rallis india - initiating coverage-feb-13-edelbreport.myiris.com/es1/ralindia_20130227.pdf ·...
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Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
Rallis India (Rallis), a Tata Group company, is an established agrochemical
player in India. The company, with market share of ~10% is well placed to
capture emerging opportunities in the domestic agrochemical market on
back of healthy distribution network, branded farm solutions and launch
of new products. Acquisition of Metahelix has further equipped it to cash
in on the spurt in the hybrid seed market riding the former’s formidable
R&D capabilities and strong product pipeline. Additionally, its Dahej SEZ
facility is expected to spur export sales and reduce dependence on the
domestic market. We initiate coverage with ‘BUY’.
Poised well to exploit emerging opportunities in agrochemical market
Increasing consumption, rising minimum support price, sharpened government focus
and mounting cost of labour will propel domestic agrochemical market to post 10-12%
CAGR in the near term. The company has launched 10 products in FY12 (versus
average three-four p.a) and this will help to gain market share in the near term.
Further, the newly commissioned Dahej SEZ facility is anticipated to boost export sales,
consequently reducing its domestic market dependence.
Metahelix to spur hybrid growth
The organised hybrid seed market is expected to post 12-15% CAGR in the coming
years. India has a dismal ~2mha of the total 40mha under hybrid seed in rice crop, thus
leaving enough room for penetrating untapped markets. Post acquisitions of
Metahelix, Rallis is well equipped to ride this surge armed with the former’s
formidable R&D capabilities and robust product pipeline.
Outlook and valuations: Poised for growth; initiating with ‘BUY’
Rallis is expected to post sales and PAT CAGR of 14.2% and 19.2% (FY05-12 CAGR of
11.6% and 23.9%), respectively, over FY12-15E. The company has a strong operating
cash flow with a healthy RoE (20%-25%) and dividend payout ratio of ~35%. We value
it at P/E of 15x FY15E (without considering positives i.e., land bank, strategic stake in
Advinus, income from pulses initiatives). We initiate a `BUY’.
INITIATING COVERAGE
RALLIS INDIA Encashing emerging trends
EDELWEISS RATINGS
Absolute Rating BUY
Investment Characteristics Growth
MARKET DATA (R: RALL.BO, B: RALI IN)
CMP : INR 120
Target Price : INR 158
52-week range (INR) : 168 / 111
Share in issue (mn) : 194.5
M cap (INR bn/USD mn) : 23 / 430
Avg. Daily Vol. BSE/NSE (‘000) : 183.7
SHARE HOLDING PATTERN (%)
Current Q2FY13 Q1FY13
Promoters *
50.1 50.1 50.1
MF's, FI's & BKs 8.9 11.5 11.8
FII's 10.8 11.9 11.6
others 30.2 26.6 26.4
* Promoters pledged shares
(% of share in issue)
: Nil
RELATIVE PERFORMANCE (%)
Sensex Stock Stock over
Sensex
1 month (3.8) (9.6) (5.8)
3 months 4.3 (21.0) (25.3)
12 months 10.8 0.5 (10.4)
Manish Mahawar
+91 22 6623 3481
Click on image to view video
Manoj Bahety, CFA
+91 22 6623 3362
Ind
ia M
idca
ps
India Equity Research| Agriculture
February 27, 2013
Financials
Year to March FY11 FY12 FY13E FY14E
Net revenues (INR mn) 10,862 12,749 14,251 16,492
Revenue growth (%) 21.1 17.4 11.8 15.7
EBITDA (INR mn) 1,915 2,126 2,154 2,615
Core profit (INR mn) 1,258 1,224 1,239 1,660
Diluted shares (mn) 194 194 194 194
EPS (INR) 6.4 6.2 6.2 8.3
EPS growth (%) (22.9) (3.6) 0.3 33.0
P/E (x) 18.6 19.2 19.2 14.4
EV/EBITDA (x) 12.0 11.0 10.8 8.6
ROAE (%) 27.0 22.9 20.6 23.9
Agriculture
2 Edelweiss Securities Limited
Investment Rationale
Wide network to widen consumer base further
According to the industry, the domestic agrochemical sector has shown a 10Yr CAGR (FY01-
10) of 7-8% and is worth INR80bn at present. Domestic agrochemical market is expected to
grow at 10%-12% CAGR in the near term on the back of increasing consumption levels, rising
MSP, better government focus and mounting cost of labour. In India, consumption of
agrochemical is well below the global standards.
Chart 1: Consumption pattern of Agrochemicals
Source: Company, Edelweiss research
Rallis has domestic market share of ~10% and is well placed to capture emerging
opportunities on the back of healthy distribution network, branded farm solutions and
launch of new products. Rallis is competing with Bayer Crop science and Syngenta, who are
the largest players in India. Other competitors are United Phosphorus, PI Industries,
Dhanuka Agritech etc. Rallis has 2500 dealers and 37000 retailers, covering 80%of India’s
districts. Further, it uses 700 exclusive outlets of Tata Chemicals for marketing purpose and
has extended its reach to 0.5mn farmers. Rallis plans to double the farmer reach over the
next two years. The company has established a strong rapport with farmers through Rallis
Kisan Kutumbha (RKK) that has extended support in crop protection, led to better yields and
quality produce.
