. Direct seeding is less cumbersome and needs less water in the field; however a major problem with direct seeding is the challenge of controlling weed growth, which can reduce yields sharply. Effective weed control provided by Nominee Gold turns direct seeding an attractive option compared to transplanting. Impressed by its success and immense market potential, global innovator companies such as Bayer and Syngenta have sought to partner with PIL to launch their own versions of bispyribac-sodium as PIL has exclusive rights for it in India. Rallis already sells it under the brand name ‘Taarak’. PIL indicates that it wants to grow the market share of it as fast as possible before the competition from generic players kick in. PI also get monetary benefit on sales by any of these partners alongwith strengthening relationship which may be useful in sourcing more in-licensing from innovator companies. Tie up with Sony for research PI has set up a joint research laboratory with one of the largest electronics companies in the world (Sony Corporation of Japan) for developing processes for electronic chemicals at Udaipur. Award from Bayer Crop Science Bayer Crop Science India’ awarded the certificate of Excellence to PI Industries Ltd. in Supplier Sustainability Program 2011 for their excellent Systems & practices of environment Management, Base Management, Manufacturing practices, Legal Systems, Health, Safety and Environment Management. Vast distribution network and effective marketing strategy The company currently has niche product portfolio of over 25 products. It markets its product through 10,000 + Distributors and 40,000 + Retailers across all the major farming states. Exit from Polymer compounding business PIL’s strategy to concentrate on its core businesses of Agri-inputs and Customs Synthesis business is visible with the divestment of the polymer compounding business to Rhodia, S.A., a French multinational speciality chemical major as this piece of business was not fitting in with growth strategy of PIL going forward. PIL received RS 0.7 billion for this business which helped in reducing debt and part funding of its core business activities. PIL has booked exceptional gain of Rs 0.3 billion on sale during FY12. . The deal includes transfer of all assets, people, plant facility, R & D capabilities, customer base and logistic network in India. The deal was concluded in April, 2011. The polymer business witnessed significant pressure on margins because of input-cost pressures. Post this divesture, PIL is completely focused on both high margin and highly scalable businesses.

PIL


2 Bonus issues since 2009 PI Industries has rewarded investors with 2 bonus issues in recent years. In Apr’09, PIL issues Bonus of 1:1 while in Jul’10, Bonus shares were issued in 1:2 ratio. Improving Balance Sheet PIL’s Balance sheet quality is improving with high growth rates in profits. D/E ratio has decline from 2.0x in FY09 to 0.65x in FY12. This is set to decline further as investment in new facility at Jambusar start contributing to bottomline post commissioning during FY13. Management guides for topline growth at ~30 p.a. for few years PIL’s management guides for ~30% topline growth p.a. for few years given the order visibility in its CSM business and promising product pipeline alongwith health growth rates in existing product portfolio. Margin expansion is inevitable owing to improving product mix, higher operating leverage and divesture of the low margin polymer business.

PIL


Exhibit 93: PI Industries Product Basket

Brand Name Product Crop Pest

Insecticides

PI BUPRO Buprofezin 25% SC Rice, F&V, cotton Hoppers

DIAFURAN Carbofuran 3% CG (encapsulated) Maize, rice, cotton, F&V Various

LEPIDO Chlorfenapyr 10% SC F&V, non‐crop Bollworm, mites, etc.

COLT Cypermethrin 25% EC Cotton, F&V, maize, cereals Bollworm, weevils, etc.

COLFOS Ethion 40% + Cypermethrin 5% EC F&V, non‐crop Various

FOSMITE Ethion 50% EC Cotton, F&V, non‐crop Various

PI INDOX Indoxacarb 15.8% EC Cotton, F&V, maize Various

JUMBO Imidacloprid 17.8% SL Rice, cotton, maize, F&V Various

SNAILKIL Metaldehyde 2.5% DP F&V, cereals, non‐crop Slugs and snails

KADETT Monocrotophos 36% SL Cotton, rice, F&V Bollworm, various others

FORATOX Phorate 10 % CG Potato, rice, cereals Nematodes, etc.

ROKET Profenofos 40% + Cypermethrin 4% EC Cotton, F&V, maize, others Various

CARINA Profenofos 50% EC Cotton, F&V, maize, others Various

SIMBAA Propargite 57% EC F&V, cotton, non‐crop Mites

MAXIMA Thiamethoxam 25 %WP Maize, potato, soybean, others Various

OVAL Acephate 75 WP F&V, cotton, rice, others Various

VOLTAGE Spiromesifen 2.9 SC F&V, cotton White fly, mites

Fungicides

LURIT Dimethomorph 50% WP Vine, potato, F&V Mildew, blight, others

KITAZIN Iprobenfos 48% EC Rice, F&V Blast, blight, rot

SANIT Metiram 70% WG F&V, vine Mildew, blight, others

CLUTCH Pyraclostrobin 5%+Metiram 55% WG Cereals, soybean, maize Rust, leaf spot, mildew

LOGIK Tricyclazole 75% WP Rice Blast

SANIPEB Broad spectrum of crops

Herbicides

SOLARO Atrazine 50% WP Maize, sugarcane, cereals Grasses, broadleaved weeds

NOMINEE GOLD Bispyribac Sodium 10% SC Rice, non‐crop Grasses, broadleaved weeds

PI GLYPHO Glyphosate 17.6 SL RR crops, burn‐down Grasses, broadleaved weeds

INRO Imazethapyr 10 SL Soybean, rice, F&V, maize Grasses, broadleaved weeds

WICKET Wheat

Other products

BIOVITA Lq®. Seaweed (Ascophyllum nodusum) Source: Company, Sunidhi Research

PIL



Fair value of ` 685/share (Upside of 26%), Initiate with “Buy” With return ratios of ~30%, robust growth trajectory and lower tax rates after commissioning of Jambusar SEZ unit, PIL’s earnings will continue to be in growth momentum. At CMP of ` 542, PIL is trading at P/E of 12.5x and 9.5x for FY13E and FY14E. We value PIL at P/E of 12x for FY14E consolidated earnings.



Dhanuka FY13E 6108 901 639 12.8 7.7 1.9 5.6 0.0 26.7

FY14E 7051 1022 733 14.7 6.7 1.5 4.8 0.0 25.1

Insecticides India

FY13E 6737 741 423 33.3 12.4 1.8 8.1 0.2 17.7

FY14E 8382 964 523 41.2 10.0 1.5 6.8 0.4 16.4

PI Ind FY13E 10911 1893 1081 43.2 12.5 3.3 8.3 0.5 29.2

FY14E 13427 2420 1430 57.1 9.5 2.5 6.4 0.4 30.2

Rallis FY13E 15398 2618 1492 7.7 18.9 4.4 11.3 0.2 16.6

FY14E 17890 3086 1809 9.3 15.6 3.7 9.4 0.1 21.3

UPL FY13E 86852 15199 6689 14.6 9.0 1.3 5.7 0.6 15.3

FY14E 95547 16721 7844 17.1 7.7 1.2 5.0 0.5 16.0

Average FY13E 25201 4270 2065 22.3 12.1 2.5 7.8 0.3 21.1

FY14E 28459 4843 2468 27.9 9.9 2.1 6.5 0.3 21.8 Source: Sunidhi Research Estimates, Bloomberg

PIL



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PIL


Risks to our Price Target Delay in commercialization / development of new molecules PIL’s growth in CSM will be dependent on the commercialization of molecules. Any delay in the same or delay in ramping up volumes in global markets shall lead to lower growth. Client and Product concentration PIL’s growth in CSM is also dependant on few molecules. Slower growth in volumes of key molecules will mean slower growth in topline in this business.

