Agrochemical Industry

October 01, 2012
Indian Agrochemical Industry

Imminent partner in achieving food security
Tarun Surana tarun.s@sunidhi.com Phone: +91-22-66318632
Jayant Sharma
Shyam Bhatt
Agrochemical Industry
Imminent partner in achieving food security
Agrochemical Industry plays role of Shiva The destroyer in Agri-input chain Hindu mythology tells us about Brahma, Vishnu & Mahesh. All 3 play vital roles in world. Brahma is associated with creation or beginning, Vishnu is associated with life/existence/maintenance and finally Mahesh (Shiva) is associated with end or destruction. Agri-input industrys value chain consists of mainly Seeds, Fertilisers and Agrochemicals. Brahmas role can be associated with Seed industry which creates a new plant, Vishnu The Fertiliser industry as it helps in sustaining life of plants and Mahesh The Agrochemical industry as it destroys/kills pests. It is thus very important part of Agri-input chain that saves crop losses due to pests and will continue to help in feeding ever increasing population in decades to come. Challenge of feeding the world By 2050 the worlds population will reach 9.1 billion, 34 percent higher than today. Nearly all of this population increase will occur in developing countries. Urbanization will continue at an accelerated pace, and about 70 percent of the worlds population will be urban (compared to 49 percent today). Income levels will be many multiples of what they are now. In order to feed this larger, more urban and richer population, food production (net of food used for biofuels) must increase by 70 percent. Annual cereal production will need to rise to about 3 billion tonnes from 2.1 billion today and annual meat production will need to rise by over 200 million tonnes to reach 470 million tonnes. has to be met with higher crop yields Some 90% of the growth in crop production globally (80% in developing countries) is expected to come from higher yields and increased cropping intensity, while the remainder coming from land expansion. Arable land will expand by some 70 million ha (or less than 5%), with the expansion in developing countries by about 120 million ha (or 12%) being offset by a decline of some 50 million ha (or 8%) in developed countries. On an average, annual crop yield growth rate over the projection period would be about half (0.8%) its historical growth rate (1.7% average; 0.9% for developed and 2.1% for the developing countries) according to FAO. This will require extensive use of agri-input chain including agrochemicals, which palys vital role in increasing yields by saving the crops from pest attacks. Food consumption to rise faster in developing countries like India with rising incomes and large populations Grain and oilseed consumption has been rising at a steady pace in the developed world for the last few decades. There is continuing rise in consumption in most developing regions with large populations and expanding economies. Millions of people in the developing world now have higher incomes and a strong desire to improve their standard of living especially quality of their diets. With the worlds food producers (farmers) working to increase production and get more crop from each unit of limited land, we see robust demand for solutions that help in this endeavor, Agrochemicals being one of the critical factor among them. Our top picks Dhanuka Agritech & PI Industries Our top picks in the industry are Dhanuka Agritech & PI Industries with 49% & 26% upside respectively. We upgrade UPL to Buy recommendation with upside of 31%. We find Rallis and Insecticides India expensive at current valuations, Initiate with Reduce.
Price target and recommendation

Company Dhanuka Agritech Insecticides India PI Industries Rallis India United Phosphorus
*As on 28th Sep 2012
CMP* 98 414 542 145 131
Target 146 412 685 140 171
Upside (%) 49 -0.5 26 -3 31
Recommendation BUY REDUCE BUY REDUCE BUY
Sunidhi Research |
Agrochemical Sector
Financial Snapshot
Company Dhanuka Agritech Insecticides India PI Ind Rallis United Phosphorus Average Year FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Sales 6108 7051 6737 8382 10911 13427 15398 17890 86852 95547 25201 28459 EBIDTA 901 1022 741 964 1893 2420 2618 3086 15199 16721 4270 4843 PAT 639 733 423 523 1081 1430 1492 1809 6689 7844 2065 2468 EPS Adj 12.8 14.7 33.3 41.2 43.2 57.1 7.7 9.3 14.6 17.1 22.3 27.9 P/E 7.7 6.7 12.4 10.0 12.5 9.5 18.9 15.6 9.0 7.7 12.1 9.9 P/ Bv 1.9 1.5 1.8 1.5 3.3 2.5 4.4 3.7 1.3 1.2 2.5 2.1 EV/ EBIDTA 5.6 4.8 8.1 6.8 8.3 6.4 11.3 9.4 5.7 5.0 7.8 6.5 Net D/E 0.0 0.0 0.2 0.4 0.5 0.4 0.2 0.1 0.6 0.5 0.3 0.3 ROaE 26.7 25.1 17.7 16.4 29.2 30.2 16.6 21.3 15.3 16.0 21.1 21.8
Source: Sunidhi Research Estimates
Dhanuka Agritech - Fair value of ` 146/share (Upside of 49%), Initiate with Buy DAL will continue to focus on launching new products and keep a diversified portfolio along with tie ups with innovator companies for marketing their products in India. It will continue to follow its strategy of following asset light model (manufacturing only formulations) and thus generate free cash flow and clock-in high return ratios. At CMP of `98, DAL is trading at P/E of 7.7x and 6.7x for FY13E and FY14E. We value DAL at P/E of 10x for FY14E earnings. Initiate with Buy. Insecticides India Ltd - Fair value of `412/share (Upside of -0.5%), Initiate with Reduce At CMP of `414, IIL seems fully valued and is trading at P/E of 12.4x and 10.0x for FY13E and FY14E. We value IIL at P/E of 10x for FY14E earnings (at a discount compared to Rallis and PI Ind due to lower return ratios, generic portfolio). We have factored in 15% dilution on account of planned QIP in our forecasts. Initiate with Reduce. PI Industries - Fair value of ` 685/share (Upside of 26%), Initiate with Buy With return ratios of ~30%, robust growth trajectory and lower tax rates after commissioning of Jambusar SEZ unit, PILs earn ings will continue to be in growth momentum. At CMP of ` 542, PIL is trading at P/E of 12.5x and 9.5x for FY13E and FY14E. We value PIL at P/E of 12x for FY14E consolidated earnings. Initiate with Buy. Rallis India - Fair value of ` 140/share (Upside of -3%), Initiate with Reduce Rallis will continue to focus on launching new products in domestic markets with reliance on strong brands. We expect revenue share of exports to grow further with potential for Dahej Phase 2 upon success in negotiating contracts with clients. It witnessed massive re-rating in FY10 and FY11. Though it has underperformed broader markets in last year, it is still priced to perfection with no margin of safety in our view. At CMP of `145, Rallis is trading at P/E of 18.9x and 15.6x for FY13E and FY14E. We value Rallis at P/E of 15x for FY14E earnings. Initiate with Reduce United Phosphorus - Fair value of ` 171/share (Upside of 31%), Upgrade to Buy UPL is proxy play to global generic agrochemical markets. Weather is key risk to Its business with challenging season in USA due to draught, delayed monsoon in India and very wet season in Europe. UPL is banking very high on Rest of the World markets, especially Brazil. Any weather related issues in this market may threaten growth. UPL is being supported with ongoing Buyback. It is trading at attractive valuations though deterioration in margins. Rising debt on balance sheet is also a concern. It has Poor ROAEs compared to smaller Indian peers due to asset heavy model with presence across the globe that includes markets with low margin, higher credit cycles. At CMP of `131, UPL is trading at P/E of 9x and 7.7x for FY13E and FY14E EPS. We maintain estimates and upgrade target price to `171 based on P/E of 10x for FY14E EPS (from `145 based on FY13E EPS earlier) as we roll forward valuations to FY14E. Upgrade to Buy (from Accumulate earlier).
Sunidhi Research |
Table of Contents
Particulars
Global agriculture & food scenario Indian agriculture & food scenario Debunking some myths Agrochemical industry basics Global agrochemical industry Indian agrochemical industry Porters 5 forces Comparison of long term sales & profit growth, average margins & return ratios 2nd Quarter is biggest quarter in the year for Indian agrochemical industry Sunidhi Agrochem & Seed Index jumps 6x from FY08 Risk factors
Page No
5 7 15 16 20 22
28 29 31 32 34
Company Section
Dhanuka Agritech Limited Insecticides India Limited PI Industries Limited Rallis India Limited United Phosphorus Limited 36 51 64 79 94
Sunidhi Research |
Global Agriculture & Food Scenario

World population to rise to over 9 billion, faster in Less Developed countries Between 1960 and 2000, global population rose by 100% (3bn to 6bn), and global agricultural production rose by 150%. Over the same period, the global agricultural labour force rose by 60%, and the global agricultural land area rose by only 10%. In other words, food production significantly outpaced population growth. Food production measured in calories per capita per day has increased steadily since 1961. Agricultural production has risen steadily since 1961 due to advancement in technology and related factors (e.g. investment, education, institutions and improved farm management). Even then, almost 1 billion people remain hungry every day. Exhibit 1: World population (In Millions)
9000 8000 7000 6000 5000 4000 5671
7875
3000
2000
1717
1237
1275
1000
0
812
1950 2010 2050
More Devloped
Less Developed
Source: UN, Bunge, Sunidhi Research
Rising population, limited land will continue to reduce per capita arable land In 1960, world had 3 billion people and had 4.3 ha arable land per person which reduced to 2.2 ha per person and is set to decline further to 1.8 ha per person by 2020. Exhibit 2: Per Capita Arable land will continue to decline
8 7 6 5 4 3 2 1 0
1960 1980 Population (Billion)
Source: FAOStat, Sunidhi Research
7.5 6 4.3
4.4
3
2.2 1.8
2000
2020
Arable land per person (ha)
Sunidhi Research |
Agrochemical Industry World Is Urbanizing With rising population, interestingly, world is getting more urbanized. In 1950, rural population was 2.5x of urban population where as in 2010, both were almost equal. By 2050, urban population will be 2.3x of rural population. As world urbanizes, it reduces agricultural work force available in rural areas. In developed economies of Europe and America, agriculture workforce represents only 5% of total work force while estimates for Africa and Asia suggests that from 70% in 1980s, it will decline to 50% by 2015. Exhibit 3: Global Population by Type of Community (millions)
7000
6000
5000 4000 3000 3412
6398
2793 3495 1798
2000
1000 0
737 1950 2010 2050
Rural
Urban
Source: UN, Bunge, Sunidhi Research
Growth in World Demand for Grains and Oilseeds Demand for grains and oilseeds come not just from food but also from feed and fuel. With every passing decade, demand is rising faster than previous one in CAGR terms. Exhibit 4: Demand for grains and oil seeds are rising faster
900
800 700 600 500 400 300 1.6% 2.9% 2.7%
2.8%
200
100
0 All Uses
1990
Food
2000 2010
Feed
2020
Fuel
Source: LMC, Bunge, Sunidhi Research
Sunidhi Research |
Indian Agriculture & Food Scenario

India will need 355 mn tonnes of food grains to feed population of over 1475 million by 2030 The Indian population, which increased from 683 millions in 1981 to 1210 millions in 2010, is estimated to reach 1412 million in 2025 and to 1475 millions in 2030. To feed the projected population of 1.48 billion by 2030 India needs to produce 355 million tonnes of food grains. The expanded food needs of future must be met through intensive agriculture without much expansion in the arable land. The per capita arable land decreased from 0.34 ha in 1950-51 to 0.15 ha in 2000-01 and is expected to shrink to 0.08 ha in 2025 and to 0.07 ha in 2030. Globally, 10,000 years of historical food production must be matched in the next 50 years for feeding increased population. Exhibit 5: Domestic demand for food grains to reach 355 mn tonnes by 2030
Source: ICAR Vision 2030, Sunidhi Research
India is likely to witness massive shortages in pulses, edible oil and sugars by 2021 and 2026 as per ICRIER. Exhibit 6: Supply-Demand Gap for selected foods
Source: ICRIER working paper - Mittal 2008
Sunidhi Research |
Agrochemical Industry Food Security Bill raises need to enhance food production urgently National Food Security Bill proposes coverage of up to 75% of total rural population with at least 46% population belonging to priority households and up to 50% of the total urban population with at least 28% population belonging to priority households would have 7 Kg of foodgrain per person per month. Besides, general household would also have entitlement of 3 Kg of foodgrain per person per month. $20 bn worth crop is lost to pests Demand for food products will keep spiraling with the expected rise in population. But as overall land under agriculture keeps decreasing (with the rise in other uses of land), governments will focus more on increasing crop productivity/yields. With Indias crop losses on account of inadequate and improper use of pesticides exceeding $20 bn per annum (source: ASSOCHAM), we believe that higher penetration of pesticide usage will be an important factor for increasing farm productivity. Consequently, well entrenched pesticide players will benefit from the macroeconomic factors. The domestic agrochemical industry has shown healthy growth of over 12% CAGR in last few years. At present, the domestic agrochemical industry is worth ~Rs 84 bn and is expected to grow by at least 12% per annum till 2015. Low crop yields in India v/s World average The yield per hectare in India is amongst the lowest in the world - 2.9 mn tonnes per hectare as compared to 7.8 mn tonnes in the US, 6.2 mn tonnes in Japan, and world average of 4.0 mn tonnes per hectare. The government is making sustained efforts to improve per hectare yield which in turn necessitates increased usage of agrochemicals. Exhibit 7: Per Ha yields in India are lower than world
10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0
Yields (Kg/Hectare)
Source: FAO, Sunidhi Research
Sunidhi Research |
Agrochemical Industry Exhibit 8: Crop-wise yields in India v/s world average (Tonne per Ha)
6
5
5
4.2
3 2.8
4 3
2 1 0.9
2.3
2.2
2.2
1.9 1.1
1.6 0.9
0
Wheat Rice Corn Soyabean Rapeseed Peanuts
World
Source: CIL, Sunidhi Research
India
Exhibit 9: Significant Yield-gaps exist within states (KG per Ha)
Source: Ministry of Agriculture, Sunidhi Research
Exhibit 10: Trend of gross cropped area, net sown area, net irrigated area, and gross irrigated area
Source: Agricultural Statistics 2011-12 Sunidhi Research | 9
Agrochemical Industry Agriculture has been losing land to other lucrative sectors which are growing slower Arable land in India is coming down over the last few decades as more sectors compete for land (such as industries, housing, and education) while agriculture has been losing it. Net Sown area has remained stagnated at ~141 mn ha over last 2 decades. Net irrigated area has gone up, thanks to governments focus on bringing more land under irrigation by undertaking various projects. Indian agriculture is dotted with small farmers without access to modern agricultural techniques Landholdings are fragmented in India. Over 80% farmers have less than 2 ha land under cultivation. That is Indias biggest challenge in increasing yields. The average size of the landholdings declined to 1.32 ha in 2000-01 from 2.30 ha in 1970-71, and absolute number of operational holdings increased from about 70 million to 121 million. If this trend continues, the average size of holding in India would be mere 0.68 ha in 2020, and would be further reduced to a low of 0.32 ha in 2030. This is a very complex and serious problem, when share of agriculture in gross domestic product is declining, average size of landholding is contracting (also fragmenting), and number of operational holdings are increasing. Declining size of landholdings without any alternative income augmenting opportunity is resulting in fall in farm income, causing agrarian distress. A large number of smallholders have to move to postharvest and non-farm activities to augment their income. The research focus should be to evolve technologies and management options to suit needs of smallholders agriculture, and also to involve them in agri-supply chain through institutional innovations. In 1960, when global population was 3 bn, per capita arable land was 0.5 ha. Global population is now placed at 7 bn with available per capita around 0.2 ha. Exhibit 11: Indias average farm size is just 1.2 ha
Source: FAI, Sunidhi Research
Area under food grains declined at annual rate of 0.02% during 1994-95 to 2009-10 Exhibit 12: Crop Wise CAGR
2.0 1.5 1.82 1.63 1.51
CAGR (%)
1.0 0.5 0.0 -0.5
0.53 0.07
0.53
0.42
-1.0 -1.5
(0.51)
Cereals
Foodgrains
Bajra
Rice
Source: Ministry of Agriculture, Sunidhi Research
Sunidhi Research |
Oil Seeds
Wheat
Pulses
Jowar
Maize
(1.29)
10
Agrochemical Industry Agriculture & allied activity credit rising in India Indian farmers are typically small with affordability issues. India has witnessed sharp rise in credit to agriculture & allied activities, which augurs well for higher agri-input usage, including agrochemicals. Exhibit 13: Outstanding Farm Credit (INR Billion)
6,000
5,225
4,603 4,161 3,387 2,753 2,304
5,000 4,000
3,000
2,000 1,000
0
2007 2008 2009 2010 2011
2012
Source: RBI, Sunidhi Research
Governments thrust on Agriculture Government has increased RKVY plan outlay from `78.6 bn to `92.2bn. Exhibit 14: Governments thrust on Agriculture (INR Billion)
100.0 90.0
92.2 78.6 67.2
80.0 70.0 60.0

50.0 40.0 30.0 20.0 10.0 0.0 28.9 37.6
12.5
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Source: Ministry of agriculture, Sunidhi Research
Sunidhi Research |
11
Agrochemical Industry Rising MSPs, higher rural incomes leading to better times for Agri-input industry MSP trend, higher rural income with resilient economic growth and income in hands of poor through MNREGA schemes augur well for Agri-input industry in the long run. Exhibit 15: Rising MSPs to drive up foodgrain sourcing by government.
INR Thousands
4.5 4.0 3.5 3.0
2.5
2.0 1.5 1.0 0.5 2005-06
Paddy (grade A) Urad
2008-09
Jowar/ Bajra Soyabean
2009-10
Maize
2010-11
Arhar
2011-12
2012-13
Moong
Groundnut in Shell
Cotton (Med Staple)
Source: Ministry of Agriculture, Sunidhi Research Fruits & Vegetables are also rewarding farmers well Along with hikes in MSP in foodgrains, prices of fruits & vegetables are also rising which in turn is turning more attractive for farmers. Our analysis of WPI index for both from FY05 shows that inflation in fruits & vegetables is volatile compared to foodgrains, however over longer term, both are aligned.
Exhibit 16: WPI of Food grains, Fruits & Vegetables

250
200
150
100
50
Dec-10
Dec-05
Oct-06
Aug-07
Oct-11
May-06
Nov-08
May-11
Mar-07
FOOD GRAINS(CEREALS+PULSES)
Source: MOSPI, Sunidhi Research
FRUITS & VEGETABLES
Sunidhi Research |
Mar-12
Aug-12
12
Apr-04
Sep-04
Feb-05
Apr-09
Jan-08
Sep-09
Feb-10
Jun-08
Jul-05
Jul-10
Agrochemical Industry Rural Employment Guarantee Scheme Due to increased government thrust on making work available in rural India, labour costs are rising. This has led to higher usage of Herbicides as it is alternative to manual weeding which requires manual labour on fields. Herbicides growth is faster than industry in recent years. Exhibit 17: MNREGS Allocation (` Billion)
450 400 350 300 250 200 150 117.5 122.2 408.0 418.8
310.2
320.0
100 50 0
FY07 FY08 FY09 FY10 FY11 FY12
Source: Ministry of Finance, Sunidhi Research
Growth of horticulture and floriculture industries Buoyed by growth of the Indian floriculture industry in 3 years, India launched National Horticulture Mission. This augurs well for demand for agrochemicals (especially fungicides). Exhibit 18: Horticultural Production India (Mn Tons)
Source: National Holtculture Mission, Sunidhi Research
Sunidhi Research |
13
Agrochemical Industry Focus on productivity improvement in agricultural produce to drive growth of domestic pesticide industry Crop losses in India - due to insects, rodents, diseases and weeds - range from 10-30% annually depending on the severity of attack and climatic and environmental conditions. Consumption of pesticides in India is close to 0.57 kg/ha while in countries like Taiwan it is 17 kg/ ha; in the US it is 3 kg/ha, in the EU it is 3 kg/ha and in Japan it is 12 kg/ha. Exhibit 19: Indias per ha Pesticide Consumption (FY09) is very low
Source: Industry, Sunidhi Research
Low penetration only 35 40% of farmland is under crop protection There is great scope for increase in usage of agrochemicals with only 35-40% of the total farmland under crop protection chemicals. Per ha consumption of agrochemicals in India is very low compared to many developed countries and world average.
Sunidhi Research |
14
Debunking some Myths

Pesticides = Poison in our food? The answer is - of course, yes! Pesticides are poisonous and there is no doubt about it. But does that mean, we are eating poison in our food plates when we eat food where pesticide has been used? The answer may well be Yes if usage of pesticide is not restricted to prescribed level. Pesticides are poisonous for target pests and kill them but are safe for humans till the maximum permissible levels which is certified after extensive checks by regulatory authorities. Anything in excess is bad and so is the case with pesticides. Its basically a medicine which saves crop from insect / pest attacks. We can understand this by example of sleeping pills or pain killers. If a human takes them rationally, it helps in bringing relief from a problem/disease, but if excessive doses are taken, it can even lead to death. That doesnt mean that medicines per se had an issue and should be banned. It was its wrong usage which leads to unwarranted health hazards. Is Organic farming the way forward? World was growing food organically before the advent of chemical industry i.e. Pesticides and Fertilisers. Genetically Modified seeds are also a recent phenomenon and didnt exist few decades back. One can compare the yields in recent years vis--vis yields few decades back when entire Agri-input chain was Organic. Land is limited and is increasingly getting more expensive due to competing usage from increasing industrialization, infrastructure projects and rapid urbanization. Organic farming may not be the answer to increasing need of food production as rising population demands more nutrition in developing world. Organic food will continue to remain expensive in our view due to lower yields and hence out of reach for majority of people. The way forward to satisfy billions of hungry people is maximization of crop yields to generate adequate food production. Globally, production of major crops has more than tripled since 1960. Yields for rice have more than doubled and yields for wheat have gone up about 160%. In the 1980s, one farmer produced one tonne of food, and one hectare of arable land produced 1.8 tonnes, annually on average. Today, one farmer produces 1.4 tonnes, and one hectare of land produces 2.5 tonnes. This has come about as a result of both an increase in yields and a reduction in post-harvest losses. In some regions, losses can be as low as 20%. Conversely, losses can amount to 100% of a harvest if no crop protection is available or unaffordable. Is organic food completely safe? Over 30 people were killed and thousands were affected due to E Coli outbreak after consuming Bean Sprouts from an organic farm in Germany. Organic farms do not use Agrochemicals, chemical fertilisers and put crops at greater risk of contamination from bacteria in manure.
Sunidhi Research |
15
Agrochemical industry basics

