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abcGlobal Research

India’s food consumption projections

warrant strong yield improvement

Crop protection and seeds sectors are

the most attractive ways to play growth

We initiate on Kaveri and PI with

Overweight (V) ratings, on UPL with an

Overweight and on Rallis with a Neutral;

Kaveri and PI are our top picks

Focus to remain on improving yields. India’s food demand

projections suggest that agricultural yields will need to

improve by 1.7% annually. In this context, we believe that

India’s agro-inputs space will be a strong gainer in coming

years. India’s crop protection sector is emerging strongly

(cUSD4.7bn, growing at 12% pa) driven by current low

domestic yields and low pesticides usage in addition to a

large export potential due to technical expertise and low

manufacturing costs. Furthermore, a significant number of

products going off-patent during 2014-20 should provide a

sizeable opportunity for Indian players. The Indian seeds

sector (cUSD2bn) has also been a fast-growing sector

(c12% CAGR expected) and has significant potential due to

low penetration of hybrid seeds.

Initiate on Kaveri and PI with Overweight (V) ratings,

UPL with Overweight, and Rallis with Neutral. Kaveri

and PI are our top picks due to their growth profiles,

favourable sector trends and attractive valuations. We also

like UPL as India’s only genuine play on global crop

protection, covering c70% of global markets. We are Neutral

on Rallis as we believe it is unlikely to positively surprise

the Street and the recent rally has made the valuations rich.

HSBC vs consensus. For Kaveri, our estimates are above

consensus as we believe that the Street is underestimating

Kaveri’s market share gain momentum and hence its sales

growth. For PI, we are again above consensus as we expect a

larger margin expansion driven by PI’s exports segment. For

UPL, our net profit estimates are slightly above consensus

due to higher margin expansion assumptions.

Risks to our calls include poor domestic monsoons, weather

swings globally, adverse currency movements, and adverse

regulatory policies.

Natural Resources & Energy

India Agricultural Products

India Agro-inputs

An exciting space; several options to play

Name Bloombergcode

(IN)

Marketcap

(INRbn)

16-Julprice(INR)

Rating Targetprice(INR)

HSBC vsconsensus

Kaveri Seeds KSCL 51.4 746 OW(V) 965 6.9%PI Industries PI 45.5 334 OW(V) 460 -3.0%UPL Limited UPLL 145.9 330 OW 382 2.9%Rallis India RALI 41.0 209 N 230 -2.9%

Key: OW = Overweight; N = Neutral; V = VolatileSource: Bloomberg, HSBC estimates

21 July 2014Alok Deshpande*

Analyst

HSBC Securities and Capital Markets (India) Private Limited

+91 22 2268 1245 [email protected]

Kumar Manish*

Analyst

HSBC Securities and Capital Markets (India) Private Limited

+91 22 2268 1238 [email protected]

Thomas C Hilboldt*

Head of Oil, Gas and Petrochemicals Research, Asia Pacific

The Hongkong and Shanghai Banking Corporation Limited

+852 2822 2922 [email protected]

Vivek Priyadarshi*

Associate

Bangalore

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to FINRA regulations

Issuer of report: HSBC Securities and Capital Markets (India)Private Limited

Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it

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Key financials and business details for coverage stocks

FY14 FY15e FY16e FY17e FY14 FY15e FY16e FY17e FY14 FY15e FY16e FY17e

_____________ Net sales (INRm) _____________ _____________ EBITDA (INRm) ______________ ____________ Net profit (INRm) _____________ Kaveri Seed 10,111 12,591 15,605 19,105 2,212 2,789 3,666 4,635 2,092 2,660 3,576 4,579PI Industries 15,955 19,655 24,259 29,884 2,890 3,605 4,572 5,782 1,880 2,264 2,914 3,833UPL Ltd 107,709 121,173 135,022 151,374 20,196 23,023 25,654 28,837 9,498 11,664 13,871 16,687Rallis India 17,466 19,889 22,568 25,513 2,613 3,104 3,571 4,083 1,519 1,853 2,199 2,602

___________ Net sales growth (%) ____________ ___________ EBITDA growth (%) ____________ ___________ Net profit growth (%)____________ Kaveri Seed 42.0% 24.5% 23.9% 22.4% 58.8% 26.1% 31.4% 26.4% 63.3% 27.1% 34.5% 28.1%PI Industries 38.6% 23.2% 23.4% 23.2% 60.0% 24.8% 26.8% 26.4% 93.1% 20.4% 28.7% 31.5%UPL Ltd 17.3% 12.5% 11.4% 12.1% 22.2% 14.0% 11.4% 12.4% 22.8% 22.8% 18.9% 20.3%Rallis India 19.8% 13.9% 13.5% 13.0% 24.1% 18.8% 15.0% 14.3% 28.4% 22.0% 18.7% 18.3%

____________ Gross margins (%) ____________ ___________EBITDA margins (%)____________ __________ Net profit margins (%) ___________

Kaveri Seed 62.9% 63.0% 62.9% 62.5% 21.9% 22.1% 23.5% 24.3% 20.7% 21.1% 22.9% 24.0%PI Industries 40.9% 41.2% 41.4% 41.5% 18.1% 18.3% 18.8% 19.3% 11.8% 11.5% 12.0% 12.8%UPL Ltd 49.5% 50.0% 50.3% 50.5% 18.8% 19.0% 19.0% 19.1% 8.8% 9.6% 10.3% 11.0%Rallis India 42.3% 42.5% 42.8% 42.5% 15.0% 15.6% 15.8% 16.0% 8.7% 9.3% 9.7% 10.2%

Main product categories Main target crops Regional mix within India Domestic/Exports

Kaveri Seed Seeds, Micro-nutrients Cotton, Maize, Paddy PAN-India, but mainly in Southern India Domesticc40% domestic; c60% importsPI Industries Pesticides, top products in Herbicides Paddy, Cotton PAN-IndiaUPL Ltd Pesticides, Seeds Spread across various crops PAN-India c21% India; Rest in EU, US & LatAMRallis India Pesticides & Seeds (Metahelix) Spread across various crops PAN-India 1/3rd exports; 2/3rd domestic

Source: Company; HSBC estimates

Coverage snapshot: Investments thesis for stocks and valuation methodologies

Company Rating 16-Julprice (INR)

TP(INR)

PE (x)(FY15e)

PE (x)(FY16e)

Investment thesis Valuation methodology

Kaveri Seed OW(V) 746 965 19.3 14.3

Kaveri is one of India’s fastest growing seed companiesand one of our top picks. Kaveri has strong cotton seedproducts that have tasted phenomenal success in the past4-5 years and we believe that these will continue to helpKaveri aggressively garner market share over the next3-4 years. Low hybrid seed penetration in corn and rice inIndia give further scope of growth. We expect Net Salesand PAT CAGR of 24% and 30%, respectively, overFY14-17e.

Our TP of INR965 is based on a3-stage DCF using a WACC of14%. Our TP implies a PE of 18xon Kaveri’s FY16 earnings; this isin-line with Kaveri’s current 1-yearforward multiple.

PI Industries OW(V) 334 460 20.1 15.6

PI is also one of our top picks. We like PI’s uniquedomestic business model where it has exclusive marketing

tie-ups for most of its domestic products. Its exportsegment of custom synthesis and manufacturing (CSM)has strong visibility with nearly 2.5x of FY14 CSMrevenues. Benefits from operating leverage are likely tosurprise the Street on margins, in our view.

Our TP of INR460 is based on a

3-stage DCF using a WACC of12.3%. Our TP implies a PE ofc20x on PI’s FY16 earnings; this isin line with PI’s current 1-yearforward multiple.

UPL Ltd OW 330 382 12.1 10.3

UPL is India’s only genuine play on the global cropprotection sector. We like UPL’s product portfolio andregional spread which can give investors balancedexposure to various regions. India and Latin Americacontribute c40% to UPL’s business and we expect theseregions to be the key drivers.

Our TP of INR382 is based on aPE of 12x on UPL’s FY16e EPSestimates. UPL’s currently tradesat a PE of 10.3x on FY16 EPSestimates; we believe that thestock should re-rate further to 12xas UPL is likely to deliver strongearnings over FY14-17e.

Rallis India N 209 230 21.7 18.1

While Rallis is slated to deliver c20% earnings CAGR overthe next three years, we believe that the valuations fairly

capture this earnings growth trajectory. Exports fromRallis’s Dahej plant and subsidiary Metahelix (seeds)should continue to contribute significantly to growth.

Our TP of INR230 is based on aPE of 20x on Rallis’ FY16e EPS

estimates, in-line with its 3-yearhistorical PE average where itdisplayed similar sales growth.

Source: Company; Bloomberg; HSBC estimates



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Investment summary 4

India Agro-inputs 16

Kaveri Seed Company 36

PI Industries Ltd (PI IN) 45

UPL Limited 56

Rallis India Limited 66

Disclosure appendix 77

Disclaimer 79

Contents



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Focus to remain on yield

According to India’s Planning Commission, India’s demand for food grains is expected to rise from the

current 263mmt to 310mmt by FY24 (a CAGR of 1.7%). With the cultivable area likely to remain

constant at best, assuming constant yields, we estimate that there is likely to be shortfall of 46mmt in

food grain production by FY24. To meet this shortfall, the agricultural yields in India will need to grow to

c2.6 tonnes/hectare by FY24 (from 2.2 tonnes/hectare currently) or at a CAGR of 1.7%. Although the

Indian agricultural sector has achieved such yield improvement levels in previous decades, there will be a

need for strong thrust from agro-inputs to improve the yields from the current higher base.

Indian agro-inputs: an attractive opportunity with high growth

With this background, we find the Indian agro-inputs space a very exciting opportunity for investors. In

this report, we have focussed on the crop protection and seed sectors in India which we believe can

deliver strong growth over FY14-17e and remain largely un-regulated, unlike the Indian fertilizer sector.

Sizeable agro-input market overall, but crop protection and seed sectors are most attractive

India’s agro-inputs market (consisting of fertilisers, crop protection inputs, seeds and micro-irrigation) is

one of the largest in the world, with a market size of cUSD18bn in 2013. Fertilisers are the largest in

terms of volume used agro-input with an estimated market of USD10.5bn constituting c61% of the total

agro-inputs markets. The second-largest agro-inputs are crop protection products (insecticides, herbicides,

fungicides, etc) with a total market size of USD4.2bn, followed by the domestic seed market which is

estimated to be around USD2bn annually. Crop protection and seed sector in India are growing fast and

are expected to continue growing a CAGR of 11-12% over the next 6-8 years as Indian agriculture sectortargets higher yields to match the country’s food grain demand.

Investment summary

India’s food demand projections warrant strong and consistent

yield improvement

The crop protection and seeds sectors are the most attractive way

to play high growth stories with favourable sector trends

We initiate on Kaveri and PI at OW(V), UPL at OW, and Rallis at

N; Kaveri and PI are our top picks given their strong growth

profiles, and we like UPL for its balanced exposure to the global

crop protection market



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India crop protection: low pesticide usage to continue driving domestic growth,exports is a big lever

India is currently the second-largest manufacturer of pesticides in Asia, following Japan with an

8% global market share. India’s crop protection sector’s market size is estimated to have grown to

USD4.7bn by FY14-end from USD2.0bn in FY05 with a CAGR of c10%. Exports currently form 53% of

India’s pesticides market; this is up from c30% in FY05, growing at a CAGR of c17% during FY05-14.

We estimate the overall crop protection market to grow at a CAGR of c12% over the next four to five

years. The thrust for this growth is likely to continue from exports which we estimate will grow at a

CAGR of c15% over the next few years; while the domestic market is expected to grow at 8-10%.

Pesticides usage (kg/hectare) in India is one of the lowestglobally Crop losses in India by category

Source: Federation of Indian Chambers of Commerce and Industry (FICCI), Crop Care

Federation of India (CCFI); HSBC Research

Source: FICCI; CCFI; Ministry of Agriculture; HSBC Research

India has one of the lowest pesticides usage rates which should continue to drive domestic markets

Domestic pesticide consumption is among the lowest globally. India’s pesticide consumption is

0.6 kg/hectare versus 13.0 kg/hectare in China and 7.0 kg/hectare in the US. Some of the reasons for low

consumption in India are low purchasing power of farmers, lack of awareness among farmers, limited

reach and lower accessibility of pesticides. This presents an immense opportunity for the crop protection

sector to grow in India. Further, the prospects of crop loss reduction are likely to continue to be a strong

driver as well. Lower use of pesticides leads to wastage of 15-20% of crop produce annually in India. In

value terms, experts believe this is equivalent to cUSD15bn of crop losses.

Exports is the key driver with c15% growth

India is now the 13th largest exporter of pesticides globally. This growth has been primarily been driven by

low-cost manufacturing and technically trained manpower in India. We believe that the strong growth is likely

to continue in exports, and we estimate a CAGR of c15% for exports over the next four to five years. India’s

seasonal domestic demand often leads to domestic overcapacity of pesticides and this further aids exports

growth. India has production capacity of 150ktpa while production stood at 90ktpa MT in 2012. Further, better

margins in overseas markets should ensure that companies keep exports as a focus.

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India crop protection exports segment growth potential (USDbn) Estimate size of market opportunity from products going offpatent during 2014-20e (USDbn)

Source: FICCI; CCFI; HSBC Research Source: FICCI; Insecticides India; HSBC Research

Off-patent market – a big opportunity for Indian players

Patented products contribute only c20% to the total Indian crop protection market. Based on our

discussions with company managements and other industry participants, the growth in the generics

segment is expected to continue with cUSD6.3bn worth of patented products expected to lose patented

status between 2014 and 2020. This is a significant growth opportunity considering the current size of the

Indian crop protection market.

Top is concentrated, bottom remains fragmented

India’s crop protection sector is highly fragmented with over 800 formulators. However, with the R&D

driven product strength and breadth of product portfolio, distribution network and brand strength almost

entirely the deciding factors in this industry, the top 10 companies have a nearly 75-80% market share.

To conclude, we see India’s crop protection sector as an attractive play on growth with strong structural

drivers in place for multi-year growth. Key drivers such as low domestic pesticide use and yields and high

export potential should continue to play out over the next 4-5 years, in our view.

Indian seed sector: drivers in place for multi-year structural growth

India is the fifth-largest seed market in the world with a market size of cUSD2bn. The domestic seed

industry has doubled over the last five years growing at a CAGR of c15%, and is expected to grow at aCAGR of 11-12% over the next four to five years. The growth is expected to be driven largely by higher

adoption of hybrid seeds by farmers (value growth) and a larger cropped area coming under seeds

coverage (volume growth). About c30% of the seed market is dominated by cotton (Bt cotton seeds),

followed by rice (21%), vegetables (20%) and maize (11%), while remaining is from crops such as pearl

millet (bajra), oilseeds, pulses, wheat, sunflower, etc.

0.61.6 1.8 1.9 2.2 2.5 2.9 3.3

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Indian seed industry (INRbn): Domestic seed sector to growat 11-12% annually over the next 4-5 years

Seed consumption shares in India by crop: Cotton remainsthe dominant crop for the seed sector

Source: Indian Seed Congress; HSBC estimates Source: Indian Seed Congress; HSBC Research

Current low hybrid penetration levels show ample scope for improvement

While cotton has high hybrid penetration, largely due to the extensive use of Bt cotton in India, we see

sizeable opportunity for increased hybrid consumption in maize and rice. Currently, of the total 42m

hectares under rice cultivation, only 2m hectares use hybrid paddy seeds.

Hybrid penetration levels for some key crops: rice is thebiggest long-term opportunity with the lowest penetration

Bt cotton’s impact on production and yields in India

Source: Indian Seed Congress; Ministry of Agriculture; HSBC Research Source: Cotton Corporation of India; HSBC Research

1 bale of cotton: 170 kgs;

2008-09 production decline was due to uneven rainfall, non-release of water from

canals and a sudden decline in exports demand due to sharp economic slowdown

Bt cotton: a game-changer in the last 10 years

Bt cotton was launched in India in 2002. (‘Bacillus thuringiensis’ (Bt) cotton is a genetically modified

variety of cotton producing an insecticide that kills harmful worms that destroy cotton). In 2002, around

50,000 farmers used Bt cotton; that number has now grown to 7m farmers. Furthermore, it is not only the

large cotton farmers who prefer to grow Bt cotton; the average Indian cotton farmer cultivates 1.5

hectares of cotton and even the smaller farmers have switched to Bt cotton in large numbers. The Bt

cotton adoption has risen from nil to 93% during the last ten years.

Corn remains a key area of growth: India’s corn yields have potential to double

Maize is a generally an all-year-round crop in India, but remains predominantly a kharif crop (sown during

monsoons) with 85% of the area under cultivation in the season. Indian maize yields have been improving but

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are still below 50% of global average. The US has the highest yield of 10 tonnes/hectare when compared to

global average of 5.5 tonnes due to 85% of the area being under Bt-Single Cross Hybrid (SCH) and the

remaining 15% under 15% SCH. Other nations under SCH have also shown higher corn yields. Higher use of

SCH leads to higher yields as seen in other nations. In India, Andhra Pradesh is the largest producer of corn in

India with a 40% share. Andhra Pradesh has the highest yield followed by Tamil Nadu due to the majority of

the area being covered under SCH. Overall at the India level, only 30% of corn cultivated area is under SCH;

further SCH adoption can lead to significant yield improvement.

India’s corn yields (tonnes/hectare) have significant scope forimprovement with higher adoption of single cross hybrids

Hybrid penetration levels for some key crops: Rice is thebiggest opportunity with the lowest penetration

Source: FICCI; Indian Seed Congress; HSBC Research Source: FICCI; Indian Seed Congress; HSBC Research

Hybrid rice remains under-penetrated, a long term opportunity for the whole industry

Rice hybrids seed is the most under-penetrated category in India. India’s area under rice cultivation

stands at 42m hectares (c22% of the total cropped area) while the hybrids cover only c2m hectares or

c5% penetration. Industry experts peg the hybrid paddy market growth at c10% per annum for the next

four to five years. India’s rice productivity is 2.9 tonnes/hectare as against world average of 3.9 tonnes

and China at 6.0 tonnes where c65% of the rice area is under hybrid. It is believed that rice hybrids have

the potential to increase yields by 15-35%.

To conclude, the Indian seed sector has several trends in favour for multi-year growth. Key drivers

include higher adoption of hybrid seeds in corn and higher hybrid paddy seed adoption.

Crop protection and seeds sectors both need high R&D expertise

Both the crop protection and seed sectors globally require significant R&D efforts to invent and launch

new products. We note that over past ten years, crop protection related R&D expenditure globally has

been in the range of 6-7% of the total industry turnover. In the past 10 years, this sector has grown very

rapidly due to high growth in emerging markets and significant contribution from generic products. We

also observe that R&D expenditure in the global seed sector has grown at a much faster pace than crop

protection. This is largely due to the high R&D spending on genetically modified (GM) seeds and to a

lesser extent due to conventional seeds. Further, our discussion also indicates pesticides generally

entailing lower R&D activities compared to R&D in hybrid seeds. In our coverage, UPL, PI and Rallis

(pesticides business) fall into the crop protection category which compared to seeds requires lower R&D.Further, a number of those companies’ target markets are dominated by generic products and as a result

R&D spending as a share of revenues for the companies is below the industry average. Kaveri’s mainstay

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is cotton seeds, but since GM seeds for other crops are yet to be allowed in India, Kaveri’s R&D spending

remains lower than global average. Rallis’s seed subsidiary Metahelix also requires much higher R&D

efforts compared to pesticides business.

High entry barriers due to strict approval process, long timelines and high R&D costs

We see significant entry barriers in these sectors on various levels. Firstly, our discussions with industry

participants indicate that the approvals for agro-inputs sector are comparatively difficult relative to other

sectors. Further, industry estimates put the cost of bringing a new product to market at cUSD250m on

average. In addition, the timeline from the first synthesis to first commercial sales has extended over the

years. In 1995, this timeline was around eight years; this has grown to 10 years currently.