Genetically Modified Crops Genetically modified crops are made with inbuilt immune system that reduces dependence on usage of agrochemicals. We understand that plants require protection at various stages of lifecycle of plant and it may be difficult for even genetically modified crops to keep control on pests. Recently, Bt Cotton is reported to be affected from pests in some parts of Gujarat recently. Pests too become resistant to human intervention and gain power to attack crops despite being genetically modified, resulting in usage of agrochemicals. Adaption of Bt Cotton in India has resulted in lower application of pesticides over last few years. To mitigate this risk, most of the agrochemical majors globally have added and enhanced seeds business over the years. Forex risks PIL's Revenues, raw material imports are denominated in foreign currencies. Hence, any volatility in the exchange rate leads to volatility in company's revenues, borrowings, assets and profit. Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Delay in increase of MSP Agrochemical consumption gets affected by government’s decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to farmers. Regulatory risks The Agrochemical industry is highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court.

PIL


Financial Analysis


7200

.1

8791

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ROAE ROACE


We believe PIL will continue to have ROAE and ROACE of ~30% going forward.


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PIL


Company in Depth Incorporated in 1947, PI Industries focuses on Agri-Input and Custom Synthesis with strength of over 1,100 employees, PI Industries currently operates three formulation and two manufacturing facilities as well as four multi product plants under its three business units across Jammu and Gujarat. These state-of-art facilities have integrated process development teams with in-house engineering capabilities. PIL’s journey over 6 decades PIL was founded in 1947 and it was earlier known as Pesticides India which was renamed PI Industries in 1993 to reflect its diversified businesses. PII was set up by the late Mr. P P Singhal, as an edible oil refinery unit. It later ventured into the agrochemicals formulation business, which is currently its major revenue driver. In 1978, the company diversified into mining and mineral processing; this business was later hived off into a separate unlisted company, Wolkem India Ltd. PIL also entered the energy metering business in the 1980s which too was hived off into a separate unlisted company, Secure Meters Ltd. PII diversified into polymer compounding in the 1990s. Also, in the mid-1990s, PII entered the CRAMS business, which currently accounts for ~38% of the topline in FY12 and we expect it to go to ~45% by FY15. From April 2011, the polymer business has been divested to Rhodia, S.A., a French multinational speciality chemical major. Thus, It has 2 core focus area currently viz. Agri-inputs (Pesticides) and Custom Synthesis & Manufacturing (CSM). Agri-Input PI is one of India’s leading players in the Agri-Input industry, primarily dealing in agro-chemicals, specialty fertilizers, plant nutrients and seeds. This venture is the flagship business (unit) for which PI enjoys tremendous brand recognition across several industry leading products. The Company has exclusive rights with several global Corporations for distribution in India and is constantly evaluating prospects to further expand its product portfolio. Given the inevitable surge in demand for food grain production in the agriculture sector, the opportunities for Agro-Chem Companies are innumerable. PI Industries is favorably positioned to contribute to the growth in this space by leveraging its long-standing association with business partners and intensive network of distributors across India. PIL has 3 formulation and 2 manufacturing facilities based in north (Jammu) and west (Panoli, Gujarat) currently while new facility at Jambusar is going to commission soon. Custom Synthesis & Manufacturing The Fine Chemicals business unit of PI focuses on Custom Synthesis which entails dealing in custom synthesis and contract manufacturing of chemicals including techno commercial evaluation of chemical processes, process development, lab & pilot scale up as well as commercial production. The Company has an impressive product portfolio as result of exclusive tie-ups with leading agro-chemical, pharmaceutical and fine chemical companies around the world. PI has made substantial investments in building state of art process research and manufacturing facilities of chemical intermediates and active ingredients with special focus on strong process R&D capabilities. This business unit is expected to be the primary growth driver with strong revenue visibility as India continues to be a preferred destination for outsourcing Custom Synthesis and contract manufacturing related projects. With exceptional growth opportunities in the offing this business segment is poised for great success.

PIL



Salil Singhal, Chairman & Managing Director (Promoter Director)

Took charge of the family business in July ‘79. He headed Pesticide Association of India (now Crop Care Federation of India) as Chairman for 17 yrs and is now Chairman Emeritus.

Mayank Singhal Managing Director & CEO (Promoter Director)

An Engineering Management Graduate from the UK, joined PI in 1988. Worked at the plant level for 2 years and was inducted to the Board of the Company in 2000 and appointed as Joint MD in 2004.

Anurag Surana (Whole Time Director)

A B.Com (Hons.) graduate joined Company in 1995. Initially, he handled the polymer compounding business and later he managed the entire manufacturing operations of the Company at Panoli. His current responsibilities are in the operations, manufacturing, quality control, commercial and general management areas.