New product launches to drive growth
Rallis is registering and launching new products on a continuous basis. The company has
registered 63 products and launched 38 products during FY05-12 (usually, it launches 3-4
products/pa). Rallis discontinued a few products that had alternative products and less
profitable. It has discontinued all red triangle (toxic) products in FY12 as a conscious
measure. Rallis launched ten products in FY12 (v/s average 3-4 products/pa) which we
believe, will drive the growth in the near term and help to gain market share.
0
4
8
13
17
21
Taiwan China Japan USA Korea France UK Pakistan India
(Pe
r k
g/H
ec
tare
)
Rallis exited completely from toxic
products as a conscious decision
in FY12.
In India, consumption of
agrochemicals is well below global
standards.
The INR80bn domestic
agrochemical industry is expected
to grow at 10%-12% CAGR in near
term.
Rallis with a ~10% domestic
market share is well-poised to
capture emerging opportunities. It
plans to double its farmer reach
to 1.0mn in the next two years.
Rallis India
3 Edelweiss Securities Limited
Chart 2: New product registrations and launches
Source: Company, Edelweiss research
Chart 3: Providing Greener products
Source: Company, Edelweiss research
Rallis defined its turnover from newly introduced products in the last four years to total
turnover as ‘Innovation Turnover Index (ITI)’. ITI was normally 25%-30% during FY05-10. It
has fallen down to 20% and 11% in FY11 and FY12, respectively. Key revenue generating
products ‘Applaud’ and ‘Takumi’ have come out of the ITI in FY11 and FY12. Hence, index
has fallen down substantially (including revenue from both the products turnover
innovation index stood at 20% in FY12). We expect that ITI will be back to normal bracket
of 25%-30% because products launched during FY12 will drive the growth in near term.
1
6
10
15
19
24
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
(No
. of
pro
du
cts
)
Registrations Launches
Yellow
47%
Blue
36%
Green
7%
Red
10%
2001-02
Yellow
18%
Blue
52%
Green
30%
Red
0%
2011-12
Rallis launched ten products in
FY12 as against the annual
average of 3-4 products. This will
drive growth in the near term and
help to gain market share.
Innovation Turnover Index is
expected to be back to normal
range of 25%-30% as products
launched during FY12 will drive
up growth in near term.
Agriculture
4 Edelweiss Securities Limited
Chart 4: Innovation turnover index
Source: Company, Edelweiss research
Table 1: Some of the Key Products Launched during FY10-12
Source: Company, Edelweiss research
Dahej to boost exports further
In FY12, Rallis has set up a new pesticide plant of 5000MT/PA in Dahej, Gujarat (SEZ) with
the capex of INR1.8bn. This plant will enjoy tax exemption for the initial five years and has
a potential to generate cumulative turnover of INR5bn over three years. The new plant
would primarily cater to export market as the company is targeting higher export sales
growth v/s domestic sales growth on the back of increased contribution from existing
geographies and entry to newer market. The Dahej facility will drive the export sales and
reduce dependence on the domestic market.
8.0
14.0
20.0
26.0
32.0
38.0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
(%)
Key products ‘Applaud’ and ‘Takumi’
have come out of the ITI in FY11 and
FY12. Hence, index has fallen down
substantially
Products Description
Taarak Rice Herbicide
Ergon A unique fungicide product which enhance the yield
Rall igold Plant Growth Nutrients
Toran Pesticide for Cotton crop
Saaras Fungicide with collaboration of Syngenta
Neon An effective insecticide for the management of cotton
jassids and tea mites
Sonic A granular insecticide for paddy and sugarcane
Vaar Soyabean post emergence herbicide for the management of
all major weeds
Honcho Pre-post emergent herbicide for the management of all
major weeds in Onion
Cylo Post emergent herbicide for grassy weeds in rice
Tata Bahaar Plant Growth Promoter (PGP) for vegetables and fruit crops
to improve the growth and yield
Dahej facility has potential to
generate cumulative turnover of
INR5bn over the next three
years. It will boost export sales
and reduce dependence on the
domestic market.
Rallis India
5 Edelweiss Securities Limited
Chart 5: Export sales and contribution to total sales
Source: Company, Edelweiss research
Metahelix – a growth ladder
In December 2010, Rallis entered into a definitive agreement to acquire a majority stake of
53.5% in the Bengaluru-based seeds research company ‘Metahelix Life Sciences’ (Metahelix)
in an ~INR1bn all-cash deal funded largely through internal accruals. Further, the company
increased its stake to 75.64% at the end of FY12 and total investment increased ~INR1.6bn.
Rallis further increased its stake to 77.02% during Q3FY13. As per the agreement, Rallis will
enhance its shareholding to 100% in Metahelix over a period of five years.
Organised hybrid seeds market is worth INR100bn (including vegetable seeds market size
INR20bn) in India and is expected to post 12-15% CAGR in coming years. India has ~2m ha
(of total 40m ha) under hybrid seed in rice crop, which is the next big opportunity for the
industry as well as Rallis. Area under rice hybrid seed is likely to reach 4-5m ha over the
three-four years.
