Ambit Capital - Agri Inputs - Diverging Growth Rates (Sector Update) (POSITIVE)

Agri Inputs
POSITIVE
SECTOR UPDATE March 11, 2015
Diverging growth rates Key Recommendations

PI Industries BUY
So far in FY15, PI and Bayer have posted higher domestic revenue
Target Price: Rs775 Upside 17%
growth, due to higher share of specialty products, new launches and
better farmer engagement. Though the weak monsoon has led to low Rallis India SELL
growth and price moderation for some generics, specialty products
volumes/prices have held steady. We expect materially divergent Target Price: Rs255 Upside: 5%
growth for PI and Rallis given PIs superlative CSM/in-licensed focus vs
Rallis relatively average execution. We upgrade PIs TP to Rs775 (from Agri stock price returns
Rs650) based on increasing confidence in its domestic product launches
60%
and sustainability of the CSM business. We downgrade Rallis to SELL 50%
47%
given very little chance of it beating our estimates (18%/22% 40%
30% 24%
revenue/EBITDA CAGR in FY15-17); the recent run-up in the stock post 17%19%
the disappointing results is unjustified. Key risk for PI: Key man
20% 8% 12%12%
10% 4%
risk/competitive threats to Nominee Gold. 0%
-10%
Agrochemicals and within that specialty performed the best -20%
-14%
-30%
On a YTD basis, cumulatively the seven listed agrochem companies delivered -40% -32%
Dhanuka
PI
UPL
Excel
Kaveri
Monsanto
Sharda
Bayer
Rallis
sales growth of 13% despite a bad monsoon and relatively lower pest
Insecticides
incidence; EBITDA growth was 23% led by operating leverage, improving
product mix and some moderation in raw material prices. Continued pace of
product launches (CY14 was a record year for number of 9(3) launches) and a Source: Bloomberg. Data since 21st Nov 2014
normal monsoon should further speed up the growth rates in FY16. In seeds,
whilst Kaveri has grown at 15% in sales terms aided by record cotton acreages, Agri Inputs revenue growth rates YoY
Monsanto felt the pressure of lower corn acreages. Fertiliser players (Zuari, 3QFY15 9M FY15
Coromandel, and Deepak) posted aggregate revenue growth of 7% whilst Fertilizers
profitability improved due to lower RM prices driving aggregate EBITDA growth
GSFC -10.2% 3.6%
of 19%. We continue to prefer agrochem companies (wherein product
Coromandel 7.5% 5.7%
innovation can be supplemented by in-licensing) over seeds and fertilisers.
Zuari -8.3% 7.7%
Dynamics of domestic business steadily changing Deepak -9.5% 8.8%
Industry participants indicate that specialty products (such as TargaSuper, Chambal 19.7% 12.1%
Nominee Gold), herbicides/fungicide portfolio orientation, and strong farmer
Aggregate 4.3% 7.6%
connect are incrementally becoming more important. Farmers are ready to pay
4x the price (as demonstrated in case of certain products such as Rynaxypyr) till Agro Chem
the time they are more than compensated by savings in labour (due to lower Rallis -2.8% 6.0%
number of sprays) and better yields. Pesticides account for 15-20% of farmers Dhanuka 7.2% 8.3%
crop expenditure but farmers can clearly improve yields by 30-40% by better Insecticides -22.0% 10.2%
adoption. As a result, a strong farmer engagement programme is also
PI 38.4% 13.6%
important. We believe players with higher share of generic molecules may
UPL 15.6% 14.6%
struggle given rising competitive intensity in the segment.
Bayer 9.7% 17.3%
Agri valuations have significantly re-rated Sharda 28.7% 43.8%
Valuations for agrochemicals have significantly re-rated over the last few Aggregate 13.5% 14.7%
months driven by increasing investor interest in the changing agri landscape,
Seeds
sustained earnings growth amidst a weak season and high RoEs for most
players. We believe such rich valuations could sustain due to structural changes Monsanto -27.1% -4.8%
such as rising farmer awareness, labour shortage, higher demand for quality Kaveri -31.6% 15.4%
farm output and improved product availability sustaining healthy double-digit Aggregate -29.0% 8.5%
growth rates. Low penetration and consumption levels in both agrochem and Source: Company, Ambit capital research
seeds would continue to aid superior growth rates in case of sustained efforts
by private players and infrastructure improvement support by the Government.
In addition, exports is also turning out to be a sizable opportunity driven by
growing generics share globally, rising government incentive, and improving Analyst Details
competitiveness of India vs China for relatively complex agrochemicals. Ritesh Gupta, CFA
+91-22-3043 3242
riteshgupta@ambitcapital.com
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Agri Inputs
CONTENTS
SECTOR
Agri Inputs performance continued to remain healthy despite ...................................3
weak monsoons
High MSPs not the only factor driving agrochemical growth ..6
Channel inventory levels a concern for next years growth? ..9
Expect healthy double-digit growth rates to continue for the space ..10
Agri valuations re-rated significantly .13
Agri Inputs/Pharma/Consumer Similarities and differences .16
Results Summary 3QFY15 17
COMPANIES
PI Industries: He who toils ...31
Rallis India: Why did it rally?...... 47
March 11, 2015 Ambit Capital Pvt. Ltd. Page 2

Agri Inputs
Agri Inputs performance continued to

remain healthy despite weak monsoons
Agrochemicals continued to perform well, with aggregate EBITDA growth of 23% in The aggregate revenue growth was
YTDFY15. The aggregate revenue growth was muted at 13% led by weaker muted at 13% led by weaker
performance of Rallis and Dhanuka. However, strong margin expansion of ~120bps performance of Rallis and
on an aggregate basis kept EBITDA growth rates healthy. Seeds growth was mixed, Dhanuka.
with 15% growth for Kaveri whilst Monsanto India reported a sales decline of 5%.
Fertilisers reported sales growth of 7% and EBITDA growth of 19% led by better RM
prices.
Exhibit 1: India Agri Inputs Results Summary YTDFY15
Sales EBITDA PAT
9MFY15 9MFY14 YoY (%) 9MFY15 9MFY14 YoY (%) 9MFY15 9MFY14 YoY (%)
Fertilizers
Zuari 39,738 36,885 7.7% 1,710 1,108 54.4% 12 -1,210 -101.0%
Coromandel 82,650 78,221 5.7% 6,938 6,260 10.8% 3,331 2,845 17.1%
Deepak 9,818 9,027 8.8% 1,008 736 37.0% 382 225 69.8%
Aggregate 132,206 124,133 6.5% 9,656 8,104 19.2% 3,725 1,860 100.3%
Agro Chemicals
Dhanuka 6,349 5,865 8.3% 1,094 939 16.5% 842 707 19.1%
PI 13,972 12,297 13.6% 2,747 2,337 17.5% 1,829 1,385 32.1%
Insecticides 8,034 7,289 10.2% 975 731 33.3% 487 348 39.9%
UPL 83,481 72,836 14.6% 15,777 13,475 17.1% 7,150 5,605 27.6%
Sharda 7,205 5,010 43.8% 1,022 716 42.7% 749 576 30.0%
Rallis 14,860 14,019 6.0% 2,312 2,171 6.5% 1,359 1,326 2.5%
Bayer 30,747 26,203 17.3% 4,649 3,510 32.5% 3,396 2,433 39.6%
Aggregate 236,949 209,115 13.3% 37,353 30,462 22.6% 20,191 15,510 30.2%
Seeds
Kaveri 11,213 9,719 15.4% 3,012 2,152 40.0% 2,997 2,072 44.6%
Monsanto 4,774 5,016 -4.8% 1,264 1,426 -11.4% 1,146 1,289 -11.1%
Aggregate 15,987 14,735 8.5% 4,276 3,578 19.5% 4,143 3,361 23.3%
Source: Company reports, Ambit analysis
Exhibit 2: India Agri Inputs Results Summary 3QFY15

Sales EBITDA PAT
3QFY15 3QFY14 YoY (%) 3QFY15 3QFY14 YoY (%) 3QFY15 3QFY14 YoY (%)
Fertilizers
Zuari 14,127 15,399 -8.3% 730 902 -19.1% 171 171 0.2%
Coromandel 29,431 27,379 7.5% 2,252 2,192 2.7% 1,207 942 28.1%
Deepak 3,020 3,338 -9.5% 350 310 12.9% 127 113 12.4%
Aggregate 46,578 46,116 1.0% 3,332 3,404 -2.1% 1,505 1,226 22.8%
Agro Chem
Dhanuka 1,790 1,670 7.2% 259 250 3.6% 220 213 3.3%
PI 5,021 3,629 38.4% 941 627 50.1% 622 347 79.3%
Insecticides 1,490 1,909 -22.0% 210 194 8.2% 83 68 23.2%
UPL 30,101 26,047 15.6% 5,746 4,651 23.5% 2,632 2,094 25.7%
Sharda 1,838 1,428 28.7% 49 5 880.0% 52 18 188.9%
Rallis 3,847 3,959 -2.8% 558 556 0.4% 301 304 -0.8%
Bayer 6,872 6,266 9.7% 727 483 50.5% 550 390 41.0%
Aggregate 64,367 62,088 3.7% 10,380 8,513 21.9% 5,211 4,043 28.9%
Seeds
Kaveri 907 1,326 -31.6% 362 382 -5.2% 359 365 -1.6%
Monsanto 1,333 1,829 -27.1% 457 668 -31.6% 483 651 -25.8%
Aggregate 2,240 3,155 -29.0% 819 1,050 -22.0% 842 1,016 -17.1%
Source: Company, Ambit analysis

Agri Inputs
Agrochemicals Growth divergence in FY15

In agrochemicals, the growth rates in FY15 have been divergent so far, with
certain players such as Rallis, Dhanuka and Insecticides growing at single
digits whilst certain players such as PI, UPL and Bayer growing handsomely
at 16-18% YoY. Players with a higher share of generic molecules clearly
struggled in the absence of a differentiated proposition to the farmer at a
time when acreages were declining and output prices were also subdued.
Clearly, a higher share of differentiated products, good alignment to
herbicides/fungicide products and strong farmer connect are few key drivers that we
believe are incrementally becoming important. Farmers are ready to pay 4x the price
(as demonstrated in case of certain products such as Rynaxypyr) till the time they are
more than compensated by savings in labour (due to lower number of sprays) and
better yields. Pesticides account for 15-20% of farmers crop expenditure but farmers
can clearly improve yields by 30-40%.
Exhibit 3: 9MFY15 domestic business sales growth
20% 18%
17%
18% 16%
16%
14%
12% 10%
10% 8% 8%
8%
6%
4% 2%
2%
0%
Rallis Excel Dhanuka Insecticide PI Bayer UPL
Cropcare India
Source: Company. Note: Estimated growth for Rallis India, as the company does not report the segment
separately.
Whilst new launches provided some support to Dhanukas revenue growth, lower
soya acreages and higher competition for Targa Super adversely impacted growth
rates. Rallis had its own challenges related to strict working capital norms and lack of
new differentiated products.
however, adoption of value-added novelty products and response to good

farmer connect programmes remains strong
Bayer Cropscience India continues to deliver strong growth rates despite a bad
crop season driven by a mix of steady innovation rates at ~25% (sales contribution
from products launched over the last four years) and price hikes taken over the year.
We believe the ability to take price hikes in a seemingly bad season without a
significant impact on volumes clearly shows the strength of brand pull enjoyed by the
company. Our channel checks suggest that Bayers efforts on distribution expansion
and farmer connect initiatives have been aiding these growth rates.
PI Industries continued to record healthy growth rates led by Nominee Gold and Osheen had a spectacular season
Osheen. Our channel checks suggest Osheen had a spectacular season driven by a driven by a good pest season in
good pest season in Rice. Nominee Gold continues to grow well driven by rising Rice.
penetration of the product. Melsa (launched in FY14) also has been gaining traction,
as per our channel checks. In-licensed products account for nearly 70% of the
companys revenues and continue to gain traction. PIs 9MFY15 growth of 16% was
in line with the domestic growth of 18% in the last four years despite relatively
weaker farm conditions.
UPL delivered strong growth rates driven by healthy performance of herbicide
portfolio (led by wheat) and good performance of core brands such as Ulala, Lancer
Gold, Starthene Power, Saaf, and Saathi. New products, Iris and Eros, both herbicides
performed well ahead of the managements expectations.

Agri Inputs
Exhibit 4: Quotes from recent calls/press releases on the domestic performance in 3QFY15
Speaker Comment
The performance shown by us in the domestic agri-inputs comes on the back of our strong brand introductions over the
Mayank Singhal, last few years and the ongoing farmer connect initiatives that we run. I am pleased that we have been able to deliver
CEO, PI despite unfavourable agro-climatic scenario. We have a very capable product portfolio, that is showing progressively
Industries better volumes YoY and it is our belief that the new broad spectrum insecticide launched by us will trace a similar
growth trajectory going forward.
In the crop protection category, let me also add that category like herbicides, which used to be very small, not very long
ago is increasing at a very, very fast pace, purely because it brings in a labour-saving device. It helps in cutting down
costs and agony for the farmers in finding adequate labour to do the farming. There is also a lot of requirement of
V Shankar, CEO,
fungicides particularly on fruits and vegetables. And fruits and vegetables has been a growing category in India and
Rallis India
value-added fruits and vegetables are increasing in a very handsome way. So these are all good, good opportunities
unfolding. There is room for good technology; there is room for value-added solutions. So I do see that all these
categories have very, very robust future.
We have launched in India two products and both are herbicides. One is Iris, which is for soybean and the pulse crops.
UPL The other herbicide we have launched is rice herbicide. It is called Eros, which is used in the transplanted rice. Both the
Management herbicides, they have performed well, especially the update of the herbicides is going quite well in our country because
of the increasing labour shortages and obviously the cost of labour also has significantly gone up.
Source: Bloomberg transcripts, company press releases

Agri Inputs
High MSPs not the only factor driving

agrochemical growth
Most of the leading agrochemical players have recorded strong growth rates over the
last few years. The growth drivers are not limited to growth in MSP prices but are also
led by: (1) rapid growth in patented molecules, and (2) growth in herbicides due to
rising labour rates.
Exhibit 5: India domestic agrochemicals growth rates have been quite healthy over the last six years (Rs mn)
Revenues FY08 FY09 FY10 FY11 FY12 FY13 FY14 6 Year CAGR
BASF India Ltd - Agri 3,702 3,277 4,863 6,309 7,914 9,229 10,448 19%
Bayer CropScience Agrochem 6,421 9,825 11,599 13,255 14,207 16,283 20,450 21%
Bayer CropScience Actives 1,251 1,657 1,029 3,992 4,634 5,543 6,292 31%
Dhanuka Agritech Ltd. 2,486 3,368 4,081 4,910 5,292 5,823 7,384 20%
Excel Crop Care Ltd. 5,342 7,009 6,486 7,394 6,950 7,791 9,841 11%
Gharda Chemicals Ltd. 8,433 8,433 8,948 9,864 10,583 11,591 11,591 5%
Insecticides (India) Ltd. 1,976 2,637 3,774 4,501 5,218 6,167 8,641 28%
Meghmani Organics Ltd. 6,001 7,914 8,163 10,451 10,622 10,585 11,783 12%
Nagarjuna Agrichem Ltd. 4,148 6,054 6,529 5,701 6,431 6,006 6,358 7%
PI Industries Ltd. Domestic Business 3,703 4,057 4,140 5,800 6,133 6,869 8,860 16%
Rallis India Ltd. Domestic Pesticide Business 5,002 6,052 7,323 8,421 8,181 8,835 10,161 13%
Sabero Organics Gujarat Ltd. 2,073 3,773 4,303 4,108 3,584 5,148 7,240 23%
Syngenta India Ltd. 11,927 13,802 17,553 20,771 25,399 29,617 30,686 17%
UPL Ltd. - India 8,011 10,326 11,970 14,940 17,190 18,050 22,710 19%
Agrochemicals 70,475 88,184 100,761 120,417 132,338 147,538 172,445 16%
Source: Company, Ambit Capital research
Rapid growth in patented molecules

Indias crop protection industry is mostly generic, with around 80% of the molecules
(vs 50% globally) being generic and with the distribution network and brand image
acting as the product differentiator. However, the patented or proprietary off-
patent segment is growing at a rapid pace. After India became TRIPS-compliant
and started giving product patent protection, MNCs have turned more comfortable in
launching their patented products into India. Indian companies too have been able to
in-license many patented products from global innovators in this better IP
environment.
Case study: Coragen (a Dupont product)
This new product from Dupont is able to drive much more value growth for the
company on a per acre basis, materially increasing the overall market size.
The product requires much lower dosage, resulting in better gross margins for the
company. The company is also able to charge a premium (measured in pricing
realisation/acre of area under usage) on these products, further aiding gross
margins.
Its a win-win for farmers as well, as their consumption goes down significantly, and
yield improvement takes care of additional costs. The product, as per farmer checks,
seems to be aiding yields by 5-7 tonnes/acre.
Exhibit 6: Product comparison Coragen
Coragen (new technology) Caldan, Thimet (Old technology)
60 ml (paddy, soybean, tomato, arhar, chilli)
Dosage 250ml 1000ml
150ml (sugarcane)
Cost 1600/acre/spray 350/acre/spray
Number
1 3
of Sprays
Yield 35-37 tonne/acre 28-30 tonne/acre
Source: Dupont Management Interview, Hindu Business Line

