Agrochemical Sector IC Feb'14 Eisec

Institutional ResearchFebruary 4, 2014

Agrochemical Sector ReportInitiating Coverage - Rallis India Ltd, UPL Ltd & Bayer CropScience Ltd

1Sageraj Bariya [email protected] 022-61925337

Agrochemical Sector Report

Tag Line



2

Contents

Executive Summary ....................................................................................................................................................... 3

Are generic players gaining share or are innovators exiting? ............................................................................................. 10

Slowing rate of new molecule introduction ........................................................................................................................ 10

Changing Business Model - Focus shifting from Agrochemical to Seed ................................................................................ 11

Is cost of inventing seed lower than agrochemicals? ............................................................................................................ 12

Future Outlook ........................................................................................................................... 13

Key Challenges ........................................................................................................................... 13

Companies Covered

Rallis India Ltd ........................................................................ 17-30

UPL Ltd ............................................................. 31-42

Bayer CropScience Ltd ................................................ 43-50



3

Executive SummaryThe Indian Agrochemical Industry is estimated to be worth US $3.8 bn (~Rs210 bn) at the end of CY2012. India accounts for 3.8% of global agrochemicalindustry. Even though Global agrochemical market grew by 6.5% in 2012, Indianagrochemical industry is estimated to have recorded lower growth in 2012-13.On a country level, the rainfall during the season (June-September-2013) camein at 106 % of long term average. There has been loss of sale on account floodsand cyclone. But, these are near time concerns. We believe there is immensepotential for incumbent dominant players on account of 1) low penetrationlevel of agrochemicals 2) low market share of organized player 3) fragmentationof organized market 4) low cost manufacturing destination and 5) Globalagrochemical majors looking at diversifying sourcing requirement.

Low penetration level of agrochemicals - India's consumption of agrochemicalis one of the lowest in the world, standing at 0.6kg per hectare. This comparesvery poorly with other countries that have less arable land under coverage. Forinstance, countries like Taiwan, Japan and Korea have higher consumption thanIndia. We believe this again highlights the under usage of agrochemicals byIndian farmers and unexploited opportunity at bay for the agrochemicalcompanies.

Unorganized still dominate market - Indian agrochemical market compared toglobal is highly fragmented and generic in nature. Over 80% of market isdominated by non-patented molecules and Top-4 players' control roughly 27%of total market while 50% of market is served by unorganized players. That iswhere, we believe that major players are in a position to gain higher marketshare as well as charge a premium for its products.

Contract Manufacturing huge opportunity - Global agrochemical companieshave been reducing manufacturing capacity of low value products toconcentrate on higher-value products. Conversely, they are maintaining theirstrong hold on off-patent Active Ingredients (AI) through outsourcing the same.For example, Germany's BASF has cut its range of AI from 300 in 2001 to 130 in2006. Syngenta has also reduced its portfolio from 120 to 80. Bayer CropSciencereduced its portfolio by 29 actives between 2000 and 2006. This in turn is drivenby 2 major events (1) Japanese companies on account of natural calamities arelooking at de-risking their manufacturing base (2) US & EU agrochemicals major

Agrochemical Sector ReportDomestic market on strong footing, Seed holds future

have been outsourcing from china to the extent of 80-95% of their requirementand are looking for geographic diversification.

Global Industry shifting to seed - Globally there has been shift in businessmodel, from Agrochemicals to Seed. Given agrochemicals are last componentthat goes into farmer's investment chain, it faces lot of uncertainty. Anotheradvantage seed offers is considerable pricing power to company. Performanceof saved seed is substantially lower compared to original. Farmers have to buynew seed for every season from company, in turn giving pricing power tocompany.

Seed the next growth frontier - Total Global Seed sales post CAGR of 8.8% andsubset GM/Hybrid seeds posted CAGR of 19.6%. India Seed industry isestimated to be worth Rs 80 bn-100 bn (US $ 2 bn) and is 6th largest in theworld. Indian seed industry is growing at 12-13% p.a. and the commercial seedsegment accounts for a mere 25% of the total market. SRR is the percentage ofarea sown out of total area of crop planted in the season by using certified/quality seeds/cultivars other than the farm saved seed. On country level SRRstands at 25.9%, indicating huge opportunity for organized industry.

Patent expiry of molecules - Agrochemicals are protected by patents toencourage innovation akin to the Pharmaceutical industry. Going ahead,molecules worth US$ 5.2 bn are likely to go off patent throwing the marketopen for generic players.

Key ChallengesLack of innovation due to high cost - As per study on average to develop newmolecule it costs 10-years and Rs 10 bn. Indian companies are yet to focus oninnovation due to high R&D cost.

Dominance by unorganized player & risk of fake products - Indian agrochemicalindustry is almost 50% controlled by unorganized industry.

Biotech seeds threat to agrochemicals - Scientific research has come up withseeds that have self-immunity towards natural adversaries. This can be apotential threat to the business of agrochemicals.



4

The BasicsAgrochemicals are used to improve crop performance, yield or control pests,etc. As per Rallis India annual report, value of crop losses caused due to non-usage of pesticides was around Rs 1 trillion, accounting for approximately 1%of India's GDP (FY2012). Agrochemicals are the last input in any agriculturaloperation that protects all the other inputs as significant investment are alreadycommitted by then. It is estimated that India food grain production can beincreased by 33% to Rs 4 trillion by use of Agrochemicals.

Investment chain of farmer

Source: Eisec Research, Industry

Losses caused by different pests -FY12

Weeds, 33%

Insects, 26%

Diseases,

26%

Rodents &

Others,

15%


Size & Scale - Global & India

Global Agrochemical industry has grown at an average rate of 6.2% over CY2002-12 to US$ 53.7 bn. For CY2012, the industry registered a growth of 6.9% yoycompared to 13.8% growth witnessed in 2011. Global agrochemical sales areexpected to register a CAGR of 6.7% over 2012-18 to US $ 80 bn.

Year Crop Protection (US $ mn)

2002 29,420

2003 31,155

2004 35,400

2005 36,095

2006 35,575

2007 38,755

2008 46,130

2009 43,720

2010 44,195

2011 50,3052012 53,732


29

54

80

-

25

50

75

100

2002 2012 2018E

(US

bn

)

6.2%

6.7%


Land

Seed

Labour

Fertiliser

Agrochemicals



5

On the other hand, the Indian Agrochemical Industry is estimated to be worthUS $3.8 bn (~Rs 210 bn) at the end of CY2012. India accounts for 3.8% of globalagrochem industry. Even thought Global agrochemical market grew by 6.5% in2012, Indian agrochemical industry is estimated to have recorded low growthin 2012-13. Low growth was on account of 1) Delayed season in western, centraland south central part of India leading to delay in sowing of key crops (likecotton and paddy) across impacted region. 2) Harvesting of rice in AP wasimpacted by Neelam Cyclone. 3) Rabi season witnessed low pest and diseaseoccurrence in key crops, especially paddy and pulses. 4) Area under cultivationof key crops like cotton, paddy and coarse cereals was lower than last yearleading to drop in demand for agrochemicals.

Key Markets and Consumption

North America and EU have been early promoters and adopters of agrochemical;hence they dominate overall market of global agrochemical sales with share of23% and 29% respectively. Asian region is 2nd biggest with a share of 25%,followed by Lat-Am with 19% and Rest of the World having 4% share.

Developed markets like US & EU are almost matured ones and hence futuregrowth is likely to be very low and stable. Also we believe there has beenunderlying shift towards GM/Hybrid seed by market in those markets (discussedahead in more detail).

N.America

23%

EU

29%

Asia

25%

Lat-Am

19%

RoW

4%

Global Pesticides consumption (Kg/ha)

17

1312

7 7

5 5

0.6

0

5

10

15

20

Taiwan China Japan USA Korea France UK India

(Kg

/h

a)


Global Agrochem sales by region



6

India's consumption of agrochemical is one of the lowest in the world, standingat 0.6kg per hectare. This compares very poorly with other countries that haveless arable land under coverage. For instance, countries like Taiwan, Japan andKorea have higher consumption than India. We believe this again highlightsthe under usage of agrochemicals by Indian farmers and unexploitedopportunity at bay for the agrochemical companies. India accounts for 16% ofthe world's total food grain production and uses only around 2% ofagrochemicals. Low consumption can be attributed to: a) fragmented landholdings- low purchasing power, b) high dependence on monsoons and lowlevel of irrigation, c) low awareness among farmers about the benefits of usingpesticides and d) lower accessibility of products.

In India, Andhra Pradesh (AP) is the largest consumer of pesticides, with a totalshare of around 24%. Top-3 states (AP, Maharashtra and Punjab) consume48% (49% in 2001) of country's total agrochemical consumption in 2012. WhileTop-8 states consumed 77% of total agrochemical sold in India in 2012 comparedto 81% in 2001. If one compares the consumption pattern of CY2001 withCY2012, contribution from other states (Non Top-8) has increased from 17% to23%, indicating increasing penetration in other states.

State-wise Share of Pesticides Consumption trend

0%

7%

14%

21%

28%

AP PJB MS GUJ KNTK HRY W.Ben TN Others

2001 2006 2012


Pesticides Classification and Market share - Global and India

Agrochemicals are classified as Insecticides, Herbicides and Fungicides.Individual sales of various categories however depend on climatic conditionsand crop.