Agrochemicals are broadly classified into two categories basic (Technical grade) and Formulations. Technical grade manufacturers sell high purity chemicals in bulk (generally in drums of 200-250 Kg) to formulators. Formulators, in turn, prepare formulations by adding inert carriers, solvents, surface active agents, deodorants etc. These formulations are packed for retail sale and bought by the farmers. Based on application, agrochemical market can be segmented into insecticides, herbicides and fungicides. Herbicides - Save crops by controlling weeds and unwanted vegetation, such as thistles and nettles. Fungicides - Protect plants by combating harmful crop diseases, such as potato blight and reduce fungal toxins. Insecticides - Safeguard crops by controlling insect pests, such as aphids and improve human health. Some 20-40% of the world's potential crop production is already lost annually because of the effect of weeds, pests and diseases (FAO). These crop losses would be doubled if existing pesticide uses were abandoned, severely impacting food security. Exhibit 20: The Agrochemical Manufacturing Chain
Most of the raw materials in industry are derived from various products which have linkages with crude oil. The above chart explains the journey of Natural gas / crude oil to final agrochemical product. Indian agrochemical industry is 2 largest market for agrochemicals next to China in Asia and figures in Top 15 in the world. Compared to several developed countries, per hectare consumption of agrochemicals in India is very low at ~0.6 kg/ha. India produces 16% of the food grain in the world, while consumes only 2% pesticides of the world. The growth in industry in recent years has been rapid and agrochemical industry looks promising on account of the increasing need to protect food grains, vegetables and fruits from pests to feed increasing demand, higher farmer affordability, higher availability of farm credit and lucrative farm produce prices. Sunidhi Research | 16
nd
Agrochemical Industry Exhibit 21: Agrochemical & Seed market globally in last decade
Industry is highly consolidated Almost 85% of industry is controlled by large global players and there is intense competition. Large global players are increasingly turning their focus on developing new molecules and investing in biotech seed research. This often presents attractive acquisition opportunities of generic products where innovator is still dominant, but the product no longer fits in long term product portfolio strategy. India is the 4th largest manufacturer of crop protection chemicals behind USA, Japan and China. India is also one of the most dynamic generic pesticide manufacturers in the world though highly fragmented in nature. According to industry data, more than 60 technical grade pesticides are being manufactured indigenously by 125 producers including 60 large and medium scale enterprises. Most Indian technical manufacturers are focused on off-patent pesticides, which account for c. 70% of the domestic market. Further, there are over 1,200 pesticide formulators across India. The industry landscape includes multinational companies, medium sized Indian Companies and hundreds of regional formulators. Exhibit 22: Global Agrochemical players
10000 9000
8000
7000 6000 5000 4000 3000 2000 1000 0
BASF
Sumitomo Chem
Bayer
Syngenta
Dow Agro
DuPont
MAI
Sipcam
UPL
Mitsui Chem
Nufarm
Arysta
FMC
Cheminova
ISK
Nippon Soda
Monsanto
2009
2010
Sunidhi Research |
Nihon Nohyaku
Kumlai
Nissan
17
Agrochemical Industry High entry barriers Agrochemical industry has inherent entry barriers because of its highly regulated structure. Innovator companies on an average take 10 years to bring a new active ingredient to the market. Over 140,000 synthesis are tested in R&D phase to come out with 1 active ingredient. R&D costs for bringing 1 active ingredient to market is over $250 million. For generic companies too, entry barriers exist in form of registrations. Each country has its own regulations regarding approvals of agrochemicals. Any formulation needs to go through registration process before taking it to market in any country, and takes anywhere between 2-4 years. Exhibit 23: Typical expense in development of new molecule
Sunidhi Research |
18
Agrochemical Industry Exhibit 24: Timeline of development of new molecule

Year CHEMISTRY 1 2 3 4 5 6 7 8 9 10 Costs In
Active ingredient
Synthesis Synthesis optimisation
Process
~ 50 million Pilot plant production Production Formulation / Packaging
Formulation BIOLOGY Laboratory / greenhouse
Research
~ 60 million Pilot trials Field trials for development and registration Optimisation of application
Development
TOXICOLOGY Acute, sub-chronic, chronic toxicity / mutagenicity / carcinogenicity / teratogenicity / reproduction Algae / daphnies / fish / birds micro-organisms / bees / non-target organisms Official evaluation of registration documents / registration / first sales
Mammals
Environment
~ 40 million
ENVIRONMENT
Metabolism
Plants / animals / soil / water / air Plants / animals / soil / water / air 50.000 500 10 5 2 1 1 1 1 1 ~ 150 million
Residues Substances
Source: Croplife, Sunidhi Research
Exhibit 25: Market size by 2015 Crops Herbicides Cereals 4184 Maize 3293 Rice 1873 Soybean 2340 Rape 912 Sunflower 450 Cotton 559 Sugarbeet 556 Sugarcane 1048 Potato 316 Vine 268 Pome Fruit 175 Other F&V 1623 Fruit & Vegetable 2382 Others 1753 Total 19350
Insecticides 592 957 1374 983 198 45 1289 70 357 412 259 475 2570 3716 1235 10818
Fungicides 2464 491 867 1251 350 25 87 58 0 796 1076 597 2169 4638 1017 11248
Others 249 8 92 3 16 3 315 1 38 40 38 46 202 326 212 1263
Total CCP 7489 4749 4206 4577 1476 523 2250 685 1443 1564 1641 1293 6564 11062 4217 42679
AgBio 0 7757 60 5332 390 0 1224 63 0 0 0 0 0 0 0 14826
TOTAL $ Mn 7489 12506 4266 9909 1866 523 3474 748 1443 1564 1641 1293 6564 11062 4217 57505
Source:Phillips McDougall, UPL, Sunidhi Research
Sunidhi Research |
19
Global agrochemical industry

Globally, herbicides account for largest value within agrochemical industry followed by insecticides and fungicides. Indian market however has largest value from insecticides due to tropical warm weather which is conducive for higher insect attacks on crops. Share of herbicides is growing fast now due to sharp rise in labour costs. Exhibit 26: Global Crop Protection Market by Product ($ Billion)
Exhibit 27: Region wise break-up of Agrochemical sales (2010)
Sunidhi Research |
20
Agrochemical Industry Innovator companies invest in R&D to discover new molecules and they get patent for normally 20 years during which they get exclusive right to manufacture the product. As patent expires, it throws opportunity for generic agrochemical manufacturers to enter the market and launch product in the market. Exhibit 28: $9.3 bn worth Agrochemicals will go off-patent in this decade
Source: Phillips McDougall, MAI Analysis, Sunidhi Research
Exhibit 29: Global Crop-wise Market Distribution - 2008
Source: FICCI, Industry, Sunidhi Research
Sunidhi Research |
21
Indian agrochemical industry

Exports now account for ~40% of the industry Last few years have witnessed sharp growth rates in exports as India is attractive destination for low cost manufacturing with ample talent pool in complex chemicstry. We expect export growth to be more than domestic industrys growth as existing players leverage their ralationships with clients and more players enter in attractive CRAMS opportunities. Exhibit 30: Indian Pesticide industry is over $3.5 billion
Indias 5 year CAGR in among the fastest in world Indian agrochemical market is groing among the fastet in the world along with Brazil, Russia and Thailand. Exhibit 31: Indias growth among the fastest in the world
Ukraine Argentina Brazil Russia India Thailand Italy China Australia Mexico Canada Poland Spain Germany UK USA Korea France Japan Colombia -5 0 5 10 15 20 25 30 35
CAGR in Home Currency (2006 - 11)
Sunidhi Research |
22
Agrochemical Industry Exhibit 32: Crop Protection Market YoY real Growth
% 12.0
10.0
8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0
-8.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Return on Investment in high for farmers using Pesticides By using pesticides, farmers can avoid up to 90% crop losses in various crops. Benefit in terms of saving of crop output is multifold compared to expense borne by farmers for buying agrochemicals. Exhibit 33: Avoidable crop losses & Cost-Benefit ratio Crop Avoidable Losses Cotton 49 - 90% Rice 21 - 51% Mustard 35 - 75% Sunflower 36 - 51% Groundnut 29 - 42% Maize 20 - 25% Sugarcane 8 - 23% Pulses 40 - 88% Vegetables 30 - 60% Fruits 20 - 35%
Cost: Benefit Ratio 1:07 1:07 1:12 1:08 1:28 1:03 1:13 1:04 1:07 1:04
Market share of generics going up 25% of the market is controlled by patented products, while ~25% comes from proprietary offpatent products. Generic players (products with companies other than original patent holders) have grown their revenue share very fast as product patent keeps on expiring and currently account for 50% market share. Products worth $9.3 billion are set to expire in this decade (2010 2020) which is almost ~20% of current industry size. Lower price sensitivity We have observed lower price sensitivity among farmers towards agrochemicals. When crops suffer due to fungis or pest attacks, the primary goal in farmers mind is to save the crop and ge t the best possible solution, even if it costs 10-20% higher within competing products. In generics, where products are exactly similar to that of various players, brand recall and goodwill plays important part in decision making.
Sunidhi Research |
23
Agrochemical Industry Distribution push is critical Agrochemical industry has thousands of products available in market with several companies offering as high as 100 products. A typical Agri-input shop resembles that of a medical shop with products from different companies for different crops and several possible diseases to plant or various pest attacks. It is therefore almost impossible for a farmer to know what should be bought for a particular problem just as it becomes difficult for us to know what medicine can be taken in case of any disease. Retailers have to opt for the role of a Doctor who suggests farmers after hearing the description of issues with crops, often checking plant samples brought by farmers to shops. Thus, Retailer too is a very important link in the chain and often less educated farmers in general rely on advice of retailers and go home with solution suggested by them. This leads to fierce competition among industry participants and hence for better product push, industry participants offer best possible margins to them. Strong regulatory framework There are serious implications of pesticide use on safety as well as crop protection, therefore there is a need for strict enforcement of pesticide regulations. The Pesticides Management Bill incorporates provisions for more effective regulation with punishment commensurate with the severity of offence. However, the Department of Agriculture and Cooperation has taken action against domestic as well as multi-national companies found flouting the existing regulations governing registration, import, manufacture and sale of pesticides, by cancelling certificates of registration of the products in question. Indian market is dominated by generics The agrochemical industry in India is dominated by generics manufacturing with over 90% of the molecules being non-patented. Most competitors offer similar products and generic formulations. This industry has low entry barriers, with very little capital requirement which leads to few factors being critical to success such as 1) 2) 3) 4) Strong distribution networks, Pricing Brand recall Dealers Push (higher commission)
Losses Caused by Different Pests Exhibit 34: India losses over `900 billion of crops every year as per govt. estimate in 2002
Sunidhi Research |
24
Agrochemical Industry Exhibit 35: Top Molecules - Global Product Category Herbicides Insecticides Fungicides Glyphosate, Triazines, Sulphonyl Urea Pyrethroids, Organophosphates, Neonicotenoids Triazoles, Strobillurin, Dithiocarbamates
Exhibit 36: Domestic Crop Protection market major products Segment Insecticides Fungicides Herbicides Bio-Pesticides Major Products Acephate, Monocrotophos, Cypermethrin Mancozeb, Copper Oxychloride, Ziram Glyphosate, Isoproturan, 2, 4-D Spinosyns, Neem Based Main Applications Cotton, Rice Fruits, Vegetables, Rice Rice, Wheat Rice, Maize, Tobacco Stored Procude
Others Zinc Phosphide, Aluminium Phosphide Source: FICCI, Industry, Sunidhi Research
Exhibit 37: Pesticide Consumption in India (Techinical Grade in Tonnes)

82000
72000 62000
52000
42000 32000
22000
12000 2000
1955-56
1965-66
1985-86
1990-91
1991-92
1993-94
1994-95
1996-97
1997-98
1998-99
2000-01
2001-02
2003-04
2004-05
2005-06
2007-08
2008-09
Consumption
Source: DACNET, Sunidhi Research
(MT Tech Grade)
Exhibit 38: New molecules requires less usage, leading to lesser volumes Conventional Molecules New Molecules Segment Insecticide Dose/ha Insecticide Dose/ha Monocrotophos 625-750 ml Acetamiprid 50-150 g Sucking Insect Dimethoate 1250-1500 ml Imidacloprid 100-150 ml Pests Acephate 625-750 g Thiomethoxam 100-150 g Endosulfan 1250-1500 ml Indoxacarb 450-500 ml Quinalphos 1250-1500 ml Spinosad 188-200 ml Caterpillar Profenophos 1500-2000 ml Novaluron 375-500 ml Chlorpyriphos 1500 ml Thiodicarb 500 g
Sunidhi Research |
2010-11
1975-76
1992-93
1995-96
1999-00
2002-03
2006-07
2009-10
25
Agrochemical Industry Exhibit 39: New molecules requires less usage, leading to lesser volumes Conventional Molecules New Molecules Segment Name Dose/ha Name Isoproturon 1250 g Sulfosulfuron Wheat 2,4-D 1250 g Clodinofop Metsulfuron Methyl Butachlor 2500 ml Metsulfuron Methyl + Paddy Chlorimuron Ethyl Pyrazulfuron Pendimethlin 2500 ml Imazethapur Trifluralin 2500 ml Quizalofop Ethyl Paddy Fluchloralin 2500 ml Fenaxoprop-p-ethyl Chlorimuron Ethyl Source: Industry, Sunidhi Research Exhibit 40: Leading Agrochemical Exporting Countries by Sector, 2009 ($ Mn) Insecticides USA France India China Germany 609 545 500 438 423 Germany France UK Spain Switzerland Fungicides 951 917 578 460 341 USA France Germany Belgium China Herbicides 1165 1096 1092 943 758
Dose/ha 33 g 400 g 20 g
750 ml 1000 ml 750 ml 25 g
Paddy & cotton account for almost half of Indian agrochemical market For Indian agrochemical industry, Paddy & Cotton are two most important crops. Unremunerative price of these two, lower area under sowing and abnormal weather in key regions where these crops are prominent are key risks to domestic agrochemical industry. Exhibit 41: Indian Crop wise Market Distribution FY09
Sunidhi Research |
26
Agrochemical Industry Agrochemical consumption on cotton has reduced after adopting Bt cotton From 33% of total pesticide consumption in 2005, consumption of it for cotton crop has fallen to 20% of total usage in India. This reflects the effect of adoption of Bt-cotton where seeds are genetically modified to tackle major issues with pests. Exhibit 42: Pesticide consumption pattern ( 2005 - 2009)
33 28 24 20
21 20
16
10 6
Cotton
Paddy
Fruits & Vegetables
Wheat
Pulses & Oilseeds
Others
2005
2009
7 states in india account for over 70% of agrochemical usage Andhra leads with 24% of indian agrochemcial consumption and far ahead than any other state in India. Maharashtra & punjab are pther key state with over 10 of overall usage. Top 7 states account for over 70% of indian agrochemcial usage. Exhibit 43: 7 states account for over 70% of consumption
Sunidhi Research |
27
Agrochemical Industry Rabi outlook improves as Reservoir levels climb to 108% of the last ten year's average Despite a late monsoon 84 reservoirs monitored by Central Water Commission (CWC) are holding volumes which are 108% of the last ten year's average. They are holding water of 114.8 billion cubic meters which is 74% of the storage capacity of reservoirs in different parts of the country. This is about 87% of last year's volume. As many as 11 reservoirs are full to their brim. There are two reservoirs each in North and East India that are 100% full, while three each in West and Central zone are full. One in South India is full. About 13 reservoirs are holding water levels that vary between 91% and 99%, while another 14 have water level between 81% and 90%. Nine reservoirs are holding water levels ranging between 71% and 80% of their capacity. As many as 29% water reservoirs are holding water that is less than 50% of their full capacity. According to basin wise storage position water levels in Ganga, Indus, Narmada, Tapi, Mahi and Sabarmati is better than normal as per CWC. Godavari and West flowing rivers of South have a storage position that is close to normal. Krishna, rivers of Kutch and Cauvery had deficient water position. Exhibit 44: Porters 5 forces for industry
Potential New Competitors Product registrations, extensive data submission to regulatory authorities, compliance with strict environment laws and other regulations serve as entry barriers for new players. Entry into Formulations is relatively easier than Technicals. With very low capital requirements Competitors in the Industry Industry rivalry is high, especially in case of formulators. The Indian agrochemical industry is fragmented, with the five largest players accounting for less than 40% of the market share. Globally, market is dominated by Big-6 with high competition among the companies. Customers
Farmers cant dictate prices to industry. However, consumption gets affected by affordability which is key for volume growth and dependent on the prospects of Agriculture in India, Government determines MSP of key crops after taking account of cost of inputs.
Suppliers
Low supplier concentration (especially for formulators who buy Technicals), reduces the bargaining power of suppliers. In case of sales through tie ups , supplier power for in-licensing products is higher. For manufacturers of Technicals, suppliers are typically passing-on prices of intermediates which is linked to distant derivatives of crude oil and are volatile.
Substitutes Threat of substitutes is low in new molecules as product development is an expensive and time consuming process, which can only be afforded by large players. A formulator with tie-ups with innovator companies is well placed as it can leverage its existing sales network to market niche products while generics have high threat of substitutes.
Source: Sunidhi Research
Sunidhi Research |
28
Comparison of long term sales & profit growth, average margins & return ratios
All agrochemical companies in our coverage universe have done well on sales, EBIDTA and PAT CAGR. PI industries stands out with PAT CAGR of 101%. This is partly due to 278% growth in PAT in nd FY09 from lower base of `64 million in FY08. Our top pick, Dhanuka delivered 2 best PAT CAGR of 36% over last 5 years. Exhibit 45: 5 year CAGR sales & Profit growth (FY08 FY12)
120% 100% 80% 60% 40%
20% 0%
101%
41%
28%
30%
23%
21%
21%
23%
17%
UPL
17%
Rallis
Sales
20%
21%
PIL
EBIDTA PAT
IIL
21%
DAL
Source: Company, Sunidhi Research Rallis wins by a wide margin as far as working capital management is concerned with Net Working Capital of only 13 days (5 year average). Dhanuka looses out due to lower payable days (reflects supplier power in in-licensing of products) which is compensated well by need of lower investments in fixed assets. Exhibit 46: 5 year average working capital days (FY08 FY12)
120 100
85 93 94 102 95 112
85
86 64
80
62 64
79 82 60 59 50
60 40 20 0 UPL Rallis
37
56 49
13
PIL
Inventory Days
IIL
Payable days
DAL
NWC
Receivable days
Source: Company, Sunidhi Research
Sunidhi Research |
24%
36%
29
Agrochemical Industry Dhanuka & Rallis are best at generating ROCEs Dhanuka tops the list among the companies under our coverage with ~37% average ROE and ROCEs. PI industries is also impressive with high average ROE. UPL ranks lowest due to its diversified and asset heavy model. Exhibit 47: 5 year average return ratios (FY08 FY12)
40
35 30 25.8 22.1 16.8 15.3 23.2 30.4 29.7 24.6 36.9 36.9
25
20 15
10
5 0
UPL
Rallis
ROE
PIL
ROCE
IIL
DAL
Source: Company, Sunidhi Research UPL & Rallis are best at operating margins As evident from exhibit below, UPL & Rallis generate best operating margins in our coverage universe. Rallis stands out as far as PAT margin is concerned as it is debt free company and relatively higher asset turnover ratio (consequently lower depreciation). Our top pick Dhanuka also delivers stron PAT margins despite relatively lower operating margins due to its asset light model and debt free status. Exhibit 48: 5 year average EBIDTA & Profit margin (FY08 FY12)
25
20 15 10.8 10 8.8 19.6
18.3
13.3 9.6
13.4 8.1
6.4 5
0
6.7
UPL
Rallis
PIL
IIL PAT Margin
DAL
EBIDTA Margin
Sunidhi Research |
30
Agrochemical Industry Quarterly revenue trend Q2 is biggest for domestic markets We analysed quarterly trends for last 5 years and conclude that Q2 is the most important quarter for Indian agrochemical industry. It is clearly visible from quarterly trend of companies like Rallis, Dhanuka, Insecticides India which are more focussed on domestic markets. Companies with large export revenues such as UPL and PI Industries show less tendency of a loaded Q2 in revenue terms. For Seeds, Q1 is the biggest season as reflected from analysis of Kaveri Seeds while Advanta being a global seed company is more diversified across quarters. Exhibit 49: Quarterly Revenue Trend Company Bayer Crop Rallis India Dhanuka Agritech United Phos. P I Inds. Sabero Organics Excel crop care Insecticides India Advanta India Kaveri Average
Q1 34.7% 22.4% 18.7% 27.9% 23.7% 24.7% 28.3% 25.9% 27.3% 61.6% 28.7%
Q2 29.6% 31.3% 30.9% 23.0% 26.4% 27.2% 28.8% 33.6% 23.8% 19.9% 25.9%
Q3 22.4% 25.5% 24.4% 22.1% 23.9% 24.5% 21.6% 22.3% 24.5% 10.9% 22.5%
Q4 13.4% 20.7% 26.0% 27.0% 25.9% 23.6% 21.3% 18.2% 24.4% 7.5% 22.9%
Exhibit 50: Long Term (5 Year) Correlation of Agrochem & Seed companies stock prices
Correlation with Sunidhi Agro Chem & Seed Index Sensex Advanta India Kaveri Seeds Bayer Crop Sabero Excel Crop Insecticides Ind Dhanuka PI Ind Rallis UPL Average UPL Rallis PI Ind Insecti Sunidhi Agro Dhanu Excel Bayer Kaveri Advanta cides Sabero Sensex Chem & Seed ka Crop Crop Seeds India Ind Index 0.98 0.58 -0.64 0.77 0.93 0.88 0.49 0.92 1.00 0.93 0.96 0.05 0.65 0.96 0.47 -0.62 0.85 0.83 0.83 0.28 1.00 0.92 0.98 0.89 -0.12 0.61 0.40 0.64 -0.37 0.06 0.68 0.30 1.00 0.28 0.49 0.22 0.59 0.55 0.40 0.92 0.48 -0.60 0.75 0.83 1.00 0.30 0.83 0.88 0.85 0.87 -0.01 0.59 0.91 0.68 -0.65 0.67 1.00 0.83 0.68 0.83 0.93 0.81 0.96 0.20 0.65 0.82 0.45 -0.32 1.00 0.67 0.75 0.06 0.85 0.77 0.84 0.67 -0.16 0.53 -0.67 -0.03 1.00 -0.32 -0.65 -0.60 -0.37 -0.62 -0.64 -0.65 -0.73 0.29 -0.33 0.54 1.00 -0.03 0.45 0.68 0.48 0.64 0.47 0.58 0.39 0.59 0.68 0.54 1.00 0.54 -0.67 0.82 0.91 0.92 0.40 0.96 0.98 0.97 0.96 -0.02 0.65
-0.02 0.68 0.29 -0.16 0.20 -0.01 0.55 -0.12 0.05 -0.19 0.09 1.00 0.20
0.96 0.59 -0.73 0.67 0.96 0.87 0.59 0.89 0.96 0.89 1.00 0.09 0.64
0.97 0.39 -0.65 0.84 0.81 0.85 0.22 0.98 0.93 1.00 0.89 -0.19 0.59
Sunidhi Research |
31
Sunidhi Agrochem & Seed Index jumps 6x from FY08