Agri Inputs
Change into pest-specific chemistry a key driver

Farmers are incrementally moving toward target pest-specific chemistries rather than
generic ones. This is driving a tremendous change in value realisations as well as
product effectiveness. To break-up the growth in the agrochemicals space, nearly
60% would be due to improved chemistries and 40% would be from an increase in
treated areas. However, the long gestation period of registration of ~5-10 years is a
big challenge in terms of bringing new products to the market.
With strong 16-18% growth over the last couple of years, many companies have
aggressively been launching new products. MNCs have launched a couple of
blockbuster products from their parents portfolio whilst Indian companies too have
been aggressive on licensing from other MNCs that do not have a strong Indian
distribution.
The exhibit below highlights the key factors for such a shift towards higher value
chemistries.
Exhibit 7: Whilst affordability could be challenged by lower growth in MSPs, rising farmer awareness and improved
distribution reach will continue to aid agrochemicals growth rates
Reason Explanation
Rural affordability for higher-priced agri inputs is on the rise driven by better realisation over the last few
Better affordability years. Farmers incrementally focus on better yields and invest more if they see some signs of benefit.
Availability of credit too has improved.
Improved efforts by agrochemical companies to educate farmers about advanced chemistries have led to
Improved farmer increased adoption of high-value agrochemicals. A significant proportion of this pesticide consumption is non-
awareness specific in nature, commanding lower value. Crop- and pest-specific solutions are still limited despite
significant growth over the last decade.
On the supply side, both Indian and foreign players have been launching new products and focusing on
Availability engaging with farmers. Companies have improved their distribution reach, which has led to far deeper
availability of branded products.
Source: Ambit Capital research
Rising labour shortage promoting adoption of

weedicides
Various factors such as urban migration, NREGA spends and other opportunities in
In the crop protection category, let
the rural ecosystem have led to a decline in the availability of agriculture labour. As a
me also add that category like
result, wages have shot up significantly in rural areas. That has also driven
herbicides, which used to be very
incrementally better economics for use of weedicides. Newer generations are also
small, not very long ago is
less keen on manual labour and look for weedicide solutions.
increasing at a very, very fast pace,
Herbicides brands such as Targa Super, Nomine Gold, and Roundup have purely because it brings in a labour
gained significant scale over the last few years saving device. It helps in cutting
down costs and agony for the
Launch of new products and awareness creation by individual companies amongst
farmers in finding adequate labour
farmers have also helped overall growth rates. Over the past few years, Nominee
to do the farming.
Gold (rice herbicide, PI Industries), Targa Super (soybean crop herbicide, Dhanuka
Agritech) have gained tremendous success, achieving a revenue size of Rs2bn-3bn in
a small period of 4-5 years since launch. Monsantos Roundup also doubled its size There is also a lot of requirement
from Rs0.9bn in FY11 to Rs2.1bn in FY14. PI Industries Nominee Gold continued to of fungicides particularly in fruits
register strong growth rates in FY15 as well driven by rising adoption and better rice and vegetables. And fruits and
acreages (up 4% YoY). Targa Super was impacted slightly in FY15 due to lower vegetables has been a growing
soybean acreages (down 12% YoY). category in India and value-added
fruits and vegetables are increasing
Slowdown in wage inflation to impact herbicide growth momentum?
in a very handsome way.
Whilst we agree that wage inflation slowed down in FY15, this is unlikely to affect the
strong trends in weedicide growth, as the cost proposition for weedicide is better.
- Mr. V Shankar, MD, Rallis
However, we agree that a sustained low single-digit growth in rural wages for
India during the 3QFY15
multiple years may slow down the expansion in herbicide penetration. Monsoons are
post-results conference call
important for weedicide consumption given that a dry season leads to lower
requirements for weedicide sprays.

Agri Inputs
Exhibit 8: India pesticides segment breakup Exhibit 9: Worldwide pesticides segment breakup
Biopesticid
es and Others, 7
Fungicides,
16 Others, 4
Insecticides
, 22
Herbicides,
44
Herbicides,
15
Insecticides
, 65
Fungicides,
27
Source: FICCI Source: FICCI
Exhibit 10: Rural wage inflation has slowed down but Exhibit 11: Rising urbanisation trends are posing
continues to make a case on a cost basis for rising challenges on availability of rural labour (in %)
adoption of chemical weedicides (YoY growth in %)
25%
21%
20% 18%
17%
15% 15%
15%
10% 75
10% 72
7%
6%
5% 4% 68 67
0%
1991
2001
2011
2014E
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
Source: RBI Source: ICAR
Exhibit 12: Monsanto Weedicide Glyphosate (generic) grew by 2.4x over FY11-14
(indexed revenues)
250 235
200
156
150
113
100
100
50
-
FY11 FY12 FY13 FY14
Source: Monsanto annual report

Agri Inputs
Channel inventory levels a concern for

next years growth?
We extensively checked with various industry participants (dealer, sales
officers, mid-level managers) if unsold inventory with the channel will choke
next years growth. What we understand is that such issues would be player-
specific. Most of the credible industry players were forced to take corrections
in 2HFY15 to aid receivable collections and meet expiry norms.
Some of the industry players such as Syngenta took inventory correction in 3Q. Bayer
apparently had already been cautious on inventory placements and its channel
inventory seems to be in control. General feedback in our channel checks was that
MNC players were careful enough to rotate their unused inventories from one state
to another. Some domestic players corrected channel inventory in 3Q and the current
quarter. Rallis also pulled back inventory placement post 1Q once the company
realised that the season was not panning out as per their expectations.
Player such as Insecticides India and Crystal had higher inventories in the channel. Some of our channel checks
We believe pure-play generic players will face higher difficulties next year, as channel suggest that the inventories in the
is already filled with excess inventory. Some of our channel checks suggest that the system are higher by about 20-30%
inventories in the system are higher by about 20-30% for generics. Nonetheless, even for generics
the players whose channel inventories are controlled will face repercussions of the
channel inventories of other generic players. We believe 4Q will again be muted
given the inventory correction in the channel.
Exhibit 13: Management commentaries on inventory
Management Comment
Given these sets of conditions, demand has been muted along
with the inventory, which is already there in the pipeline. And
therefore, as you know, our way of working is to align our sales
V Shankar, MD, Rallis and placements to consumption. So all this has resulted in volumes
being a bit mute on the domestic side. And we have made sure
that our focus on cash and collections is relentless and it
continues.
As per the information definitely in the industry there is huge
M K Dhanuka, MD,
inventory available, but with Dhanuka that is not the case. We
Dhanuka Agritech
have normal inventory, which we have usually every year.
Source: Company
Players with excess inventories of generics to face pressure on margins

The other bigger challenge for the players with higher inventories on their books is
that the prices for some generics (led by price cuts from the Chinese on organo
phosphorus molecules) have already started to drop post the crude price correction.
Players sitting on inventories with higher costs might see pressure on gross margins,
as they liquidate their inventories at market prices, which could be lower.
Exhibit 14: Inventory levels A concern for next year?
Inventory Payables Receivable Cash Conversion
Consolidated data
Days Days Days Cycle
1HFY15 1HFY14 1HFY15 1HFY14 1HFY15 1HFY14 1HFY15 1HFY14
PI 151* 109 145 130 119 141 126 120
Bayer India 91 93 56 53 119 113 154 153
Rallis 124 105 130 123 81 85 76 67
Dhanuka 170 161 54 68 166 162 283 255
Insecticide India 173 144 141 130 121 128 153 142
Excel Crop care 136 91 133 125 112 123 114 89
Source: Company. * PI inventories were higher due to planned CSM batch export in 3QFY15.

Agri Inputs
Expect healthy double-digit growth rates

to continue for the space
We expect healthy double-digit growth rates to continue for the space due to: (1)
rising aggression on farmer engagement programmes and distribution expansion by
MNCs and top Indian players, (2) strong growth in herbicides (led by increasing
adoption of chemicals over physical labour) and fungicides (rising demand for better-
quality fruits and vegetables), and (3) introduction of new-age molecules (such as
Rynapyxyr) which are driving up value realisations per acre significantly.
Exhibit 15: Agrochemical companies have been driving the high cost: benefit value
proposition of pesticides to farmers
India Crop Yield Avoidable Loss Cost: Benefit
Cotton (non BT) 40-90 1:7
Paddy 21-51 1:7
Mustard 35-75 1:12
Sunflower 36-51 1:8
Groundnut 29-42 1:26
Maize 20-25 1:3
Pulses 40-88 1:4
Sugarcane 8-23 1:13
Vegetables 30-60 1:7
Fruits 20-35 1:4
Source: IARI
We believe only 30% of arable area is under pesticide treatment. States like Punjab,
Haryana, and Andhra Pradesh lead pesticide consumption whilst UP, MP, and Orissa
lag on the consumption curve. Farmer awareness is on the rise, as the younger
generation is more educated. Also, private efforts on educating farmers have been
rising, which is driving increased use of pesticides.
On another side, demand for high-quality fruits and vegetables is clearly rising driven
by growth in organised retail and growing affluence of consumers in India. Fruits and
vegetables contributed 13-14% to the agrochemical pie 4-5 years back and now they
contribute close to 20% of overall pesticide consumption. Pricing for fruits and
vegetables remains sticky, and even if inflation comes off significantly, farmers will
continue using agrochem products to improve the quality of the product which drives
the incremental pricing. PI industries recent product launch Keefun is likely to see
strong growth momentum given rising agrochem demand in fruits and vegetables.
The initial feedback on product is extremely positive as per our channel checks.
Agri demand is becoming more resilient

Exhibit 16 below clearly shows that growth rates have held up strongly even in bad
monsoon years such as FY10 and FY13.
Many industry participants expect market growth to remain in double digits despite
moderation in MSP growth. These participants believe unless MSPs start declining
meaningfully or growth remains muted for the next 2-3 years, current industry growth
rates will not face a material downside, as farmers are still getting much more benefit
for every rupee invested in pesticides. Organised players are gaining market share
from lower-end players which thrived due to lower availability and reach of branded
products. Clearly, drop in acreages, bad weather trends (such as fewer incidences of
pests and lower incidence of weeds due to weak monsoons), and irreversible damage
to standing crops impact pesticide consumption. But these are temporary impacts and
vary every year.
Many participants also believe that direct investments such as in irrigation
infrastructure and storage facilities are much more beneficial than subsidy or free
cash distribution programmes like MNREGA.

Agri Inputs
Exhibit 16: Aggregate agrochem growth for top-15 players has held up well despite
the bad monsoons over the last few years
Agrochem growth (%) Monsoon Departure vs. Normal (%)

For agrochem growth, good
30% 25% monsoons are important but
20% geographical and time distribution
20% 17%
14%
10% 11% 10% are also important
10% 6%
2% 2%
0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15E
-10% -7%
-2%
-12%
-20%
-22%
-30%
Source: Company data, Ambit research. Note: Agrochemicals growth is based on sum of leading 15 companies
sales.
Global commodity price crash

I think in India the agri commodity prices are relatively lower as compared to the
global prices. Wheat is still around $300 or there about or little bit plus. Indias wheat
prices are in the range of $220 at the farmer level. So I think there is still a lot of gap
between what the Indian farmer gets and what the global farmer gets. I do not think
the subsidies will be disrupted in a big way and also in a short span of time. So I think
we should not see much impact of commodity prices as far as the Indian consumption
is concerned on a lot of cash crops. Prices are still good, the price of oil seeds continues
to be good, the only commodity which is coming under major attention globally is corn
where the prices have dipped below $4 per bushel. But in India corn is not a very
significant crop price; here rice and wheat are the major drivers and both come under
MSP. So what you are saying is right for the rest of the world, it will not have major
impact on consumption
- Mr. Kapil Mehan, MD, Coromandel International Limited (2QFY15 conference
call)
Channel inventory levels a concern for next years growth?

We extensively checked with various industry participants (dealer, sales officers, mid-
level managers) if unsold inventory with the channel will choke next years growth.
What we understand is that such issues would be player-specific. Most of the credible
industry players were forced to take corrections in 2HFY15 to aid receivable
collections and meet expiry norms. We believe pure-play generic
Some of the industry players such as Syngenta took inventory correction in 3Q. Bayer players will face higher difficulties
apparently had already been cautious on inventory placements and its channel next year, as channel is already
inventory seems to be in control. General feedback in our channel checks was that filled with excess inventory; some
most of the MNC players were careful enough to rotate their unused inventories from of our channel checks suggest that
one state to another. Some domestic players corrected channel inventory in 3Q and the inventories in the system are
the current quarter. Rallis also pulled back inventory placement post 1Q once the higher by about 20-30% for
company realised that the season was not panning out as per their expectations. generics
However, Rallis and Monsanto India (for Glyphosate) are likely to face higher
competition in their key molecules given channel inventory is significantly high.
Player such as Insecticides India and Crystal also had higher inventories in the
channel, as per our checks. We believe pure-play generic players will face higher
difficulties next year, as channel is already filled with excess inventory. Some of our
channel checks suggest that the inventories in the system are higher by about 20-
30% for generics. Nonetheless, even the players whose channel inventories are
controlled will face repercussions of the channel inventories of other generic players.
We believe 4Q will again be muted given the inventory correction in the channel.

Agri Inputs
Exhibit 17: Management commentaries on inventory

Management Comment
Given these sets of conditions, demand has been muted along with the
inventory, which is already there in the pipeline. And therefore, as you know, our
V Shankar, MD, Rallis way of working is to align our sales and placements to consumption. So all this
has resulted in volumes being a bit mute on the domestic side. And we have
made sure that our focus on cash and collections is relentless and it continues.
As per the information definitely in the industry there is huge inventory available,
M K Dhanuka, MD, Dhanuka
but with Dhanuka that is not the case. We have normal inventory, which we have
Agritech
usually every year.
Source: Company
Players with excess inventories of generics to face pressure on margins

The other bigger challenge for the players with higher inventories on their books is
that the prices for some generics such as Asataf by Rallis, Glyphosate by Monsanto
India (led by price cuts from the Chinese on organo phosphorus molecules) have
already started to drop post the crude price correction. Players sitting on inventories
with higher costs might see pressure on gross margins, as they liquidate their
inventories at market prices, which could be lower.
Drop in cotton acreages could be a concern?

Cotton acreages are likely to go down next year, as prices have not been so attractive
in recent months. This could have a potential impact on agrochem demand, as cotton
is one of the largest contributors for agrochem industry. Industry participants believe
it is too early to comment on any demand impact as the acreage is just one of the
parameters. Pest incidence and monsoon trends are few other parameters that
control agrochem demand. An example is that last year despite record acreages for
cotton, agrochem demand was weak given low pest incidence and monsoon. In
addition, the farmer has very limited choices apart from cotton, as soybean prices too
have been muted. Agrochemicals account for nearly 20% of a farmers cost but have
much more impact on driving yields if pest incidence is high. Hence, in that scenario,
whatever be the end prices, demand on agrochem is not likely to be impacted
materially.

