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AGROCHEMICAL INDUSTRY
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WELINGKAR INSTITUTE OF MANAGEMENT RESEARCH &
DEVELOPMENT
SUMMER PROJECT
ON
ANALYSIS OF AGROCHEMICAL AND FERTILISER SECTOR AND
COMPANY VALUATIONS
BY
URVI THAKKAR
PGDM 2009 – 11 TRIMESTER IV
ROLL NO 148
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DECLARATION I, Urvi Thakkar, hereby declare that I have completed my project titled ‘Agrochemical &Fertiliser
Sector Analysis and Company Valuation’ in Kisan Ratilal Choksey Shares & Securities Pvt Ltd
under the guidance of Kunal Dalal (Head of Institutional Research) and Neha Pathak (Senior
Analyst) for the course of Post Graduate Diploma in Management. The information provided in the
project report is true and original to the best of my knowledge.
Urvi Thakkar
PGDM (2009-2011)
Welingkar Institute of Management Research & Development
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ACKNOWLEDGEMENT I would like to thank my Project Guide Mrs. Neha Pathak (Senior Analyst), K.R Choksey Shares &
Securities for providing me an opportunity to work on this project and providing support and
guidance during my project work at such a valuable organization. I would also like to thank
Mr.Kunal Dalal Institutional Research Head, K.R Choksey for helping me with the study of this
project and also information and their valuable suggestion and comments on bringing out this project
in the best possible way.
Thank you
Urvi Thakkar
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Executive Summary
With the global demand for food increasing at a rapid pace led by rising population and higher living
standards in developing nations, agro-commodity prices are considerably higher compared to their
historical standards. Matters have been compounded by a shortage of area under cultivation leading
to greater thrust on yield improvement. The major beneficiaries of this scenario are Agrochemical
companies & Fertiliser Companies.
The generic agrochemical market is all set to grow at a healthy rate of 10% .The industry is
characterised by entry barriers in the form of product registrations and access to distribution
network. Rallis India & Sabero Organics Gujrat were two strong bets. Rallis India mainly catering to
the Indian market has the largest manufacturing capacity in India and a strong distribution network.
Sabero Organics mainly focussed on foreign markets it is backward integrated for production of
Glyphosate. It has received registrations in various countries thus showing growth in top line of the
firm
Fertiliser sector is hugely dependant on government subsidies but now the government is
deregulating the sector by introducing NBS (Nutrient Based Subsidy Scheme) .Urea is the cheapest
and most sold fertiliser in India. Study of Chambal Fertilisers and Chemicals showed many business
segments, manufacturing and trading of fertilisers, shipping and texile. Huge risk involved due to
fluctuation in shipping rates and urea prices which are key revenue drivers for the firm.
The report also gives an understanding of the correlation of rainfall and fertiliser stock movement.
Understanding which would be the best stock picks and why.
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TABLE OF CONTENTS
Agrochemical Industry .............................................................7
Indian Agrochemical Industry ................................................ 11
Global Agrochemical Market & Consumption .......................... 13
Key opportunities and challenges for industry ....................... 13
Rallis India ............................................................................ 18
Sabero Organics Gujrat ltd ..................................................... 36
Fertiliser Sector .................................................................... 48
Current Status of Phosphatic & Potassic Fertiliser Industry ... 54
Indian Monsoons & Fertilizer sector: ...................................... 63
Chambal Fertilisers & Chemicals ............................................ 69
Bibliography .......................................................................... 74
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Agrochemical Industry
Agrochemicals also known as Pesticides are substance or mixture of substances that are used to
avert, destroy or control any kind of pests or unwanted type of plants or animals that cause harm to
crops or hampers the normal growth process of a crop. As per a Government of India estimate of
2002, value of crop losses caused due to non-usage of pesticides was around Rs 90,000 crore.
Thereon, assuming losses grew at an average 2%, total losses would have amounted to Rs 101,355
crore in FY2009, a staggering 2.2% of India's GDP
With the global demand for food increasing at a rapid pace led by arising population and higher
living standards in developing nations, agro-commodity prices are considerably higher compared to
their historical standards. Matters have been compounded by a shortage of area under cultivation
leading to greater thrust on yield improvement.
The need to increase crop yields to meet the ever growing food demand has put the agrochemical
industry into a sweet spot. According to the estimates, during the next 20 years, the world's
population will rise from 6.3bn to more than 8bn, leading to a 50% increase in demand for food and
50% increase in demand for energy. Demand growth will also be compounded by peoples' demand
for higher standards of living. Furthermore, land under cultivation is facing pressure in the wake of
rapid urbanization, erosion, etc.
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As is evident from the graph, historically, higher agri-commodity prices have led to higher crop
protection market growth and vice versa.
With agri-commodity prices picking up in CY10 and well above historical standards, we expect
agrochemical market growth to remain healthy, going forward. Moreover ,crop protection products
account for only 5-10% of the farmer’s total costs. Given the risk of crops being damaged by pests
or disease and increasing realizations, it is in the great interest of farmers to increase use of
agrochemicals
Global Agrochemical Industry
The global crop protection industry is highly consolidated because of high entry barriers in the form
of a tedious and expensive registration process and difficulty in penetrating the distribution network.
The global agrochemical sector is dominated by the proprietary brand manufacturers, who control
almost 80% of the overall sales in the industry. These players offer large product portfolios, which
gives them a huge competitive advantage to enhance their influence on distributor.
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Proprietary v/s Offpatent Chart
As is evident from the above figure, while 72% of the agrochemicals market is generic,
almost 70-75% of the off-patent market is still controlled by the innovator companies
Global Agricultural Market Growth Rate
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According to Phillips McDougall, the global market size for agrochemicals in CY09 was ~US$38bn
(down 6.4% y-o-y) after growing by 21% in CY08. This decline in market size compared to CY08 is
due to lower commodity prices, less intensity of product use in Europe, higher levels of
agrochemical inventory in the distribution pipeline and credit issues. In terms of product-wise break-
up, herbicides account for US$18.5bn, followed by fungicides and pesticides, with a global market
size of US$9.5bn each.
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Indian Agrochemical Industry
The Indian Agrochemical Industry estimated at ~US$1 bn. i.e. Rs 5,000 crore at the end of FY09.
With more than 85000MT production, India is ranked 2nd in Asia (behind China) and 12th globally.
In FY10 the industry was impacted due to weak monsoons, both in terms of geographic and
temporal spread. Rainfall distribution was 23% lower to normal, with major impact in northern &
western parts where the rains were short by 36% as compared to normal. Consequently there was
significant decline in the cultivated area of major crops, particularly that of paddy. Severe moisture
stress has resulted in reduced yields in most crops. Late season floods during August, though, has
resulted in replenishment of reservoirs and thus led to better prospects of late sown and long duration
crops like pulses and rabi crops.
Since FY01 the total area under cultivation has grown marginally at CAGR of 0.4% to 124.4mn
hectares and production of food grains has grown at a CAGR of 2.3% over the same period. As
production of majority of agricrops in India is rainfall dependent, the demand for agrochemicals is
seasonal & heavily governed by monsoons. Paddy, cotton & wheat account for ~60% of the demand
for agrochemicals in India
In terms of state wise consumption Andhra Pradesh is the largest consumer of agrochemicals
followed by Punjab, Maharashtra & Karnataka. Unlike the global scenario, where the industry is
highly consolidated (with the top five players controlling almost 70% of the market), the Indian
agrochemical industry is very fragmented with about 30-40 large manufacturers and about 400
formulators .China has come to be known as factory of the world and this fact remains the same for
agrochemicals .However, to diversify risks arising out of single location for manufacturing base,
many MNCs have been looking at other countries. Here, the Indian agrochemical manufacturers can
position themselves as suitable alternatives to their Chinese counterparts.
Increase in food grain production can be contributed to agricultural research, plant protection, hybrid
seeds, water management etc. To meet the growing demand, we believe that India needs to increase
its productivity significantly. Use of pesticides has been poor and inadequate which has been the
primary cause of poor yield of Indian crops due to which a great deal of agriculture production has
been suffering. As compared to global crop protection industry, India accounts for a meagre 2%
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share of the global crop protection industry. Factors leading to low agrochemical consumption in
India are fragmented land holdings, low level of irrigation, high dependence on monsoons & low
awareness among farmers about the benefits of using pesticides .Lower spending on crop protection
despite growing food grain demand offers attractive opportunities for farm inputs in India.