PIL


Valuations Summary




Adj. EPS 29.1 28.5 43.2 57.1 Share Capital 112 125 125 125

CEPS 36.1 48.3 52.0 69.6

Preference Capital 81 0 0 0

BVPS 95.5 129.9 165.5 213.2 Reserves and Surplus 1944 3129 4020 5216

DPS 2.0 5.0 6.5 8.0 Total Shareholders’ funds 2137 3254 4145 5341

Payout (%) 6.9 17.5 15.1 14.0 Minority Interest 0 0 0 0

Valuation (x) Non-Current Liability 0 0 0 0

P/E 18.6 18.9 12.5 9.5 Long Term Borrowings 590 1191 1191 1191

P/BV 5.7 4.2 3.3 2.5 Deferred Tax Liabilities (Net) 326 329 329 329

EV/EBITDA 12.3 11.0 8.3 6.4 Long Term Liab/ Provisions 108 124 167 202

Dividend Yield (%) 0.4 0.9 1.2 1.5 Current Liabilities 0 0 0 0

Return ratio (%) Short Term Borrowings 1547 1106 1050 945

EBIDTA Margin 16.0 16.3 17.4 18.0 Trade Payables 1058 958 1345 1655

Adj. PAT Margin 9.0 8.1 9.9 10.7 Other Current Liabilities 754 888 1046 1287

ROAE 30.5 38.4 29.2 30.2 Short Term Provisions 119 166 165 180

ROACE 23.4 30.6 26.9 29.2 Grand Total 6640 8016 9439 11130

Leverage Ratios (x) Assets

Long term D/E 0.3 0.4 0.3 0.2 Non Current Assets

Net Debt/Equity 1.0 0.7 0.5 0.4 Fixed Assets 2875 3785 4068 4519

Interest Coverage 5.9 8.2 7.0 9.2 Deferred Tax Assets 0 0 0 0

Current ratio 1.0 1.3 1.4 1.5 Non-Current Investments 5 5 5 5

Growth Ratios (%) Long Term Loans and Advances 189 192 299 368

Income growth 32.8 19.8 25.0 23.6 Other Non Current Assets 14 16 16 16

EBITDA growth 31.4 24.5 32.1 27.8 Current Assets 0 0 0 0

PAT growth 56.7 59.1 4.4 32.3 Current Investments 0 0 0 0

Turnover Ratios

Inventories 1410 1788 2242 2759

F.A Turnover x 2.8 3.0 2.7 3.0 Trade Receivables 1750 1722 2242 2759

Inventory Days 71.5 66.4 70.0 70.0 Cash and Cash Equivalents 70 94 88 116

Debtors Days 88.7 72.1 75.0 75.0 Short Term Loans and Advances 314 394 448 552

Payable days 63.9 50.0 50.0 50.0 Other Current Assets 13 19 30 37

Income Statement(` mn) Grand Total 6640 8016 9439 6640

Year End-March FY11 FY12 FY13E FY14E Cash flow Statement

Revenues 7200 8791 10911 13427 Year End-March FY11 FY12 FY13E FY14E

Op. Expenses 6048 7357 9017 11007 PBT 914 1434 1481 1932

EBITDA 1152 1434 1893 2420 Depreciation 157 173 222 314

Other Income 104 372 56 62 Interest Exp 185 199 247 235

Depreciation 157 173 222 314 Others -27 -293 0 0

EBIT 1099 1633 1728 2167 CF before W.cap 1229 1513 1949 2482

Interest 185 199 247 235 Inc/dec in W.cap -839 -361 -558 -612

PBT 914 1434 1481 1932 Op CF after W.cap 390 1152 1391 1869

Tax 263 398 400 502 Less Taxes 180 400 400 502

Reported PAT 651 1036 1081 1430 Exceptional & Prior Period Adj 0 0 0 0

Minority 0 0 0 0 Net CF From Operations 210 753 991 1367

Prior Period Adj 0 0 0 0 Inc/(dec) in F.A + CWIP -971 -1171 -505 -765

Sh. of Associates 0 0 0 0 others 30 128 0 0

Ex. ordinary 0 321 0 0 CF from Invst Activities -941 -1043 -505 -765

Adjusted Pat 651 715 1081 1430 Loan Raised/(repaid) 946 358 -55 -105

Source: Company, Sunidhi Research Equity Raised 0 -77 0 0

Dividend -15 -100 -190 -234

Interest Paid -177 -196 -247 -235


Net inc /(dec) in cash 23 -306 -6 28

Op. bal of cash 19 42 94 88


Rallis India Ltd

Priced to perfection, Initiate with ‘Reduce’

Rallis is part of respected ‘Tata’ group with its parent as Tata Chemicals. It is present in domestic formulations, seeds, PGN, Agri services and organic manure (through its subsidiary). It entered in contract manufacturing and expanded exports with commissioning of its Dahej plant. Complete value chain of Agri-inputs It offers wide product portfolio to farmers along with manufacturing of technicals. It has also done several tie-ups with global agrochemical companies. With acquisition of Metahelix, it has added Seeds to its product portfolio. Its parent, Tata Chemicals is present in Fertilisers, both Urea and complex fertilizers. It thus cover entire spectrum of Agri-inputs needed by farmers. Strong Brand name attracts premium Rallis focused on building brands over the years as India’s Agrochemical market is dominated by ‘Generics’ where there is hardly any product differentiation possible. Key to higher margins and better return ratios is strong brand that can sell at premium compared to peers alongwith extensive distribution reach. As per Gallop survey, Rallis has 7 brands among top 12 agrochemical brands in India. Rallis reached over 80% of India’s districts, which further strengthens ‘Tata’ brand among farmers. Focus on High return ratios Rallis has delivered better than industry average return ratios on account of premium that it commands for its strong brands and larger reach which is aided by its parent Tata Chemicals. Seeds and exports to be key growth drivers Metahelix is having a long pipeline of new variants which will be launched in Indian seed market over the next few quarters. Ramp up of exports of technicals and bulk formulations will be another key growth driver in FY13-FY14. Focus on Green chemistry leads to lower growth in FY12 In line with its commitment to promote green chemistry, which is less hazardous, Rallis discontinued Red triangle products from its product offerings in FY12, which led to revenue loss which wouldn’t have occurred otherwise. Red triangle products had ~10% contribution in topline. Fair value of ` 140/share, Initiate with “Reduce” Rallis will continue to focus on launching new products in domestic markets with reliance on strong brands. We expect revenue share of exports to grow further with potential for Dahej Phase 2 upon success in negotiating contracts with clients. It witnessed massive re-rating in FY10 and FY11. Though it has underperformed broader markets in last year, it is still priced to perfection with no margin of safety in our view. At CMP of `145, Rallis is trading at P/E of 18.9x and 15.6x for FY13E and FY14E. We value Rallis at P/E of 15x for FY14E earnings. Initiate with ‘Reduce’

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Tata Chemicals CAGR growth (FY11 - FY13E)

Recommendation Buy

CMP (`) Price Target (`) Upside (%) 52 Week H / L ` BSE 30

Key Data

No.of Shares, Mn. Mcap, ` Mn Mcap,USD Mn @ `55 2 W Avg Qty (BSE+NSE)


Promoters FII DII Public & Others


Stock Return % -5.3 -11.4 1.5 -21.7

Relative Return % -5.0 -3.0 10.0 -11.4

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Tata Chemicals NIFTY

Tarun Surana

[email protected] Phone: +91-022-66318632


` mn ` mn ` mn ` x x %

FY11 10862.4 1914.8 1260.4 6.5 22.4 15.3 25.0

FY12E 12748.7 2029.6 1163.7 5.1 28.5 14.6 23.8

FY13E 15398.0 2617.7 1492.3 7.7 18.9 11.3 16.6

FY14E 17890.0 3086.0 1809.1 9.3 15.6 9.4 21.3 Source: company, Sunidhi Research


18.5%

23.3%

27.3%

24.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


CAGR (FY12-14E)

Recommendation Reduce

CMP (`) 145


Upside (%) -3

52 Week H / L ` 186/111

BSE 30 18763

Key Data


Mcap, ` Mn 28196.7

Mcap,USD Mn @ `55 512.7



Promoters 50.1

FII 11.6

DII 11.8



Stock Return % 9.2 8.1 17.1 -14.7

Relative Return % 2.9 -2.5 8.7 -32.3

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

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Rallis India NIFTY

Rallis


Investment Thesis: 10 new products launched in FY12 Rallis has launched 10 new products during FY12 across the category i.e. Insecticides (3 products), Herbicides (4 Products) and Fungicides (3 Products). Further, it has registered sixteen and four products in the international and domestic market, respectively. Rallis’ Turnover Innovation Index (sales of product launched during the trailing four years) stood at 11% during FY12 (v/s 28-30% in the past seven years except FY11). Rallis believes that new generation products like Ergon and Saras, plant growth nutrient products like Tata Bahar and Ralligold, Herbicide like Tata Vaar and Honcho will drive the growth in the future. Exhibit 104: Broad Product portfolio – 10 new products launched in FY12

Products Description

Neon Effective insecticide for the management of cotton jassids and tea mites

Sonic Granular insecticide for paddy and sugarcane

Taffin Effective insecticide for the control of thrips on chillies and cotton

Tata Vaar Soybean post emergence herbicide for the management of all major weeds

Fycol Post Emergent Grassy Herbicide in soyabean, groundnut and cotton

Honcho Pre-post emergent herbicide for the management of all major weeds in onion