Agri Inputs
Agri valuations re-rated significantly

Valuations for agrochemicals have significantly re-rated over the last few months
driven by strong earnings growth trajectory even in a weak environment, increasing
institutional investor interest and rising RoEs of the space. We believe such rich
valuations could sustain due to structural changes such as rising farmer awareness,
labour shortage, rising demand for quality farm output and improved product
availability leading to healthy double-digit revenue growth rates. Margins and RoCEs
are also likely to improve given operating leverage and rising share of specialty
products. Low penetration and consumption levels in both agrochem and seeds
would continue to aid superior growth rates in case of sustained efforts by private
players and infrastructure improvement support by the Government.
In addition, exports (currently half of the Indian agrochem market) is also turning out
to be a sizable opportunity driven by growing generics share globally, rising
government incentive, increasing propensity of agrochemical players to outsource low
technology manufacturing, and improving competitiveness of India vs China for
relatively complex agrochemicals.
Relative valuations MNCs trading at a premium

Both Bayer and Monsanto trade at a premium vs their domestic peers given superior
product capabilities, strong farmer engagement programmes and brand recall.
Monsanto has an option value built in around the launch of RR flex and continued
adoption of herbicides (Glyphosate) which is keeping multiples higher despite weak
operating performance in FY15. Kaveri Seeds trades at a discount to agrochemical
players driven by the inherent risks of the seeds business and dependence on one
region/crop. We believe Rallis could see some valuation downside if domestic
underperformance continues. PI may too see further re-rating, as its RoCEs continue
to improve.
Most of the agrochemical peers of PI have slightly dissimilar business models, and
hence relative valuations need to be seen in the right context.
PI Industries High growth to sustain, supporting

marginal re-rating
PI trades at 21x FY17 EPS, relatively cheaper to Bayer; we believe this differential will
narrow in the near term, given PIs higher earnings growth trajectory to balance the
relatively lower share of domestic brand/distribution-led revenues.
Better RoEs than peers: We believe PI could trade at a premium to the sector as it
generates much better RoEs as well as RoCEs vs most of its agrochemical peers.
B2B nature of business: We believe PI is gradually emerged as a more strategic
partner for its clients. The entry barriers into the business are high and not many
Indian players have been able to build a business of this size and scale in CSM.
More diversified business: With more than 60% of earnings now coming from the
export-led CSM business, the business is well insulated from the vagaries of
monsoon.
Superior growth profile: PIs EPS CAGR FY14-FY17 of 28% is the best amongst
agrochemical players (23% for Dhanuka and Rallis, and 26% for Bayer).
Quality management and corporate governance: We believe PIs management
has done well on executing its strategy to build a superior business model for the
future. In corporate governance, PI scores better than most of its peers.
Upgrading TP to Rs775 from Rs650
PIs domestic business (40% revenue share) has a differentiated approach of in-
licensing new molecules (nearly 70-75% of revenues) from global innovators, thus

Agri Inputs
providing it with superior growth rates, better margins, and increased pull effect for
its products. In the domestic business, it introduced two new products, MELSA and
PIMIX, in FY14 and KEEFUN in 3QFY15, which should aid growth rates going
forward. KEEFUN is a promising product which has both insecticidal and fungicidal
properties. The product caters to the fruits and vegetables segment which accounts
for 20% consumption of pesticides in India. PI is launching another product over next
1-2 months and Nominee Gold (>30% of domestic sales) is growing well, driven by
improving adoption of direct seeded rice. Osheen (>10 of domestic sales) has also
been growing at a good pace driven by enhanced efficacy of the product on insects
infesting the rice crop. In domestic business, PI has again grown at a superior 16%
growth rates in FY15 so far after registering 21% growth rates over FY10-FY14
period.
We believe PI is next only to Bayer in terms of execution amongst listed
peers. With recent launch of Keefun, success of Osheen and Melsa, and another 7-8
products in pipeline we raise our FY18-FY26 domestic growth estimates on our DCF
from 13% to 14.5%. We also build in higher EBITDA margin of ~40bps on account of
higher sales base. The business is also well shielded by the faster-growing CSM
business.
At our target price, implied valuation is 24x FY17E; we believe strong
earnings trajectory of 29% in FY15-17 and beyond will strongly support stock
price. Our recent channel checks indicate PIs strong ability to hold on to such growth
rates beyond FY17 as well. As a result, we would expect PIs earnings to outperform
most of its peers in the agrochem space in the medium term. At our target multiple,
PI will trade at a 15% premium to Rallis and Dhanuka and in line with Bayer
Cropscience which is justified given strong earnings trajectory, RoCEs of ~30%, and a
high quality management and Board which is capable enough to invest future surplus
cash into useful growth opportunities.
Why will PIs multiples sustain at current levels?
Over FY12-15, PIs P/E multiple expanded to 28x one-forward from 12x, given
improvement in both the business but more importantly the difficult-to-build CSM
business (which is a US$6bn opportunity). Alongside rising revenue growth rates,
margins expanded and cash flow improved and the company was able to de-
lever despite continuing but modular capex needs of the CSM business. All this
resulted in post-tax RoCE increasing to 27% in FY15 from 17% in FY10.
We expect RoCE to further increase to 30% in FY17E, more importantly from
rising gross block turnover and marginal expansion in EBIT margins. The CSM
business will be the key driver of this RoCE expansion, as the large opportunity,
established credibility and limited competition will provide enough re-investment
opportunities of the large cash flows. Availability of reinvestment capital and
opportunity are they key factors for sustenance/expansion of multiples.
In an industry where not many companies have established a credible, fast
growing and simultaneously cash generating domestic or exports business, PI has
established that it will focus on both the business contrarily for credible
competitive advantagesquality and not at the cost of exports; differentiated
branded products and not generic for local markets.
Rallis No more re-rating; valuations could moderate

if domestic underperformance continues
Rallis is one of the most-diversified agri inputs companies in the space. However, we
have concerns over the lack of aggression in capitalising on opportunities. A case in
point is the lagging growth of Rallis vs its peers in the domestic pesticides business.
Even in exports, Rallis was the best-positioned player to capture the Indian agri
exports opportunity. However, the company lagged here in seizing the opportunity vs
other domestic players such as PI Industries and UPL.

Agri Inputs
Rallis currently trades in-line with domestic peers based on its distribution strength
and its longstanding association with Indian farmers. The companys relative
premium would not expand if its growth rates remain lower than peers.
RoEs weaker than peers: Rallis RoEs are close to median RoEs in the space, with
PI, Dhanuka, Kaveri and Monsanto India delivering better RoEs than the company.
Rallis delivering on Metahelix margins will be a key to RoE improvement.
Business well diversified but ability to grow ahead of industry growth will be
the key: Rallis has been able to diversify its business well, with ~30% revenues
flowing from the non-pesticides portfolio. However, with too many business
segments, the managements capability to grow them ahead of industry growth rates
would be a challenge.
Downgrading Rallis to SELL (Revised TP of Rs255)
Rallis is trading closer to our DCF-derived 12-month forward TP of Rs255. At current
valuations of 19x FY17 P/E, the stock prices in most of the positives including a 28%
EPS CAGR over FY15-17E aided by normalisation of Metahelix margins and weaker
base of FY15. We do not see any material upgrades to our and consensus EPS
estimates based on our channel checks and recent track record of operational
underperformance.
Rallis domestic portfolio accounts for nearly 55% of its revenues. The domestic
business has underperformed its peers over the last few years due to lack of
aggression on new innovative products (such as Applaud and Takumi which had a
differentiated proposition to farmers at the time of their launch many years back).
However, it significantly stepped up its innovation pipeline in FY15 and launched
three new products in 1HFY15. Initial feelers are that the products are not great
products though they will support growth rates (15% for FY15-F17 vs 11% over FY10-
FY14) given Ralliss strong distribution channel.
Our channel checks suggest that Rallis may feel some pressure on domestic margins,
due to some price correction for generics led by Chinese importers. We are awaiting
more clarity on this before building it into our estimates. However, even at our
current estimates, we believe the growth opportunities are adequately priced in in
current valuations. Going forward, we believe the trajectory for the stock price would
be governed by exports growth and Metahelix business performance (specifically
margin improvement).
Exhibit 18: Agri Inputs valuation summary
ADVT P/E P/B EV/EBITDA ROE CAGR (FY14-FY17)
MCap
- 6m
Company Name (USD
(USD FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E Sales EBITDA EPS
mn)
mn)
Global Agri Majors
Monsanto 56,564 6.5 20.0 17.2 15.0 7.2 6.6 5.3 12.1 11.1 10.0 36.9 42.4 44.1 4.7% 8.9% 9.2%
Dow Chemicals 54,539 8.1 16.2 16.3 13.1 3.0 2.2 2.1 9.1 8.6 7.7 16.5 14.7 18.5 0.0% 11.4% -5.6%
FMC Corp 7,991 1.2 26.1 15.8 13.3 5.2 5.1 4.0 14.2 10.4 9.3 20.2 31.0 31.0 7.7% 9.6% 27.0%
Syngenta 30,498 1.7 18.6 17.3 15.5 3.4 3.2 3.0 13.4 11.4 10.3 17.6 18.2 19.7 2.2% 3.8% 6.3%
Bayer AG 120,279 4.3 32.9 19.6 17.3 5.6 5.0 4.7 15.8 13.0 11.9 16.8 23.5 24.4 6.4% 12.7% 27.0%
BASF 85,758 4.2 15.6 15.8 14.5 2.9 2.8 2.6 8.6 8.9 8.3 18.9 17.2 17.9 1.5% 2.7% 4.3%
Domestic Agro Chemical Players
PI Industries 1,449 1.4 35.4 27.6 21.4 10.4 8.0 6.2 23.9 18.9 14.6 30.8 30.6 30.4 21.3% 26.6% 28.4%
Rallis India 752 1.3 30.7 24.0 19.0 5.9 5.1 4.3 16.9 13.6 11.0 20.8 23.3 25.2 12.9% 16.1% 19.0%
Bayer CropScience 1,997 1.3 33.2 27.7 23.2 6.0 5.0 4.1 23.2 18.8 15.8 19.1 17.0 20.0 16.9% 21.9% 25.4%
UPL Ltd 2,956 10.7 15.8 13.3 11.4 3.0 2.5 2.2 9.1 8.1 7.2 20.1 20.2 20.1 11.9% 12.8% 19.5%
Dhanuka Agritech 537 0.4 31.9 26.3 21.6 8.2 6.6 5.4 24.1 19.6 16.1 28.4 28.0 28.1 16.6% 20.3% 18.9%
Insecticides India 147 0.8 16.1 11.4 8.6 3.1 2.5 2.0 11.1 8.6 6.7 21.2 24.3 25.9 19.9% 30.2% 39.5%
Excel Crop Care 203 0.3 9.1 7.3 DNA 2.5 2.0 DNA 6.3 5.2 DNA 27.3 27.8 DNA DNA DNA DNA
Domestic Seeds Players
Kaveri Seeds 1,049 2.9 21.7 17.5 14.2 8.6 6.2 4.6 20.9 17.0 13.9 46.7 40.6 36.6 19.8% 27.7% 30.5%
Monsanto India 877 2.7 42.5 32.0 27.3 14.5 12.6 10.6 37.3 29.2 25.2 33.4 37.9 42.1 10.6% 12.9% 18.0%
Source: Company

Agri Inputs
Agri Inputs/Pharma/Consumer
Similarities and differences
Agri Inputs/Pharma/Consumer Similarities and
differences
AgrochemicalsAkin to pharma on chemistry but to consumer on importance
of distribution
We believe agri input-agrochemicals multiples should trade somewhere
between pharma and consumer staples. We acknowledge that product-related
risks in agri inputs-agrochemicals are very similar to pharma; however, regulatory
risks are lower. Also if we look at the product mix, pharma has a higher share of
generic product exports which is largely B2B whilst most of the agrochemical
companies have lower-to-zero exposure to the exports segment and are mostly B2C.
We reckon that most of the Indian companies operate on an in-licensing model for
patented molecules. Global innovators usually do this to tap a big market like India,
as only one player cannot fully capture the revenue opportunity. In addition, many
innovators do not have an existing distribution network in India. Hence, the product
risks are taken care of to a certain extent, though relationships or the ability to
procure new molecule remain the key. However, in this case, agrochemical MNCs
should get better multiples than domestic players.
In addition, brand and distribution advantages are clearly much higher in case of agri
vis-a-vis pharma, similar to staples. Creating a distribution network in rural
hinterland which is much more fragmented is difficult, similar to FMCG
companies.
Creating a brand in agri inputs space is difficult also because of limited
availability of national influencers such as television media. In case of agri
inputs, building a brand is a slow process driven by a mix of BTL activities and farmer
engagement activities.
In case of pharma and consumer staples, distributor involvement is lower because the
dealer/retailer does not play an important part in influencing the choice of the end
consumer. In case of agrochemicals, distributor/retailers play an important role.
SeedsHigh replacement risks should keep multiples lower to agrochem
In case of seeds, product replacement risks are high. In case of agrochemicals, a
company would have more than 50 products; in case of seeds, there would be one or
two major hybrids which will be driving the success for the company. Hence, their
multiples will be lower than agrochemicals. Also, given the biodiversity of Indian soil,
it is difficult for a player to become a pan-India player.
In case of seeds, word-of-mouth publicity for a particular seed variety is a key
demand driver apart from distribution and farmer engagement. Usually every hybrid
variety has a 3-4-year cycle and then the product starts losing its market share.
Exhibit 19: Comparison between agri inputs, pharma, and consumer staples
Agri Inputs - Agrochem Agri Inputs - seeds Pharma Consumer Staples
Distribution Important Less Important Less Important Important
Key Influencer Dealer, Farmer engagement Dealer, Farmer engagement Doctor TV media
Engagement with end
Medium Medium Low High
Consumer
Field Advisors, BTL activities. National Field advisors. Word of mouth is Medical representatives, National Media, BTL
Driver of Engagement
Media is limited also an important influencer Doctor incentives activities
Product obsolescence risk Medium Medium Medium Low
Product concentration risk Low High Medium Low
Somewhat low - consumption levels per Somewhat down trading
Discretionary nature of demand No No
acre go down in case of agrochemicals is possible
Exports portion Medium None High None
Longevity of earnings High Medium Medium High
Regulatory risks Medium Medium High Low
Working Capital Mid to High High High Negative WC
FY17 P/E Multiples 20x 17x -25x 17-22x 26-28x

Agri Inputs
Results Summary 3QFY15

PI Industries steady performance continues
PI continued to demonstrate superior quality execution driving sales growth of 38%,
EBITDA growth of 50%, and PAT growth of 79% for 3QFY15. PI clearly has emerged
as the best hybrid business model to capitalise on the rising specialty chemicals
exports opportunity and the underpenetrated agri inputs sector. Amidst investor
concerns of a commodity price crash on the exports side and weaker Rabi season on
the domestic side impacting near-term demand, these robust results should put to
rest concerns on slowing revenue growth for PI. We believe PI has perfected the
model in the CSM business by building strong relationships with global innovators
through flawless execution of 18 commercialised molecules, a clean record on IP
protection and manufacturing facilities of global standards on QSHE parameters. On
the domestic side, PIs strategy to focus on in-licensed molecules is driving market
share gains for the company.
For detailed results: see our note dated 12 Feb 2015
Exhibit 20: PI - 3QFY15 summary
(In Rs mn, unless otherwise
3QFY15 3QFY14 YoY (%) 2QFY15 QoQ (%) 3QFY15E % Divergence 9MFY15 9MFY14 YoY (%)
specified)
Net Revenues 5,021 3,629 38% 4,250 18% 4,771 5% 13,972 12,297 14%
Other Operating Income 29 5 472% 16 84% 16 84% 55 26 114%
Raw materials consumed 2,930 2,021 45% 2,443 20% 2,750 7% 8,054 7,214 12%
Gross Profit 2,119 1,613 31% 1,822 16% 2,037 4% 5,973 5,108 17%
Gross Margins 42% 44% -224bps 43% -67bps 43% -48bps 43% 42% 121bps
Employee expenses 335 260 29% 319 5% 330 2% 971 771 26%
Other expenses 843 726 16% 777 8% 780 8% 2,255 2,000 13%
Total Operating Expenditure 1,178 986 19% 1,096 7% 1,110 6% 3,226 2,771 16%
EBITDA 941 627 50% 726 30% 927 2% 2,747 2,337 18%
Other income 59 40 48% 55 7% 40 48% 151 78 92%
Depreciation 97 79 23% 96 1% 98 -1% 291 232 25%
Interest 36 20 79% 19 94% 18 99% 72 85 -15%
Foreign exchange (gain) / (loss) -46 33 -239% -51 -9% - - (135.6) (8.0) 1591%
PBT 914 535 71% 717 27% 851 7% 2,670 2,106 27%
Tax 292 188 55% 228 28% 305 -4% 841 720.96 17%
PAT 622 347 79% 490 27% 546 14% 1,829 1,385 32%

Agri Inputs
Rallis India weak set of results

Rallis reported a weak set of results, with consolidated sales decreasing by 3%,
adjusted EBITDA increasing by 3% and adjusted PAT decreasing by 1%. Rallis reported
two one-time charges of Rs71.1mn (Rs17.2mn charges related to the Dahej land and
Rs53.9mn for stock-related adjustments). Reported sales decreased by 3%, EBITDA
decreased by 9% and PAT decreased by 18%. The agrochemicals business (domestic
and exports) declined by 6%, given the weaker Rabi performance and market share
losses in the domestic business. The Metahelix business continued to report healthy
growth rates of ~55% driven by market share gains. The adjusted PAT numbers were
significantly below our (by 13%) and consensus estimates. Agrochemical (domestic
and exports) sales declined by 6%, suggesting a significant moderation in domestic
sales. The Metahelix business continued to do well with ~50% growth. On reported
EBITDA margins, whilst the domestic business margin saw an improvement of 50bps
YoY, overall margins were down 90bps YoY, indicating continued drag from the
Metahelix business and one-time charges due to inventory write-offs and Dahej one-
time land charges. Adjusting for the one-time charges, consolidated EBITDA margins
expanded by 100bps YoY.
For more details see our note: dated 23 Jan 2015
Exhibit 21: Rallis 3QFY15 Summary
3QFY15 3QFY14 YoY (%) 2QFY15 QoQ (%) 3QFY15E % Divergence 9MFY15 9MFY14 YoY (%)
specified)
Net Revenues 3,847 3,959 -3% 6,359 -40% 4,340 -11% 14860 14019 6%
Other Operating Income 48 48 -1% 60 -21% 51 -6% 140 132 6%
Raw materials consumed 2,047 2,342 -13% 3,905 -48% 2,578 -21% 8270 8186 1%
Gross Profit 1,848 1,666 11% 2,515 -27% 1,813 2% 6730 5965 13%
Gross Margins 48.0% 42.1% 597bps 39.5% 849bps 41.8% 625bps 45% 43% 274bps
Employee expenses 341.6 291.1 17% 309.7 10% 315 8% 980 853 15%
Other expenses 1001.6 818 22% 986.1 2% 879 14% 3438 2941 17%
Total Operating Expenditure 1,343 1,109 21% 1,296 4% 1,194 12% 4418 3794 16%
EBITDA 505 556 -9% 1,219 -59% 619 -19% 2312 2171 6%
Other income 8.6 38.5 -78% 7.7 12% 7.7 12% 48 49 -3%
Depreciation 126.1 93.6 35% 126.6 0% 129 -2% 364 271 34%
Interest 25.8 31.3 -18% 25.5 1% 26 -1% 76 104 -27%
PBT 361 470 -23% 1,075 -66% 472 -23% 1920 1845 4%
Tax 128.3 185.1 -31% 346.1 -63% 140 -8% 535 524 2%
PAT 233 285 -18% 728 -68% 332 -30% 1386 1322 5%
Adjusted PAT (After MI) 301 304 -1% 734 -59% 332 -9% 1359 1326 2%
Source: Company, Ambit estimates