Increasing MSP (Minimum Support Prices) for agri commodities and increased awareness is likely
to be the key driver for farmers to use pesticides. Pesticide consumption in India is lowest at 0.6 kg
/hectare as compared to various comparable regions.
Pesticides Classification and Market Share:
Agrochemicals are classified as Insecticides, Herbicides and Fungicides. In case of India's
Agrochemical market ,insecticides constitute the largest share at 62% compared to the global
consumption of 28%. This is mainly on account of the tropical climate which India has, which
results in more incidences of insect pests. Going forward we believe consumption of fungicide &
herbicide to grow faster than insecticide on the back of increasing use of Bt cotton & rising rural
labor costs. Globally, herbicides constitute the largest consuming agrochemical with a share of 48%.
Statewise Consumption of Pesticide in India
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Global Agrochemical Market & Consumption
North America, with a share of 26% in total consumption, is the largest consumer of agrichemicals
globally. The Asia-Pacific and EU regions consume almost the same amount of agrichemicals.
India's consumption of agrichemical is one of the lowest in the world, standing at 0.48kg per hectare.
This compares very poorly with other countries that have less arable land under coverage. For
instance, countries like Taiwan, Japan, Holland and Korea have higher consumption than India. We
believe this again highlights the under usage of agrochemicals by Indian farmers and unexploited
opportunity at bay for the agrochemical companies. India produces approximately 16% of the
world's total food grain production and uses only around 2% of pesticides.
Key opportunities and challenges for industry
Low penetration of pesticides:
Estimated size of the Indian economy is US $1 trillion of which Agriculture accounts for 18%. The
Agrochemical industry's size is estimated at US$1bn (Rs 5,000 crore) i.e. 0.1% of the country's total
GDP and 0.6% of Agriculture GDP. Meanwhile, the subsidy burden of urea for is estimated at
US$21.2 billion or 2% of the total GDP and 12% of agriculture GDP. We believe this demonstrate
the gross under penetration of agrochemical and the opportunity that is available to the companies in
the Sector.
Increase in Demand for Food:
The world’s population is set to increase further in next few years. According to estimates, the
world’s population will touch 8bn by 2030, led by the population boom in the emerging markets in
Asia, Africa and Latin America. This increase in population will create further pressure on per capita
arable land.
Moreover, increasing urbanization and higher income levels in the emerging economies is also
leading to more demand for proteins. In India and China, 50,000 people per day are expected tobe
added to cities over the next decade. This, coupled with higher incomes, demographic changes,
improved infrastructure and increasing consumer awareness will influence global eating habits. As
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people become wealthier, higher protein foods will be consumed. As urban consumers demand more
variety and protein foods versus rural counterparts, increased pressure will lead to pressure on
limited resources, thereby necessitating higher yields from the existing land.
Biotech seeds threat to agrochemicals:
Scientific research has come up with seeds that have self-immunity towards natural adversaries. This
can be a potential threat to the business of agrochemicals. Best example of such an introduction in
the Indian market is "Bt Cotton", which resulted in a decline in the consumption of agrochemicals by
cotton crop. However, off late there have been few reports of Bt Cotton unable to develop immunity
towards new type of pests.
Increase in Demand for Bio fuel:
Demand for energy is rising, thereby putting pressure on global regulators to look for alternative
resources. Due to scarce natural fuels, bio fuels are increasingly being used as efficient substitutes.
The US Energy Independence and Security Act of 2007 have called for an increase in bio fuel
production from 7.5bn gallons in 2012 to 36bn gallons by 2022. Currently,30% of US corn crop is
already used for ethanol production. European Union also wants bio fuels to account for 10% of its
2020 fuel requirements. Global bio fuel output is expected to more than double in the next few years,
leading to an increased need for land .As the demand for bio fuels grows, the world will need
increased farm acreage, higher yields and new crops, which bodes well for the agrochemical
industry.
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Patent expiry of molecules:
Agrochemicals are protected by patents to encourage innovation similar to the Pharmaceutical
industry. Going ahead, many molecules are likely to go off patent throwing the market open for
generic players. As per estimates, total likely available opportunity through patent expiry stands at
US $3.6 billion.
Over the years the share of generics has been consistently increasing over the years. Consequently,
the growth in sales for the generic industry has been much higher at roughly 10%, compared to 3%
growth recorded by the overall crop protection market in the last 8-10 years. We expect generics’
share to continue to increase in the off-patent market, led by the higher number of registrations made
by the generic companies. According to the industry estimates, from 2009-13, 41 active ingredients
(AIs) are going off-patent, which further present an opportunity for the top generic players.
Diversification of manufacturing base:
China has come to be known as factory of the world and this fact remains the same for
agrochemicals. However, to diversify risks arising out of single location manufacturing base, many
MNCs have been looking at other countries. Here, the Indian agrochemical manufacturers can
position themselves as suitable alternatives to their Chinese counterparts.
Competition and Players
Globally, six major innovators control 75% of the total market, while 4-5 generic players control
10% and the balance 15% is controlled by hundreds of small regional players.
Lengthy Registration Process acts as an entry barrier
The industry is highly regulated by specific and separate registration processes in different countries
and is subject to various environmental and safety legislations, especially in big markets like the US
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and Europe. The US and Europe follow a lengthy and detailed process, and carry out field trials for
every crop and soil type. It takes over three years to get one product registered in the US, and the
time frame increases to around five years in the European Union. The cost involved is also
prohibitive at around US$1-5mn per registration. This results in very few new entrants in this
industry. Moreover, even after registration, access to the distribution network is also difficult. In
markets like the US and Europe, the top six distributors control 80-85% of sales thereby making it
even more difficult for new generic players to enter these markets. Complex registration processes
and highly consolidated distribution networks by a few companies that dominate, make it difficult
for smaller players to survive.
Competition & Players
Globally, six major innovators control 75% of the total market, while 4-5 generic players control
10% and the balance 15% is controlled by hundreds of small regional players.
Global Innovator & Generic players (FY 2009)
Domestic Market –Generic players (FY-2009)
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Rallis India
Rallis India, a Tata group company, is 2nd largest player in Indian pesticide market, next only to
Bayer Crop Science. Currently Rallis enjoys a strong market share of ~13%. With more than 150
years of experience in servicing rural markets and a strong product portfolio across pesticides,
herbicides, fungicides and plant nutrients for Indian farmers, Rallis India is a dominant player in the
agrochemical industry. The name Rallis is derived from the Ralli brothers of Greece, a family of
merchants who had a trading business in England and came to India in1851. In 1950 the firm began
trading in pesticides and fertilizers in India & went public in 1951 & issue was oversubscribed. From
1960-1970 the decade was of M & A’s for Rallis which saw Tatas becoming its major shareholders
in 1962. Rallis then started manufacturing of pesticides & by the early 1990s, it divested numerous
loss making businesses to focus on the core agrochemicals business. In mid1990s Rallis went for
international expansion & also ventured into related business of seeds & speciality fertilisers. Rallis
has factories at 5 locations in India and a network of 1,500 distributors that reach more than 40,000
retail counters. Rallis has the largest agrochemicals capacity in the country (10,000 tonnes per
annum of technical grade pesticides and 30,000 tonne/litres per annum of formulations).
Management Background
Mr. Gopal Krishnan- He is the chairman, he is graduate in Physics from Calcutta University
B-Tech from IIT Khargpur. Hes has 31 years of experience with HUL, 12 years with Tata Group Mr.
V Shankar – He is the MD & CEO he has done his CA , ICWA, CS . He has worked for 18 yrs HUL
an joined Rallis in 2010.
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Rallis Business Model
Rallis operates into following 3 key Business segments:
Agri Business Domestic:
This segment is the major revenue contributor for Rallis generating ~65% of the revenue in FY10.