Tata Cylo Post emergent herbicide for grassy weeds in rice

Saaras Broad Spectrum fungicide for the management of grapevine, chilli and potato disease

Ditaf Specialist fungicide for the management of downy mildew in grapes and late blight diseases in potato

Tata Bahaar Plant Growth Promoter for vegetables and fruit crops to improve growth and yield


Innovation Turnover Index Rallis defines Innovation Turnover Index as revenue contribution from products launched in trailing 4 years. It maintained this index at 28% – 30% for most of the years in last decade. The index has gone down sharply in past 2 years as ‘Takumi’ and ‘Applaud’ which are amongst its top products are now out of calculation if they were launched before trailing 4 years. The index is likely to show uptick post 10 new launches in FY12 which will drive revenues from ‘newly launched products’. Exhibit 105: Innovation Turnover Index

28%

25%

31%

25%

28%30% 29% 30% 31%

20%

11%

0%

5%

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20%

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35%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12


Rallis


Tie-ups with other companies to add products – sustain growth Rallis has tie-ups with several companies for launching products under its own brand names. Following table presents names of companies with whom Rallis has tie-ups and launched its brands in the market. Exhibit 106: Company Tie-Ups

Company Brand Name

Bayer India Spiro, Tatamida

Borax International Solubar

Du Pont Daksh, Rekord

FMC India Furadan, Tatafuran, Electra, Impeder

Gharda Chemicals Fateh, Koranda

Makhteshim Chemical Works Captan, Nova, Atrazine

Nihon Nohayaku Fuji1, Applaud, Fenpyroximate

Syngenta India Preet, Anant, Sartaj, Prabhav, Paralac

Yara International Water Soluble NPK Fertilisers


Contract Manufacturing will continue to remain growth driver Rallis undertakes contract manufacturing of technicals and bulk formulations. It is high growth segment with higher margin as most of the contract manufacturing is for patented molecules which involves complex chemistry and need for IP protection. Exhibit 107: Revenue contribution from Exports

20% 24%33% 35% 35% 40%

80% 76%67% 65% 65% 60%

0%

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80%

100%

120%

FY1

0

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1

FY1

2

FY1

3E

FY1

4E

FY1

5E

Exports India revenues


Rallis entered in Seeds business by acquiring Metahelix Metahelix almost doubled its revenue in FY12 to `814 million in FY12 and achieved break even with PAT at `6 million. Metahelix has strong pipeline of Bt and Hybrids and will continue to launch new traits and cover broad spectrum of crops in FY13/14. It has 24 crops in BT pipeline & 150 in hybrid pipeline. Metahelix had launched & established 9 products in seeds & extensive field activities to lay strong foundation for new brands across geographies.

Rallis


Exhibit 108: World Biotech Seed Market by Crop

Maize, 47.9%

Soybeans, 41.4%

Cotton, 7.9%Canola, 2.3%

Others, 0.5%

Source: FAO, Sunidhi Research

Focus on working capital, cash generation Rallis has one of the best working capital management as reflected from its financials over last few years. It has relentlessly worked on cash generation, focused on reduction in receivable and inventory days which helps in generating free cash flow. Exhibit 109: Net Working Capital is ~ 1 month only

7772 70 70

3630 30 33

23 2530 33

0

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Inventory Days Debtors Days NWC Days


Rallis


Exhibit 110: Cash Flow (`Million)

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3E

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Rallis enters in organic manure business – ‘GeoGreen’ acquisition in Apr’12 All cash deal to acquire a majority stake (51%) in Zero Waste Agri Organics Pvt. Ltd. at a consideration of `290 million. Management expects to generate cumulative revenue of `1000 million in next 5 years from this product. It is an organic soil conditioner that will vastly improve soil structure. It is produced from sugar mills’ by-product i.e. Baggase. It is a rich source of ‘organic carbon’ capable of supporting & enhancing biological activities in soil. Key drivers in organic manure business

About 1 millimeter of top soil is lost every year due to erosion

Increased cropping intensity depleting soil fertility

Natural agents building Organic Manure in soil such as earthworm etc are reducing

Imbalanced use of fertilisers and Nutrients coupled with low addition of organic matter.

Most Indian soils are not only deficient in organic carbon but also hungry in organic carbon Surplus Land at Hyderabad & Thane Rallis has considerable surplus land which can be divested at appropriate time if need arises to raise cash as it did in 2008 when it sold 31 acres land to Peninsula for `0.9bn in 2008. It has ~85 acre land in Hyderabad and ~22 acres in Turbhe (Navi Mumbai). ‘MoPu’ - Grow more pulses Rallis entered into MoU with Maharashtra Govt. to drive MoPu initiative in the State with the intention to cover 1 Lakh Ha. of land under pulses over the next five years. In FY12, 50,000 acres of land has been covered with focus on various Gram pulses. The initiative did not only improve the yield but also fetched price premium of `100 - `250 per quintal for the farmers.

Rallis


Strong Brand recall among farmers As per Gallup survey, Rallis has 7 products out of Top 12 products which have highest Brand Recall among the customers. Exhibit 111: Brand Recall by Farmers

Company Brand 2010 2011

Bayer Confidor 54% 51%

Rallis Contaf 30% 41%

Rallis Rogor 29% 37%

Rallis Asataf 28% 38%

Rallis Tata Mida 24% 15%

Rallis Contaf Plus 19% 30%

Bayer Fame 17% 26%

Bayer Antracol 15% 29%

Rallis Tata Mono 13% 31%

Rallis Applaud 13% 16%

Syngenta Proclaim 13% 17%

Bayer Hostathion 12% 14%


Farmer connect – Samruddh Krishi An Agri Services programme by Rallis which can leverage the Agri Expertise, Reach and Farmer connect of Rallis and increasingly available ICT led knowledge to provide solutions to farmers. Exhibit 112: TRAITS – focus on farmer’s prosperity


Rallis



Fair value of ` 140/share, Initiate with “Reduce” Rallis will continue to focus on launching new products in domestic markets with reliance on strong brands. We expect revenue share of exports to grow further with potential for Dahej Phase 2 upon success in negotiating contracts with clients. It witnessed massive re-rating in FY10 and FY11. Though it has underperformed broader markets in last year, it is still priced to perfection with no margin of safety in our view. At CMP of `145, Rallis is trading at P/E of 18.9x and 15.6x for FY13E and FY14E. We value Rallis at P/E of 15x for FY14E earnings. Initiate with ‘Reduce’



Dhanuka FY13E 6108 901 639 12.8 7.7 1.9 5.6 0.0 26.7

FY14E 7051 1022 733 14.7 6.7 1.5 4.8 0.0 25.1

Insecticides India

FY13E 6737 741 423 33.3 12.4 1.8 8.1 0.2 17.7

FY14E 8382 964 523 41.2 10.0 1.5 6.8 0.4 16.4

PI Ind FY13E 10911 1893 1081 43.2 12.5 3.3 8.3 0.5 29.2

FY14E 13427 2420 1430 57.1 9.5 2.5 6.4 0.4 30.2

Rallis FY13E 15398 2618 1492 7.7 18.9 4.4 11.3 0.2 16.6

FY14E 17890 3086 1809 9.3 15.6 3.7 9.4 0.1 21.3

UPL FY13E 86852 15199 6689 14.6 9.0 1.3 5.7 0.6 15.3

FY14E 95547 16721 7844 17.1 7.7 1.2 5.0 0.5 16.0

Average FY13E 25201 4270 2065 22.3 12.1 2.5 7.8 0.3 21.1


Rallis



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Mcap 0.75x 1.5x 2.25x 3x


Rallis



Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Delay in increase of MSP Agrochemical consumption gets affected by government’s decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to farmers. Regulatory risks The Agrochemical industry is highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court. Threat from GM seeds Genetically modified seeds are made inherently resistant to pests, which does away the need to agrochemicals. A case in point is Bt-Cotton where use of Insecticides has fallen sharply. As world moves towards adopting more GM seeds, need of using agrochemicals may reduce. The counter point to this is that often after few initial years; pests can become immune to anti-pest treatment in the seed which makes it imperative to use agrochemicals.