Agri Inputs
Sharda Cropchem on a steady growth path

Sharda Cropchem continued to display solid execution with strong operational
delivery of sales growth of 29% and operational EBITDA margin expansion of 580bps.
Sharda continued to invest in registrations, with addition of 79 registrations in
3QFY15 and 601 more registrations in the pipeline. The top-10 molecules continued
to gain traction, contributing 64% of sales. Given a low market share base, strong
cost controls and growing generics share, Shardas management could be well ahead
of its stated revenue growth target of >20% at ~20% operational EBITDA margins.
The stock is trading at 13x FY16E consensus EPS, a 30% discount to its peers with
similar RoCE/RoEs. Click here to access our recent visit note for more details about
the company.
Solid 3Q results: Sharda reported a solid 3QFY15, with sales growth of 29% and
operational EBITDA margin expansion of 580bps. On an LTL basis, the company
reported an operational EBITDA of Rs115mn vs Rs 5mn in 3QFY14. Forex losses
accounted for a 350bps impact on EBITDA margins. The growth was led by strong
performance in NAFTA and Latin America, two key focus regions for the company.
The company continued to show a strong cost control with 20bps YoY decline in
operational costs. On YTDFY15 basis, Sharda has reported revenue growth of 44%
and operational EBITDA growth of 66%. Adverse foreign currency movements led to
PAT growth of 30%.
For more details see our note: dated 10 Feb 2015
Exhibit 22: Shardas 3QFY15 results snapshot
(In Rs mn, unless otherwise specified) 3QFY15 3QFY14 2QFY15 YoY (%) 9MFY15 9MFY14 YoY (%)
Net Revenues 1,838 1,428 2,663 28.7% 7,205 5,010 43.8%
Other Operating Income 8 0 5 NM 19 5 262.3%
Raw materials consumed 1,332 1,018 1,816 30.9% 4,880 3,391 43.9%
Gross Profit 514 410 852 25.2% 2,345 1,624 44.4%
Employee expenses 56 56 58 -0.1% 174 120 44.5%

Other expenses 408 349 426 17.0% 1148 787 45.8%
Total Operating Expenditure 1,796 1,423 2,300 26.3% 6,202 4,299 44.3%
EBITDA 49 5 369 816.5% 1,022 716 42.8%
Other income 64 61 71 5.2% 193 291 -33.6%
Depreciation 55 75 59 -27.1% 167 211 -20.9%
Interest 6 5 7 11.4% 17 9 95.2%
PBT 53 -14 373 -472.9% 1,032 787 31.1%
Tax 4.606 -13 106 -135.5% 286 221 29.4%
PAT 48 -1 267 -4143.8% 746 566 31.7%
Prior Period Adjustments -4 -18 0 -75.8% -4 -10 -56.7%
Reported PAT 52 16 267 220.4% 750 576 30.2%
Minority Interest 0 -1 2 -96.8% 1 - NM
Reported PAT after Minority Interest 52 18 265 195.0% 749 576 30.0%
Gross profit margin 27.9% 28.7% 32.0% -80 bps 32.5% 32.4% 12 bps
Exp as % of sales
Employee expenses 3.0% 3.9% 2.2% -90bps 2.4% 2.4% 1 bps
Other expenses 22.2% 24.4% 16.0% -220 bps 15.9% 15.7% 22 bps
Total Operating Expenditure 97.7% 99.6% 86.4% -190 bps 86.1% 85.8% 26 bps
EBITDA margin 2.7% 0.4% 13.8% 230 bps 14.2% 14.3% -10 bps
PBT margin 2.9% -1.0% 14.0% 390 bps 14.3% 15.7% -139 bps
PAT margin 2.6% -0.1% 10.0% 270 bps 10.4% 11.3% -95 bps
Source: Company

Agri Inputs
Insecticides India weak results post channel inventory

correction
Insecticides Indias 3QFY15 results were weak, with a sales decline of 22%. Our
channel checks earlier had suggested higher channel inventories for the companys
product. We believe channel inventory correction led to this decline.
On EBITDA, lower other expenses and better gross margins drove 8% YoY growth.
PBT declined 2% YoY on higher depreciation charges. The 3% tax rate provisioning
led to artificial PAT growth of 23%.
On a YTD basis, sales growth was at 10% whilst EBITDA growth was at 33% led by
improved gross margins (up 400bps YoY) though operating expenses were higher by
180bps YoY.
Exhibit 23: Insecticides Indias 3QFY15 results snapshot
3QFY15 3QFY14 2QFY15 YoY (%) QoQ (%) 9MFY15 9MFY14 YoY (%)
specified)
Net Revenues 1,490 1,909 4,020 -22.0% -62.9% 8,034 7,289 10.2%
Raw materials consumed 976 1,369 2,724 -28.7% -64.2% 5,428 5,209 4.2%
Gross Profit 514 540 1,296 -4.8% -60.3% 2,605 2,080 25.3%
Employee expenses 83 74 83 13.3% 0.0% 246 213 15.3%
Other expenses 221 272 786 -18.9% -71.9% 1385 1135 22.0%
Total Operating Expenditure 1,280 1,715 3,593 -25.4% -64.4% 7,058 6,557 7.6%
EBITDA 210 194 427 8.2% -50.8% 975 731 33.3%
Other income 1 0 1 100.0% 0.0% 3 1 100.0%
Depreciation 33 17 48 97.6% -30.5% 103 50 106.0%
Interest 92 90 88 1.9% 4.1% 276 239 15.6%
PBT 86 88 291 -2.1% -70.5% 599 444 34.9%
Tax 2.5 20 62.1 -87.5% -96.0% 112.3 96.3 16.6%
PAT 83 68 229 23.2% -63.6% 487 348 39.9%
Gross profit margin 34.5% 28.3% 32.2% 622 bps 226 bps 32.4% 28.5% 390 bps
Exp as % of sales
Employee expenses 5.6% 3.9% 2.1% 174 bps 352 bps 3.1% 2.9% 13 bps
Other expenses 14.8% 14.3% 19.6% 55 bps -474 bps 17.2% 15.6% 166 bps
Total Operating Expenditure 85.9% 89.8% 89.4% -393 bps -349 bps 87.9% 90.0% -210 bps
EBITDA margin 14.1% 10.2% 10.6% 393 bps 349 bps 12.1% 10.0% 210 bps
PBT margin 5.8% 4.6% 7.2% 117 bps -148 bps 7.5% 6.1% 136 bps
PAT margin 5.6% 3.5% 5.7% 205 bps -11 bps 6.1% 4.8% 129 bps
Source: Company

Agri Inputs
Dhanuka Agritech muted growth

Dhanuka announced its 3QFY15 results recently. Sales growth and EBITDA growth
was muted at 7% and 4% growth respectively in 3QFY15. On a YTD basis, Dhanuka
has been under delivering at 8% YoY growth vs 10% guidance on topline
earlier. Margins compressed due to increase in all cost heads. On a YTD basis
though, margins have expanded by 125bps, leading to EBITDA growth of 17%.
Dhanuka has a higher share of generic products vs PI and Bayer. We expect Dhanuka
to grow ahead of the industry in the medium term, with increasing share of in-
licensing revenues though we have our concerns on weak cash conversion (56%
CFO:EBITDA), unclassified loans and advances, high promoter salaries (10% of PBT),
and succession issues in the medium term.
Exhibit 24: Dhanukas 3QFY15 results snapshot
specified)
Net Revenues 1,790 1,670 2,829 7.2% -36.7% 6,349 5,865 8.2%
Other Operating Income 1 0 4 106.6% -79.1% 23 1 1651.8%
Raw materials consumed 1,169 1,051 1,769 11.2% -33.9% 4,040 3,762 7.4%
Gross Profit 622 619 1,063 276.7% 119.3% 2,332 2,105 10.8%
Employee expenses 150 142 194 6.2% -22.5% 501 436 15.0%
Other expenses 213 228 317 -6.4% -32.8% 736 730 0.9%
Total Operating Expenditure 1,533 1,421 2,281 7.9% -32.8% 5,278 4,928 7.1%
EBITDA 259 250 552 3.5% -53.1% 1,094 939 16.6%
Other income 1 19 3 -92.6% -57.6% 6 34 -81.4%
Depreciation 13 13 11 0.6% 12.0% 37 36 4.7%
Interest 6 17 6 -65.2% 0.5% 21 32 -35.6%
PBT 241 239 538 0.9% -55.1% 1,043 905 15.2%
Tax 21 26 121 -19.1% -82.3% 201 198 1.3%
PAT 220 213 417 3.4% -47.3% 842 707 19.1%
Gross profit margin 34.7% 37.1% 37.6% -23 bps -284 bps 36.7% 35.9% 85 bps
Exp as % of sales
Employee expenses 8.4% 8.5% 6.9% -10bps 154 bps 7.9% 7.4% 46 bps
Other expenses 11.9% 13.6% 11.2% -170 bps 69 bps 11.6% 12.4% -85 bps
Total Operating Expenditure 85.6% 85.1% 80.6% 50 bps 498 bps 83.1% 84.0% -89 bps
EBITDA margin 14.4% 15.0% 19.5% -50bps -506 bps 17.2% 16.0% 123 bps
PBT margin 13.5% 14.3% 19.0% -80bps -553 bps 16.4% 15.4% 99 bps
PAT margin 12.3% 12.7% 14.8% -50 bps -246 bps 13.3% 12.0% 121 bps
Source: Company

Agri Inputs
Bayer Cropscience growing leader

Bayer posted a good set of results, reporting 10%/51%/41% growth on
Sales/EBITDA/PAT. For 9MFY15, sales growth and EBITDA growth was 17% and 33%.
We reiterate our thesis that agrochemical companies with good product portfolios
(with new age innovative molecules) and strong farmer connect programmes will
continue to grow well despite the weak seasonal pattern. Bayers 10% growth in this
quarter is much better than the decline seen in case of Rallis and Monsanto India.
Many investors were concerned that Bayer India will shortchange minority
shareholders specifically on margins, as most RM/finished goods are imported from
parent entities. However, overall margin expansion of 170bps YoY will allay some of
these concerns. Margin expansion is driven by employee costs and other expenses
costs coming off due to sale of the Ankleshwar plant to a third party. Depreciation
also came off due to gross block coming off post the sale of the manufacturing
facilities. In 3Q, gross margins and other expenses interplayed with the shift in
promotional strategy and the sale of the Ankleshwar plant.
The management believes growth is driven (2x of industry average) by good price
increases and healthy innovation rates of 20-25% (revenues from products launched
in last 4 years). The company intends to launch 3-5 new products every year to keep
these innovation rates healthy. The companys pricing power is driven by superior
performance of the products. Even in generics, the company is able to create a
difference through better formulations.
Exhibit 25: Bayers 3QFY15 results snapshot
specified)
Net Revenues 6,872 6,266 12,151 9.7% -43.4% 30,747 26,203 17.3%
Other Operating Income 248 278 259 -10.8% -4.2% 790 722 9.4%
Gross Profit 2,648 2,572 4,650 3.0% -43.1% 11,016 9,425 16.9%
Employee expenses 537 549 499 -2.2% 7.6% 1694 1581 7.1%
Other expenses 1384 1540 1711 -10.1% -19.1% 4673 4334 7.8%
EBITDA 727 483 2,440 50.5% -70.2% 4,649 3,510 32.5%
Other income 173 234 277 -26.1% -37.5% 659 744 -11.4%
Depreciation 59 113 48 -47.8% 22.9% 192 539 -64.4%
Interest 9 7 8 28.6% 12.5% 24 20 20.0%
PBT 832 597 2,661 39.4% -68.7% 5,092 3,695 37.8%
Tax 282 207 900 36.2% -68.7% 1696 1262 34.4%
PAT 550 390 1,761 41.0% -68.8% 3,396 2,433 39.6%
Gross profit margin 38.5% 41.0% 38.3% -25 bps 26 bps 35.8% 36.0% -14 bps
Exp as % of sales
Employee expenses 7.8% 8.8% 4.1% -95 bps 371bps 5.5% 6.0% -52 bps
Total Operating Expenditure 93.0% 96.7% 82.1% -370 bps 1098 bps 87.4% 89.4% -191 bps
EBITDA margin 10.6% 7.7% 20.1% 287 bps -950 bps 15.1% 13.4% 172 bps
Source: Company data

Agri Inputs
UPL Ltd strong India growth

UPL reported a healthy revenue growth led by the India business (up 25% YoY).
Growth was primarily volume-driven (16%) whilst pricing growth was muted (2%
YoY). The company had translational loss of 2% on sales. The good wheat season led
to strong growth in the herbicide portfolio for India. The management has guided for
revenue growth of 12-15%, EBITDA margins of 18-19% and WC of ~105 days in
FY16.
Exhibit 26: UPLs consolidated 3QFY15 results snapshot

(In Rs mn, unless otherwise specified) 3QFY15 3QFY14 2QFY15 YoY (%) QoQ (%) 9MFY15 9MFY14 YoY (%)
Net Revenues 30,101 26,047 26,177 15.6% 15.0% 83,481 72,836 14.6%
Other Operating Income 371 422 446 -12.1% -17.0% 1,181 1,507 -21.6%
Raw materials consumed 15,413 13,244 12,948 16.4% 19.0% 41,558 37,146 11.9%
Gross Profit 15,059 13,225 13,675 13.9% 10.1% 43,104 37,197 15.9%
Employee expenses 2640 2619 2547 0.8% 3.6% 7720 7228 6.8%
Other expenses 6673 5955 6323 12.1% 5.5% 19607 16493 18.9%
Total Operating Expenditure 24,726 21,818 21,818 13.3% 13.3% 68,885 60,868 13.2%
EBITDA 5,746 4,651 4,805 23.6% 19.6% 15,777 13,475 17.1%
Other income 136 501 171 -72.9% -20.7% 465 1047 -55.6%
Depreciation 1086 1043 1092 4.0% -0.5% 3211 2875 11.7%
Interest 1381 1095 1401 26.1% -1.5% 3944 3666 7.6%
PBT 3,415 3,012 2,484 13.4% 37.5% 9,087 7,982 13.8%
Tax 598.3 521.3 461.7 14.8% 29.6% 1942.7 1781.3 9.1%
PAT 2,817 2,491 2,022 13.1% 39.3% 7,144 6,201 15.2%
Exceptional incomes/ (expenses) -184 -397 -168 6 -596
Reported PAT 2,632 2,094 1,853 25.7% 42.0% 7,150 5,605 27.6%
Gross profit margin 50.0% 50.8% 52.2% -75 bps -222 bps 51.6% 51.1% 56 bps
Exp as % of sales
Employee expenses 8.8% 10.1% 9.7% -129 bps -96 bps 9.2% 9.9% -68 bps
Other expenses 22.2% 22.9% 24.2% -69 bps -199 bps 23.5% 22.6% 84 bps
EBITDA margin 19.1% 17.9% 18.4% 123 bps 73 bps 18.9% 18.5% 40 bps
PBT margin 11.3% 11.6% 9.5% -22 bps 186 bps 10.9% 11.0% -7 bps
PAT margin 9.4% 9.6% 7.7% -21 bps 163 bps 8.6% 8.5% 5 bps
Source: Company