Weak 2014 monsoon predicted, but limited impact for most of our OW stocks

The Indian Meteorological Department (IMD), Indian Government Weather Agency has forecast rainfall

for India as a whole is likely to be 93% of the long period average (LPA). In terms of regional forecasts,

the season rainfall is likely to be 85% of LPA over North-West India, 94% of LPA over Central India,

93% of LPA over the South Peninsula and 99% of LPA over North-East India. In terms of monthly

rainfall, July and August typically contribute 33% each to the total monsoon forecast. IMD forecasts that

while July will be around 93% of LPA, August is likely to better with 96% of LPA. Further, the IMD has

given a high chance (more than 70%) of El Nino occurring during the monsoons. Historically, India has

experienced a reasonable correlation (if not one to one) between its drought years and occurrence of El

Nino. Since 1950, India has faced 13 droughts, 10 of these have been in El Nino. But, since 1950 there

have been 23 global El Nino years, experts believe that all El Nino years do not imply drought in India.

While poor monsoons in India are likely to weigh on the agri-inputs stock sentiment, we see limited impact

on our coverage due to strong exports exposure. Although Kaveri, one of our top picks, is entirely dependent

on domestic markets, its primary markets currently are Andhra Pradesh and Karnataka (>70% of sales), are

expected to receive rainfall which is 93% of LPA. IMD defines this range as below normal but deficient. For

PI Industries, the high CSM growth segment (exports) has managed to reduce PI’s dependence on monsoons

significantly. For the remaining c40% domestic-dependent business, PI continues to have target markets that

are spread out across various regions. For UPL, the impact from poor monsoons is expected to be very limited

as only c20% of the consolidated top line is derived from India.

Companies: Kaveri and PI are our top picks

Kaveri and PI are our top picks, we are also positive on UPL but Rallis lacks triggers: We are

initiating coverage on four agro-inputs companies: Kaveri Seeds (OW(V); TP: INR965); PI Industries

(OW(V); TP: INR460); UPL Ltd (OW; TP: INR382) and Rallis India (N; TP: INR230). Our top picks are

Kaveri and PI due to their high growth prospects, favourable sector trends and attractive valuations.

Kaveri is one of the fastest-growing seed companies in India, achieving strong market share gains across

different seed categories, but mainly cotton seed. With PI Industries, it is its unique business model that

we like in which growth is driven by its export segment (custom synthesis and manufacturing – CSM) via

long-standing partnerships with global crop protection majors. At the same time, PI’s domestic business

is mainly in-licensing operations where it enjoys exclusive distribution and marketing rights in key

pesticides for patented products from global MNCs, as opposed to non-exclusive marketing. We initiate

with an Overweight (V) rating on UPL as we believe that it is India’s only genuine play on the global



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crop protection sector with its operations spread over c70% of the global agro-chemical market.

We initiate on Rallis with a Neutral rating as we believe that despite impressive growth prospects, the

performance is unlikely to surprise the market on the upside. Additionally, Rallis’s shares have run-up

c60% in the past year, making the stock richly valued compared to sector peers.

Coverage snapshot with valuations and profit growth forecasts over FY14-17e

Market cap(INRbn)

Market cap(USDm)

Rating 16-Jul price(INR)

1-year TP(INR)

Potentialreturn*

FY14-17ePAT CAGR

FY15e PE FY16e PE FY16e PEat TP

Kaveri Seeds 51.4 855 OW(V) 746 965 29.4% 29.8% 19.3 14.3 18.6PI Industries 45.5 757 OW(V) 334 460 37.7% 26.8% 20.1 15.6 20.8UPL Ltd 145.9 2,429 OW 330 382 17.2% 19.4% 12.1 10.3 12.0Rallis India 41.0 682 N 209 230 11.7% 21.1% 21.7 18.1 20.0

Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield for UPL and Rallis onlySource: Company data, Bloomberg, HSBC estimates

Expect upside despite strong stock performances in the past year

All three of the OW(V)/OW stocks have rallied strongly in the past year due to a combination of a strong

rally on the broader Indian markets and strong business performances in FY14. Despite these strong stock

performances, we believe that there is further upside left in these stocks due to the high earnings growth

these companies can potentially deliver during FY14-17e. As seen from the table above, we expect our

coverage universe to deliver a net profit CAGR of 20-30% during FY14-17e and this should sustain the

valuations, in our view.

1-year stock performance for our coverage universe (rebased to 100)

Source: Bloomberg

We also note that the new government in India has been vocal about focusing on the Indian agricultural

sector through a variety of schemes that will help the farmers at the ground level. Overall, with the new

government showing a focus on improving the agricultural production, agro-inputs are certain to play a

pivotal role in the process. This is also one of the reasons why the agro-inputs stocks have rallied

significantly in the past year.

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J u l - 1

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Kaveri PI UPL Rallis



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Kaveri Seed Company

Kaveri has a c17% in India’s cotton seed sector, which is India’s largest seed category in value terms.

Kaveri has a share of 12-13% in corn seed markets and has a 5-6% market share in hybrid paddy seeds

markets. Kaveri has an overall 40% market share in the state of Andhra Pradesh; however there are

some districts in the state where Kaveri has a 60%+ market share while some districts have less than a

15% market share, which leaves scope for market share gains. Also, we see large scope for market share

gains for Kaveri in states such as Maharashtra and Gujarat where Kaveri’s market share is less than 10%.

Further, we see corn and hybrid rice seeds as two under-penetrated markets and we believe that Kaveri’s

product portfolio is well equipped to capture these opportunities as these markets grow.

Strong R&D driven products and distribution to help garner market share and fend offcompetition: Kaveri has one of the strongest R&D divisions in the Indian seed industry. It has one of the

largest germplasm banks in India, which is Kaveri’s biggest strength. Germplasm (seed, stem or pollen) is

a living tissue from which a new plant can be grown. As a result of this, Kaveri’s products have proved to

be sizeable successes. Kaveri’s cotton seed brand ‘Jadoo’ is a prime example of its R&D expertise. Jadoo

has been a blockbuster seed product where farmers witnessed c20% higher yield cotton. Jadoo also has

very high drought stress quality. Distribution is a key area in the seeds business in India as there is small

window for sales (before the sowing season). According to company management, Kaveri has a network

of 15,000 distributors and retailers.

Financials and valuation: Over the next three years (FY14-17e), we expect Kaveri’s market share gains

to deliver a CAGR for sales and net profit of 24% and 30%, respectively. For our target price of INR965,

we have valued Kaveri on a DCF methodology. We have used a three-stage DCF model wherein we use

estimated cash flows until FY20e (20-25% growth), then a 10% profit growth from FY21-25 and a

terminal growth rate of 6%. We have used a WACC of 14.0% for Kaveri. Our DCF-based target price of

INR965 implies a 1-year forward PE of c19x on Kaveri’s FY16 estimates, which is in-line with Kaveri’s

current rolling forward trading PE multiple of 19x. Risks include adverse weather conditions, adverse

regulatory changes and emergence of superior quality seeds from competitors.

HSBC vs consensus: Our net sales estimates are above consensus by 1% for FY15, 2% for FY16 and

11% for FY17; we believe this is because consensus underestimates the momentum of Kaveri’s market

share gains. Our higher sales growth estimates are largely a function of our assumption that Kaveri’s

cotton seed revenues are likely to grow at more than 20% due to the continued success of products such

as Jadoo (c50% of cotton seed revenues) and ATM (c10% of cotton seed revenues).



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Expected market shares for Kaveri across seed categories(%): we expect Kaveri to continue garnering market share

Kaveri Seeds: consolidated financials

Source: Company: HSBC estimates Source: Company: HSBC estimates

PI Industries

PI operates in two segments: (1) branding and marketing of pesticides in domestic markets and

(2) custom synthesis and manufacturing (CSM) which contributes about two-thirds to the revenues.

We expect the CSM to segment grow at c25% annually (in line with guidance). The CSM order book

currently stands at cUSD400m, more than twice FY14 CSM sales, which provides strong cash flow

visibility and potential margin expansion from using operating leverage. PI’s domestic business model is

also unique due to PI’s in-licensing arrangements with global MNCs which gives it exclusive marketing

rights in India.

Financials and valuation: In the last five years (FY09-14), PI’s sales have grown at a CAGR of

28% while the net profit has grown at a CAGR of 51%. During FY14-17e, we expect PI to deliver top-

line growth of 23% annually and bottom-line growth of 27% annually. We expect growth to be driven

largely by the in-licensing and CSM segments, which we expect to deliver a CAGR of 30% and 24%,

respectively. For our target price of INR460, we have valued PI on a DCF methodology. We have used a

three-stage DCF model wherein we use estimated cash flows out to FY20 (15-25% growth), then a

10% profit growth from FY21-25 and a terminal growth rate of 5%. We have used a WACC of 12.3% for

PI. Our DCF-based TP of INR460 implies a 1-year forward of c20x which we believe is reasonable for a

high growth company like PI. We expect the stock to continue re-rating as it starts generating significantcash flows from FY16 onwards due to the conclusion of the capex phase and the company maximising

asset turns and using operating leverage to enhance margins. The main risks include adverse weather

conditions in India and adverse currency movements which can hurt PI’s exports segment.

HSBC vs consensus: While we are in line with consensus in terms of sales growth, our PAT estimates

are 3% below consensus for FY15, and 2% above for FY16 and 10.4% above for FY17 due to higher

margin assumptions for FY16 and FY17. We believe that the Street is underestimating the positive impact

of the improving product mix change and of PI using the operating leverage in its new Jambusar plant and

thus enhancing its margins in the CSM segment. Our EBITDA margin estimates of 18.4% for FY15,

18.9% for FY16 and 19.4% for FY17 are higher than Street EBITDA margin estimates of 18.6%, 18.8%,

and 19.2%, respectively.

17%

13%

7%

13%

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16%

9%

15%

0%

5%

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15%

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30%

Cotton Corn Hybrid paddy Bajra (PearlMillet)

FY14 FY17e

INR mn FY14 FY15e FY16e FY17e

Net Sales 10,111 12,591 15,605 19,105COGS 3,751 4,660 5,797 7,170

Gross profit 6,360 7,931 9,808 11,935Other expenses 4,148 5,142 6,143 7,300EBI TDA 2, 212 2, 789 3, 666 4, 635Deprec iation 164 202 231 259

EBIT 2,048 2,587 3,435 4,376Interest/Excep. 2 1 1 1Other income 97 171 272 370PBT 2,143 2,756 3,705 4,745

Tax es 52 96 130 166PAT 2,092 2,660 3,576 4,579EPS (INR/sh) 30.4 38.7 52.0 66.6



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PI’s growth profile: CAGRs for FY09-14 and FY14-17e periods PI Industries: consolidated financials


UPL Limited

UPL is the 12th largest agro-chemical company in the world and the 6th-largest generic agrochemical

player. Over the last 10 years, UPL has acquired 17 companies and has managed to turn around most of

these. With exposure to c70% of the global crop protection industry, UPL remains India’s only play on

the global crop protection sector. India and Latin America (Brazil, Columbia, Argentina) contribute

c21% and c19% to UPL’s group revenues respectively. In FY14, both these regions delivered strong

growth, while the mature markets of North America had moderate growth. Although margins continue to

be higher in the US and the Europe, India and Latin America have been earmarked as the growth by UPL.

The Indian domestic pesticide market is expected to grow at a CAGR of 8-10% over the next four to five

years. Brazil is the largest agro-chemical market in the world with cUSD10bn market size. UPL has a

3% market share in Brazil through its recent acquisitions of DVA Agro. Key crops in Brazil are coffee,

sugarcane, oranges, soybean, corn and other grains/horticultural products. Brazil is expected to grow

10-12%. We expect UPL’s Latin America and Latin America segments to grow at a similar rate over the

next two years.

Financials and valuation: We expect UPL’s net profit to grow at a CAGR of c19% between FY14 and

FY17e (consensus is at c17%), driven by c10% CAGR in the top line during the same period and margin

expansion. We arrive at our 1-year target price of INR382 by assigning a PE of 12x on FY16e EPSestimates. UPL is currently trading at a PE of 10x on our FY16e estimates. We note that after the good

Q4 FY14 results and strong guidance, the stock’s PE has re-rated from 8x to 10x; however we see several

ways in which better financial performance can likely to further re-rating. Higher business visibility is

likely to lead to PE expansion for such high profit growth. Furthermore, UPL’s RoE is likely to exceed

and be sustained above 20% during FY14-17e, which indicates a strong RoE compared to global peers.

Main risks include adverse weather conditions globally and adverse currency movements.

28%23%

35%

26%

51%

27%

0%

10%

20%

30%

40%

50%

60%

FY09-14 FY14-17e

Net sales EBITDA PAT

FY14a FY15e FY16e FY17e

Net Sales 15,869 19,555 24,159 29,784

COGS 9,198 11,617 14,265 17,526

Gross profit 6,758 8,038 9,994 12,358

Operating ex pens es 3, 868 4,433 5,422 6,576

EBITDA 2,890 3,605 4,572 5,782

Depreciation 316 380 432 527

EBIT 2,574 3,225 4,141 5,255

Finance ex penses 119 124 104 74

Other income 158 88 11 69

PBT 2,613 3,188 4,047 5,250

Tax es 733 925 1,133 1,418

PAT 1,880 2,264 2,914 3,833

EPS 13.8 16.6 21.4 28.2



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Revenue contribution by region has transformedsignificantly for UPL from FY04 to FY14

UPL: consolidated financials

Source: Company; HSBC Research Source: Company: HSBC estimates

Rallis India

Rallis is one of India’s oldest agro-input companies. The Indian domestic pesticide market is expected to

grow at a CAGR of 8-10% over the next four to five years, and we expect Rallis to sustain its market

share of c10% in India. Rallis set up a new manufacturing plant in the Petroleum, Chemicals and

Petrochemical Investment Region (PCPIR) at Dahej in the state of Gujarat with an INR1.8bn. We expect

the Dahej plant to achieve asset turnover of at least 2x (in line with PI’s similar business segment). We

expect the revenue from this plant to grow at c13% annually and act as the main contributor to margin

expansion due to improved pricing. Rallis acquired Metahelix Life Sciences (a Bangalore-based seed

company) in 2010 and has steadily increased its stake to c81% over the past two years. This acquisition

has strengthened Rallis’ seeds portfolio with products such as Bt rice, Bt cotton and hybrid seeds.

In FY14, Metahelix reported revenues of INR1.8bn, implying a c1.5% market share in India’s

INR120bn (cUSD2bn) domestic seeds market. Rallis’ management has given long-term sales guidance of

Metahelix achieving INR10bn. Rallis management had earlier expected Metahelix to achieve this target

by FY15; however considering Metahelix had turnover of INR1.8bn in FY14, we expect the

INR10bn target to be achieved by FY18-FY19 at the earliest.

Financials and valuation: We expect Rallis’s sales and net profit to grow at CAGR of c14% and c21%,respectively, between FY14 and FY17. Rallis’s stock currently trades at a 1-year rolling forward PE of 22x and

18x on FY16e EPS. We believe there remains very little room for further re-rating of the stock from these

valuation levels. We have valued Rallis at a PE of 20x which is in line with the three-year historical average

where it had displayed a similar sales growth as FY11-14. To conclude, while Rallis should deliver an

impressive growth trend, we do not find it an attractive opportunity considering the stock run-up and current

valuations. Risks include an adverse monsoon in India and adverse currency movements.

32%21%

25%

20%

19%

19%

24%

14%

26%

0%

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60%

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100%

FY04 FY14India North America EU Rest of World Latin America

IN R m n F Y14 A F Y15 E F Y16 E F Y17 E

Net sales 107,709 120,037 132,239 146,260COGS 54,408 60,018 65,789 72,399Gr oss p ro fit 53,301 60,018 66,450 73,861Operating expenses 33,105 37,211 41,325 45,999EBITDA 20,196 22,807 25,125 27,862Depreciation 4,069 4,501 4,801 5,101EBIT 16,126 18,306 20,325 22,762Finance expenses 4,866 4,498 4 ,238 3,978Other income 1,314 921 1,199 1,713PBT (pre ex c p) 12, 574 14, 729 17, 285 20, 496Ex ceptional 1,009 - - -PBT 11,565 14,729 17,285 20,496Tax es 2,217 3,388 3,976 4,714PAT 9,349 11,341 13,310 15,782

Minority share 149 331 348 365Group PAT 9,498 11,672 13,657 16,147EPS (INR/sh) 22.2 27.2 31.9 37.7



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Sales CAGR for various agro-inputs players: Rallis’s 3-yearand 5-year growth trends lag peers

Rallis India: Consolidated financials

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P

I I n d u s t i e s

K a v e r i

U P L

R a l l i s

D h a n u k a

B a y e r

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INR mn FY14 A FY15 E FY16 E FY17 E

Net sales 17,466 20,035 22,894 26,058COGS 10,084 11,570 13,164 14,918

Gross profit 7,381 8,465 9,730 11,140Operating expenses 4,768 5,326 6,080 6,922EBITDA 2,613 3,139 3,650 4,218Depreciation 407 413 455 497

EBIT 2,206 2,726 3,195 3,720Finance ex penses 126 91 85 79Other income 64 48 112 214PBT 2,144 2,682 3,222 3,855

Taxes 617 805 967 1,156PAT 1,527 1,877 2,255 2,698Minori ty /Share in loss/profit 8 11 15 18

Group PAT 1,519 1,866 2,241 2,680EPS (INR/sh) 7.8 9.6 11.5 13.8



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India’s food supply outlook lags projected demand

India’s food-grain production has grown at a CAGR of c2% during the last decade from 213mmt in

FY04 to 263mmt in FY14. During the same period, India population has grown at a CAGR of 1.4% from

1.09bn to 1.25bn, based on data from the World Bank. With increasing use of agro-chemicals and farmmechanisation, India’s yield has also shown improvement rising from 1.7 tonnes/hectare in FY04 to

2.2 tonnes/hectare currently.

India’s food-grain yield CAGR: over the next 10 years, India’sagricultural yield will need to grow 1.7% annually to meet itsfood grain demand

India’s population has grown at a CAGR of 1.4% during thepast 10 years; India’s per capita food grain consumption hasalso grown from 162kg/person to 210kg/person

Source: India Planning Commission, Ministry of Agriculture; HSBC estimates Source: World Bank; HSBC Research

Demand projections warrant meaningful yield improvements

According to India’s Planning Commission, over the next 10 years, India’s demand for food grains is

expected to rise from the current 263mmt to 310mmt by FY24 (a CAGR of 1.7%). With the cultivable

area likely to remain constant at best, assuming constant yields, we estimate that there is likely to be

shortfall of 46mmt in food grain production by FY24. To meet this shortfall, the agricultural yields in

India will need to grow to c2.6 tonnes/hectare (from 2.2 tonnes/hectare currently), based on our

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1974-84 1984-94 1994-2004 2004-14 2014-24(Required)

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Population (LHS) bnPer capita foodgrain consumption p.a (RHS) (kg/per capital)

India Agro-inputs

Higher agricultural yields is the only way forward to address rising

food demand

Output expectations are high, but inefficiencies are higher leaving

ample scope for yield improvement

We favour the high growth and regulation-free segments of crop

protection and seed as opposed to fertilisers players in India



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21 July 2014

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calculations. We estimate that this will entail about a c20% improvement in yields overall in the next

10 years and a CAGR of 1.7%. While the Indian agricultural sector has achieved such yield improvement

levels in past decades, it will need a strong thrust from agro-inputs to improve the yields from their

currently higher base.

India’s per capita consumption of food grain is 210kgs annually. In absence of yield improvement,

we estimate that India’s per capita food grain consumption will fall to 190kgs annually by FY24. On the

other hand, based on population growth estimates by the Indian Planning Commission, to maintain the

current per capita consumption, India will need 293mmt of food-grain output by FY24. For this, yields

will need to go up from the current 2.2 tonnes/hectare to 2.5 tonnes/hectare, again entailing a CAGR

improvement of c1.7% over the next 10 years.

India’s area under cultivation has been declining over the years With cultivable land area declining, food grain productionhas been largely driven by rising yields

Source: Ministry of Agriculture; HSBC Research Source: Ministry of Agriculture; HSBC Research

India agro-inputs sector

India’s agro-inputs market (consisting of fertilisers, crop protection inputs, seeds and micro-irrigation) is one

of the largest in the world. We estimate that the market size for India’s agro-inputs was around USD18bn for

2013. Fertilisers are the largest used agro-input with an estimated market of USD10.5bn constituting c61% to

the total agro-inputs markets. The second largest agro-input are crop protection products (insecticides,

herbicides, fungicides, etc) with a total market size of USD4.2bn. This is followed by the Indian seed market

which is estimated to be around USD2bn annually. Micro-irrigation is estimated to be USD600m market in

India but constitutes only 3% to the total Indian agro-inputs industry.