Sunidhi Agrochem & Seed Index (10 companies, equal weight) has risen ~6x from FY08 led by strong returns from PI industries, Sabero, Rallis India, Bayer Crop and Dhanuka Agritech and Kaveri Seeds. Exhibit 51: Sunidhi Agro Chem & Seed Index
700 600 500 400 300 200 100 0
Apr-07 Apr-08 Apr-11 Feb-08 Feb-09 Feb-10 Feb-12
Feb-11
594.72
140.03
Apr-12
Apr-09
Apr-10
Jun-07
Jun-08
Jun-11
Dec-07
Dec-08
Aug-07
Aug-08
Aug-11
Dec-11
Dec-09
Dec-10
Oct-07
Oct-08
Oct-11
Oct-09
Oct-10
Jun-12
Apr-12
Jun-09
Jun-10
Sensex
Sunidhi Agro Chem & Seed Index
Exhibit 52: Comparative Performance of Agro Chem Companies

2500
2000
1500
1000
500
0
Apr-08 Apr-11
Apr-07 Apr-09 Apr-10
Jul-09
Jul-11
Oct-09
Oct-10
Oct-07
Oct-08
Oct-11
Jan-08
Jan-09
Jan-11
Jan-10
UPL
Rallis
PI Ind
Dhanuka
Insecticides Ind
Excel Crop
Sabero
Bayer Crop
Kaveri Seeds
Jan-12
Advanta India
Sunidhi Research |
Jul-12
Jul-07
Jul-08
Jul-10
Aug-12
Aug-09
Aug-10
32
Agrochemical Industry Exhibit 53: Long Term stock price performance (FY08 Sep12)
700.00 600.00 500.00
PI Ind
400.00 300.00
200.00 100.00 0.00
Feb-08
Feb-10
Aug-07
Aug-09
Aug-10
Aug-11
Aug-08
Feb-12
Feb-09
Feb-11
Nov-07
May-08
May-09
Nov-09
May-10
Nov-11
Sunidhi Research |
May-12
May-07
Nov-08
Nov-10
May-11
Aug-12
33
Key Risk factors

Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Delay in increase of MSP Agrochemical consumption gets affected by governments decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to farmers. Regulatory risks The Agrochemical industry is highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court. Threat from GM seeds Genetically modified crops are made with inbuilt immune system that reduces dependence on usage of agrochemicals. We understand that plants require protection at various stages of lifecycle of plant and it may be difficult for even genetically modified crops to keep control on pests. Adaption of Bt Cotton in India has resulted in lower application of pesticides over last few years, however, Bt Cotton is reported to be affected from pests in some parts of Gujarat. Pests too become resistant to human intervention and gain power to attack crops despite being genetically modified, resulting in usage of agrochemicals.
Sunidhi Research |
34
Company Section
Sunidhi Research |
35
Dhanuka Agritech Ltd (DAL)

Asset light model with focus on return ratios Agrochemicals Sector Outlook- Positive
Initiating Coverage
16.5%
16.0% 15.5% 15.0% 14.5% 14.0% 13.5% 13.5% 13.3% 15.4%
CAGR Growth (FY12-14E)

15.8%
Dhanuka Agritech Limited is engaged in manufacturing a wide range of pesticides (mainly branded formulations) covering herbicides/weedicides, insecticides, fungicides, miticides, plant growth regulators / stimulants in various forms liquid, dust, powder and granules. It has technical tie-ups with 3 US & 4 Japanese companies. It has ~80 brands in their portfolio and keeps adding new brands every year with focus on specialty molecules. International tie-ups ensure a bigger, better basket of products Since its first international collaboration with Du Pont in 1992 (First ever such tie-up with MNC by any Indian company), for manufacturing formulations, DAL has entered into collaborations with various MNCs in the US and Japan. The foreign collaborator typically supplies active ingredients as well as the exact combination in which the chemicals are to be mixed and in turn is allowed to market its products in India. Vast distribution network and effective marketing strategy Dhanuka Agritech currently has over 80 products and 400 SKUs (stock keeping units). The company markets its products through over 7,000 distributors/dealers that reach 70,000 retailers across all the major farming states which touch over a million farmers. Strong pipeline of new products It has launched 4 new products in FY12 while 2 products have been launched in Q1FY13. 2 more product launches are scheduled in rest of FY13. Further, DAL is working on 8-10 products currently and provides visibility for revenue growth in coming years. Focus on tie-ups rather than backward integration to maintain asset light model While Dhanuka compares well with its peers in terms of profitability, its lack of backward integration into technicals has historically resulted in higher raw material costs. The company has been able to tide over this by focusing on tie-ups with global pesticide majors to procure technical pesticides and specialty molecules. Dhanuka exclusively markets some of these molecules, which gives it the first mover advantage in introducing these products in India. For example, Targa Super, (which contributes ~20% to Dhanukas revenue) is exclusively marketed by the company in India. Wh ile on one hand, this helps Dhanuka to compete with larger players in the domestic market, on the other hand, it is able to maintain an asset light business model. Fair value of ` 146/share (Upside of 49%), Initiate with Buy DAL will continue to focus on launching new products and keep a diversified portfolio along with tie ups with innovator companies for marketing their products in India. It will continue to follow its strategy of following asset light model (manufacturing only formulations) and thus generate free cash flow and clock-in high return ratios. At CMP of `98, DAL is trading at P/E of 7.7x and 6.7x for FY13E and FY14E. We value DAL at P/E of 10x for FY14E earnings.
13.0%
12.5% 12.0%
11.5%
Sales EBIDTA PBT Adj.PAT
Recommendation CMP (`) Price Target (`) Upside (%) 52 Week H / L ` BSE 30
Buy 98 146 49 115 / 80 18694
Key Data No.of Shares, Mn. Mcap, ` Mn Mcap,USD Mn @ `55 2 W Avg Qty (BSE+NSE) 50.0 4901.0 89.1 51538
Share holding, June'12 Promoters FII DII Public & Others 75.0 8.3 1.3 15.5
Performance Stock Return % Relative Return %
1M 8.3 1.7
3M 2.5 -7.9
6M 19.3 9.9
12 M -3.5 -18.4
20.0%
15.0% 10.0%
5.0%
0.0% -5.0%
-10.0%
-15.0% -20.0%
Financials Revenues ` mn FY11 FY12 FY13E FY14E 4910 5292 6108 7051
EBIDTA ` mn 759 794 901 1022
Net Profit ` mn 511 571 639 733
-25.0%
Sep-11 Feb-12 Apr-12 Mar-12 Dec-11 Nov-11 May-12 Aug-12 Sep-12 Jun-12 Oct-11 Jan-12 Jul-12
Dhanuka Agritech
NIFTY
EPS ` 10.2 11.4 12.8 14.7
P/E x 9.6 8.6 7.7 6.7
EV/EBIDTA x 7.2 6.6 5.6 4.8
ROAE % 30.0 29.7 26.7 25.1
Source: company, Sunidhi Research
DAL Investment Thesis:

Broad portfolio of 80 products, 2/3 of revenue comes from specialty molecules DAL has a wide portfolio of over 80 brands and keeps adding new brands every year. The Company has a wide range of agrochemicals to protect all major Indian crops from most of the pests, insects and diseases that affect them. Though it has strong generic portfolio, its focus is on specialty molecules where it has tie-up with MNCs for marketing their products. This reflects in its rd revenue mix as well where 2/3 of the Companys sales comprise of specialty molecules and t he remaining one-third comprises of generics. Plans of launching new specialty molecules Dhanuka is working to launch six speciality molecules during 2013-15 two molecules each year from 2013 onwards. Two of these products (of which one is patented) will be launched in collaboration with Nissan Chemicals of Japan. It will also launch a fungicide in collaboration with Du Pont. These molecules will be introduced in India for the first time and Dhanuka will exclusively sell most of these products in India. Post introduction, these molecules are expected to have 8-10 years of dominating life cycle. Focus on tie-ups rather than backward integration While Dhanuka compares well with its peers in terms of profitability, its lack of backward integration into technicals has historically resulted in higher raw material costs. The company has been able to tide over this by focussing on tieups with global pesticide majors to procure technical pesticides and specialty molecules. Dhanuka exclusively markets some of these molecules, which gives it the first mover advantage in introducing these products in India. For example, Targa Super, (which contributes ~20% to Dhanukas revenue) is exclusively marketed by the company in India. While on one hand, this helps Dhanuka to compete with larger players in the domestic market, on the other hand, it is able to maintain an asset light business model. International tie-ups ensure a bigger, better basket of products Since its first international collaboration with Du Pont in 1992, for manufacturing formulations, Dhanuka Agritech has entered into collaborations with various MNCs in the US and Japan. The foreign collaborator typically supplies active ingredients as well as the exact combination in which the chemicals are to be mixed and in turn is allowed to market its products in India. Dhanukas collaborating partners include:
E. I. du Pont, US
rd
Dunet, Hook, Qurin, Dhawa Gold, Hi-Dice, Cursor Aatank, Markar, Brigade Wrap-up, Zargon, One-up Caldan, Sheathmar Nukil, Bombard Kasu Targa Super Samadhan Omite, Vitavax, Dimilin, Banmite Fluid
FMC Corporation, US
Dow AgroSciences, US
Sumitomo Chemical Co., Japan

Mitsui Chemicals, Japan
Hokko Chemical Ind. Co., Japan

Nissan Chemical Industries, Japan
Yara International, Norway

Chemtura, US
Bayer AG
Currently, Dhanukas sales through international tie-ups are more than 60% of total revenue. In most cases, the product is marketed under the brand name of Dhanuka. The company is, therefore, able to offer a large number of products addressing crop protection needs across different kinds of crops, type of pests, various soil types and weather conditions.
Sunidhi Research |
37
DAL
Exhibit 54: Top 3 products of DAL Product Targa Super Caldan Markar MNC Nissan Chemical Sumitomo Chemical FMC Corp Segment Weedicide Insecticide Insecticide Active Ingredient Quizalofop ethyl Cartap hydrochloride Bifenthrin Revenue share 18-20% 8-10% 3-5%
In case of speciality molecules sourced through tie-ups with MNCs, the active ingredient is supplied by them to Dhanuka under purchase contracts. Dhanuka receives the product know-how as well as the right to formulate and market the product in India. In our opinion, tie-ups with foreign partners enable Dhanuka to offer a large number of products addressing crop protection needs across different kinds of crops, type of pests, various soil types and weather conditions. Looking Beyond 1000 DAL management has set its ambitious vision to achieve topline of `1000 crore in 3 years time. DALs product pipeline will lead to continu ous expansion of its product portfolio which will help DAL in reaching closer to this target in our view. Farmer connect initiative - Dhanuka Doctors The structure of the Indian crop protection market makes it necessary to be in close contact with customers i.e. farmers. The products have to, therefore, necessarily be bundled along with services such as awareness campaigns regarding periodicity and quantity of usage, product demonstrations, counselling and after sales support. Sales is made through distributors who are present at the village/district level. The companys contact person who liaises with the farmer is called the Dhanuka Doctor; the Doctors job is to ensure the companys brand recall and encourage the use of Dhanukas products through farmer engagement. Nearly 2,000 locally-recruited (on contract basis) Dhanuka Doctors work across villages, conducting product demonstrations and providing counselling for the right product based on the type of pest infestation and soil.
Sunidhi Research |
38
DAL
Exhibit 55: Agrochemical Sales (` million)
7000 6000 5000 628 2606
508
268 227 2043 1594 353 632 499 928 349
` Million
4000 3000 2000 1000

0
2418
2238
684
583 1172 1755
658
1824
FY09
FY10
Herbicides
Fungicides
Insecticides
Others
Exhibit 56: Geographical break-up of Sales (` million)

6000 5000
4000
1974 1411
1259 944 541 919 947
1902
841
` Million
3000 2000 1000 0
733 602 1130

1007 1453 1119
438 653 725
1533
1160
FY08
FY09
FY10
FY11
North India
South India
East India
West India
Exhibit 57: Focus on Branded Formulations (` million)

7000
6000 5000 4000 3000

2000 1000 0 2744 33 73 85 185
196 431
267 201
18 44
3632 4072
4738
5248
FY09
Formulations - Retail sales (B2C)
Formulations - Institutional sales (B2B)
Technicals sales (B2B)
FY12
FY08
FY10
FY11
FY12
FY12
FY08
FY11
Sunidhi Research |
39
DAL
Exhibit 58: Concentration of top products (INR Million)
3000 2500
2000
1500 1000
500
0 FY08 FY09 FY10 FY11 FY12
Top 3 Products
Top 5 Products
Top 10 Products
Exhibit 59: Category wise Sales break up (INR Million)

6000 5000
4000 3000 2000 1000 0
FY08
FY09
FY10
FY11
Class Ia (red triangle) Class III (green triangle)
Class Ib (yellow triangle) O Hazard unlikely
Class II (blue triangle)
Exhibit 60: New Product Launches

8
7 6
5
4 3 2
2 2
4 1
2
1 0
2
1
3
3 1
1
2
FY12
2
1
FY08
FY09
FY10
FY11
Herbicides
Fungicides
Insecticides
Others
FY12
Sunidhi Research |
40
DAL
Exhibit 61: Dhanukas product basket caters to wide variety of crops
Exhibit 62: DALs key products Insecticides Herbicides Fungicides Plant Growth Nutrients / Others Media, Dunet, Caldan, Omite, Aaatank, Adfyre, Brigade, Bombard, Dhanpreet, Dhawa Gold, Markar Targa Super, Barrier, Craze, Qurin, Weedmar Super, Noweed, Ozone, D-Era, Hook WG, Nabood Vitavax Power, Sixer, Kasu-B, Hi-Dice, Cursor, Hexadhan Plus, Dhanteam, Sheathmar, Vitavax Ultra Dhanuvit, Dhanzyme Gold, Samadhan, Wetcit
Sunidhi Research |
41
DAL
What makes Dhanuka our top pick? Dhanuka has been clocking higher than industry average revenue growth Dhanukas revenue has grown by 25% CAGR over FY08-11, as compared to 15% revenue CAGR by Rallis and 16% revenue CAGR by United Phosphorus, over the same period. Dhanukas growth slipped to just 9% in FY12 due to erratic monsoon in 2HFY12 which impacted entire domestic agrochemical industry. Dhanukas RoE is one of the best in the industry (next only to PI Ind in our coverage universe). Deep discount compared to Rallis Dhanuka is trading at a significant discount (around 50%) to Rallis in spite of better financial performance and RoE. Rallis PE multiples got re-rated got re-rated from 6-7x in 2009 to 16-18x currently due to a significant jump in RoE. Rallis posted RoaE of around 24% in FY12 compared to 29.7% for Dhanuka in FY12. Exhibit 63: Comparative ROaE
Source: Sunidhi Research estimates
Free cash flow due to asset light model We strongly believe that there is a case for DALs earnings multiple to improve given better return ratios, free cash flow generation and asset light model. DAL is the only large player in domestic agrochemical industry without being present in technical manufacturing. Even though it procures technicals for manufacturing formulations, its operating margins are in -line/better than its peers. rd This is possible through higher sales of specialty molecules which represents 2/3 of its revenues. Exhibit 64: Free Cash Flow generation
700 600 500 400 300 200 100 0 -100 -200 -300
FY13E FY14E FY11 FY12
Opearting Cash Flow
Cash used in Investments
Free Cash Flow
Source: Company, Sunidhi Research estimates
Sunidhi Research |
42
DAL Price Target Derivation

Fair value of ` 146/share (Upside of 49%), Initiate with Buy DAL will continue to focus on launching new products and keep a diversified portfolio along with tie ups with innovator companies for marketing their products in India. It will continue to follow its strategy of following asset light model (manufacturing only formulations) and thus generate free cash flow and clock-in high return ratios. At CMP of `98, DAL is trading at P/E of 7.7x and 6.7x for FY13E and FY14E. We value DAL at P/E of 10x for FY14E earnings. Exhibit 65: Comparative valuation table Company Dhanuka Insecticides India PI Ind Rallis UPL Average Year FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Sales 6108 7051 6737 8382 10911 13427 15398 17890 86852 95547 25201 28459 EBIDTA 901 1022 741 964 1893 2420 2618 3086 15199 16721 4270 4843 PAT 639 733 423 523 1081 1430 1492 1809 6689 7844 2065 2468 EPS Adj 12.8 14.7 33.3 41.2 43.2 57.1 7.7 9.3 14.6 17.1 22.3 27.9 P/E 7.7 6.7 12.4 10.0 12.5 9.5 18.9 15.6 9.0 7.7 12.1 9.9 P/ Bv 1.9 1.5 1.8 1.5 3.3 2.5 4.4 3.7 1.3 1.2 2.5 2.1 EV/ EBIDTA 5.6 4.8 8.1 6.8 8.3 6.4 11.3 9.4 5.7 5.0 7.8 6.5 Net D/E 0.0 0.0 0.2 0.4 0.5 0.4 0.2 0.1 0.6 0.5 0.3 0.3 ROaE 26.7 25.1 17.7 16.4 29.2 30.2 16.6 21.3 15.3 16.0 21.1 21.8
Sunidhi Research |
43
DAL
Exhibit 66: Valuation Bands - P/E
140
Exhibit 67:Valuation Bands - P/BV

160 140 120 100 80 60 40 20 0
Dec-08 Dec-10 Aug-09 Aug-10 Dec-11
Dec-09
120
100 80 60 40 20 0
Price
3x
5x
7x
9x
Price
1x
1.5x
2x
2.5x
Exhibit 68:Valuation Bands - EV/EBIDTA

7000 6000 5000 4000
Exhibit 69:Valuation Bands MCap/Sales

8000 7000 6000 5000 4000
3000
2000 1000 0
3000 2000
1000
Apr-08
Apr-09
Apr-11
Dec-08
Dec-09
Aug-08
Aug-09
Aug-11
Dec-11
Dec-10
Apr-12
Apr-10
Aug-12
Aug-10
Dec-08
Dec-09
Dec-10
Aug-08
Aug-09
Aug-10
Aug-11
Dec-11
EV
3x
4x
5x
6x
Mcap
0.25x
0.5x
0.75x
1x
Sunidhi Research |
Aug-12
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Aug-12
Aug-08
Aug-11
Apr-09
Apr-10
Apr-11
Apr-12
Apr-08
Dec-08
Dec-09
Dec-10
Aug-08
Aug-09
Aug-10
Aug-11
Dec-11
Aug-12
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
44
DAL Risks to our Price Target

Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Dependence on domestic markets Larger players such as UPL, Rallis and PI Industries have a presence in the technicals segment, with revenues from exports. Dhanuka is completely focused on domestic markets and erratic whether conditions in India affects its revenue growth much more than it does for diversified companies with multiple continents as markets. Regulatory risks The Agrochemical industry is a highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court. Threat from GM seeds Genetically modified crops are made with inbuilt immune system that reduces dependence on usage of agrochemicals. We understand that plants require protection at various stages of lifecycle of plant and it may be difficult for even genetically modified crops to keep control on pests. Adaption of Bt Cotton in India has resulted in lower application of pesticides over last few years, however, Bt Cotton is reported to be affected from pests in some parts of Gujarat. Pests too become resistant to human intervention and gain power to attack crops despite being genetically modified, resulting in usage of agrochemicals. Delay in increase of MSP Agrochemical consumption gets affected by governments decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to them.
Sunidhi Research |
45
DAL Financial Analysis

Exhibit 70: Revenue (`Million) and Revenue Growth Trend
Exhibit 71: EBIDTA (`Million) and EBIDTA Margin
Exhibit 72: PAT (`Million) and PAT Margin
Sunidhi Research |
46
DAL
Exhibit 73: ROA and ROACE
Exhibit 74: Leverage Ratios
Sunidhi Research |
47
DAL Company in Depth

Dhanuka Agritech Limited is engaged in manufacturing a wide range of pesticides covering herbicides/weedicides, insecticides, fungicides, miticides, plant growth regulators / stimulants in various forms liquid, dust, powder and granules and reaching out to more than 10 mn farmers. The Company has a pan-India presence through its marketing offices in all major states in India, with a network of more than 7,000 distributors/ dealers selling to over 70,000 retailers across India. The Company has technical tie-ups with 3 US & 4 Japanese companies. The Company is managed by a good blend of both experienced and young team. The founding promoters, Mr. R.G. Agarwal and Mr. M.K. Dhanuka oversee the whole operations as the Chairman and Managing Director respectively and have been involved with the Company since inception (for more than 25 years). They are ably supported by young team of professionals including Mr. Rahul Dhanuka who heads marketing, Mr. Mridul Dhanuka who heads production and Mr. V K Bansal who is the CFO. The Company has three manufacturing units located at Gurgaon (Haryana), Sanand (Gujarat) and Udhampur (J&K). Two-third of the Companys sales comprises of speciality molecules and the remaining one-third is generics. The product having highest turnover is Targa Super and is in technical tie-up with Nissan Chemical Industries Ltd., Japan. The Companys Gross Sales were Rs. 576.16 crores in 2011-12 and Net Sales were Rs. 529.19 crores, which were higher by 6.5% & 7.8% respectively, over the previous fiscal. The Company has achieved a CAGR of over 20% for the last 5 years. For the last 3 years it has been constantly reporting very healthy ROCEs of well above 25%. The company expects its Top -line to grow by 1520% and Bottom-line by 20- 25%, over the next two years. The target customers of Dhanuka are farmers, planters and pest control operators. Growth drivers would be the potential to intensify the marketing network and reach the countrys interiors, increased farm income due to increase in MSP, increased awareness in rural India about usage and cost-benefit tradeoff of pesticides, edge over the competitors in the diverse product range and widespread market reach, increased customer base, marketing strategies and technical tieups. The Company keeps adding new products every year and entering into new technical collaborations. Dhanuka has an aggressive marketing strategy with a sales team of more than 500 full time employees and more than 1000 Dhanuka Doctors. For getting best results, it is very important for farmers to have knowledge about using the right product in right quantity at the right time. For this, DAL conducts training programs for them by giving product demonstrations, providing technical advice on right use of products and about specific crop related problems at their doorstep through Dhanuka Doctors. The Company has mobile soil and water testing laboratories in Public Private Partnership. Dhanuka has around 80 brands in their portfolio and keeps adding new brands every year. The Company has a wide range of pesticides to protect from most of the pests, insects, diseases that affect crops and these products are used in all major crops produced in our country.
Sunidhi Research |
48
DAL Key Management Personnel