Metahelix boasts of a good product portfolio in paddy, maize, millets & vegetable seeds,
and has a nationwide presence through its brand 'Dhaanya Seeds'. It has strong R&D
capabilities with ~70 scientists. We believe that Metahelix is well positioned to capture the
market due to strong R&D capabilities and product pipeline. Metahelix has launched ten
new seed hybrids and conducted extensive field activities in FY12 which is expected to
support the strong growth trajectory in the near term. Further, strong distribution network
of Rallis and Tata Chemicals will accelerate the growth of Metahelix, going forward.
Rallis guided to achieve cumulative net sales of INR10bn in initial five years. Metahelix had
sales of INR0.4bn during FY11 i.e. at the time of acquisition. It has already achieved sales of
INR0.8bn in FY12/H1FY13. At present, Metahelix’s EBITDA margin is 5%-10%. However, it is
expected to be in the range of 15-20% on account of operating leverage, going forward.
0.0
8.0
16.0
24.0
32.0
40.0
0
1,400
2,800
4,200
5,600
7,000
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
E
FY
14
E
FY
15
E
(%)
(IN
R m
n)
India has only ~2mha (of total
40m ha) under hybrid seed in rice
crop, which is big opportunity for
the industry as well as for Rallis.
Metahelix is well positioned to
capture the market due to strong
R&D capabilities and product
pipeline.
Rallis guided to achieve
cumulative sales of INR10bn in
the initial five years from seed
business. Seed business EBITDA
margin is expected to improve on
account of operating leverage.
Agriculture
6 Edelweiss Securities Limited
Chart 6: Metahelix – Seeding growth
Source: Company, Edelweiss research
Into organic manure business
Rallis entered into an agreement to acquire 51% stake in ‘Zero Waste Agro Organics’ for
INR0.3bn in April 2012. Company makes organic manure from waste of sugarcane mills and
has brand ‘Geogreen’. Acquisition would be funded through internal accruals. The company
guided cumulative sales of Rs1bn in the next five years from the acquisition.
0.0
3.2
6.4
9.6
12.8
16.0
0
500
1,000
1,500
2,000
2,500
FY11 FY12 FY13E FY14E FY15E
(%)
(IN
R m
n)
Sales EBITDA EBITDA margin
Rallis guided to achieve
cumulative sales of INR1bn in next
five years from organic manure
business.
Rallis India
7 Edelweiss Securities Limited
Valuations
At current valuation, Rallis is trading at a premium to domestic peers and at par with global
peers on account of
• Better financials
• Brand recognition
• Higher return ratio (RoE of 20%-25% )
• Marketing synergy with Tata Chemicals (TCL).
We strongly believe that Rallis will trade at premium, going forward too. We are initiating
coverage on Rallis with ‘BUY’ rating, valuing the stock at P/E of 15xFY15E. Though, we have
not considered the positives listed below, either in estimate or valuation.
• Surplus land bank: Rallis has considerable surplus land which it can divest any time as
per its requirement. As per media sources, the company is holding 110acres of land
(85acres in Hyderabad and 25acres in Mumbai). We believe both the property together
could fetch ~INR3bn (~INR15/share or ~13% of CMP)
• Strategic stake in Advinus: Rallis has a ~14% stake in Advinus Therapeutics (Advinus),
with a total investment of INR0.18bn. Advinus is a research-based pharmaceutical
company founded by leading global pharmaceuticals executives and promoted by the
Tata Group. Company offers development services to pharma, agro and biotech
industries.
• Income from pulses initiatives (with TCL): TCL has forayed into branded pulses, retailing
under brand ‘I-Shakti’ with Rallis. TCL has introduced four variants – Tur, Moong,
Chana and Urad retailing under brand ‘I-Shakti’. Rallis would encourage farmers to
grow pulses, provide them necessary agri-inputs and pay them higher prices (v/s MSP)
for their produce. Tata Chemicals is targeting INR50bn of sales in the next five years
from this initiative. Hence, we believe that even 1% margin for Rallis could generate
INR0.50bn (~24% of FY12 EBITDA) of EBITDA in the next five years.