Crop-protection and seed segments – key growth pockets

In this report, we have focussed only on the crop-protection and seeds companies in India. These are also

the two sub-segments which are growing fast and are expected to continue growing a CAGR of 11-12%

over the next 4-5 years as the Indian agriculture sector targets higher yields to match the country’s food

grain demand. This overall agro-inputs markets (including fertilisers) is expected to grow at a CAGR of

c8% over the next five years, based on our estimates. However, we expect the crop protection and seeds

sectors to grow faster than fertilisers at 11-12% per annum.

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India’s agro-inputs market size by sub-segment (USDbn) The entire agro-inputs sector (incl. fertilisers) in India isexpected to grow c8% during FY14-19e (INRbn)

Source: FICCI; CCFI; Ministry of Agriculture; HSBC Research Source: FICCI; CCFI; Ministry of Agriculture; HSBC Research

Large scope for improvement

While India is one of the largest producer and consumers of food-grains globally, there are significant

inefficiencies in the sector due to wastage of food-grains, low yield levels vis-à-vis other nations, lack of

farm modernisation, lack of access to credit, small farm holdings and a number of other issues. For all the

key crops produced in India, India’s yield levels are among the lowest globally. With higher use of agro-

inputs, we believe that there is significant scope for yield improvement.

Rice yield (tonnes per hectare): Despite producing c20% ofglobal rice output, India’s rice yield is one of the lowest globally Yields for key crops: India vs. China vs. global average(tonnes/hectare)

Source: CCFI; Ministry of Agriculture; HSBC Research Source: FICCI; CCFI; Ministry of Agriculture; HSBC Research

India’s agro-inputs usage is one of the lowest globally

In our view, there is further scope for yield improvement driven especially by the use of agro-chemicals

as we observe that compared to global peers India’s use of fertilisers and crop protection inputs remains

very low. Despite a steady increase in the use of agro-chemicals over the last few years, India’s usage still

stands meaningfully below global usage levels.

Fertilisers,10.5 , 61%

Cropprotection,4.2 , 24%

Seeds, 2.0, 12%

Micro-irrigation,0.6 , 3%

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Fer til isers Crop p rotection Seeds Micro-irrigati on

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Australia US China Russia India World

India China World

India vs

China

Indi a vs

World

Paddy 2.4 6.5 4.4 -62.8% -45.1%Wheat 3.1 4.8 3.0 -34.7% 4.5%Maize 2.5 6.0 5.5 -58.0% -54.2%Groundnut 1.1 1.5 1.6 -25.5% -28.0%Sugarcane 66.1 69.8 74.0 -5 .3% -10.7%

Soy abean 1.2 1. 6 2. 2 -23.8% -44.6%



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Indian Agricultural ScenarioFertilizer use (kg per hectare) in India Fertilizer use (kg per hectare) in India and other regions

Source: RBI Agriculture Database Source: World Bank

Split of agricultural land holdings in India by size (m hectares) Institutional credit in Agriculture in India (INRbn)

Source: Ministry of Agriculture Source: Ministry of Agriculture, India

Mechanization penetration in India Only 40% of total cultivated land in India is irrigated which is

highly dependent on underground water

Source: Indian Seed Congress Source: Ministry of Agriculture, India

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Credit Cooperat iv e Banks RRBs

Commercial Banks Other Agencies

82%

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preparation

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care

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Canals26%

Tanks3%

Tubewells46%

Dug wells16%

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India’s crop protection sectorIndia’s crop protection sector’s market size is estimated to be around USD4.7bn by FY14-end. This sector

has grown from USD2.0bn in FY05 to USD4.7bn currently, at a CAGR of c10%. India is currently the

second-largest manufacturer of pesticides in Asia, following Japan. In terms of global shares, India’s crop

protection sector constitutes c8% of the global pesticides manufacturing market. Furthermore, exports

currently form 53% of India’s pesticides market; this is up from c30% in FY05 and 47% in FY10.

Exports have grown at a CAGR of c17% during FY05-14 to reach USD2.5bn in value terms. We estimate

exports’ contribution to the sector to cross 60% by FY19e.

India’s crop protection likely to grow at c12% CAGR and takea 10% global share by FY19 from c8% in FY12

India’s crop protection market (USDbn): Exports to a CAGRof 15%, while domestic growth is likely to be 8-10% CAGR

Source: FICCI; CCFI; HSBC Research Source: FICCI; CCFI; HSBC Research

We estimate this market to grow at a CAGR of c12% over the next 8 to 10 years. The thrust for this

growth is likely to continue from exports which we estimate will grow at a CAGR of c15% over the next

few years. The domestic market for pesticides has been growing at a CAGR of c6% during FY05-14; we

estimate that the domestic market is likely to grow at a CAGR of 8-10% going forward.

Exports’ share of India’s crop protection market to cross60% by FY19e

Source: FICCI; HSBC Research

Key product categories in crop protection sector

Insecticides protect crops by killing insects or preventing their attack. Insecticides may attack a

particular type of insect or could be broad spectrum insecticides.

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India's pesticides market (USD bn) (LHS)

India's share in global (%) (RHS)

1.4 1.8 1.9 1.9 2.1 2.2 2.4 2.6 2.8 3.0 3.30.6

1.6 1.8 1.9 2.2 2.52.9

3.33.8

4.45.1

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

F Y 0 5

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5 e

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

F Y 1 9 e

Domestic Exports

7 0 %

5 3 %

5 1 %

5 0 %

4 8 %

4 7 %

4 5 %

4 4 %

4 2 %

4 1 %

3 9 %

3 0 %

4 7 %

4 9 %

5 0 %

5 2 %

5

3 %

5

5 %

5 6 %

5 8 %

5 9

%

6 1

%

0%

20%

40%

60%

80%

100%

F Y 0 5

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5 e

F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

F Y 1 9 e

Domestic Exports



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Fungicides are used to prevent the deterioration of crops due to fungal infestation. Fungicides are

classified as protectants or eradicants. Protectant fungicides prevent or inhibit fungal growth and may

have to be applied at regular intervals. Eradicant fungicides kill the pests on application.

Herbicides or weedicides are used to prevent the growth of unwanted plants in a crop field. Herbicides

could be selective, which kill the unwanted plants without any harm to the crop, or non-selective which

kill all the plants.

Bio-pesticides are derived from natural substances like plants, animals, bacteria and certain minerals

and control pests by nontoxic mechanisms. Bio-pesticides are considered eco-friendly and easy to use.

They could be classified as microbial pesticides, plant incorporated protectants and biological pesticides.

Fumigants and rodenticides are used to prevent the attack of pests during storage of crops. Plant growth

regulators control or modify the plant growth process and are most commonly used in cotton, rice and fruits.

Sector characteristics

Product contribution: biased towards insecticides but rising labour costs to making herbicides

grow faster

In the Indian crop protection sector, insecticides are the dominant product category with a 65% share.

This is followed by herbicides with 16% and fungicides with 15%, and the remaining 4% is accounted for

by other products such as bio-pesticides and rodenticides. This is starkly differently from the product

composition for the global crop protection market. Globally, herbicides are the largest product categorywith 44%, followed by fungicides with 27% and insecticides with 22%. This contrast is largely due to the

fact that in India the weeds are removed manually and hence herbicides usage is much lower than

globally where labour is much more expensive. However, our recent discussion with industry participants

suggest that as labour costs keep rising in India, herbicides is emerging as one the highest growing

category in the Indian crop protection sector. In India, herbicides sales are seasonal in nature as weeds

typically grow in damp and warm weather and die in cold weather. As a result, rice and wheat are the

crops where herbicides are majorly consumed.

Category split in India vs Global Product application

Source: FICCI; UPL; HSBC Research Source: Industry; HSBC Research

65%

22%

15%

27%

16%

44%

4% 7%

0%

20%

40%

60%

80%

100%

India World

Insecticides Fungicides Herbicides Others

Product Used mainly for

Insecticides Rice & Cotton

Fungicides Fruits, v egetables & rice

Herbicides Rice & w heat



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Insecticides are mostly used on rice and cotton crops. Fungicides are used for fruits and vegetables and

rice. In India, the government has been promoting the export of fruits and vegetables and as a result

farmers are moving from cash crops to fruits and vegetables. This should drive the demand for fungicides

in the coming years. Bio-pesticides is a currently a small contributor to the sector, but may grow fast in

the future due to the lower base and government initiatives to promote the use of non-toxic,

environmentally friendly pesticides.

Cotton and rice are the largest consumers due to insecticides heavy market structure

With insecticides being the largest product category in India, cotton and paddy are the major consumers

of crop protection chemicals accounting for 50% and 18%, respectively. Fruits and vegetables also

account for a significant share of the crop protection chemicals market with a 14% share. Cotton, which isgrown on just over 5% of cropped area, consumes about 50% of the pesticides. Rice grown over 24% of

the cropped area uses c18%, while fruits and vegetables that are raised over 3% consume c14%.

Plantation crops covering 2% of the area consume, c8% and cereals, millets and oilseeds extending over a

large 58% of the cropped area consume c7%. Sugarcane uses 2% of pesticides and other crops grown

over 5% of the cropped area account for remaining 1%.

Use of pesticides in India by crop Pesticide use vs versus share of cultivated area by crop


The top three states Andhra Pradesh, Maharashtra and Punjab account for about 50% of total pesticide

consumption in India. Andhra Pradesh is the largest consumer of pesticides with a share of 24%.

Supply chain is more distribution heavy due to generic nature of products

India is characterized by small marginal land holdings across the country and as a result the base of

India’s supply chain pyramid (distribution/retail) is very broad compared to developed nations. Secondly,

India’s crop protection sector is generic in nature with c80% of the molecules being non-patented. This

further necessitates strong distribution network and brand strength. Crop protection products are

manufactured as technical grades and then converted into formulations for agricultural use. India’s crop

protection industry consists of 125 technical grade manufacturers (includes about 10 multi-nationals),

800 formulators producing the end products and 145,000 distributors. Technical grade manufacturers sell

high purity chemicals in bulk (in drums of 200-250kgs) to formulators. Formulators prepare formulations

by adding inert carriers, solvents, surface active agents, deodorants etc. These formulations are packed for

retail sale and bought by the farmers. On average, a crop protection company with an all-India presence

could have 500-1,000 distributors catering to 25,000-30,000 retailers. Companies keep their stocks in

Cotton50%

Paddy18%

Fruits &veg14%

Plantationcrops8%

Cereals,Millets &oilseeds

7%

Sugarcane2%

Others1%

50%

18%14%

8% 7%2% 1%

5%

22%

5%2%

58%

2%5%

0%

10%

20%

30%

40%

50%

60%

C o t t o n

P a d d y

F r u i t s & v e g

P l a n t a t i o n

c r o p s

C e r e a l s ,

M i l l e t s & …

S u g a r c a n e

O t h e r s

Pesticides use share Cropping area share



23



21 July 2014

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warehouses or depots from where it is supplied to distributors. Multinationals, at times, enter into co-

marketing and co-distribution arrangements with Indian companies.

India’s crop protection sector structure Pesticide usage across different countries (kg/hectare)

Source: HSBC research Source: FICCI; CCFI; HSBC research

Key drivers for India crop protection sector

India has one of the lowest pesticides usage globally

Consumption of crop protection products in India is among the lowest in the world. Consumption of crop

protection products in India is 0.6kg/ha compared to 13.0kg/ha in China and 7.0kg/ha in the USA. Some

of the reasons for low consumption in India are low purchasing power of farmers, lack of awarenessamong farmers, limited reach and lower accessibility of products. This presents an immense opportunity

for the crop protection industry to grow in India.

Crops losses by categories Avoidable crop losses by crop categories (%)

Source: FICCI; CCFI; HSBC Research Source: Insecticides India; Ministry of Agriculture; HSBC Research

Reduction in losses also remains a key driver for higher yield

According to industry experts, the non-usage or under-usage of crop protection chemicals leads to a

wastage of 15-20% of crop produce annually. In value terms, experts believe this is equivalent to

cINR900bn (cUSD15bn) of crop losses. There is large scope for cutting down these losses through

increased use of crop protection chemicals.

17

1312

7 7

5 5

0.6

0

24

6

8

10

12

14

16

18


Weeds33%

Insects26%

Diseases26%

Rodents &others15%

0%

20%

40%

60%

80%

100%

C o t t o n

P a d d y

M u s t a r d

S u n f l o w e r

g r o u n d n u t

M a i z e

P u l s e s

S u g a r c a n e

V e g e t a b l e

F r u i t s



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Cost benefit ratio: estimated benefit in INR by using INR1 ofpesticides

Crop protection exports segment potential (USDbn)

Source: Ministry of Agriculture; CCFI; HSBC Research Source: FICCI; CCFI; HSBC Research

Exports is the key driver with c15% growth

Indian exports of pesticides have been growing rapidly over the past 8-10 years and India has now

emerged as the 13th largest exporter of pesticides in the world. This growth has been primarily been

driven by low-cost manufacturing and technically trained manpower in India. We believe that the strong

growth is likely to continue in exports and we estimate a CAGR of c15% for exports over the next four to

five years. India’s seasonal domestic demand often leads to domestic overcapacity of pesticides and this

further aids exports growth. India has production capacity of 150ktpa but production stood at 90ktpa MT

in 2012.

Further, our discussions with industry players indicate better and better realization in international

markets. Most of the exports are off-patent products. In terms of export destinations, the US, Asia (China

and ME) and Europe (mainly France and Belgium) are the major exporting destinations. Our channel

checks also indicated there are some hints of registration processes becoming stringent for generic

products in the US and Europe, which may be a threat to Indian pesticides, exports in future.

Off-patent market – a big opportunity for Indian players

Patented products contribute only c20% to the total Indian crop protection market. According to industry

bodies, the growth in the generics segment is expected to continue, with cUSD6.3bn worth of patented

products expected to lose patented status between 2014 and 2020. The proprietary off-patent segment can

provide a significant growth opportunity to generic companies, but increased focus on R&D is needed to

tap into this segment.

0

5

10

15

20

25

30

C o t t o n

P a d d y

M u s t a r d

S u

n f l o w e r

g r o u n d n u t

M a i z e

P u l s e s

S u g a r c a n e

V e

g e t a b l e

F r u i t s

0.61.6 1.8 1.9 2.2 2.5 2.9 3.3

3.84.4

5.15.8

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1.0

2.0

3.0

4.0

5.0

6.0

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F Y 1 0

F Y 1 1

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F Y 2 0 e



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Market segmentation in pesticides market Market opportunity (USDbn) – products going off-patent(2014-20e)

Source: Ministry of Agriculture; HSBC Research Source: Ministry of Agriculture; Insecticides India; HSBC Research

Competition: concentrated at the top, but growth profiles of Indian profiles more

attractive than large global players

India’s crop protection sector is highly fragmented with over 800 formulators. However, with distribution

network, brand strength and product portfolio almost entirely the deciding factors in this industry, the top

10 companies have a nearly 75-80% market share. Large global crop protection and seed players are also

present in India leveraging on the R&D expertise and large product portfolios. However, we notice

despite the presence of these large players, Indian companies have carved their market shares largelythrough collaborating with these global MNCs. Indian players have used their strong distribution and

marketing presence for either co-marketing or exclusive marketing arrangements.

Indian players’ growth profile and valuations remain attractive

We also note that compared to some of the global players, Indian companies come across as attractive

investments opportunities. We expect much higher earnings growth rates for Indian companies in the crop

protection and seeds sectors and see these trading at relatively attractive valuations.

Patented20%

Propreitoryoff-patent

30%

Generic50%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2 0

1 4 e

2 0

1 5 e

2 0

1 6 e

2 0

1 7 e

2 0

1 8 e

2 0

1 9 e

2 0

2 0 e

Comparison with global crop protection and seed players

Sales CAGR % PAT CAGR % PE (x)

CY10-13 CY13-15 CY10-13 CY13-15e CY14e CY15e

FY11-14 FY14-16e FY11-14 FY14-16e FY15e FY16e

Syngenta 8.1% 5.1% 5.6% 15.8% 16.2 13.8Monsanto 12.3% 6.0% 31.3% 10.4% 22.8 20.6Makhteshim Agan 9.2% 5.1% NA 5.0% NA NANufarm 6.3% 4.0% NA 13.2% 25.0 11.4FMC 7.5% 10.6% 28.9% 20.8% 16.2 13.5Sumitomo -1.2% 0.3% 4.7% -5.6% 14.2 12.9

HSBC coverage

Kaveri Seeds 63.0% 24.2% 70.1% 30.7% 19.3 14.3PI Industries 30.4% 23.3% 42.4% 24.5% 20.1 15.6

UPL 23.2% 10.8% 19.4% 19.9% 12.1 10.3Rallis 17.2% 14.5% 6.4% 21.5% 21.7 18.1

Source: Company; Bloomberg; HSBC estimates





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Indian seed sector: drivers in place for multi-year structural growthIndia is the fifth-largest seed market in the world with a market size of cUSD2bn. The domestic seed

industry has doubled over the last five years growing at a CAGR of 15%. According to industry experts

and industry participants, the domestic seed sector is expected to grow at a CAGR of 11-12% over the

next four to five years. The growth is expected to be driven largely by higher adoption of hybrid seeds by

farmers (value growth) and larger cropped area coming under seeds coverage (volume growth).

Seed markets by country (USDbn) Indian seed industry (INRbn): domestic seed sector to growat 11-12% per annum over the next 4-5 years

Source: Indian Seed Congress; HSBC Research Source: Indian Seed Congress; HSBC Research

In terms of crop pattern, roughly c30% of the seed market is dominated by cotton (Bt cotton seeds,

discussed later in detail), followed by rice (21%), vegetables (20%) and maize (11%). The rest of the

domestic seed market caters to crops such as pearl millet (bajra), oilseeds, pulses, wheat and sunflower.

Increased hybrid penetration to continue driving growth

The seed production process starts with R&D activities. The R&D is considerably higher for hybrid seeds

and the process involves a fair bit of trial and error. Initially, there is trait or quality selection that is

desired, such as higher yields, pest resistance, drought tolerance, and content. Germplasm contain these

desirable qualities and a variety of germplasm are created and maintained.

-

2.00

4.00

6.00

8.00

10.00

12.00

U S

C h i n a

F r a n c e

B r a z i l

I n d i a

J a p a n

G e r m a n y

A r g e n t i n a

I t a l y

N e t h e r l a n d s

0

50

100

150

200

250

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

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F Y 1 6 e

F Y 1 7 e

F Y 1 8 e

F Y 1 9 e



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21 July 2014

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Seed consumption shares in India by crop

Source: Source: Indian Seed Congress; HSBC Research

What are varieties? Varieties are saved by the farmers and re-used every year; however, the seed benefits

decline every year in terms of yields and other quality. Overall, varietal seeds have lower yields. Varieties

are usually pollinated by natural means and produce progeny with no significant variation from their

component lines. To start with nucleus seeds are produced by the breeder to develop a particular variety

and are directly used for multiplication as breeder seeds. Breeder seeds are directly controlled by

breeder for initial and recurring reproduction of foundation seeds. Foundation seeds can be a progeny of

the breeder seeds or be produced from foundation seeds which can be clearly traced back to the breeder

seeds. Registered seeds are a progeny of the foundation seeds; certified seeds are a progeny of registered

or foundation seeds and are finally sold to farmers.

What are hybrid seeds: Farmer has to buy hybrids every year as the yield decline from saved/re-used

hybrids is meaningful. Hybrid seeds are the first-generation progeny of two different parent lines and are

produced by cross pollinating two genetically dissimilar parent plant lines. Only the first-generation

hybrids have all the desired qualities; the qualities deteriorate in the second generation. For hybrids the

breeder is initially developed and then multiplied into several levels of parent seeds.

Current hybrid penetration levels show scope for improvement

While cotton has high hybrid penetration largely to the extensive use of Bt cotton in India, we see a

sizeable opportunity for increased hybrid consumption in maize and rice. Currently, of the total 42m

hectares under rice cultivation, only 2m hectares use hybrid paddy seeds.

Within our coverage, Kaveri’s hybrid portfolio is well-diversified to tap this opportunity. Kaveri has 12

cotton hybrids, 31 maize hybrids, 17 paddy hybrids, 3 millet hybrids and 4 sunflower hybrids.