Rallis


Financial Analysis


1086

2.4

1274

8.7

1539

8.0

1789

0.0

21.3%

17.4%

20.8%

16.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

16000.0

18000.0

20000.0


Revenue Growth



1914

.8

2029

.6

2617

.7

3086

.0

17.6%

15.9%

17.0%

17.3%

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

0.0

500.0

1000.0

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2000.0

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3000.0

3500.0


EBIDTA Margin



1260

.4

991.

8

1492

.3

1809

.1

11.6%

7.9%

9.7% 10.1%

0.0%

2.0%

4.0%

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10.0%

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14.0%

0.0

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1200.0

1400.0

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PAT Margin


Rallis



24.96 23.83

16.55

21.27

30.11 28.02

23.86

28.13

0

4

8

12

16

20

24

28

32

36

40

FY11 FY12 FY13E FY14E(%

)

ROAE ROACE



0.2

0.3 0.2

0.1

50.6

12.4

16.8

25.4

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20.0

30.0

40.0

50.0

60.0

0.0

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Exhibit 123: Free Cash Flow (`Million)

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FY11

FY12

FY13

E

FY14

E



Rallis


Company in Depth Rallis India Limited (Rallis), a subsidiary of Tata Chemicals (50.1% stake), is the 2nd largest domestic crop protection company (Bayer Crop being the first) in India. It holds comprehensive product portfolio of generic agrochemicals, seeds (including Metahelix) and plant growth nutrients. Strong relations with farmers through initiatives like Rallis Kisan Kutumba, Samruddha Krishi and pan-India distribution which covers over 80% districts of India aided by 1,500 dealers and 40,000 retailers. It also enjoys credible presence in international markets. The company got its name from Ralli brothers of Greece, who started a trading business in England 2 centuries back (in 1815) which later was spread out across the globe. Rallis India Ltd. went public in 1951 and in 1962 Tata group became the major shareholder of the company. From 1962-63 fertilizer and agrochemicals became dominant segments in its revenues. From being a trader, Rallis ventured into manufacturing of agrochemicals in 1981. In mid 1990s Rallis closed down its various loss making as well as non-agri business and started focusing on agrochemicals. It also expanded its operations internationally, mainly US, Europe and Asia. It has also extended its business domain to include seeds and specialty fertilizers. During FY12, Rallis derived 67% revenues from domestic markets while 33% comes from exports which has seen significant jump from just 20% in FY10.

‘Rallis Poised’ – Management identifies growth opportunities 5 years back, Rallis adopted the ‘Rallis Poised’ growth agenda targeted at driving it’s sustained revenue and profit growth. Management hopes that these new initiatives will continue to guide Rallis on growth path. Rallis Poised framework include following growth drivers:

• New products • Brand premium • Apollo (Overseas market expansion) • Inorganic growth (Acquired Metahelix, GeogGreen) • Adjacent Businesses • Contract manufacturing • Infrastructure • Value enhancement - “DISHA” initiative

Diversification from Crop Protection to Agri services, Seeds & CRAMS Rallis management has drawn vision to diversify revenue streams and will work towards achieving a more balanced revenue mix in next 4-5 years.

Exhibit 124: Business Segments

Crop Protection

Agri Services

Seeds & PGN

CRAMS


Rallis


Product portfolio of Rallis Rallis has a wide portfolio of products in the agrochemical segment out of which insecticides contributes highest at ~70% of the topline which is in line with India’s consumption where insecticides normally contribute highest each year. It has kept on launching products in each category as per evolving challenges in Indian agriculture and needs of farmers. It has focused on creating strong brands in insecticides, herbicides as well as fungicides and across crops.

Exhibit 125: Key products of Rallis across categories

Brand Name Technical Crops Pest/Weed

Insecticides

Tata Milda Imidacloprid Paddy, Cotton, Maize, Potatoes Sucking Pests/Plant Hoppers

Reeva Lambda Cyhalothrin Cotton, Cereals, Vegetables Bollworm, Sucking Pests, Leaf

Roller, etc.

Asataf Acephate Cotton, Sugarcane, Cereals, Vegetables, Fruits,

Tobacco Sucking & Chewing Pests

Tafgor Dimethoate Cotton, Cereals, etc. Sucking, Chewing Pests, Mites

Manik Acetamiprid Cotton Sucking Pests

Herbicides

Fateh Sulfosulfuron Wheat Phalaris Minor, Broad-Leaved

Weeds

Tata Metri Metribuzin Wheat, Soybean, Potato, Tomato, Sugarcane Grasses, Broad-Leaved Weeds

Tata Panida Pendimethalin Soybean, Wheat, Groundnut, Cotton, Mustard,

etc. Grasses, Broad-Leaved Weeds

Fungicides

Contaf Hexaconazole Paddy, Fruits, Various Other Crops Sheath Blight, Leaf Spots,

Powdery Mildew

Contaf Plus Captan+Hexaconazol

e Cereals, Oilseeds, Horticultural and Plantation

Crops Powdery Mildew, Rust, Leaf

Spots, Blight

Master Mancozeb+Metalaxyl Grapes, Potato, Tomato, Tobacco, Cardamom,

etc. Downey Mildew, Late Blight,

Blotch, Damping

Fujione Isoprothiolane Paddy Blast Disease Source: Company, Sunidhi Research

Green & Blue triangle products now account for 82% of revenues Rallis has aligned its product portfolio to less hazardous products. It has discontinued Red triangle products completely from FY12.

Exhibit 126: Product Portfolio FY02

Red Triangle,

10%

Yellow Triangle,

47%

Blue Triangle,

36%

Green Triangle,

7%

FY02


Exhibit 127: Product Portfolio FY12

Red Triangle,

0%Yellow

Triangle, 18%

Blue Triangle,

52%

Green Triangle,

30%

FY12


Rallis



Designation Name

R Gopal Krishnan, Chairman

Gopalakrishnan is a graduate from Calcutta University and completed engineering from IIT. From 1967, he served HUL for over three decades in various capacities including vice-chairman of HUL. In 1998, he joined Tata Sons as executive director. He is also the chairman of AutoComp systems, Advinus Therapeutics, vice-chairman of Tata Chemicals, and director of Tata Power and Tata Technologies. Gopalakrishnan also serves as an independent director on the boards of Indian subsidiaries of Akzo Nobel and BP Castrol.