Agri Inputs
Kaveri Seeds management U turn on stake sale

Kaveris results were weak, with a 32% decline in sales and 5% decline in EBITDA,
which the management attributed to: (1) zero lint sales which had contributed nearly
Rs357mn sales in 3QFY14; (2) weak corn acreages which led to flat seed sales. More
importantly, the management backtracked from its earlier plan of raising about
Rs10bn-15bn through a stake sale to invest in the vegetable exports business. The
stock price had corrected nearly 25% on the news and we believe this would lead the
stock to outperform in the near term. However, note that the promoter has already
sold 8-9% of his stake over the last 18 months. We also are negative on the seeds
space for Indian players due to their low investments in R&D vs MNC peers, lack of
quality processes on hybrid development, and over-dependence on the cotton market
(Kaveris 60% revenues comes from cotton which has a historical track record of
having a new market leader every 4-5 years). The promoters hurry in diluting his
stake clearly demonstrates such risks to this business model.
Weak results attributed to loss of lint sales: Kaveris results were weak, with a
32% decline in net revenues and 5% decline in EBITDA. PAT declined by 2%. The
company maintained that it was able to maintain flat seed sales at ~Rs830mn
despite a significant decline in corn acreages due to a shift towards cotton. The
management attributed the weak results to a loss in the sales of lint (cotton fibre balls
which are a by-product in seed cultivation), resulting in loss in sale of ~Rs357mn. The
management highlighted that lint revenues were equally expensed from other
expenses, leading to zero EBITDA contribution. This year the company did not have
any lint sales, which again led to zero EBITDA contribution, but led to a decline in
sales and other expenses. EBITDA declined by 5% on an LTL basis due to flat seed
revenues (ex-lint) and higher RM + employee costs (lint sales had zero EBITDA
contribution in 3QFY14).
Promoter no longer planning to sell stake: The management stated it does not
have any plans for a stake sale anymore. It stated that it was doing a viability study
but was not much enthused about the vegetables export project anymore. As a result,
the stake sale plans are now shelved at least for some time. The management
highlighted that the information about the stake sale was given only as a
transparency measure and the promoter never had any firm plans to for a stake sale.
Cotton growth to be driven by mix of market share gains and higher density
plantation: The company has a market share of ~18% in cotton which it believes
will go up to 25% over the next three years. The management is fairly positive on
ATM seeds (which is significantly better in terms of protection for sucking pests) to
drive market share gains in Maharashtra. The company expects market volume
growth rates to benefit from the increase in current usage of 1.6 packets/acre to 2
packets/acre. The company has sold about 0.85mn packets (overall market ~48-
50mn packets) in cotton this year which is likely to reach 12.5-13.5mn packets over
the next three years. This implies volume growth of about 15% going forward driven
by market share gain and higher density plantation of cotton seeds. The
management expects RRF (herbicide tolerant gene) to commercialise by June 2016,
which will drive up realisations. Kaveri along with other seeds players are also trying
to get price hike approvals on cotton seeds from the Government which may aid
value growth.
Drought-resistant varieties in Maize and BPH-resistant varieties in Paddy to
aid market share expansion: The company is also expecting to expand its market
share in Maize from 13% going forward through the launch of drought-resistant
varieties from a low share base. This year it estimates to have gained about 100-
200bps in market share. In Hybrid paddy, the company has 6% market share and it is
expecting to gain market share driven by new product launches which will provide
better resistance against brown plant hoppers.
Cash utilisation: Kaveri currently has Rs 2.4bn cash on its books. Going forward,
the management is looking for a dividend payout of ~20%. The company intends
to have a cumulative capex of Rs1bn-1.5bn over the next three years at best and
hence it will be generating a fairly good amount of cash flows.

Agri Inputs
Exhibit 27: Kaveris 3QFY15 results snapshot

(In Rs mn, unless otherwise specified) 3QFY15 3QFY14 2QFY15 YoY (%) 9MFY15 9MFY14 YoY (%)
Net Revenues 907 1,326 2,037 -31.6% 11,213 9,719 15.4%
Raw materials consumed 305 507 1,007 -39.9% 4,195 3,554 18.0%
Gross Profit 602 819 1,030 -26.4% 7,018 6,165 13.8%
Employee expenses 73 68 90 7.4% 246 203 21.0%
Other expenses 168 368 612 -54.2% 3760 3810 -1.3%
Total Operating Expenditure 546 943 1,709 -42.1% 8,201 7,567 8.4%
EBITDA 361 382 328 -5.7% 3,012 2,152 40.0%
Other income 25 32 47 -22.0% 109 82 32.8%
Depreciation 22 43 22 -48.9% 65 119 -45.1%
Interest 1 0 1 71.9% 1 1 4.1%
PBT 363 371 352 -2.2% 3,054 2,113 44.5%
Tax 5 5.624 18 -11.1% 56 39 42.6%
PAT 358 366 334 -2.0% 2,999 2,075 44.5%
Minority interest 0 -1 1 -28.8% -2 -3 -35.4%
PAT 358 365 335 -2.0% 2,997 2,072 44.6%
Gross profit margin 66.4% 61.7% 50.6% 47 bps 62.6% 63.4% -84 bps
Exp as % of sales
Employee expenses 8.1% 5.1% 4.4% 293 bps 2.2% 2.1% 10 bps
Other expenses 18.6% 27.8% 30.1% -918 bps 33.5% 39.2% -566 bps
Total Operating Expenditure 60.2% 71.2% 83.9% -1092 bps 73.1% 77.9% -472 bps
EBITDA margin 39.8% 28.8% 16.1% 1092 bps 26.9% 22.1% 472 bps
PBT margin 40.1% 28.0% 17.3% 1205 bps 27.2% 21.7% 549 bps
PAT margin 39.5% 27.6% 16.4% 1192 bps 26.7% 21.3% 540 bps
Source: Company

Agri Inputs
Monsanto India weak corn acreages impacting

growth
Monsanto India reported weak numbers for the December quarter. The listed entity of
Monsanto has two businesses: corn seed business (60% of revenues) and glyphosate
(weedicide). The decline in YoY growth of 27% was driven by high base effect, weak
sowing for corn and falling global glyphosate prices.
EBITDA margins were down 220bps YoY due to poor operating leverage despite a
330bps jump in gross margins.
Exhibit 28: Monsantos 3QFY15 results snapshot

specified)
Net Revenues 1,333 1,829 846 -27% 58% 4,774 5,016 -5%
Other Operating Income 5 8 58 -34% -91% 117 64 81%
Raw materials consumed 396 604 408 -34% -3% 2,087 2,142 -3%
Gross Profit 943 1,234 496 -24% 90% 2,803 2,938 -5%
Gross Margins 70.7% 67.4% 58.6% 326bps 1212bps 58.7% 58.6% 16bps
Employee expenses 154 165 157 -7% -2% 458 438 5%
Other expenses 331 401 360 -17% -8% 1081 1073 1%
Total Operating Expenditure 881 1,170 925 -25% -5% 3,626 3,654 -1%
EBITDA 457 668 -21 -32% -2247% 1,264 1,426 -11%
Other income 49 41 112 21% -56% 180 97 86%
Depreciation 22 30 30 -27% -26% 79 90 -12%
Interest 1 2.2 1 -55% 0% 3.2 4.1 -22%
PBT 484 676 60 -28% 705% 1,362 1,429 -5%
Tax 0.5 24.8 108.2 -98% -100% 216.1 139.5 55%
PAT 483 651 -48 -26% -1105% 1,146 1,289 -11%
Source: Company

Agri Inputs
Zuari Agro Chemicals weak results

Zuaris results were significantly weak, with a sales decline of 8% and EBITDA decline
of 19%. Whilst the sales growth was impacted by certain logistics-related issues,
margins were impacted by higher energy charges due to higher use of diesel gensets.
The company is focusing on an acquisition-led strategy to build a pan-India presence.
In addition, it is looking at a capex of Rs15bn (funded partly by a QIP of Rs4bn).
Exhibit 29: Zuaris 3QFY15 results snapshot

Net Revenues 14,127 15,399 15,316 -8.3% -7.8% 39,738 36,885 7.7%
Other Operating Income 36 175 39 -79.6% -8.0% 121 221 -45.1%
Raw materials consumed 10,616 11,602 12,224 -8.5% -13.2% 30,870 28,769 7.3%
Gross Profit 3,547 3,973 3,131 -10.7% 13.3% 8,989 8,337 7.8%
Employee expenses 205 251 225 -18.3% -8.7% 670 629 6.5%
Other expenses 2612 2820 2093 -7.4% 24.8% 6609 6600 0.1%
EBITDA 730 902 813 -19.1% -10.2% 1,710 1,108 54.4%
Other income 62 48 63 29.7% -0.8% 173 217 -20.2%
Depreciation 43 53 29 -18.6% 45.9% 129 155 -16.8%
Interest 481 726 567 -33.8% -15.3% 1727 1858 -7.0%
PBT 269 171 279 57.0% -3.9% 27 -688 -104.0%
Tax 97.2 0 59.8 NM 62.5% 15.3 -116.8 -113.1%
PAT 171 171 220 0.2% -22.0% 12 -571 -102.1%
Exceptional incomes/ (expenses) 0 0 0 0 -640
Reported PAT 171 171 220 0.2% -22.0% 12 -1,210 -101.0%
Gross profit margin 25.1% 25.8% 20.4% -69 bps 467 bps 22.6% 22.6% 2 bps
Exp as % of sales
Employee expenses 1.5% 1.6% 1.5% -18 bps -1 bps 1.7% 1.7% -2 bps
Other expenses 18.5% 18.3% 13.7% 18 bps 482 bps 16.6% 17.9% -126 bps
Total Operating Expenditure 95.1% 95.3% 94.9% -19 bps 14 bps 96.0% 97.6% -159 bps
EBITDA margin 5.2% 5.9% 5.3% -69 bps -14 bps 4.3% 3.0% 130 bps
PBT margin 1.9% 1.1% 1.8% 79 bps 8 bps 0.1% -1.9% 193 bps
PAT margin 1.2% 1.1% 1.4% 10 bps -22 bps 0.0% -1.5% 158 bps
Source: Company

Agri Inputs
Coromandel International going through the pain

Coromandels results remained muted, with sales growth of 8% and EBITDA growth
of 3%. The sales growth was impacted by lower acreages and weak water reservoir
levels. Lower interest expenses led to an adjusted PAT growth of ~30%. EBITDA
margins were down 40bps YoY driven by higher ammonia prices, depreciating
currency, production loss at Visakhapatnam plant and change in mix due to higher
trading revenues. Sabero Organics continued its strong ramp-up, with revenue
growth of 37% YoY aided by higher exports revenues. The non-subsidy businesses
contributed to 18%/39% of revenue/EBITDA respectively.
The management noted that the demand revival in complex fertiliser is driving the
improvement in channel inventory. Margins are likely to improve going forward, with
capacity utilisation moving up to 80-85% in the future.
Exhibit 30: Coromandels 3QFY15 results snapshot

Net Revenues 29,431 27,379 34,552 7.5% -14.8% 82,650 78,221 5.7%
Other Operating Income 190 183 109 3.5% 74.4% 439 472 -7.1%
Gross Profit 6,896 7,144 8,465 -3.5% -18.5% 20,537 19,873 3.3%
Employee expenses 724 728 694 -0.5% 4.4% 2053 2041 0.6%
Other expenses 3921 4224 4305 -7.2% -8.9% 11547 11572 -0.2%
EBITDA 2,252 2,192 3,466 2.7% -35.0% 6,938 6,260 10.8%
Other income 128 126 139 1.5% -8.0% 433 418 3.6%
Depreciation 256 252 264 1.6% -3.0% 777 744 4.5%
Interest 446 608 601 -26.7% -25.8% 1657 1836 -9.8%
Exceptional items -39 0 0 -39 -126
PBT 1,638 1,458 2,741 12.4% -40.2% 4,897 3,972 23.3%
Tax 486 502 911 -3.2% -46.6% 1566 1126 39.0%
PAT 1,152 956 1,830 20.5% -37.1% 3,331 2,845 17.1%
Minority interest -55 14 31 0 88
PAT after minority interest 1207 942 1799 28.1% -32.9% 3331 2757 20.8%
Gross profit margin 23.4% 26.1% 24.5% -266 bps -107 bps 24.8% 25.4% -56 bps
Exp as % of sales
Employee expenses 2.5% 2.7% 2.0% -20 bps 45 bps 2.5% 2.6% -13 bps
Total Operating Expenditure 93.0% 92.7% 90.3% 33 bps 271 bps 92.1% 92.6% -46 bps
EBITDA margin 7.7% 8.0% 10.0% -36 bps -238 bps 8.4% 8.0% 39 bps
Source: Company

Agri Inputs
Deepak Nitrite margin expansion drives 13% EBITDA

growth
Exhibit 31: Deepaks 3QFY15 results snapshot
specified)
Net Revenues 3,020 3,338 3,597 -9.5% -16.0% 9,818 9,027 8.8%
Other Operating Income 43 46 40 -6.4% 6.8% 129 103 25.6%
Raw materials consumed 1,925 2,227 2,328 -13.6% -17.3% 6,427 5,984 7.4%
Gross Profit 1,139 1,157 1,309 -1.6% -13.0% 3,520 3,146 11.9%
Employee expenses 254 237 260 7.0% -2.2% 758 649 16.8%
Other expenses 534 610 661 -12.4% -19.2% 1754 1761 -0.4%
EBITDA 350 310 389 12.9% -9.9% 1,008 736 37.0%
Other income 3 3 3 -3.7% -7.7% 19 10.62 74.5%
Depreciation 92 75 90 22.9% 2.3% 268 217 23.7%
Interest 111 70 100 57.8% 10.4% 283 200 41.5%
PBT 150 168 201 -10.7% -25.5% 475 329 44.3%
Tax 22 54 43 -58.7% -47.7% 92.8 105 -11.2%
PAT 127 113 158 12.2% -19.4% 382 225 70.1%
Gross profit margin 37.7% 34.7% 36.4% 303 bps 130 bps 35.9% 34.9% 100 bps
Exp as % of sales
Employee expenses 8.4% 7.1% 7.2% 130 bps 119 bps 7.7% 7.2% 53 bps
Other expenses 17.7% 18.3% 18.4% -57 bps -68 bps 17.9% 19.5% -164 bps
EBITDA margin 11.6% 9.3% 10.8% 230 bps 79 10.3% 8.1% 212 bps
PBT margin 5.0% 5.0% 5.6% -7 bps -63 4.8% 3.6% 119 bps
PAT margin 4.2% 3.4% 4.4% 82bps -18 3.9% 2.5% 140 bps
Source: Company

Agri Inputs
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PI Industries
BUY
COMPANY INSIGHT PI IN EQUITY March 11, 2015
He who toils Agri Inputs
The less-appreciated drivers of PIs success in CSM are: (a) decade-plus Recommendation
perseverance/investments for building credibility with global Mcap (bn): `91/US$1.5
innovators; (b) propositions built around capabilities and not cost 6M ADV (mn): `91/US$1.5
savings; and (c) agility in long-duration contract pricing. We build in
CMP: `663
24% FY15-18 CAGR in CSM revenues, given rising order book from
TP (12 mths): `775
established clients and strong cash flows. Also, its focus on specialty
Upside (%): 17
products and improved farmer/channel connect should keep domestic
revenue growth (18% in FY15-17), ahead of peers. We marginally
upgrade our FY17 earnings but build in higher growth beyond FY17, Flags
based on our increasing conviction of PIs sustainable advantages; our Accounting: GREEN
TP of `775 implies a deserving 24x FY17E EPS. Predictability: GREEN
Earnings Momentum: GREEN
Competitive position: STRONG Changes to this position: POSITIVE
CSM business15 years of sowing, reaping has just begun
Catalyst
Primary experts suggest that PIs recent financial performance should be
considered an outcome of promoters unmatched foresight (over the last two Commissioning of Jambusar Phase 2
decades) to build a credible CSM business. The promoters have invested time in 2HFY16
and money (sales offices, samples manufacturing) along with curtailing
Revenue jump in FY16 from the
domestic generics business to address any potential conflict issues. We estimate newly launched products in domestic
a US$6bn CSM opportunity; presence of only a few credible players across the business
world in the patented domain implies a large but concentrated opportunity.
Success in commercialisation of
Domestic businesscontrarian and consistent launches non-agrochemical molecules in CSM
Whilst global MNCs and Rallis have stronger products and farmer connect, business over the next 12 months
respectively, PIs contrarian bets (Nominee Gold) and consistent differentiated
product launches (two p.a.) have created pull demand from the channel,
making it the largest domestic agrochem player. Senior managements Performance (%)
relentless involvement in product selection keeps the success rate high for PI vs 33000
620
peers. Industry sources suggest competition risk to Nominee (~12% of FY15
28000 520
revenues) is few years away whilst Keefun (vegetable fungicide cum insecticide)
420
may be as successful as Nominee/Osheen, aiding domestic growth. 23000
320
Strong growth momentum/operating leverage and heaps of cash
18000 220
Post a strong FY15, we expect 22% revenue CAGR over FY15-17, due to 24%
Feb-14
Apr-14
Jun-14
Oct-14
Dec-14
Feb-15
Aug-14
revenue CAGR for CSM segmenttwo new molecules commercialisation (p.a.)