0%

5%

10%

15%

20%

25%

30%

B T C o t t o n

R i c e

V e g e t a b l e s

M a i z e

O i l s e e d s

P e a r l M i l l e t

P u l s e s

W h e a t

S o r g u m

S u n f l o w e r

O t h e r s



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Hybrid penetration levels for some key crops: rice is thebiggest opportunity

Kaveri’s hybrid seeds portfolio is well-diversified to capturethe hybrid penetration opportunity in India

Source: Ministry of Agriculture; Indian Seed Congress; HSBC Research Source: Company

Bt cotton: a game-changer in the last 10 years

Bt cotton is a genetically modified variety of cotton producing an insecticide. This cotton carries genes

from the bacterium ‘Bacillus thuringiensis’ (abbreviated to Bt); these genes produce proteins that protect

the plant against bollworms, an infamous pest in cotton. These Bt proteins are only toxic to some moth

and butterfly caterpillars and/or larvae of beetles and mosquitoes. They are harmless to other animals,

including humans. Bt cotton was officially first introduced in India during the FY02-03 growing season.

It is produced by Monsanto in India.

Cotton area under cultivation (m hectares) Bt cotton’s impact on production and yields in India

Source: Cotton Corporation of India; HSBC Research Source: Cotton Corporation of India; HSBC Research

1 bale of cotton: 170 kgs;

2008-09 production decline was due to uneven rainfall, non-release of water from

canals and a sudden decline in exports demand due to sharp economic slowdown

How Bt cotton works

Bt cotton is made through the addition of genes encoding toxin crystals in the Cry group of endotoxin. The

Cry proteins inhibit the appetite of Bt sensitive caterpillars and larvae, resulting in death through

starvation. The way in which this happens is similar for all types of Cry proteins. The site of action is the

insect’s intestines. The caterpillars and larvae ingest the Cry pro-toxins by eating plants that have been

sprayed with Bt crystals or by eating plants that produce the Cry pro-toxins (via biotechnology). A digestive

enzyme in the mid-section of the insect’s intestine cleaves the pro-toxin. This converts the pro-toxin into an

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

S o

r g h u m

S u n f l o w e r

C o t t o n

M a i z e

B a j r a

R i c e

12

31

17

3 4

0

5

10

15

20

25

30

35

Cotton(Jadoo,Jackpot,

ATM)

Maize(Ekka, 3110,

Bumper)

Paddy(Sampurna,

Chintu,

Sleek)

Millet (Super Boss, Fouzi)

Sunflower (Sunkranti,

Champ)

0

2

4

6

8

10

12

14

F Y 9 2

F Y 9 4

F Y 9 6

F Y 9 8

F Y 0 0

F Y 0 2

F Y 0 4

F Y 0 6

F Y 0 8

F Y 1 0

F Y 1 2

0

100

200

300

400

500

600

0

10

20

30

40

1 9 5 0 - 5 1

1 9 6 0 - 6 1

1 9 7 0 - 7 1

1 9 8 0 - 8 1

1 9 9 0 - 9 1

2 0 0 0 - 0 1

2 0 0 1 - 0 2

2 0 0 2 - 0 3

2 0 0 3 - 0 4

2 0 0 4 - 0 5

2 0 0 5 - 0 6

2 0 0 6 - 0 7

2 0 0 7 - 0 8

2 0 0 8 - 0 9

2 0 0 9 - 1 0

2 0 1 0 - 1 1

2 0 1 1 - 1 2

2 0 1 2 - 1 3

2 0 1 3 - 1 4

Production in mn bales (LHS)

Yield kgs per hectare (RHS)



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21 July 2014

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active Cry toxin. The Cry toxins bind to a cadherin receptor protein on the membrane of the insect’s

intestinal cells. The exact molecular and cellular mechanisms that eventually result in the death of the insect

can vary per insect family.

Bt cotton was launched in India in 2002. In 2002, around 50,000 farmers used Bt cotton; that number is

now 7m farmers. Furthermore, it is not only the large cotton farmers who prefer to grow Bt cotton; the

average Indian cotton farmer cultivates 1.5 hectares of cotton and even the smaller farmers have switched

to Bt cotton in large numbers. Bt cotton adoption has risen from nil to 93% during the last ten years.

As seen from the exhibit showing the impact of Bt cotton by state, Maharashtra, Gujarat and Andhra

Pradesh have c75% of the area under cotton cultivation. We observe that more than 80% of the

incremental annual production is contributed by these three states.

Seed economics give 15-20% EBITDA margins

All cotton seed players using Bt cotton technology have to pay a INR180/packet royalty to Monsanto.

Typically, the EBITDA margins for key players in the sector are 15-20%.

Impact of Bt cotton on area under cotton cultivation, production and yields by state: the states of Maharashtra, Gujarat and Andhra Pradesh have alonecontributed to more than 80% of the production increase

Area (m hectares) Production (m bales) Yield kgs per hectare

State FY03 FY14 Incremental Share ingrowth (%)

FY03 FY14 Incremental Share ingrowth (%)

FY03 FY14 Yieldimprovement

%

Punjab 0.45 0.51 0.06 1.4% 0.75 2.10 1.35 5.6% 284 707 148.9%Haryana 0.52 0.56 0.04 1.0% 0.88 2.30 1.43 6.0% 287 702 144.6%Rajasthan 0.39 0.30 (0.08) -2.1% 0.50 1.40 0.90 3.8% 220 785 256.8%North Total 1.35 1.37 0.01 0.3% 2.13 5.80 3.68 15.4% 267 722 170.4%Gujarat 1.63 2.69 1.06 27.2% 3.05 11.60 8.55 35.8% 317 733 131.2%Maharashtra 2.80 3.87 1.07 27.6% 2.60 8.10 5.50 23.0% 158 356 125.3%Madhya Pradesh 0.55 0.62 0.08 2.0% 1.80 1.90 0.10 0.4% 561 520 -7.3%Central Total 4.98 7.18 2.21 56.7% 7.45 21.60 14.15 59.2% 254 511 101.2%

Andhra Pradesh 0.80 2.14 1.34 34.5% 1.98 7.20 5.23 21.9% 418 571 36.6%Karnataka 0.39 0.58 0.19 4.8% 0.50 1.80 1.30 5.4% 216 529 144.9%Tamil Nadu 0.09 0.12 0.03 0.8% 0.30 0.50 0.20 0.8% 600 726 21.0%South Total 1.28 2.84 1.56 40.0% 2.78 9.50 6.73 28.1% 368 569 54.6%Orissa 0.05 0.13 0.08 2.1% 0.10 0.40 0.30 1.3% 321 507 57.9%Others 0.03 0.03 0.8% - 0.20 0.20 0.8% 1030Total 7.67 11.55 3.89 100.0% 12.45 37.50 25.05 104.8%Loose lint 1.15 - (1.15) -4.8%Grand Total 7.67 11.55 3.89 100.0% 13.60 37.50 23.90 100.0% 302 552 82.8%

Source: Cotton Corporation of India; HSBC Research



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21 July 2014

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Bt cotton adoption has jumped from 0% to 93% in the last 10years

Seed economics for farmers in India (INR)

Source: Cotton Corporation of India; HSBC Research Source: HSBC Research

Corn remains a key area of growth

Maize is generally an all-around-the year crop in the year in India, but it remains predominantly a kharif

crop with c85% of the area under cultivation in the season. Maize accounts for c9% of total food grain

production in India. The area under maize cultivation in the period has increased at a CAGR of 2.5%

from 7.5m hectares in FY04-05 to 9.4m hectare in FY13-14. The remaining increase in production is due

to increase in yield. Factors such as adaptability to diverse agro-climatic conditions, lower labour costs

and lowering of water table in the rice belt of India have contributed to the increase in acreage.

Corn-related data in India by state Indian corn production (m tonnes)


0%

20%

40%

60%

80%

100%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

F Y 0 1

F Y 0 2

F Y 0 3

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F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

Non BT-Cotton hectarage (mn hectares) (LHS)

BT Cotton hectarage (mn hectares) (LHS)

BT Cotton adoption (%) (RHS)

Royalty toMonsanto,180, 19%

RM cost,350, 38%

R&D , 20,

2%

Employeecost, 50,

6%

Sales &others,

150, 16%

Margins,180, 19%

State Area underhybrids

Area undercultivation

Production Yield

% mn hect mn tonne tonn e/hecKarnataka 100% 1.3 4.4 3.5Rajasthan 25% 1.1 2.1 1.8MP 16% 0.8 1.0 1.2Maharashtra 100% 0.9 2.6 2.9

AP 100% 0.7 4.0 5.3UP 21% 0.8 1.1 1.5Bihar 80% 0.6 1.4 2.2Gujarat 21% 0.5 0.8 1.6Tamil Nadu 100% 0.2 1.0 4.5Others 60% 1.5 3.3 2.1

All India 60% 8.6 21.7 2.50

5

10

15

20

25

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21 July 2014

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Area under cultivation has grown but there is further scopefor yield improvement

Key corn producing states in India


India’s corn yields can double from current levels; Kaveri’s corn portfolio is equipped to capture

the opportunity

There are several types of hybrids. A single cross is the first generation of a cross of two inbred lines, an

inbred line and a foundation backcross or two foundation backcrosses. A three-way cross is the first

generation of a cross of a foundation single cross and an inbred line or foundation backcross. A double

cross is the first generation of a cross between two foundation single crosses. A top cross is the first

generation of a cross of an open pollinated variety and an inbred line, a foundation backcross, or a

foundation single cross.

The US has the highest yield of 10m tonnes/hectare when compared to global average of 5.5m tonnes due

to 85% of the area being under Bt-Single Cross Hybrid (SCH) and the remaining 15% under SCH. Other

nations under SCH have also shown higher corn yields. In India, Andhra Pradesh is the largest producer

of corn in India with a 40% share. Andhra Pradesh has the highest yield followed by Tamil Nadu due to

majority of the area being covered under Single Cross Hybrids. In India as a whole, only 30% of corn

cultivated area is under SCH; further SCH adoption could lead to significant yield improvement.

Hybrid rice remains under-penetrated, a long-term opportunity for the

whole industry

Rice hybrids seed is the most under-penetrated category in India. India’s area under rice cultivation stands

at 42m hectares (c22% of the total cropped area) while the hybrids cover only c2m hectares or c5%

penetration. Industry experts peg the hybrid paddy market growth at c10% per annum for the next four to

five years. India’s rice productivity is 2.9m tonnes/hectare as against the world average of 3.9m tonnes,

and China at 6.0m tonnes where c65% of the rice area is under hybrid. It is believed that rice hybrids have

the potential to increase yields by 15-35%. Bayer Cropscience (Unrated) is the market leader in India in

hybrid with a nearly 50% market share, followed by Pioneer Seeds with c20%. Kaveri has about 6-7%

market share.

Conclusion: The Indian seed sector has several trends in favour for multi-year growth. Key drivers

include higher adoption of hybrid seeds in corn and higher hybrid paddy seed adoption.

-

0.5

1.0

1.5

2.0

2.5

3.0

-

2.0

4.0

6.0

8.0

10.0

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

Area under maize cultivation (mn hec) (LHS)

Yield (tonne/hectare) (RHS)

-

1.0

2.0

3.0

4.0

5.0

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

R a j a s t h a n

B i h a r

M a h a r a s h t r a

K a r n a t a k a

A P

M P

Area under maize cultivation (mn hec) (LHS)Production (mn tonne) (RHS)



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Crop protection and seeds sectors both need high R&D expertise

Both crop protection agro-chemicals and seed sectors globally require significant R&D efforts to invent

new products. We note that over past ten years, crop protection related R&D expenditure globally has

been in the range of 6-7% of the total industry turnover. In the past 10 years, this sector has grown very

rapidly due to high growth in emerging markets and significant contribution from generic products.

However, the R&D expense has kept up pace steadily. We also observe that R&D expenditure in the

global seed sector has grown at a much faster pace than crop protection. Our discussion with industry

experts indicate this is largely due to the high R&D spending on genetically modified (GM) seeds and to

a lower extent due to conventional seeds. Further, our discussion also indicates pesticides generally

entailing lower R&D activities compared to R&D in hybrid seeds. Furthermore, the highest R&D

spending is required in the GM seeds.

In our coverage, UPL, PI and Rallis (pesticides business) fall in the crop protection category which,

compared to seeds, companies require lower R&D. Further, a number of the companies’ target markets

are dominated by generic products and as a result the R&D spending as a share of revenues for these

companies is the below the industry average. Kaveri’s mainstay is cotton seeds but since GM seeds

for other crops are yet to be allowed in India, Kaveri’s R&D spending remains lower than global

average. Rallis’s seed subsidiary Metahelix also requires much higher R&D efforts compared to its

pesticides business.

R&D as a % of industry sales for global crop protection andseeds industries

GM seeds industry has grown sharply compared toconventional seeds (USDbn)

Source: Industry; HSBC Research Source: Industry; HSBC Research

High entry barriers remain due to strict approval process, long timelines and high R&D costs

We see significant entry barriers in these sectors on various levels. Firstly, our discussions with industry

participants indicate that the approvals for agro-inputs sector are comparatively difficult relative to other

sectors. Further, industry estimates put the cost of bringing a new product to market at cUSD250m on

average. In addition, the timeline from the first synthesis to first commercial sales has increased over the

years. In 1995, this timeline was around eight years; this has grown to 10 years currently.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

Crop-protection R&D Seeds R&D

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

Conventional seeds GM seeds



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Weak 2014 monsoon predicted, but impact limited for most of the coverage stocks

The Indian Meteorological Department (IMD) is the Indian Government agency that gives two stages of

forecasts every year: first in April (pre-monsoon) and then the second-stage forecast in June. In its

second-stage forecast in June this year, IMD has forecast that the monsoon season rainfall for India as a

whole is likely to be 93% of the long period average (LPA). In terms of regional forecasts, the season

rainfall is likely to be 85% of LPA over North-West India, 94% of LPA over Central India, 93% of LPA

over the South Peninsula and 99% of LPA over North-East India. North-West India contributes c47% to

India’s total food production and a rainfall of 85% of LPA an unfavourable forecast. Central India and

South Peninsula which contribute c37% to the total are also forecast to have 93-94% of LPA of rainfall.

In terms of monthly rainfall, July and August typically contribute 33% each to the total monsoon forecast.IMD forecasts that while July will be around 93% of LPA, August is likely to better with 96% of LPA.

Further, the IMD’s forecasting model also predicts moderate El Nino conditions in the tropical Pacific for

summer months; warm sea surface temperature conditions in most regions are predicted. Based on this,

IMD gives a high chance (more than 70%) of El Nino occurring during the monsoons. Historically, India

has experienced a reasonable correlation (if not one to one) between its drought years and occurrence of

El Nino. Since 1950, India has faced 13 droughts, 10 of these have been in El Nino. However, as there

have been 23 global El Nino years since 1950, experts believe that all El Nino years do not imply drought

in India.

Food grain production shares and rainfall forecasts by IMDfor each region for 2014

Food grain production in India by state: Top 10 statescontribute more than 80%

Source: Ministry of Agriculture; IMD; HSBC Research Source: Ministry of Agriculture; HSBC Research

We see limited impact on our OW calls

While poor monsoons in India are likely to weigh on the agri-inputs stock sentiments, we see limited

impact on our coverage due to strong exports exposure. Further, our discussions with industry participants

also indicate that the water levels in reservoirs have been healthy and hence even the impact of domestic

markets may not be drastic this year. Though Kaveri, one of our top picks, is entirely dependent on

domestic markets, its primary markets currently are Andhra Pradesh and Karnataka which together

account for more than 70% of the sales. According to IMD’s forecast, the South Peninsula region (AP &Karnataka fall in this region) is expected to receive rainfall which is 93% of LPA. IMD defines this range

as below normal but deficient. Furthermore, our discussions with company managements of various seed

47%

15%

21%

16%

75%

80%

85%

90%

95%

100%

105%

0%

10%

20%

30%

40%

50%

North West Northeast

India

Central India South

PeninsulaShare in total food production (%) (LHS)

% of LPA (RHS)

20%

11%

7% 7% 7% 7% 6% 6% 5% 5%

0%

5%

10%

15%

20%

25%

U t t a r P r a d e s h

P

u n j a b

M P

R a j a

s t h a n

A

n d h r a

H a

r y a n a

W e s t B

e n g a l

B i h a r

M a h a r a s h t r a

K a r n

a t a k a



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players in the region suggest that there has not so far been a significant detrimental impact. In addition,

while the states of Maharashtra and Gujarat are the new growth avenues on Kaveri’s radar, these are

unlikely to be big drivers in FY15 itself.

Typical monthly rainfall spread in India PI’s revenue split by segment

Source: IMD; HSBC Research Source: Company data, HSBC estimates

For PI Industries, the high CSM growth segment (exports) has managed to reduce PI’s dependence on

monsoons significantly. CSM currently contributes about c60% to PI’s top line. The remaining c40% is

dependent on domestic monsoons; PI continues to have target markets that are spread out across various

regions and not concentrated in one particular region.

For UPL, the impact from poor monsoons is expected to be very limited as only c20% of the consolidated

top line is derived from India. UPL has a 17% market share in India’s crop protection markets and its

regional spread is quite wide without being exposed to one particular region. As a result, despite India

being one of the growth drivers, we see limited impact on UPL’s India and overall operations.

June, 17%

July, 33%

August,

33%

September,17%

57%48% 42% 42% 41% 40%

43%52% 58% 58% 59% 60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY12 FY13 FY14 FY15e FY16e FY17e

Domestic agri segment CSM



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Strong surge in market share gains continues

We initiate coverage on Kaveri Seeds (Kaveri) with an Overweight (V) and a DCF-based target price of

INR965. We expect Kaveri to deliver sales and net profit of 24% and 30% respectively over FY14-17e.

Despite higher revenue base, we expect healthy growth to continue, driven by market share gains (INRm)


A proven performer now

Kaveri is one of the leading and fastest-growing seed companies in India. Kaveri’s top line has a grown at

a CAGR of c47% between FY07-14, while the company has delivered net profit CAGR of c53% during

the same period. Kaveri has a c17% in India’s cotton seed sector, which is India’s largest seed category in

value terms. Kaveri has a share of 12-13% in corn seed markets and has 5-6% market share in hybrid

paddy seeds markets.

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5 e

F Y 1 6 e

F Y 1 7 e

Kaveri Seed Company

One of the fastest growing seed players in India; we expect

market share gains to deliver a c30% PAT CAGR in FY14-17e

Successful products, and strong distribution network to sustain its

competitive edge; seed sector dynamics in favour

Initiate with OW(V) and DCF-based TP of INR965; consensus

estimates seem conservative considering the growth momentum



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A large part of Kaveri’s success has been driven by two key cotton seed brands ‘Jadoo’ and ‘Jackpot’ that it

launched in FY08. As a result of the mega-success that these two brands experienced, Kaveri’s cotton seed

volumes have grown exponentially from 0.5m packets in FY08 to 6.7m packets in FY14 (every packet is

450grams). This has led to cotton seed revenues rising from cINR0.4bn in FY08 to cINR6bn in FY14.

Growth to be largely driven by market share gains

In the past few years, Kaveri has continued to garner market share at a strong rate, including from larger

players, with a combination of strong products (strong R&D), brand recall and a robust distribution

network. We expect Kaveri to continue acquiring market share based on the above advantages.

Our recent discussions with various industry experts suggests that even in the current environment whenthere are high cotton seed inventories and many leading players are liquidating inventories at a high

discounts, Kaveri’s cotton seed brands have been performing well without any meaningful discounts.

Seed revenues for Kaveri by category (INRm) Revenue split by category for Kaveri

Source: Company; HSBC estimates Source: Company; HSBC estimates

Almost two-thirds of Kaveri’s sales are from cotton seed brands, followed by c18% from corn seeds and

roughly c10% from hybrid paddy and pearl millets. We do not expect this mix to change meaningful over

the next three years as all of the above seed categories should continue grow at a healthy rate.

Consolidate where strong, gain share in new regions

Kaveri has a 40% market share in the state of Andhra Pradesh; however there are some districts whereKaveri has 60%+ market share while some districts have less than 15% market share, according to

company management. Kaveri aims to consolidate its position in Andhra Pradesh by focusing on districts

where it has a lower market share.

On the other hand, we see large scope for market share gains for Kaveri in states such as Maharashtra

and Gujarat where Kaveri’s market share is less than 10%. Players such as Nuziveedu Seeds, Ajeet Seeds

and Mahyco hold larger market shares in these states. More importantly, it is worth nothing that the states

of Maharashtra and Gujarat contribute about 45-50% to the total cotton production and thus hold

significant potential.