Mr. V. Shankar, MD & CEO

Mr. V. Shankar joined the Company on 1st December, 2005 as Chief Operating Officer and was appointed as Executive Director with effect from 13th March, 2007 and subsequently as Managing Director from 15

th January, 2009. Prior to joining

the Company, he had worked with Tata Chemicals Ltd. as Chief Operating Officer, Phosphates Business, before which, he was with Hindustan Lever Ltd. from 1986 to 2004. He served in various capacities in the Unilever Group of Companies and was responsible for the Seeds business and later Fertilisers Business.

Rallis


Valuations Summary








Payout (%) 30.9 43.1 32.6 32.2 Non-Current Liability Valuation (x) Long Term Borrowings 843 856 856 756



EV/EBITDA 15.1 14.5 11.2 9.3 Current Liabilities Dividend Yield (%) 1.4 1.5 1.7 2.1 Short Term Borrowings 305 650 550 350




ROAE 25.0 23.8 16.6 21.3 Grand Total 10167 11226 12732 14224

ROACE 30.1 28.0 23.9 28.1 Assets

Leverage Ratios (x)

Non Current Assets


Net Debt/Equity 0.2 0.3 0.2 0.1 Goodwill on Consolidation 1236 1533 1533 1533



Growth Ratios (%)

Other Non Current Assets 7 2 2 2

Income growth 21.0 17.4 20.8 16.2 Current Assets EBITDA growth 19.0 6.0 29.0 17.9 Current Investments 29 30 30 30

PAT growth 25.0 -20.4 48.2 21.2 Inventories 2289 2717 3164 3676

Turnover Ratios

Trade Receivables 1064 1035 1477 1715


Inventory Days 76.9 71.7 69.7 69.8

Short Term Loans and Advances 291 448 422 490





Revenues 10862 12749 15398 17890 PBT 1845 1494 2227 2700



Other Income 138 69 72 76 Others -153 -61 0 0



Interest 37 146 141 111 Op CF after W.cap 1589 1353 2149 2802

PBT 1845 1666 2227 2700 Less Taxes 706 407 735 891


PAT 1264 1179 1492 1809 Net CF From Operations 883 946 1414 1911


Prior Period Adj 0 0 0 0 others -25 -170 0 0


Ex. ordinary 0 172 0 0 Loan Raised/(repaid) 99 369 -100 -300



Interest Paid -38 -138 -141 -111


Net inc /(dec) in cash 2 -37 5 188

Op. bal of cash 120 122 112 117


United Phosphorus Ltd (UPL)

Proxy play to Global Agrochem industry, Upgrade to ‘Buy’

UPL is an Indian multinational, 3rd

largest generic agrochemical company in the world and thus is a proxy play to global agrochemical industry. It is also present in seeds through its holding in Advanta India. Its topline grew by 25%, EBIDTA by 23% and PAT by 39% CAGR from FY02 to FY12. UPL covers 90% of global market with Over 1000 product registrations United Phosphorus possesses a rich experience of having filed more than 1,000 successful registrations in more than 20 years, which reduced the gestation period usually associated with getting products registered in various countries. Branded products (B2C) contribute ~65% of UPL’s topline. It has a rich portfolio of 60 technical products of which 20 were added in last 5 years. It possesses the capability to file more than 300 registrations annually, resulting in a widening market penetration. UPL possesses registrations across a geographic spread that accounts for 90% of the world’s food basket. UPL has grown 26% CAGR from 2005-11 v/s industry growth of 4% UPL has been one of the fastest growing global agrochemical company compared to its larger MNC peers like Makhteshim-Agan Industries, Sumitomo Chemical and Nufarm Ltd. During 2005-11, the industry topline grew at an average CAGR of 4% v/s UPL, which registered CAGR of 26%. Inorganic route too played crucial role in achieving furious growth with 24 acquisitions (companies/products) in last decade. UPL will continue to pursue organic as well as inorganic growth opportunities with an aim to double its revenues in next 5 years. Investments in acquisitions to decline going forward UPL management indicates that following the Brazilian acquisitions in FY12 which is largest and fast growing market, its global platform is now in place and investments in acquisitions will decline. UPL will now reinforce investments in research and development that strengthens process efficiencies on one hand and product pipeline on the other, which will translate into enhanced margins and ROCE. Fair value of ` 171/share (Upside of 31%), Upgrade to “Buy” UPL is proxy play to global generic agrochemical markets. Weather is key risk to Its business with challenging season in USA due to draught, delayed monsoon in India and very wet season in Europe. UPL is banking very high on Rest of the World markets, especially Brazil. Any weather related issues in this market may threaten growth. UPL is being supported with ongoing Buyback. It is trading at attractive valuations though deterioration in margins. Rising debt on balance sheet is also a concern. It has Poor ROAE’s compared to smaller Indian peers due to asset heavy model with presence across the globe that includes markets with low margin, higher credit cycles. At CMP of `131, UPL is trading at P/E of 9x and 7.7x for FY13E and FY14E EPS. We maintain estimates and upgrade target price at `171 based on P/E of 10x for FY14E EPS (from `145 based on FY13E EPS) as we roll forward valuations to FY14E. Upgrade to ‘Buy’ (from ‘Accumulate’ earlier).

C

om

pa

ny U

pd

ate

11.7%10.6%

12.9%

18.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Sales EBIDTA PBT PAT

CAGR (FY12-14E)

Recommendation Buy

CMP (`) 131


Upside (%) 31

52 Week H / L ` 169/105

BSE 30 18763

Key Data


Mcap, ` Mn 60495.8

Mcap,USD Mn @ `55 1099.9



Promoters 27.7

FII 33.2

DII 16.9



Stock Return % 13.1 7.3 1.8 -5.2

Relative Return % 6.8 -3.1 -7.6 -20.1

-25.0%

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United Phosphorus NIFTY


` mn ` mn ` mn ` x x %

FY11 57606.8 10698.7 5576.2 12.1 10.9 6.5 15.0

FY12E 76547.2 13674.1 5555.5 12.0 10.9 6.3 14.1

FY13E 86852.0 15199.1 6688.5 14.6 9.0 5.7 15.3

FY14E 95547.1 16720.7 7844.0 17.1 7.7 5.0 16.0

Source: company, Sunidhi Research


UPL


Investment Thesis:

Market share of generics is increasing rapidly In the global agrochemical industry, Generics are now over over 51% of the market while ~25% market belongs to Proprietary Off Patent products leaving less than 24% market to patent products. As products become off-patent, generic players find the opportunity and grab the market share from innovator companies. Large inorganic opportunities in global agrochemicals market UPL is among top 3 generic agrochemical players in the world. The industry is highly consolidated with top 6 innovator companies i.e. Syngenta, Bayer, BASF, Dow, Monsanto and DuPont. UPL has positioned itself among the large generic players such as MAI, Nufarm, Sumitomo, Arysta etc. Inorganic growth opportunities emerged from divestment of products by big 6, R&D companies with focus on developing new active ingredients, who want to partner with large players to access distribution and registration strengths across continents that are possessed by companies such as UPL. Many small and mid-size players come under financial distress due to lengthy and costly registration processes for launching new products while old products get banned or lose market share because pests start becoming resistant to formulations over a period and new products are required in such situations. Only large Indian company to play global generic agrochemical market UPL is the only sizeable Indian company to play global generic opportunity in agrochemical industry with revenues of over $ 1 billion. UPL has over 40% of revenues from highly regulated markets of the US and Europe. With c.78% of its revenues coming from global markets and a strong direct presence in the targeted markets, UPL has emerged as one of the top 3 generics companies and 7

th largest agrochemical company in the world.