Globally herbicides dominate (44%) the consumption, while in India it standsat 16%. Insecticides dominate Indian market with share of 65%, against globalaverage of 22%. This dichotomy is on account of climatic conditions, henceinsecticides are more prevalent in Asian countries.

Increased usage of GM/Hybrid seeds by North America has also led to reductionin consumption of insecticides.

Global v/s India Share of Pesticides Consumption - 2012

Herbicides,

44%

Fungicides,

27%

Insecticides,

22%

Others,

7%

Global

Herbicides,

16%

Fungicides,

15%

Insecticides,

65%

Others,

4%

India




7

Product category Top molecule - Global

Herbicides Glyphosate, Triazines, Sulphonyl urea

Insecticides Pyrethroids,Organophosphates,Neonicotenoids

Fungicides Triazoles, Strobillurin, DithiocarbamatesSource: Eisec Research, Industry

Product category Top molecule - India

Insecticides Acephate, Monocrotophos, Cypermethrin

Fungicides Mancozeb, Copper Oxychloride, Ziram

Herbicides Glyphosate, Isoproturan,

Bio-pesticides SpinosynsOthers Zinc Phosphide, Aluminium Phosphide


Largest selling molecule category wise - Global

Largest selling molecule category wise - India

India's changing Pesticides consumption pattern

India has predominately been an insecticides market due to its tropical climateand availability of cheap labour (replacement for herbicides). However, over aperiod of time, there has been a minor, but certain shift in demand towardsfungicides and herbicides.

Indias Changing Pesticides Consumption Pattern

16% 18% 16%12%

15% 15%

72%67% 65%

4%

0%

20%

40%

60%

80%

2002 2007 2012

Herbicides Fungicides Insecticides Others




8

Key consuming crops

Globally, fruits & vegetables and cereals are the largest consumer ofagrochemicals. In case of India Cotton and Paddy consumes highest with 50%and 18% share respectively.

Key consuming crops

Fruits &

Vegetables

26%

Cereals

18%

Maize

13%Cotton

6%

Rice

9%

Others

18%

Soyabean

10%

Global

Cotton

50%

Rice

18%

Fruits &

Vegetables

14%

Plantation

crops

8%

Cereals

7%

Sugarcane

2%Others

1%

India

There is dichotomy when one compares particular crops area undercultivation and share of total pesticides consumption. Like cottoncovers 5% of total area under cultivation, however it consumes 50%of total pesticides sold in country. Similarly cereals and oilseeds cover58% of total area under cultivation, but consume only 7% of totalpesticides. This again highlights gross under penetration ofagrochemicals in Indian market.


Crop % of total area under % of total agrochem cultivation consumption

Cotton 5% 50%

Rice 24% 18%

Fruits & Vegetables 3% 14%

Plantation crops 2% 8%

cereals, millets and oilseeds 58% 7%

Market Structure, Competition and Players

Globally agrochemical market is fairly consolidated and few large players controlthe market. Top-6 Innovator players (Syngenta, Bayer, BASF, Dow, Monsantoand DuPont) control 67% of total agrochemical market. If one were to includetop-4 generic players too, market share would amount to 86%.



-

3,000

6,000

9,000

12,000

Sales of Total 6 Cos-

US$ 36bn

Sales of generic Top-4 Cos -

US$ 10bn

Total market - US$

54bn

Syn

gen

ta

Bay

er

BA

SF

Do

w

Mo

nsa

nto

Du

Po

nt

Sum

ito

mo

MA

I

Nu

farm UP

L

Oth

ers

(US

$m

n)



9

Indian agrochemical market compared to global is highly fragmented andgeneric in nature. Over 80% of market is dominated by non-patented moleculesand Top-4 players' control roughly 27% of total market while 50% of market isserved by unorganized players.

Indian agrochem market

Unorganized

50%

Top-4

27%

Other Players

23%


According to Pesticide Monitoring Unit of GoI, there are about 125 technicalgrade manufacturers, more than 800 formulators and over 145,000 distributorsin India in FY12.


In order to counter competition from generic and unorganized sector, topcompanies have opted for strategy of (1) Larger product catalogue/offering ofagrochemical (2) Diversify into agri related business - seed & seed treatment,plant growth nutrient, agriculture equipment and other agri related services.


Company Insecticides Herbicides Fungicides Others

BASF India Seed treatment

Bayer Crop science Ltd Seed treatment, plant growth regulators

Dhanuka Agritech Limited PGRs, Surfactants

Dow AgroSciences India Pvt. Ltd. Plant Growth Regulator

DuPont Growth Enhancer

Excel Crop Care Limited Seed treatment, Home & Garden

Gharda Chemicals Ltd. Plant growth Regulator

Meghmani Organics Limited Pesticide Intermediates

Monsanto India Ltd. Seeds

Nagarjuna Agrichem Limited Fertilizers, Micro Nutrients, Liquid Fertilizers,

PI Industries Ltd Speciality Products

Rallis India Rodenticides, Seed treatment, Agri services

Syngenta India Seed treatment

United Phosphorous Limited Fumigants, Rodenticides



10

TrendAre generic players gaining share or are innovators exiting? - Share of generichas been increasing continuously over last decade. Share of generics haveincreased from 36% in 2004 to 40% in 2006 to 52% in 2011. This begs questionwhether generic companies are gaining upper hand and managing to increasetheir market share or Top-6 Innovators players are exiting the agrochemicalbusiness.

Declining Marketshare of Innovators

31% 28% 23%

33%32%

25%

36% 40%52%

0%

25%

50%

75%

100%

2004 2006 2011

Proprietary Proprietary off patent Generic


Slowing rate of new molecule introductionThere has been visible drop in rate of introduction of new agrochemical / cropprotection molecule over past 2 decade. Given low consumption rate indeveloping countries, it offers strong growth opportunities. Given ~50% ofmarket is growing at reasonable pace, Agrochemical companies ought to spendmore on agrochemical R&D. However that doesn't seem to be the case, asvisible from declining rate of introduction of new molecule.

0

20

40

60

80

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


New Active Ingredient Introductions

Agrochemical Active Ingredients in Development

0

6

12

18

24

19

51

19

53

19

55

19

57

19

59

19

61

19

63

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11



11

Changing Business Model - Focus shifting from Agrochemical to SeedIncreasing market share of generic and slowing rate of new moleculeintroduction point to distinct shift in strategy followed by Top-6 Innovatorcompanies. This is visible in changing business model, wherein R&D spend onSeed has grown at higher rate compared to Agrochemical.

R&D Expenditure Historical development

On aggregate basis, global industry R&D spends on Seed has surpassed that ofagrochemicals.

There has been marked increase in cost of innovation and bringing new moleculeto market over period. A single new molecule required spent of US$ 152 mn in1995 that grew by 21.1% to US$ 184 mn in 2000 and 39.1% from there to US$256 mn in 2008 (CAGR - 4.1% from 1995)

Cost of Bringing a New Product to Market

152

184

256

0

70

140

210

280

1995 2000 2008

(US

$m

n)


R&D Expenditure of Leading Agrochemical Companies



0

900

1800

2700

3600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Agrochemical R&D Seed and Trait R&D

(US

$m

n)

0

150

300

450

600

Monsanto DuPont Syngenta BASF Dow Bayer

Agrochemicals Seed and Traits

R&

De

xpe

nd

itu

reU

S$

mn

2001

0

400

800

1200

1600

Monsanto DuPont Syngenta BASF Dow Bayer

Agrochemicals Seed and Traits

R&

De

xpe

nd

itu

reU

S$

mn

2011



12

Is cost of inventing seed lower than agrochemicals?

If one were to believe there has been change in business models of Top-6innovator players from agrochemical to seed, one needs to understandeconomics of inventing better seed. Studies show cost of inventing new planttraits/seed are lower than agrochemical.

Cost of Bringing a New Product to Market


As per industry, cost of inventing new plant trait/seed is in region of US$ 136mn,while that for agrochemical is US$ 256 mn. However, if one were to look ataverage time needed for new product introduction, it stands at 10 years foragrochemical and 13 years for seed. This raises another question, if old adageof "Time is Money" holds true, then why would company invest in seedcompared to agrochemical.

Time from New Product Inception to First Introduction



256

136

0

70

140

210

280

Agrochemical Plant trait

(US

$m

n)

Land

Seed

Labour

Fertiliser

Agrochemicals

Investment chain of farmer

0

4

8

12

16

1995 2000 2005 -08 2011

Agrochemical Seed

Yea

r



13

Future OutlookLow penetration of pesticides: Estimated size of the Indian economy is US $ 2trn of which Agriculture accounts for 18%. The Agrochemical industry's size isestimated US $3.8bn (~Rs210 bn), evenly split between organized andunorganized at the end of CY2012. Organized industry represents 0.1% of thecountry's total GDP and 0.5% of Agriculture GDP. India's pesticide consumptionstands at abysmally low rate of 0.60kg/ha as compared to the global averageof 3 kg/ha. We believe this demonstrate the gross under penetration ofagrochemical and the opportunity that is available to the companies in theSector.

Contract Manufacturing: Most of manufacturers have been moving todeveloping economies as labour cost is cheap in those economies. Hence, webelieve Indian Agrochemical Company with excess manufacturing capacitywould have strong advantage in securing contract manufacturing assignment.Typical contract manufacturing assignments are long term in nature with fixedmargin. Hence although fixed margin limits overall profitability of company,certainty of cash flow is very high.