3,9756,000 7,647

9,51011,626

1,306

1,7502,195

2,739

3,400

-

5,000

10,000

15,000

20,000

F Y 1 3

F Y 1 4

F Y 1 5 e

F Y 1 6 e

F Y 1 7 e

Cotton Maize Hybrid Paddy

Pearl Millet Sunflower Other seeds

58% 61% 63% 63% 63%

19% 18% 18% 18% 18%4% 6% 5% 6% 6%

0%

20%

40%

60%

80%

100%

F Y 1 3

F Y 1 4

F Y 1 5 e

F Y 1 6 e

F Y 1 7 e

Cotton Maize Hybrid Paddy

Pearl Millet Sunflower Other seeds



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Strong research-driven products and distribution strength: the two most critical elements for

market share gains and fending off competitors

Kaveri has one of the strongest R&D divisions in the Indian seed industry. It has one of the largest

germplasm banks in India, which is Kaveri’s biggest strength. Germplasm (seed, stem or pollen) is a

living tissue from which a new plant can be grown. Over the years, Kaveri has utilized this germplasm

bank to develop a broad-based product portfolio. A diversified portfolio helps as hybrid penetration in a

number of crops is still growing, implying strong potential for larger business. Furthermore, in times of

poor monsoons, farmers often switch crops, and a wide range of seed varieties helps in de-risking its

business in a seasonal market. Kaveri’s cotton seed brand Jadoo is a prime example of its R&D expertise.

Jadoo has been a blockbuster seed product where farmers witnessed c20% higher yield cotton. Jadoo also

has very high drought stress quality.

Distribution is a key area in the seeds business in India as there is small window for sales (before the

sowing season). According to company management, Kaveri has a network of 15,000 distributors and

retailers. While Southern has been a region for the past few years, the distribution network has helped

Kaveri to enter new Northern markets such as Chhattisgarh, Jharkhand, West Bengal and Odisha.

Expected market shares for Kaveri across seed categories (%) Kaveri’s corn seed revenue (INRm)

Source: Company: HSBC estimates Source: Company; HSBC Research

Hybrid rice remains under-penetrated, a long-term opportunity for thewhole industry

Rice hybrids seed is the most under-penetrated category in India. India’s area under rice cultivation stands

at 42m hectares (c22% of the total cropped area) while the hybrids cover only c2m hectares or c5%

penetration. Industry experts peg the hybrid paddy market growth at c10% per annum for the next four to

five years. India’s rice productivity is 2.9m tonnes/hectare as against world average of 3.9m tonnes and

China at 6.0m tonnes where c65% of the rice area is under hybrid. It is believed that rice hybrid has the

potential to increase yields by 15-35%.

Bayer Cropscience (Unrated) is the market leader in India in hybrid with nearly 50% market share,

followed by Pioneer Seeds with c20%. Kaveri has about 6-7% market share. Currently, hybrid paddycontributes c5.5% to Kaveri’s total sales.

17%

13%

7%

13%

25%

16%

9%

15%

0%

5%

10%

15%

20%

25%

30%

Cotton Corn Hybrid paddy Bajra (PearlMillet)

FY14 FY17e -

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY13 FY14 FY15e FY16e FY17e



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Financials and valuationWe are initiating coverage on Kaveri Seeds with an Overweight (V) rating and a target price of INR965.

Over the past five years (FY09-14) Kaveri has delivered sales CAGR of 52% and a PAT of CAGR 53%.

Over the next three years (FY14-17e), we expect Kaveri’s market share gains to deliver CAGR for sales

and net profit of 24% and 30%, respectively. Despite the higher revenue base, we expect this healthy

growth largely to be driven by the c20%+ growth CAGR in cotton and corn seeds which contribute more

than 80% to Kaveri’s top line.

Kaveri’s growth profile in FY09-14 and FY14-17 Kaveri Seeds: forecasts

Source: Source: Company; HSBC estimates Source: Company; HSBC estimates

HSBC vs consensus: street underestimating top-line growth

Our FY15, FY16 and FY17 sales estimates are 1%, 2% and 11% above consensus. Our sales growth

estimates are 25% for FY15, 24% for FY16 and 22% for FY17, while consensus sales growth estimates

are 24%, 22% and 12%, respectively. Our higher sales growth estimates are largely a function of our

assumption that Kaveri’s cotton seed revenues are likely to grow at more than 20% due to the continued

success of Jadoo (c50% of cotton seed revenues) and ATM (c10% of cotton seed revenues). In our view,

Jadoo is likely to deliver sales growth of 20%+ while according to our conversations with industry

participants, ATM revenues may even double in FY15e. We believe that Kaveri’s performance in FY15

and FY16 may beat the Street’s top-line growth expectations. Further, the consensus estimates may also

be lower due to the conservative guidance of 15-20% from the company; however we also note that

historically the company has mostly given conservative guidance ranges.

Valuation and risks

To arrive at our target price of INR965, we have valued Kaveri on a DCF methodology (see detailed table

on next page). We have used a three-stage DCF model wherein we use estimated cash flows out to FY20

(20-25% growth), then 10% profit growth from FY21-25 and a terminal growth rate of 6%. We have used

a WACC of 14.0% for Kaveri.

Our DCF-based target price of INR965 implies a 1-year forward PE of c19x on Kaveri’s FY16 estimates,

which is in-line with Kaveri’s current forward trading PE multiple of 19x. Kaveri’s high growth trajectoryshould help its stock in attaining the PE multiple around 20x, in our view.

52%

24%

48%

28%

53%

30%

0%

10%

20%

30%

40%

50%

60%

FY09-14 FY14-17e

Net Sales EBITDA PAT

INR mn FY14 FY15e FY16e FY17e

Net Sales 10,111 12,591 15,605 19,105COGS 3,751 4,660 5,797 7,170Gross profit 6,360 7,931 9,808 11,935Other expenses 4,148 5,142 6,143 7,300EB ITD A 2, 212 2, 789 3, 666 4, 635Deprec iation 164 202 231 259EBIT 2,048 2,587 3,435 4,376Interest/Excep. 2 1 1 1Other income 97 171 272 370PBT 2,143 2,756 3,705 4,745Taxes 52 96 130 166PAT 2,092 2,660 3,576 4,579EPS (INR/sh) 30.4 38.7 52.0 66.6



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Kaveri’s 1-year forward roiling PE trend (x) Kaveri Seeds: DCF valuation

Source: Company data, Bloomberg, HSBC estimates Source: HSBC estimates

Kaveri is zero-debt company and with high RoE profile of c40% during FY14-17e. Kaveri currently has a

dividend pay-out of c20%; the company management has indicated its intent of increasing dividend pay-

outs in future. Our estimates suggest that over the next four years (FY15-18), Kaveri is likely to generate

pre-dividend free cash flows of cINR12bn (cUSD200m).

Under HSBC’s Equity Research model, the 12-month potential return band for volatile stocks meriting a

Neutral (V) rating (the ‘Neutral band’) equals the local hurdle rate (average cost of equity) set by our

Global Equity Strategy team, plus or minus 10ppt. The hurdle rate for India is 11%; this translates into a Neutral band of 1-21%. Our target price of INR965 implies a potential return of 29.4% (excluding

forecast dividend yield), which is above the Neutral band; we therefore initiate our coverage of Kaveri

shares with an Overweight (V) rating. Potential return equals the percentage difference between the

current share price and the target price, including the forecast dividend yield when indicated.

Risks to our thesis, estimates and target price

Currently, Kaveri’s business is concentrated in the Southern region of India. Adverse weather

conditions, especially poor monsoons or droughts in this region, are likely to affect Kaveri’s business

operations in this region.

Adverse regulatory changes for the domestic seed industry overall could hurt Kaveri’s business prospects.

Emergence of superior quality seed from competitors can affect Kaveri’s current market share and

projected market share gains.

0

2

4

6

8

10

12

14

16

18

20

22

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

O c t - 1 1

J a n - 1 2

A p r - 1 2

J u l - 1 2

O c t - 1 2

J a n - 1 3

A p r - 1 3

J u l - 1 3

O c t - 1 3

J a n - 1 4

A p r - 1 4

J u l - 1 4

Risk free rate 8.5%

Ex pected Market Return 14.0%Cost of equity 14.0%Net cost of Debt 10.5%WACC 14.0%

Terminal Year Growth Rate 6%Present Value of FCF to FY2025E (INR mn) 28,772Terminal v alue (INR mn) 151,494PV of terminal v alue (INR mn) 35,846Enterprise Value (INR mn) 64,618 Add: Net Cash (FY15 end) (INR mn) 1,738Equity value (INR mn) 66,356No. of shares O/s (mn) 68.7

12-month TP (INR/share) 965



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Kaveri Seeds: DCF valuation

FY15e FY16e FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e

EBIT 2,587 3,435 4,376 5,395 6,657 8,145 8,960 9,856 10,842 11,926 13,118growth rate 26.3% 32.8% 27.4% 23.3% 23.4% 22.4% 10.00% 10.00% 10.00% 10.00% 10.00%EBIT (1- tax) tax adjusted 2,496 3,315 4,223 5,206 6,424 7,860 8,646 9,511 10,462 11,508 12,659Depreciation 202 231 259 287 315 344 378 416 457 503 553Working Capital Changes (248) (1,042) (1,282) (1,379) (1,379) (1,379) (1,379) (1,379) (1,379) (1,379) (1,379)Capex (400) (400) (400) (400) (400) (400) (400) (400) (400) (400) (400)FCF 2,050 2,103 2,800 3,714 4,960 6,425 7,245 8,148 9,140 10,232 11,434Year - 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00Discount factor 0.00 0.88 0.77 0.67 0.59 0.52 0.46 0.40 0.35 0.31 0.27Discounted FCF - 1,845 2,154 2,507 2,937 3,337 3,301 3,256 3,204 3,147 3,084

Source: HSBC estimates

Kaveri Seeds: Key assumptions

FY14 FY15e FY16e FY17e

Volumes of key seed productsCotton m packets 6.8 8.5 10.4 12.5Maize tonnes 12,500 15,525 19,176 23,574Hybrid paddy tonnes 1,600 1,845 2,518 3,304 SalesCotton INRm 6,000 7,647 9,510 11,626Corn INRm 1,750 2,195 2,739 3,400Hybrid paddy INRm 550 641 883 1,170Pearl Millet INRm 450 540 648 778Others INRm 1,033 1,154 1,289 1,440Microtek INRm 308 384 497 640Kexveg INRm 20 30 40 52

Sales growth %Cotton % 50.9% 27.4% 24.4% 22.2%Maize % 34.0% 25.4% 24.8% 24.2%Hybrid Paddy % 120.0% 16.5% 37.8% 32.5%Pearl Millet % 22.6% 20.0% 20.0% 20.0%Sunflower % 8.1% 10.0% 10.0% 10.0%Other seeds % 7.3% 12.0% 12.0% 12.0% EBITDA INRm 2,212 2,789 3,666 4,635EBITDA margins % 21.9% 22.1% 23.5% 24.3%EBITDA growth % 58.8% 26.1% 31.4% 26.4%




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Company descriptionKaveri Seeds is a company engaged in the business of hybrid seeds of field and vegetable crops and

micronutrients. It is headquartered at Secunderabad, India with R&D labs located at Gundla Pochampally

and Pamulpurthi village in the Medak District on the outskirts of Hyderabad. Kaveri has pan-India tie-ups

with 15,000 distributors, distributors and market outlets. Kaveri has 7 processing plants in Andhra

Pradesh and Karnataka. It has 50,000 acres of land under seed production and a cold storage facility with

a capacity of 8,330 MT for seed reserves. Kaveri Seeds has close to 38 years of experience in the seeds

business. It started as a family business in 1976 with Mr. G.V. Bhaskar Rao and his wife Ms. G Vanaja

Devi setting up a seed production facility in Gatla Narsingapur village, Andhra Pradesh. Kaveri Seeds

was formally incorporated in 1986. Kaveri has close to 700 employees.

Kaveri’s seed portfolio includes: commercial crops – cotton and sunflower; food crops – corn, rice, bajra

and jowar; vegetables – tomato, okra and chillies. Kaveri Seeds also produces micronutrients, and bio and

organic products and bio-pesticides for soil enrichment under a separate division, Microteck.

The KexVeg division, a subsidiary company, is involved in the cultivation of premium vegetables and

herbs. The division has started herb cultivation in an exploratory built-up area of 5 hectares of green

houses. Vegetables cultivated include tomatoes, cucumber, melons, and bell peppers. Future additions to

the portfolio include green and colour capsicums, hybrid and cherry tomatoes, parthenocarpic cucumber,

leafy lettuce, iceberg lettuce and basil; and culinary herbs – chives, sage, cilantro and parsley to cater to

the European market. Kaveri is also planning to double the area under protected cultivation in the nexttwo years. The company has plans to scale up the division considerably over the next three to four years.

Kaveri Seed shareholding pattern

Source: Bombay Stock Exchange

Promoter 64%

FII11%

DII10%

Others15%



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21 July 2014

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Management profile

Kaveri Seed Company: Management profile

Name Designation Description

GV Bhaskar RaoChairman and ManagingDirector; Founder

Graduate in agriculture science. Chief strategist and looks after production, R&D andbusiness development

G Vanaja DeviFulltime Director;Co-founder

Co-founder of the company. Assists the MD of the company in general functioning andoversees CSR activities

R Venu Manohar Rao Executive DirectorInstrumental in setting up the marketing and sales network. Main interface with farmers,dealers, distributors, and other statutory authorities

C Vamsheedhar Executive Director Oversees the strategic aspects of Company affairs.

C Mithun Chand Executive DirectorIn charge of Microteck (micro nutrient division) and initiator of KexVeg, the subsidiary ofKaveri for exotic vegetables.

Dr. G Pawan Director Dr. G Pawan is an MD from Illinois State University, Chicago, US, and an MBBS fromJawaharlal Nehru University, Belgaum, Karnataka.

Dr. Y L Nene Director Agricultural scientist and science administrator. Served as Deputy Director GeneralICRISAT, Hyderabad. He established Asian Agri History Foundation.

M Srikanth Reddy DirectorGraduate in agricultural science with 35 years of experience in agri business. Advisor inpolicy matters and business affairs.

Dr. S RaghuvardhanReddy

Director PhD in Agricultural Sciences and former VC of Acharya N G Ranga Agricultural University.

Dr. SM Ilyas Director Agricultural engineer. Former Director of National Academy of Agricultural ResearchManagement (NAARM), Hyderabad and former VC of Narendra Dev University of

Agriculture and Technology, Faizabad.

P Vara Prasad Rao DirectorScience graduate with more than 35 years of experience in forest contracts andmanagement works. Expert in business transactions and negotiations.

K. Purushotham DirectorScience graduate in Agriculture. Retired as General Manager from the Indian OverseasBank (IOB) and has more than 36 years of experience in the Banking Sector.

Source: Company Information, Annual Reports



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Financials & valuation: Kaveri Seed Company Ltd Overweight (V) Financial statements

Year to 03/2014a 03/2015e 03/2016e 03/2017e

Profit & loss summary (INRm)

Revenue 10,111 12,591 15,605 19,105EBITDA 2,212 2,789 3,666 4,635Depreciation & amortisation -164 -202 -231 -259Operating profit/EBIT 2,048 2,587 3,435 4,376Net interest 95 169 270 369PBT 2,143 2,756 3,705 4,745HSBC PBT 2,143 2,756 3,705 4,745Taxation -52 -96 -130 -166Net profit 2,092 2,660 3,576 4,579HSBC net profit 2,092 2,660 3,576 4,579

Cash flow summary (INRm)

Cash flow from operations 1,935 2,614 2,764 3,556Capex -262 -400 -400 -400Cash flow from investment -1,726 -400 -400 -400Dividends -419 -533 -716 -917Change in net debt 77 -1,681 -1,648 -2,239FCF equity 1,674 2,214 2,364 3,156

Balance sheet summary (INRm)

Intangible fixed assets 0 0 0 0Tangible fixed assets 1,553 1,751 1,920 2,061Current assets 8,575 11,731 15,107 19,420Cash & others 67 1,748 3,396 5,635

Total assets 10,283 13,637 17,182 21,636Operating liabilities 4,882 6,108 6,794 7,587Gross debt 9 9 9 9Net debt -57 -1,738 -3,386 -5,625Shareholders’ funds 5,155 7,282 10,142 13,804Invested capital 5,180 5,626 6,837 8,260

Ratio, growth and per share analysis

Year to 03/2014a 03/2015e 03/2016e 03/2017e

Y-o-y % change

Revenue 42.0 24.5 23.9 22.4EBITDA 58.8 26.1 31.4 26.4Operating profit 61.2 26.3 32.8 27.4

PBT 62.5 28.6 34.5 28.1HSBC EPS 63.3 27.1 34.5 28.1

Ratios (%)

Revenue/IC (x) 2.4 2.3 2.5 2.5ROIC 46.6 46.2 53.2 55.9ROE 48.6 42.8 41.0 38.2ROA 22.1 22.2 23.2 23.6EBITDA margin 21.9 22.1 23.5 24.3Operating profit margin 20.3 20.5 22.0 22.9Net debt/equity -1.1 -23.9 -33.4 -40.8Net debt/EBITDA (x) 0.0 -0.6 -0.9 -1.2

Per share data (INR)

EPS Rep (diluted) 30.43 38.69 52.02 66.61HSBC EPS (diluted) 30.43 38.69 52.02 66.61DPS 5.21 6.62 8.90 11.40Book value 74.99 105.93 147.53 200.80

Valuation data

Year to 03/2014a 03/2015e 03/2016e 03/2017e

EV/sales 5.1 3.9 3.1 2.4EV/EBITDA 23.1 17.7 13.0 9.8EV/IC 9.9 8.8 7.0 5.5PE* 24.5 19.3 14.3 11.2P/Book value 9.9 7.0 5.1 3.7FCF yield (%) 3.3 4.3 4.6 6.2Dividend yield (%) 0.7 0.9 1.2 1.5

*Based on HSBC EPS (diluted)

Issuer information

Share price (INR)745.50 Target price (INR)965.0029.4

Reuters (Equity) KVRI.BO Bloomberg (Equity) KSCL INMarket cap (USDm) 855 Market cap (INRm) 51,362Free float (%) 100 Enterprise value (INRm) 49,472Country India Sector Agricultural Products

Analyst Alok Deshpande Contact +91 22 2268 1245

Price relative

Source: HSBC

Note: Priced at close of 16 July 2014

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2012 2013 2014 2015Kaveri Seed Company Ltd Rel to BOMBAY SE SENSITIVE INDEX



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Strong partnerships to drive structural growth

We are initiating coverage on PI Industries (PI) with an Overweight rating and a target price of INR460.

Custom Synthesis and Manufacturing (CSM) has been a fast-growing segment for PI, and currently

constitutes c60% of the total business. PI is one of our top picks in the sector due to its well-establishedand high growth custom synthesis segment and a hedged business model due to balanced exposure to

India’s monsoon dependent agro-chemical sector. In terms of business, we like PI’s business model

where it has exclusive long-standing tie-ups with global MNCs for both its domestic pesticides and CSM

segments. In our view, these partnerships give it a significant competitive advantage and we believe that

business from these partnerships is likely to be very sustainable in nature.

PI’s revenue split by segment (INRbn) PI’s revenue split by segment (%)


Company background: PI is one of the fast-growing crop protection companies in India with a well-

established pan-India presence for its agro-chemical products. PI operates in two segments: Agro-chemicals (purely domestic) and CSM. CSM has been a fast growing segment for PI and currently

constitutes c60% of the total business.

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CSM vertical providing strong cash flow visibility; differentiated

domestic business model giving competitive advantage

We expect strong momentum to continue with a sales CAGR of

23% and a net profit CAGR of 27% over FY14-17e

Initiate with Overweight (V) and DCF-based TP of INR460; stronger-

than-expected margin expansion likely to surprise consensus



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CSM segment has high visibility; margins may surprise on the upside

In its CSM segment, PI provides contract research and contract manufacturing services to global MNC

innovators, primarily from Japan and Europe. The end-use of these products is largely targeted for the

agro-chemical, pharmaceutical and technology sector. PI’s CSM business is entirely export-oriented. PI

has also established a joint research facility for developing processes for the manufacture of electronic

chemicals with Sony Corporation.

PI’s focus in this segment is to tie-up with the customer at an early stage in their product life cycle and to

maintain the tie-up throughout the commercialisation process. The process from an enquiry from a

customer to actual commercialisation typically takes two to five years.