and execution of US$0.5bn order book. We do not build in any segemental
EBITDA margin expansion but rising share of the high margin CSM segment Sensex PI (RHS)
(21% in FY15) will expand overall margins by 100bps to 21% in FY17. Prudent
capital allocationled high RoCE (27%) will further expand (to 30% in FY17) as Source: Bloomberg, Ambit Capital research
asset turns increase with manufacturing efficiencies.
Rising conviction led longer-term growth rates, upgrading yet again
We upgrade our overall revenue growth rates in FY17-20 to 21% from 20% and
EBITDA margins (~40bps) due to our increased conviction in the domestic
business (led by launches); PI currently trades at 27x FY16E EPS but our 12-
month valuation implies 2x FY17E EPS. PIs two synergetic growth pillars with
high potential make it a unique Indian agrochem play whilst its peers are
struggling to execute effectively. Key man risk is a cause for concern.
Key financials
Y/E March FY13 FY14 FY15E FY16E FY17E
Operating Income (` mn) 11,514 15,955 19,214 23,280 28,470 Analyst Details
EBITDA (` mn) 1,826 2,910 3,794 4,738 5,908
Ritesh Gupta, CFA
EBITDA margin (%) 15.9 18.2 19.7 20.4 20.8
+91 22 3043 3242
EPS (`) 7.6 15.0 19.2 24.7 31.8
riteshgupta@ambitcapital.com
RoCE 16.2 23.9 26.5 28.1 29.5
P/E (x) 87.2 44.1 34.6 26.9 20.9
PI Industries
PI Industries P&L account (` mn)

Matrix FY14 FY15E FY16E
PI is a leading agrochemicals company in India with two lines of
Net revenues 15,955 19,214 23,280 business: (1) domestic agrochemicals 40% of revenues (2) custom
EBITDA 2,910 3,794 4,738 synthesis and manufacturing (CSM) business 60% of revenues.
Under the custom synthesis business, the company offers process
Depreciation 316 394 473 research, analytical development, scale-up and large-scale
Interest expense 139 136 98 manufacturing needs of agrochemical giants and other leading global
Adjusted PBT 2,613 3,437 4,358 innovators. In the domestic business, it has been focusing on niche in-
licensed molecules which are patented or off-patented. PIs domestic
Tax 733 997 1,220 business has a strong marketing and distribution network that covers
Adjusted net profit 1,912 2,441 3,138 more than 35,000 retail points and 8,000 distributors/direct dealers
Reported net profit 1,880 2,441 3,138 across all major agricultural areas of India.
Profit and Loss PI has three formulation units and six multiproduct plants across
Ratios manufacturing sites at Panoli (near Ankleshwar) and Jambusar (near
EBITDA Margin (%) 18.2% 19.7% 20.4% Bharuch) in Gujarat and Jammu in J&K. It is also building two more
Net profit margin manufacturing plants in the Jambusar facility.
12.0% 12.7% 13.5%
(%)
EV/ EBITDA (x) 31.3 23.8 19.1
P/E on adjusted
44.1 34.6 26.9
basis (x)
EV/Sales (x) 5.7 4.7 3.9
PI Industries Cash Flows (` mn) PI Industries Balance Sheet (` mn)

Matrix FY14 FY15E FY16E Matrix FY14 FY15E FY16E
PBT 2,613 3,437 4,358 Total Assets 13,084 15,488 18,148
Depreciation 316 394 473 Fixed Assets 5,692 6,798 7,874
Tax (743) (997) (1,220) Current Assets 7,388 8,685 10,269
Net Working Capital (81) (562) (510) Investments 5 5 5
CFO 2,188 2,555 3,086 Total Liabilities 13,084 15,487 18,148
Capital Expenditure (640) (1,500) (1,550) Total networth 6,945 8,913 11,582
Interest received 138 174 191 Total debt 1,223 1,223 223
CFI (502) (1,326) (1,359) Current liabilities 4,480 4,914 5,906
Issuance of Equity (6) (82) (0) Deferred tax liability 437 437 437
Inc/Dec in Balance Sheet ratios
(1,097) - (1,000)
Borrowings
RoCE 24 26 28
Net Dividends (272) (390) (468)
RoE 31 31 31
Interest paid (115) (136) (98)
Gross Debt/Equity (x) 0.2 0.1 0.0
CFF (1,451) (608) (1,566)
Net debt (cash)/ Eq
Net change in cash 236 620 161 0.1 0.0 (0.1)
(x)
Closing cash
1,548 1,055 1,536 P/B (x) 13.0 10.1 7.8
balance
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
RoCE trend (%) Revenue growth trend (%)
Domestic International CSM Growth (RHS)

24
20,000 43%
20
18 16,000 39%
17 16 36%
14 33%
12,000 31%
29%
7 8,000
25%
5 5 22% 22%
4,000
17%
0 15%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY08 FY09 FY10 FY11 FY12 FY13 FY14

PI Industries
Domestic business led aptly by in-licensed

molecules
Whilst global MNCs and Rallis have stronger product capabilities and farmer connect,
respectively, PIs contrarian bets (Nominee Gold) and consistent differentiated
product launches (two p.a.) have created pull demand from the channel, making it
the largest domestic agrochem player. Senior managements continuous/focused
involvement at all stages of product selection keeps PIs success rate high vis--vis
peers. Industry sources suggest that competition risk to Nominee Gold (~12% of
overall revenues) is a few years away whilst its new launches such as Keefun
(vegetable insecticide cum fungicide) may be as successful as Nominee/Osheen,
adding a longer kicker to domestic growth.
Exhibit 1: Domestic business growth rates
45% 40%
40%
35%
29%
30%
25%
20% 18% 18%
16%
15% 12%
10%
10% 6%
5% 2%
0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
In-licensing approach paying dividends

PIs domestic business (40% share) has a differentiated approach of in-licensing new
molecules from global innovators, thus providing it with superior growth rates, better
margins, and increased pull effect for its products. In the domestic business, it
introduced two new products, MELSA and PIMIX in FY14, and one product, KEEFUN in
3QFY15.
Our channel checks suggest that Nominee Gold (>30% of domestic sales) is growing
well, driven by improving adoption of direct seeded rice and growing adoption of
herbicides. We believe risk of generics for Nominee Gold is a few years away given
the recent restrictions by the Gujarat High Court and new competitive launches will
also take time to build traction with farmers. In addition, our channel checks suggest
PI only makes nearly 40% gross margin on the product, and hence we believe that
Nominee Gold has not been a materially big driver for the companys overall
margins, and the launch of generics would be a big risk for the companys margins.
Osheen (rice insecticide) has also been growing handsomely, with >25% growth seen
over FY15. As per our channel checks, the recently launched insecticide with
fungicidal properties, KEEFUN (Tolfene Pyride), is also likely to do quite well. The
product has both insecticidal and fungicidal properties (as the name denotes
Keetnashak or insecticides and fungicides) on wide varieties of fruits and vegetables.
Fruits and vegetables account for nearly 20% of agrochemicals demand now. MELSA
also had a good season and is gaining traction.
Exhibit 2: PI has been an outperformer on domestic growth rates vs its peers over the
last four years (` mn)
FY10 FY11 FY12 FY13 FY14 4 YR CAGR 2 YR CAGR
Rallis Domestic 7,323* 8,421 8,181 8,835 10,161 13%* 11%
PI 4,140 5,800 6,133 6,869 8,860 21% 20%
Dhanuka 4,456 5,412 5,762 6,464 8,291 17% 20%
Bayer Domestic 12,629 17,247 18,841 21,826 26,743 21% 19%
Actives 1,029 3,992 4,634 5,543 6,292 57% 17%
Formulation 11,599 13,255 14,207 16,283 20,450 15% 20%
Source: Ambit Capital research, Company annual reports. Note: * We have adjusted for Rs1bn of sales loss in
FY12 due to discontinuation of Red triangle products for calculating CAGR

PI Industries
Exhibit 3: It retained its leadership in FY15, as evident from the nine-month results
reported so far
20% The Nominee Gold generics

17% 18%
18%
matter is sub judice. We have built
16% a strong brand and quality of the
16%
product is well established. It
14%
wouldnt be an easy task for
12% 10% someone to come and build his
10% 8% 8% position to start impacting
8%
Nominee Gold.
6%
4% 2%
2% Rajnish Sarna, ED, PI
0% Industries
Cropcare India
separately for quarterly results.
Management outlook for domestic business remains

bullish
Here the key takeaways from the management commentary in the recent concall:
KeeFun expected to be on a differentiated positioning: KeeFun (Tolfene Pyrad)
is focused on the vegetables segment. The product is being expanded to other crops
as well. The product acts as a Keetnashak (insecticide) and fungicide. The
management remains fairly confident on the future demand for the product.
New product launch in 4QFY15/1QFY16: In 4QFY15, the management expects
one more registration subject to regulatory approval. The management noted that it
has a rich pipeline of ~7-8 products. The management expects 1-2 products to be
launched every year which will support domestic growth rates going forward.
Focus on market development and farmer initiatives: The management believes
it has been taking various initiatives related to market development and farmer
connect, which are equally important drivers for growth as new product launches.
4Q growth to be healthy partly aided by lower base: Growth in 3Q was driven
by in-licensed products launched in the last few years. The company has benefited
from a lower base in 2HFY14. The management remains confident of delivering 15-
20% growth in 4Q.
Domestic revenue growth in FY16 is likely to be 15-20%, aided by new product
launches and continued healthy performance of existing molecules.

PI Industries
CRAMS opportunity to be fairly large

Facing compliance, cost, and capacity issues, global agrochemical innovators are Global companies think that given
looking to outsource their manufacturing processes to India. However, unlike the the expertise, technology, logistics,
pharma sector, players such as PI which can deliver on innovators quality and safety location, raw materials etc., they
parameters are limited. In comparison with the agrochem manufacturing outsourcing will make the product X in e.g.
market size of ~US$5bn, PIs current revenues of ~US$200mn pa are miniscule. We India rather than say country X.
build in achievable 25% FY15-18 CAGR in CSM revenues due to its rising order book, Indian plants of many MNCs are
availability of reinvestment capital and established clients. now exclusively supplying products
for the worldwide markets of
Growing demand for specialty chemicals globally
MNCs, and lot of investments have
Specialty chemicals are globally growing at early double-digit growth rates driven by happened. I see many
new molecule discovery, adoption of new usages, and rising demand from Asia. PI opportunities here for Indian
has a presence only in agrochemicals currently; however, we believe with its Companies. As it has happened in
adherence to global quality standards, flawless execution record, and experience of many industries like Pharma, Agro-
commercialising >18 molecules so far, the company is well set to spread its wings to chemicals MNCs are also looking
other sub-segments of specialty chemicals. Its JV with Sony Corporation, Japan, on to outsource their key
imaging chemicals is one such opportunity. intermediates and raw materials.
Even in agrochemicals, PI has significant room to drive market share gains. Out of That's where India has a good
the US$50bn agrochemicals market globally, manufacturing should command 25% opportunity.
of the overall value chain. Nearly half of the market is patented or proprietary off-
patent, implying a market size of ~US$25bn. This in turn implies a ~US$5bn
manufacturing opportunity for PI vs its current size of just under US$200mn in the Salil Singhal, MD, PI
CSM business. Industries
Rising footprint of India in global manufacturing services specifically in
chemicals Given the small share of
We believe India is gaining prominence in manufacturing services for higher outsourcing, we do not see much
complexity chemical molecules. Rising wage inflation, cost of environmental of a problem due to falling
compliance and appreciating RMB in China are making Indias cost proposition commodity prices. Many of
incrementally attractive. In addition, in our conversations with innovators, we find companys molecules are new
that incrementally they are more comfortable with Indian players in molecules where products which arent likely to be
IP violation concerns are high. In addition, chemical SEZs such as Dahej, which impacted by slowdown. Usually
provide tax incentive along with relatively world-class environmental compliance generics will face more heat from
standards at lower costs, are encouraging manufactured chemicals exports. this slowdown.
Well placed to benefit from both these headwinds
We believe PI is well placed to benefit from these two tailwinds, given its significant Rajnish Sarna, ED, PI
experience in the CSM business (advantage of starting quite early in 1995). PI has the Industries
ability to maneuver faster client turnaround without significant competitive costing
and without any compromise on margins. PIs 2Q order book of US$520mn (3.5x
FY14 revenues) clearly provides strong visibility on the future growth in the CSM
business. We believe PI should be seen as a manufacturing services provider where
the key drivers are its ability to manage client relationship, dig deeper and grow the
client accounts, and enter new technologies/chemistries/application areas. Above all,
it has strong project management skills rather than just the depth of R&D capabilities.
Exhibit 4: Current order book (LHS) and revenues to the last 12-month trailing
revenue ratio (RHS)
550 520 4
4
500 4
3
450 435 3.4 3
3.0 395 3
400 2.8 3
365
3
2.6 334 2.6
350 2
305 307 2.4 2.4 2
300 2
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Source: Company

PI Industries
Primary data checks suggest unmatched

execution
The less-appreciated drivers of PIs success in CSM are: (a) decade-plus
perseverance/investments for building credibility with global innovators; (b)
propositions built around capabilities/integrity and not cost savings; and (c) agility in
long-duration contract pricing. Primary experts across the value chain, competition
and ex/present stakeholders suggest that PIs recent financial performance should be
considered in the light of promoters unmatched foresight (over last two decades) to
build a credible CSM business. The promoters have invested time and money (sales
offices, samples manufacturing) along with curtailing the domestic generics business
to address any potential conflict issues. We estimate a US$6bn CSM opportunity; the
presence of only a few (not even dozen) credible players across the world in patented
domain implies a large but concentrated opportunity; PI is looking to broad base this
by focusing on other specialty chemicals.
High-quality management and Board steering high-quality execution and in

turn growth
Our channel checks clearly suggest that PIs strong growth trajectory in the domestic
and CSM business is to be credited to the right choices made by the management
over the years at various inflection points such as: (1) the management decided to
start on the CSM journey in 1995 and continue the business for 10 years without
material progress, (2) moving out of reverse engineered products in 2000 to avoid
any conflict of interest with innovators, and (3) moving to an in-licensing strategy,
leading to much superior product launches and capitalising on strong relationship
with Japanese innovators.
Other right decisions include: (1) getting the pricing right in the CSM business, which
is critical for key client wins, (2) investing in strong development and GLP certified
laboratories in a city like Udaipur, (3) taking a call on products such as Nominee
Gold (when it was a failure with the parent and many other leading domestic players
had exercised their chance of refusal). These softer nuances speak highly of the
capabilities of the management team to expand the franchise at healthy growth rates
over the next 8-10 years.

PI Industries
The exhibit below highlights the key takeaways from a few of our primary data checks
from various stakeholders.
Exhibit 5: Secret sauce of PIs success lies in management execution
Person Comments
Salil and Mayank Singhal both are quite capable leaders. Mayank (the son) has been leading the business for quite
some time and has an extreme eye for detail. He knows his numbers and can rip apart any sales officer with his
analytical sharpness. Some of the new client additions, project execution of the state-of-art Jambusar plant, the
beautiful Gurgaon office are all under his execution. I think of Mayank as a worthy and capable successor to Mr.
Salil.
PI has dealt with the loss of certain key managerial resources, such as Anurag Surana (who was quite solid on the
Technical side despite being a commerce grad) and key R&D head (who was ex-Ranbaxy) over last 3-4 years, quite
Former senior executive with
well.
the company
PI has added quite a few molecules over the last few years and hence shows the CSM business is in a good
momentum.
A key success parameter for PI has been the investments in its Japan office. It has an office with just 5-6 people but
they are all very experienced sales guys and are a key reason for PIs strong relationships with the Japanese.
They havent typically cut corners on cost wherever required. And hence the plants are quite world standard. One
should see their plant to see and understand their capabilities.
New generation of leadership (from promoters) is extremely competent. They now have 5-7 years of running the
show.
PI is a very professionally managed company. Independent directors are very participative and they have lots of
inputs. Its a very formally structured board. The Audit Committee is extremely demanding.
Another former senior 3Cs - Compliance, cost, and capacity are the three important pillars of manufacturing outsourcing; PI scores well on
executive with the company all these parameters.
PI never focused on dirty chemistry; 100% of manufacturing capacities are occupied from innovators (capacity)
75% of molecules they make are still patented. They are targeting premium products and strategic products.
The management realised that generics would then be under conflict with the contract manufacturing. Hence, they
stopped registering new products under generics. Their last product was in 1996 which is a huge commitment.
PI has the ability to get the costing right. Their knowledge of domestic agrochemical business helps them in coming
up with the right costing quotes for the enquiring clients. Their office in China and Japan also aid them in getting
their pricing right. Getting the pricing right is important to keep the profitability right while not impacting the client
A domestic competitor wins.
PI has been always prudent in judging the revenue potential of a new molecule (under CSM business) and as a
result has been conservative on new capacity addition as well as their quotations on costs.
An international competitor We sometimes say no to certain projects because we couldnt ascertain the pricing rightly.
PI has carefully built a solid domestic portfolio. PI has managed its relationships with Japanese innovators quite well.
Another domestic competitor
Keefun would be a likely blockbuster.
Osheen registered 50% growth this year. Melsa is also doing quite well. PIs portfolio is relatively small but very
A distributor
successful.
We do not do anything extraordinary. Whatever we do, we do it with integrity, transparency and with an
Salil Singhal, MD, PI Industries
understanding of customer needs. This is no special mantra. If you understand the customer needs, and work in a
transparent manner with integrity, business will follow. And this is true for any business.

