beacon may 2014
TRANSCRIPT
B E A C O N A Newsletter by SIMCON– SIMSREE Consulting Club
Volume : 2
Issue : 7 May 2014
INDUSTRY ANALYSIS : AGRO CHEMICALS
Introduction
Indian agriculture has come a long way since the Green Revolu-
tion of the late 1960s. The food grain production in country in
the FY2014 is estimated to be 263 million metric tonnes. How-
ever, India’s agricultural yield of 2 metric tonnes/hectare is
lower than the global average. One of the key reasons for the
low yield is loss of crops due to pests – which in turn can be
attributed to the low consumption of pesticides – 0.58 Kg per
hectare compared to the global average of 3 Kg per hectare. The
Indian government estimates this loss to be around $8.5 billion
every year on an average. The low usage of pesticides are on
account of low purchasing power of farmers, lack of awareness
about crop protection benefits and poor accessibility of crop
protection chemicals.
INDUSTRY OVERVIEW
India is the fourth largest producer of agrochemicals globally,
after United States, Japan and China. The industry can be di-
vided into following segments:
1. Pesticides Segment
2. Seeds Segment
3. Fertilizers Segment
PORTER’s 5 FORCES ANALYSIS
Barriers to Entry
Because of the capital and
cash requirements of this
industry, it is very
unlikely that new entrants
would succeed. Due to the
large fixed costs of run-
ning fertilizer plants and
mining operations, vol-
ume is key to profitabil-
ity, so a small player is not likely to be successful. Additionally
the extensive data submission to regulatory authorities, compli-
ance with strict environment laws and other regulations serve as
entry barriers for new players. Entry into formulations is rela-
tively easier than techni-
cals with comparatively
low capital requirements.
Threat of Substitutes
With advances in science and rising concern about the harmful
effects of pesticides on the environment, the pesticide usage has
grown only marginally through the past decade. Integrated Pest
Management (IPM) is now seen as a way to achieve sustainable
agricultural production with lesser pesticides usage and conse-
quently lesser damage to the nature. The introduction of GM/
transgenic crops which are pest resistant and even drought resis-
tant have brought substantial decline in usage of chemicals. The
usage of fertilizers however has increased manifold as the GM
crops too demand certain nutrients not present in the soil. The
seeds segment has no substitutes and hence many agrochemical
industries have diversified into this segment and are investing
heavily in biotechnology and
R&D.
Bargaining Power of Suppli-
ers
The suppliers to the agro-
chemical industry are in gen-
eral rather weak, given that
the input for this industry mostly consists of raw materials i.e.
active ingredients. Many of the chemical substances derived
from these raw materials are input for further production, mak-
ing the chemical/agrochemical industry an important supplier to
itself. Also a low concentration of suppliers means a lower bar-
gaining power of suppliers. All in all, the bargaining power of
suppliers is low to medium.
Bargaining Power of Con-
sumers
Fertilizer purchasers are gen-
erally large trading firms
while buyers of seed and pes-
ticide would usually be dis-
tributers who would then sell
to the farmers. In each case there is a middleman between the
producer and end-user. This may limit some of the ways that
farmers themselves can influence pricing. However, consump-
tion gets affected by affordability which is key for volume
growth and dependent on the prospects of Agriculture in India.
Thus bargaining power of
consumers is low.
Intensity of Rivalry : Top ten
companies control almost
80% of the market share in
India. The market share of
large players depends primar-
ily on the product portfolio
Volume : 2
Issue : 7
BEACON : Page 1
May-2014
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and introduction of new molecules and strategic alliances
amongst competitors are common to reduce risk and serve a
wider customer base. The leading players drive some margin
growth with more innovative products. The intensity of rivalry
is thus medium-high.
IMPACT ANALYSIS
Existing Policies & Scenario
Urea Policy 2013
Under the new policy, the government will give 12-20 per cent
post-tax return on fresh capital infused by manufacturers for
setting up of new plants as well as for expansion and the re-
vamp of the existing ones. The government controls the urea
sector and has fixed the MRP at Rs 5,360 per tonne. The differ-
ence between the MRP and cost of production is given as sub-
sidy to manufacturers. For determining the cost of production of
new plants to be set up after the policy comes into effect, the
government has set a floor and ceiling price of urea based on
the price of natural gas plus 12-20 per cent equity returns.