Exhibit 128: UPL has grown faster than most other large companies (2006-2011 sales CAGR)

25.7

13.8

11.1 10.6 9.8 9.6 8.9 8.4 8.15.6 4.6

2.1

0

5

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15

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25

30

Source: Phillips McDougall, Company, Sunidhi Research

It ‘pays’ to be an ‘Indian’ MNC Though UPL is truly a global giant in agrochemical industry, majority of its manufacturing is based in India (~52% in FY12) which has advantage of lower costs & excellent talent pool over developed countries. Because of consolidation over the years, Some of the plants – mancozeb, aluminium phosphide, devrrinol, cypermethrin, and monocrotophos – of UPL are amongst the largest in the world in their respective product spaces, and competitive raw material cost due to forward and backward integration, resulting in lower per unit cost of manufacturing. It also enjoys the advantage of young assets. Almost 45% of the capacities globally were established in last 5 years which results in higher efficiencies.

UPL


Presence in seed business through Advanta India Seed business goes well as a strategy for agrochemical players. Globally, most of the agrochemical companies have added Seed business either organically or inorganically. The global Seed industry (GM + conventional) is estimated to be worth US$34bn in 2011 and has been growing much faster than agrochemical industry. Due to innovation by genetically modifying, seeds develop resistance from pests and increase yields. Global Seed Industry is dominated by the same companies that are leaders in the agrichemical industry. UPL too entered in seed business after acquiring 100% stake in Netherland-based Advanta Seeds in 2006 for Euro100 million. It divested its stake through IPO and now holds 49.83% stake in the company. Advanta is in the business of hybrid seeds and operates in geographies like USA, Argentina, Australia and Asia. Advanta's products cater to crops like rice, cotton, sunflower, sorghum, corn, canola and vegetables. In CY2006 (9 month period), Advanta posted revenues of `2980 million. For CY2010, the company posted Revenues of `9943 million and Net Profit of `123 million. India, RoW growing rapidly every year UPL classifies its revenues in 4 geographies i.e. North America, Europe, India and Rest of the World (RoW). Europe and North America, being mature markets are growing slowly, while India and RoW are growing at a faster rate over the years. Exhibit 129: Geography wise revenue growth

Geography - Growth FY09 FY10 FY11 FY12

North America 30.9% 4.7% 4.1% 32.1%

Europe 43.0% -1.2% -20.0% 17.2%

India 33.2% 15.6% 29.6% 15.0%

Rest of World 37.3% 26.0% 36.3% 52.9%

Total 36.6% 10.2% 11.5% 31.6% Source: Company, Sunidhi Research

EU has been largest contributor till FY10, RoW will continue to be highest In FY10, EU had been largest contributor (effect of Ceraxagri acquisition) to its revenues at 29%. North America contributed 22%, while India stood at 22%. Rest of World (RoW) market contributed 27% as of FY10. This has significantly changed following series of acquisitions in Brazil. Exhibit 130: Exhibit-10: Geographical revenue mix (` millions)

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Source: Company & Sunidhi Research

UPL


UPL had grown significantly in Europe (thanks to its acquisition of Ceraxagri, which was primarily deriving its revenues from Europe). Mature markets such as Europe and North America are growing slower than growth witnessed in developing countries such as India and Rest of World (RoW). From 24% in FY08, RoW is contributing to 38.5% of revenues, while share of Europe declined to 18.3% in FY12 from 30.5% in FY08. North America too contributed only 21% in FY12 from 24.6% in FY08. India’s share remained at 22.1% in FY12 from 21.3% in FY08. Over 1000 product registrations across the world United Phosphorus possesses a rich experience of having filed more than 1,000 successful registrations in more than 20 years, which reduced the gestation period usually associated with getting products registered in various countries. Branded products (B2C) contribute ~65% of UPL’s topline. It has rich portfolio of 60 technical products of which 20 were added in last 5 years. It possesses the capability to file more than 300 registrations annually, resulting in a widening market penetration. It possesses registrations across a geographic spread that accounts for 90% of the world’s food basket. Working Capital cycles turns longer on increasing contribution from Brazil FY12 was a challenging year with several weather uncertainties in global agrochemical markets. In such times, receivable cycle becomes longer than usual. Post acquisitions in Brazilian markets, its share in consolidated revenue has gone up sharply. Brazil is known for very long credit periods. Receivables of 210 days are considered normal in that market due to longer crop cycles. Exhibit 131: Working Capital analysis

Particulars FY11 FY12

Turnover 56500 75340

Proportinate Turnover 78880

Inventory 14140 18780

No of Days 91 87

Receivables 14790 25070

No of Days 96 116

Payables 16250 19370

No of Days 105 90

Net Working Capital 12680 24480

Net Working Capital Days/ Sales 82 113 Source: Company, Sunidhi Research

UPL



Fair value of ` 171/share (Upside of 31%), Upgrade to “Buy” UPL is proxy play to global generic agrochemical markets. Weather is key risk to Its business with challenging season in USA due to draught, delayed monsoon in India and very wet season in Europe. UPL is banking very high on Rest of the World markets, especially Brazil. Any weather related issues in this market may threaten growth. UPL is being supported with ongoing Buyback. It is trading at attractive valuations though deterioration in margins. Rising debt on balance sheet is also a concern. It has Poor ROAE’s compared to smaller Indian peers due to asset heavy model with presence across the globe that includes markets with low margin, higher credit cycles. At CMP of `131, UPL is trading at P/E of 9x and 7.7x for FY13E and FY14E EPS. We maintain estimates and upgrade target price at `171 based on P/E of 10x for FY14E EPS (from `145 based on FY13E EPS) as we roll forward valuations to FY14E. Upgrade to ‘Buy’ (from ‘Accumulate’ earlier).