The segment includes 5 sub categories that are Pesticides (Domestic formulation business), seeds,
Fertilizers, Household products & Seed treatment chemicals. Out of which Domestic formulation
accounts for 62% of the revenue & balance 3% by others. Within pesticide segment Rallis is a
diversified player with strong product portfolio covering Insecticides, Herbicides & Fungicides.
Some of its popular products are Rogor, Daksh, Ergon, TataMida, Reeva, Asataf in the insecticide
segment (Rogor being the strongest brand in the country), Fateh, Tata metri, Tata panida in
weedicides segment & Contaf, Master, Fujione etc in herbicide segment. But going forward with
introduction of GM seeds & increased awareness of herbicides & fungicides Rallis is focused to
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increase its product portfolio in these high margin segments of Agrochemicals. Currently fungicides
& herbicides contribute around 20% & 10% to revenue respectively. In seed segment Rallis
produces & markets several hybrid seeds catering too Cereals (Maize,Paddy,Wheat), Oilseeds
(Mustards) & Fiber crops (Cotton, Bt cotton). Rallis has tie ups with global agrochemical giants such
as Dupont, Syngenta, Nihon Nohyaku, Bayer etc. and has successfully launched internationally
proven products into Indian markets.
International Business: Contract Manufacturing & Formulations Exports
On the back of strong competencies in agrochemical industry Rallis has international presence
across over 50 countries. Rallis also has a fully owned subsidiary in Australia – Rallis Australia Pty
Ltd. to increase its presence outside India. Rallis sells formulations under its own brand name post
registration in almost 25 different countries across the world in regions like Latin American, USA,
Japan, South East Asia, Australia and Africa. Rallis is increasing its global foot prints through new
registrations, strategic alliances with global majors & contract manufacturing. Rallis is achieving its
global ambitions with its strong ability to invest into new registrations, developing formulations to
suit requirements of various countries & its vast experience in product branding, farm advisory &
distribution management. Rallis is one of the most cost effective manufacturing companies & its
strong manufacturing capabilities make it a preferred choice for outsourcing. The international
business accounts for 20% of the total revenue & its export revenue grew at a CAGR of 9.3%
from FY05 to FY10. Going forward we believe contract manufacturing to be the key revenue driver
for Rallis .Also the new facility coming up at Dahej will exclusively cater to contract manufacturing
& is expected to generate turnover of Rs 500crore over next 3 years, We see the revenue share from
this segment increasing significantly.
Institutional Business:
Rallis provides technical & bulk of various molecules to leading companies like Bayer, Syngenta ,
Excel, UPL ,Gharda, Cheminova, Dhanuka, Nagarjuna etc. This segment accounted for ~15% of
total revenue in FY10. Rallis provides Techincal & Bulk for following products:
Technical Products: Acephate, lamda tech, Metalaxyl Tech, Ethion, Bromadiolone, Phorate
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Bulk: Acephate, Captan, Hexa EC, Imida SL, Lambda 2.5, Metribuzin, Pendimethalin ,Ethion
,Imidacloropid
Rallis India – Turnaround Story
In 1990s Rallis expanded production capacity on the back of strong demand expectations. However
demand fell sharply on account of poor monsoons in early 2001-03. Cotton is one of the major
consumers of pesticides & with introduction of Bt cotton in India in 2002, demand for organ
phosphorus & parathyroid insecticides further declined significantly. This led to sharp decline in
agrochemical prices & pesticide industry revenue was hugely impacted. Rallis recorded losses from
FY01 to FY03. In 2003; Tata Sons Executive Director R. Gopalakrishnan became the Chairman of
the Board & Dr. Venkatrao Sohoni was appointed Managing Director. They led the turnaround
strategy by taking several effective steps divesting non-core businesses of pharma & gelatin,
merging of subsidiaries to reduce operating costs, reducing debtors and inventory, repayment of debt
through sales of surplus land bank available and the issuance of preference shares worth Rs 88 crores
to Tata group. With Bt cotton being vulnerable to sucking pests, consumption of neonicotinoid
picked up thus leading to revival in agrochemical industry. Managements turnaround efforts along
with normal monsoons led to revival in Rallis top line & company reported profit in FY05.
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The strategic initiatives clearly visible in sales and margin improvements.
Product Range
Rallis India manufactures products in each of the key segments of agrochemicals i.e Insecticides,
Fungicides, & Herbicides. The portfolio consists of comprehensive range of products to cater to
variety of soils & vegetations found in India, with more emphasis on Rice, Cotton & Vegetables.
Some of the popular products of Rallis are Daksh, Tata Mida, Reeva ,Rogor in Insecticide segment.
In fungicides the key products are contaf, contaf plus,Fujione etc & in weedicides, fateh, Tata metri
& Tata panida are some of the popular products in the Indian markets.
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Dahej facility to drive Contract Manufacturing :
Rallis is setting up a 5,000 tonne new facility in Dahej with a capex of Rs 150 crore in Phase-I. The
plant is scheduled to start commercial production by Q2FY11, The facility is expected to generate
cumulative revenues of over Rs 500 crore in its first three years of operations. Rallis expects a
turnover of ~Rs 250 crores at peak utilization, depending on the mix of products being
manufactured. Rallis has a ready base of customers for the products that will be manufactured at this
facility. We believe the new EOU at Dahej will further strengthen its capabilities in contract
manufacturing leading to a double digit growth over the period of 2-3 years. Export sales growth
was exceptionally high in FY09 (+80%) on the back of high crop prices (which led to increased
demand from farmers) as well as lower production from Chinese firms as the government had
shutdown several agrochemicals factories in China, to control pollution levels ahead of the Olympic
Games. In comparison with this high base, exports are down in FY10 due to high level of inventory
in key markets like USA and Latin America and also a sharp drop in agrochemical prices compared
to FY09.
Adverse weather conditions in Africa and Australia also contributed to the overall decrease in sales.
The Asian and Middle East region performed relatively better posting a growth of about 18% over
the last year. Demand stabilization was evident only in Q4FY10, as the marketing channels opened
up after depletion of their high priced inventory from FY09. Hence, the outlook remains positive for
the long term & with the products from Dahej facility having ready markets allow Rallis to grow in
export market, supplementing growth from domestic market.
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Export Growth Year on Year
Successful New product Registrations & launches over past 5 years:
Rallis has a proven track record in terms of new registrations & new product launches in the
agrochemical market. In past 7 years Rallis has registered 42 products & launched 31 new products
with average turnover index of 29%. Rallis in FY10 had introduced key product - Ergon, a fungicide
based on active ingredient kresoxim-methyl whose global market size is estimated at $400mn. It
provides dual functionality by combating fungal infections & aiding plant growth.
It has emerged as major brand in Rallis portfolio & has superior cost benefit ratio making it
preferred product for the farmers. Moreover, Rallis has obtained 3 year exclusivity on experimental
on Ergon, which means no competitor can launch a similar product thus giving rallis significant edge
over the other domestic players. A new product 'Balwan' which is an insecticide, is likely to be
launched shortly. This product is in collaboration with DuPont. These registrations are granted by
the EPA/Dept. of Agriculture in respective countries.
Depending on local requirements, registrations may take from 3 months to3 years and costs vary
from few thousand dollars to many hundred thousand dollars. Registrations in countries such as
Brazil, Europe, Argentina, and USA take longer and are more expensive to obtain. Rallis has proven
track record & strong expertise in the registration process giving it an edge over other generic
players.
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New Product launches
Rallis plans to introduce new products in the insecticides and herbicides segment over next few
years. As margins are higher in herbicides, new products in this segment would enhance margins.
Alliances with Global agrochemical giants:
Historically Rallis has been successful in building co-marketing alliances with MNC agrochemical
companies on account of its strong distribution network & its strength in brand building. Some of
the successful launches include Applaud (buprofezin) and Takumi (flubendiamide), both being
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sourced from Japanese company Nihon Nohyaku. We believe Rallis’s strong penetration capability,
understanding of Indian agrochemical markets backed by track record of successful alliances makes
Rallis a preferred partner for MNC’s to foray into in Indian markets.