Diversification of manufacturing base: China has come to be known as factoryof the world and this fact remains the same for agrochemicals. However, todiversify risks arising out of single location manufacturing base, many MNCshave been looking at other countries. Here, the Indian agrochemicalmanufacturers can position themselves as suitable alternatives to their Chinesecounterparts.

Patent expiry of molecules: Agrochemicals are protected by patents toencourage innovation akin to the Pharmaceutical industry. Going ahead, manymolecules are likely to go off patent throwing the market open for genericplayers. As per Nufarm , total likely available opportunity through patent expirybetween 2011-16 stands at US$ 5.2 bn (2010 sales value).

Key ChallengesLack of innovation due to high cost: As per study on average to develop newmolecule it cost 10-years and Rs 10 bn. Indian companies are yet to focus oninnovation due to high R&D cost.

Dominance by unorganized player & risk of Fake products: Indian agrochemicalindustry is almost 50% controlled by unorganized industry. Many of them sellfake products and thus giving bad name to overall agrochemical industry. Thiscreates biggest hurdle for organized player to sell idea of agrochemical tofarmers.

Biotech seeds threat to agrochemicals: Scientific research has come up withseeds that have self-immunity towards natural adversaries. This can be apotential threat to the business of agrochemicals. Best example of such anintroduction in the Indian market is "Bt Cotton", which resulted in a decline inthe consumption of agrochemicals by cotton crop. However, Bt Cotton has beenunable to develop immunity towards new type of pests and hence it stilldominates 50% of total agrochemical consumption of country.



14

Seed the next growth frontierGlobal

Total Global agrochemical sales posted CAGR of 6.1% over 2002-11, while duringsame period, Total Seed sales post CAGR of 8.8% and subset GM seeds postedCAGR of 19.6%.


NAFTA comprising of US, Canada and Mexico has seen drop in value ofagrochemical sales over 2005-11. Given US has been the early proponent andadaptor of GM seed, there has been shift from usage of chemical.

US$ mn 2005 2006 2007 2011 CAGR (2005-11)

NAFTA 9,300 9,100 9,200 8,412 -1.70%

Lat-America 5,200 5,000 5,900 10,060 11.60%

Europe 9,350 9,500 11,000 12,196 4.50%

Asia 9,300 9,100 9,300 11,607 3.80%

RoW 1,750 1,800 1,850 1,740 -0.10%


Global Seed Industry

12

6

2 2 21 1

1 1 1

8

-

4

7

11

14

USA

Ch

ina

Fra

nce

Bra

zil

Ind

ia

Jap

an

Ge

rma

ny

Ita

ly

Arg

en

tin

a

Ca

na

da

Oth

ers

(US

$b

n)


Year\ US$ mn Crop Agrochem Non-Crop Agrochem Total Agrochem GM seeds Conventional Seed Total Seeds

2002 25,150 4,270 29,420 3,140 13,060 16,200

2003 26,710 4,445 31,155 3,709 13,521 17,230

2004 30,725 4,675 35,400 4,476 14,524 19,000

2005 31,190 4,905 36,095 5,095 14,657 19,752

2006 30,425 5,150 35,575 5,855 14,485 20,340

2007 33,390 5,365 38,755 7,068 14,648 21,716

2008 40,475 5,655 46,130 9,150 16,870 26,020

2009 37,860 5,860 43,720 10,570 17,185 27,755

2010 38,315 5,880 44,195 12,870 17,950 30,820

2011 44,015 6,290 50,305 15,685 18,810 34,495

CAGR (02-11) 6.40% 4.40% 6.10% 19.60% 4.10% 8.80%



15

India

India Seed industry is estimated to be worth Rs 8,000-10,000 cr (US $ 2 bn)and is 6th largest in the world. Indian seed industry is growing at 12-13% p.a.and the commercial seed segment accounts for a mere 25% of the total market.Hence, the growth opportunity for commercial seeds is substantial going ahead.As per one study wheat, groundnut, soybean and chickpea (high-volume low-value seeds) 80% of the cropping area is sown with farm-saved seeds that areold and obsolete varieties. Another study has concluded that more over 70%of seed used in India are through the farm-saved seed. In earlier days, Indiaseed industry was driven by PSU enterprise and has share of 60%. Howeverover the years positive government policies has attracted investments by privateplayers and share of Private sector share has increased from to 80% in 2010.

India's seed industry lacked any player as such till 1960, government establishedNational Seeds Corporation (NSC) in 1963. NSC was key participate behindsuccessful green revolution that started in 1968. High Yield Varieties of rice,wheat, jowar, maize, cotton, sunflower and few vegetables were growth driver.Till 1987, NSC remained dominate player and sector grew at CAGR of 8-10% tobe at Rs 6000 mn. Government liberalized the sector in 1988 by introducingNational Policy on Seed Development (NPSD). NPSD allowed import of seed ,entry of MNC players and Indian players established their own R&Dinfrastructure. Number of companies operating in sector went up to 350-400and size grew to be Rs 20 bn by 2000 and Rs 25 bn by 2002, a CAGR of 10%.

Launch of Bt Cotton is considered to be key turning point for India AgricultureIndustry. Bt cotton increased role of private company, introduced concept oftechnology to Indian market. Area under cultivation for cotton increased from7.6 million hectars (mn ha) in 2002 to 12 mn ha in 2011. Demand for Bt CottonSeed in value term increased from Rs 3750 mn (2002) to Rs 32,000 mn (2011),an increase of 8.5x over 10 years.

From above table its clearly visible growth in seed was best during period of2002-11, during period industry registered CAGR of 14.9%, compared to 5.1%(1991-2002) and 6.1% (1983-88). This growth was primarily driven byinnovation, increased participation from private and MNC players (driven bystrengthening of IPR norms).

One of the biggest opportunity seed industry has is Seed Replacement Rate(SRR), SRR is the percentage of area sown out of total area of crop planted inthe season by using certified/quality seeds/cultivars other than the farm savedseed. On country level SRR has improved from around 18.3% in 2001 to 25.9%in 2008, an increase of 760bps over years. However, SRR at 25.9% indicatedthat farmer still avoids buying new seed up to great extend

Crop-wise growth in distribution of seeds (%)

Period Cereals Pulses Oilseeds Fibres Other Total

1983-88 9.9 16.1 (0.2) (2.3) (1.8) 6.1

1991-2002 6.8 2.6 2.2 4.7 (0.1) 5.1

2002-2011 14.5 16.4 17.4 (0.9) 15.4 14.9

Overall CAGR 7.8 8.7 8.5 2.2 0.1 7.0




16

Crop 2001 2002 2003 2004 2005 2006 2007 2008 Average

Wheat 13.0 13.0 13.0 16.5 17.6 21.8 25.2 26.8 18.4

Paddy 19.2 19.3 19.2 16.3 21.3 22.4 25.9 30.1 21.7

Maize 21.0 21.4 24.4 31.5 35.4 43.8 44.2 48.5 33.8

Jowar 18.4 18.8 26.7 19.3 19.0 19.4 19.9 26.2 21.0

Bajra 45.9 48.5 51.0 44.9 55.4 55.1 48.5 62.9 51.5

Chickpea 4.2 4.2 7.1 9.9 9.4 9.0 11.9 14.4 8.8

Urdbean 16.6 17.1 20.5 17.2 15.7 13.7 23.9 26.3 18.9

Arhar 8.7 8.8 13.6 9.8 10.5 11.6 16.1 16.0 11.9

Peanut 5.2 5.5 11.0 7.1 6.9 9.8 14.3 17.0 9.6

RSM 38.4 44.6 67.0 58.5 55.4 60.7 58.6 52.7 54.5

Soybean 12.4 12.5 15.6 27.0 28.9 28.4 33.4 35.1 24.2

Sunflower 13.7 15.7 19.6 60.2 67.7 66.9 62.9 43.6 43.8

Cotton 21.2 21.9 19.8 20.7 21.8 19.8 15.3 12.1 19.1

All India seed replacement rate (%) of major crops


Hence, even if SRR is increased from currently level of 25.9% to 50%, size ofdomestic industry would double (US$ 5 bn). We believe private sector wouldplay biggest role in increasing SRR as historic performance shows increasingcontribution of private sector.

Number of hybrids in major field crops developed by private and public sectorin India


Allowing private player entry into seed industry was one of the key turningpoint of the industry. Entry of private player led to strong growth and expansionof domestic seed industry. Private players have been to do it on back of theirability to bring new products to market, unlike PSU that are limited by resources.

Pvt PSU Pvt PSU Pvt PSU

Cotton 150.0 15.0 43.0 10.0 193.0 25.0 88.5

Maize 67.0 3.0 36.0 25.0 103.0 28.0 78.6

Paddy 12.0 4.0 11.0 15.0 23.0 19.0 54.8

Pearl 60.0 6.0 22.0 7.0 82.0 13.0 86.3

Sorghum 41.0 5.0 12.0 8.0 53.0 13.0 80.3

Pigeon pea 1.0 2.0 1.0 2.0 33.3

Sunflower 35.0 6.0 13.0 10.0 48.0 16.0 75.0

Jute 23.0 - 23.0 -

Mesta 11.0 - 11.0 -

Castor 4.0 9.0 4.0 9.0 30.8

Mustard 11.0 1.0 11.0 1.0 91.7

Safflower 2.0 - 2.0 -

2003 to 2010 Total Share of Pvt(%)

Crop2001-02



17

Established in 1815, as Rallis Brothers, Rallis India came under Tata fold in 1962. The company is one of the oldest andsecond largest pesticide agrochemical company in the country. With agrochemical exports getting boost after setting up ofDahej Plant in 2010, overall revenue mix between domestic (~70%) & international business (~30%) is likely to remainsame going ahead. Post acquisition of Metahelix, non-agrochemical revenue has seen continuous increase in contributionto overall revenue pie, from zero in FY09 to 11% in FY13. It is likely to see further increase of 300bps to 14% by FY15.