Impending rise in Gas Price
The government, last year, approved a hefty rise in gas prices to
around $8.40 per million British thermal units in a bid to boost
returns for local producers, spur investment in the industry and
ease acute power shortages. Gas accounts for nearly 80 percent
of the production cost of urea. According to Fertiliser Associa-
tion of India, India consumes about 30 million tonnes a year of
urea, with local producers supplying 22 million tonnes and the
rest imported. The gas price hike is estimated to increase the
annual urea production cost by ₹100 billion. Thus, higher pro-
duction costs for the country's most widely used fertiliser would
force authorities to raise either farm or food subsidies. An alter-
native would be to allow manufacturers to pass on the costs
through higher prices.
Reduction of Subsidy to Manufacturers of Fertilizers In a bid to avoid a potential ratings downgrade, the Indian gov-
ernment will aim to cut its fiscal deficit to 4.1 percent of GDP
in FY15 by lowering fuel and fertiliser subsidies. The govern-
ment aims to reduce bills arising due to subsidy provided to
urea – the country’s most widely used fertilizer. The fertiliser
subsidy bill has tripled in the past seven years and the govern-
ment has allocated 679.7 billion rupees in 2014-15, but the fig-
ures stands well short of what's needed given the impact of the
impending gas price hike. The government fixes support prices
for the food grains considering input costs. If the urea price
goes up, then it has to raise the MSP (minimum support price)
of food grains. The rise in food grain prices will be reflected in
the government's food subsidy. Thus the government trapped in
a vicious circle.
The Impact
Fertiliser manufacturers are going slow on expansion plans fol-
lowing the petroleum ministry’s approval to double natural gas
prices. The grievances are the pricing of gas, lack of offtake
commitment and concerns over gas availability through long-
term tie-ups. Fresh investments in new projects have been
stalled due to uncertainty over subsidy for the revised gas price.
Inadequate subsidy budgets and delays in disbursal already
plague the industry which has led to increased working capital
requirements of companies. The manufacturers fund this sub-
sidy shortage through short-term debt straining the cash flow
from operations, impacting their credit profiles, as borrowing
costs are not included in the subsidy reimbursement mecha-
nism.
TREND ANALYSIS
Increasing Herbicide consumption : Tropical climatic condi-
tions and high production of paddy, cotton, sugarcane and other
cereals in India drive the consumption of insecticides. Avail-
ability of cheap labor for manual weed picking also contributed
to low consumption of herbicides in India. However herbicides,
now, are the fastest growing segment due to increasing farm
labour wages in India.
Strategic Alliances and Acquisitions : Increase in strategic
alliances among large players for greater market reach and ac-
quisitions of smaller companies globally to diversify product
portfolio. Rallis has a marketing alliance for key products with
FMC, Dupont, Syngenta, Bayer and Nihon Nohayaku. In addi-
tion, UPL has had a series of small acquisitions globally to enter
new geographies and gain product expertise.
CONCLUSION
The crop protection market has experienced strong growth in
the past and is expected to grow further at approximate 12% p.a.
to reach $ 6.8 billion by FY17. The growth would be largely
driven by export demand which is expected to grow at 15-16%
p.a, while domestic demand is expected to grow at 8-9% p.a.
Biopesticides, which currently represent only 4.2% of the over-
all pesticide market in India, are expected to exhibit an annual
growth rate of about 10% in the coming years. The seed seg-
ment is expected to grow at 3.8% CAGR till FY2018. However,
the fertilizer segment is expected to remain stagnant with no
addition in capacities until the new government comes out with
clear gas pricing and subsidy related policies.
SOURCES: AgroNews, IndianMirror, Nuziveedu Seeds,
Henry Fund Report, The Hindu Business Line, Business Today,
Business Standard, Phillip Capital Agri Inputs 2012, Phillip
Capital Agri Inputs Feb 2014
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Volume : 2
Issue : 7
BEACON : Page 2
May- 2014
INDUSTRY ANALYSIS : AGRO CHEMICALS
COMPANY ANALYSIS : UPL
Volume : 2
Issue : 7
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BEACON : Page 3
May - 2014
Introduction :
United Phosphorus Ltd was incorporated on January 2,
1985 with the name Vishwanath Commercials Ltd. In February
1985, the company went public. Later in February 1994 Shri
R.D. Shroff along with his family and investment companies
acquired 78.61% of the equity capital of the company and
changed the name to Search Chem Industries Ltd. In March
1995 the group reorganised the shareholding, as a result United
Phosphorus Limited acquired 75% of the Equity Capital of
Search Chem Industries Limited from the family and invest-
ment companies of Shri R. D. Shroff. The company is engaged
in the research, manufacture and distribution of crop protection-
products, speciality chemicals and other industrial chemicals
and seeds.UPL is one of the top-five companies in the world
under the generic agro chemical domain. Within India, the com-
pany is the largest producer of crop protection products.