Key Strategic Alliances
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Strong Production Infrastructure backed by robust Marketing & Distribution
Network
Rallis has effective manufacturing base with factories spread over 5 locations across the country
producing around 10000 MT of technical grade pesticide & 30000 tonnes/litres of formulations per
annum, largest capacity in the country. Rallis has a R&D centre called Rallis Research centre located
at Hyderabad. It has a network of 1,500 distributors that reach more than 40,000 retail counters.
With this strong distribution network Rallis is able to cover above 80% of India’s district. The
company has 3 regional offices, 37 area sales offices, about 20 depots & Field staff headquarters
across the country. With the help of above 200 Field staff & 1000 field assistants Rallis is able to
penetrate large proportion of the Indian markets, reach out at dealers, retailers & farmers to promote
their products, making them leading agrochemical company in terms of infrastructure & capabilities
in rural sector. Various awareness related programs / initiatives organized by Rallis for farmers also
helps it to generate a direct platform to market & sell its products. Almost 55% of its pesticide
revenues come from domestic branded business. With such a strong distribution network, Rallis will
be able to leverage its new product offerings and the ones in pipeline.
Manufacturing Facilities
Diversified product portfolio with presence in all the key agrochemical products
Rallis is an integrated agrochemical player with presence in Insecticides, Fungicides and Herbicides.
Rallis has products in all widely consumed active ingredients in the India market.
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Peer Comparison: Key Agrochemical products
Tata Chemicals (TCL) has raised its stake in Rallis in late 2009 and now holds 50.06%
in the company:
TCL increased its stake to 45.97% by acquiring 35.8% share in August 2009. In November 2009 it
acquired further 4.09% taking overall holding to 50.06%. The combined entity offers a wide variety
to its target customers (farmers) with ample opportunity for cross selling and leveraging its
distribution network. TCL has strong presence in the north & East while Rallis is strong in western
& southern India. We do not expect an immediate acquisition but option available to TCL would
give both companies synergies.
Non Core Assets: Surplus Land Bank & Investment in Advinus Theraputics
Rallis owns substantial amount of land in Mumbai & Hyderabad. It owns around 25 acres of land in
Turbhe, Navi mumbai & ~85 acres in Patancheru, Hyderabad. In past it has sold significant amount
of land & can do the same going ahead in order to unlock the value from surplus land to fund its
growth plans. Rallis holds 15% stake in Advinus Therapeutics, a Tata Group-promoted company
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that does contract research for the pharmaceuticals and agrochemicals industries. Rallis also
transferred its Knowledge Services Business to Advinus for Rs 26 crore in 2005 & all regulatory
studies required to obtain registrations are outsourced through Advinus and other institutions.
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Financial Overview
Net Sales to grow at a CAGR of 17%
The revenue for the company is expected to grow at a CAGR of 17% during FY08-FY12E backed
by robust growth from its international business on the account of commissioning of Dahej facility.
Also new launches like Ergon & Balwan are expected to boost the top line. The diversified product
as well as its expertise in contract manufacturing along with formulation exports will act as the
future revenue growth driver for Rallis.
Net Sales (Rs. Crore) & Growth – FY08-FY12E
Operating margin to double from FY08 to FY12E
We expect EBITDA margins to improve in the coming years mainly due to improvement in revenue
visibility as well as operating matrix. Also strong revenue inflow from International markets on
account of growth in contract manufacturing & exports, improved product mix & increased focus on
high margin fungicides & herbicides would add to the growth. Rallis intends to have presence in the
value segment categories either through organic or in-organic route.
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Net Sales (Rs. Crore), EBITDA & OPM
PAT to register a growth at a CAGR of 7% from FY08-12E
We expect the PAT to register a CAGR growth of 7% during FY08-12E, on a back of improved
revenue mix and gaining stability. Inspite of higher depreciation and interest we expect margins to
improve in FY12 to 13.3% on the back of improved revenue mix, tax benefit from Dahej facility.
Net Sales, PAT & Margins – FY08-FY12E (Rs. Crore)
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Valuations
Globally demand for pesticides is likely to grow at a CAGR of 3 – 4% for next few years. Inspite of
having one of the largest cultivable land, usage of agrochemicals is one of the lowest in India. Indian
agrochemical industry is poised to grow at 10% p.a. on the back of lower per capita consumption,
stagnant acreage under cultivation and yield, rising MSP for crops and increasing population. Rallis
being a well established player in the agrochemical space with its sound R&D setup, successful new
product launches, widespread distribution network, strong balance sheet makes Rallis preferred
player for MNC’s for strategic alliance. All these reasons make Rallis attractive and worth investing
at current. Considering a higher P/E multiple (compared to its historica1 year forward P/E) to Rallis
on account of its strong product profile, higher margins, successful turnaround and growth prospects.
PE 1 yr forward
1 yr forward EV/EBITDA Bands
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Key Financials
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Sabero Organics Gujrat ltd
Sabero Organics Gujarat Limited (Sabero) was established in the year 1991 to manufacture specialty
chemicals and intermediates for the crop protection business. Sabero then forward integrated in 1997
into manufacturing crop protection chemicals. In order to have a diversified portfolio, Sabero chose
one or two key products in each sector such as Acephate and Monocrotophos (Insecticides),
Glyphosate (Herbicide) and Mancozeb (Fungicide). As the company was already manufacturing
some of the intermediates for these products, it excelled in the technology for manufacturing
organophosphorus and dithiocarbamate products. Sabero Organics is into Crop Protection Chemicals
& Inputs business. It has a presence in all the three segments of the crop protection (Pesticides
market) industry – Herbicides, Fungicides, and Insecticides. Sabero is the largest producer of 2 of its
key products Mencozeb & Glyphosate, in India and second largest in world.
Segment wise Revenue-Break up Geography wise Revenue(%)
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Sales Mix Export Gaining Share(%)
Product Range
Sabero produces products in each of the main segments of agrochemicals, namely Fungicides,
Insecticides & Herbicides. The main products namely Acephate, Mancozeb, Chlorpyriphos,
Glyphosate are the largest selling generic products in their respective segments with markets in most
regions of the world. Sabero’s portfolio of products in different segments of Fungicides, Insecticides
and Herbicides have different selling seasons through out the year as also exports constitute a
majority of sales to countries in the Northern & Southern hemispheres (with opposing climatic
seasons) has ensured that the Company has fairly stable and uniform sales throughout the year to
overcome the historical seasonality of the business.
Investment Rationale
Diversified product portfolio - Sabero is an integrated agrochemical player with presence in
Fungicides, Insecticides and Herbicides. Sabero is the largest producer of 2 of its key products
Mancozeb (contributing 35% to its top line) & Glyphosate, in India and second largest in world.
Herbicides have higher margins compared to fungicides and insecticides.
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Capacity and utilization rate – Pesticides
Herbicides
Sabero has recently obtained registration of glyphosate (largest herbicide globally with a market size
of US$ 4bn.) technical in Europe. Sabero is completely backward integrated in glyphosate from
yellow phosphorous. Sabero’s focus on higher margin markets for glyphosate in Africa, Europe and
Latin America will drive the revenues going forward.
Fungicides
In the fungicide sectors, the largest fungicide sold globally is a product called Mancozeb (estimated
market size of US$ 500mn.), which in fact has been one of the key products of Sabero. While the
demand for this product has been steadily growing globally and Sabero is second largest producer
of the said product supported with more than 200 registrations world wide will definitely help to
boost its share in the sales globally and in India. Mancozeb contributes 35% to Sabero’s top line.
Sabero produces the entire range of formulations of mancozeb including granules, oil suspension,
wettable powder, suspension concentrate, bluegreen mancozeb, and has a significant share in the
banana plantation segment in Philippines and Latin/Central America.
Insecticides
In the insecticide sector, one of the largest molecules globally is Chlorpyriphos (estimated market
size of US$ 500mn.) which Sabero has been manufacturing since CY04. The demand for this
product has increased globally, as some older molecules have been discontinued / replaced with the
share of this molecule being taken up by Chlorpyriphos. Registration of chloropyriphos was obtained
in Brazil in FY09 and Sabero has received orders from Brazil in excess of half of its capacity from
Brazil alone in the current year (estimated revenue in FY10 ~Rs. 25 crore). Sabero is also a
significant player in acephate, one of the other largest selling insecticides in the world and is a
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major product in India, Brazil, USA, Argentina, Paraguay, and Japan. Sabero is registered as a
source with three multinational companies for the USA market. Other important insecticide
products for Sabero include monocrotophos and dichlorovos, Where Sabero is completely backward
integrated from yellow phosphorous, giving Sabero competitive cost position and control over
quality at every stage of manufacture.