Investment Rationale Best place to take advantage of domestic opportunity - India's consumption of agrochemical is one of the lowest in

the world, standing at 0.6kg per hectare. We believe that Rallis is well-placed to seize this opportunity on the back ofits strong business model that revolves around - distribution network, strong brands and robust new product pipeline.

Contract Manufacturing - opportunity abundant - Total global sales of agrochemicals were estimated to be worth US$54bn in CY2012. Exports on average have been contributing 1/3rd of total revenue for the past several years. RallisDahej plant will help the company grow its export business. We expect export to post CAGR of 17% over FY13-15.

Seed - The next growth frontier - India Seed industry is estimated to be worth Rs 80 bn-100 bn and is growing at 12-13% p.a. and the commercial seed segment accounts for a mere 25% of the total market. 80% of the cropping area issown with farm-saved seeds that are old and obsolete varieties. Sighting seed to be next growth driver, Rallis acquiredseed Research & Marketing company Metahelix. Management had guided for Rs 10 bn revenue, on accumulativebasis by the end of FY2015,CAGR of 66%, however we are building in CAGR of 37% (FY13-15) in our estimate.

We believe at current price stock is trading at attractive valuation and hence recommend Accumulate with target price ofRs 189 (20x FY15E EPS).

Risks to our call: Seed business continues to make losses - Rallis's seed business is currently loss making, as it is under investment

phase. Although we are not building in any profit from segment, but continuation of loss would affect negatively. Weather: Agrochemicals are the last input in any agricultural operation and protect the final output i.e. crop. Hence,

vagaries in season could affect the demand for agrochemicals and in turn impact our estimates. Difficulty in getting Exports: If the company is unable to get new customer/order and in turn unable to meet our

export target, the company may post dismal performance and pose a downside risk to our estimates.

Rallis India Ltd ACCUMULATETrue Blue Ace

Analyst: Sageraj BariyaEmail ID: [email protected] No.: 022-61925337

Year Revenue (Rs mn) PAT (Rs mn) EPS (Rs) EBIDTA Margin (%) P/E (x) EV/EBIDTA (x) PB (x) ROE (%) ROCE (%)

FY11 10,862 1,260 6.5 17.6 24.7 16.6 6.2 13.6 10.6

FY12 12,749 835 4.3 15.9 37.3 15.7 5.6 15.8 17.6

FY13 14,582 1,188 6.1 14.4 26.2 14.7 5.0 20.2 17.1

FY14E 17,348 1,531 7.9 15.4 20.3 11.2 4.4 23.0 20.1

FY15E 20,032 1,833 9.4 15.4 17.0 9.3 3.8 24.0 20.5

Recommendation

CMP(Rs) 160

Target(Rs) 189

Upside % 18%

Share Holding (%)

Promoter 50.0

Public 31.4

FII 12.5

DII 6.1

Key Data

Average Vol(6m)(000) 237.7

FV 1

Beta 0.6

Mcap (Rs Mn) 31,815

52 week H/L 185 / 110

Bloomberg /Reuters RALI IN/RALL.BO

Group B / S&P BSE 500

Sensex / Nifty 20,209 / 6,002

Stock Performance (%)

Abs(%) Sensex RALLIS

3M -3.1 3.4

1Y 3.1 25.7



18

Executive SummaryInvestment RationaleRallis India is one of the oldest and second largest pesticide agrochemicalcompanies in the country with a market share of around ~7% and belongs tothe Tata Group. Rallis derives around 75% of its Revenues from its domesticbusiness through sale of own branded formulations. Rallis has come a longway since its restructuring (FY2007-10) period, where it divested it non-corebusiness (Pharma & Gelatin) and generated cash (land sell-off & preferentialallotment) for investing in core agrochemical business.Best place to take advantage of domestic opportunity - India's consumptionof agrochemical is one of the lowest in the world, standing at 0.6kg per hectare.This compares very poorly with other countries that have less arable land undercoverage. For instance, Taiwan - 17kg/ha, Japan & Holland - 11kg/ha,S.Korea -7kg/ha,USA-4.2kg/ha. We believe that Rallis is well-placed to seize thisopportunity on the back of its strong business model that revolves around -distribution network (Rallis has one of the best distribution networks in thecountry with reach of 30,000 retailers covering around 80% of India's districts),strong brands (In market research survey done 7 out of 12 brands belong toRallis) and robust new product pipeline (New product launches has been a keystrategy behind Rallis continuous strong performance). According to industryestimates, the unorganized market accounts for another 50% of the industry.And that is where, we believe that Rallis is in a position to gain higher marketshare as well as charge a premium for its products.Contract Manufacturing - opportunity abundant - Global agrochemicalcompanies have been reducing manufacturing capacity of low value productsto concentrate on higher-value products. Conversely, they are maintaining theirstrong hold on off-patent Active Ingredients (AI) through outsourcing the same.For example, Germany's BASF has cut its range of AI from 300 in 2001 to 130 in2006. Syngenta has also reduced its portfolio from 120 to 80. Bayer has reducedits portfolio by 29 actives between 2000 and 2006. Key Driver for contractmanufacturing is 1) Japanese companies on account of natural calamities arelooking at de-risking their manufacturing base. 2) US & EU agrochemicals majorhave been outsourcing from china to the extent of 80-95% of their requirementand are looking for geographic diversification.

The next growth frontier - Seed Business - India Seed industry is estimated tobe worth Rs 8,000-10,000 cr (US$ 2 bn) and is 6th largest in the world. Indianseed industry is growing at 12-13% p.a. and the commercial seed segmentaccounts for a mere 25% of the total market. Hence, the growth opportunityfor commercial seeds is substantial going ahead. As per one study wheat,groundnut, soybean and chickpea (high-volume low value seeds) 80% of thecropping area is sown with farm-saved seeds that are old and obsolete varieties.Another study has concluded that more over 70% of seed used in India arethrough the farm-saved seed. Rallis acquisition of Metahelix places companyin sweet spot to capitalize on seed opportunity.

Outlook and ValuationWe believe that Rallis is well placed to capitalize on emerging opportunities indomestic agrochemical and seed business. Besides, EBITDA Margins have shownturnaround from lows of 14.4% in FY13 and are likely to show a minimumimprovement of 100bp in FY14 & FY15. Going ahead, we expect ContractManufacturing along with Seed to drive the company's next level of growth.Overall, we estimate Rallis to register a CAGR of 17% and 24% in Net Sales andProfit over FY2013-15E, respectively.On the valuation front, at current price, the stock is trading at 17x FY2015EEarnings and 9.3x FY2015E EV/EBITDA. Historically, Rallis has traded at anaverage 20x one-year forward over the last 5-years. We Initiate Coverage onthe stock with an Accumulate rating and Target Price of Rs189 (20x FY15E EPS).

Risk to our callDifficulty in getting Exports: If the company is unable to get new customer/order and in turn unable to meet our export target, the company may postdismal performance and pose a downside risk to our estimates.Seed business continues to make losses: Rallis's seed business is currentlyloss making, as it is under investment phase. Although we are not building inany profit from segment, but continuation of loss would affect negatively.Weather: Agrochemicals are the last input in any agricultural operation andprotect the final output i.e. crop. Hence, vagaries in season could affect thedemand for agrochemicals and in turn impact our estimates.



19

BackgroundRallis India is one of the oldest and the second largest pesticide agrochemicalcompany in the country with a market share of around ~7% and belongs to theTata Group. The company also has a credible presence in the internationalmarket. Pesticide accounts for 89% of the company's Total Revenues, whileplant nutrients and seeds constitute the balance. Historically contribution fromthe Domestic business was at ~75% levels while Exports accounted for thebalance.

Source: Company , Eisec Research

Revenue Mix

78%71% 71% 71% 71%

22%29% 29% 29% 29%

0%

25%

50%

75%

100%

FY11 FY12 FY13 FY14E FY15E

Domestic Export

Business restructuring aids turnaround

During FY2001-04, the company was involved in too many businesses whichdiluted management's focus and was loss making. Since then, it has come along way. Rallis initiated several measures to restructure its business followingwhich it managed to turn the corner. Some of the measures initiated by thecompany included the following:

Selling of non-core business like Pharma and Gelatin; Merger of subsidiaries to reduce operating expenses; Disposing land to generate cash; and Issuance of Preference share worth Rs88cr to Tata group companies.

R&D

Rallis has a pipeline of new molecules under the various categories. Rallis andthe Council of Scientific and Industrial Research (CSIR), New Delhi jointly holdcommercial rights of these molecules, as this project is initiated under the Public-Private-Partnership (PPP) scheme of New Millennium India TechnologyLeadership Initiative. The government through soft loans (3% interest rate) fundsthis research. These molecules are at various stages of field trials and moleculeshave International Patent. Agrochemical R&D is very similar to that ofpharmaceutical, any molecule can turn out to be a multi-billion dollaropportunity or prove to be a complete failure. Success of a single molecule, webelieve, will put the company into an altogether new growth trajectory. However,it's difficult at current juncture to factor in any possible upside or downsidefrom this.