Table 2: Peer Comparison
Source: Bloomberg, Edelweiss research
Companies Mcap DPS D-Yield
(USD bn) CY13/FY14E CY14/FY15E CY13/FY14E CY14/FY15E CY13/FY14E CY14/FY15E CY11/FY12 %
Domestic Players
Rall is India 0.4 33.0 26.8 14.4 11.4 23.9 25.5 2.2 1.8
PI Industries 0.3 37.3 26.1 10.9 8.6 26.1 25.9 5.0 0.8
United Phosphorus 1.0 25.9 19.1 5.9 5.0 18.6 18.9 2.5 2.0
Big Six Global Players
Monsanto 52.9 14.3 11.9 19.0 16.9 20.0 20.1 1.3 1.3
Syngenta 40.4 10.1 5.4 14.5 13.7 24.1 21.7 9.5 2.4
Bayer 80.7 9.1 9.6 12.3 11.2 21.8 20.5 1.7 2.3
BASF 90.9 11.2 9.3 12.4 11.4 19.4 19.1 2.5 3.4
Dupont 43.5 18.0 12.4 11.8 10.5 31.5 29.0 1.7 3.7
Dow Chemical 37.9 24.4 24.8 13.4 10.7 13.7 15.6 1.2 3.8
Global Generic Players
FMC Corp 8.0 14.5 15.8 14.6 12.6 27.4 26.4 0.4 0.7
Nufarm (Global) 1.5 12.3 9.5 11.7 10.7 8.7 9.0 0.1 1.1
EPS Growth (%) P/E (x) ROE (%)
Agriculture
8 Edelweiss Securities Limited
Chart 7: One year forward P/E
Chart 8: One year forward EV/EBITDA
Chart 9: One year forward P/BV
Source: Bloomberg, Edelweiss research
5x
10x
15x
20x
0
40
80
120
160
200
Ap
r-0
5
Se
p-0
5
Fe
b-0
6
Jul-
06
De
c-0
6
Ma
y-0
7
Oc
t-0
7
Ma
r-0
8
Au
g-0
8
Jan
-09
Jun
-09
No
v-0
9
Ap
r-1
0
Se
p-1
0
Fe
b-1
1
Jul-
11
De
c-1
1
Ma
y-1
2
Oc
t-1
2
(x)
5x
10x
15x
0
50
100
150
200
250
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
(x)
2x
4x
6x
0
50
100
150
200
250
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
(x)
Rallis is trading at lowest
valuation of past three years
Rallis India
9 Edelweiss Securities Limited
Key Risks
Weather: Crop protection industry faces the risks of seasonal weather factors. The weather
can affect the presence of pest infestations as well as affect the demand for crop-protection
products. In the domestic market, sales are highly seasonal, mainly during the monsoon.
Any adverse change in the weather will have a negative effect on the sales.
Chart 10: Correlation of monsoon v/s Rallis sales growth
Source: IMD, Company, Edelweiss research
Genetically modified (GM) crops: The usage of crop protection products is significantly less
for GM crops. Hence, growth and acceptance of GM crops by consumers may have an
adverse effect on Rallis’ business.
Overseas regulation: Rallis is registering its products in the overseas market. Any negative
measure by the respective countries can affect the company’s growth adversely.
(28.0)
(17.0)
(6.0)
5.0
16.0
27.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12
(%)
Monsoon % Departure Rallis Sales growth (%)
Agriculture
10 Edelweiss Securities Limited
Company Description
About Rallis India
Rallis is a Tata Group owned Agrochemical Company and a key player in India. Tata
Chemicals holds 50.09% in Rallis India. Company has employee strength of 857 as on March
31, 2012 and have plants located at Akola, Ankaleshwar, Ratnagiri and Bharuch.
Agrochemical and seed business constitute ~94% and ~6% in consolidated FY12 sales.
Company acquired Bangalore based seed players Metahelix during FY11 and entered into
an agreement to acquire 51% stake in ‘Zero Waste Agro Organics’ in April 2012. Rallis has
broad and diversified product portfolio in terms of crops as well as type of pesticide.
Chart 11: Standalone sales breakup (FY12) Chart 12: Consolidated Sales breakup (FY12)
Source: Company. Edelweiss research
According to customer engagement survey by Gallop, Company has 7 of the top 12 brands
when it comes to awareness of brands in Indian agrochemical market.
Table 3: Strong Brands in Portfolio
Source: Company. Edelweiss research
Insecticide
45%
Herbicide
30%
Fungicide
25%
Brands Players
Confidor Bayer
Contaf Rall is
Rogor Rall is
Asataf Rall is
Tata Mida Rallis
Contaf Plus Rall is
Fame Bayer
Antracol Bayer
Tata Mono Rallis
Applaud Rallis
Proclaim Syngenta
Hostathion Bayer
Domestic
64%
Export
30%
Seed
6%
Rallis India
11 Edelweiss Securities Limited
Rallis has strong relationship with global majors and entered into several alliances such as
Dupont, Syngenta, Bayer, among others. These tie-ups enable it to offer a bouquet of
specialty products, addressing varied crop protection needs.
Table 4: Details of alliances
Source: Company, Edelweiss research
About Metahelix Lifescience
Metahelix is an agricultural biotechnology company focusing on developing traits and
technologies for crop production and improved productivity. Hybrid seeds and traits are
commercialized by its wholly owned subsidiary— Dhaanya Seeds—that serves as a
production and marketing organization for technologies developed by Metahelix.
At present, Dhaanya Seeds markets farmer driven hybrids in major food crops such as rice,
maize, pearl millet, sorghum, oil seeds (sunflower), fibre crop (cotton). In vegetables, the
focused crops are tomato, hot pepper (chilli), brinjal, gourds and water melon. A large
number of new hybrids in these crops are also under test in actual farming conditions for
evaluation that would be ready for commercial launch in the next 1-2years. Metahelix has
launched ten new seed hybrids and conducted extensive field activities in FY12 which is
expected to support the strong growth trajectory in the near term.
Dhaanya Seeds is well supported by Metahelix’s world class infrastructure consisting of
20000sqft laboratory space and 24000sqft green house. Company has production
operations in Karnataka, Tamilnadu and Andhra Pradesh. Metahelix has management team
with rich agricultural experience. It has strong R&D capabilities with ~70 scientists.