Peer Comparison
New Product Registrations in pipeline
Sabero has 240 product registrations in 50 countries and are selling their products in these countries,
including those where importers have their own registrations. These registrations are granted by the
EPA/Dept. of Agriculture in respective countries. Depending on local requirements, registrations
may take from 3 months to 3 years and costs vary from few thousand dollars to many hundred
thousand dollars. Registrations in countries such as Brazil, Europe, Argentina, and USA take longer
and are more expensive to obtain. Sabero have obtained first registration of Chlorpyriphos in Brazil
in April’ 09 (after three years of process) and expect to obtain three more registrations of Mancozeb,
Acephate & Glyphosate in Brazil in FY10.We believe, Brazil being the second largest Agrochemical
market in the world serves a strong opportunity for company. Sabero has also obtained Glyphosate
registration in Europe in 2008. Sabero plans to introduce new products in the insecticides and
herbicides segment over next few years. As margins are higher in herbicides, new products in this
segment would enhance margins.
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Geographically diversified business
This de-risks the revenues from uncertain vagaries of nature in a particular country, ensuring
revenue visibility. Sabero has a wide spread presence in US, Latin America, Asia, Europe, South
Africa, Columbia, Germany etc. Company has 6 subsidiaries in Australia,Europe, Brazil (two),
Philippines and Argentina. The subsidiaries have been set up with the initial purpose of obtaining
registrations in the relevant countries/continents. These subsidiaries would later be the vehicle for
building a strong distribution network in the relevant regions. In Brazil, one of the JV subsidiaries
has already started local distribution using 25 local field staff and offices in Belo Horizonte and Sao
Paulo, with revenues of US$ 5 Million in FY09. In FY09, about 65% of revenue contribution was
from international markets like Latin America, Europe, Asia, US whereas 35% was from domestic
market. In FY10, we expect 70% of revenues to come from international market and rest 30% from
domestic market. If we further breakup the revenues, around 35% of Company’s business is to
Multinational Companies such as Syngenta, Dow, Bayer, Nufarm, Arysta, Makhteshim and Dupont.
Another 50% is to strong independent domestic companies and balance through dealer distribution
network.
Strong independent companies – Sabero’s clients
Capacity Expansion completed will drive the growth further
Sabero has completed capacity expansions in FY09 of its three product manufacturing facilities. If
we consider the case that at 100% capacity utilization fixed assets can deliver top line of Rs.
725crore (v/s. gross sales of Rs. 400 crore in FY09) thus gaining a scope.
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Manufacturing Capacities
Formulations- well placed to take on competition
Sabero ventured into this segment of the business about 5 years ago in order to build brands and add
further value. The company made the foray into this segment due to the intense working capital
nature of the business. The strategy focused on building brands of formulations based on its own
technicals like Mancozeb (“Emthane –45), Glyphosate (Glyweed), Acephate (Acehero),
Monocrotophos (Mophos) and Chlorpyriphos (Robust) & DDVP (Lava). Sabero has been able to
establish the brands of Mophos, Acehero & Glyweed among the top 5 brands domestically and aims
to continue building other brands in the similar way. The formulation business also includes sale of
eight other formulations that are based on technicals bought from other companies in barter with
technicals supplied by company. The company’s business plan for this segment for FY10 is Rs
75crore and could grow at more than 50% CAGR over next three years. It has also expanded its
operations to over 15 states in India and renewed focus on development work at the farmer level in
order to enhance its brands for this purpose it has got over 50 sales force in various states of the
country. This will enable the company to enhance its market share in the domestic as well as
international market.
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Concerns
Lengthy registration process – A strong entry barrier for start ups
The registration process in the agrochemicals sector spans for a period of at least 4-6 years. One of
the biggest advantages the big six companies in the agrochemicals sector and the existing generic
companies enjoy is the longer than usual and expensive registration process the new formulators or
generics in the sector have to go through.
Toxity of products may influence government to ban a product
The main reason why use of pesticides has been slow is that composition of pesticides is from
chemicals which may be hazardous for human or continuous use of it may make the land infertile for
further use. Thus, use of particular pesticide is either restricted or banned from use. This again is a
country to country subject and involves a risk that a particular pesticide may be banned by the
government at any time in future. This would lead to further investment by companies in R&D to
develop new products.
Climatic condition
Use of pesticides is typically dependant on climate in respective regions. Thus any variation in
climatic conditions could affect the use of pesticides.
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Financial Overview
Net Sales to grow at a CAGR of 46.5%
The revenue for the company is expected to grow at a CAGR of 46.5% FY08-FY11E backed by
robust growth from its international business. New registration done in Brazil, Europe and other
countries will also drive the growth. The diversified product as well as geographical mix will act as
the future revenue growth driver for the company.
Operating margin to improve by 409bps
We expect EBITDA margins to improve in the coming years mainly due to improvement in revenue
visibility as well as operating matrix. Also the improved product mix would add on to the growth.
Going forward on the back of strong revenue inflow from International markets like Brazil, Europe
and domestic markets would result in improved margins. Sabero intends to have presence in the
value segment categories either through organic or in-organic route.
Operating Profit, Operating margins & Growth – FY08-FY11E (Rs. Crore)
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PAT to register a growth at a CAGR of 113.9% from FY08-11E
It is expected the PAT to register a CAGR growth of 113.9% FY08-11E, on a back of improved
revenue mix and gaining stability. Inspite of higher depreciation and interest we expect margins to
improve in FY11 to 8.4% on the back of improved revenue mix.
Net Profit & Margins – FY08-FY11E (Rs. Crore)
Valuation
Globally demand for pesticides would continue to grow at a CAGR of 3 – 4% for next few years.
Indian agrochemical industry is poised to grow at 10% p.a. on the back of lower per capita
consumption, stagnant acreage under cultivation and yield, increasing population to demand more
food grains. Strong financial track record, good management pedigree, diversified product portfolio
and wide spread geographical presence are the reasons that make Sabero attractive in the
agrochemical space. The valuations of Sabero to improve further once new registrations from Brazil
and European countries are obtained by FY10 - FY11. Valuing the company using earnings multiple
of 8x and given discount to the industry P/E (26x) and peers because of Sabero’s size in terms of
revenue and non-presence in other segments of agri input. At CMP of Rs 62.0 Sabero is trading at
4.9x FY10E EPS of Rs. 12.5 and 3.5x FY11E EPS of Rs.17.8.
Historically, Sabero has traded in a P/E band of 1x – 5x, at a discount to its peers in the industry.
However, over the last year, with capacity expansion in place, Sabero is geared up for the
competition and is expected to get multiple re-rating. With new product registrations in pipeline
Sabero expects to achieve top line of Rs. 1,000 crore over next 3 years.
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1 yr Forward PE
1 year forward P/E
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Financials
Profit &Loss Account
Balance Sheet
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Cash Flow
Key Ratios
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Fertiliser Sector
Summary of Fertiliser Sector
Consumption of food grain is set to increase with growth in population and change in food
consumption pattern. The food grain requirement for the Indian population is estimated to be ~252
mn tonnes in FY12 and ~297 mn tonnes in FY21 from ~230 mn tonnes in FY08.The key challenge
to produce more from the limited arable land would hereafter be through higher yield for which the
main driver would be appropriate and balanced use of fertilisers.
In India the fertiliser consumption is skewed towards Urea. The ideal ratio of Nitrogen: Phosphorus:
Potash (N: P: K) is 4:2:1 for Indian soil condition. It is at 4.6:2.0:1 in FY09. Balanced use of
fertiliser leading to the ideal ratio can improve the yield hereafter. This augurs well for phosphatic
fertilisers.
Currently in India, consumption outstrips production in the phosphatic fertiliser segment. The
incremental demand is met through imports, leading to increased subsidy burden for the government.