(10.0)

(5.0)

0.0

5.0

10.0

15.0

(400)

(200)

0

200

400

600

800

1,000

1,200

FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

Sales EBITDA %

RestructuringSale of pharma, fertiliserbusiness leading to dropin sales.Sale of asset andissuance of preferenceshare for rationalisationof debt.

Focus on corefocus on internal costcutting,introduction ofnew products andbrand building

Resultcontinuing benefit ofinternal cost cutting andfocuson export

DownfallDraught andovercapacity inindustry lead to losses

Rs

cr

%

Business Turnaround




20

Seed Business

Rallis India acquired 77% stake in Bangalore-based seeds Research Company,Metahelix Life Sciences (MLS) for Rs 1.2 bn. valuing the company at ~1.2xFY2012E revenues of Rs 1 Bn. Company funded the acquisition through internalcash.

With Rallis focusing on increasing its share of farmers' agri-spend, there existshuge opportunity in the seed industry with the acquisition of MLS. The seedindustry is growing at a healthy 12-13% p.a. Notably, MLS enjoys the foremostadvantage of being the first Indian company to have proprietary Bt trait, whichis basically a proprietary new variant of Bt Cotton (pending govt clearancesince Dec-2010). MLS also offers technology, strong brand and goodwill ofexisting products coupled with a robust product pipeline and presence in theinternational markets.

About Metahelix

MLS has been developing high-performance hybrid seeds in rice, maize, cottonmillets and vegetables for the Indian markets with transgenic traits for insect,viral and fungal protection. It also provides plant transformation, regulatorysciences and molecular marker services. MLS has also taken its key productsunder rice and maize to international markets like Vietnam, Thailand, Indonesiaand Philippines. Its subsidiary, Dhaanya Seeds, has been involved incommercialising the hybrid seeds and traits.

MLS was founded by five scientists in 2000, which has increased to become ateam of 50 scientists comprising 20 Phd's and 30 agronomics and plant genomicspecialists. MLS has research facilities in Bangalore, Hyderabad and Aurangabad.The company has 3,000 contract farmers, a seed processing plant and a warehouse at Hyderabad. Dhaanya Seeds has a field force of 120 agronomists whoreach out to more than 1,000 distributors across the country.

Founders Background

K K Narayanan

Serves as Managing Director of MLS; Narayanan, a plant molecular biologist

and breeder, is a Ph.D. in plant breeding and genetics from the Tamil Nadu

Agricultural University at Coimbatore, India. He later carried out post-doctoral

research at the Department of Biological Sciences in Stanford University under

a Rockefeller Foundation Fellowship.

Gautham Nadig

Leads the business development, operations and investment at MLS. Served as

chief executive officer (CEO) of Material Sciences Corp. (MSC) in 1997 and as its

president in 1991. Nadig also served as senior scientist in the bioinformatics

division at the Monsanto Research Center, Bangalore and later was a

consultant to Monsanto's Plant Biotech Group for the nutrition programme at

Saint Louis. Nadig was also chairman of the board of MSC in 1998.Nadig

graduated with an M.Sc in nuclear physics from the Bangalore University and

did his Ph.D. in molecular biophysics from the Indian Institute of Science,

Bangalore followed by a brief post-doctoral stint at the Department of

Chemistry, Pennsylvania State University, USA.

Ganesh Kishore

Served as VP of the science and technology department and chief

biotechnology officer at DuPont. Earlier, he was the chief technology officer of

DuPonts agriculture and nutrition platform. Kishore previously served as the

co-president of the nutrition and consumer segment and assistant chief

scientist and chief biotechnologist at Monsanto Company, which he joined in

1980. He is the inventor of more than 65 issued patents. Kishore received post-

doctoral training in chemistry and biology and also served as a Robert A. Welch

Fellow at The University of Texas at Austin. Kishore is a Ph.D. in biochemistry

from the Indian Institute of Science. He has a master's and bachelor's degree in

biochemistry, physics and chemistry from the University of Mysore, India.

Ravi Krishna S

Prior to joining MLS, Ravi was with the business development group in E.I.

DuPont India Private Limited, Gurgaon and earlier led the seed business at PHI

Seeds Limited, Hyderabad. He also worked with Advanta India (previously ITC

Zeneca Ltd) in different positions before leading the marketing and business

development function. In previous roles, Ravi was responsible for new business

initiatives and has considerable experience in marketing and business

development. Ravi is a post-graduate in dairy technology and a business

graduate from the Indian Institute of Management, Ahmedabad.



21

0

500

1,000

1,500

2,000

FY11 FY12 FY13

Rs

mn

Revenue

(120)

(60)

0

60

FY11 FY12 FY13

Rs

mn

PAT

Hidden value

Advinus Therapeutics - During 2005, the company transferred its KnowledgeServices Business, a Research & Development Centre at Bangalore to AdvinusTherapeutics Pvt Ltd for a consideration of Rs26cr. Advinus is India's finestClinical Research Organisation (CRO) involved in business of New Drug Discovery(Pharma & Agriculture) and clinical trials. The company is the first of its kind inIndia to offer end-to-end development services to the global Pharma, Agroand Biotech industries. Advinus was named as India's best emerging CRO indrug discovery services, according to a survey conducted by Proximare, amanagement consulting firm based in New Jersey that exclusively servespharmaceutical and biotechnology companies with strategic issues. We believeAdvinus has one of the best management teams in place to capitalise on theR&D outsourcing opportunity

Ex-President of R&D - Ranbaxy Research Lab

Ex-Vice President in the Pharmaceutical Research Institute,

Bristol-Meyers Squibb (BMS).

Dr. Kasim Mookhtiar - EVP and CSO Ex-Bristol-Meyers Squibb & Ranbaxy Lab

Dr. Gopal Muralidharan -Chief of

Technical Operations

20 years of experience in research and managerial in North

America

Christopher M. Cimarusti, Ph.DEx-Bristol-Meyers Squibb (BMS) - worked in drug discovery

and development

Perry B. Molinoff, MDProfessor of Pharmacology at the University of Pennsylvania.

More than 30 years of experience in academic and industrial

sectors

David C. U'Prichard, Ph.DPresident of Druid Consulting LLC, consultant to the

pharmaceutical and biotechnology industries

Advinus - Executive Committee

Dr. Rashmi Barbhaiya - CEO and

Managing Director

Advinus - Scientific Advisory Board



22

The Tata group is a major shareholder in Advinus while Rallis holds 15% stakein it with company management holds minority stake. Advinus is currently lossmaking and under investment mode. Rallis does not plan to sell its stake as itconsiders it as a strategic investment. We have not taken any value of Advinusin our valuation of Rallis however any developments on this front would haveminor impact on Rallis.

Real Estate -

Rallis has considerable amount of surplus real estate that it can divest if theneed arises. The company in the past had sold real estate to raise funds for itscore business. As per media reports, the company currently has excess land of85 acres in Hyderabad and 22 acres in Thane, Maharashtra. We haveconservatively estimated value of the same in the region of Rs 4.6 bn translatinginto Rs 24 per share. Our valuations take in 30% premium to Rallis last selltransaction of 31 acre property at Hyderabad for Rs 900 mn to Peninsula inFY2008. We have not factored any value of Real Estate in our valuation

Investment RationalBest place to take advantage of domestic opportunity

India's consumption of agrochemical is one of the lowest in the world, standingat 0.6kg per hectare. This compares very poorly with other countries that haveless arable land under coverage. For instance, Taiwan - 17kg/ha, Japan & Holland- 11kg/ha,S.Korea - 7kg/ha,USA-4.2kg/ha .

Global Pesticides consumption (Kg/ha)

17

1312

7 7

5 5

0.6

0

5

10

15

20

Taiwan China Japan USA Korea France UK India


India accounts for 16% of the world's total food grain production and usesonly around 2% of agrochemicals. We believe this again highlights the underusage of agrochemicals by Indian farmers and unexploited opportunity at bayfor the agrochemical companies.

We believe that Rallis is well-placed to seize this opportunity on the back of itsstrong business model that revolves around - distribution network, strongbrands and robust new product pipeline. According to industry estimates, theunorganized market accounts for another 50% of the industry. And that iswhere, we believe that Rallis is in a position to gain higher market share as wellas charge a premium for its products.



23

1) Distribution network - Rallis has one of the best distribution networks inthe country with reach of 30,000 retailers covering around 80% of India'sdistricts. Rallis derives around 61% of its Revenues from its domesticagrochemical business through sale of own branded formulations and supplyof bulk to other branded sellers. We believe that Rallis distribution networkis its key strength and the differentiating feature vis-a-vis competition. Hence,many MNC global players have inked strategic alliances with Rallis fordistribution of their products (pesticides and seeds) in the domestic market.