Players Brand/Products
FMC, USA Furadan, Tatafuran, Electra, Impeder
Nihon Nohyaku Co. Ltd. , Japan Applaud, Fuji 1
Dupont, USA Daksh, Rekord
Syngenta Preet, Anant, Paralac, Prabhav, Sartaj
Bayer Tata Mida, Spiro
Gharda Chemicals Fateh, Koranda
Makhteshim Chemical Works Captan, Atrazine, Nova
Borax, USA Micronutrient Boron
Yara International Asa Range of specialty products
A large number of new hybrids
are also under test in actual
farming conditions for evaluation
that would be ready for
commercial launch in the next 1-
2years.
Agriculture
12 Edelweiss Securities Limited
Table 5: Metahelix‘s key personnel in management team
Source: Company, Edelweiss research
Dr. K.K. Narayanan,
Managing Director
One of the founder member of Metahelix and is in overall
incharge of company. Earlier Narayanan was the program lead
for Crop Transformation and Functional Genomics at the
Monsanto Research Center, Bangalore.
Dr. Gautham Nadig,
Director
Dr. Nadig is one among the founder members of Metahelix. Dr.
Nadig leads the Research and Development, Business
Development and administrative function of the Company.
Before joining Metahelix, Dr. Nadig was a Senior Scientist in the
Bioinformatics division of the Monsanto Research Center,
Bangalore and later on served as a consultant to Monsanto's
Plant Genomics group at Saint Louis.
Ravikrishna S.,
Director
Prior to joining Metahelix, Ravi was with Business Development
group in E.I. DuPont India Private Limited, Gurgaon and earlier
led the seed business at PHI Seeds Limited, Hyderabad. He had
also worked with Advanta India (previously ITC Zeneca Ltd) in
different positions before leading the Marketing and Business
Development function. In his previous roles, Ravi has been
responsible for new business initiatives and brings in
considerable experience in marketing and business
development.
Rallis India
13 Edelweiss Securities Limited
Industry highlights
Agrochemical Industry
Global agrochemical industry has shown a 10-year CAGR (FY01-10) of ~4% and is worth
USD45bn. Crop protection industry players are categorised into innovators and generics.
Innovators are research & development patented product based players like Bayer,
Syngenta, BASF, Monsanto, Dow and Dupont. While off-patented product based players are
called as generic players. Generic players have a key strength of low-cost manufacturing and
wide distribution network.
Chart 13: Global Agrochemical Industry
Source: Company, Edelweiss research
Agrochemicals are necessary to avoid large losses due to weeds, fungal diseases and insect
infestations to crops. According to Cheminova (global generic crop protection player), 30-
50% of crops are saved by usage of spray globally.
As per Philips McDougall report (2007), patented products contribute only ~25% to the
global crop protection market, while balance market is off-patented (generics). However,
45% of the generic market is still marketed by innovator companies. Hence, we believe that
it will be an attractive opportunity for generic players in the future.
20.0
26.8
33.6
40.4
47.2
54.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
(US
D b
n)
Agriculture
14 Edelweiss Securities Limited
Chart 14: Global patented and off-patented market Chart 15: Share of innovators in off-patented market
Source: Philips McDougall, Edelweiss research
Chart 16: Geography-wise global agrochemical market
Source: United Phosphorus, Edelweiss research
As per industry sources, domestic crop protection industry has shown a 10 year CAGR (FY01-
10) of 7%-8% and is worth INR80bn. Further, 18%-20% of crops are saved on the back of
crop protection usage in India. Major agrochemical consuming states in India are from
southern and western India belts. Further, paddy (rice) followed by cotton is major
agrochemical consuming crop.
Patented
25%
Off
Patented
75%
Europe
27%
Latin America
22%North America
21%
Asia
26%
Rest of World
4%
Generic
Players
55%
Innovators
45%
Rallis India
15 Edelweiss Securities Limited
Chart 17: State-wise pesticide consumption in India
Source: Ministry of Agriculture, PI Industries, Edelweiss research
Chart 18: Crop-wise pesticide consumption in India
Source: Industry, Edelweiss research
Global as well domestic food demand has been driven by increasing population, declining
arable land and shift from food to fuels. In India, arable land has been declining since the
last four decades. However, food production witnessed 2.1% CAGR (during 1960-2010)
primarily on the back of yield improvement.
Andhrapradesh
23%
Punjab
12%
Maharashtra
12%Karnataka
7%
Gujarat
7%
West Bengal
6%
Haryana
7%
Tamilnadu and
Kerala
6%
Others
20%
Paddy
35%
Cotton
25%
Others
40%
Agriculture
16 Edelweiss Securities Limited
Chart 19: Stagnant India’s Arable Land
Source: Department of Agriculture, Edelweiss research
Chart 20: India’s food production
Source: Department of Agriculture, Edelweiss research
India’s agricultural yield is rising with the same CAGR as the world, despite having an
absolute yield, which is much lower than the world. Demand for food is growing consistently
on account of rising population, diversion from food to fuels, rising income in developing
countries etc. Further, declining arable land and climatic problems are imposing supply-side
pressures. Hence, we believe that the only solution to increase food availability is to
improve agricultural yield that ensures strong trajectory for agricultural inputs like
fertilizers, crop protection products, seeds and irrigation facilities.