PI Industries
Financial assumptions
Exhibit 6: Financial assumptions
Particulars Change (%)
FY14 FY15E FY16E FY17E Comment
(in ` mn unless mentioned) FY15E FY16E FY17E
We expect domestic growth rates to remain ahead
Domestic Business 8,860 10,277 12,127 14,310 16% 18% 18% of industry growth rates driven by new product
launches and scale up of existing products
International business would grow well at >20%
growth rates driven by strong order book of
International Business 9,771 11,725 14,421 18,027 20% 23% 25%
US$520mn and commercialisation of new
molecules
Financials
Growth rates to be aided by healthy growth in
Net Sales 15,955 19,214 23,280 28,470 20% 21% 22%
both the domestic and CSM business
Adjusted EBITDA 2,910 3,794 4,738 5,908 30% 25% 25%
EBITDA margins to scale up driven by improving
Adjusted EBITDA margin (%) 18.2 19.7 20.4 20.8 150 bps 60 bps 40 bps
segment mix and operating leverage
Higher depreciation in FY16 and FY17 due to new
Depreciation 316 394 473 519 25% 20% 10%
capacity addition
Interest cost to gradually go down driven by
Interest 139 136 98 58 -3% -28% -41% decreasing debt; the company turned net cash in
1HFY15
Healthy PAT growth aided by improved margins
PAT 1,912 2,441 3,138 4,045 28% 29% 29% and lower tax rates due to tax exemption at the
Jambusar facility
Pat margin (%) 12.0 12.7 13.5 14.2 70 bps 80 bps 70 bps
Cash Flow Parameters
We conservatively build in higher working capital
CFO 2,188 2,555 3,086 3,949 17% 21% 28%
days in FY15 due to a weak monsoon year
Capex in FY15 and FY16 for new capacity addition
Capex (640) (1,500) (1,550) (200) 134% 3% -87%
in Jambusar; we assume similar capex for FY17
FCF 1,548 1,055 1,536 3,749 -32% 46% 144% FCF remains healthy
Turnover Ratios
Cash Conversion Cycle 41 42 39 37 2% -7% -5%
We do not build in any improvement in asset
Gross Block Turnover 2.5 2.5 2.6 2.9 3% 1% 12%
turnover due to new capacity addition in FY16
Capital Employed Turnover 0.5 0.5 0.5 0.5 -4% -2% -1%
Profitability Ratios
RoCE expansion to continue driven by improving
RoCE 23.9 26.5 28.1 29.5 260 bps 170 bps 140 bps
margins
RoE 31.2 30.8 30.6 30.4 -40 bps -20 bps -20 bps RoEs likely to remain healthy at >30%
RoIC 24.8 28.7 31.3 36.9 390 bps 250 bps 560 bps ROICs will move up sharply
Exhibit 7: Earnings revision

Particulars (in ` mn unless New Old Change (%)
mentioned otherwise) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
Domestic Business 10,277 12,127 14,310 10,277 12,127 14,189 0% 0% 1%
International Business 11,725 14,421 18,027 11,725 14,304 17,737 0% 1% 2%
Financials
Net Sales 19,214 23,280 28,470 19,214 23,177 28,110 0% 0% 1%
Adjusted EBITDA 3,794 4,738 5,908 3,794 4,710 5,777 0% 1% 2%
Adjusted EBITDA margin (%) 19.7 20.4 20.8 19.7 20.3 20.5
Depreciation 394 473 519 394 473 527 0% 0% -1%
Interest 136 98 58 136 98 58 0% 0% 0%
PAT 2,441 3,138 4,045 2,441 3,118 3,943 0% 1% 3%
Pat margin (%) 12.7 13.5 14.2 12.7 13.5 14.0
Source: Company

PI Industries
Sustainable multiples; industry-leading

growth
The stock is trading at 21x FY17E EPS, in line with Dhanuka and Rallis India,
despite its superior growth trajectory and stronger competitive positioning.
We believe PIs relatively lower share of domestic brand/distribution-led
earnings is offset by its higher RoEs, superior growth and relatively more
niche CSM business. The stock is trading at a 10% discount to Bayer, given
Bayers strong parentage which gives it a sustainable product advantage
against PI.
We prefer a DCF-based valuation for PI Industries, because we believe that this is the
best way to value a company that is relatively asset-intensive but has a high-growth
trajectory in large potential market/opportunities. Our 12-month forward DCF-based
valuation of `775 implies 24x FY17E EPS. Key risks include slowdown in CSM
revenues and higher competition for Nominee Gold.
DCF methodology
We value PI Industries using a DCF methodology with a WACC of 15%. Key things to
look into PIs DCF model are revenue growth of the international business, working
capital intensity, gross asset turnover, and EBITDA margins.
We have defined growth rates in two phases: For FY14-18 (phase 1) we assume
active growth rates, and we gradually fade away the growth rates from FY18 to FY26
(phase 2). FY26 onwards we assume 5% growth rates.
Revenue growth rates
Phase 1 (FY14-18): We assume revenue CAGR of 21% over FY14-18 driven by 17%
(earlier 16%) growth rates (vs 22% over FY10-FY14) in the India business and 23%
growth rate in the export-led CSM business (vs 48% in FY10-14). Post the new
capacity addition in FY16, we believe there might be some upside in our CSM
business revenue growth estimate.
Phase 2 (FY18-26): We assume revenue CAGR of 18% (earlier 15%) over FY18-26
with average domestic business growth rate of 15% (earlier 13%) and CSM business
growth rate of 20% (earlier 17%). At our assumed growth rates, the CSM businesses
will just triple its market share in Global CSM market from 0.2% to 0.6% over FY14-
26. Our assumed domestic rate is also in line with industry growth rates for this
phase.
Phase 3 (FY26 onwards): We assume terminal growth rate of 5%. Given lower
penetration of agrochemicals (25%) and even further consumption (in terms of value),
we believe 5% growth rates are very conservative.
Exhibit 8: Revenue growth rates
India Business Growth (%) CSM Growth (%) Overall Growth (%)
60%
50%
40%
30%
20%
10%
0%
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26

PI Industries
EBITDA margin improvement

Phase 1 (FY14-18): We assume margin improvement of 380bps from 18.2% in FY14
to 22% in FY18. We believe with business gaining scale and other process
improvement projects, we would see some leverage over fixed costs. The key drivers
are: (1) the positive mix impact from the CSM business which is 250-300bps higher
than the domestic business at the EBITDA margin level, (2) rising share of in-licensed
molecules will drive up domestic business margins, (3) Improving mix within the CSM
business due to a comfortable order book level and due to the management saying
no to less-profitable projects. We draw comfort from the fact that management has
been guiding for 20% margins in FY15 itself, after more than doubling its margins
from 8.6% to 18.2% in FY08-14.
Phase 2 (FY18-26): We assume margins to expand from 22% in FY18 to 26.5% by
FY26 driven by the reasons highlighted above. As PI scales up its business and
improves its process efficiency and starts taking up more complex projects in the CSM
business, there might be some further upside to our margin estimates. Some of its
pharma peers such as Divis Labs generate EBITDA margins of ~40%.
Phase 3 (FY26 onwards): We assume margins to remain stable at 26.5%.
Exhibit 9: We expect EBITDA margins to gradually stabilise Exhibit 10: We assume working capital days would decline
around 26% from 41 days in FY14 to 37 days in FY17 due to
improvement in receivable days from rising share of the
CSM business
90
26 26 27
24 25 25 80
23
22 23 70
20 20 21 60
18
50
40
30
FY14
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
FY26E
Working Capital Days Inventory Days
Receivable Days Payable Days
FY14 FY16E FY18E FY20E FY22E FY24E FY26E

PI Industries
Gross asset turnover and capex

We expect gross asset turns to improve marginally from 2.5x in FY14 to 3.2x by FY18
driven by improvement in product mix and process improvement projects. We expect
operating cash flows to take care of future capex needs. Free cash flows will rise, as
incremental capex continues to become a smaller part of the existing gross block.
On long term basis, as domestic growth rates and CSM business growth rates
converge we expect gross block turnover to improve further beyond FY20.
Exhibit 11: Capex will be funded by internal accruals (` mn)
Capex OCF FCF Gross Asset Turns (RHS)
30,000 4.5
25,000 4.0
20,000 3.5
3.0
15,000
2.5
10,000
2.0
5,000
1.5
- 1.0
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
FY25E
FY26E
FY14
(5,000) 0.5
(10,000) -
Terminal growth rate of 5%: We have taken a terminal growth rate of 5% for the
company post FY26 which is conservative, in our opinion. PIs revenues have never
declined on a YoY basis in the last 15 years and we do not think agrochemicals
penetration will reach a level that will pull PIs growth lower to 5%.
WACC of 15%: We assume Cost of Equity of 15%. Our WACC comes at 15% in the
absence of any debt. Our 12-month DCF-based valuation of ` 775/share implies
23.5x FY17E EPS estimates.
Exhibit 12: PI Industries 12-month forward DCF valuation summary (` mn)
Parameter Value
Total PV of free cash flow (a) 43,986
PV of terminal value (b) 61,795
EV (a) + (b) 105,782
Net debt 165
Equity value 105,617
No. of shares 136.1
Implied share price (`) 776
Current share price 663
Upside 17%
Exhibit 13: Sensitivity analysis of TP to terminal growth and WACC estimates

WACC
13.0% 14.0% 15.0% 16.0% 17.0%
3.0% 890 781 693 620 558
Growth rate
Terminal
4.0% 954 830 731 649 581

5.0% 1,035 890 776 684 609
6.0% 1,139 965 831 726 641
7.0% 1,278 1,061 900 777 680

PI Industries
Cross-cycle valuation: Premium to historical valuations

justified
PI Industries stock along with other major agrochemical peers has seen a significant
re-rating over the last few years. The stock is trading near its all-time high on one-
year forward P/E and EV/EBITDA multiples given its steady performance over the last
few years. We believe such premium valuations are justified due to the improved
outlook for the agri inputs space in India and growing competitiveness of Indian
companies for chemical intermediates exports.
We believe a comparison of the three-year historical cross-cycle valuations can be
deceiving. Over the last six years, PI has gradually improved its RoCE driven by
superior margin expansion and improved asset turnover. It delivered healthy revenue
growth of 28% and profit growth of 66% over the last six years. Thus, PIs rerating of
P/E and EV/EBITDA multiples is justified, in our opinion. We believe there is further
potential for a rerating underpinned by strong revenue CAGR of 22% and profit
CAGR of 29% (on a large base) in FY15-17, which will generate sufficient operating
cash flow to fund capital expenditure and still generate a healthy free cash flow.
Why will current multiples sustained/expand?

Over FY12-15, PIs P/E multiple expanded to 27x one-forward from 6x, due to the
improvement in both the business but more importantly due to the difficult-to-
build CSM business (which is a US$6bn opportunity). Alongside rising revenue
growth rates, margins expanded, cash flow improved and the company was able
to de-lever despite continuing but modular capex needs of CSM business. All this
resulted in post-tax RoCE increasing to 27% in FY15 from 17% in FY10.
We expect RoCE to further increase to 33% in FY17E, more importantly from
rising gross block turnover and marginal expansion in EBIT margins. The CSM
business will be the key driver of this RoCE expansion, as the large opportunity,
established credibility and limited competition will provide enough re-investment
opportunities of the large cash flows. Availability of reinvestment capital and
opportunity are they key factors for sustenance/expansion of multiples.
In an industry where not many companies have established a credible, fast-
growing and simultaneously cash-generating domestic or exports business, PI has
established that it will focus on both the business contrarily for credible
competitive advantagesquality and not at the cost for exports; differentiated
branded products and not generic for local markets.
Exhibit 14: One-year forward P/E Exhibit 15: One-year forward EV/EBITDA
30
25
25
20
20
15 15
10 10
5 5
- -
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
Nov-11
Mar-12
Jul-12
Nov-12
Mar-13
Jul-13
Nov-13
Mar-14
Jul-14
Nov-14
Mar-15
One-yr fwd P/E 5-yr avg P/E One-yr fwd EV/EBITDA 5-yr avg EV/EBITDA

PI Industries
Key catalysts
Commissioning of Jambusar Phase 2 in 2HFY16
PI is nearly fully utilising its existing facilities in Jambusar. The commissioning of two
plants under phase 2 at Jambusar will help the company drive the new growth phase
under the CSM business. We expect the CSM business to benefit, with 22% YoY
growth in 2HFY16 and 24% YoY growth in FY17.
Success of newly launched products in domestic business
Further scale-up of Osheen or other new launches such as Keefun would be a key
driver for future earnings and further market share gains by PI Industries. The
company is also launching an in-licensed broad-spectrum insecticide in the current
quarter, which is a 9(3) registration. Our current estimates of 17% FY15-17 revenue
CAGR for domestic agrochemicals would have upside risks if any of these products
shows a healthy traction.
Successful diversification to non-agrochemical molecules in CSM business
PI has so far commercialised 18 molecules, all of which are intermediates or AIs for
agrochemicals. We believe given PIs expertise on chemistry and process engineering,
PI should be able to expand into other fine chemicals as well. PI currently has ~30%
product pipeline in the CSM business from non-agrochemicals; however, it has not
yet commercialised any molecule. Any successes on this will clearly increase the
addressable market for PI. We would expect this catalyst to play out over the next 1-2
years.
Key risks
Under-utilisation of new capacities may drag margins: PI is setting up two new
plants in 2HFY16; under-utilisation could adversely impact EBITDA margins.
However, the company has a strong order book of US$520mn and current capacities
are fully utilised. We assign a low probability of under-utilisation for more than 1-2
quarters. We expect 2HFY16 margins to largely remain unaffected.
Slowdown in global agriculture input markets: Weak commodity prices, climate
changes and lower pest incidence may lead to lower agrochemicals demand globally
and in India, which can impact both the CSM and domestic businesses.
Other risks: Regulatory changes in key markets such as India, Russia/CIS, Africa,
Latin America and the US could adversely affect profitability. Quality deficiency
concerns in the CSM business, plant closure due to accidents, and INR appreciation
against USD are few other risks.
FLAGS
PI scores well on most accounting parameters and does better than its peers on most
parameters.
Exhibit 16: Explanation for the flags on the first page
Segment Score Comments
On our forensic accounting screener of 16 agrochemicals and seeds stocks, PI
Accounting GREEN ranks in the top quartile due to high CFO/EBITDA (90% conversion ratio), low
audit fees and no material unclassified loans or contingent liabilities.
PIs management has been guiding conservatively and has mostly delivery
Predictability GREEN
better than expectations.
Earnings
GREEN Consensus EPS estimates recently saw upward revisions post the 3Q results.
momentum
Source: Company, Bloomberg, Ambit Capital research

PI Industries
Exhibit 17: Ambit vs Consensus (` mn)

Sales Ambit Consensus Deviation
FY15E 19,214 18,878 1.8%
Our sales estimates are
FY16E 23,280 22,922 1.6%
marginally ahead of consensus
FY17E 28,470 27,992 1.7%
Reported EBITDA
FY15E 3,794 3,649 4.0%
FY16E 4,738 4,539 4.4%
FY17E 5,908 5,671 4.2%
Reported EBITDA margin
FY15E 19.7% 19.3% 0.4%
We build in margins 40-60bps
FY16E 20.4% 19.8% 0.6% ahead of consensus estimates
due to operating leverage
FY17E 20.8% 20.3% 0.5%
Reported PAT
FY15E 2,441 2,384 2.4%
We expect PIs tax rates to
FY16E 3,138 3,044 3.1% benefit from higher contribution
from Jambusar SEZ in FY17
FY17E 4,045 3,795 6.6%
Source: Company reports, Consensus, Ambit Capital research

PI Industries
Income statement Summary

Year to March (` mn) FY13 FY14 FY15E FY16E FY17E
Net Sales 11,514 15,955 19,214 23,280 28,470
% growth 31.0% 38.6% 20.4% 21.2% 22.3%
Operating expenditure 9,688 13,045 15,421 18,541 22,562
EBITDA 1,826 2,910 3,794 4,738 5,908
% growth 26.0% 59.4% 30.4% 24.9% 24.7%
Depreciation 220 316 394 473 519
EBIT 1,606 2,595 3,400 4,265 5,389
Interest expenditure 238 139 136 98 58
Non-operating income 82 158 174 191 210
Adjusted PBT 1,450 2,613 3,437 4,358 5,541
Tax 477 733 997 1,220 1,496
Adjusted PAT 974 1,912 2,441 3,138 4,045
% growth 19.7% 96.2% 27.6% 28.6% 28.9%
Extraordinary income/ (expense) (1) (44) - - -
Reported PAT after minority interest 973 1,880 2,441 3,138 4,045
Balance Sheet Summary