Designation R.G. Agarwal Chairman
Name He started pesticides business more than 30 years ago; a philanthropist; mentors and provides strategic leadership; also served for two terms as Chairman of Crop Care Federation of India. co-founded the Company; has 36 years of experience; re-elected as President of HPMA (Haryana Pesticide Manufacturers Association) consecutively for the 4th year; oversees the overall operations of the Company Masters in Business Administration from S.P. Jain, Mumbai; oversees the entire marketing function of the company; leads the large marketing team from the fore-front & maintains cordial relations with International collaborators. Masters in Business Administration (Operations) from NITIE, Mumbai; oversees the manufacturing and supply chain functions across the Companys three production facilities; spearheads expansion projects; brought technological and managerial excellence in the companys operations Chartered Accountant, experience of over 20 years with Dhanuka, controls entire financial division and has been one of the key contributors in the success of Dhanuka
M.K.Dhanuka Managing Director
Rahul Dhanuka Director (Marketing)
Mridul Dhanuka Director (Operations)
V.K.Bansal CFO
Sunidhi Research |
49
DAL
Valuations Summary Year End-March Per share (`) EPS CEPS BVPS DPS Payout (%) Valuation (x) P/E P/BV EV/EBITDA Dividend Yield (%) Return ratio (%) EBIDTA Margin PAT Margin ROAE ROACE Leverage Ratios (x) Long term D/E Net Debt/Equity Interest Coverage Current ratio Growth Ratios (%) Income growth EBITDA growth PAT growth Turnover Ratios F.A Turnover x Inventory Days Debtors Days Payable days Income Statement(` mn) Year End-March Revenues Op. Expenses EBITDA Other Income Depreciation EBIT Interest PBT Tax PAT Minority Prior Period Adj Sh. of Associates Ex. ordinary Adj Pat FY11 4910 4151 759 26 49 737 65 673 161 511 0 0 0 0 511 FY12 5292 4498 794 6 45 755 55 700 129 571 0 0 0 0 571 FY13E 6108 5207 901 10 48 863 43 820 180 639 0 0 0 0 639 FY14E 7051 6028 1022 12 56 979 39 940 207 733 0 0 0 0 733 12.8 105.5 102.4 45.9 13.6 96.8 99.6 43.2 13.8 91.5 97.7 42.5 14.4 93.3 98.0 43.7 21.5 31.6 40.7 6.5 4.6 11.8 16.5 13.4 11.9 15.4 13.5 14.6 0.1 0.3 11.4 2.0 0.0 0.1 13.8 2.1 0.0 0.0 20.1 2.2 0.0 0.0 25.1 2.4 15.5 10.4 30.0 30.4 15.0 10.8 29.7 29.5 14.8 10.5 26.7 29.4 14.5 10.4 25.1 28.3 9.6 2.9 7.2 2.0 8.6 2.3 6.6 2.2 7.7 1.9 5.6 2.5 6.7 1.5 4.8 2.8 10.2 11.2 34.1 2.0 19.6 11.4 12.3 42.9 2.2 19.3 12.8 13.7 52.8 2.5 19.6 14.7 15.8 64.2 2.8 18.8 FY11 FY12 FY13E FY14E Balance Sheet (` mn) Year End-March Equity and Liabilities Share Capital Reserves and Surplus Total Shareholders funds Minority Interest Non-Current Liability Long Term Borrowings Deferred Tax Liabilities (Net) Long Term Liab/ Provisions Current Liabilities Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions Grand Total Assets Non Current Assets Fixed Assets Deferred Tax Assets Non-Current Investments Long Term Loans and Advances Other Non Current Assets Current Assets Current Investments Inventories Trade Receivables Cash and Cash Equivalents Short Term Loans and Advances Other Current Assets Grand Total Cash flow Statement (` mn) Year End-March PBT Depreciation Interest Exp Others CF before W.cap Inc/dec in W.cap Op CF after W.cap Less Taxes Exceptional & Prior Period Adj Net CF From Operations Inc/(dec) in F.A + CWIP others CF from Invst Activities Loan Raised/(repaid) Equity Raised Dividend Interest Paid CF from Fin Activities Net inc /(dec) in cash Op. bal of cash Cl. balance of cash FY11 673 49 65 -8 777 -765 13 150 0 -138 -54 10 -44 12 339 -75 -65 211 29 20 50 FY12 700 45 55 -5 795 -76 720 131 0 589 -52 -145 -198 -182 0 -117 -55 -353 38 50 87 FY13E 820 48 43 0 911 -262 649 180 0 468 -101 0 -101 -37 0 -146 -43 -226 141 87 229 FY14E 940 56 39 0 1034 -349 685 207 0 479 -101 0 -101 -33 0 -161 -39 -233 145 229 373 0 1419 1377 50 212 0 3576 153 1388 1377 87 242 0 3956 153 1674 1512 229 251 0 4677 153 1932 1757 373 290 0 5460 391 0 0 128 0 393 0 0 182 0 446 0 0 167 0 491 0 0 193 0 402 522 496 136 3576 338 543 564 150 3956 304 669 669 165 4677 273 773 773 180 5460 174 28 115 57 26 133 54 26 151 51 26 174 100 1605 1705 0 100 2046 2146 0 100 2539 2639 0 100 3111 3211 0 FY11 FY12 FY13E FY14E
Sunidhi Research |
50
Insecticides (India) Ltd (IIL)

Aggressive generic play, fully valuedReduce Agrochemicals Sector Outlook- positive
Initiating Coverage
32.0%
31.0% 30.0% 29.0% 28.0% 27.0% 26.0% 25.0% 24.0%
Insecticides (India) Ltd (IIL) manufactures formulations and technicals. It has also acquired off the shelf products and turned them around to achieve higher growth. IILs product mix is skewed mostly towards generic formulations. Gaining market share amidst intense competition in domestic generic market IIL is gaining market share in intensely competitive domestic market of Generics. It has grown at a rapid pace with Sales CAGR of 24%, EBIDTA CAGR of 30% and PAT CAGR of 23% over FY08 12. It has launched new products on a sustained basis, acquired off-shelf brands and turned them around with aggressive marketing campaigns. Diversified portfolio of over 100 products to offer one stop shop solutions IIL manufactures over 100 products led by insecticides (~61% of total revenues), herbicides (~28% of total revenues), fungicides (~7% of total revenues) and plant rd growth regulators. The rice crop insecticides constitute ~1/3 of revenues; cotton, wheat and other vegetable crops account for the rest. The wide basket of products with various applications not only ensures risk diversification but also provides a complete one-stop-shop solution to the farmers. This enables IIL to easily push its products in the small retail farm outlets, in contrast to an MNC player who will be able to provide the retailer only few crop-specific usage pesticides. 7 New products launched during FY12 contributed ~7% of FY12 revenues During FY12, IIL launched 7 products Metro, Rambo, Super Star, Monocil, Ultra, Dynamite Plus and Lethal Super550. These brands in first year of launch itself contributed ~7% to IILs FY12 revenues. Monocil, Victor, Lethal and Thimet are prominent amongst its top contributing products. Top 5 products in its portfolio account for 30 % of the revenues, while share of Top 10 products stood at 42% of revenues. Backward integration, lower tax rates to kick in margin expansion IIL has added massive capacities during FY12. Total capex over FY11-12 is ~`1 bn. The Udhampur formulations plant will enjoy 100% excise duty exemption and 100% income tax exemption for the first five years from the date of commissioning and 30% income tax exemption for the subsequent five years. We expect IIL to manufacture most of its high margin molecules at this plant to take maximum advantage of lower effective tax rates. Technicals form base for manufacturing raw materials. Dependence on sourcing Technicals will be lower due to expansion of its Active Ingredient (AI) manufacturing capacities. Fair value of `412/share (Upside of -0.5%), Initiate with Reduce At CMP of `414, IIL seems fully valued and is trading at P/E of 12.4x and 10.0x for FY13E and FY14E. We value IIL at P/E of 10x for FY14E earnings (at a discount compared to Rallis and PI Ind due to lower return ratios, generic portfolio). We have factored in 15% dilution on account of planned QIP in our forecasts. Initiate with Reduce. Financials Revenues ` mn FY11 FY12 FY13E FY14E 4501.0 5217.6 6737.0 8382.0 EBIDTA ` mn 436.3 563.6 741.1 963.9 Net Profit ` mn 322.2 330.2 422.9 523.1 EPS ` 25.4 26.0 33.3 41.2 P/E x 16.3 15.9 12.4 10.0 EV/EBIDTA x 12.7 11.7 8.1 6.8 ROAE % 20.8 19.6 17.7 16.4
CAGR (FY12-14E)
30.8%
26.7% 25.8%
25.9%
23.0%
Reduce 414 412 -0.5% 477/311 18763
1M 6.7 0.4
3M 0.8 -9.8
6M 1.0 -7.4
12 M 11.9 -5.7
25.0%
20.0% 15.0%
10.0% 5.0%
0.0% -5.0%
-10.0%
Dec-11 Oct-11 Nov-11 Aug-12 Sep-11 Feb-12 Apr-12 Jan-12 May-12 Mar-12 Sep-12 Jun-12 Jul-12
Insecticides India
NIFTY
Source: company, Sunidhi Research
IIL Investment Thesis

Monocil a blockbuster addition into product portfolio Historically, IIL has acquired off-shelf brands and successfully launched them through aggressive promotion. It acquired a popular generic brand Monocil from Nocil Ltd in March11. Monocil is an insecticide which controls a broad spectrum of pests in various crops and is one of the largest selling molecules (Monocrotophos). This brand was also off-shelf (5-6 years prior to acquisition by IIL) as the product did not fit into Nocils product strategy. However , IIL sensed opportunity as Monocil continued to have a high brand recall among farmers. Post acquisition, its aggressive promotion and reach helped in getting ~9% of market share of Monocrotophos sales in India leading to ~6% contribution to IILs topline in first year itself (FY12). Lethal Successful revival of off-the-shelf brand Lethal is one of the top selling brand in IILs product portfolio , which was acquired from Montari Industries in 2003 and contributed ~7% to its revenues in FY12. Montari Industries ceased operations in 2004 and went in BIFR. IIL acquired all the brands of Montari Industries for ~Rs 6 mn after being off-the-shelf for 3-4 years as brands of Montari continued to have high brand recall. After acquisition, IIL invested on advertising to revive the brands and successfully launched them in domestic market. Lethal has grown at a CAGR of 7% over FY08-12 and contributed ~7% of IILs topline in FY12 and is one of the largest brands in its segment i.e. chlorpyrifos. IIL too starts adding products in collaboration of MNCs IILs management has been focusing on increasing its tie-ups with global Agro-chemical companies to source specialty and generic molecules. During FY12, IIL announced tie-up with Nissan Chemicals, Japan with exclusive marketing rights for its patented product Pulsar which was launched in May 2012. It is Rice fungicide that prevents sheath blight. The Active Ingredient for this is Thifluzamide which is both preventive and curative in nature. Sheath blight is responsible for up to 20-25% of total yield loss in paddy crops and, therefore, Pulsar finds a big market in India as the country is one of the biggest rice producers. The product is already established in several key markets such as Japan, Brazil, China, Vietnam etc. According to IILs management, Pulsar is estimated to have Rs 2 bn market potential in India. IIL also announced collaboration with American Vanguard Corporation (AVC) to manufacture and market AVCs generic insecticide brand Nuvan (dichlorvos) in domestic market. IIL already has relationship with AVC since 2003 for manufacturing and marketing Thimet (Active Ingredient Phorate) in India. For Thimet, it pays US$175,000 or 5% of Thimets sales, whichever is lower to AVC as royalty. The initial agreement was valid till 2011 and has been renewed till 2016. Thimet added ~7.5% to IILs topline in FY12 and is its largest selling brand. IIL has entered into another tie-up with Nissan Chemicals to co-market Nissans popular weedicide quizalofop-ethyl in India, under the brand name Hakama. This is not an exclusive tie-up and the product will be manufactured by another player but will be marketed by IIL under the brand name Hakama. Tax rate to remain lower on account of tax benefits with recent capacity expansions IIL has added massive capacities during FY12 by setting up one formulation plant each in Dahej (Gujarat) and Udhampur (J&K) and a Technicals plant in Dahej. Total capex over FY11-12 is ~Rs 1 bn. The Udhampur formulations plant will enjoy 100% excise duty exemption and 100% income tax exemption for the first five years from the date of commissioning and 30% income tax exemption for the subsequent five years. We expect IIL to manufacture most of its high margin molecules at this plant to take maximum advantage of lower effective tax rates.
Sunidhi Research |
52
IIL
Exhibit 75: Sales trend of key products (` million)
450 416 415 416 374 316 287
400
350 300
250
200 150
100
50 0
FY11
Victor Thimet Lethal
FY12
Higher Technicals capacity to be key growth driver with Increased domestic B2B sales & exports We expect IILs B2B business as well as exports to increase sharply on the back of 2x growth in technicals manufacturing capacity with the commissioning of the Dahej plant which started commercial production in current fiscal i.e. FY13. It had only 3800 tonne of technicals manufacturing facility at Chopanki, Bhiwadi (Rajasthan). IIL plans to manufacture 5-6 different products in Dahej, which will kick in advantage of higher backward integration with ~50% of production to be utilized for IILs formulation plan ts. IIL also plans to expand its footprint in export markets by supplying active ingredients to the Middle East, Far East, CIS, Africa, and South Asia. Currently, IIL exports small quantities to Nepal, Lebanon, Pakistan, Israel and Bangladesh. For future growth, Management bets on CRAMS Management is planning to tap opportunities emerging on Contract Research & Manufacturing in Agrochemical Space. As India is turning attractive destination with cost advantage and ample talent in understanding complex chemistry. IIL is planning to add dedicated facility for contract manufacturing for global agrochemical majors and R&D companies. It may entail investment of ~ `500 million during FY14-FY15. We are not building in this capex yet in our estimates as we would rather wait for more clarity on these plans. It is also planning to invest in R&D facilities at its Chopanki, Bhiwadi (Rajasthan) plant which will support not just IILs research but can also be used for contract research from potential clients mainly from Japan. This may entail capex of `250 million to be spent during FY14.
Expanding formulation capacities at Samba (J&K) and Chopanki (Rajasthan) Current formulation plant at Samba is eligible for Excise and Income tax benefits. Till FY10, the benefit was 100%, and currently it gets 30% benefit. With additional capex at plant, it will become eligible for income tax and excise benefits for nest 10 years. The capex requirement is likely to be ~`75 million. Capacity expansion at Chopanki will be required as IIL has announced several new products and plans to introduce several more in coming quarters. The capex is estimated to be Rs 150 million for this formulation plant.
Sunidhi Research |
53
IIL
Exhibit 76: Capex Plans Plans Chopanki - Formulation capacity Expansion ` mn Expected By Remarks IIL will use the incremental capacity to manufacture the new products announced recently. The plant currently receives income tax and excise duty benefits. Additional capex will make the plant eligible for tax benefits for another 10 years The facility will not only support IILs in-house research but will also be utilised for player for contract research. IIL is exploring possibility with Japanese companies for Contract Research. Dedicated facility for contract manufacturing operations.
150
FY13
Samba (J&K) Formulation capacity Expansion
75
FY13
New R&D facility Chopanki Greenfield Plant for Contract Manufacturing of Technicals at Dahej
250
FY14
500
FY14 / FY15
Exhibit 77: Product Concentration as % of Agrochem Sales

45 42
40
35
35
30 24 18
30
25
22
20
15
10
5 0 FY11 FY12
Top 3 Products
Top 5 Products
Top 10 Products
Red triangle accounts for 10% Though IIL sells mostly generic agrochemicals, its revenue contribution from Red triangle (highest risk of getting banned) products is just 10%. Yellow triangle accounts for 31% while Blue triangle too accounts for 31%. Green triangle products contribute 9% while rest 19% is from Category O which are not hazardous if used safely.
Sunidhi Research |
54
IIL
Exhibit 78: Agrochemical Sales (` Mn)
6000 5000 201 432
1051 476
1739
4000 3000
2000 1000 0
1424
2246 476
1706 568
FY11
Class Ia (red triangle) Class III (green triangle)
Class Ib (yellow triangle) O Hazard unlikely if used safely
Class II (blue triangle)
FY12
Sunidhi Research |
55
IIL Price Target Derivation

Fair value of `412/share (Upside of -0.5%), Initiate with Reduce At CMP of `414, IIL seems fully valued and is trading at P/E of 12.4x and 10.0x for FY13E and FY14E. We value IIL at P/E of 10x for FY14E earnings (at a discount compared to Rallis and PI Ind due to lower return ratios, generic portfolio). We have factored in 15% dilution on account of planned QIP in our forecasts. Initiate with Reduce. Exhibit 79: Comparative valuation table Company Dhanuka Insecticides India PI Ind Rallis UPL Average Year FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Sales 6108 7051 6737 8382 10911 13427 15398 17890 86852 95547 25201 28459 EBIDTA 901 1022 741 964 1893 2420 2618 3086 15199 16721 4270 4843 PAT 639 733 423 523 1081 1430 1492 1809 6689 7844 2065 2468 EPS Adj 12.8 14.7 33.3 41.2 43.2 57.1 7.7 9.3 14.6 17.1 22.3 27.9 P/E 7.7 6.7 12.4 10.0 12.5 9.5 18.9 15.6 9.0 7.7 12.1 9.9 P/ Bv 1.9 1.5 1.8 1.5 3.3 2.5 4.4 3.7 1.3 1.2 2.5 2.1 EV/ EBIDTA 5.6 4.8 8.1 6.8 8.3 6.4 11.3 9.4 5.7 5.0 7.8 6.5 Net D/E 0.0 0.0 0.2 0.4 0.5 0.4 0.2 0.1 0.6 0.5 0.3 0.3 ROaE 26.7 25.1 17.7 16.4 29.2 30.2 16.6 21.3 15.3 16.0 21.1 21.8
Source: Sunidhi Research Estimates, Bloomberg
Sunidhi Research |
56
IIL
500

600 500
450
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Aug-12
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IIL Risks to our Price Target

Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Delay in increase of MSP Agrochemical consumption gets affected by governments decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to farmers. Regulatory risks The Agrochemical industry is highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court. Threat from GM seeds Genetically modified crops are made with inbuilt immune system that reduces dependence on usage of agrochemicals. We understand that plants require protection at various stages of lifecycle of plant and it may be difficult for even genetically modified crops to keep control on pests. Adaption of Bt Cotton in India has resulted in lower application of pesticides over last few years, however, Bt Cotton is reported to be affected from pests in some parts of Gujarat. Pests too become resistant to human intervention and gain power to attack crops despite being genetically modified, resulting in usage of agrochemicals.
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IIL Financial Analysis

9000.0 35.0
8000.0
7000.0 6000.0
29.3
30.0 24.4 25.0
20.4 15.9
5000.0
4000.0 3000.0
20.0
15.0 10.0
4501.0
6737.0
8382.0
5217.6
2000.0
1000.0 0.0
5.0
0.0
FY11
FY12
Revenue
FY13E
Growth
FY14E
The high revenue growth is expected in FY12E as a result of high fertiliser prices. We dont build in any price escalations in DAP/complex fertiliser business in FY13 in our estimates, which will moderate growth in FY13E. Exhibit 85: EBIDTA (`Million) and EBIDTA Margin
1200.0 1000.0 10.8 800.0 600.0 11.0 11.5 12.0 11.5 11.0 10.5
9.7
400.0
10.0 9.5
436.3
741.1
963.9
563.6
200.0 0.0
9.0
8.5
FY11
FY12
EBIDTA
FY13E
Margin
FY14E

600.0 500.0 400.0 300.0 200.0 7.2 7.4
7.2
7.0 6.8
6.6 6.3
6.3 6.2 6.4 6.2
322.2
523.1
330.2
422.9
100.0 0.0
6.0
5.8 5.6
FY11
FY12
PAT
FY13E
Margin
FY14E
Sunidhi Research |
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IIL
25 23
21
21.9
20.3 20.8
(%)
19.3 18.3
19.6 17.7 16.4
19 17 15 FY11
FY12
FY13E
FY14E
ROAE
ROACE
Exhibit 88: Net D/E and Interest Coverage Ratio (RHS)

0.8
0.7 0.6 42.8
45.0 0.7 40.0

35.0 30.0 25.0 20.0
0.5
0.4 0.3 0.2
0.4
0.2 FY11 4.9 5.1 0.2 4.5
15.0 10.0 5.0 0.0
0.1
0.0
FY12
FY13E
FY14E
Net D/E
Interest Coverage Ratio (RHS)
Exhibit 89: Cash flow (`Million)

600 400
200 0 -200 -400 -600 -800 -1000
FY13E
Opearting Cash Flow
Free Cash Flow
FY14E
FY11
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Sunidhi Research |
60
IIL Company in Depth