Company has 23 manufacturing sites, which includes
nine in India, four in France and two in Spain. They operate in
every continent and have a customer base in 123 countries with
their own subsidiary offices in Argentina, Australia, Bangla-
desh, Brazil, China, Canada, Denmark, France, Germany, Hong
Kong, Indonesia, Japan, Korea, Mauritius, Mexico, New Zea-
land, Russia, Italy, Turkey, Spain, South Africa, Taiwan, USA,
UK, Vietnam, Zambia, Shanghai, Columbia and Netherland.
The company has also got a captive power plant in Jhagadia.
Key People:
R D Shroff Chairman & Managing Director
V R Shroff Executive Director
A C Ashar Director – Finance
S R Shroff Vice Chairman
K Banerjee Whole Time Director
J R Shroff Director & Global CEO
Business :
The company operates in three segments :
The agro chemicals segment consists of agrochemicals technical
and formulations. The industrial chemicals segment consists of
industrial chemicals and speciality chemicals. The others seg-
ment consists of traded products. The company offers a range of
products that includes insecticides, fungicides, herbicides, fumi-
gants, plant growth and regulators and rodenticides.
COMPANY ANALYSIS : UPL
Volume : 2
Issue : 7
For detailed report and all company analysis from previous Beacons together, please visit our blog:
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BEACON : Page 4
May - 2014
Competitor analysis :
UPL is into agrochemicals business, in which it faces competi-
tion by Rallis india, Gharda chemicals, Indofill industrie, Excel
crop care, PI industries, etc. Intensity of rivalry in these compa-
nies is medium.
Future Strategy:
Focus on Branding : Marketing structures are developed in
all regions to focus on product branding along with pre-
mium brand positioning for new products. Some of the key
brands like Cuprofix, Thiopron are positioned as partners to
organic farming in Europe
Expansion in new geographies : UPL looks forward to en-
ter in the countries with growth potential beyond $ 50Mn
over next 5 years. Some of them are Mexico, Andean Re-
gion, Indonesia, Vietnam and Thailand
Business excellence with digital platforms : Developing
farmer database and providing key farmers CRM facilities.
Providing digital platform to improve sales force effi-
ciency. Utilization of farmer segments by marketing
through various communication platform
Innovation and advanced technologies : Aspire to take in-
novation rate to more than 15% Technologies for Vector
control, Hot & cold Fogging, Warehouse Disinfection
Financial Statement:
Reference:
http://www.moneycontrol.com/company-facts/upl
http://www.uplonline.com
http://www.ibef.org/download/united_phosphorus_23oct.pdf
http://www.uplonline.com/capitalmarketday
UPL annual reports
Concept of the Month VRIO Framework
Why VRIO?
Assessing the limitations of the prevalent SWOT analysis, researchers have noted that it is not sufficient to simply look at the environ-
mental factors influencing a firm’s success. According to the SWOT framework, certain environments such as highly competitive indus-
tries hardly offer favorable conditions for companies. However, this thesis has been proven wrong by several firms that were able to ex-
ploit sustainable competitive advantages within their respective industry (e.g. Southwest Airlines in US airline industry).
In order to overcome these limitations, new models for internal assessment of strengths and weaknesses have been introduced. VRIO
framework is one such model.
What is VRIO?
Looking at a company from the inside, distinctive re-
sources and capabilities are the main means to exploit
opportunities and neutralize threats. The VRIO analysis
does not look at resources and capabilities themselves,
but rather tries to answer what distinctive characteristics
they should have in order to increase a company’s com-
petitiveness. These characteristics are classified as
Value, Rareness, Imitability & Organization
Value
A valuable resource or capability is defined as being
able to contribute to the customer’s needs, at a price the
customer is willing to pay. The external factors such as
available alternatives in the market, industry structure or
customer preferences contribute in determining the
value of a resource. A valuable resource may aid the company in different ways, either contributing to quality, efficiency or innovation of
the production process and the finished product, or by meeting the customer needs well.
Generally speaking, value is a core prerequisite of any resource or capability which will not be required to be classified as a weakness.
A company that wants to survive in the market needs valuable resources. For example,
Rareness
While it is important that resources and capabilities are valuable, a company should also aim at obtaining rare resources in order to
achieve a competitive advantage. In spite of that, valuable but non-rare (common) resources are important, too. These resources and
capabilities can be used to create competitive parity, thus ensuring the survival of the company.