The subsidy for phosphatic fertiliser for FY10 is estimated to be ~ Rs.350 bn.
In a step to contain subsidy burden, the government has introduced a new Nutrient Based Subsidy
(NBS) scheme effective 01 April 2010.Under this scheme, the quantity of subsidy per nutrient is
fixed. The manufacturers are allowed to fix the sale price of the fertilisers.
New policy (NBS) is a paradigm shift for the industry that used to work under fixed sale price and
varying subsidy. We believe that this new policy will benefit efficient players who can source raw
materials and operate efficiently.
Nutrient based Subsidy Salient Features
The government has come up with a new Nutrient based subsidy (NBS) effective April 2010, whose
salient features are as follows:
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It is believed that the NBS scheme, apart from government fixed subsidy burden for the year,
Companies would benefit by improved EBITDA margins and realisations.
Indian Fertiliser Overview and Current Status
Agriculture continues to be one of the most important sectors in India, contributing role in ensuring
country’s to 18% of GDP growth and providing employment to nearly 65% of the total food security
workforce, directly or indirectly. Fertilisers had played a key role in taking the country out of serious
food shortage in spite of rapid population growth.
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Area, production and yield of food grains (FY94-09)
Fertiliser consumption versus Yield of food grains (FY91-09)
With the area under food grain production being almost stagnant at 123 mn ha, the production of
food grains had grown from 184 mn tonnes in FY94 to 234 mn tonnes in FY09. During this period,
the fertiliser consumption had increased from 27.4 mn tonnes in FY94 to 50.4 mn tonnes in FY09,
indicating the vital role, it has played in improving the agricultural productivity.
Production, Consumption &Imports – Urea & Phosphatic Fertiliser
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Fertilisers are broadly classified into Nitrogenous (Urea) and Phosphatic & Potassic (P&K)
fertilisers.
• The production of nitrogenous fertilisers was almost stagnant at 20 mn tonnes between FY03 and
FY09 while the consumption grew at a CAGR of 6.3% during the same period.
• The production of phosphatic fertilisers varied between 9-12 mn tonnes per annum between FY03
and FY09 while the consumption grew at a CAGR of 6.9 % during the same period.
• Muriate of Potash (MoP) is the main potassic fertiliser used in India and it is completely imported.
• The incremental demand in the case of Urea & phosphatic fertiliser is met through imports, which
grew at a CAGR of 90% and 54%, respectively, during the period FY03-09.
Fertiliser consumption in India skewed towards Urea
In India, Urea is the most widely used fertiliser. The consumption of Urea grew from 18.5 mn
tonnes in FY03 to 26.6 mn tonnes in FY09, while the consumption of phosphatic & potassic
fertiliser grew from 12.8 mn tonnes in FY03 to 19.1 mn tonnes in FY09.
Consumption of Urea Versus Fertilisers
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The ideal/appropriate NPK ratio for improved productivity in Indian soil condition is stated to be
4:2:1. In FY92, the NPK ratio was 5.9:2.4:1. Consequent to decontrol of phosphatic and potassic
fertilisers in FY94, the NPK ratio got distorted to 9.7:2.9:1.The decontrol was subsequently
withdrawn. With government’s continuous thrust on balanced fertilisation and announcing policy
measures at appropriate intervals, the ratio has since then improved to 4.6:2.0:1 in FY09.
Food grain Production versus per capita food grain availability
Food Grain Production versus Fertiliser Consumption in India
In spite of fertiliser consumption growing at a CAGR of 4.2% between FY94-09, from 27.4 mn
tonnes in FY94 to 50.4 mn tonnes in FY09, the food grain production showed a CAGR growth of
only 1.6% during the same period, from 184.3 mn tonnes in FY94 to 234 mn tonnes in FY09.The per
capita net availability of food grains per annum which was 144 kg/capita/year in 1951 peaked to 183
kg/capita/year in 1997 and started declining. It was 159.2.4 kg/capita/year in FY08.
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Food grains for growing Population
It has been projected that the Indian population which was ~1,149 mn if FY08, would grow to nearly
1,208 mn by FY12 and to nearly 1,340 mn by FY21. The Indian Council of Agricultural Research
(ICAR) has estimated that the food grain requirement for the growing population to be ~252 mn in
FY12 and ~297 mn in FY21. The demand of food grains was 230 mn tonnes in FY08.
With the area under food production almost stagnant at 123 mn ha, the only way to increase food
production is by appropriate and effective use of fertilisers, high yield variety of seeds and usage of
pesticides. Fertiliser Association of India has estimated that the requirement of fertilisers (nutrients)
would grow from 24.9 mn tonnes inFY09 to ~29 mn tonnes by FY14.
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Current Status of Phosphatic & Potassic Fertiliser Industry
Phosphatic fertiliser capacities under utilised
It has been observed that the capacity utilisation of Urea plants in India have consistently been above
90% in the past 10 years whereas the capacity utilisation of the phosphatic industry has been ~70%
for the same period. The capacity of Urea plants for FY09 was 89.7%, while that of phosphatic
plants was only 56.7%.
Dependence on Imports for key Raw material
The raw material for Urea, which is basically a hydro carbon source like natural gas,self sufficient
on the raw naphtha, LSHS, etc, is mostly available in India while the raw materials like phosphoric
materials, while the acid, rock phosphate, ammonia and sulphur for the phosphatic industry are
mainly phosphatic segment mostly imported. Availability of the raw materials is a key impediment
for capacity utilisation.
India imports nearly 67% of its phosphoric acid requirement. For the balance indigenous
production, India imports nearly 75% of its rock phosphate requirement.In FY09, while the
indigenous phosphoric acid production was 1.2 mn tonnes, the import acid was1.6 mn tonnes. In
FY08, the consumption of indigenous rock was 1.5mn tonnes, while the consumption of imported
rock was 5.3 mn tonnes.
Government encourages Joint Ventures in resource rich countries
Approximately, 85% of the world production of phosphoric acid is for captive consumption and
only 15% is traded in the international market, which amounts to~5 mn tonnes. Of this, nearly 50%
is imported by India. Further, the phosphoric acid trade is generally by way of long-term supply
arrangements between the producers and the importers. Government, keeping this in mind has
encouraged Indian companies to participate in more joint ventures for phosphoric acid production in
phosphate rich countries by way of providing incentive through ‘outlier’ concept in FY09.We expect
those companies who have entered into such JV’s to benefit as these companies would get assured
quantity of the acid.
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With the subsidy on account of P&K fertilisers, saw an 8.8x increase between FY03 and FY09, the
government had been left with no other option except to bring out policies which will contain the
subsidy burden.
Subsidy burden forces Government to change policies
Phosphatic & Potassic fertilisers’ consumption grew at a CAGR of 8.1% from 14.7 mn tonnes in
FY03 to 23.4 mn tonnes in FY09, while the production of these fertilisers remained stagnant at
almost 10 mn tonnes. The incremental demand was met through imports, which saw a 4x growth
during the same period.
Consequent to the increase in imports, the subsidy for P&K fertilisers, which was Rs 32.3bn in
FY03 had went up to Rs 285 bn in the budget estimate for FY11. From FY09 onwards, the subsidy
for P&K fertilisers have overtaken the subsidy for Urea.
Consequent to the increase in imports, the subsidy for P&K fertilisers, which was Rs 32.3 bn in
FY03 had went up to Rs 285 bn in the budget estimate for FY11. From FY09 onwards,the subsidy
for P&K fertilisers have overtaken the subsidy for Urea.
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Imports of DAP & MOP
Di-Ammonium Phosphate (DAP) and Muriate of Potash (MoP) constitute 98% of the total P&K
imports. The DAP imports which was 0.38 mn in FY03 rose to 6.19 mn in FY09. In India, as we do
not have any indigenous production of MoP, the entire requirement is imported. The MoP import
which was 2.6 mn tonnes in FY03 went up to 5.7 mn tonnes in FY09.
With the subsidy on account of P&K fertilisers, saw an 8.8x increase between FY03 and FY09, the
government had been left with no other option except to bring out policies which will contain the
subsidy burden.