IIL manufactures branded formulations and technicals in India. Over 98% of revenues come from domestic markets, though institutional segment (B2B) accounts for ~20% of sales. IIL has three formulation units located in Chopanki, Udhampur and Samba. Its technicals (active ingredients) plants are located in Chopanki and Dahej. In formulation products, IILs popular brands are Thimet (phorate), Monocil (monocrotophos), Lethal (Chlorpyrifos) and Victor (imidacloprid). IIL refers these as MVLT that remains the focus for driving revenue growth. It was promoted in 1996 and commercial operations commenced in 2002 after the setting up of the Chopanki formulation unit. In 2007, the company came out with an IPO to fund its expansion plans and raised `369.2 mn at an issue price of `115 per share. IIL has an experienced management headed by Mr H. C. Aggarwal, chairman, and his son Mr Rajesh Aggarwal, managing director. Mr Rajesh Aggarwal promoted the company in 1996. IIL has reported strong revenue growth in the recent years with 27% CAGR over FY06-12. Aggressive capacity additions, expansion of distribution network and focus on brand building have been the main drivers of IILs growth strategy. Mr H. C. Aggarwal has more than 30 years of experience in the agrochemical industry. He has been the president of Northern India Pesticides Manufacturing Association for over five terms and the director of Crop Care Federation of India (CCFI). He is currently on the board of CCFI. Mr Sanjeev Bansal (Mr H.C. Aggarwals son-in-law) is a wholetime director and heads administration. Mr Sandeep Agarwal heads finance and is designated as CFO. Exhibit 90: Agrochemical Sales (` mn)
5000 4383 3846
4000 3000 2000 1000 0
933
1158
FY11
Formulations - Retail sales (B2C)
FY12
Formulations - Institutional sales (B2B)
Exhibit 91: Insecticides contribute to 60% of topline, share of Herbicide ~30%

6000
5000 4000 223 3374 3000 2000 1000 0 330 1171 1553 3055 372 242
` Million
FY11
Herbicides
Fungicides
Insecticides
Others
FY12
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IIL
Exhibit 92: AP, Punjab, Maharashtra & Haryana are largest markets for IIL
Others, 17%
AP, 17%
Gujrat, 5% Bihar, 5% Karnatka, 6%

TN, 6%
Punjab, 16%
UP, 8%
Haryana, 10%
Maharastra, 11%
Key Management Personnel

Designation Chairman Managing Director Whole-Time Director Independent Director Independent Director Independent Director Independent Director Independent Director Name Mr. Hari Chand Aggarwal Mr. Rajesh Aggarwal Mr. Sanjeev Bansal Mr. Navneet Goel Mr. Rajender Pershad Gupta Mr. Gopal Chandra Agarwal Mr. Navin Shah Mr. Anil Kumar Singh
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IIL
Valuations Summary Year End-March FY11 Per share (`) EPS 25.4 CEPS 26.6 BVPS 122.0 DPS 2.5 Payout (%) 9.8 Valuation (x) P/E 16.3 P/BV 3.4 EV/EBITDA 12.7 Dividend Yield (%) 0.6 Return ratio (%) EBIDTA Margin 9.7 PAT Margin 7.2 ROAE 20.8 ROACE 21.9 Leverage Ratios (x) Long term D/E 0.0 Net Debt/Equity 0.2 Interest Coverage 42.8 Current ratio 1.3 Growth Ratios (%) Income growth 20.4 EBITDA growth 19.7 PAT growth 14.2 Turnover Ratios F.A Turnover x 14.3 Inventory Days 102.0 Debtors Days 65.4 Payable days 89.3 Income Statement(` mn) Year End-March FY11 Revenues 4501 Op. Expenses 4065 EBITDA 436 Other Income 1 Depreciation 15 EBIT 422 Interest 10 PBT 413 Tax 90 PAT 322 Minority 0 Prior Period Adj 0 Sh. of Associates 0 Ex. ordinary 0 Adj Pat 322 Source: Company, Sunidhi Research Balance Sheet (` mn) Year End-March Equity and Liabilities Share Capital Reserves and Surplus Total Shareholders funds Minority Interest Non-Current Liability Long Term Borrowings Deferred Tax Liabilities (Net) Long Term Liab/ Provisions Current Liabilities Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions Grand Total Assets Non Current Assets Fixed Assets Deferred Tax Assets Non-Current Investments Long Term Loans and Advances Other Non Current Assets Current Assets Current Investments Inventories Trade Receivables Cash and Cash Equivalents Short Term Loans and Advances Other Current Assets Grand Total Cash flow Statement Year End-March PBT Depreciation Interest Exp Others CF before W.cap Inc/dec in W.cap Op CF after W.cap Less Taxes Exceptional & Prior Period Adj Net CF From Operations Inc/(dec) in F.A + CWIP others CF from Invst Activities Loan Raised/(repaid) Equity Raised Dividend Interest Paid CF from Fin Activities Net inc /(dec) in cash Op. bal of cash Cl. balance of cash
FY12 26.0 27.9 143.6 2.5 9.6 15.9 2.9 11.7 0.6 10.8 6.3 19.6 20.3 0.2 0.7 4.9 1.2 15.9 29.2 2.5 10.2 114.8 59.4 85.4 FY12 5218 4654 564 1 24 541 111 429 99 330 0 0 0 0 330
FY13E 33.3 37.9 233.5 3.0 9.0 12.4 1.8 8.1 0.7 11.0 6.3 17.7 18.3 0.1 0.2 5.1 1.4 29.3 31.5 28.1 3.9 114.8 56.7 81.0 FY13E 6737 5996 741 1 58 684 134 549 126 423 0 0 0 0 423
FY14E 41.2 48.6 270.6 3.5 8.5 10.0 1.5 6.8 0.8 11.5 6.2 16.4 19.3 0.3 0.4 4.5 1.5 24.4 30.1 23.7 3.8 108.2 58.6 81.5 FY14E 8382 7418 964 1 93 872 193 679 156 523 0 0 0 0 523
FY11 127 1421 1547 0 9 20 23 333 994 335 171 3435
FY12 127 1695 1822 0 383 29 29 1152 1185 340 265 5203
FY13E 146 2815 2961 0 383 29 35 652 1477 461 300 6297
FY14E 146 3286 3432 0 883 29 41 602 1837 574 325 7723
906 0 0 161 35 0 1258 806 37 145 85 3435 FY11 413 15 10 1 439 40 478 104 0 374 -599 53 -545 161 0 -30 -10 122 -49 87 37
1432 0 0 255 31 0 2024 892 178 276 115 5203 FY12 429 24 111 2 566 -839 -273 87 0 -359 -556 6 -550 1198 0 -37 -111 1049 140 37 177
1724 0 0 277 148 0 2215 1200 309 277 148 6297 FY13E 549 58 134 0 742 -216 526 126 0 399 -350 0 -350 -481 742 -45 -134 82 132 177 309
2231 0 0 344 184 0 2756 1493 187 344 184 7723 FY14E 679 93 193 0 965 -536 429 156 0 273 -600 0 -600 450 0 -52 -193 205 -122 309 187
Sunidhi Research |
63
PI Industries Ltd (PIL)

Custom synthesis, In-licensing to drive robust growth Agrochemicals Sector Outlook- Positive
Initiating Coverage
45.0% 40.0% 35.0% 29.9% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 23.6% 16.1%
CAGR Growth (FY12-14E)
41.4%
PI is manufacturer of agri-inputs and is present in custom synthesis of fine chemicals (Contract Research and Manufacturing Services: CRAMS). It undertakes crop protection and manufacture of specialty products and plant nutrients. Respect for IP helps in driving in-licensing of products PIL has uniquely positioned itself with its non-compete and IP driven business model to leverage its strong reach and brand with millions of Indian farmers on one side and chemical process research & manufacturing capabilities to partner global innovators on the other side. It doesnt aggressively launch new products by reverse engineering of products that turn off-patent. This helps in building trust with innovators who can see respect for IP and PILs commitment.
0.0%
Buy 542 685 26 627/424 18763
Focus to remain on adding & growing topline from in-licensing molecules PI has adopted a strategy of in-licensing MNC molecules for marketing and distribution in India rather than competing in the generics formulations market, which is likely to help it sustain growth and margins in a highly competitive industry. We expect margins to improve led by PIs strategy of in-licensing molecules for marketing and distribution in India and of building leadership in select sub-product segments instead of competing in generic market Custom synthesis business to remain key growth driver Growth in past few years has been driven by custom synthesis business. We expect this business to continue to grow faster than domestic Agri-input business as strong order book provides visibility. It currently stands at ~$310 mn which is ~4.5x of FY12 revenue from CSM business. Over 80% of the revenues from CSM business are derived from patented products. Profitability to improve further with changing revenue mix, low tax rates We expect PI to maintain high return ratios on improved margins which will be led by fast changing product mix with higher growth in the more profitable custom synthesis business, Lower tax rate on account of commencement of operations in the Jambusar SEZ unit during Q3FY13 where PI has tax benefits for first 10 years of operations. In last 3 years, PIL has grown its revenue by 2x and PAT by 3x. Ramp up in CSM business and higher scale of domestic agrochemical sales has led to Operating margin improvement from ~13% in FY09 to 16.3% in FY12. Fair value of ` 685/share (Upside of 26%), Initiate with Buy With return ratios of ~30%, robust growth trajectory and lower tax rates after commissioning of Jambusar SEZ unit, PILs earnings will continue to be in growth momentum. At CMP of ` 542, PIL is trading at P/E of 12.5x and 9.5x for FY13E and FY14E. We value PIL at P/E of 12x for FY14E consolidated earnings.
Share holding, June'12 Promoters FII DII Public & Others Performance Stock Return % Relative Return %
20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0%
Apr-12 Sep-11 Feb-12 Mar-12 Dec-11 Nov-11 May-12 Aug-12 Sep-12 Jun-12 Oct-11 Jan-12 Jul-12
63.7 8.6 0.9 26.8 1M 0.7 -5.9 3M 8.9 -1.5 6M 4.2 -5.2 12 M -0.1 -15.1
Financials Revenues ` mn FY11 FY12 FY13E FY14E 7200.1 8791.1 10910.7 13426.8
EBIDTA ` mn 1151.8 1433.7 1893.3 2420.0
Net Profit ` mn 651.0 714.9 1081.3 1430.0
EPS ` 29.1 28.5 43.2 57.1
P/E x 18.6 18.9 12.5 9.5
EV/EBIDTA x 12.3 11.0 8.3 6.4
ROAE % 30.5 38.4 29.2 30.2
PI Industries
NIFTY
PIL Investment Thesis:

Custom Synthesis the big differentiator Custom Synthesis is used for the production of organic drug compounds to the specification of the client for the their specific development and research needs PI provides Contract Research (CR) and Contract Manufacturing (CM) services. Having pioneered this business in India for last 15-16 years, PI is one of the leading companies in this space and the largest in the Agrochemical Sector. Having built an outstanding reputation with the leading multinationals in Europe and Japan PI today has long term contracts for key Agrochemical active ingredients and intermediates for both the newly launched and to be launched products across the globe. In its Custom Synthesis business, PI provides services in the areas of Contract Research, Process Development, Analytical Method Development, Synthesis of high purity Product and Impurities for analytical reference standards, 5 batch analysis under GLP conditions, Scale up studies, Process detailed engineering and Commercial scale production. The strength of this business has been developed through years of experience in this business and the in depth of understanding of customer requirements. All this is backed by defined business processes, state of the art R&D centre, kilo lab, pilot plant and manufacturing & analytical facilities, excellent and well experienced stable and dedicated team. PILs Product focus is on patented, high value, complex chemistry and early stage molecules that grows from almost zero base and leads to high growth rates on successful commercialization across geographies. PI has created a knowledge database in the custom synthesis business over several years to enable it to provide value added services and build trustworthy relationships with its key customers. It is associated with the leading innovators in the fine chemical industry in Europe, Japan and some segment in America. A key attribute of PI is its process research expertise and its ability to quickly scale up to commercial manufacturing. It has over the years proven these capabilities by developing more than 300 molecules at various stages of process development with up to 15 step chemical reactions. Unique position of PIL in CSM business Global innovators typically are hesitant in sharing patented molecules with other big Indian players. The reason for the same being Indian agrochemical majors had been exporting the reverse engineered patented products till 2005 as India had not signed WTO patent & IPR treaty. On the other hand, Indias competitor in outsourcing of manufacturing i.e. China is not regarded well for protection of Intellectual property, thus it loses out in opportunities emerging in nongeneric products. European players offering CSM business to R&D companies have significantly less risk as far as IP protection is concerned, however these are not cost competitive due to higher operating costs (mainly high labour rates). Scope of Custom Synthesis Research including conducting clinical trials, bioequivalence studies, drug library generation & screening etc on contract Process research on new chemical process for synthesis and production scale up Custom manufacture of special chemicals in small quantities Contract manufacture of chemicals including fine chemicals, intermediates, cGMP intermediates, APIs, agrochemicals and specialty chemicals.
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PIL
12 14 products commercialized, Jambusar Phase-1 to commission during Q3FY13 PILs current portfolio of commercialized products is 12 to 14, and this number i s scheduled to improve with more products in the pipeline R&D scale up in the next two years. The first phase of the new manufacturing facility in Jambusar is expected to get commissioned during Q3FY13. The investment of this location will be made in the phases according to additional capacity requirements, for new products getting commercialized. Committing Capex on Strong revenue visibility The Custom Synthesis business is now in a growth phase. As a result, all capital expenditure being planned is only against assured revenues for which contracts are either signed or being negotiated. Contracts are negotiated to ensure minimum risk for PI on account of commercial, raw material & currency. Thus, PIL enjoys strong revenue visibility and predictability at lower investment risk. Global CSM opportunity is whopping $85 billion The Global Fine chemical Industry is estimated to be ~ $ 300 billion by the year 2015 having a growth rate of 7-8 % with strong anchors in Asia. Of this, the addressable portion of Custom Synthesis and Manufacturing (CSM) is estimated at ~$ 85 billion. Although India currently accounts for less than 5% of the CSM business globally, this share is expected to grow substantially over the next 5-7 years. The Indian CSM industry is expected to grow at much faster pace than the ~12% CAGR of the global CSM market. India already has the highest number globally of USFDA and UK MHRA approved plants for pharma products. With 170 approved plants, India has become a natural outsourcing destination for global companies seeking to achieve accelerated time to market and superior cost efficiencies. CRAMS Pharma companies can be potential competitors in manufacturing of the agro chemical space; globally competition comes from companies like Saltigo, Lonza and DSM. Weakness in global economy augurs well for outsourcing The recent global economic slowdown has further catalysed the adoption of the contract manufacturing model with both innovators and generic makers searching for optimal quality and cost options. These factors augur well for the Indian CSM players that are well equipped to capitalise on opportunities in global outsourcing. These companies have strengthened presence in the market by acquiring better technologies and developing expertise in niche segments that have high entry barriers and present attractive margins. Traditionally, India has been the outsourcing destination for Intermediates and Active Pharmaceutical Ingredients (c. 60% of total outsourcing has been in this segment). However, the outlook is changing rapidly as many Indian companies have expanded their offering under contract manufacturing and have also built capabilities in the areas of contract research for discovery and development. Non-Compete business model attracts more customers PI does not compete with the innovator by reverse engineering of molecules and hence attracts innovators from not just Agrochemical, but pharmaceutical sector as well. PI strictly focuses on IPR chemistry as a result its involvement with client is from an early stage throughout the grant of a patent on the molecule, client comfortable with sharing technology. Agro-chemical sector has been a starting point and now PI is working on pharmaceuticals and performance chemicals too. PIL is creating a diversified Custom Synthesis business across the Custom Synthesis delivery chain, addressed at the patent life cycle. Operational efficiencies to aid in margin expansion The manufacturing unit has also taken up a special project with the support of a reputed consultant towards operational excellence. These initiatives would result in substantial operational efficiencies and hence margin expansion going forward.
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PIL
Europe leads CSM orderbook In CSM business, 65-70% of orderbook comes from Europe while Japan accounts for 15-20%. The top molecule doesnt account for more than 20% of topline in CSM business. Top 5 molecules rd have revenue of 55-60% while Top 5 client concentration is not more than 2/3 of the CSM revenues. It thus have diversified business in terms of clients, products and geographies. Take or Pay contracts to avoid risks PIl enters into Take or Pay contracts with MNCs for CSM business to avoid any risks that may arise from failure of any product to take off in global markets. It normally passes on raw material and forex risks to clients and works on reasonable conversion margin basis. Very high entry barriers Registration of a new outsourcing partner as a source normally takes 2 3 years and meanwhile existing trustworthy sources continues to corner substantial share of production of newly commercialized molecules. Every successful molecule offers potential opportunity varying from US$ 5mn to US$ 15mn p.a. for PIL depending on the type and scope of the molecule. As complex chemistry is involved from Lab to scalability at plant, a steep learning curve in the process engineering business ensures that the innovator continues to source from the partner who has the expertise built over the years. Thus, manufacturing contracts are generally long term (3-5 years) or renewed every year. Concentrated Product portfolio in domestic Agri-inputs PIL has focused on small no. of products (less than 30) as the strategy is to develop strong market positions where a majority of its brands are among Top 2-3 in their respective categories. As a result, it can successfully create premium positioning for its brands. In-licensed products dominate in revenue mix Most of the new and big potential launches by PIL has been for in-licensed products from innovators. It is driving robust growth rates in Agri-inputs division. While over 50% of revenues came from generics with backward integration into Technical, remaining ~45-50% came from inlicensed products which are typically bought from innovator companies. PIL buys these products, Formulates, manufactures and packs them under its own brand to sell in Indian markets. Most of these deals have an exclusive license lasting minimum 5 years. 22% topline growth in Agri-inputs in challenging year Agri-input revenues grew 22% in FY12. The growth was achieved despite several challenges for the industry during the year. These include increasing costs of production due to increased input costs (manpower, fuel etc.) and the inability of the farmers to realize Minimum Support Prices (MSP) in many parts of the country (this impacted crop economics for farmers). Further a change in subsidy system for fertilizers, export restrictions on leading crops, crop holidays in certain areas and unfavorable rains for crops such as pulses and soybeans posed further challenges. 4 new products in FY12, Expect 2 launches in FY13 As a part of its strategy to provide complete crop solutions, PIL introduced two broad spectrum modern fungicides: CLUTCH and SANIPEB, one wheat herbicide: WICKET and a broad spectrum Insecticide: OVAL during FY12. PIL has also reached the penultimate stages of registration approval for two new broad spectrum insecticides. Both these molecules are expected to be launched in FY13. Signup 6 new product agreements PIL continues its quest for new molecules and has signed 6 new agreements with their patent holders in insecticide / herbicide / fungicide segments to evaluate their potential in the domestic market. These products further add to the Companys product pipeline and strengthen our product portfolio for the coming years.
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PIL
Synergies between CSM & domestic Agrochemicals PIL has shifted its focus from generics to newer patented products due stagnancy & low margins in the domestic generics. There are successful products the company has been able to clinch deals with clients to launch in Indian markets leading to synergies across businesses. Nominee Gold becomes Rs 1 billion product Nomini Gold is a shining example for potential of in-licensed product, which is a rice herbicide, launched in FY10 in a tie up with Kumiai Chemicals - the innovator of bispyribac-sodium and has become a blockbuster in just two years and generates over ~`1bn revenues per year. Management indicates that Nominee Gold has reached ~5% of rice under acreage in India and thus presents an immense opportunity by entering in more areas. What drives Nominee Golds success? Rice is typically cultivated either by transplantation method or direct seeding. In transplantation method, rice seeds are planted in a nursery and normally saplings are left to grow for few weeks before planting them in farms. This method is labour-intensive (Alternatively Transplanter machines can be used) and also requires a lot of water in the field. Direct seeding is less cumbersome and needs less water in the field; however a major problem with direct seeding is the challenge of controlling weed growth, which can reduce yields sharply. Effective weed control provided by Nominee Gold turns direct seeding an attractive option compared to transplanting. Impressed by its success and immense market potential, global innovator companies such as Bayer and Syngenta have sought to partner with PIL to launch their own versions of bispyribacsodium as PIL has exclusive rights for it in India. Rallis already sells it under the brand name Taarak. PIL indicates that it wants to grow the market share of it as fas t as possible before the competition from generic players kick in. PI also get monetary benefit on sales by any of these partners alongwith strengthening relationship which may be useful in sourcing more in-licensing from innovator companies. Tie up with Sony for research PI has set up a joint research laboratory with one of the largest electronics companies in the world (Sony Corporation of Japan) for developing processes for electronic chemicals at Udaipur. Award from Bayer Crop Science Bayer Crop Science India awarded the certificate of Excellence to PI Industries Ltd. in Supplier Sustainability Program 2011 for their excellent Systems & practices of environment Management, Base Management, Manufacturing practices, Legal Systems, Health, Safety and Environment Management. Vast distribution network and effective marketing strategy The company currently has niche product portfolio of over 25 products. It markets its product through 10,000 + Distributors and 40,000 + Retailers across all the major farming states. Exit from Polymer compounding business PILs strategy to concentrate on its core businesses of Agri-inputs and Customs Synthesis business is visible with the divestment of the polymer compounding business to Rhodia, S.A., a French multinational speciality chemical major as this piece of business was not fitting in with growth strategy of PIL going forward. PIL received RS 0.7 billion for this business which helped in reducing debt and part funding of its core business activities. PIL has booked exceptional gain of Rs 0.3 billion on sale during FY12. . The deal includes transfer of all assets, people, plant facility, R & D capabilities, customer base and logistic network in India. The deal was concluded in April, 2011. The polymer business witnessed significant pressure on margins because of input-cost pressures. Post this divesture, PIL is completely focused on both high margin and highly scalable businesses.
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PIL
2 Bonus issues since 2009 PI Industries has rewarded investors with 2 bonus issues in recent years. In Apr09, PIL issues Bonus of 1:1 while in Jul10, Bonus shares were issued in 1:2 ratio. Improving Balance Sheet PILs Balance sheet quality is improving with high growth rates in profits. D/E ratio has decline from 2.0x in FY09 to 0.65x in FY12. This is set to decline further as investment in new facility at Jambusar start contributing to bottomline post commissioning during FY13. Management guides for topline growth at ~30 p.a. for few years PILs management guides for ~30% topline growth p.a. for few years given the order visibility in its CSM business and promising product pipeline alongwith health growth rates in existing product portfolio. Margin expansion is inevitable owing to improving product mix, higher operating leverage and divesture of the low margin polymer business.
Sunidhi Research |
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PIL
Exhibit 93: PI Industries Product Basket Brand Name Insecticides PI BUPRO DIAFURAN LEPIDO COLT COLFOS FOSMITE PI INDOX JUMBO SNAILKIL KADETT FORATOX ROKET CARINA SIMBAA MAXIMA OVAL VOLTAGE Fungicides LURIT KITAZIN SANIT CLUTCH LOGIK SANIPEB Herbicides SOLARO NOMINEE GOLD PI GLYPHO INRO WICKET Other products BIOVITA Lq. Seaweed (Ascophyllum nodusum)
Product Buprofezin 25% SC Carbofuran 3% CG (encapsulated) Chlorfenapyr 10% SC Cypermethrin 25% EC Ethion 40% + Cypermethrin 5% EC Ethion 50% EC Indoxacarb 15.8% EC Imidacloprid 17.8% SL Metaldehyde 2.5% DP Monocrotophos 36% SL Phorate 10 % CG Profenofos 40% + Cypermethrin 4% EC Profenofos 50% EC Propargite 57% EC Thiamethoxam 25 %WP Acephate 75 WP Spiromesifen 2.9 SC
Crop Rice, F&V, cotton Maize, rice, cotton, F&V F&V, noncrop Cotton, F&V, maize, cereals F&V, noncrop Cotton, F&V, noncrop Cotton, F&V, maize Rice, cotton, maize, F&V F&V, cereals, noncrop Cotton, rice, F&V Potato, rice, cereals Cotton, F&V, maize, others Cotton, F&V, maize, others F&V, cotton, noncrop Maize, potato, soybean, others F&V, cotton, rice, others F&V, cotton
Pest Hoppers Various Bollworm, mites, etc. Bollworm, weevils, etc. Various Various Various Various Slugs and snails Bollworm, various others Nematodes, etc. Various Various Mites Various Various White fly, mites
Dimethomorph 50% WP Iprobenfos 48% EC Metiram 70% WG Pyraclostrobin 5%+Metiram 55% WG Tricyclazole 75% WP
Vine, potato, F&V Rice, F&V F&V, vine Cereals, soybean, maize Rice Broad spectrum of crops
Mildew, blight, others Blast, blight, rot Mildew, blight, others Rust, leaf spot, mildew Blast
Atrazine 50% WP Bispyribac Sodium 10% SC Glyphosate 17.6 SL Imazethapyr 10 SL
Maize, sugarcane, cereals Rice, noncrop RR crops, burndown Soybean, rice, F&V, maize Wheat
Grasses, broadleaved weeds Grasses, broadleaved weeds Grasses, broadleaved weeds Grasses, broadleaved weeds
Sunidhi Research |
70
PIL Price Target Derivation