For example, a firm might have many trained workers, but its competitors possess a workforce of equal skill. While both companies need
those workers to prevail on the market, an advantage in workforce could only be obtained if one of the firms had some experts with spe-
cial knowledge.
Imitability
Imitability refers to the degree to which a company’s product, brand, resource or capability can be copied by competitors. Imitability is a
very important aspect in strategic management. When it is difficult and/or expensive for competitors to copy a certain resource, the com-
pany has gained a significant competitive advantage. The extent to which a resource can be copied plays a role in the market performance
of the firm’s product and influences the brand value.
Organization
The final characteristic of the VRIO framework, organization, is defined as the company’s skill at keeping and using their resources and
capabilities in a value-adding way and describes how well a firm exploits the resource in question. A resource might be valuable, rare and
inimitable, but in order to turn this resource into a competitive advantage, it also needs to be identified and exploited in the right way –
otherwise, it might not benefit the company, or even become a weakness.
VRIO Framework
The VRIO framework is a useful tool for analyzing the company in an individual and functional way, exposing strengths and weaknesses
and thereby improving the company’s performance. In doing so, each of VRIO’s four characteristics has to be taken into account.
There are different competitive situations a company can be in relation to its competitors: competitive disadvantage, competitive equal-
ity/parity, short term competitive advantage, unused competitive advantage and long term/sustained competitive advantage.
To attain a sustained competitive advantage is clearly most desirable. Applying the VRIO framework, this advantage can be achieved by
exploiting valuable, rare and inimitable (or expensive) resources in the right way.
However Johannes Kepler emphasizes that an adequate strategy for increasing the company’s value is no guarantee for permanent com-
petitive advantage. As the environment of competition undergoes constant change, the strategy applied by a company also requires con-
stant change, innovation and analysis in order to maintain a competitive advantage.
References
Barney, J. B. (1995): Looking inside for competitive advantage, Academy of Management
Barney, J. (2002): Gaining and sustaining competitive advantage, Pearson Education Inc. New Jersey
Barney, J. B. (2007): Evaluating Firm Strength and Ewaknesses: The Ressource-Based View
Kepler, Johannes: Discuss possibilities and boundaries of the following instruments of strategic management: SWOT, VRIO and BAL-
ANCED SCORECARD; University of Linz, Institute of Strategic Management
Volume : 2
Issue : 7
BEACON : Page 5
May - 2014
Did you know?
1. The name of the official match ball of the 2014 FIFA World Cup
- Brazuca - denotes “national pride in the Brazilian way of life”.
The Adidas Brazuca is primarily manufactured by Forward Sports,
in Sialkot, Pakistan.
2. The recently published The PwC World Cup Index: what can the
dismal science tell us about the beautiful game opined that Group D
is the “Group of Death” and Brazil are the clear favourites, riding on
home turf advantage.
3. This FIFA World Cup is the most expensive World Cup ever
costing an estimated $14 billion, with nearly $4 billion spent on building new stadiums and $900
million for security.
QUIZ OF MAY
1. X = PWC, Y = Deloitte
2. Omnicom Group Inc and Publicis Group SA
3. X = Rupay, Y= National Payments Corporation of India (NPCI)
4. X = Savings Catcher, Y = Walmart
5. Jacobs Douwe Egberts
1. X was recently in the news due to his proximity to our new PM. A S.Y., B.Com and a first generation
entrepreneur, X is the chairman of a conglomerate, known for its port business.
2. Name the company - associated with the 2014 Fifa World Cup - located in Vila Velha, Espírito Santo,
founded in 1929. Also name its founder
3. Recently, on an inaugural flight, a CEO and a CFO were distribut-
ing red caps and mugs to passengers. Name the people and the com-
pany.
4. Name the consulting firm which was recently appointed by an In-
dian MFI to transform itself into a bank in 18 months. Name the
MFI as well.
5. Name the Brand associated with the images.
ANSWERS : APRIL ISSUE
Answer To: [email protected] with Subject= simcon_quiz_may_2014
Winner will be recognized.
All Correct Answers will be published in next month’s Edition.
Contributions invited:
To make this feature a successful effort, we seek continued involvement and contribution from our readers, that is
YOU. We invite articles and trivia on themes related to consulting. Be it industry news, consulting trends, a joke, a cartoon or
feedback, we are eager to hear from you. So go ahead, do your research, pen down your thoughts and mail your entries to sim-
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Volume : 2
Issue : 7
BEACON : Page 6
May - 2014
Saurabh Kankariya
MMS, SIMSREE
Winner:-