Dhanuka FY13E 6108 901 639 12.8 7.7 1.9 5.6 0.0 26.7

FY14E 7051 1022 733 14.7 6.7 1.5 4.8 0.0 25.1

Insecticides India

FY13E 6737 741 423 33.3 12.4 1.8 8.1 0.2 17.7

FY14E 8382 964 523 41.2 10.0 1.5 6.8 0.4 16.4

PI Ind FY13E 10911 1893 1081 43.2 12.5 3.3 8.3 0.5 29.2

FY14E 13427 2420 1430 57.1 9.5 2.5 6.4 0.4 30.2

Rallis FY13E 15398 2618 1492 7.7 18.9 4.4 11.3 0.2 16.6

FY14E 17890 3086 1809 9.3 15.6 3.7 9.4 0.1 21.3

UPL FY13E 86852 15199 6689 14.6 9.0 1.3 5.7 0.6 15.3

FY14E 95547 16721 7844 17.1 7.7 1.2 5.0 0.5 16.0

Average FY13E 25201 4270 2065 22.3 12.1 2.5 7.8 0.3 21.1


UPL



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UPL


Risks to our Price Target Acquisitions may pose challenges Inorganic growth has been UPL's key strategy, which has led to 29% CAGR growth from FY05 to FY10, while Industry grew at just 4% CAGR during the same period. In a bid to grow continuously, any acquisitions done at expensive valuations could lead to lengthy pay back periods which can potentially be value destructive for short to medium term for shareholders. Further, acquisitions cause volatility in profits due to uncertainties related to restructuring, challenges in closing down overseas plants and relocating production to cheaper locations such as India. Ceraxagri (UPL’s biggest acquisition so far) is one such example where the company found it difficult to restructure operations for a long period. Improving margins and taking advantage of recent Brazilian acquisitions will be key monitorables. Genetically Modified Crops Genetically modified crops are made with inbuilt immune system that reduces dependence on usage of agrochemicals. We understand that plants require protection at various stages of lifecycle of plant and it may be difficult for even genetically modified crops to keep control on pests. Recently, Bt Cotton is reported to be affected from pests in some parts of Gujarat recently. Pests too become resistant to human intervention and gain power to attack crops despite being genetically modified, resulting in usage of agrochemicals. Adaption of Bt Cotton in India has resulted in lower application of pesticides over last few years. To mitigate this risk, most of the agrochemical majors globally have added and enhanced seeds business over the years. UPL too has presence in the Seeds business through its associate company Advanta India, which captures increased usage of GM seeds and provides a natural hedge. Forex risks UPL's Revenues (to the extent of c.80%) are denominated in foreign currencies. Hence, any volatility in the exchange rate leads to volatility in company's revenues, borrowings, assets and profit. Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Delay in increase of MSP Agrochemical consumption gets affected by government’s decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to farmers. Regulatory risks The Agrochemical industry is highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court.

UPL


Financial Analysis


5760

6.8

7654

7.2

8685

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9554

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UPL


Exhibit 140: ROaE and ROaCE

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Exhibit 141: Net D/E and Interest Coverage ratio

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UPL


Company in Depth

UPL is a farm solutions company providing a complete array of farm solutions (from delivery of seeds to seed treatment solutions to pre-harvest to post-harvest to storage treatment products to farmer feed schools). Its product range – pesticides, herbicides, insecticides and rodenticides – makes it a one stop shop for farmers.

It is leading global player in the Agrochemical Industry and ranks amongst the top 3 generic (post patent) companies. UPL operates in every continent and have a customer base in over 120 countries. UPL has 23 manufacturing sites globally. It has 70 subsidiaries, 16 Associates and 3 Joint venture companies at the end of FY12. UPL has very low client concentration due to its diversified and global presence. While no single customer accounted for more than 2% of topline, Top 10 customers accounted for ~12% of sales FY12.

It is principally a manufacturer supported by tolling and third-party outsourcing capability. The result is that the Company selects to manufacture value-added products while outsourcing the rest. During FY12, Nearly 75% of the revenues were supported by backward integration into manufacturing of raw materials.

Exhibit 142: Agrochemical Sales

19%27%

38% 38% 33% 31%

40%31%

32% 29%30% 32%

34%23%

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Fungicides Insecticides Herbicides Others


Exhibit 143: Geographical break-up of Sales (FY08) Exhibit 144: Geographical break-up of Sales (FY13E)

North America,

19.6%

Europe, 18.6%

India, 22.6%

Rest of World, 39.2%


UPL


Exhibit 145: Price, Exchange rate and Volume trend

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Key Management Personnel Mr. R.D. Shroff is Chairman & Managing Director of the company, while Mr. J.R. Shroff is Global CEO of UPL group. Mr. A.C. Ahsar handles responsibility of Director – Finance.

UPL


Valuations Summary








Payout (%) 19.3 24.3 22.0 20.5 Non-Current Liability Valuation (x)

Long Term Borrowings 10023 23772 29957 26957



EV/EBITDA 6.5 6.3 5.7 5.0 Current Liabilities Dividend Yield (%) 1.5 1.9 2.1 2.3 Short Term Borrowings 4950 8674 8674 8674




ROAE 15.0 14.1 15.3 16.0 Grand Total 82784 103529 117985 124035

ROACE 18.4 17.5 14.8 15.1 Assets

Leverage Ratios (x)

Non Current Assets

Long Term D/E 0.3 0.6 0.7 0.5 Fixed Assets 23776 35286 38072 37233




Growth Ratios (%)


Income growth 5.5 32.9 13.5 10.0 Current Assets EBITDA growth 7.0 27.8 11.2 10.0 Current Investments 3553 1250 1250 1250

PAT growth 5.9 -0.4 20.4 17.3 Inventories 14055 18779 22605 24868

Turnover Ratios








Revenues 57607 76547 86852 95547 PBT 6816 7693 8579 9805



Other Income 1375 1089 800 700 Others -985 -435 -100 100



Interest 3120 4146 4206 4277 Op CF after W.cap 9205 -1786 11815 14185

PBT 6816 7693 8579 9805 Less Taxes 885 1242 1716 1961

Tax 731 1280 1716 1961 Exceptional & Prior Period Adj -171 -196 0 0

PAT 6085 6413 6864 7844 Net CF From Operations 8148 -3224 10099 12224


Prior Period Adj 31 222 0 0 others -781 2750 0 0

Sh. of Associates -234 -398 -100 100 CF from Invst Activities -8809 -6599 -6000 -2500

Ex. ordinary 140 185 0 0 Loan Raised/(repaid) 2888 7023 6185 -3000

Adj Pat 5576 5556 6689 7844 Equity Raised 0 0 -1029 0


Others -2113 -3305 -4206 -4277

CF from Fin Activities -316 2562 -521 -8883

Net inc /(dec) in cash -977 -7260 3578 841

Op. bal of cash 16635 14262 7002 10580




Sunidhi’s Rating Rationale The price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral.

(For Mid & Small cap stocks from 12 months perspective)

BUY Absolute Return >20%

ACCUMULATE Absolute Return Between 10-20%

HOLD Absolute Return Between 0-10%

REDUCE Absolute Return 0 To Negative 10%

SELL Absolute Return > Negative 10%

Apart from Absolute returns our rating for a stock would also include subjective factors like macro environment, outlook of the industry in which the company is operating, growth expectations from the company vis a vis its peers, scope for P/E re-rating/de-rating for the broader market and the company in specific.

SUNIDHI SECURITIES & FINANCE LTD

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Maker Chamber IV, 14th Floor, Nariman Point, Mumbai: 400 021

Tel: (+91-22) 6636 9669 Fax: (+91-22) 6631 8637 Web-site: http://www.sunidhi.com

Disclaimer: "This Report is published by Sunidhi Securities & Finance Ltd.("Sunidhi") for private circulation. This report is meant for informational purposes and is not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. While utmost care has been taken in preparing this report, we claim no responsibility for its accuracy. Recipients should not regard the report as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without any notice and this report is not under any obligation to update or keep current the information contained herein. Past performance is not necessarily indicative of future results. This Report accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. Sunidhi and its associated companies, directors, officers and employees may from time to time have a long or short position in the securities mentioned and may sell or buy such securities, or act upon information contained herein prior to the publication thereof. Sunidhi may also provide other financial services to the companies mentioned in this report."

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