Price disparity makes phosphatic fertilisers costlier
One of the key reasons for fertiliser consumption getting skewed towards Urea is because of the fact
that it is the cheapest among all the fertiliser sold. Urea which was priced at Rs. 4830 (~US$ 93) has
been upward revised to Rs 5,310 (~US$ 114) effective April 2010 and still continues to be the
cheapest fertiliser. Government had realised that adoption of an appropriate pricing policy is a
prerequisite for ensuring balanced use of fertilisers. Accordingly government came out with the
nutrient based pricing scheme in 2008, by which the sale price (MRP) of certain complex fertilisers
were reduced from the existing price. This has considerably reduced the price disparity that was
prevailing. This move we believe will go along way in promoting balanced fertilisation.
Complex fertilisers to reduce dependence on Urea and DAP
In India, the fertiliser consumption is concentrated on urea and DAP. Together, both account for
more than 70% of the total fertiliser consumption. In FY09, of the total fertiliser consumption of
47.76 mn tonnes, urea and DAP accounted for 36.1 mn tonnes.
The international prices of Urea and DAP had risen to unprecedented levels in the FY08 and
1HFY09, the import prices of these fertilisers have put on substantial pressure on the subsidy outgo
for the government. Further making available Urea and DAP was also a concern for the government.
In order to reduce the over dependence of Urea and DAP, government had come out with a nutrient-
based pricing in 2008, where in the price of the nutrients N, P & K are common across the complex
fertilisers and the major fertilisers namely Urea, DAP and MoP. Subsequently the MRP prices of all
the complex fertilisers had been reduced.
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Raw Material for Phosphatic Fertilisers
The key raw materials for producing phosphatic fertilisers are ammonia, rock phosphate/phosphoric
acid, sulphur/sulphuric acid and Muriate of Potash (MoP). The sources of these raw materials are as
follows:
Raw materials Source
Ammonia Indigenous/Imported
Rock Phosphate Indigenous mostly for Single Super Phosphate and Imported for others
Phosphoric Acid Indigenous/Imported
Sulphur Imported
Sulphuric Acid Indigenous/Imported
Muriate of Potash Imported
Ammonia
Ammonia is mostly produced indigenously. The major raw material for production of produced
indigenously ammonia is hydro carbons like natural gas, naphtha, LNG, RLNG, fuel oil, etc. Only
those companies, who do not have captive ammonia, import them. International prices of ammonia
had been volatile in FY09 had remained stable in FY10. Going forward, with NBS in place we do
not see any violent fluctuations.
Rock Phosphate
India mainly depends on imports for the rock supply. There are rock mines at Rajasthan, which are
low grade rocks and are typically used only for production of low end phosphatic fertilisers like
Single Super Phosphate and Triple Super Phosphate. For all other phosphatic fertilisers who
manufacture captive phosphoric acid typically import rock phosphate. Rock phosphate is found
abundantly in African and most of the Indian companies have opted for Joint ventures for production
of phosphoric acid.
The international prices of rock phosphate saw a very steep increase in FY08 and the same got
corrected in FY09. The unprecedented surge in the prices of rock in global market was attributed to
the raising global demand for fertilisers coupled with rising commodity prices seen world wide
during that year.
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Phosphoric acid
Indian phosphatic industry typically imports two thirds of its total requirement of phosphoric acid. In
FY09, against the indigenous production of ~1.2 mn tonnes, India imported ~2.2 mn tonnes of
phosphoric acid. The bulk of the imports are from the African countries like Morocco, South Africa,
Tunisia and Senegal. These countries constitute ~92% of the total imports to India.
The international price of phosphoric acid was very volatile in FY09 due to surge I commodity
prices world wide. However from end FY09 onwards the prices got corrected significantly and were
stable. With NBS implementation and the quantum of subsidy fixed, we do not for see any violent
fluctuations in the international prices of phosphoric acid, going forward.
Emerging Trends:
1. Foliar fertilisers
• Foliar fertilisation is any fertilising substance applied in a liquid form.
•Currently all fertilisers are in solid form, which is applied as powder or granules to the soil in dry
form. This then has to be dissolved by mostly rain, to be made available to the plant via the roots.
• By contrast, modern foliar fertilisers are concentrated solutions using very high grade technical
elements, in which the nitrogen, phosphorus and potassium are combined to the desired ratio in a
controlled environment.It is increasingly being used along with drip irrigation.
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2. Micro nutrient coated fertilisers
Apart from the primary nutrients, crops require other micro nutrients like Boron,Calcium, Zinc etc.
for growth. These fertilisers cater to the needs of the farmers and are soil/crop specific. The
government policy announcement encouraging manufacture of nutrient coated fertilisers will
encourage companies to manufacture such products.
3. Specialty fertilisers
Specialty fertilisers are high analysis totally water soluble fertilisers. These are available in mono,
double and multi nutrient combinations. They are available in liquid and crystalline forms and can be
applied to plants through soil application (broadcasting), fertigation or foliar application to maximise
fertiliser use efficiency and crop productivity, minimise production cost and to improve quality of
crop and its produce.
These fertilisers very high margin products and the sale prices are fixed by the manufacturers. Under
the new NBS policy, fixed subsidy is given to the micro nutrients as well from the current year,
which is a positive for the manufacturers of the micro nutrients coated fertilisers. Currently most of
the fertiliser companies are importing and distributing after re packing as their own brands. These
are value-added products resulting in improvement in yields it is widely believed to have more
acceptability among the farming community for them. We expect more number of companies to
start their own production in the near future.
Key Positives for Phosphatic & Potassic Fertilisers
Nutrient-based subsidy – a boon for the industry
In the new NBS policy, the quantity of subsidy per nutrient is fixed at the beginning of is fixed and
the sale price the year and the manufacturers are allowed to fix the sale price of the fertilisers. This
can be fixed by the is a paradigm shift for the industry that used to work under fixed sale price and
varying manufacturers subsidy. Any fluctuation in the international prices of key raw materials
could be passed on to the users by increasing the sale price. Under NBS only 20% of the fertilisers
that is produced/imported will be controlled by government, allowing a sales is now controlled by
greater degree of flexibility in marketing for the companies. Further under NBS all government
variants of fertilisers with secondary and micronutrients will be eligible for subsidy,
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Variants of fertilisers with allowing the manufacturers to come out with customised fertilisers that
are crop/soil secondary & micro nutrients specific. Import of phosphatic fertilisers will now be
eligible for subsidy licence, allowing the manufacturers to import fertilisers at competitive prices,
which was hitherto channelised through government agencies.
We believe that implementation of NBS to be the first step of freeing up the industry from the
clutches of government control and would improve the profitability of the companies going forward.
The increase in consumption of fertilisers has not lead to the corresponding increase in agricultural
productivity and production. Further it has also been observed that there is also a decline in the crop
response to fertiliser usage. The government had initiated a number of steps to ensure balance
fertilisation like:
a. Implementation of Nutrient-based fertiliser subsidy.
b. Expanding soil testing infrastructure
c. Inclusion of specialty and crop specific/area specific customized fertilisers in theFertiliser
(Control) order.
d. Reducing price parity between complex fertilisers and DAP/Urea.
The above initiatives will give the much needed thrust for the usage of phosphatic fertilisers and thus
augurs well for phosphatic fertiliser manufacturers going forward.NBS to benefit efficient
manufacturers by allowing the companies to fix the sale price of the fertilisers, we believe efficient
manufacturers to get benefitted. The companies will be better equipped while negotiating their raw
material prices. Companies who have better operational efficiencies and lesser freight and
distribution costs have an edge over their competitors. Companies who enjoy a strong brand image
stand to benefit as they could now fix a premium for their products.
We believe that with the implementation of NBS, the companies would be forced to be efficient in
procurement and operation to stay ahead in the competition. Better times ahead for phosphatic
fertiliser manufacturers, available at attractive valuations Government’s restrictions over sales price,
control over movement and unfavourable raw material spread was plaguing the phosphatic fertiliser
companies in the past.
Companies return over invested capital has remained subdued and unattractive for the investments.