80
92
104
116
128
140
FY
60
FY
62
FY
64
FY
66
FY
68
FY
70
FY
72
FY
74
FY
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(m m
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Rallis India
17 Edelweiss Securities Limited
Chart 21: Agricultural yield
Source: USDA, Department of Agriculture (India), Edelweiss research
Seed Industry
Indian seed industry is the eighth largest in the world and market size is estimated to be
INR80-100bn (including vegetable seeds market size INR20bn). Domestic seed industry is
growing at the rate of 12% as compared to 6%-7% globally and is expected to post 12-15%
CAGR in coming years. Of this, domestic cotton seed market is worth INR40bn and is
expected to be same over the next two to three years on account of declining cotton
acreage in India. Nuziveedu Seeds is largest player in hybrid cotton seeds with 25% market
share followed by Rashi Seeds and Myhco.
Seed Industry has a long business cycle of 13-14years (R&D – ~7years, production – ~3years
and commercialization - ~3years) which plays big entry barrier.
India has ~2mha (of total 40mha) under hybrid seed in rice crop, which is the next big
opportunity for the industry. Area under rice hybrid seed is likely to reach 4-5mha over the
next three to four years. Bayer Crop Science is biggest player in hybrid rice seed with
domestic market share of 40%-50%.
0.0
0.8
1.6
2.4
3.2
4.0
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(mt
/ h
ec
tare
)
World's Yield India's Yield
Agriculture
18 Edelweiss Securities Limited
Chart 22: Indian seed industry crop-wise
Source: Kaveri Seeds, Edelweiss research
Cotton
40%
Vegetable and
fruits
20%
Others
40%
Rallis India
19 Edelweiss Securities Limited
Financial Outlook
Healthy financials, dividend payouts
We expect Rallis’ net sales and PAT to grow FY12-15E at CAGR of 14.2% and 19.2%,
respectively (v/s FY05-12 CAGR of 11.6% and 23.9%) on the back of higher growth in export
sales, which would be supported by the new facility in Dahej, and the growth in Metahelix
seed business. We are considering 4%/12%/12% domestic agrochemical business growth
during FY13/14/15 (FY09-12 CAGR of 13.1%), primarily on account of volume growth that
we expect, to be driven by new products. During FY12, Rallis domestic business has shown
de-growth of 2.2% YoY primarily on account of discontinuation of red triangle (toxic)
products and adverse weather condition.
Chart 23: Strong revenue growth to continue
Source: Company, Edelweiss research
Chart 24: PAT Growth
Source: Company, Edelweiss research
0
4,500
9,000
13,500
18,000
22,500
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
(IN
R m
n)
Agrochemicals - Domestic Agrochemicals - Export Seeds Organic Manure
0
500
1,000
1,500
2,000
2,500
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
(IN
R m
n)
Agriculture
20 Edelweiss Securities Limited
The company has improved its EBITDA margin from 11.3% in FY05 to 19.4% in FY10 on the
back of product optimization and internal initiatives, though it has come down to 17.6% in
FY11 and 16.7% during FY12 on account of higher input cost, sales of low margin products
led by erratic rain and contribution of lower margin seed business. We are considering flat
consolidated EBITDA margin over FY12-15 despite margin improvement in seed business
led by operating leverage.
Rallis has shut down its Turbhe, Mumbai plant and shifted its production to new Dahej
facility. On account of cessation, the company has given voluntary retirement scheme to its
employees and we believe that there will be cost saving pertaining to cessation of Turbhe
facility. We have not considered any benefit or margin improvement led by cessation of
Turbhe facility. Hence, it will be upside risk to our margin assumption.
Chart 25: EBITDA and EBITDA margin
Source: Company, Edelweiss research
Ralls’s gross debt increased from INR0.1bn in FY10 to INR1.5bn in FY12 (DER from Nil in FY10
to 0.3x in FY12) because company has made substantial investment by way of setting up
plant in Dahej (~INR1.8bn), acquisition of Metahelix (~INR1.6bn) and higher working capital
requirement (INR0.8bn in FY11 and FY12).
We believe there is no major capex likely in the near term as recent initiatives are seen
increasing cash-flows. This would lead to a lower debt in the near future and reduce interest
outgo. The company has healthy RoE (20%-25%) and strong dividend payout ratio of ~35%.