High visibility adds comfort to our growth assumptions and management guidance

PI’s current CSM order book stands at cUSD400m, 2.6x its FY14 CSM revenues (USD152m). Even

assuming the management guidance of c20% annual growth for the CSM revenues, the segment currently

has two years of revenue visibility. We estimate the CSM revenues to grow at a CAGR of c25% over

FY14-17 as we believe that PI has been aggressively adding to its order book. Our reverse calculations

suggest that PI added new orders of USD80m in FY12, USD115m in FY13 and USD240m in FY14,

clearly showing the rising momentum in this business vertical. We expect cumulative revenues of

USD700m for FY15-17 for PI.

PI has so far commercialised 16 molecules in CSM, including three new molecules in FY14. PI is

targeting the introduction of three new molecules in FY15 and there are currently about 12-14 other products in the pipeline which lend strong visibility for the CSM business.

We also observe that the management guidance for the past three to four years has been very conservative

and the company has over-delivered on all occasions. Looking at the current momentum in CSM order

book accretion, we believe there is meaningful potential for this segment to outperform management’s

revenue growth guidance of c25%.



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Custom synthesis sample process


High value, low value focus to enhance segment margins

As mentioned above, in the CSM segment, PI focuses on patented molecules in early stages of their life-

cycles. Typically, the focus is on high-value and low-volume products, and as a result we also see this

segment having potential for meaningful margin expansion. We are conservatively assuming EBITDA

margin expansion from c20% currently to 21% in FY17; however with PI’s recent capacity addition in its

Jambusar plant (capex of INR3bn), we expect significant operating leverage to come into play from

FY17. PI is expecting asset turnover of 2x plus from its new capacity which is in line with its historical

asset turnover ratio.

Customer enquiry

Pre-feasibility Sample validation

Sign Secrecy Agreement SOP & Plant Design

Customer agreement

Detailed plant engg.

Plant erection&installation

Raw material procurement

Process Evaluation

Bench Scale Trials

Desktop costing

Customer approval

Process & cost review

Commercial ProductionPilto/Kilo Lab Scale up



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CSM segment order book and revenue booking trends andestimates (USDm)

PI’s segment-wise domestic business growth (INRbn)

Source: Company; HSBC estimates Source: PI Industries; HSBC estimates

Global CSM trends favouring India

Within the USD300bn globally fine chemicals industry (growing at 7-8% annually), the CSM sector is

estimated to be a segment worth USD85bn. Of the segment’s total India accounts for about 5%

(USD4.3bn) according to industry experts. However, India is emerging as a preferred destination for

CSM and this segment is expected to grow at a CAGR of c12% in the coming years. In recent years, for

many global innovators, India has become a preferred location due to its world-class research capabilities

and manufacturing infrastructure, a large and well-qualified talent pool with strong chemistry and

procedural skills, moderate R&D cum manufacturing costs and high capital efficiency. In our view, PIshould continue to outperform the industry growth due to its long-standing relationship and strategy of

getting in at an early stage of the product life cycles. According to industry experts, the confidentiality of

IPR is of prime importance in this sector and PI has gained a reputation for this over the past few years.

Differentiated business model for domestic agro-chemical business

PI has a differentiated strategy for its domestic business compared to some of the other players. About

60% of PI’s domestic business comes from its in-licensing business wherein PI makes exclusive tie-ups

with global innovators for the introduction of new molecules in the Indian market. PI manages the

marketing of newly launched or patented molecules from multinational innovators. In India, for exclusive

marketing right/registration, a 9(3) registration is required. This creates a win-win situation for both PI

and the global innovator as PI gets exclusive marketing rights to the products and the global MNCs get

access to PI’s strong established marketing and distribution network. PI currently has 15-20 in-licensing

products with the top 5-7 products contributing c50% of the domestic top line. The target in the in-

licensing segment is to introduce two to three products annually.

The other c40% of the domestic business is contributed by the branded generic products which PI

manufacturers and markets. PI has a strong 10,000+ distributor network which has access to more than

40,000 retail points, according to company data. We expect growth for this segment to be lower growth

than for in-licensing due to the generic nature of products and high competition levels.

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PI’s domestic pesticide growth to outpace industry growth

Due to the high-growth in-licensing segment in PI’s domestic vertical, we are expecting the overall

domestic pesticide business grow at 20%+ for PI. This is significantly higher than the growth

expectations for the domestic crop protection sector of c8% over the next few years.

Financials and valuation

We initiate coverage on PI Industries with an Overweight (V) rating and target price of INR460.

In the last five years (FY09-14), PI’s sales have grown at a CAGR of 27% while the net profit has grown

at a CAGR of 51%. During FY14-17, we expect PI to deliver top-line growth of 23% annually and

bottom-line growth of 27% annually. We expect this growth to be driven largely by the in-licensing and

CSM segments, which we expect to deliver a CAGR of 30% and 24%, respectively.

PI’s growth profile: CAGRs for FY09-14 and FY14-17e PI Industries: Consolidated financials

Source: Company; HSBC estimates Source: Company: HSBC estimates

HSBC vs consensus

While we are in line with consensus in terms sales growth, our PAT estimates are 3% below consensus

for FY15, but 2% above for FY16 and 10.4% above for FY17 due to higher margin assumptions. We

believe that the Street underestimates the positive impact of improving product mix change and of PI

using the operating leverage in its new Jambusar plant and thus enhancing its margins in the CSM

segment. Our EBITDA margin forecasts of 18.4% for FY15, 18.9% for FY16 and 19.4% for FY17 are

higher than the Street’s EBITDA margin estimates of 18.6%, 18.8% and 19.2%, respectively.

Valuation: target price of INR460 based on DCF

For our target price of INR460, we have valued PI on a DCF methodology (see detailed table on next

page). We have used the DCF method as we expect significant visibility in PI’s cash flows over the next

four to five years. We have used a three-stage DCF model wherein we use estimated cash flows out to

FY20 (15-25% growth), then 10% profit growth from FY21-25 and a terminal growth rate of 5%. We

have used a WACC of 12.3% for PI.

Our DCF-based target price of INR460 implies a 1-year forward of 21x which is in line with the current 1-

year forward multiple of 20x for PI. We expect the stock to re-rate further as it starts generating significant

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FY09-14 FY14-17e

Net sales EBITDA PAT

FY14a FY15e FY16e FY17e

Net Sales 15,869 19,555 24,159 29,784

COGS 9,198 11,617 14,265 17,526

Gross profit 6,758 8,038 9,994 12,358

Operating ex pens es 3, 868 4,433 5,422 6,576

EBITDA 2,890 3,605 4,572 5,782

Depreciation 316 380 432 527

EBIT 2,574 3,225 4,141 5,255

Finance ex penses 119 124 104 74

Other income 158 88 11 69

PBT 2,613 3,188 4,047 5,250

Tax es 733 925 1,133 1,418

PAT 1,880 2,264 2,914 3,833

EPS 13.8 16.6 21.4 28.2



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cash flows from FY16 onwards due to the conclusion of the capex phase and the company maximising asset

turns and using operating leverage to enhance margins. We estimate PI to generate FCF of cUSD200m over

FY15-19; this is roughly 7x of FY14 net profit. Historically, PI has traded close to 17x at times; however the

high growth profile is now off a higher base and should continue to re-rate the stock.

PI’s PE trend for the past 5 years PI Industries: return on equity historical trends andestimates

Source: Bloomberg; HSBC estimates Source: Company; HSBC estimates

We expect PI’s valuation to sustain as we expect PI to maintain its high RoE profile.

Under HSBC’s Equity Research model, the 12-month potential return band for volatile stocks meriting a Neutral (V) rating (the ‘Neutral band’) equals the local hurdle rate (average cost of equity) set by our

Global Equity Strategy team, plus or minus 10ppt. The hurdle rate for India is 11%; this translates into a

Neutral band of 1-21%. Our target price of INR460 implies a potential return of 37.7% (excluding

forecast dividend yield), which is above the Neutral band; we therefore initiate our coverage of PI

Industries shares with an Overweight (V) rating. Potential return equals the percentage difference

between the current share price and the target price, including the forecast dividend yield when indicated.


Failure to continue with the tie-ups with global MNCs could significantly hamper PI’s business operations.

About a 40% contribution is from PI’s domestic business. Weak monsoons in India could have a

negative impact on PI’s domestic business.

Increased competition in the custom synthesis and manufacturing segment.

Adverse foreign currency movements could hamper PI’s exports segment.

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Risk free rate 8.5%

Expected market return 14.0%Beta of the stock 1.1Cost of equity 14.6%Gross cost of debt 11.0%Tax rate 30.0%Net cost of debt 7.7%D/E 33.0%WACC 12.3%

Terminal year growth rate 5.0%Present value of FCF to FY2025E (INRm) 25,928Terminal value (INRm) 132,779PV of terminal value (INRm) 37,102

Enterprise value (INRm) 63,030 Add: net cash (FY15e end) (INRm) (707)Equity value (INRm) 62,322No. of shares O/s (m) 136.112-month target price (INR) 460


PI Industries: DCF valuation

FY15e FY16e FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e

EBIT 3,225 4,141 5,255 6,372 7,537 8,593 9,452 10,398 11,437 12,581 13,839growth rate 25.3% 28.4% 26.9% 21.3% 18.3% 14.0% 10.00% 10.00% 10.00% 10.00% 10.00%EBIT (1- tax) tax adjusted 2,290 2,981 3,836 4,652 5,427 6,101 6,711 7,382 8,121 8,933 9,826Depreciation 380 432 527 591 617 643 671 699 729 760 792Working Capital Changes (693) (830) (1,029) (1,043) (1,046) (900) (900) (900) (900) (900) (900)Capex (1,839) (1,510) (1,010) (510) (510) (510) (500) (500) (500) (500) (500)FCF 138 1,073 2,324 3,689 4,488 5,334 5,981 6,681 7,449 8,292 9,218Discounted FCF - 955 1,843 2,606 2,823 2,988 2,984 2,968 2,947 2,922 2,892




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PI Industries: Key assumptions

INRm FY13a FY14a FY15e FY16e FY17e Comments

Net salesIn-licensing 2,800 4,160 5,533 7,193 9,135 We expect the in-licensing segment to

drive the growth in the domestic segmentdue to its exclusive products and strongdistribution. We conservatively assumeslower growth rate for the other domesticagri business.

Other agri business 2,800 2,550 2,677 2,811 2,952Total agri business 5,600 6,710 8,210 10,004 12,087

CSM 6,000 9,240 11,445 14,255 17,797 CSM to grow at a CAGR of c25%between FY14-17 driven by strong orderbook addition. Order book momentumremains strong.

Total net sales 11,476 15,869 19,555 24,159 29,784

Sales growth (%)In-licensing 23.7% 48.6% 33.0% 30.0% 27.0%Other agri business 1.2% -8.9% 5.0% 5.0% 5.0%Total agri business 11.3% 19.8% 22.4% 21.8% 20.8%CSM 60.8% 54.0% 23.9% 24.6% 24.8%Total net sales 31.2% 38.3% 23.2% 23.5% 23.3%

Revenue share (%)In-licensing 24.4% 26.2% 28.3% 29.8% 30.7%Other agri business 24.4% 16.1% 13.7% 11.6% 9.9%Total agri business 48.8% 42.3% 42.0% 41.4% 40.6%CSM 52.3% 58.2% 58.5% 59.0% 59.8%

Total EBITDA 1,806 2,890 3,605 4,572 5,782 We conservatively assume modest

EBITDA margin expansion of c100bpsduring FY14-17; PI may positively surprisehere due to operating leverage comes intoplay with the new capacity additionsexpected to have asset turnover of 2x plus.

EBITDA margin % 15.7% 18.1% 18.3% 18.8% 19.3%EBITDA growth % 26.0% 60.0% 2 7.7% 22.8% 22.9%

Source: PI Industries; HSBC estimates



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Company descriptionPI Industries is an Indian crop protection company. PI Industries was incorporated in 1947 as Mewar Oil

& General Mills. It has its registered office in the lake city of Udaipur, Rajasthan. PI Industries operates

three formulation, two manufacturing facilities and five multi product plants under its three business units

across Gujarat ( Panoli and Jambusar) and Jammu. PI’s marketing and distribution network covers more

than 40,000 retail points and more than 9,000 distributors with 29 stocking points.

PI has two business activities, Agri Inputs, offering plant protection products, and Custom Synthesis &

Manufacturing for contract research. PI has an employee strength of close to 1,400.

Shareholding patternPI Industries shareholding pattern


Promoter 59%

FII20%

DII5%

Others16%



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Management profile

Management profile


Salil SinghalChairman &Managing Director

Took charge of the business in 1979. He headed Pesticide Association of India (now Crop Care Federation of India) as Chairman for17 years and is now Chairman Emeritus. He was the Chairman of the Environment Committee & FICCI for five years and is currentlyon the Boards of Wolkem India, Historic Resorts Hotels, The Lake Palace Hotels and Motels, Secure Meters, Somani Ceramics, UshaMartins, PILL Finance and Investments and Entity Holding PTE, Singapore.

Mayank SinghalManaging Director& CEO

An Engineering Management Graduate from the UK, joined PI in 1988. Worked at the plant level for two years and was inducted to theBoard of the Company in 2000 and appointed as Joint MD in 2004 and is also Director on the boards of P I Life Science Research,PILL Finance and Investments and Samaya Investment and Trading.

Rajnish Sarna Full-time Director He is a Chartered Accountant and has responsibilities in business strategy, operations and finance.

P.N. Shah Non-executivedirector

Director since 1991. He is a Chartered Accountant and a partner of M/s Shah & Co., a CA firm. He was the President of the ICAIans ison the board of Indo Count, Secure Meters, Taparia Tools, Lipi Data Systems, Wolkem India, LIC Mutual Fund Trustee Company andPranavaditya Spinning Mills.

Raj KaulNon-executivedirector

Worked for Bayer India earlier as Executive Director/CEO for its crop protection business. He later moved to Bayer AG head office andworked for the M&A division, where he rose to become the Vice President reporting to the Board. He has successfully concluded over200 M&A transactions in the areas of agro‐chemicals and biotechnology. He is also on the Board of Gowan Company, Yuma in

Arizona (USA).

Narayan K.Seshadri

Non-executivedirector

Director since 2006. He is a Chartered Accountant and worked with Arthur Anderson earlier. He was also the managing partner of thebusiness advisory practice of KPMG. He is also the founder chairman & CEO of Halcyon Group, an investment advisory &management services organization.

Bimal KishoreRaizada


A Chartered Accountant and a member of Board of Governors of the Institute of Internal Auditors, New Delhi, Treasurer of the Association of UK Chartered Accountants in India. He is also on the Board of Ranbaxy Diagnostics Ltd, BVI‐HR Practice Pvt. Ltd andInsta Power Ltd.

Pravin K. LaheriNon-executivedirector

He is a retired IAS from the Gujarat cadre. He joined Indian Railways in 1967 and Indian Administrative Services in 1969. He served inGovernment of Gujarat as District Development Officer (Jamagar), Collector (Banaskantha), Director Cottage Industries, JointSecretary (Education Department), Industries Commissioner, Principal Secretary to Five Chief Ministers of Gujarat, Principal Secretary(Rural Development, Information) and Chief Secretary. He also worked as Executive Director of National Institute of FashionTechnology (NIFT) in Government of India.

Ramni NirulaNon-executivedirector

Holds a Bachelor’s Degree in Economics and Master’s Degree in Business Administration from Delhi University with more than 30years of experience in the financial sector, beginning her career with ICICI Limited. She has held leadership positions in projectfinancing, strategy, planning, resources and corporate banking

Anurag SuranaNon-executivedirector

B.Com (Hons) Graduate joined the company in 1995. Initially, handled the polymer compounding business and later managed theentire manufacturing operations of the Panoli plant. He is on the board of PILL Finance, PI Life Science Research and WILLInvestments.

Venkatrao S.Sohoni


Holds a B.Tech degree in Electronics Engineering from IIT, Kharagpur and also has a PhD in Information Systems for Banking fromIIT, Mumbai. He has more than 48 years of experience with MNCs in India and USA. He held the position of Managing Director withRallis India Ltd & Novartis India Ltd, and as President at Pharmacia India Pvt Ltd, Biosys Inc and Sandoz Group. He is also on theBoard of Advinus Therapeutics Ltd, Fulford India Ltd (a Merck subsidiary), and Advisor to Bausch & Lomb India.




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Financials & valuation: PI Industries Ltd Overweight (V) Financial statements

Year to 03/2014a 03/2015e 03/2016e 03/2017e


Revenue 15,955 19,655 24,259 29,884EBITDA 2,890 3,605 4,572 5,782Depreciation & amortisation -316 -380 -432 -527Operating profit/EBIT 2,574 3,225 4,141 5,255Net interest 39 -37 -93 -5PBT 2,613 3,188 4,047 5,250HSBC PBT 2,613 3,188 4,047 5,250Taxation -733 -925 -1,133 -1,418Net profit 1,880 2,264 2,914 3,833HSBC net profit 1,880 2,264 2,914 3,833


Cash flow from operations 2,209 1,951 2,515 3,330Capex -621 -1,839 -1,510 -1,010Cash flow from investment -621 -1,839 -1,510 -1,010Dividends -318 -397 -511 -673Change in net debt -1,289 285 -494 -1,648FCF equity 1,587 112 1,005 2,320


Intangible fixed assets 0 0 0 0Tangible fixed assets 5,692 7,150 8,228 8,712Current assets 7,349 8,259 10,180 13,625Cash & others 438 53 347 1,795

Total assets 13,179 15,547 18,547 22,475Operating liabilities 4,613 5,215 6,012 6,980Gross debt 860 760 560 360Net debt 423 707 213 -1,434Shareholders’ funds 6,945 8,812 11,214 14,374Invested capital 7,990 10,141 12,050 13,562


Year to 03/2014a 03/2015e 03/2016e 03/2017e

Y-o-y % change


PBT 80.2 22.0 26.9 29.7HSBC EPS 93.1 20.4 28.7 31.5

Ratios (%)

Revenue/IC (x) 2.0 2.2 2.2 2.3ROIC 23.7 25.3 26.9 30.0ROE 30.7 28.7 29.1 30.0ROA 16.0 16.4 17.5 18.9EBITDA margin 18.1 18.3 18.8 19.3Operating profit margin 16.1 16.4 17.1 17.6EBITDA/net interest (x) – 98.8 48.9 1238.7Net debt/equity 6.1 8.0 1.9 -10.0Net debt/EBITDA (x) 0.1 0.2 0.0 -0.2CF from operations/net debt 522.7 275.8 1,178.9 –



Valuation data

Year to 03/2014a 03/2015e 03/2016e 03/2017e



Issuer information


Reuters (Equity) PIIL.BO Bloomberg (Equity) PI INMarket cap (USDm) 757 Market cap (INRm) 45,474Free float (%) 100 Enterprise value (INRm) 46,043Country India Sector Agricultural Products


Price relative

Source: HSBC


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We initiate on UPL Limited (UPL) with an Overweight rating and a target price of INR382. UPL is one of

the largest crop protection companies in the world. With exposure to c70% of the global crop protection

industry, UPL remains India’s only play on the prospering global crop protection sector. Over the years,

UPL has grown largely through regular acquisitions in different regions and thus remains insulated from the

vagaries of the weather in any one particular region. We expect UPL’s net profit to grow at a CAGR of

c20% between FY14-17 (consensus is at c17%), driven by c10% CAGR in the top-line during the same

period and margin expansion.

India’s only genuine play on the global crop protection sector

UPL is the 12th largest agro-chemical company in the world and the 6

th largest generic agrochemical

player. Over the last 10 years, UPL has acquired 17 companies and has managed to turn around most of

these. UPL has sales presence in more than 120 countries as a result of these acquisitions across regions;

UPL currently has more than 3,500 product registrations.