With introduction of new policy which is expected to encourage usage of complex fertilisers by
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farmers and better operating environment for producers, we expect companies’ profitability to
improve in the future. Complex fertiliser manufacturers expected to double the RoCE and RoE from
the levels of FY07 by FY11E.
Key Concerns
Dependence on imports for key raw materials
India is dependent on imports for key raw materials like rock phosphate, sulphur and imports for key
raw Muriate of Potash (MoP) and a considerable quantity of phosphoric acid. This has materials
like rock exposed India to the risk of price volatility in the international market. Further, as the
phosphate, Sulphur,supply of rock phosphate and phosphoric acid are predominantly controlled by
the phosphoric acid and MOP African countries like Morocco, Tunisia, Senegal, etc., the market is
highly unregulated making India vulnerable to pricing and supply constraints.
However, except for FY09, the international prices have been stable and we expect the prices to
remain stable and within a range, as the international suppliers know that under the NBS, subsidy is
fixed and in case of any violent fluctuation of prices, India would stop buying these raw materials
which would lead to drop in the prices. To mitigate the risk associated with currency fluctuations,
companies go for appropriate hedging strategies.
Government control
Government still controls Even though the phosphatic fertilisers are called as decontrolled fertilisers,
still the industry by way of government controls the industry by way of dispersing subsidy (that
contributes ~66% dispersing subsidy and of the company’s revenue) and distribution. Delay in
disbursement of subsidy and partially controlling the substituting cash with bonds affects the
profitability of the companies. movement
Fertiliser being a highly sensitive and essential input for Indian agriculture and also since the
government gives subsidy, its partial control is expected to continue for a while. Further the
government has assured that in future dispersement of subsidies would be only by way of cash. The
distribution, which was completely controlled by government, has been reduced to movement of
only 20% of the total sales.
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Dependence on monsoon
Monsoon plays a key role in In India, agricultural prospects are primarily dependent on monsoon, as
more than determining country’s 60% of the lands are rain fed. Monsoon play a key role in
determining the country’ agricultural prospects and agricultural prospects and the demand for
fertilisers moves in tandem with the monsoon impacts fertiliser sales
In spite of monsoon failure, the demand for fertilisers did not fall in FY10, as in India demand
outstrips supply. India imports ~25% of its requirement and any fall in demand will result only in
lesser imports, as witnessed in FY10. Further government’s initiatives for improving irrigation
facilities through various schemes mitigate the risk to a larger extent going forward.
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Indian Monsoons & Fertilizer Sector:
Indian Meteorological Department (IMD) has already come out with its prediction about the
monsoon and they have expected that the monsoon, a key determinant of the country's farm output,
economic growth and inflation, is going to be 98% of the long term average this year across the
country; significantly higher compared to last year's 77 per cent LPA (Long period Average). The
probability of a normal monsoon is high because only thrice in the past century there has been two
consecutive drought years. Rainfall since June 1’ 2010, start of the four -month season, was 6%
below normal because of the cyclone in the first few days of the month. However, June typically
accounts for 18% of the rainfall and recovery in July & August is important as they account for 33%
& 29% of rainfall distribution respectively.
A good monsoon is essential for crops such as rice, sugar cane, soybeans, sugar, corn, groundnut,
pulses and cotton. In 2009, the output of Kharif crop declined by 12% on the back of poor monsoons
which in turn led to high food inflation of ~18%. Kharif crops contribute to over 50% of the
country’s farm production. The south west monsoon is important for India as about 60% of the
country's farmlands are rain-fed. Month of July being the crucial sowing month, thus distribution of
rainfall is of importance for the farmers & the fertilizer companies as the fertilizer consumption is
dependent on it.
Pre-monsoon being the time for peak sales for Fertilizer companies, these stocks come under vogue
during this period as greater the monsoon, higher is the demand for fertilizer & better is the payment
cycle. Thus, we believe probability of normal monsoon this year is really a positive indicator for the
whole fertilizer sector as there is a direct co-relation between monsoon & fertilizer sector. Also
better monsoon will have positive impact on the fertilizer industry in the next year as well, because
of some lag effect i.e higher the rainfall, more the fertilizer consumption leading to better output &
better realization for the farmers. Consequently increase in farmer income which would induce them
to spend more on fertilizer & agri-inputs thus improving the sales in coming quarters.
We have analyzed monsoons & 6 fertilizer stocks over a period of FY06 – FY10. This indicates that
the year in which monsoons are good Q2 performance for the fertilizer stocks is the best and we see
a positive impact on the stock prices. Assuming the monsoons to be
normal this year our top picks remain Tata Chemicals, GSFC & GNFC.
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Financial Snapshot:
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Quarterly Sales Performance Trend (06-10)
Q2 & Q3 have been the best quarter for the fertilizer companies indicating a strong co-relation
between fertilizer sales & Monsoon distribution
Monsoon Versus Urea Consumption
Based on Historical trend of Average rainfall distribution & Urea consumption in the country we can
see a strong co-relation between the two. Urea consumption was highest in 2007-08 when the
average rainfall was 105% of the LPA leading to a better realization for farmers. Consequently, we
see higher consumption in 2008 too as farmers invested more in fertilizer. However, due to poor
rainfall in 2008 & 2009 we see the urea consumption declining significantly. With the good
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monsoon expected this year we believe urea consumption to increase thus benefiting urea
manufacturing companies like GNFC & GSFC.
Average Rainfall Break-up by the month Fertiliser Stock Performance Q2
Top Picks:
Tata Chemicals – Business Model
At CMP of Rs. 309, Tata Chemicals is trading at 9.4x FY11E EPS of Rs. 33.0
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GNFC
At CMP of Rs. 106, GNFC is trading at 13.3x its TTM EPS of Rs.
GSFC
At CMP of Rs. 238, GSFC is trading at 7.5x TTM EPS of Rs. 31.9
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Conclusion:
Monsoon distribution has been a key factor in determining the fertilizer consumption, in turn
impacting the profitability of the fertilizer companies. Looking at historical sales trends Tata
chemicals, GSFC & GNFC have always registered robust top line growth whenever the rainfall
distribution has been in the normal & above normal range. In our view, based on the business model,
historical performance & higher probability of normal monsoon we expect Tata chemicals, GNFC &
GSFC to register strong volume growth & generate higher returns in the coming quarter.
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Chambal Fertilisers & Chemicals
Key Business Concerns
Shipping concerns revives
Shipping rates are back to square one from US$20,000/day in January to US$8,000/day and given
the pain in interest rate swap in Shipping expected next year, interest cost will increase. Further,
reported adjusted profits in Q4 were also below expectations. We reduce FY11E EBIT estimate from
domestic Shipping business to Rs520mn from Rs706mn. Further, the fact that overseas shipping
subsidiary reported a loss of Rs30mn (expectations of Rs10mn profits on base of Rs262mn profits in
FY09) was a negative.
No more tailwinds from buoyant urea prices
International urea prices melted significantly recently to US$250/te from +US$300/te. This is in line
with our view that urea prices are likely to be range-bound given supply glut and pressure from cost
side globally. The decrease in international urea price will not affect our earning estimates as we
have built in the floor level prescribed in the Urea policy. However, urea price at +US$300/te was a
significant tailwind for the stock given that it gains if international urea price rises above US$295/te.
Subsidiaries/JVs disappoint on performance
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Performance of Software subsidiaries and comment in annual report
Shipping spot rate – Back to square one
International urea prices subdued
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Segment wise result analysis
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Q4FY10 Results Review
Chambal –BaseEPS lowered to Rs6.6 from Rs 7.5
Chambal PE bands
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Profit & Loss Statement
Cash Flow Statement
Balance sheet Key Ratio
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Bibliography
Agrochemical Sector Reports of Alchemy
Company Annual Report
www.crisil research.com
www.site.securities.com
Kr Choksey Reports
Fertecon/FMB
Phillips McDougall
Data & Reports from Bloomberg
FAO statistics
Nufarm Presentation
Fertiliser Association of India
Department of Agriculture and Cooperation
Department of Fertilisers
India Stats
Bayer crop Industry
Syngenta Industry data
Indian Council of agriculture & Research
Research on Fertiliser Sector-B&K
Financial Management – Khan & Jain
Valuation by Damodaran