Company Product

Dupont IndoxacarbAcetamiprid

Syngenta Pretilachlor

Thiomethozam

Paraquat di Chloride

Emmamaectine

Clodinofop

Makhteshim Atrataf

Captaf

Novaluron

Bayer Thirodicarb

ImidaclorpidNihon Nohayaku Fuji 1

Buprofezin

Fenpyroximate

FMC Carbofuran

Carbosulfan

Bifenthrin

Gharda Chemicals Sulfosulfuron

Chloro + Cyper

Yara International Calcium nitrate solution

Borax International Boron 20%

Strategic alliance

2) Strong Product & Brand portfolio - We believe Rallis has one of the bestbrand portfolios in the industry. In market research survey done 7 out of 12brands belong to Rallis. This clearly shows brand power and producteffectiveness of Rallis.


0% 10% 20% 30% 40% 50% 60%

Confidor (Bayer)

Contaf (Rallis)

Rogor (Rallis)

Asataf (Rallis)

Tatamida (Rallis)

Contaf Plus (Rallis)

Fame (Bayer)

Antracol (Bayer)

Proclaim (Syngenta)

Applaud (Rallis)

Tatamono (Rallis)

Indofil M-45 (indofil)

Rallis Brand Strengths in Indian Crop Protection Market Awareness ofbrands - 2009




24

New product launch & registration


3) Robust new product pipeline - New product launches has been a key strategybehind Rallis continuous strong performance. On an average, the companyhas been registering 5-6 products and launching 3-4 products every year.Pertinently, new product launches were possible due to Rallis strong reachand goodwill among the farmers and the Tata brand associated with it whichhas enabled it to conduct the field trials. The Indian registration process isregarded as one of the most stringent ones in Asia (excluding Japan). Eachnew formulation typically takes 2-3 years for approval from the time ofregistration, as it has to undergo extensive field trials with respect tochemistry, toxicology, metabolism, efficacy, soil residue and packaging/labeling

0.0

5.0

10.0

15.0

20.0

FY10 FY11 FY12 FY13

Registration Launch

Innovation Index


Rallis uses Innovation Index to measure its performance of new productlaunches. Innovation index shows sales contribution from products launchedin last 4 years. Index has typically average at 25-30% of sales. In FY12 & 13,Rallis's key brand "Applaud" and "Takumi" completed 4 years and hence cameout of Innovation index that led to fall in innovation index. We believe Rallis'sconstant focus on new products would continue to yield results going aheadon the back of its strong R&D and Registration pipeline. We believe its matterof time before contribution from new launches start kicking.

0%

10%

20%

30%

40%

FY10 FY11 FY12 FY13



25

Contract Manufacturing - Low margin, Steady cash flow - opportunityabundantGlobal agrochemical companies have been reducing manufacturing capacityof low value products to concentrate on higher-value products. Conversely,they are maintaining their strong hold on off-patent Active Ingredients (AI)through outsourcing the same. For example, Germany's BASF has cut its rangeof AI from 300 in 2001 to 130 in 2006. Syngenta has also reduced its portfoliofrom 120 to 80. Bayer CropScience reduced its portfolio by 29 actives between2000 and 2006.Total global sales of agrochemicals were estimated to be worth US $54bn inCY2012. Sales of patented product constituted approximately 1/4th of the totaland another 1/4th is proprietary off patent (Patent of molecule has expired butno credible generic brand has been able to garner significant market sharefrom patented brand). Opportunity of even 10% of the total market size wouldtranslate into US$ 3 bnHence, Rallis plans to selectively target this opportunity by supplying AI to theindustry top players. Rallis has a credible presence in the international marketthrough exports. Exports on average have contributed 1/3rd of total revenueover long term. Over FY2011-13, Rallis Exports registered a CAGR of 27.3%. Toattract client and for focus on export, Rallis set up a new plant at Dahej formanufacturing for the export market.

Revenue - Domestic & Export

Source: Company, EISEC Research

0

15

30

45

60

0

1,500

3,000

4,500

6,000

FY12 FY13 FY14E FY15E

(%)

(Rs

mn

)

Export % YoY

Management believes there is huge scope for contract manufacturing give thesize of the opportunity. This in turn is driven by 2 major events

Japanese companies on account of natural calamities are looking atde-risking their manufacturing base.

US & EU agrochemicals major have been outsourcing from china tothe extent of 80-95% of their requirement and are looking forgeographic diversification.

Agrochemicals being crop specific have varying demand based on the specifictype of pest that hampers growth of the crop. Hence, one crop might needdifferent type of insecticides or fungicide or herbicide in different regions. Inaddition, there are many crops that are grown in very specific regions and mayrequire less amount of agrochemicals which may not be economical to produceand profitable to sell to the big global players. Therefore, the smaller regionalplayers very often dominate these niche segments. Rallis plans to meet therequirements of such niche demand.

Rallis has is set up a new plant at Dahej (Phase-1) for manufacturing AI for theexport market as well as to meet its own formulation consumption. Total capexof the Dahej plant is estimated at Rs150-200cr. Management has hinted aboutthe Dahej Phase-2 and to attract new customer has recently started newchemistry reaction plant (pilot plant) at its existing Dahej plant.



26

The next growth frontier - Seed BusinessIndia Seed industry is estimated to be worth Rs 8,000-10,000 cr (US $ 2 bn) andis 6th largest in the world. Indian seed industry is growing at 12-13% p.a. andthe commercial seed segment accounts for a mere 25% of the total market.Hence, the growth opportunity for commercial seeds is substantial going ahead.As per one study wheat, groundnut, soybean and chickpea (high-volume lowvalue seeds) 80% of the cropping area is sown with farm-saved seeds that areold and obsolete varieties. Another study has concluded that more over 70%of seed used in India are through the farm-saved seed. In earlier days, Indiaseed industry was driven by PSU enterprise and has share of 60%. Howeverover the years positive government policies has attracted investments by privateplayers and share of Private sector share has increased from to 80% in 2010.

Crop-wise growth in distribution of seeds (%)

Period Cereals Pulses Oilseeds Fibres Other Total

1983-88 9.9 16.1 (0.2) (2.3) (1.8) 6.1

1991-2002 6.8 2.6 2.2 4.7 (0.1) 5.1

2002-2011 14.5 16.4 17.4 (0.9) 15.4 14.9

Overall CAGR 7.8 8.7 8.5 2.2 0.1 7.0


One of the biggest opportunity seed industry has is Seed Replacement Rate(SRR), SRR is the percentage of area sown out of total area of crop planted inthe season by using certified/quality seeds/cultivars other than the farm savedseed. On country level SRR has improved from around 18.3% in 2001 to 25.9%in 2008, an increase of 760bps over years. However, SRR at 25.9% indicatedthat farmer still avoids buying new seed up to great extend.

Crop 2001 2002 2003 2004 2005 2006 2007 2008 Average

Wheat 13.0 13.0 13.0 16.5 17.6 21.8 25.2 26.8 18.4

Paddy 19.2 19.3 19.2 16.3 21.3 22.4 25.9 30.1 21.7

Maize 21.0 21.4 24.4 31.5 35.4 43.8 44.2 48.5 33.8

Jowar 18.4 18.8 26.7 19.3 19.0 19.4 19.9 26.2 21.0

Bajra 45.9 48.5 51.0 44.9 55.4 55.1 48.5 62.9 51.5

Chickpea 4.2 4.2 7.1 9.9 9.4 9.0 11.9 14.4 8.8

Urdbean 16.6 17.1 20.5 17.2 15.7 13.7 23.9 26.3 18.9

Arhar 8.7 8.8 13.6 9.8 10.5 11.6 16.1 16.0 11.9

Peanut 5.2 5.5 11.0 7.1 6.9 9.8 14.3 17.0 9.6

RSM 38.4 44.6 67.0 58.5 55.4 60.7 58.6 52.7 54.5

Soybean 12.4 12.5 15.6 27.0 28.9 28.4 33.4 35.1 24.2

Sunflower 13.7 15.7 19.6 60.2 67.7 66.9 62.9 43.6 43.8

Cotton 21.2 21.9 19.8 20.7 21.8 19.8 15.3 12.1 19.1

All India seed replacement rate (%) of major crops


Sighting seed to be next growth driver, Rallis acquired seed Research &Marketing company Metahelix along with its R&D subsidiary Dhaanya Seeds.In case of Seed business during acquisition (FY2010), Management had guidedfor Rs 10 bn revenue, on a cumulative basis by the end of FY2015. Till dateMetahelix has registered total cumulative revenue of Rs 3.8 bn (FY10-13). Toachieve the target of Rs 10 bn, company would need to achieve CAGR of ~66%over next 2 years. Given seed industry is expected to grow at 12-13%, we keepmoderate expectation for Rallis Seed business and estimate it to register CAGRof 37% over FY2013-15. However any positive contribution on EBITDA marginwould only be possible once business achieves revenue of Rs 3.5 bn plus.



27

Improving financialsBased on 9MFY2014 performance of Rallis, where in revenues grew by 20.7%and EBITDA margin marginally improved by 51bps to 16.4%, we expect domesticbusiness to post CAGR of 13% over FY2013-15. Our estimate of domesticbusiness growth is same as that during FY2007-10 and 800bps higher comparedto FY2010-13 (5% CAGR). Even though India has received good rainfall duringthe current season, there has been a case of excess rain on district level.Monsoon withdrawal that typically starts from 1-Sept, this time got delayed to9-Sept. This led to delay in spraying activity by farmer, similarly 3Q has witnesscyclone Helen and Leher hit coastal Andhra Pradesh largest agrochemical marketof country. Due to this Industry has collectively lost sales approximately worthRs 12-13 bn in 9mFY14.