UPL Limited

India’s only genuine play on global crop protection

Strong presence in India and Brazil, two of world’s fastest-growing

agro-chemical markets, supports UPL’s growth prospects

Initiate with Overweight rating and target price of INR382

(12x PE); re-rating likely to continue as markets get more

confident about earnings

Shift in UPL’s revenue geographical shift UPL’s shift in product mix from FY04 to FY14

Source: Company; HSBC Research Source: Company; HSBC estimates

32%21%

25%

20%

19%

19%

24%

14%

26%

0%

20%

40%

60%

80%

100%

FY04 FY14India North America EU Rest of World Latin America

44%28%

5%25%

24%28%

27%19%

0%

20%

40%

60%

80%

100%

FY04 FY14Insecticides Fungicides Herbicides Others



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About 10 years back, UPL had a much higher focus on India, and India made a much higher business

contribution. However, with all the acquisitions, we believe that UPL now has a much more balanced

global exposure which hedges the company’s business operations against the weather-related swings of

particular countries and region. As a result of increasing exposure to the global crop protection sector,

UPL’s product contribution has also undergone a significant shift. India’s crop protection market still

remains insecticide heavy, although the shares of herbicides and fungicides are gradually increasing. In

FY04, UPL’s revenue split by product was much more aligned to the Indian pesticide sector; however the

split now resembles more of a global pattern with insecticides’ share down from 44% in FY04 to 28% in

FY14, and herbicides/fungicides’ share up from 29% to 53% during the same period.

String of overseas acquisitions has almost completely erased seasonality factorSince 1994, UPL has made a total of 40 acquisitions. The acquisitions, especially those in the past 10

years, have helped UPL to almost fully mitigate the seasonality factor associated with agriculture. We

note that most of the Indian crop protection companies typically post 65-70% of the annual sales during

the April-September quarter due to the sowing season. For UPL, the group revenues are almost evenly

spread across the four quarters due to varied sowing and harvesting seasons in the different geographies it

operates in. The table on the next page clearly shows the different sowing and harvesting seasons across

different regions.

Product mix now closer to global patterns UPL’s group revenues are fairly evenly spread out on aquarterly basis

Source: Company; HSBC estimates Source: Company

0%

20%

40%

60%

80%

100%

India UPL (FY04) World UPL (FY14)

Insecticides Fungicides Herbicides Others

25% 24% 24% 23%

22% 23% 20% 21%

21% 25% 25% 25%

32% 28% 31% 31%

0%

20%

40%

60%

80%

100%

FY11 FY12 FY13 FY14

Q1 Q2 Q3 Q4



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While agriculture remains seasonal in individual regions, UPL’s exposure to various geographies mitigates the seasonality factor to a larger factor

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

RICE

India (Kharif) Harvesting Sowing Sowing Sowing Sowing Harvesting Harvesting Harvesting

India (Rabi) Sowing Sowing Harvesting Harvesting Harvesting Sowing Sowing Sowing

China Sowing Sowing Harvesting Harvesting Harvesting Harvesting

WHEAT

India (Rabi) Harvesting Harvesting Harvesting Sowing Sowing Sowing

USA (winter) Harvesting Harvesting Harvesting Sowing Sowing Sowing

USA (spring) Sowing Sowing Harvesting Harvesting

Europe (winter) Harvesting Harvesting Harvesting Sowing Sowing Sowing

MAIZE

Brazil Harvesting Harvesting Harvesting Harvesting Harvesting Sowing Sowing Sowing

China Sowing Sowing Sowing Sowing Harvesting Harvesting Harvesting Harvesting Harvesting

US Sowing Sowing Sowing Harvesting Harvesting

Europe Sowing Sowing Sowing Harvesting Harvesting Harvesting

Source: HSBC Research

Snapshot of UPL’s presence in key crop protection markets and estimate share in its revenues

Country Top players

Agro-chemmarket

(USDbn)

UPL’smarketshare

UPL’sestimated

sales(USDbn)

Estimatedshare in

total sales*UPL productregistrations Key brands

India UPL, Bayer, BASF, Syngenta andRallis

2.0 17% 0.34 21% More than 50 Lancer Gold, Ulala, Saaf, Saathiand Lagaam

China Zhejiang Wynca Chemical IndustryGroup Co. Ltd (Zhejiang Wynca),

Jiangsu Yangnong Chemical Co. Ltd,Hubei Sanonda Co, Ltd, Yancheng,Southern Chemical Co. Ltd and TheZhejiang DeHeng BiochemicalDetection Technology Co

3.5 1% 0.04 2% 10 Vondozeb, Akito, Microthial, Blazerand Saaf

US Dow Agro Sciences (USA), Monsanto(USA), DuPont (USA)

8.5 5% 0.43 26% More than 50 Manzate, Aquathol, Microthial, SurFlan, Asulam, Ultra Blazer and Tricor

Europe Dow, Bayer, Syngenta, BASF and DuPont

12.0 3% 0.36 22% More than 50 Beet up and Napropamide

BrazilBayer, BASF, Syngenta and FMC

10.0 3% 0.30 18% More than 50 Trinca, Lancer, Unimark andVondozeb

Japan Sumitomo Chemicals and AryastaLifescience (Japan)

4.0 1% 0.04 2% NA Vondozeb, Epitume, Sur Flan,Devrinol and Asulam

Turkey Astranova Tarim Ticaret Ve San. A.S., Menta Co. Ltd and AgrobestGroup

0.6 6% 0.03 2% More than 50 Quickphos, Total Landax, Mancolaxyl,Unipic

Indonesia Bayer, Syngenta, DuPont, Dow and Agricon

0.4 4% 0.02 1% More than 50 Counter, Cynex, Fenkill, Saaf, Lancerand Starthene

Other nations 6.3 0.10 6%

*Estimated based on company data, differs slightly from reported financials by regionSource: Company; HSBC Research



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India and Latin America remain the growth areasIndia and Latin America (Brazil, Columbia & Argentina) contribute c21% and c19% to UPL’s group

revenues. In FY14, both these regions delivered strong growth, while the mature markets of North

America had moderate growth.

In FY14, India sales grew c26% y-o-y, aided by good monsoons. Latin America (26% of total and

includes Brazilian business) grew c14% y-o-y. While margins continue to be higher in the US and the

Europe, India and Brazil have earmarked as the growth by UPL.

India: As mentioned earlier in this report, India’s pesticides market stands at cUSD4bn currently with

USD2bn of domestic market and USD2bn of exports. The Indian domestic pesticide market is expected to

grow at a CAGR of 8-10% over the next four to five years. India’s agricultural sector is characterised by

low yields compared to other nations and the global average.

FY14 sales growth rates by region India’s pesticides use remains one of the lowest (kg/hectare)

Source: Company; HSBC estimates Source: FICCI; HSBC research

Consumption of crop protection products in India is among the lowest in the world. Consumption of crop

protection products in India is 0.6 kg/ha compared to 13 kg/ha in China and 7 kg/ha in USA. Some of the

reasons for low consumption in India are low purchasing power of farmers, lack of awareness among

farmers, and limited reach and lower accessibility of products. According to industry experts, the non-

usage or under-usage of crop protection chemicals leads to wastage of 15-20% of crop produce annually.

In value terms, experts believe this is equivalent to INR900bn (USD15bn) of crop losses. Large scope

exists to cut down these losses through increased use of crop protection chemicals. This presents an

immense opportunity for the crop protection industry to grow in India.

UPL has been in the Indian markets for many decades and has garnered c17% market share in India with

more than 50 product registrations. We expect UPL to leverage its long-established distribution network,

manufacturing efficiency to grow faster than the industry growth.

Brazil: Brazil is the largest agro-chemical market in the world with cUSD10bn market size. UPL has a

3% market share in Brazil through its recent acquisitions of DVA Agro. Key crops in Brazil are coffee,

sugarcane, oranges, soybean, corn and other grains/horticultural products. Brazil’s crop protection sector

is expected to grow 10-12% over the next two to three years. We expect UPL’s Brazil and Latin America

segments grow at similar rates.

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Europe RoW North America

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Registration: Product registration is a time-consuming and complicated process which can take

anywhere between four to seven years. The registration norms differ in every country and separate

registrations need to be filed in every country. Acquisitions are the easiest way to circumvent this process

as one company can buy-out an entire company or a subsidiary when the parent plans to divest.

Distribution network: In distribution, local knowledge is of paramount importance. Local knowledge

will include knowing local market conditions, cropping patterns, and developing relationships with local

dealers and farmers. Acquisitions are especially helpful when there are significant cultural differences and

setting up and managing own distribution would not be an efficient use of resources. UPL’s acquisitions

in Latin America came with established distribution networks which would otherwise have taken five to

ten years to build, according to industry experts.

Branding: In most pesticides markets globally, the top 10 players have 65-85% market shares. Apart

from suggesting good products, this is a strong indicator of the importance of branding in this sector.

Farmers usually are reluctant to switch from the brands with which they have had a relationship for many

years unless the alternative product offers super-normal results. Again, UPL’s Latin American

acquisitions have come with a number of strong brands in these markets where some of these brands are

market leaders.

Several re-rating triggers in the offing

We are initiating coverage on UPL with an Overweight rating and a target price of INR382. Our positive

view is based on the fact that UPL offers itself as the best risk-adjusted play in the Indian agro-inputs

sector due to its global exposure. As UPL’s earnings are not seasonal in nature, we expect the stock price

performance to be less volatile than that of the India-dependent businesses.

We arrive at our 1-year target price of INR382 by applying a PE of 12x to FY16 EPS estimates, based on

FY09-12 period where it showed profitability in-line with our expectations during FY14-17e. UPL is

currently trading at a PE of 10.3x on our FY16 estimates. We note that after the good Q4FY14 results and

strong guidance, the stock’s PE has re-rated from 8x to 10x; however we see multiple triggers that can

lead to further re-rating.

UPL’s forward PE multiple has re-rated in the recent months;

further re-rating triggers exist

We estimate a 19% CAGR in net profit during FY14-17

Source: Bloomberg; HSBC Research Source: Bloomberg; HSBC estimates

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On the bottom-line, we are expecting a CAGR of 19.4% between FY14 and FY17. Higher business

visibility is likely to lead to PE expansion for such high-profit growth. Furthermore, UPL’s RoE is likely

to exceed and be sustained above 20% over FY14-17, which indicates a strong RoE compared to global

peers. Global peers are currently trading at an average PE of 12x.

RoE profile likely to stay 20%+ from here on Cash flows sufficient to bring down D/E significantly

Source: Bloomberg; HSBC estimates Source: Bloomberg; HSBC estimates

Cash flows to be used for de-leveraging in absence of acquisitions in medium term

On the balance sheet side, in the absence of any major acquisition over the next two to three years, we see

UPL’s net debt ratio falling sharply from 0.5x FY14 to 0.2x. This deleveraging should help UPL’s stockachieve a higher multiple, in our view.

Under HSBC’s Equity Research model, the 12-month potential return band for non-volatile stocks

meriting a Neutral rating (the ‘Neutral band’) equals the local hurdle rate (average cost of equity) set by

our Global Equity Strategy team, plus or minus 5ppt. The hurdle rate for India is 11%; this translates into

a Neutral band of 6-16%. Our target price of INR382 implies a potential return of 17.2% (including

forecast dividend yield), which is above the Neutral band; we therefore initiate our coverage of UPL

shares with an Overweight rating. Potential return equals the percentage difference between the current

share price and the target price, including the forecast dividend yield when indicated.


While India’s contribution to total is limited to c20%, adverse weather is likely to have some impact

on UPL’s India business.

Due to global exposure, adverse currency movements in various regions can hurt UPL’s business

performance.

UPL has historically grown through only acquisitions. Any illogical acquisition could be a risk to our

investment thesis.

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FY13 FY14 FY15e FY16e FY17e

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Management profile

UPL Ltd: Management profile


R D ShroffChairman &Managing Director

Director since 1992 and associated with the group since inception. He is Hon. Consul of Mexico and the Director on the Board ofUniphos Enterprises, Uniphos International, Enviro Technology, Nivi Trading, Shroff United Chemicals, SWAL Corporation, BharuchEnviro Infrastructure, Agri Net Solutions and Tatva Global Environment.

S R Shroff Vice ChairmanDirector since 1992 and associated with the group since its inception. She is also on the Board of Uniphos Enterprises, Uniphos AgroIndustries, Enviro Technology, Nivi Trading, Shroff United Chemicals, Bharuch Enviro Infrastructure, Vapi Waste and EffluentManagement Co., Ventura Guaranty and UPL Environmental Engineers.

J R ShroffGlobal CEO of theGroup

Director since 1992 and a science graduate. He is also a Director on the Board of Uniphos Enterprises, Enviro Technology, NiviTrading, Ventura Guaranty, Advanta India, Bharuch Enviro Infrastructure, Tatva Global Environment, Shivalik Solid WasteManagement, UPL Environmental Engineers, Nirlon, Latur Water Supply Management, Sharvak Environment and Entrust Environment

V R Shroff Executive Director

Director since 2006. A science graduate from University of Mumbai he has independent charge of HR functions, Purchase,Commercial, Marketing (local), production department and implementation of SAP system in the organization. He is on the Board of

Agrinet Solutions, Advanta India Sharvak Environment, Entrust Environment, SWAL Corporation, Shroff United Chemicals, AgrajaProperties, Mrugal Properties, Tatva Global Environment (Deonar) and Advanta Seeds.

A C Ashar Director – Finance

Director since 1993. He is a Chartered Accountant and was associated with the group as a consultant prior to his joining of the Board.He looks after the financial functions of the Company. He is on the Board of Uniphos Enterprises, Enviro Technology, Bharuch EnviroInfrastructure, Agrinet Solutions, Tatva Global Environment, Shivalik Solid Waste Management, Entrust Environmen, Kerala EnviroInfrastructure, Latur Water Supply Management Co., Sharvak Environment and Tatva Global Environment (Deonar).

P V KrishnaIndependent &Non-ExecutiveDirector

Director since 2002. He is a member of the Audit Committee, Shareholders/Investors Grievance Committee and RemunerationCommittee. He is Ph.D.(Tech.) and a Chemical technologist with specialization in chemicals and petrochemicals. He has over40 years’ experience in Research & Development and industry and held various positions in the Government of Gujarat andGovernment of India. He is presently a Project Consultant for Chemicals, Petro Chemicals, Safety Management and EnvironmentPlanning. He is also a Director on the Board of Suvikas People’s Co-operative Bank.

Pradeep GoyalIndependent &Non-ExecutiveDirector

Director since 2001. He is a Metallurgy Engineer from IIT and Master Graduate from MIT, USA. He has been the member of All IndiaManufacturers Organization, ASSOCHAM, Indo-German Chambers of Commerce, etc. He is the Managing Director of Pradeep MetalsLtd and is also on the Board of Uniphos Enterprises, Hind Rectifiers, Entegra and Jankalyan Sahakari Bank.

K BanerjeeWhole – TimeDirector

A Chemical Engineer and has been associated with the Uniphos Enterprises (originally called United Phosphorus) since its inception.Former President of Rotary International and former Director, CII, Western Region. He is on the Board of Uniphos International.

ReenaRamachandran

Independent &Non-ExecutiveDirector

Director since 2003. Director General of Fortune Institute of Internationals Business. Doctorate in Chemistry from University of Allahabad and Doctorate in Science (chemistry) in France. Varied professional experience of over 40 years in the textile, drug, cement,petroleum and petro chemical industries.

Pradip MadhavjiIndependent &Non-ExecutiveDirector

Director since 2004. Education qualifications include B.A., B.Com. and L.L.B. More than 49 years of experience in finance andadministration. Former chief of Thomas Cook India Former Hon. Consul of New Zealand. Worked for Dena Bank for 18 years.Currently on the Board of IDFC Assets Management Company and India Gelatine & Chemicals.

Vinod SethiIndependent &Non-ExecutiveDirector

Director since 2006. A Chemical Engineer from IIT, Mumbai and Master in Business Administration from IIM, Ahmedabad. He runs hisown private investment bank and has worked with Morgan Stanley. He is Chairman of K C P Sugar and Industries and is also on theBoard of Geodesic, Axsys Health Tech, Advanta India, Mount Everest Mineral Water, Itz cash card, G. G. Dandekar Machine Worksand ISMT

Suresh P PrabhuIndependent &Non-ExecutiveDirector

He is a Chartered Accountant and has been a Member of Parliament in the 11th, 12th, 13th and 14th Lok Sabha (from 1996 to 2009)and was a Cabinet Minister of Industry, Energy, Environment and Forests, Chemicals and Fertilizers, Heavy Industry & PublicEnterprises. He has experience in sustainable development, banking & finance and international business. He is also on the Board ofCrompton Greaves.

Source: Company



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Financials & valuation: UPL Limited Overweight Financial statements

Year to 03/2014a 03/2015e 03/2016e 03/2017e


Revenue 107,709 120,037 132,239 146,260EBITDA 20,196 22,807 25,125 27,862Depreciation & amortisation -4,069 -4,501 -4,801 -5,101Operating profit/EBIT 16,126 18,306 20,325 22,762Net interest -3,553 -3,577 -3,039 -2,265PBT 11,786 14,961 17,529 20,752HSBC PBT 11,565 14,729 17,285 20,496Taxation -2,217 -3,388 -3,976 -4,714Net profit 9,498 11,498 13,474 15,955HSBC net profit 9,498 11,672 13,657 16,147


Cash flow from operations 13,059 15,170 18,779 21,784Capex -5,888 -5,000 -5,000 -5,000Cash flow from investment -5,888 -5,000 -5,000 -5,000Dividends -2,006 -2,458 -2,876 -3,401Change in net debt -5,406 -5,091 -7,711 -9,528FCF equity 4,954 6,783 9,803 12,070


Intangible fixed assets 0 0 0 0Tangible fixed assets 40,487 40,986 41,185 41,084Current assets 75,721 85,234 97,231 111,972Cash & others 10,228 13,319 19,030 26,557

Total assets 128,585 138,597 150,792 165,432Operating liabilities 40,293 42,655 45,634 49,034Gross debt 28,610 26,610 24,610 22,610Net debt 18,382 13,291 5,580 -3,948Shareholders’ funds 52,474 61,688 72,469 85,216Invested capital 65,688 70,246 73,753 77,465


Year to 03/2014a 03/2015e 03/2016e 03/2017e

Y-o-y % change


PBT 20.9 26.9 17.2 18.4HSBC EPS 22.8 22.9 17.0 18.2

Ratios (%)

Revenue/IC (x) 1.7 1.8 1.8 1.9ROIC 20.4 20.8 21.8 23.3ROE 19.2 20.4 20.4 20.5ROA 10.7 11.3 11.6 12.1EBITDA margin 18.8 19.0 19.0 19.1Operating profit margin 15.0 15.3 15.4 15.6EBITDA/net interest (x) 5.7 6.4 8.3 12.3Net debt/equity 33.9 20.9 7.5 -4.5Net debt/EBITDA (x) 0.9 0.6 0.2 -0.1CF from operations/net debt 71.0 114.1 336.5 –



Valuation data

Year to 03/2014a 03/2015e 03/2016e 03/2017e



Issuer information


Reuters (Equity) UPLL.BO Bloomberg (Equity) UPLL INMarket cap (USDm) 2,429 Market cap (INRm) 145,949Free float (%) 100 Enterprise value (INRm) 151,748Country India Sector Agricultural Products


Price relative

Source: HSBC


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Growth trajectory better than before, but fully priced in now

We initiate on Rallis India Limited (Rallis) with a Neutral rating and a target price of INR230, based

on a PE of 20x applied to our FY16 EPS estimates. Rallis, a Tata Group company, is a subsidiary of

Tata Chemicals Limited which owns 50.06% of Rallis. Rallis is mainly involved in the manufacturing

of pesticides, plant growth nutrients and seeds.

Rallis’s stock is up c25% YTD and c60% in the last 12 months, reflecting the generally optimistic mood

in Indian markets as well as the strong growth Rallis demonstrated in FY14. In FY14, Rallis delivered

strong growth on the back of its subsidiary Metahelix (seeds business) and Rallis’ Dahej plant delivering

strong growth. Rallis has a 10% market share in the Indian pesticides market and is a long-established

player in India. However, it has been laggard in terms of business growth compared to other pesticides

players in India of similar size.

We expect Rallis’s sales and net profit to grow at CAGR of c14% and c21%, respectively, between FY14

and FY17. Rallis’s stock currently trades at a 1-year rolling forward PE of 22x and 19x on FY16e EPS.

We believe there is very little room for any further re-rating of the stock from these valuation levels.

We have valued Rallis at a PE of 20x which is in line with three-year historical average. As a validation

check, our DCF based valuation is INR240 per share, which is in line with our target price of INR230 at

which we arrived by assigning the three-year historical PE of 20x. To conclude, while Rallis should show

an impressive growth trend, we do not find it an attractive opportunity considering the stock run-up and

current valuations.