0.0
5.0
10.0
15.0
20.0
25.0
300
900
1,500
2,100
2,700
3,300
FY
05
FY
06
FY
07
FY
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FY
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FY
13
E
FY
14
E
FY
15
E
(%)
(IN
R m
n)
EBITDA EBITDA margin
Rallis India
21 Edelweiss Securities Limited
Chart 26: RoE (%) and Pretax RoCE (%)
Source: Company, Edelweiss research
Chart 27: Consistent dividend history
Source: Company, Edelweiss research
0.0
12.0
24.0
36.0
48.0
60.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
(%)
RoE Pretax RoCE
4.0
21.8
39.6
57.4
75.2
93.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E
(%)
Dividend Payout
Agriculture
22 Edelweiss Securities Limited
Financial Statements
Key assumptions
FY12 FY13E FY14E FY15E
Macro GDP(Y-o-Y %) 6.5 5.5 6.5 7.0
Inflation (Avg) 8.8 7.8 6.0 6.0
Repo rate (exit rate) 8.5 7.5 6.8 6.0
USD/INR (Avg) 47.9 54.5 54.0 52.0
Company Domestic rev. growth (%) (2.2) 4.0 12.0 12.0
Export revenue growth (%) 49.5 20.0 15.0 15.0
Seeds revenue growth (%) 324.0 57.0 35.0 30.0
Organic manure rev. grw. (%) NA NA NA 35.0
Raw Material Cost as % Net Revenue 58.3 59.8 59.3 58.8
Employee expenses as % Net Revenue 7.1 6.5 6.2 5.9
Other Expenses as % Net Revenue 18.0 18.6 18.6 18.6
Deprec. rate as % of avg. gross block 6.3 5.4 5.2 5.2
Interest rate as % of avg. gross debt 10.5 13.3 9.0 9.0
Tax rate as % of PBT 30.8 27.7 26.2 25.2
Capex (INR mn) 1,522 600 600 600
Net borrowings (INR mn) 1,429 1,422 678 (390)
Receivable (days) 30 32 35 35
Inventory (days) 123 121 118 120
Payable (days) 195 175 166 166
Cash conversion cycle (dayes) (42) (22) (13) (11)
Income statement (INR mn)
Year to March FY12 FY13E FY14E FY15E
Net revenues 12,749 14,251 16,492 18,963
Raw material costs 7,428 8,522 9,786 11,153
Gross profit 5,321 5,729 6,706 7,810
Employee expenses 902 925 1,017 1,119
Other expenses 2,292 2,650 3,074 3,535
Operating expenses 3,195 3,575 4,091 4,654
Total expenditure 10,622 12,097 13,877 15,807
EBITDA 2,126 2,154 2,615 3,156
Depreciation & amortisation 287 303 327 357
EBIT 1,840 1,851 2,288 2,799
Interest expense 141 208 112 40
Other income 69 70 74 77
Profit before tax 1,768 1,713 2,250 2,836
Provision for tax 544 474 590 716
Core profit 1,224 1,239 1,660 2,121
Extraordinary/ Prior period items (217) 3 0 0
Profit after tax 1,007 1,242 1,660 2,121
Minority interest 15 26 48 75
Profit after minority interest 992 1,215 1,613 2,046
Equity shares outstanding (mn) 194.5 194.5 194.5 194.5
EPS (INR) basic 6.2 6.2 8.3 10.5
Diluted shares (mn) 194.5 194.5 194.5 194.5
EPS (INR) diluted 6.2 6.2 8.3 10.5
CEPS 7.7 7.8 10.0 12.4
DPS 2.2 2.3 2.4 2.5
Dividend payout (%) 35.4 36.9 28.9 23.8
Common size metrics (% net revenues)
Year to March FY12 FY13E FY14E FY15E
Gross margin 41.7 40.2 40.7 41.2
Operating expenses 25.1 25.1 24.8 24.5
EBITDA margins 16.7 15.1 15.9 16.6
EBIT margin 14.4 13.0 13.9 14.8
Interest 1.1 1.5 0.7 0.2
Net profit margin 9.6 8.7 10.1 11.2
Growth metrics (%)
Year to March FY12 FY13E FY14E FY15E
Revenues 17.4 11.8 15.7 15.0
EBITDA 11.0 1.3 21.4 20.7
PBT (3.8) (3.1) 31.4 26.0
Net profit (2.7) 1.2 34.0 27.7
EPS (3.6) 0.3 33.0 26.8
Rallis India
23 Edelweiss Securities Limited
Balance sheet (INR mn)
As on 31st March FY12 FY13E FY14E FY15E
Share capital 194 194 194 194
Reserves & surplus 5,336 6,028 7,095 8,572
Shareholder equity 5,530 6,222 7,289 8,766
Minority interest 14 26 48 75
Long term borrowings 856 856 356 0
Short term borrowings 685 735 535 0
Loan funds 1,541 1,591 891 0
Deferred tax liability/asset 131 232 232 232
Sources of funds 7,217 8,071 8,459 9,072
Tangible assets 3,612 3,909 4,183 4,426
Intangible assets 25 25 25 25
CWIP (incl. intangible) 599 300 300 300
Total net fixed assets 4,236 4,234 4,508 4,751
Goodwill on consolidation 1,533 1,533 1,533 1,533
Non current investments 197 487 487 487
Current investments 30 30 30 30
Cash and cash equivalents 112 169 213 390
Inventories 2,717 2,950 3,386 3,930
Sundry debtors 1,035 1,479 1,685 1,991
Loans and advances 1,358 1,358 1,358 1,358
Other assets 8 8 8 8
Total current assets (ex cash) 5,118 5,795 6,436 7,287
Trade payable 2,680 2,840 3,260 3,729
Other current liabilities and provisions 1,330 1,337 1,488 1,677
Total current liabilities & provisions 4,010 4,178 4,748 5,406