Changing revenue mix


4,000

9,000

14,000

19,000

24,000


Domestic - Agrochemical Export - Agrochemical Seeds & Other - Domestic

(Rs

mn

)

Going ahead, we expect the company's Total Revenues to post moderate CAGRof 17% over FY2013-15E on the back of 17% & 37% growth in Exports & Seedbusiness, while domestic is expected to grow at modest pace of 13%.Management is hopeful of receiving a major leg up in export business by endof Q1FY15, as new order materialize.


63% 61% 58% 57%

29%29% 29% 29%

8% 11% 13% 15%

0%

25%

50%

75%

100%


Domestic Crop Care Export Seed & Service

Based on 9MFY14 performance we are building in 100bp improvement inEBITDA margin over FY13. We expect Rallis to t have steady EBITDA margin of15.4% in FYT14 & FY15 respectively. We believe our EBITDA Margins areachievable considering that Rallis has posted average margin of 16.7% overFY09-13 (Max - 19.4%, Min - 14.4%). We estimate EBITDA to register a CAGR of21% over FY2013-15E compared to Sales CAGR of 17% over same period.



28


EBITDA margin

10

13

15

18

20


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800

1,600

2,400

3,200


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We expect benefit of increasing EBITDA margin to flow down to PAT leading toCAGR of 24% over FY13-15. Going ahead, we estimate the company to furtherimprove its RoE to 23% and 24% in FY2014 and FY2015 respectively from 20%in FY13. While, RoCE is likely to improve from 19.4% in FY13 to 24% & 26% inFY14 & FY15.

Return ratios



Adj PAT

(Rs

mn

)

-

500

1,000

1,500

2,000


(%)

6

12

18

24

30


RoCE RoE



29

Outlook & ValuationThe agriculture sector has been the focus area of governments & industries forlong time. Food security has been top priority for the government whilereduction in food loss is one of the easiest ways to boost food production.While usage of agrochemicals can reduce the loss of food production, there isa limit. Hence the need of the hour is increasing crop yield with help of usingbetter quality seed. Country has already seen one green revolution and is indire need of another.We believe that Rallis is well placed to capitalise on emerging opportunities indomestic agrochemical and seed business. Besides, EBITDA Margins have shownturnaround from lows of 14.4% in FY13 and are likely to show a minimumimprovement of 100bp in FY14 & FY15. Going ahead, we expect ContractManufacturing along with Seed to drive the company's next level of growth.Overall, we estimate Rallis to register a CAGR of 17% and 24% in Net Sales andProfit over FY2013-15E, respectively.On the valuation front, at current price (Rs159), the stock is trading at 17xFY2015E Earnings and 9.3x FY2015E EV/EBITDA. Historically, Rallis has tradedat an average 20x one-year forward EPS over the last 5-years. We InitiateCoverage on the stock with an Accumulate rating and Target Price of Rs189(20x FY15E EPS).

P/E Chart

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Risk to our callDifficulty in getting Exports: If the company is unable to get new customer/order and in turn unable to meet our export target, the company may postdismal performance and pose a downside risk to our estimates.

Seed business continuous to make losses - Rallis's Seed Business is currentlyloss making, as it is under investment phase. Although we are not building inany profit from segment, we estimate losses to be minimal, any variance fromthe same could negatively affect our estimate earning.

Weather: Agrochemicals are the last input in any agricultural operation andprotect the final output i.e. crop. Hence, vagaries in season could affect thedemand for agrochemicals and in turn impact our estimates.

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Financial Summary

Key Ratios FY11 FY12 FY13 FY14E FY15E

EBITDA margin (%) 17.6 15.9 14.4 15.4 15.4

Net Profit Margin 11.6 7.9 8.1 8.8 9.1

RoE 13.6 15.8 20.2 23.0 24.0

ROCE 10.6 17.6 17.1 20.1 20.5

Inventory (days) 76.9 77.8 66.9 70.0 71.0

Payable (days) 120.7 91.7 78.8 79.0 80.0

Receivables (days) 39.1 32.0 44.0 42.0 40.0

Debt to Equity 0.2 0.2 0.0 0.0 0.0

Balance Sheet (Y/E Mar) FY11 FY12 FY13 FY14E FY15E

Equity Share Capital 194 194 194 194 194

Preference capital 0 0 0 0 0

Reserves & Surplus 4,855 5,336 6,013 6,907 7,944

Shareholders fund 5,049 5,530 6,207 7,102 8,138

Long term debt 844 856 107 90 90

Others 239 478 698 698 698

Current Liabilities & Prov 4,035 4,350 4,889 5,233 6,106

Total Liabilities 10,167 11,214 11,902 13,122 15,032

Net Fixed Assets 5,071 5,769 5,899 6,453 7,102

Investment 1,273 1,109 1,105 1,105 1,105

Cash & equivalents 146 112 258 1,248 2,482

Total Current Assets 3,823 4,336 4,898 5,564 6,825

Total Assets 10,167 11,214 11,902 13,122 15,032

Cash Flow (Y/E Mar) FY11 FY12 FY13 FY14E FY15E

Profit before tax 1845 1494 1723 2236 2675

(-) Tax (706) (407) (360) (704) (843)

(+) Depreciation 171 287 315 383 448

(-)Change in Working Cap (314) (507) (321) 326 687

(+)Others (113) 80 86 137 99

OCF 883 946 1443 2377 3066

(-) Capex (1278) (466) (349) (937) (1096)

(-) investment (60) (275) (50) 0 0

(-) others)

CFI (1338) (741) (399) (937) (1096)

(+) Net debt 849 369 (227) (17) 0

(+) Net Equity 0 0 0 0 0

(-) Dividend Payout (353) (473) (495) (296) (637)

(+)Others (38) (138) (172) (137) (99)

CFF 458 (242) (895) (450) (736)

Inc./(Dec.) in Cash 2 (38) 149 990 1234

Opng Cash balances 119 146 112 258 1248

C/s Cash balances 121 108 261 1248 2482

P&L Statement (Y/E Mar)

Net Sales

% chg

Total Expenditure

EBIDTA

(% of Net Sales)

Dep & Amort

EBIT

Interest

Other Income

Exceptional item

PBT

(% of Net Sales)

Tax

(% of PBT)

PAT before MI

MI & Share of Asso

Adj PAT

% chg

FY11 FY12 FY13 FY14E FY15E

10,862 12,749 14,582 17,348 20,032

20.6 17.4 14.4 19.0 15.5

8,948 10,719 12,476 14,676 16,947

1,915 2,030 2,106 2,672 3,085

17.6 15.9 14.4 15.4 15.4

171 287 315 383 448

1,744 1,743 1,790 2,289 2,637

37 146 185 137 99

138 69 117 84 138

- (172) - - -

1,845 1,494 1,723 2,236 2,675

17.0 13.1 11.8 12.9 13.4

581 487 535 704 843

31.5 29.2 31.0 31.5 31.5

1,264 1,007 1,188 1,531 1,833

(3.9) 0.0 0.0 0.0 0.0

1,260 835 1,188 1,531 1,833

39.1 (33.7) 42.3 28.9 19.7

Valuation parameter

EPS 6.5 4.3 6.1 7.9 9.4

P/E 24.7 37.3 26.2 20.3 17.0

P/S 2.9 2.4 2.1 1.8 1.6

P/BV 6.2 5.6 5.0 4.4 3.8

EV / EBITDA 16.6 15.7 14.7 11.2 9.3



31

UPL is a leading global generic player in the agrochemical Industry. UPL ranks among the Top-5 post patent agrochemicalmanufacturers in the world and has a manufacturing facilities spread across the world in India, France, Spain, UK, Vietnam,Argentina, Netherlands, Italy and China.However, we believe generics are expected to face tough time from here on account of 1) stagnation of growth in developedmarket (US & EU), 2) as more countries switch to GM & Hybrid seeds 3) increasing competition amongst generics as marketgrowth tapers down. Hence we recommend Reduce on the stock with target price of Rs195 (9x FY15E EPS). Howeverongoing buyback may continue to support stock price around current levels.

Investment Concerns Generic Market becoming generic, seed is future - Share of generic has been increasing continuously over last decade.

Share of generics have increased from 36% in 2004 to 40% in 2006 to 52% in 2011. There has been visible drop in rateof introduction of new agrochemical / crop protection molecule over past 2 decade. We believe this is consciousstrategy being followed by Innovator firms, as they have started focusing on Seed. This is visible in changing businessmodel, wherein R&D spends on Seed has grown at higher rate compared to Agrochemical. Total Global agrochemicalsales posted CAGR of 6.1% over 2002-11, while during same period, total Seed sales post CAGR of 8.8% and subsetGM seeds posted CAGR of 19.6%. In nutshell global agrochemical business is becoming low to no growth with toomany players fighting for market share.

M&A strategy not paying off - UPL's strong revenue growth was possible on back of aggressive M&A strategy. RecentM&A amongst top-4 players globally, indicates lack of growth as reason behind consolidation in global agrochemicalindustry. Although, acquisitions have bolstered size of UPL, margins have taken hit. Over the years EBITDA marginshave come down from highs of 28% in FY06 and stabilized in region of ~18% over FY10-13. While RoE/RoCE hasaveraged at 12/15%, during mentioned period.