Rallis India Limited

One of India’s most established pesticide companies, however

business growth has lagged other players

Exports from Dahej facility and strong growth seed subsidiary

Metahelix to drive growth and reduce dependence on domestic

pesticides

Initiate with Neutral rating and target price of INR230 (20x PE);

little scope for company to beat consensus, and recent stock rally

makes valuation rich



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Sales CAGR for various agro-inputs players: Rallis’s 3-yearand 5-year growth trends lag peers

India’s crop protection likely to grow at c12% CAGR and takea 10% global share by FY19 from c8% in FY12

Source: Bloomberg; HSBC estimates Source: Company; HSBC research

Domestic pesticides business steady, growth to come fromexports and Metahelix

Domestic business should deliver steady growth

Rallis is one of the oldest agro-input companies in India with a distribution network of more than 3,000

distributors. The Indian domestic pesticide market is expected to grow at a CAGR of 8-10% over the next

five to six years. India’s agricultural sector is characterised by low yields compared to other nations and

the global average. Consumption of crop protection products in India is among the lowest in the world.

Consumption of crop protection products in India is 0.6 kg/ha compared to 13 kg/ha in China and 7 kg/ha

in USA.

Rallis’ Megabrands working well so far

In FY11, Rallis started the Megabrands initiative wherein it built a portfolio of its key brands and

focussed on increasing its brand awareness significantly. Our industry conversations suggest that this

initiative has worked very well for Rallis so far. Brands such as Contaf/Contaf Plus, Applaud, Takumi,

Taqat, Ralligold and GeoGreen are included under this umbrella.

Dahej facility has improved access to the higher-growth exports markets

Rallis set up a new manufacturing plant in the Petroleum, Chemicals and Petrochemical Investment

Region (PCPIR) at Dahej in the state of Gujarat with an investment of INR1.5bn. This plant is a multi-

purpose technical manufacturing facility for a number of crop protection products for Rallis and has a

total capacity 5,000 tonnes annually.

We expect this plant to achieve asset turnover of at least 2x (in line with PI’s similar business segment).

This plant has enhanced Rallis’ ability to handle different type of chemistries leading to better potential

for carrying out contract manufacturing for global MNCs. We expect the revenue from this plant to grow

at 13% annually and act as the main contributor to margin expansion due to improved pricing.

The global contract manufacturing industry is USD300bn in size, according to industry estimates andgrowing at 7-8% annually. India’s contract manufacturing industry accounts for c5% of the global

market, at USD85bn. However, India is emerging as a preferred destination for contract manufacturing

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F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6

F Y 1 7

F Y 1 8

India's pesticides market (USD bn) (LHS)

India's share in global (%) (RHS)



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and this segment is expected to grow at a CAGR of c12% in the coming years. In recent years, for many

global innovators, India has become a preference due to its world-class research capabilities and

manufacturing infrastructure, a large and well-qualified talent pool with strong chemistry and procedural

skills, moderate R&D cum manufacturing costs and high capital efficiency.

Dependence on domestic business gradually reducing

Rallis’ management guidance has been that at least two-thirds of the Dahej production will cater to

exports while the remaining capacity will cater to domestic market. Rallis’ domestic business operations

remain dependent on the seasonality in India due to monsoons and have a lower growth rate than exports.

We note that due to the Dahej plant becoming operational, the dependence on domestic operations is

gradually decreasing. However, we also note that on a consolidated level, the split between domestic and

international sales have remained reasonably constant due to Rallis’s seed subsidiary Metahelix

performing in the past two years. For the international business, Rallis is focusing its growth efforts in the

EU and Latin America.

Standalone revenue split: exports increasing reducing thedependence on seasonal domestic markets

Consolidated revenue split: consolidated split has remainedconstant due to Metahelix doing well


Metahelix should be add significantly to growth

Rallis acquired Metahelix Life Sciences (a Bangalore based seed company) in 2010 and has steadily

increased its stake to c81% over the past two years. This acquisition has strengthened Rallis’ seeds

portfolio with products such as Bt rice, Bt cotton and hybrid seeds. Metahelix is India’s first company to

have developed two versions of Bt cotton traits with proprietary Cry1c and Cry1Ac. These act similarly to

the Bt cotton from Monsanto which kills cotton harmful pests such as bollworm and spodoptera which

account for more than 60% of the pests that damage this cotton.

In FY14, Metahelix reported revenues of INR1.8bn, implying a c1.5% market share in India’s INR120bn

(USD2bn) domestic seeds market. India’s seed sector is expected grow by 11-12% annually for the next

four to five years. Rallis’ management is very bullish on this business and has in fact given a long-term

sales guidance of Metahelix achieving INR10bn. We also note that Rallis’s management had earlier

expected Metahelix to achieve this target by FY15; however considering Metahelix achieved turnover of

INR1.8bn in FY14, we expect the INR10bn target to be achieved by FY18 or FY19 at the earliest,

considering the small revenue base and high growth.

0%

20%

40%

60%

80%

100%

FY10 FY11 FY12 FY13 FY14 FY15e FY16e FY17e

Domestic Exports

0%

20%

40%

60%

80%

100%

FY10 FY11 FY12 FY13 FY14 FY15e FY16e FY17e

Domest ic Exports



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Strong growth expected in Metahelix (INRm) Metahelix key seed products


Light balance sheet, best working capital management

Rallis has low debt of INR261m on its books and in terms of long-term debt is almost debt free but has to

maintain some short-term debt to maintain its working capital. In terms of working capital, it shows

working capital management that is among the best for Indian agro-inputs players. Rallis observes a very

strict collection policy; while the industry range for receivables is 80-120 days, we note that Rallis has

been able to maintain its receivable days in the 30-40 days range.

Receivable days (days) Cash conversion cycles (days)


Financials and valuations

We are initiating coverage on Rallis with a Neutral rating and a target price of INR230. Our neutral view

on Rallis is a function of the current price levels almost capturing the growth prospects of Rallis. While

we project Rallis to deliver a 19% PAT CAGR between FY14 and FY17, we find that Rallis’s current

forward PE multiple of 21x almost fully captures this growth trajectory. This is especially true

considering there are faster growing players available trading at much cheaper valuations. We arrive at

our 1-year target price of INR230 by applying the three-year historical PE of 20x to FY16 EPS estimates.

-

1,000

2,000

3,000

4,000

5,000

6,000


Bt Rice Bt Cotton Hybrid Seeds

Resistant to y ellowstem borer (YSB)

Resi stant toSpodoptera Litura,

Helicov erpa, Bollworm

Breeding programs inv egetable crops

(tomato, lady' s finger,hot pepper), fieldcrops (rice, maize,cotton, bajra) andsunflow er

Proprietary gene:Truncated cry1Ac

Proprietary genes:cry 1C, cry1Ac

-

20

40

60

80

100

120

140

FY10 FY11 FY12 FY13 FY14

Rallis UPL PI

(50)

-

50

100

150

200

250

FY10 FY11 FY12 FY13 FY14

Rallis UPL PI



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HSBC vs consensus

For Rallis, our estimates are 1.5% below consensus for both FY15 and FY16, but 2.6% above for FY17.

As in our case, we note that the Street has given Rallis the full benefit of the doubt in terms of the

company achieving guidance and growing in line with the industry growth rate.

Rallis’ 1-year rolling forward PE: We see limited room forfurther re-rating

Source: Bloomberg; HSBC estimates

Under HSBC’s Equity Research model, the 12-month potential return band for non-volatile stocks

meriting a Neutral rating (the ‘Neutral band’) equals the local hurdle rate (average cost of equity) set by

our Global Equity Strategy team, plus or minus 5ppt. The hurdle rate for India is 11%; this translates into

a Neutral band of 6-16%. Our target price of INR230 implies a potential return of 11.7% (including

forecast dividend yield), which is within the Neutral band; we therefore initiate our coverage of Rallis

shares with a Neutral rating. Potential return equals the percentage difference between the current share

price and the target price, including the forecast dividend yield when indicated.


About two-thirds of the top line is contributed by domestic business; any adverse weather conditionswould be downside risks to our estimates.

0

5

10

15

20

25

30

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

A p r - 1 1

J u l - 1 1

O c t - 1 1

J a n - 1 2

A p r - 1 2

J u l - 1 2

O c t - 1 2

J a n - 1 3

A p r - 1 3

J u l - 1 3

O c t - 1 3

J a n - 1 4

A p r - 1 4

J u l - 1 4

In comparison to other players in our coverage, Rallis looksfairly priced at the current levels

Rallis India: consolidated financials

Source: Company; HSBC estimates Source: Company: HSBC estimates

FY14-17 PATCAGR

FY15 P/E FY16 P/E

Kav eri 29.8% 19.3 14.4

PI 28.1% 19.5 14.6

UPL 19.4% 11.8 10.1

Rallis 21.1% 22.5 18.7

INR mn FY14 A FY15 E FY16 E FY17 E

Net sales 17,466 20,035 22,894 26,058COGS 10,084 11,570 13,164 14,918

Gross profit 7,381 8,465 9,730 11,140Operating ex pens es 4, 768 5, 326 6, 080 6, 922EBITDA 2,613 3,139 3,650 4,218Depreciation 407 413 455 497

EBIT 2,206 2,726 3,195 3,720Finance ex penses 126 91 85 79Other income 64 48 112 214PBT 2,144 2,682 3,222 3,855Tax es 617 805 967 1,156PAT 1,527 1,877 2,255 2,698Minority /Share i n loss/p rofit 8 11 15 18

Group PAT 1,519 1,866 2,241 2,680EPS (INR/sh) 7.8 9.6 11.5 13.8



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Adverse currency movements could hamper Rallis’ exports business.

Higher-than-expected growth in Rallis’ fast growing subsidiary Metahelix is an upside risk to our

estimates and thesis.

Company profile

Rallis India is an agrochemical company, which manufactures crop protection chemicals and custom

synthesis molecules. Agri-Iiputs comprise pesticides, plant growth nutrients and seeds. Its products

include fungicides, weedicides and insecticides. It provides technical and bulk formulations of various

molecules to companies, such as Bayer, Syngenta, Excel, UPL, Gharda, Cheminova, Dhanuka and

Nagarjuna. Its seeds portfolio covers cereals and fiber crops. It produces and markets hybrids and

research varieties of maize, paddy and cotton. It supplies a range of micronutrients for a range of crops

and soil. It also produces household products.

Shareholding pattern

Rallis India shareholding pattern


Promoter 50%

FII15%

DII7%

Others28%



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Management profile

Management profile


R. Gopalakrishnan Chairman

Worked earlier as Executive Director – Exports in Hindustan Lever and had more than 20 years of experience there. He also servedas Managing Director of Brooke Bond Lipton and was later appointed Vice Chairman of Hindustan Lever Ltd. He is a Director onBoard of several Tata Companies. He has a B. Sc. in Physics from Calcutta University, Engineering from IIT, Kharagpur and

Advanced Management Programme from Harvard Business School

B. D. Banerjee Director

He is a Non-Executive Director since 2004. He is a Post Graduate with Honours in Philosophy from Presidency College, CalcuttaUniversity and an Associate of the Insurance Institute of India. He has more than 37 years of experience in the Insurance Industry. Hehas served as the Chairman-cum-Managing Director of Oriental Insurance, National Insurance and as the Managing Director ofGeneral Insurance Corporation of India. He was also the Administrator of the Pune Stock Exchange and has also been the Insurance

Ombudsman for Maharashtra and Goa.

E. A. Kshirsagar DirectorNon-Executive Director since 2006 and is a Fellow Member of The Institute of Chartered Accountants, England and Wales. He waswith the Management Consultancy Division of A. F . Ferguson from 1973 and was its Director-in-Charge from 1988 to 2004. Specialistin Corporate Strategy & Structure, Valuation, Feasibility Studies, Disinvestments and Mergers & Acquisitions.

Prakash R. Rastogi Director

Non-Executive Director since 2007. He holds a degree of Master of Science in Technology from Bombay University and a PostGraduate Diploma in Business Management. He worked with Sandoz India from 1974 till 1994, when he was Vice President and Headof the Chemicals Division before it was de-merged to become Clariant India Ltd. He was then appointed the Vice Chairman andManaging Director of Clariant, which position he held till his retirement from the company.

Bharat Vasani DirectorChief, Legal and Group General Counsel for the Tata Group and has been with Tata Sons since 2000. He has over 32 years ofexperience as a corporate lawyer and has worked with Phillips India, NOCIL and Dow Chemical International. He holds a degree in B.Com., L.L.B. and Member of the Institute of Company Secretaries of India.

R. Mukundan Director

Experienced in Strategy & Business Development, Corporate Quality & Business Excellence, Corporate Planning and Manufacturing.He was Executive Vice President of the Global Chemicals Business and the Consumer Products in Tata Chemicals Ltd from 2007 andis currently its Managing Director. He is a BE (Electrical Engineering) from IIT, Roorkee and MBA from FMS, Delhi University. Also heattended the Advanced Management Programme at Harvard Business School in 2008.

Y. S. P. Thorat Director

Non-Executive Director since 2011. He holds a Doctorate in Economics and degrees in Political Science and Law. He worked for RBIfor 31 years until 2003. He has also served NABARD as Managing Director and Chairman. He was also associated at the policy levelwith Vaidyanathan Committees on the Short Term and Long Term Cooperative Credit Structure as Member Secretary and asChairman of the Expert Groups on Credit Deposit Ratio and Investment Credit. He is on the Boards of IDBI Asset Management andTata Chemicals. He is also Chief Executive Officer of Rajiv Gandhi Charitable Trust.

Punita Kumar-Sinha

Director

Additional Director since 2014. She holds a B.Tech. in Chemical Engineering with distinction from IIT, Delhi, an MBA from DrexelUniversity, Philadelphia and a Doctorate and Masters in Finance from The Wharton School, University of Pennsylvania. She has morethan 25 years of experience in investment management in international and emerging markets in Blackstone Group LP, Blackstone

Asia Advisors L.L.C., Oppenheimer & Company and CIBC World Markets, Batterymarch Financial Management Inc., Standish Ayerand IFC/ World Bank. She is also a Member of the US Council on Foreign Relations, and a Chartered Financial Analyst.

V. ShankarManaging Director& CEO

He joined Rallis India in 2005 as Chief Operating Officer. Prior to joining Rallis, he had worked with Tata Chemicals as ChiefOperating Officer, Phosphates Business, before which, he was with Hindustan Lever Ltd from 1986 to 2004. While in Hindustan Lever,he served in various capacities in the Commercial function and was also Head of the Seeds as well as Fertiliser businesses. Mr.Shankar is a Chartered Accountant, Cost Accountant, Company Secretary as well as a Law Graduate.








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Notes



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Notes



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Disclosure appendix

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that theopinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their

personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specificrecommendation(s) or views contained in this research report: Alok Deshpande, Kumar Manish and Thomas Hilboldt

Important disclosuresEquities: Stock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which

depend largely on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations.Given these differences, HSBC has two principal aims in its equity research: (1) to identify long-term investment opportunities

based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12-month horizon; and(2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical

or event-driven techniques on a 0- to 3-month horizon and which may differ from our long-term investment rating. HSBC hasassigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research.

Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor’s decision to buy or sell a stock should depend on individual circumstances such as the investor’s

existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different ratingsystems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research

report. In addition, because research reports contain more complete information concerning the analysts’ views, investorsshould carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not

be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings

HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regionalmarket established by our strategy team. The target price for a stock represents the value the analyst expects the stock to reach over

our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return,which equals the percentage difference between the current share price and the target price, including the forecast dividend yield

when indicated, must exceed the required return by at least 5ppt over the next 12 months (or 10ppt for a stock classified as Volatile*).For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5ppt

over the next 12 months (or 10ppt for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any ‘material change’ (initiation of coverage, change ofvolatility status or change in target price). Notwithstanding this, and although ratings are subject to ongoing management

review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations withoutnecessarily triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12

months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past

month’s average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,however, volatility has to move 2.5ppt past the 40% benchmark in either direction for a stock’s status to change.



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Rating distribution for long-term investment opportunities

As of 18 July 2014, the distribution of all ratings published is as follows:

Overweight (Buy) 44% (31% of these provided with Investment Banking Services)

Neutral (Hold) 38% (32% of these provided with Investment Banking Services)

Underweight (Sell) 18% (26% of these provided with Investment Banking Services)

HSBC & Analyst disclosures

Disclosure checklist

Company Ticker Recent price Price date Disclosure

KAVERI SEED COMPANY LTD KVRI.BO 763.80 17-Jul-2014 4Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months.

3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by thiscompany.

4 As of 30 June 2014 HSBC beneficially owned 1% or more of a class of common equity securities of this company.5 As of 31 May 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of investment banking services.6 As of 31 May 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-investment banking securities-related services.

7 As of 31 May 2014, this company was a client of HSBC or had during the preceding 12 month period been a client ofand/or paid compensation to HSBC in respect of non-securities services.

8 A covering analyst/s has received compensation from this company in the past 12 months.9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below.10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below.

11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or insecurities in respect of this company

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives)

of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that

company available at www.hsbcnet.com/research.

Additional disclosures

1 This report is dated as at 21 July 2014.2 All market data included in this report are dated as at close 16 July 2014, unless otherwise indicated in the report.

3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with itsResearch business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research

operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.



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Metals and Mining

EMEAAndrew KeenGlobal Sector Head, Metals and Mining

+44 20 7991 6764 [email protected] Zimmermann, CFA+44 20 7991 6835 [email protected]

Ash Lazenby+44 20 7991 2351 [email protected]

Emma Townshend+27 21 794 8345 [email protected]

Derryn Maade+ 27 11 676 4519 [email protected]

North America & Latin America

James Steel+1 212 525 3117 [email protected]

Patrick Chidley, CFA+1 212 525 4915 [email protected]

Botir Sharipov, CFA+1 212 525 5150 [email protected]

Howard Wen+1 212 525 3726 [email protected]

Francisco Navarrete+55 11 2169 4612 [email protected]

Tatiane Shibata+55 11 2169 4407 [email protected]

AsiaSimon FrancisRegional Head of Metals and Mining, Asia Pacific+852 2996 6620 [email protected]

Chris Chen+852 2822 4277 [email protected]

Jeff Yuan+852 3941 7010 [email protected]

Brian Cho+822 3706 8750 [email protected]

Jigar Mistry, CFA+91 22 2268 1079 [email protected]

Jena Han+822 3706 8772 [email protected]

Energy

EuropeGordon GrayGlobal Sector Co-head, Oil and Gas+44 20 7991 6787 [email protected]

David PhillipsGlobal Sector Co-head, Oil and Gas+44 20 7991 2344 [email protected]

Peter Hitchens+44 20 7991 6822 [email protected]

Phillip Lindsay+44 207 991 2577 [email protected]

Kirtan Mehta, CFA+91 80 3001 3779 [email protected]

CEEMEABülent Yurdagül+90 212 376 46 12 [email protected]

Ild Kh i CFA

Chemicals

EuropeDr Geoff Haire+44 20 7991 6892 [email protected]

Sebastian Satz, CFA+44 20 7991 6894 [email protected]

Jesko Mayer-Wegelin, CFA+49 211 910 3719 [email protected]

CEEMEA Yonah Weisz+972 3 710 1198 [email protected]

Sriharsha Pappu, CFA+971 4 423 6924 [email protected]

Nicholas Paton, CFA+ 971 4 423 6923 [email protected]

AsiaDennis Yoo, CFA+852 2996 6917 [email protected]

UtilitiesEuropeAdam Dickens+44 20 7991 6798 [email protected]

Verity Mitchell+44 20 7991 6840 [email protected]

Pablo Cuadrado+34 91 456 62 40 [email protected]

AsiaJenny CosgroveRegional Head of Utilities and Alternative Energy, Asia Pacific+852 2996 6619 [email protected]

Neel Sinha Analyst+65 6658 0606 [email protected]

Arun Kumar Singh Analyst+91 22 2268 1778 [email protected]

Gloria Ho+852 2996 6941 [email protected]

Summer Y Y Huang+852 2996 6976 [email protected]

Yeon Lee+822 3706 8778 [email protected]

Latin AmericaOsmar Camilo+55 11 3847 9502 [email protected]

CEEMEALevent Bayar

Analyst+90 212 376 46 17 [email protected]

Dmytro Konovalov+7 495 258 3152 [email protected]

Alternative Energy

Jenny Cosgrove

Global Natural Resources & Energy

Research Team

mailto:[email protected]


































Documents

India Agri - HSBC.PDF