Net current assets (ex cash) 1,108 1,617 1,688 1,881
Application of funds 7,217 8,071 8,459 9,072
Book value per share (INR) 28 32 37 45
Free cash flow (INR mn)
Year to March FY12 FY13E FY14E FY15E
Net profit 992 1,215 1,613 2,046
Add: Depreciation 287 303 327 357
Add: Interest and other non-cash items 175 - 0 0
Gross cash flow 1,453 1,518 1,940 2,403
Less: Changes in working capital 507 509 71 193
Operating cash flow 946 1,009 1,869 2,210
Less: Capex 466 301 600 600
Free cash flow 480 708 1,269 1,610
Peer comparison valuation
Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)
Name (USD bn) FY14E FY15E FY14E FY15E FY14E FY15E
Rallis India 0.4 14.4 11.4 8.6 6.8 23.9 25.5
PI Industries 0.3 10.9 8.6 6.7 5.2 26.1 25.9
United Phosphorus 1.0 5.9 5.0 4.0 3.4 18.6 18.9
Source: Edelweiss research
Cash flow metrics
Year to March FY12 FY13E FY14E FY15E
Operating cash flow 946 1,009 1,869 2,210
Financing cash flow (239) (361) (1,225) (1,433)
Investing cash flow (740) (591) (600) (600)
Net cash flow (34) 57 44 177
Capex (466) (301) (600) (600)
Dividends paid (473) (523) (546) (569)
Profitability ratios
Year to March FY12 FY13E FY14E FY15E
ROACE (%) 28.3 25.5 29.5 33.9
ROAE (%) 22.9 20.6 23.9 25.5
Receivables (days) 30 32 35 35
Inventory (days) 123 121 118 120
Payables (days) 195 175 166 166
Cash conversion cycle (days) (42) (22) (13) (11)
Debt-equity (x) 0.3 0.3 0.1 0.0
Debt/EBITDA 0.7 0.7 0.3 0.0
Adjusted debt/Equity (x) 0.3 0.3 0.1 0.0
Operating ratios (x)
Year to March FY12 FY13E FY14E FY15E
Total asset turnover 1.9 1.9 2.0 2.2
Fixed asset turnover 4.4 3.8 4.0 4.4
Equity turnover 2.4 2.4 2.4 2.4
Valuation parameters
Year to March FY12 FY13E FY14E FY15E
Diluted EPS (INR) 6.2 6.2 8.3 10.5
Y-o-Y growth (%) (3.6) 0.3 33.0 26.8
CEPS (INR) 7.7 7.8 10.0 12.4
Diluted P/E (x) 19.2 19.2 14.4 11.4
P/BV (x) 4.2 3.7 3.2 2.7
EV/Sales (x) 1.8 1.6 1.4 1.1
EV/EBITDA (x) 11.0 10.8 8.6 6.8
Dividend yield(%) 1.8 1.9 2.0 2.1
Agriculture
24 Edelweiss Securities Limited
Holding Top -10
Perc. Holding Perc. Holding
Amansa Investments 3.87 Reliance Capital Asset Management 1.03
Fidelity Mutual Fund 3.01 Oriental Insurance Co 1.00
Sundaram Asset Management 1.74 Argonaut Ventures 1.00
L&T Investment Management 1.47 Amundi Luxembourg SA 0.77
UTI Asset Management 1.04 Blackrock Group 0.76
*as per last available data
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded
05 Mar 2012 Tata AIG Life Insurance Company Ltd Buy 49732
05 Jun 2012 Rakesh Jhunjhunwala Buy 952000
*as per last available data
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No available data
*as per last available data
Additional Data
Directors Data
Mr. R. Gopalakrishnan Chairman Mr. Homi R. Khusrokhan Director
Mr. B.D. Benerjee Director Mr. E.A. Kshirsagar Director
Mr. Prakash R. Rastogi Director Mr. Bharat Vasani Director
Mr. Venkatrao S. Sohoni Director Mr. K.P. Prabhakaran Nair Director
Mr. R. Mukundan Director Mr. Yoginder K. Alagh Director
Mr. Y.S.P. Thorat Director Mr. V. Shankar Managing Director & CEO
Auditors - Deloitte Haskins & Sells
*as per last available data
Rallis India
25 Edelweiss Securities Limited
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: [email protected]
Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206
Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476
Nirav Sheth Head Sales [email protected] +91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): Agriculture
EID Parry India, Jain Irrigation, PI Industries, Rallis India, Shree Renuka Sugars, United Phosphorus
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 118 46 17 181
* - stocks under review
Market Cap (INR) 117 57 7
> 50bn Between 10bn and 50 bn < 10bn
Date Company Title Price (INR) Recos
Buy Hold Reduce Total
Recent Research
26-Feb-13 Agrium Uncertainty clouds Indian non-
urea fertiliser outlook;
Global Pulse
Not
Rated
19-Feb-13 PI
Industries
Stellar performance;
Result Update
610 Buy
05-Feb-13 PotashCorp Domestic challenges to stay;
Global Pulse
Not
Rated
Rating Interpretation
Buy appreciate more than 15% over a 12-month period
Hold appreciate up to 15% over a 12-month period
Reduce depreciate more than 5% over a 12-month period
Rating Expected to
Agriculture
26 Edelweiss Securities Limited
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