Risks to our call: Consolidated in Industry - there is has been consolidation in global agrochemical industry, if pace increases and in

turn reducing competition, pricing power could return to generics and boosting overall profitability of UPL. Farmer switch back to agrochemical - Global agrochemical growth has been affected as farmers have shifted to

better seed that reduces consumption of agrochemical, any switch back to agrochemical would be positive for UPL.

UPL Ltd REDUCEM&A strategy not paying off well

Analyst: Sageraj BariyaEmail ID: [email protected] No.: 022-61925337

Year Revenue (Rs mn) PAT (Rs mn) EPS (Rs) EBIDTA Margin (%) P/E (x) EV/EBIDTA (x) PB (x) ROE (%) ROCE (%)

FY11 57,607 4,774 10.3 18.6 17.9 7.0 2.3 14.2 12.4

FY12 76,713 5,365 11.6 18.0 15.9 7.2 2.0 13.6 11.7

FY13 91,945 7,719 17.4 18.1 10.6 5.5 1.8 17.5 11.5

FY14E 105,112 8,861 20.3 18.1 9.1 5.0 1.6 18.4 11.7

FY15E 116,424 9,971 22.9 18.2 8.1 4.2 1.4 18.4 12.5

Recommendation

CMP(Rs) 185

Target(Rs) 195

Upside % 5%

Share Holding (%)

Promoter 28.9

Public 17.1

FII 44.9

DII 9.1

Key Data

Average Vol(6m)(000) 2338.4

FV 2

Beta 0.8

Mcap (Rs Mn) 81,071

52 week H/L 218 / 113

Bloomberg /Reuters UPLL IN/UNPO.BO

Group A / S&P BSE 100

Sensex / Nifty 20,209 / 6,002

Stock Performance (%)

Abs(%) Sensex UPL

3M -3.1 15.2

1Y 3.1 42.7



32

Executive SummaryInvestment ConcernsUPL is a leading global generic player in the Agrochemical Industry. UPL ranksamong the Top-5 post patent agrochemical manufacturers in the world andhas a manufacturing facilities spread across the world in India, France, Spain,UK, Vietnam, Argentina, Netherlands, Italy and China. Total global agrochemicalmarket is worth US $50bn, of which a mere US$ 26 bn is currently being cateredto by the generic players. Furthermore, 49% of the same is controlled by thesix largest generic players including UPL.Generic Market becoming generic - Share of generic has been increasingcontinuously over last decade. Share of generics have increased from 36% in2004 to 40% in 2006 to 52% in 2011, total global agrochemical sales postedCAGR of 6.1% over 2002-11. There has been visible drop in rate of introductionof new agrochemical / crop protection molecule over past 2 decade, that genericcompanies target post patent-expiry. In nutshell global agrochemical businessis becoming low to no growth with too many players fighting for market shareChanging Business Model - Given low consumption rate in developing countries,it offers strong growth opportunities. Given 3/4th of market is growing atreasonable pace, Agrochemical companies ought to spend more onagrochemical R&D. However that doesn't seem to be the case, as visible fromdeclining rate of introduction of new molecule. Focus shifting from Chemicalto Seed - Increasing market share of generic and slowing rate of new moleculeintroduction point to distinct shift in strategy followed by Top-6 Innovatorcompanies. This is visible in changing business model, wherein R&D spend onSeed has grown at higher rate compared to Agrochemical. Total Globalagrochemical sales posted CAGR of 6.1% over 2002-11, while during sameperiod, Total Seed sales post CAGR of 8.8% and subset GM seeds posted CAGRof 19.6%.M&A strategy not paying off - UPL's strong revenue growth was possible onback of aggressive M&A strategy. Recent M&A amongst top-4 players globally,indicates lack of growth as reason behind consolidation in global agrochemicalindustry. Although, acquisitions have bolstered size of UPL, margins have takenhit. Over the years EBITDA margins have come down from highs of 28% in FY06and stabilized in region of ~18% over FY10-13. While RoE/RoCE has averagedat 12/15%, during mentioned period.

Outlook and ValuationThe Agriculture Sector, has been grabbing lot of attention in recent times. Asper UN report, global demand for major grains like wheat, rice and soya isestimated to grow at CAGR of 1.4% over 2012-27 driven by demand from Food,Feed and Fuel. Total food requirement is likely to increase by 30% in 2030 andby 50% in 2050.However, we believe generics are expected to face tough time from here onback of 1) stagnation in growth in developed market (US & EU), 2) countriesswitching to GM & Hybrid seeds 3) increasing competition amongst genericsas market growth tapers down. UPL has been growing on back of M&A, fromhere on key growth drivers are likely to be emerging markets like India, Braziland other Latin American countries.On the valuation front, Over the 3-year period of FY2008-13, UPL traded at anaverage one-year forward PE of 9x. We expect UPL sales to register CAGR of12.5% over FY2013-15, with marginally improvement in EBITDA margins, AdjPAT is likely to show a CAGR of 13.7% over mentioned period. With RoCE andRoE at 12.5% and 18.4% in FY15E, at current levels of FY15E earnings, thestock is trading at fair valuation. We believe there is limited upside to the stockfrom here on and hence recommend Reduce on the stock with target price ofRs195 (9x FY15E EPS). However ongoing buyback may continue to supportstock price around current levels.

RiskConsolidated in Industry - there is has been consolidation in globalagrochemical industry, if pace increases and in turn reducing competition,pricing power could return to generics and boosting overall profitability ofUPL.Farmer switch back to agrochemical - Global agrochemical growth has beenaffected as farmers have shifted to better seed that reduces consumption ofagrochemical, any switch back to agrochemical would be positive for UPL.



33

A Global Generic PlayUPL is a leading global generic player in the Agrochemical Industry. UPL ranksamong the Top-5 post patent agrochemical manufacturers in the world andhas a manufacturing facilities spread across the world in India, France, Spain,UK, Vietnam, Argentina, Netherlands, Italy and China.Total off-patent market is worth US $54bn, of which a mere US$ 18 bn iscurrently being catered to by the generic players. Furthermore, 56% of thesame is controlled by the six largest generic players including UPL.



UPL operates in major markets like USA, EU, Latina America and India, whichhelps in diversifying its revenue stream along with mitigating the risks arisingfrom operating in a single country or region. Over the years revenue mix haschanged, from US & EU dominating with 56% of revenue in FY2009 to 39% inFY2013. With revenue contribution of 27%, the company has carved Latin-American Market as separate geography, mainly comprising of Brazil, Argentina,Colombia, etc.

Revenue Breakup

-

3,000

6,000

9,000

12,000

Sales of Total 6 Cos-

US$ 36bn

Sales of generic Top-4 Cos -

US$ 10bn

Total market - US$

54bn

Syn

gen

ta

Bay

er

BA

SF

Do

w

Mo

nsa

nto

Du

Po

nt

Sum

ito

mo

MA

I

Nu

farm UP

L

Oth

ers

(US

$m

n)

The global Agrichem industry, valued at US $54bn (CY2011), is dominated bythe Top-6 Innovators, viz. Bayer, Syngenta, Monsanto, BASF, DuPont and Dow,which enjoy large market share of patented (23%) and off patent market (25%).Thus, almost 25% of the total pie worth US$ 13 bn (controlled by the Top-6Innovators through proprietary off-patent products) provides high growthopportunity for larger integrated generic players like UPL

24 22 22 19 20

21 22 2522 19

32 29 21

18 18

24 27 32

15 14

26 27

0%

25%

50%

75%

100%

FY09 FY10 FY11 FY12 FY13

(%)

N.America India EU RoW Lat-AM



34

UPL has expansive product portfolio which helps in further diversifying itsRevenue mix. UPL's product portfolio comprises: (a) Pre-harvesting cropprotection, (b) Post harvesting crop protection and (c) Non-crop protection.

Pre-harvesting crop protection is basically adopted by the farmers to avert,destroy or control pests or unwanted type of plants or animals that causeharm to crops or hampers the normal growth process of crops. Cropprotection is done prior to crops getting harvested. UPL derives maximumof its Revenue from the Farm Crop Protection Segment - further classifiedinto insecticides, herbicides and fungicides, which aids furtherdiversification of Revenues.

Post harvesting crop protection, as the name suggests, is done post thecrops are harvested and stored. Pertinently, crops can be completelydestroyed during transportation or storage by pests. But, adoption ofcrop protection methods (usage of agrochemicals) post harvestingminimises crop loss and increases food availability.

Non-Crop Protection Segment entails protecting turfs and ornamentallawns, nurseries at home and office, and domestic and industrial pestmanagement. These segments contribute the least to the company's TotalRevenues.

Advanta IndiaGlobally, all the agrochemical companies have ventured into the Seed businessas a strategy to diversify and further boost revenues. The global Seeds businessis estimated to be worth US$40bn and has registered CAGR of 9% over past 10years. Global Seed Industry is dominated by the same Top-5 innovatorcompanies that are also leaders in the Agrochemical space.In order to offer farmers a complete package of seed and agrochemical, UPLacquired 100% stake in the Netherland-based Advanta Seeds in 2006 for aconsideration of Euro100mn (approx Rs560cr). Later through an IPO, UPL dilutedits stake in the company to 49.9%. Advanta is in the business of hybrid seedsand operates in geographies like Americas (USA, Argentina), Australia and Asia(India, Thailand)

Documents

Agrochemical Sector IC Feb'14 Eisec