Fair value of ` 685/share (Upside of 26%), Initiate with Buy With return ratios of ~30%, robust growth trajectory and lower tax rates after commissioning of Jambusar SEZ unit, PILs earnings will continue to be in growth momentum. At CMP of ` 542, PIL is trading at P/E of 12.5x and 9.5x for FY13E and FY14E. We value PIL at P/E of 12x for FY14E consolidated earnings. Exhibit 94: Comparative valuation table Company Dhanuka Insecticides India PI Ind Rallis UPL Average Year FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Sales 6108 7051 6737 8382 10911 13427 15398 17890 86852 95547 25201 28459 EBIDTA 901 1022 741 964 1893 2420 2618 3086 15199 16721 4270 4843 PAT 639 733 423 523 1081 1430 1492 1809 6689 7844 2065 2468 EPS Adj 12.8 14.7 33.3 41.2 43.2 57.1 7.7 9.3 14.6 17.1 22.3 27.9 P/E 7.7 6.7 12.4 10.0 12.5 9.5 18.9 15.6 9.0 7.7 12.1 9.9 P/ Bv 1.9 1.5 1.8 1.5 3.3 2.5 4.4 3.7 1.3 1.2 2.5 2.1 EV/ EBIDTA 5.6 4.8 8.1 6.8 8.3 6.4 11.3 9.4 5.7 5.0 7.8 6.5 Net D/E 0.0 0.0 0.2 0.4 0.5 0.4 0.2 0.1 0.6 0.5 0.3 0.3 ROaE 26.7 25.1 17.7 16.4 29.2 30.2 16.6 21.3 15.3 16.0 21.1 21.8
Source: Sunidhi Research Estimates, Bloomberg
Sunidhi Research |
71
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Price
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72
PIL
PIL Risks to our Price Target

Delay in commercialization / development of new molecules PILs growth in CSM will be dependent on the commercialization of molecules. Any delay in the same or delay in ramping up volumes in global markets shall lead to lower growth. Client and Product concentration PILs growth in CSM is also dependant on few molecules. Slower growth in volumes of key molecules will mean slower growth in topline in this business. Genetically Modified Crops Genetically modified crops are made with inbuilt immune system that reduces dependence on usage of agrochemicals. We understand that plants require protection at various stages of lifecycle of plant and it may be difficult for even genetically modified crops to keep control on pests. Recently, Bt Cotton is reported to be affected from pests in some parts of Gujarat recently. Pests too become resistant to human intervention and gain power to attack crops despite being genetically modified, resulting in usage of agrochemicals. Adaption of Bt Cotton in India has resulted in lower application of pesticides over last few years. To mitigate this risk, most of the agrochemical majors globally have added and enhanced seeds business over the years. Forex risks PIL's Revenues, raw material imports are denominated in foreign currencies. Hence, any volatility in the exchange rate leads to volatility in company's revenues, borrowings, assets and profit. Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Delay in increase of MSP Agrochemical consumption gets affected by governments decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to farmers. Regulatory risks The Agrochemical industry is highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court.
Sunidhi Research |
73
PIL Financial Analysis

16000.0 14000.0 12000.0 10000.0 8000.0 6000.0 25.0
32.8
35.0 30.0 25.0
19.8
20.0
15.0 10.0
10910.7
13426.8
7200.1
8791.1
4000.0 2000.0 0.0
5.0
0.0
0.0 FY11
FY12
Revenue
FY13E
Growth
FY14E

3000.0 2500.0 2000.0 1500.0 1000.0 16.3 16.0 17.4 18.0 18.5 18.0 17.5 17.0 16.5 16.0
1151.8
1893.3
500.0 0.0
2420.0
1433.7
15.5 15.0 14.5
FY11
FY12
EBIDTA
FY13E
Margin
FY14E

1600.0 1400.0 1200.0 1000.0 800.0 600.0 9.9 9.0 8.1 8.0 6.0 4.0 10.7 12.0 10.0
1081.3
1430.0
400.0
651.0
200.0 0.0
714.9
2.0 0.0
FY11
FY12
Adj. PAT
FY13E
Margin
FY14E
Sunidhi Research |
74
PIL
40 36
32
38.4
30.5 29.2
30.6 26.9
30.2
(%)
28 24
29.2
23.4
20 FY11 FY12 FY13E FY14E
ROAE
ROACE
We believe PIL will continue to have ROAE and ROACE of ~30% going forward. Exhibit 103: Net D/E and Interest Coverage Ratio (RHS)
1.2 8.2
1.0 0.8 0.6 0.4 5.9 7.0
9.2
1.0 0.7 0.5

0.4
0.2
0.0 FY11 FY12 FY13E
10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
FY14E
Net D/E
Sunidhi Research |
75
PIL Company in Depth

Incorporated in 1947, PI Industries focuses on Agri-Input and Custom Synthesis with strength of over 1,100 employees, PI Industries currently operates three formulation and two manufacturing facilities as well as four multi product plants under its three business units across Jammu and Gujarat. These state-of-art facilities have integrated process development teams with in-house engineering capabilities. PILs journey over 6 decades PIL was founded in 1947 and it was earlier known as Pesticides India which was renamed PI Industries in 1993 to reflect its diversified businesses. PII was set up by the late Mr. P P Singhal, as an edible oil refinery unit. It later ventured into the agrochemicals formulation business, which is currently its major revenue driver. In 1978, the company diversified into mining and mineral processing; this business was later hived off into a separate unlisted company, Wolkem India Ltd. PIL also entered the energy metering business in the 1980s which too was hived off into a separate unlisted company, Secure Meters Ltd. PII diversified into polymer compounding in the 1990s. Also, in the mid-1990s, PII entered the CRAMS business, which currently accounts for ~38% of the topline in FY12 and we expect it to go to ~45% by FY15. From April 2011, the polymer business has been divested to Rhodia, S.A., a French multinational speciality chemical major. Thus, It has 2 core focus area currently viz. Agri-inputs (Pesticides) and Custom Synthesis & Manufacturing (CSM). Agri-Input PI is one of Indias leading players in th e Agri-Input industry, primarily dealing in agro-chemicals, specialty fertilizers, plant nutrients and seeds. This venture is the flagship business (unit) for which PI enjoys tremendous brand recognition across several industry leading products. The Company has exclusive rights with several global Corporations for distribution in India and is constantly evaluating prospects to further expand its product portfolio. Given the inevitable surge in demand for food grain production in the agriculture sector, the opportunities for AgroChem Companies are innumerable. PI Industries is favorably positioned to contribute to the growth in this space by leveraging its long-standing association with business partners and intensive network of distributors across India. PIL has 3 formulation and 2 manufacturing facilities based in north (Jammu) and west (Panoli, Gujarat) currently while new facility at Jambusar is going to commission soon. Custom Synthesis & Manufacturing The Fine Chemicals business unit of PI focuses on Custom Synthesis which entails dealing in custom synthesis and contract manufacturing of chemicals including techno commercial evaluation of chemical processes, process development, lab & pilot scale up as well as commercial production. The Company has an impressive product portfolio as result of exclusive tie-ups with leading agro-chemical, pharmaceutical and fine chemical companies around the world. PI has made substantial investments in building state of art process research and manufacturing facilities of chemical intermediates and active ingredients with special focus on strong process R&D capabilities. This business unit is expected to be the primary growth driver with strong revenue visibility as India continues to be a preferred destination for outsourcing Custom Synthesis and contract manufacturing related projects. With exceptional growth opportunities in the offing this business segment is poised for great success.
Sunidhi Research |
76
PIL Key Management Personnel

Salil Singhal, Chairman & Managing Director (Promoter Director) Mayank Singhal Managing Director & CEO (Promoter Director) Took charge of the family business in July 79. He headed Pesticide Association of India (now Crop Care Federation of India) as Chairman for 17 yrs and is now Chairman Emeritus. An Engineering Management Graduate from the UK, joined PI in 1988. Worked at the plant level for 2 years and was inducted to the Board of the Company in 2000 and appointed as Joint MD in 2004. A B.Com (Hons.) graduate joined Company in 1995. Initially, he handled the polymer compounding business and later he managed the entire manufacturing operations of the Company at Panoli. His current responsibilities are in the operations, manufacturing, quality control, commercial and general management areas.
Anurag Surana (Whole Time Director)
Sunidhi Research |
77
PIL
Valuations Summary Year End-March Per share (`) Adj. EPS CEPS BVPS DPS Payout (%) Valuation (x) P/E P/BV EV/EBITDA Dividend Yield (%) Return ratio (%) EBIDTA Margin Adj. PAT Margin ROAE ROACE Leverage Ratios (x) Long term D/E Net Debt/Equity Interest Coverage Current ratio Growth Ratios (%) Income growth EBITDA growth PAT growth Turnover Ratios F.A Turnover x Inventory Days Debtors Days Payable days Income Statement(` mn) Year End-March Revenues Op. Expenses EBITDA Other Income Depreciation EBIT Interest PBT Tax Balance Sheet (` mn) Year End-March Equity and Liabilities Share Capital Preference Capital Reserves and Surplus Total Shareholders funds Minority Interest Non-Current Liability Long Term Borrowings Deferred Tax Liabilities (Net) Long Term Liab/ Provisions Current Liabilities Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions Grand Total Assets Non Current Assets Fixed Assets Deferred Tax Assets Non-Current Investments Long Term Loans and Advances Other Non Current Assets Current Assets Current Investments Inventories Trade Receivables Cash and Cash Equivalents Short Term Loans and Advances Other Current Assets Grand Total Cash flow Statement Year End-March PBT Depreciation Interest Exp Others CF before W.cap Inc/dec in W.cap Op CF after W.cap Less Taxes Exceptional & Prior Period Adj Net CF From Operations Inc/(dec) in F.A + CWIP others CF from Invst Activities Loan Raised/(repaid) Equity Raised Dividend Interest Paid CF from Fin Activities Net inc /(dec) in cash Op. bal of cash Cl. balance of cash
FY11 29.1 36.1 95.5 2.0 6.9 18.6 5.7 12.3 0.4 16.0 9.0 30.5 23.4 0.3 1.0 5.9 1.0
FY12 28.5 48.3 129.9 5.0 17.5 18.9 4.2 11.0 0.9 16.3 8.1 38.4 30.6 0.4 0.7 8.2 1.3
FY13E 43.2 52.0 165.5 6.5 15.1 12.5 3.3 8.3 1.2 17.4 9.9 29.2 26.9 0.3 0.5 7.0 1.4
FY14E 57.1 69.6 213.2 8.0 14.0 9.5 2.5 6.4 1.5 18.0 10.7 30.2 29.2 0.2 0.4 9.2 1.5
FY11 112 81 1944 2137 0 0 590 326 108 0 1547 1058 754 119 6640
FY12 125 0 3129 3254 0 0 1191 329 124 0 1106 958 888 166 8016
FY13E 125 0 4020 4145 0 0 1191 329 167 0 1050 1345 1046 165 9439
FY14E 125 0 5216 5341 0 0 1191 329 202 0 945 1655 1287 180 11130
2875 0 5 189 14 0 0 1410 1750 70 314 13 6640 FY11 914 157 185 -27 1229 -839 390 180 0 210 -971 30 -941 946 0 -15 -177 754 23 19 70
3785 0 5 192 16 0 0 1788 1722 94 394 19 8016 FY12 1434 173 199 -293 1513 -361 1152 400 0 753 -1171 128 -1043 358 -77 -100 -196 -15 -306 42 94
4068 0 5 299 16 0 0 2242 2242 88 448 30 9439 FY13E 1481 222 247 0 1949 -558 1391 400 0 991 -505 0 -505 -55 0 -190 -247 -492 -6 94 88
4519 0 5 368 16 0 0 2759 2759 116 552 37 6640 FY14E 1932 314 235 0 2482 -612 1869 502 0 1367 -765 0 -765 -105 0 -234 -235 -574 28 88 116
32.8 31.4 56.7 2.8 71.5 88.7 63.9 FY11 7200 6048 1152 104 157 1099 185 914 263
19.8 24.5 59.1 3.0 66.4 72.1 50.0 FY12 8791 7357 1434 372 173 1633 199 1434 398
25.0 32.1 4.4 2.7 70.0 75.0 50.0 FY13E 10911 9017 1893 56 222 1728 247 1481 400 1081 0 0 0 0 1081
23.6 27.8 32.3 3.0 70.0 75.0 50.0 FY14E 13427 11007 2420 62 314 2167 235 1932 502 1430 0 0 0 0 1430
Reported PAT 651 1036 Minority 0 0 Prior Period Adj 0 0 Sh. of Associates 0 0 Ex. ordinary 0 321 Adjusted Pat 651 715 Source: Company, Sunidhi Research
Sunidhi Research |
78
Rallis India Ltd

Priced to perfection, Initiate with Reduce Agrochemicals Sector Outlook- Positive
Initiating Coverage
20.0% 30.0% 18.0% 16.0% 25.0% 14.0% 12.0% 20.0% 10.0% 15.0% 8.0% 6.0% 10.0% 4.0% 2.0% 5.0% 0.0% 0.0%
13.0% Tata Chemicals CAGR growth (FY11 - FY13E)
CAGR (FY12-14E)
23.3%
27.3%
Rallis is part of respected Tata group with its parent as Tata Chemicals. It is present in domestic formulations, seeds, PGN, Agri services and organic manure (through its subsidiary). It entered in contract manufacturing and expanded exports with commissioning of its Dahej plant.
24.7%
18.5%
18.9% 15.5%
16.1%
Complete value chain of Agri-inputs It offers wide product portfolio to farmers along with manufacturing of technicals. It has also done several tie-ups with global agrochemical companies. With acquisition of Metahelix, it has added Seeds to its product portfolio. Its parent, Tata Chemicals is present in Fertilisers, both Urea and complex fertilizers. It thus cover entire spectrum of Agri-inputs needed by farmers. Strong Brand name attracts premium Rallis focused on building brands over the years as Indias Agrochemical market is dominated by Generics where there is hardly any product differentiation possible. Key to higher margins and better return ratios is strong brand that can sell at premium compared to peers alongwith extensive distribution reach. As per Gallop survey, Rallis has 7 brands among top 12 agrochemical brands in India. Rallis reached over 80% of Indias districts, which further strengthens Tata brand among farmers. Focus on High return ratios Rallis has delivered better than industry average return ratios on account of premium that it commands for its strong brands and larger reach which is aided by its parent Tata Chemicals. Seeds and exports to be key growth drivers Metahelix is having a long pipeline of new variants which will be launched in Indian seed market over the next few quarters. Ramp up of exports of technicals and bulk formulations will be another key growth driver in FY13-FY14. Focus on Green chemistry leads to lower growth in FY12 In line with its commitment to promote green chemistry, which is less hazardous, Rallis discontinued Red triangle products from its product offerings in FY12, which led to revenue loss which would nt have occurred otherwise. Red triangle products had ~10% contribution in topline. Fair value of ` 140/share, Initiate with Reduce Rallis will continue to focus on launching new products in domestic markets with reliance on strong brands. We expect revenue share of exports to grow further with potential for Dahej Phase 2 upon success in negotiating contracts with clients. It witnessed massive re-rating in FY10 and FY11. Though it has underperformed broader markets in last year, it is still priced to perfection with no margin of safety in our view. At CMP of `145, Rallis is trading at P/E of 18.9x and 15.6x for FY13E and FY14E. We value Rallis at P/E of 15x for FY14E earnings. Initiate with Reduce Financials Revenues ` mn FY11 FY12E
10862.4 12748.7 15398.0
Sales Growth Sales
EBIDTA Growth EBIDTA
PBT Growth PBT
PAT Growth Adj.PAT
Recommendation Recommendation CMP (`) CMP `) Price (Target (`) Price Target Upside (%) (`) Upside (%) 52 Week H/L ` 52 Week BSE 30 H / L ` BSE 30 Key Data No.of Shares, Mn. Key Data Mcap, ` Mn No.of Shares, Mn. Mcap,USD Mn @ `55 Mcap, ` Mn 2 W Avg Qty (BSE+NSE) Mcap,USD Mn @ `55 2 W Avg Qty (BSE+NSE) Share holding, June'12 Promoters Share holding, June'12 FII Promoters DII FII Public & Others DII Performance Public & Others Stock Return % Relative Return % Performance
15% Stock Return % 10% 5% Relative Return % 0%
Buy Reduce 145 140 -3 186/111 18763
194.5 28196.7 512.7 287242
50.1 11.6 1M -5.3 -5.0 1M 9.2 2.9 3M -11.4 -3.0 3M 8.1 -2.5 6M 1.5 10.0 6M 17.1 8.7 11.8 12 M 26.4 -21.7 -11.4 12 M -14.7 -32.3
-5% -10% -15% 30.0% -20% -25% 20.0% -30% 10.0% -35%
Dec-10
Oct-10
Nov-10
Aug-11
Feb-11
Sep-10
Apr-11
May-11
0.0% -10.0%
-20.0% -30.0%
Mar-11
Sep-11
Jun-11
EBIDTA ` mn
1914.8 2029.6 2617.7
Net Profit ` mn
1260.4 1163.7 1492.3 1809.1
EPS `
6.5 5.1 7.7 9.3
P/E x 22.4 28.5 18.9 15.6
EV/EBIDTA x 15.3 14.6 11.3 9.4
ROAE % 25.0 23.8 16.6 21.3
Jan-11
Tata Chemicals
NIFTY
-40.0%
Dec-11 Oct-11 Nov-11 Aug-12 Sep-11 Feb-12 Apr-12 Jan-12 May-12
Jul-11
Tarun Surana Tarun.s@sunidhi.com Rallis India NIFTY Phone: +91-022-66318632
Mar-12
Sep-12
Jun-12
Jul-12
17890.0 3086.0 Source: company, Sunidhi Research
FY13E FY14E
Rallis Investment Thesis:

10 new products launched in FY12 Rallis has launched 10 new products during FY12 across the category i.e. Insecticides (3 products), Herbicides (4 Products) and Fungicides (3 Products). Further, it has registered sixteen and four products in the international and domestic market, respectively. Rallis Turnover Innovation Index (sales of product launched during the trailing four years) stood at 11% during FY12 (v/s 28-30% in the past seven years except FY11). Rallis believes that new generation products like Ergon and Saras, plant growth nutrient products like Tata Bahar and Ralligold, Herbicide like Tata Vaar and Honcho will drive the growth in the future. Exhibit 104: Broad Product portfolio 10 new products launched in FY12 Products Neon Sonic Taffin Tata Vaar Fycol Honcho Tata Cylo Saaras Ditaf Tata Bahaar Description Effective insecticide for the management of cotton jassids and tea mites Granular insecticide for paddy and sugarcane Effective insecticide for the control of thrips on chillies and cotton Soybean post emergence herbicide for the management of all major weeds Post Emergent Grassy Herbicide in soyabean, groundnut and cotton Pre-post emergent herbicide for the management of all major weeds in onion Post emergent herbicide for grassy weeds in rice Broad Spectrum fungicide for the management of grapevine, chilli and potato disease Specialist fungicide for the management of downy mildew in grapes and late blight diseases in potato Plant Growth Promoter for vegetables and fruit crops to improve growth and yield
Innovation Turnover Index Rallis defines Innovation Turnover Index as revenue contribution from products launched in trailing 4 years. It maintained this index at 28% 30% for most of the years in last decade. The index has gone down sharply in past 2 years as Takumi and Applaud which are amongst its top produc ts are now out of calculation if they were launched before trailing 4 years. The index is likely to show uptick post 10 new launches in FY12 which will drive revenues from newly launched products. Exhibit 105: Innovation Turnover Index
35%
30% 25% 20% 15% 10% 31% 31%
28%
25% 25%
28%
30%
29%
30%
20%
11%
5% 0%
FY02
FY03
FY04
FY05
FY07
FY08
FY09
FY10
FY12
FY06
FY11
Sunidhi Research |
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Rallis
Tie-ups with other companies to add products sustain growth Rallis has tie-ups with several companies for launching products under its own brand names. Following table presents names of companies with whom Rallis has tie-ups and launched its brands in the market. Exhibit 106: Company Tie-Ups Company Bayer India Borax International Du Pont FMC India Gharda Chemicals Makhteshim Chemical Works Nihon Nohayaku Syngenta India Yara International
Brand Name Spiro, Tatamida Solubar Daksh, Rekord Furadan, Tatafuran, Electra, Impeder Fateh, Koranda Captan, Nova, Atrazine Fuji1, Applaud, Fenpyroximate Preet, Anant, Sartaj, Prabhav, Paralac Water Soluble NPK Fertilisers
Contract Manufacturing will continue to remain growth driver Rallis undertakes contract manufacturing of technicals and bulk formulations. It is high growth segment with higher margin as most of the contract manufacturing is for patented molecules which involves complex chemistry and need for IP protection. Exhibit 107: Revenue contribution from Exports
120% 100% 80% 60%
80%
76%
67%
65%
65%
60%
40% 20%
20%
24%
FY11
33%
FY12
35%
35%
40%
0%
FY14E FY15E
FY13E
FY10
Exports
India revenues
Rallis entered in Seeds business by acquiring Metahelix Metahelix almost doubled its revenue in FY12 to `814 million in FY12 and achieved break even with PAT at `6 million. Metahelix has strong pipeline of Bt and Hybrids and will continue to launch new traits and cover broad spectrum of crops in FY13/14. It has 24 crops in BT pipeline & 150 in hybrid pipeline. Metahelix had launched & established 9 products in seeds & extensive field activities to lay strong foundation for new brands across geographies.
Sunidhi Research |
81
Rallis
Exhibit 108: World Biotech Seed Market by Crop
Others, 0.5%
Cotton, 7.9%
Canola, 2.3%
Maize, 47.9%
Soybeans, 41.4%
Source: FAO, Sunidhi Research
Focus on working capital, cash generation Rallis has one of the best working capital management as reflected from its financials over last few years. It has relentlessly worked on cash generation, focused on reduction in receivable and inventory days which helps in generating free cash flow. Exhibit 109: Net Working Capital is ~ 1 month only
90
80
70
77
72
70
70
60
50 40 30 20 36 30 25 30 30 33 33
23
10
0 FY11 FY12 FY13E FY14E
Inventory Days
Debtors Days
NWC Days
Sunidhi Research |
82
Rallis
Exhibit 110: Cash Flow (`Million)
2500
2000 1500
1000
500 0 -500
-1000
-1500 -2000
FY13E
Opearting Cash Flow

Free Cash Flow
Rallis enters in organic manure business GeoGreen acquisition in Apr12 All cash deal to acquire a majority stake (51%) in Zero Waste Agri Organics Pvt. Ltd. at a consideration of `290 million. Management expects to generate cumulative revenue of `1000 million in next 5 years from this product. It is an organic soil conditioner that will vastly improve soil structure. It is produced from sugar mills by-product i.e. Baggase. It is a rich source of organic carbon capable of supporting & enhancing biological activities in soil. Key drivers in organic manure business About 1 millimeter of top soil is lost every year due to erosion Increased cropping intensity depleting soil fertility Natural agents building Organic Manure in soil such as earthworm etc are reducing Imbalanced use of fertilisers and Nutrients coupled with low addition of organic matter. Most Indian soils are not only deficient in organic carbon but also hungry in organic carbon
Surplus Land at Hyderabad & Thane Rallis has considerable surplus land which can be divested at appropriate time if need arises to raise cash as it did in 2008 when it sold 31 acres land to Peninsula for `0.9bn in 2008. It has ~85 acre land in Hyderabad and ~22 acres in Turbhe (Navi Mumbai). MoPu - Grow more pulses Rallis entered into MoU with Maharashtra Govt. to drive MoPu initiative in the State with the intention to cover 1 Lakh Ha. of land under pulses over the next five years. In FY12, 50,000 acres of land has been covered with focus on various Gram pulses. The initiative did not only improve the yield but also fetched price premium of `100 - `250 per quintal for the farmers.
FY14E
FY12
FY11
Sunidhi Research |
83
Rallis
Strong Brand recall among farmers As per Gallup survey, Rallis has 7 products out of Top 12 products which have highest Brand Recall among the customers. Exhibit 111: Brand Recall by Farmers Company Bayer Rallis Rallis Rallis Rallis Rallis Bayer Bayer Rallis Rallis Syngenta Bayer Brand Confidor Contaf Rogor Asataf Tata Mida Contaf Plus Fame Antracol Tata Mono Applaud Proclaim Hostathion 2010 54% 30% 29% 28% 24% 19% 17% 15% 13% 13% 13% 12% 2011 51% 41% 37% 38% 15% 30% 26% 29% 31% 16% 17% 14%
Farmer connect Samruddh Krishi An Agri Services programme by Rallis which can leverage the Agri Expertise, Reach and Farmer connect of Rallis and increasingly available ICT led knowledge to provide solutions to farmers. Exhibit 112: TRAITS focus on farmers prosperity
Sunidhi Research |
84
Rallis Price Target Derivation

Fair value of ` 140/share, Initiate with Reduce Rallis will continue to focus on launching new products in domestic markets with reliance on strong brands. We expect revenue share of exports to grow further with potential for Dahej Phase 2 upon success in negotiating contracts with clients. It witnessed massive re-rating in FY10 and FY11. Though it has underperformed broader markets in last year, it is still priced to perfection with no margin of safety in our view. At CMP of `145, Rallis is trading at P/E of 18.9x and 15.6x for FY13E and FY14E. We value Rallis at P/E of 15x for FY14E earnings. Initiate with Reduce Exhibit 113: Comparative valuation table Company Dhanuka Insecticides India PI Ind Rallis UPL Average Year FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Sales 6108 7051 6737 8382 10911 13427 15398 17890 86852 95547 25201 28459 EBIDTA 901 1022 741 964 1893 2420 2618 3086 15199 16721 4270 4843 PAT 639 733 423 523 1081 1430 1492 1809 6689 7844 2065 2468 EPS Adj 12.8 14.7 33.3 41.2 43.2 57.1 7.7 9.3 14.6 17.1 22.3 27.9 P/E 7.7 6.7 12.4 10.0 12.5 9.5 18.9 15.6 9.0 7.7 12.1 9.9 P/ Bv 1.9 1.5 1.8 1.5 3.3 2.5 4.4 3.7 1.3 1.2 2.5 2.1 EV/ EBIDTA 5.6 4.8 8.1 6.8 8.3 6.4 11.3 9.4 5.7 5.0 7.8 6.5 Net D/E 0.0 0.0 0.2 0.4 0.5 0.4 0.2 0.1 0.6 0.5 0.3 0.3 ROaE 26.7 25.1 17.7 16.4 29.2 30.2 16.6 21.3 15.3 16.0 21.1 21.8
Sunidhi Research |
85
Rallis
250 200 150 100 50 0

250
200 150
100
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0
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Price
7x
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Price
1.5x
3x
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6x

50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0

60000
50000 40000 30000 20000
10000
Oct-08
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Aug-10
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Dec-08
EV
4x
8x
12x
16x
Mcap
0.75x
1.5x
2.25x
3x
Sunidhi Research |
Aug-12
Aug-11
Apr-09
Apr-10
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Apr-08
Apr-12
Aug-12
Apr-09
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86
Rallis Risks to our Price Target

Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Delay in increase of MSP Agrochemical consumption gets affected by governments decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to farmers. Regulatory risks The Agrochemical industry is highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court. Threat from GM seeds Genetically modified seeds are made inherently resistant to pests, which does away the need to agrochemicals. A case in point is Bt-Cotton where use of Insecticides has fallen sharply. As world moves towards adopting more GM seeds, need of using agrochemicals may reduce. The counter point to this is that often after few initial years; pests can become immune to anti-pest treatment in the seed which makes it imperative to use agrochemicals.
Sunidhi Research |
87
Rallis Financial Analysis

20000.0 18000.0 16000.0 21.3% 17.4% 20.8% 20.0% 16.2% 25.0%
14000.0 12000.0
10000.0 8000.0 6000.0
15.0%
10.0%
10862.4
12748.7
15398.0
4000.0 2000.0
0.0
17890.0
5.0%
0.0%
FY11
FY12
Revenue
FY13E
Growth
FY14E

3500.0 3000.0 2500.0 2000.0 16.5% 17.0% 17.0% 17.6% 17.3% 18.0% 17.5%
1500.0 1000.0
15.9%
16.0%
1914.8
2029.6
3086.0
2617.7
500.0
0.0
15.5% 15.0%
FY11
FY12
EBIDTA
FY13E
Margin
FY14E

2000.0 1800.0 1600.0 11.6% 9.7% 7.9% 8.0% 10.1% 14.0% 12.0% 10.0%
1400.0 1200.0
1000.0 800.0 600.0
6.0% 4.0%
1260.4
991.8
1809.1
1492.3
400.0 200.0
0.0
2.0%
0.0%
FY11
FY12
PAT
FY13E
Margin
FY14E
Sunidhi Research |
88
Rallis
40 36 32 28 24 20 16 12 8 4 0
30.11
28.02
23.86
28.13
(%)
24.96
23.83
16.55
21.27
FY11
FY12
FY13E
FY14E
ROAE
ROACE
Exhibit 122: Net D/E and Interest Coverage Ratio (RHS)

0.3
0.3 0.2 0.2 0.1 50.6 0.3 0.2 25.4
60.0
50.0 40.0 30.0 20.0 16.8
0.2
12.4
0.1 10.0
0.0
0.1
0.0 FY11 FY12
FY13E
FY14E
Net D/E
Exhibit 123: Free Cash Flow (`Million)

2500
2000 1500
1000
500 0 -500
-1000
-1500 -2000
FY13E
Opearting Cash Flow
Free Cash Flow
FY14E
FY12
FY11
Sunidhi Research |
89
Rallis Company in Depth

Rallis India Limited (Rallis), a subsidiary of Tata Chemicals (50.1% stake), is the 2nd largest domestic crop protection company (Bayer Crop being the first) in India. It holds comprehensive product portfolio of generic agrochemicals, seeds (including Metahelix) and plant growth nutrients. Strong relations with farmers through initiatives like Rallis Kisan Kutumba, Samruddha Krishi and pan-India distribution which covers over 80% districts of India aided by 1,500 dealers and 40,000 retailers. It also enjoys credible presence in international markets. The company got its name from Ralli brothers of Greece, who started a trading business in England 2 centuries back (in 1815) which later was spread out across the globe. Rallis India Ltd. went public in 1951 and in 1962 Tata group became the major shareholder of the company. From 1962-63 fertilizer and agrochemicals became dominant segments in its revenues. From being a trader, Rallis ventured into manufacturing of agrochemicals in 1981. In mid 1990s Rallis closed down its various loss making as well as non-agri business and started focusing on agrochemicals. It also expanded its operations internationally, mainly US, Europe and Asia. It has also extended its business domain to include seeds and specialty fertilizers. During FY12, Rallis derived 67% revenues from domestic markets while 33% comes from exports which has seen significant jump from just 20% in FY10. Rallis Poised Management identifies growth opportunities 5 years back, Rallis adopted the Rallis Poised growth agenda targeted at driving its sustained revenue and profit growth. Management hopes that these new initiatives will continue to guide Rallis on growth path. Rallis Poised framework include following growth drivers: New products Brand premium Apollo (Overseas market expansion) Inorganic growth (Acquired Metahelix, GeogGreen) Adjacent Businesses Contract manufacturing Infrastructure Value enhancement - DISHA initiative
Diversification from Crop Protection to Agri services, Seeds & CRAMS Rallis management has drawn vision to diversify revenue streams and will work towards achieving a more balanced revenue mix in next 4-5 years. Exhibit 124: Business Segments
CRAMS
Crop Protection
Seeds & PGN
Agri Services
Sunidhi Research |
90
Rallis
Product portfolio of Rallis Rallis has a wide portfolio of products in the agrochemical segment out of which insecticides contributes highest at ~70% of the topline which is in line with Indias consumption where insecticides normally contribute highest each year. It has kept on launching products in each category as per evolving challenges in Indian agriculture and needs of farmers. It has focused on creating strong brands in insecticides, herbicides as well as fungicides and across crops. Exhibit 125: Key products of Rallis across categories Brand Name Technical Tata Milda Reeva Insecticides Asataf Tafgor Manik Fateh Herbicides Tata Metri Tata Panida Contaf Fungicides Contaf Plus Master Fujione
Crops Paddy, Cotton, Maize, Potatoes Cotton, Cereals, Vegetables Cotton, Sugarcane, Cereals, Vegetables, Fruits, Tobacco Cotton, Cereals, etc. Cotton Wheat Wheat, Soybean, Potato, Tomato, Sugarcane Soybean, Wheat, Groundnut, Cotton, Mustard, etc. Paddy, Fruits, Various Other Crops Cereals, Oilseeds, Horticultural and Plantation Crops Grapes, Potato, Tomato, Tobacco, Cardamom, etc. Paddy
Pest/Weed Sucking Pests/Plant Hoppers Bollworm, Sucking Pests, Leaf Roller, etc. Sucking & Chewing Pests Sucking, Chewing Pests, Mites Sucking Pests Phalaris Minor, Broad-Leaved Weeds Grasses, Broad-Leaved Weeds Grasses, Broad-Leaved Weeds Sheath Blight, Leaf Spots, Powdery Mildew Powdery Mildew, Rust, Leaf Spots, Blight Downey Mildew, Late Blight, Blotch, Damping Blast Disease
Imidacloprid Lambda Cyhalothrin Acephate Dimethoate Acetamiprid Sulfosulfuron Metribuzin Pendimethalin Hexaconazole Captan+Hexaconazol e Mancozeb+Metalaxyl Isoprothiolane
Green & Blue triangle products now account for 82% of revenues Rallis has aligned its product portfolio to less hazardous products. It has discontinued Red triangle products completely from FY12. Exhibit 126: Product Portfolio FY02
Green Triangle, 7%
Exhibit 127: Product Portfolio FY12
FY02
Red Triangle, 10% Red Triangle, 0% Green Triangle, 30%
FY12
Blue Triangle, 36%
Yellow Triangle, 18% Blue Triangle, 52%
Yellow Triangle, 47%
Sunidhi Research |
91
Rallis Key Management Personnel

Designation Name Gopalakrishnan is a graduate from Calcutta University and completed engineering from IIT. From 1967, he served HUL for over three decades in various capacities including vicechairman of HUL. In 1998, he joined Tata Sons as executive director. He is also the chairman of AutoComp systems, Advinus Therapeutics, vice-chairman of Tata Chemicals, and director of Tata Power and Tata Technologies. Gopalakrishnan also serves as an independent director on the boards of Indian subsidiaries of Akzo Nobel and BP Castrol. Mr. V. Shankar joined the Company on 1st December, 2005 as Chief Operating Officer and was appointed as Executive Director with effect from 13th March, 2007 and subsequently th as Managing Director from 15 January, 2009. Prior to joining the Company, he had worked with Tata Chemicals Ltd. as Chief Operating Officer, Phosphates Business, before which, he was with Hindustan Lever Ltd. from 1986 to 2004. He served in various capacities in the Unilever Group of Companies and was responsible for the Seeds business and later Fertilisers Business.
R Gopal Krishnan, Chairman
Mr. V. Shankar, MD & CEO
Sunidhi Research |
92
Rallis
Valuations Summary Year End-March Per share (`) EPS CEPS BVPS DPS Payout (%) Valuation (x) P/E P/BV EV/EBITDA Dividend Yield (%) Return ratio (%) EBIDTA Margin PAT Margin ROAE ROACE Leverage Ratios (x) Long term D/E Net Debt/Equity Interest Coverage Current ratio Growth Ratios (%) Income growth EBITDA growth PAT growth Turnover Ratios F.A Turnover x Inventory Days Debtors Days Payable days Balance Sheet (` mn) Year End-March Equity and Liabilities Share Capital Reserves and Surplus Total Shareholders funds Minority Interest Non-Current Liability Long Term Borrowings Deferred Tax Liabilities (Net) Long Term Liab/ Provisions Current Liabilities Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions Grand Total Assets Non Current Assets Fixed Assets Goodwill on Consolidation Non-Current Investments Long Term Loans and Advances Other Non Current Assets Current Assets Current Investments Inventories Trade Receivables Cash and Cash Equivalents Short Term Loans and Advances Other Current Assets Grand Total Cash flow Statement Year End-March PBT Depreciation Interest Exp Others CF before W.cap Inc/dec in W.cap Op CF after W.cap Less Taxes Exceptional & Prior Period Adj Net CF From Operations Inc/(dec) in F.A + CWIP others CF from Invst Activities Loan Raised/(repaid) Equity Raised Dividend Interest Paid CF from Fin Activities Net inc /(dec) in cash Op. bal of cash Cl. balance of cash
FY11 6.5 7.4 26.0 2.0 30.9

22.2 5.5 15.1 1.4
FY12 5.1 6.6 28.4 2.2 43.1

28.2 5.1 14.5 1.5
FY13E 7.7 9.3 33.2 2.5 32.6

18.8 4.3 11.2 1.7
FY14E 9.3 11.1 39.0 3.0 32.2

15.5 3.7 9.3 2.1
FY11 194 4855 5049 21 843 32 186 305 2678 652 400 10167
FY12 194 5336 5530 14 856 131 177 650 2680 743 446 11226
FY13E 194 6259 6454 14 856 131 168 550 3164 928 468 12732
FY14E 194 7386 7580 14 756 131 148 350 3676 1078 491 14224
17.6 11.6 25.0 30.1 0.2 0.2 50.6 0.9 21.0 19.0 25.0 4.8 76.9 35.7 90.0
15.9 7.9 23.8 28.0 0.2 0.3 12.4 1.0 17.4 6.0 -20.4 3.5 71.7 30.0 76.7 FY12 12749 10719 2030 69 287 1812 146 1666 487 1179 15 0 0 172 992
17.0 9.7 16.6 23.9 0.1 0.2 16.8 1.0 20.8 29.0 48.2 3.6 69.7 29.8 69.3 FY13E 15398 12780 2618 72 322 2368 141 2227 735 1492 0 0 0 0 1492
17.3 10.1 21.3 28.1 0.1 0.1 25.4 1.1 16.2 17.9 21.2 4.0 69.8 32.6 69.8 FY14E 17890 14804 3086 76 351 2811 111 2700 891 1809 0 0 0 0 1809
3834 1236 227 1039 7 29 2289 1064 146 291 5 10167 FY11 1845 171 40 -153 1903 -314 1589 706 0 883 -1314 -25 -1338 99 750 -353 -38 458 2 120 146
4236 1533 197 909 2 30 2717 1035 112 448 6 11226 FY12 1494 287 141 -61 1860 -507 1353 407 0 946 -570 -170 -740 369 0 -473 -138 -242 -37 122 112
4514 1533 197 1266 2 30 3164 1477 117 422 11 12732 FY13E 2227 322 141 0 2690 -540 2149 735 0 1414 -600 0 -600 -100 0 -569 -141 -809 5 112 117
4792 1533 197 1470 2 30 3676 1715 306 490 12 14224 FY14E 2700 351 111 0 3162 -360 2802 891 0 1911 -629 0 -629 -300 0 -683 -111 -1093 188 117 306
Income Statement(` mn) Year End-March FY11 Revenues 10862 Op. Expenses 8948 EBITDA 1915 Other Income 138 Depreciation 171 EBIT 1882 Interest 37 PBT 1845 Tax 580 PAT 1264 Minority 4 Prior Period Adj 0 Sh. of Associates 0 Ex. ordinary 0 Adj Pat 1260
Sunidhi Research |
93
United Phosphorus Ltd (UPL)

Proxy play to Global Agrochem industry, Upgrade to Buy Agrochemicals Sector Outlook- Positive
Company Update
20.0% 18.0%
CAGR (FY12-14E)
18.8%
UPL is an Indian multinational, 3 largest generic agrochemical company in the world and thus is a proxy play to global agrochemical industry. It is also present in seeds through its holding in Advanta India. Its topline grew by 25%, EBIDTA by 23% and PAT by 39% CAGR from FY02 to FY12. UPL covers 90% of global market with Over 1000 product registrations United Phosphorus possesses a rich experience of having filed more than 1,000 successful registrations in more than 20 years, which reduced the gestation period usually associated with getting products registered in various countries. Branded products (B2C) contribute ~65% of UPLs topline. It has a rich portfolio of 60 technical products of which 20 were added in last 5 years. It possesses the capability to file more than 300 registrations annually, resulting in a widening market penetration. UPL possesses registrations across a geographic spread that accounts for 90% of the worlds food basket. UPL has grown 26% CAGR from 2005-11 v/s industry growth of 4% UPL has been one of the fastest growing global agrochemical company compared to its larger MNC peers like Makhteshim-Agan Industries, Sumitomo Chemical and Nufarm Ltd. During 2005-11, the industry topline grew at an average CAGR of 4% v/s UPL, which registered CAGR of 26%. Inorganic route too played crucial role in achieving furious growth with 24 acquisitions (companies/products) in last decade. UPL will continue to pursue organic as well as inorganic growth opportunities with an aim to double its revenues in next 5 years. Investments in acquisitions to decline going forward UPL management indicates that following the Brazilian acquisitions in FY12 which is largest and fast growing market, its global platform is now in place and investments in acquisitions will decline. UPL will now reinforce investments in research and development that strengthens process efficiencies on one hand and product pipeline on the other, which will translate into enhanced margins and ROCE. Fair value of ` 171/share (Upside of 31%), Upgrade to Buy UPL is proxy play to global generic agrochemical markets. Weather is key risk to Its business with challenging season in USA due to draught, delayed monsoon in India and very wet season in Europe. UPL is banking very high on Rest of the World markets, especially Brazil. Any weather related issues in this market may threaten growth. UPL is being supported with ongoing Buyback. It is trading at attractive valuations though deterioration in margins. Rising debt on balance sheet is also a concern. It has Poor ROAEs compared to smaller Indian peers due to asset heavy model with presence across the globe that includes markets with low margin, higher credit cycles. At CMP of `131, UPL is trading at P/E of 9x and 7.7x for FY13E and FY14E EPS. We maintain estimates and upgrade target price at `171 based on P/E of 10x for FY14E EPS (from `145 based on FY13E EPS) as we roll forward valuations to FY14E. Upgrade to Buy (from Accumulate earlier). Financials Revenues ` mn FY11 FY12E FY13E FY14E
57606.8 76547.2 86852.0
rd
16.0% 14.0%
12.0% 10.0% 8.0% 6.0% 4.0% 11.7% 10.6% 12.9%
2.0% 0.0%
Sales EBIDTA PBT PAT
Buy 131 171 31 169/105 18763
1M 13.1 6.8
3M 7.3 -3.1
6M 1.8 -7.6
12 M -5.2 -20.1
25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0%
EBIDTA ` mn
10698.7 13674.1 15199.1
Net Profit ` mn
5576.2 5555.5 6688.5 7844.0
EPS `
12.1 12.0 14.6 17.1
P/E x
10.9 10.9 9.0 7.7
EV/EBIDTA x
6.5 6.3 5.7 5.0
ROAE %
15.0 14.1 15.3 16.0
Dec-11
Oct-11
Aug-12
Nov-11
Nov-11
Aug-12
Apr-12
Feb-12
Sep-11
Feb-12
Apr-12
Jan-12
May-12
Mar-12
Sep-12
Jun-12
Jun-12
Jul-12
United Phosphorus
NIFTY
95547.1 16720.7 Source: company, Sunidhi Research
UPL Investment Thesis:

Market share of generics is increasing rapidly In the global agrochemical industry, Generics are now over over 51% of the market while ~25% market belongs to Proprietary Off Patent products leaving less than 24% market to patent products. As products become off-patent, generic players find the opportunity and grab the market share from innovator companies. Large inorganic opportunities in global agrochemicals market UPL is among top 3 generic agrochemical players in the world. The industry is highly consolidated with top 6 innovator companies i.e. Syngenta, Bayer, BASF, Dow, Monsanto and DuPont. UPL has positioned itself among the large generic players such as MAI, Nufarm, Sumitomo, Arysta etc. Inorganic growth opportunities emerged from divestment of products by big 6, R&D companies with focus on developing new active ingredients, who want to partner with large players to access distribution and registration strengths across continents that are possessed by companies such as UPL. Many small and mid-size players come under financial distress due to lengthy and costly registration processes for launching new products while old products get banned or lose market share because pests start becoming resistant to formulations over a period and new products are required in such situations. Only large Indian company to play global generic agrochemical market UPL is the only sizeable Indian company to play global generic opportunity in agrochemical industry with revenues of over $ 1 billion. UPL has over 40% of revenues from highly regulated markets of the US and Europe. With c.78% of its revenues coming from global markets and a strong direct presence in the targeted markets, UPL has emerged as one of the top 3 generics th companies and 7 largest agrochemical company in the world. Exhibit 128: UPL has grown faster than most other large companies (2006-2011 sales CAGR)
30 25.7 25
20
15 10 5 13.8 11.1 10.6 9.8
9.6
8.9
8.4
8.1
5.6
4.6
2.1
Source: Phillips McDougall, Company, Sunidhi Research
It pays to be an Indian MNC Though UPL is truly a global giant in agrochemical industry, majority of its manufacturing is based in India (~52% in FY12) which has advantage of lower costs & excellent talent pool over developed countries. Because of consolidation over the years, Some of the plants mancozeb, aluminium phosphide, devrrinol, cypermethrin, and monocrotophos of UPL are amongst the largest in the world in their respective product spaces, and competitive raw material cost due to forward and backward integration, resulting in lower per unit cost of manufacturing. It also enjoys the advantage of young assets. Almost 45% of the capacities globally were established in last 5 years which results in higher efficiencies. Sunidhi Research | 95
UPL
Presence in seed business through Advanta India Seed business goes well as a strategy for agrochemical players. Globally, most of the agrochemical companies have added Seed business either organically or inorganically. The global Seed industry (GM + conventional) is estimated to be worth US$34bn in 2011 and has been growing much faster than agrochemical industry. Due to innovation by genetically modifying, seeds develop resistance from pests and increase yields. Global Seed Industry is dominated by the same companies that are leaders in the agrichemical industry. UPL too entered in seed business after acquiring 100% stake in Netherland-based Advanta Seeds in 2006 for Euro100 million. It divested its stake through IPO and now holds 49.83% stake in the company. Advanta is in the business of hybrid seeds and operates in geographies like USA, Argentina, Australia and Asia. Advanta's products cater to crops like rice, cotton, sunflower, sorghum, corn, canola and vegetables. In CY2006 (9 month period), Advanta posted revenues of `2980 million. For CY2010, the company posted Revenues of `9943 million and Net Profit of `123 million. India, RoW growing rapidly every year UPL classifies its revenues in 4 geographies i.e. North America, Europe, India and Rest of the World (RoW). Europe and North America, being mature markets are growing slowly, while India and RoW are growing at a faster rate over the years. Exhibit 129: Geography wise revenue growth Geography - Growth North America Europe India Rest of World Total
FY09 30.9% 43.0% 33.2% 37.3% 36.6%
FY10 4.7% -1.2% 15.6% 26.0% 10.2%
FY11 4.1% -20.0% 29.6% 36.3% 11.5%
FY12 32.1% 17.2% 15.0% 52.9% 31.6%
EU has been largest contributor till FY10, RoW will continue to be highest In FY10, EU had been largest contributor (effect of Ceraxagri acquisition) to its revenues at 29%. North America contributed 22%, while India stood at 22%. Rest of World (RoW) market contributed 27% as of FY10. This has significantly changed following series of acquisitions in Brazil. Exhibit 130: Exhibit-10: Geographical revenue mix (` millions)
50000 45000
40000
35000 30000
25000
20000 15000 10000 5000 0
FY13E
North America
Europe
India
RoW
Source: Company & Sunidhi Research
Sunidhi Research |
FY14E
FY07
FY08
FY10
FY11
FY09
FY12
96
UPL
UPL had grown significantly in Europe (thanks to its acquisition of Ceraxagri, which was primarily deriving its revenues from Europe). Mature markets such as Europe and North America are growing slower than growth witnessed in developing countries such as India and Rest of World (RoW). From 24% in FY08, RoW is contributing to 38.5% of revenues, while share of Europe declined to 18.3% in FY12 from 30.5% in FY08. North America too contributed only 21% in FY12 from 24.6% in FY08. Indias share remained at 22.1% in FY12 from 21.3% in FY08. Over 1000 product registrations across the world United Phosphorus possesses a rich experience of having filed more than 1,000 successful registrations in more than 20 years, which reduced the gestation period usually associated with getting products registered in various countries. Branded products (B2C) contribute ~65% of UPLs topline. It has rich portfolio of 60 technical products of which 20 were added in last 5 years. It possesses the capability to file more than 300 registrations annually, resulting in a widening market penetration. It possesses registrations across a geographic spread that accounts for 90% of the worlds food basket. Working Capital cycles turns longer on increasing contribution from Brazil FY12 was a challenging year with several weather uncertainties in global agrochemical markets. In such times, receivable cycle becomes longer than usual. Post acquisitions in Brazilian markets, its share in consolidated revenue has gone up sharply. Brazil is known for very long credit periods. Receivables of 210 days are considered normal in that market due to longer crop cycles. Exhibit 131: Working Capital analysis Particulars Turnover Proportinate Turnover Inventory No of Days Receivables No of Days Payables No of Days Net Working Capital Net Working Capital Days/ Sales
FY11 56500 14140 91 14790 96 16250 105 12680 82
FY12 75340 78880 18780 87 25070 116 19370 90 24480 113
Sunidhi Research |
97
UPL Price Target Derivation

Fair value of ` 171/share (Upside of 31%), Upgrade to Buy UPL is proxy play to global generic agrochemical markets. Weather is key risk to Its business with challenging season in USA due to draught, delayed monsoon in India and very wet season in Europe. UPL is banking very high on Rest of the World markets, especially Brazil. Any weather related issues in this market may threaten growth. UPL is being supported with ongoing Buyback. It is trading at attractive valuations though deterioration in margins. Rising debt on balance sheet is also a concern. It has Poor ROAEs compared to smaller Indian peers due to asset heavy model with presence across the globe that includes markets with low margin, higher credit cycles. At CMP of `131, UPL is trading at P/E of 9x and 7.7x for FY13E and FY14E EPS. We maintain estimates and upgrade target price at `171 based on P/E of 10x for FY14E EPS (from `145 based on FY13E EPS) as we roll forward valuations to FY14E. Upgrade to Buy (from Accumulate earlier). Exhibit 132: Comparative valuation table Company Dhanuka Insecticides India PI Ind Rallis UPL Average Year FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E Sales 6108 7051 6737 8382 10911 13427 15398 17890 86852 95547 25201 28459 EBIDTA 901 1022 741 964 1893 2420 2618 3086 15199 16721 4270 4843 PAT 639 733 423 523 1081 1430 1492 1809 6689 7844 2065 2468 EPS Adj 12.8 14.7 33.3 41.2 43.2 57.1 7.7 9.3 14.6 17.1 22.3 27.9 P/E 7.7 6.7 12.4 10.0 12.5 9.5 18.9 15.6 9.0 7.7 12.1 9.9 P/ Bv 1.9 1.5 1.8 1.5 3.3 2.5 4.4 3.7 1.3 1.2 2.5 2.1 EV/ EBIDTA 5.6 4.8 8.1 6.8 8.3 6.4 11.3 9.4 5.7 5.0 7.8 6.5 Net D/E 0.0 0.0 0.2 0.4 0.5 0.4 0.2 0.1 0.6 0.5 0.3 0.3 ROaE 26.7 25.1 17.7 16.4 29.2 30.2 16.6 21.3 15.3 16.0 21.1 21.8
Sunidhi Research |
98
50
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Sunidhi Research |
Apr-07
Aug-07 Dec-07 Apr-08
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Aug-07 Dec-07 Apr-08

6x
EV 4x
Aug-08 Dec-08
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Apr-09

Apr-09
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14x
Dec-09 Apr-10 Aug-10
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M Cap 0.5x 1x 1.5x 2x
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UPL
99
UPL Risks to our Price Target

Acquisitions may pose challenges Inorganic growth has been UPL's key strategy, which has led to 29% CAGR growth from FY05 to FY10, while Industry grew at just 4% CAGR during the same period. In a bid to grow continuously, any acquisitions done at expensive valuations could lead to lengthy pay back periods which can potentially be value destructive for short to medium term for shareholders. Further, acquisitions cause volatility in profits due to uncertainties related to restructuring, challenges in closing down overseas plants and relocating production to cheaper locations such as India. Ceraxagri (UPLs biggest acquisition so far) is one such example where the company found it difficult to restructure operations for a long period. Improving margins and taking advantage of recent Brazilian acquisitions will be key monitorables. Genetically Modified Crops Genetically modified crops are made with inbuilt immune system that reduces dependence on usage of agrochemicals. We understand that plants require protection at various stages of lifecycle of plant and it may be difficult for even genetically modified crops to keep control on pests. Recently, Bt Cotton is reported to be affected from pests in some parts of Gujarat recently. Pests too become resistant to human intervention and gain power to attack crops despite being genetically modified, resulting in usage of agrochemicals. Adaption of Bt Cotton in India has resulted in lower application of pesticides over last few years. To mitigate this risk, most of the agrochemical majors globally have added and enhanced seeds business over the years. UPL too has presence in the Seeds business through its associate company Advanta India, which captures increased usage of GM seeds and provides a natural hedge. Forex risks UPL's Revenues (to the extent of c.80%) are denominated in foreign currencies. Hence, any volatility in the exchange rate leads to volatility in company's revenues, borrowings, assets and profit. Unpredictable weather and pest occurrences The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. Delay in increase of MSP Agrochemical consumption gets affected by governments decision or the delay therein to increase MSP. Hike in MSP leads to rise in purchasing power of the farmers that provides cushion when industry needs to pass on rising cost to farmers. Regulatory risks The Agrochemical industry is highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court.
Sunidhi Research |
100
UPL Financial Analysis

120000 32.9% 100000 80000 60000 13.5% 40000 10.0% 30.0% 25.0% 20.0% 35.0%
15.0% 10.0%
57606.8
76547.2
86852.0
20000 0
5.5%
95547.1
5.0%
0.0%
FY11
FY12
Revenue
FY13E
Growth
FY14E

18000 19.0% 18.6% 18.5%
16000
14000 12000
10000
8000 6000
17.9% 17.5%
18.0% 17.5%
17.5%
10698.7
13674.1
15199.1
16720.7
4000
2000 0
17.0%
16.5%
FY11
FY12
EBIDTA
FY13E
Margins
FY14E

9000 10.0% 9.7% 9.5% 9.0% 8.2% 8.5% 8.0% 7.5% 7.0%
8000
7000 6000
5000
4000 3000
7.7%
1000 0
5555.5
5576.2
2000
7.3%
FY11
FY12
PAT million
FY13E
Margins
FY14E
Sunidhi Research |
7843.9686
6688.5416
101
UPL
Exhibit 140: ROaE and ROaCE
19 18
17 16 15 14 13 12 11 10 15.0 18.4 17.5 16.0
15.3 14.8 14.1

15.1
ROaE
ROCE
Exhibit 141: Net D/E and Interest Coverage ratio

0.7
0.6 0.5 0.6 4.6 0.5 0.6
FY14E
FY13E
FY11
FY12
5.0 4.8
4.8 4.6
0.4
0.3 0.2
4.5
4.4
4.2
4.1
0.1
0.0
4.0
3.8
FY13E
-0.1
0.0
FY14E
FY11
FY12
3.6
Net D/E
Interest Coverage Ratio
Sunidhi Research |
102
UPL Company in Depth

UPL is a farm solutions company providing a complete array of farm solutions (from delivery of seeds to seed treatment solutions to pre-harvest to post-harvest to storage treatment products to farmer feed schools). Its product range pesticides, herbicides, insecticides and rodenticides makes it a one stop shop for farmers. It is leading global player in the Agrochemical Industry and ranks amongst the top 3 generic (post patent) companies. UPL operates in every continent and have a customer base in over 120 countries. UPL has 23 manufacturing sites globally. It has 70 subsidiaries, 16 Associates and 3 Joint venture companies at the end of FY12. UPL has very low client concentration due to its diversified and global presence. While no single customer accounted for more than 2% of topline, Top 10 customers accounted for ~12% of sales FY12. It is principally a manufacturer supported by tolling and third-party outsourcing capability. The result is that the Company selects to manufacture value-added products while outsourcing the rest. During FY12, Nearly 75% of the revenues were supported by backward integration into manufacturing of raw materials. Exhibit 142: Agrochemical Sales
120% 100% 80% 60% 32% 40% 20% 19% 0% 27% 40% 31% 29% 30% 32%
8%
20% 23%
6% 24%
8% 25%
9% 28%
7% 30%
34%
38%
38%
33%
31%
FY07
FY11
FY08
FY09
FY10
Fungicides
Insecticides
Herbicides
Others
Exhibit 143: Geographical break-up of Sales (FY08)
Exhibit 144: Geographical break-up of Sales (FY13E)
Rest of World, 39.2%
North America, 19.6%
FY12
Europe, 18.6%
India, 22.6%
Sunidhi Research |
103
UPL
Exhibit 145: Price, Exchange rate and Volume trend
35
30
25 20 15 10 5 0
Q4FY11
Q1FY12
Price
Q2FY12
Exchange Rate
Q3FY12
Q4FY12
Volume
Q1FY13
Key Management Personnel

Mr. R.D. Shroff is Chairman & Managing Director of the company, while Mr. J.R. Shroff is Global CEO of UPL group. Mr. A.C. Ahsar handles responsibility of Director Finance.
Sunidhi Research |
104
UPL
Valuations Summary Year End-March FY11 Per share (`) EPS 12.1 CEPS 16.7 BVPS 80.7 DPS 2.0 Payout (%) 19.3 Valuation (x) P/E 10.9 P/BV 1.6 EV/EBITDA 6.5 Dividend Yield (%) 1.5 Return ratio (%) EBIDTA Margin 18.6 PAT Margin 9.7 ROAE 15.0 ROACE 18.4 Leverage Ratios (x) Long Term D/E 0.3 Net Debt/Equity 0.0 Interest Coverage 4.6 Current ratio 1.5 Growth Ratios (%) Income growth 5.5 EBITDA growth 7.0 PAT growth 5.9 Turnover Ratios F.A Turnover x 1.3 Inventory Days 89.1 Debtors Days 93.7 Payable days 70.3 Income Statement(` mn) Year End-March FY11 Revenues 57607 Op. Expenses 46908 EBITDA 10699 Other Income 1375 Depreciation 2138 EBIT 9936 Interest 3120 PBT 6816 Tax 731 PAT 6085 Minority 104 Prior Period Adj 31 Sh. of Associates -234 Ex. ordinary 140 Adj Pat 5576
FY12 12.0 18.4 90.4 2.5 24.3 10.9 1.5 6.3 1.9 17.9 7.3 14.1 17.5 0.6 0.6 4.1 1.8 32.9 27.8 -0.4 1.3 89.5 116.6 71.7 FY12 76547 62873 13674 1089 2924 11840 4146 7693 1280 6413 54 222 -398 185 5556
FY13E 14.6 21.6 100.4 2.8 22.0 9.0 1.3 5.7 2.1 17.5 7.7 15.3 14.8 0.7 0.6 4.5 2.0 13.5 11.2 20.4 1.4 95.0 120.0 75.0 FY13E 86852 71653 15199 800 3214 12785 4206 8579 1716 6864 75 0 -100 0 6689
FY14E 17.1 24.4 114.0 3.0 20.5 7.7 1.2 5.0 2.3 17.5 8.2 16.0 15.1 0.5 0.5 4.8 2.0 10.0 10.0 17.3 1.4 95.0 120.0 75.0 FY14E 95547 78826 16721 700 3339 14082 4277 9805 1961 7844 100 0 100 0 7844
Balance Sheet (` mn) Year End-March Equity and Liabilities Share Capital Reserves and Surplus Total Shareholders funds Minority Interest Non-Current Liability Long Term Borrowings Deferred Tax Liabilities (Net) Long Term Liab/ Provisions Current Liabilities Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions Grand Total Assets Non Current Assets Fixed Assets Deferred Tax Assets Non-Current Investments Long Term Loans and Advances Trade Receivables Current Assets Current Investments Inventories Trade Receivables Cash and Cash Equivalents Short Term Loans and Advances Other Current Assets Grand Total Cash flow Statement Year End-March PBT Depreciation Interest Exp Others CF before W.cap Inc/dec in W.cap Op CF after W.cap Less Taxes Exceptional & Prior Period Adj Net CF From Operations Inc/(dec) in F.A + CWIP others CF from Invst Activities Loan Raised/(repaid) Equity Raised Dividend Others CF from Fin Activities Net inc /(dec) in cash Op. bal of cash Cl. balance of cash
FY11 924 36337 37261 180 10023 731 735 4950 11092 16572 1241 82784
FY12 924 40808 41731 2499 23772 940 3517 8674 15035 5787 1575 103529
FY13E 915 45004 45919 2574 29957 940 3568 8674 17586 7035 1732 117985
FY14E 915 51242 52157 2674 26957 940 3624 8674 19360 7744 1905 124035
23776 809 4678 2199 0 3553 14055 14795 15659 2412 846 82784 FY11 6816 2138 3120 -985 11089 -1884 9205 885 -171 8148 -8028 -781 -8809 2888 0 -1091 -2113 -316 -977 16635 15659
35286 997 6695 2587 613 1250 18779 24453 7002 5137 731 103529 FY12 7693 2924 4146 -435 14329 -16115 -1786 1242 -196 -3224 -9348 2750 -6599 7023 0 -1156 -3305 2562 -7260 14262 7002
38072 997 6695 3283 0 1250 22605 28554 10580 4759 1190 117985 FY13E 8579 3214 4206 -100 15899 -4084 11815 1716 0 10099 -6000 0 -6000 6185 -1029 -1472 -4206 -521 3578 7002 10580
37233 997 6695 3614 0 1250 24868 31413 11420 5235 1309 124035 FY14E 9805 3339 4277 100 17521 -3336 14185 1961 0 12224 -2500 0 -2500 -3000 0 -1606 -4277 -8883 841 10580 11420
Sunidhi Research |
105
Sunidhis Rating Rationale

The price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral. (For Mid & Small cap stocks from 12 months perspective) BUY ACCUMULATE HOLD REDUCE SELL Absolute Return >20% Absolute Return Between 10-20% Absolute Return Between 0-10% Absolute Return 0 To Negative 10% Absolute Return > Negative 10%
Apart from Absolute returns our rating for a stock would also include subjective factors like macro environment, outlook of the industry in which the company is operating, growth expectations from the company vis a vis its peers, scope for P/E re-rating/de-rating for the broader market and the company in specific.
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106

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Agrochemical Industry

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October 01, 2012

Indian Agrochemical Industry

Tarun Surana tarun.s@sunidhi.com Phone: +91-22-66318632

Price target and recommendation

CMP* 98 414 542 145 131

Target 146 412 685 140 171

Upside (%) 49 -0.5 26 -3 31

Recommendation BUY REDUCE BUY REDUCE BUY

Source: Sunidhi Research Estimates

Global Agriculture & Food Scenario

Source: UN, Bunge, Sunidhi Research

Arable land per person (ha)

2793 3495 1798

737 1950 2010 2050

Source: UN, Bunge, Sunidhi Research

Source: LMC, Bunge, Sunidhi Research

Indian Agriculture & Food Scenario

Source: ICAR Vision 2030, Sunidhi Research

Source: ICRIER working paper - Mittal 2008

Source: FAO, Sunidhi Research

Exhibit 9: Significant Yield-gaps exist within states (KG per Ha)

Source: Ministry of Agriculture, Sunidhi Research

Source: Agricultural Statistics 2011-12 Sunidhi Research | 9

Source: FAI, Sunidhi Research

1.0 0.5 0.0 -0.5

Source: Ministry of Agriculture, Sunidhi Research

Source: RBI, Sunidhi Research

92.2 78.6 67.2

80.0 70.0 60.0

Source: Ministry of agriculture, Sunidhi Research

4.5 4.0 3.5 3.0

Cotton (Med Staple)

Exhibit 16: WPI of Food grains, Fruits & Vegetables

FRUITS & VEGETABLES

Source: Ministry of Finance, Sunidhi Research

Source: National Holtculture Mission, Sunidhi Research

Source: Industry, Sunidhi Research

Debunking some Myths