Shareholders' equity 135 136 136 136 136
Reserves and surpluses 5,182 6,809 8,777 11,446 14,867
Total net worth 5,317 6,945 8,913 11,582 15,003
Debt 2,172 1,223 1,223 223 (0)
Deferred tax liability 483 437 437 437 437
Total liabilities 7,972 8,605 10,573 12,242 15,439
Gross block 6,178 6,829 8,329 9,879 10,079
Net block 4,781 5,267 6,373 7,449 7,131
CWIP 605 425 425 425 425
Investments (non-current) 5 5 5 5 5
Cash & cash equivalents 161 438 1,058 1,219 4,272
Debtors 2,625 2,568 3,106 3,635 4,290
Inventory 2,418 3,188 3,422 4,082 4,992
Loans & advances 695 1,194 1,099 1,332 1,553
Total current assets - - - - -
Current liabilities 5,900 7,388 8,685 10,269 15,107
Provisions 3,026 4,113 4,317 5,230 6,396
Total current liabilities 224 324 555 633 789
Net current assets 3,250 4,437 4,871 5,863 7,185
Miscellaneous expenditure - - - - -
Total assets 7,972 8,605 10,573 12,242 15,440

PI Industries
Cash flow Statement Summary

Net profit before tax 1,450 2,613 3,437 4,358 5,541
Depreciation 220 316 394 473 519
Others 155 84 (38) (93) (152)
Tax (380) (743) (997) (1,220) (1,496)
(Incr)/decr in net working capital (425) (81) (242) (432) (463)
Cash flow from operations 1,020 2,188 2,555 3,086 3,949
Capex (net) (1,510) (640) (1,500) (1,550) (200)
(Incr)/decr in investments - - - - -
Other income (expenditure) 63 138 174 191 210
Cash flow from investments (1,447) (502) (1,326) (1,359) 10
Net borrowings (402) (1,097) - (1,000) (223)
Issuance/buyback of equity 4 (6) (82) (0) -
Interest paid (251) (115) (136) (98) (58)
Dividend paid (76) (272) (390) (468) (625)
Cash flow from financing 452 (1,451) (608) (1,566) (905)
Net change in cash 25 236 620 161 3,054
Free cash flow (before investments) (490) 1,548 1,055 1,536 3,749
Ratio analysis
Year to March FY13 FY14 FY15E FY16E FY17E
PBT margin (%) 12.6% 16.4% 17.9% 18.7% 19.5%
Net profit margin 8.5 12.0 12.7 13.5 14.2
Dividend payout ratio (%) 13.1% 13.3% 13.0% 12.2% 12.6%
Net debt/Equity(x) 0.38 0.11 0.02 (0.09) (0.28)
RoCE (post-tax) (%) 16.2% 23.9% 26.5% 28.1% 29.5%
RoIC (%) 16.5% 24.8% 28.7% 31.3% 36.9%
Working Capital Turnover 6.0 8.7 10.0 9.9 10.6
Gross Block Turnover 2.2 2.5 2.5 2.6 2.9
Valuation parameters
Year to March FY13 FY14 FY15E FY16E FY17E
EPS (`) 7.7 15.0 19.2 24.7 31.8
Diluted EPS (`) 7.6 15.0 19.2 24.7 31.8
Book value per share (`) * 39.3 51.0 65.5 85.1 110.2
Dividend per share (`) 1.0 2.0 2.5 3.0 4.0
P/E (x) 87.2 44.1 34.6 26.9 20.9
P/BV (x) 16.9 13.0 10.1 7.8 6.0
EV/EBITDA (x) 50.5 31.3 23.8 19.1 15.3
EV/EBIT (x) 57.4 35.1 26.6 21.2 16.8
EV/Sales (x) 8.0 5.7 4.7 3.9 3.2

Rallis India
SELL
COMPANY INSIGHT RALI IN EQUITY March 11, 2015
Why did it rally? Agri Inputs
We turn SELLers on Rallis, given no scope for estimate/valuation Recommendation

upgrades post recent poor performance. Incrementally, we are Mcap (bn): `47/US$0.8
concerned about the rising risks from: (a) pricing pressure from generics 6M ADV (mn): `84.6/US$1.4
in its key products such as Takumi and Applaud (~30% revenues); (b)
CMP: `243
strategy of focusing on combination products which lack differentiation;
TP (12 mths): `255
and (c) unfounded exuberance around the long-gestation CSM
Upside (%): 5%
opportunity. Whilst Rallis brand recall, cash conversion and multiple
revenue sources drive its above-average competitiveness, execution
remains sub-par (8% revenue CAGR over FY13-15 vs 21%/22% for Flags
Bayer/PI). We expect growth to recover to industry rates (15%), but after Accounting: GREEN
a weak 4Q. We retain our 12-month TP of `255/share, implying Predictability: AMBER
negligible upside but rich 20x FY17E EPS. Earnings Momentum: RED
Competitive position: MODERATE Changes to this position: NEGATIVE
Catalysts
Rising competitive intensity from generics
Rallis stagnating portfolio and lack of new differentiated launches is exposing its Weaker 4Q performance
existing portfolio to competitive threats from generic players; lower priced Delay in CSM commercialization
generics (15-20% cheaper) are eating into Rallis flagship 5-6 year old products
which contribute to 30% of revenues and to much higher EBITDA. Dealers
incentives are driving the sales of generics; either Rallis will have to give away Performance (%)
margins or launch better products to address competitive intensity. 33000 300
Slippages in not-so-differentiated product launches 28000 250
After a product launch hiatus, we were hopeful about the five planned new
launches in FY15 from the rising R&D investments in FY10-14. Rallis slipped on 23000 200
launches (three so far) and also launched relatively under-promising products; 18000 150
Feb-14
Feb-15
channels checks suggest no differentiated proposition for the farmer. Rallis is
Apr-14
Aug-14
Jun-14
Oct-14
Dec-14
further guiding for combination products which at best could add marginally to
revenue growth. We fail to understand the revenue diversification at the cost of a
slipping franchise centered on strong farmer connect. Sensex Rallis (RHS)
Exportsnear-term challenges; CSM a long journey

Source: Bloomberg, Ambit Capital research
We expect 16% CAGR for exports over FY15-17 and a significant surprise could
be difficult, as: (1) domestic players (IIL, Sabero, UPL) are getting aggressive, (2)
weak commodity prices/currency depreciation are curbing demand from key
markets such as Brazil, and (3) CSM opportunity will take at least 3-4 years to
materialise; management expects `1bn revenue from CSM in FY18. Optimism
around a quick ramp-up in CSM is unfounded given the potential conflict with
generics exports and time required to stabilise processes/ build credibility.
Weak execution pulling competitive positioning lower
Whilst Rallis has an unmatched cash conversion/strong brand recall, execution
remains sub-par. We fail to understand the recent rally in the stock after
extremely poor results, which led to 7% cut to our FY15/FY16 estimates. We
build in closer to industry growth rates in agrochem and see no reason for
upgrades except for any EBITDA margin surprise in Metahelix, which is unlikely
given margins continue to disappoint despite high revenue growth. Rallis trades
at 20x FY17E EPS, a marginal discount to superior executors (Bayer, PI).
Key financials
Particulars FY13 FY14 FY15E FY16E FY17E
Revenues (` mn) 14,582 17,466 18,473 21,723 25,527
Adjusted EBITDA (` mn) 2,105.8 2,636.4 2,785.5 3,479.4 4,144.6 Analyst Details
EBITDA margin (%) 14.4% 15.1% 15.1% 16.0% 16.2%
Adjusted EPS (`) 5.88 7.83 8.14 10.76 13.25 Ritesh Gupta, CFA
ROCE (%) 20.3% 21.6% 19.8% 22.8% 24.4% +91 22 3043 3242
P/E (x) 41.35 31.05 29.86 22.58 18.34 riteshgupta@ambitcapital.com
Rallis India
Domestic business Rising competitive

intensity from generics
Rallis stagnating portfolio and lack of new differentiated launches is
exposing its existing portfolio to competitive threats from topline-focused
generic players such as Insecticides India (IIL), Makhteshim and Crystal;
these three peers 15-20% lower-priced generics are eating into Rallis
flagship 5-6 year old products which not only contribute to 30% of revenues
but also to much higher EBITDA. Dealers incentives are driving the sales of
generics and either Rallis will have to give away margins or launch better
products to address competitive intensity.
We believe that pricing competition in core brands like Takumi or Applaud is rising
though management expects value growth to revive due to strong volume growth off
a low base. Our channel checks suggest: (1) channel inventory for the industry is
high, and (2) prices for products such as organo phosphate compounds (Asataf) have
decreased by as much as 25-30%; however, it believes that higher volumes will more
than make up for it. Crude oilbased raw materials have also become cheaper which
will also take away some of the value growth. Out of these RM gains, the company
will have to pass on most of the benefits as market remains competitive under
generics segment.
Strategy to focus on combination products is a bit misplaced

As per the management, they have been taking steps to arrest the underperformance
in the domestic business. Out of the three products launched so far, the management
is bullish on two productsHunk and Origin (a combination product). It remains
confident that the products will become `1bn products over the next 2-3 years. It is
expecting four new product launches in FY16 which will largely be 9(3) as these
combinations would be unique. Most of these new launches would be combination
products that: (a) will support the pricing decline for existing standalone molecule
products, as many of them are facing pricing competition from other generic players,
and (b) will improve volume growth as the efficacy of the existing formulations have
reduced due to resistance development by insects.
We believe Rallis strategy to focus on combination molecules rather than in-licensed
molecules is a bit misplaced in the current context, as at best these launches will
arrest the slide in revenues from rising generic competition; however, it is unlikely to
give them superior growth rates vs peers. Note that competition by lower-
margin/WC-focused players may lead to market share losses for Rallis in certain key
products such as Takumi/Applaud/Asataf.
Apart from combination products, launch of novelty in-licensed molecules will be
limited in the next few years.
We do not believe that Rallis will be able to outdo our 15% growth estimates
for FY16/FY17
Rallis has been an underperformer in the domestic business in FY10-14. The
underperformance continued in FY15. We remain optimistic that domestic business
growth rates will revive from 11% CAGR in FY12-14 to 15% in FY15-17 primarily led
by recent aggression on new product launches post the revival of its own R&D since
FY10. However, it will continue to lose share to peers such as PI, Dhanuka, and
global MNCs. We believe Rallis visible strategy to focus on combination products
rather than in-licensing (as adopted by some of its peers) is likely to make it
underperform vs its peers.

Rallis India
Exhibit 1: Rallis has been an underperformer on domestic growth rates vs peers over
the last four years
FY10 FY11 FY12 FY13 FY14 4 YR CAGR 2 YR CAGR
Rallis Domestic 7,323* 8,421 8,181 8,835 10,161 13%* 11%
PI 4,140 5,800 6,133 6,869 8,860 21% 20%
Dhanuka 4,456 5,412 5,762 6,464 8,291 17% 20%
Bayer Domestic 12,629 17,247 18,841 21,826 26,743 21% 19%
Actives 1,029 3,992 4,634 5,543 6,292 57% 17%
Formulation 11,599 13,255 14,207 16,283 20,450 15% 20%
Source: Ambit estimates, Company annual reports. Note: *We have adjusted for Rs1bn sales loss in FY12 due to
discontinuation of Red triangle products for calculating CAGR
Exhibit 2: and it continued to underperform significantly as evident from 9MFY15

revenue growth rates reported so far
20% 18%
17%
18% 16%
16%
14%
12% 10%
10% 8% 8%
8%
6%
4% 2%
2%
0%
Cropcare India
separately for quarterly results.
We believe our numbers might be at risk if next year the monsoons/pest incidences
are lower than normal.
Exhibit 3: Rallis India Domestic business growth rates
20%
15% 15% 15% 15%
15%
10% 8%
5%
0%
FY11 FY12 FY13 FY14 FY15E FY16E FY17E
-5% -3%
-4%
-10%

Rallis India
International business Near-term

challenges persist
We expect exports to grow at 16% CAGR over FY15-17 and a significant surprise to
this could be difficult, as: (1) other domestic players such as IIL, Sabero, and United
Phosphorus (UPL) are also getting aggressive in generics manufacturing, (2) weak
commodity prices and currency depreciation are adversely affecting demand from key
markets such as Brazil, and (3) CSM opportunity will take at least 3-4 years to add
credibly to its growth rates; the management expects `1bn revenue from CSM in
FY18. Market enthusiasm around quick ramp-up in CSM is unfounded given the
potential conflict with generics exports and time required to stabilise processes/build
credibility.
Pressure on contract manufacturing business to persist in near term
We expect pressure on contract manufacturing to continue persisting driven by: (1)
depreciation in Brazilian Real which made imports quite expensive in Brazil, a key
market for Rallis, (2) lower usage in soybean due to weaker commodity prices, and
(3) high pipeline inventory globally due to lower offtake. We expect near-term
challenges to persist, as Brazilian Real continues to depreciate against INR. The
management guided that 4Q momentum on exports remains weak.
In addition, players such as Insecticides India and Sabero have been incrementally
eyeing export opportunities to drive utilisation of existing capacities and have recently
hired experienced hands to drive growth in the business.
Exhibit 4: Brazilian Real depreciated further against INR in 4Q
30
28
26
24
The export business of Rallis can be
22 classified as: (a) contract
manufacturing 50-55% of
20 revenues, (b) B2B sales 30-35%
18 and (c) Branded sales 10-15% (as
of FY15).
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Oct-13
Sep-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Oct-14
Sep-14
Nov-14
Dec-14
Jan-15
Feb-15
Source: Bloomberg
We remain positive on the international exports business in the long term though it
will underperform vs that of PI, as Rallis operates largely in the generics segment. The
management believes Dahej infrastructure would be utilised gradually. It has been
receiving a significant number of export enquiries and it may look at using adjacent
land to its existing plant at Dahej to build further capacities. In the international
business, Rallis faces price competition from Chinese manufacturers but it is preferred
by MNCs like Syngenta and Dupont for better quality.
CSM to be a gradual opportunity

We believe CSM will be a gradual opportunity for Rallis. CSM business takes a long
time to build and its peer PI Industries took 15 years to build a similar business to a
decent size and scale. Consensus expectations from Rallis to build a sizable CSM
business in a short time are misplaced. The management noted that the CSM
business can contribute `1000mn of revenues at best in FY17 though FY16 will likely
have very limited contribution. Newly commercialised molecules in FY16 will see a
gradual pickup and initially the final output will be fairly small.

Rallis India
Exhibit 5: International business growth rates
60%
48%
50%
40% 34%
30% 24%
20% 16% 15%
9% 9%
10%
0%

Rallis India
Seeds Margin recovery to be slower than

earlier
We believe revenue growth of 25% is sustainable over the next two years led by
addition of cotton seeds and recent launches of one new corn hybrid and two new
hybrids for paddy (in FY15). Rallis has started to participate in government tenders in
a bid to win seed orders, which is aiding growth rates; we believe this would have
longer receivable cycle.
The Metahelix business will reach EBITDA margins of ~16% in FY17, as per the
management. This is slightly lower than our expectations given higher investments in
R&D and employee costs. Metahelix has brought forward losses and hence there will
be no tax payout this year as well.
Exhibit 6: Seeds business Impressive growth (` mn)
Revenues (Rs mn) Growth (%)
6,000 0.5
44%
5,000 0.4
38%
4,000 35%
0.3
3,000 25% 25%
0.2
2,000
1,000 0.1
- 0
Plant growth nutrients Growing well off a low base

We believe that the plant growth nutrients (PGN) business will continue to witness
high growth from a low base. As per management, the total market for PGN to be
about `30bn-35bn though most of it is unorganised. The sales of the business almost
doubled from `200mn in FY13 to `430mn in FY14. It is likely to be a high-margin
business, as branded competition is low. Gross margins of the business are around
35-40% currently.
Exhibit 7: Plant growth nutrients Gradually scaling up (` mn)
1,400 1,275
1,200
981
1,000
755
800
581
600
430
400 320
238
200
-
Source: Company

Rallis India
Marginal EBITDA margin improvement of

110bps likely over FY15-17
We expect the margins to benefit from: (1) new combination launches, which will
arrest the price decline in some generics, (2) lower crude oil prices, (3) Disha
initiatives internal cost efficiency drive (which will bring in many cost efficiencies into
the system), and (4) improving margins on Metahelix.
DISHA, a programme to boost internal efficiency, was initiated a few months back.
The management expects some benefits from this initiative.
However, we believe on the negative side, margins in some of the old products have
been facing pressure due to rising competition. In addition, Metahelixs margin
trajectory is likely to be slower than our earlier expectations of ~17-18% EBITDA
margins by FY17. On a blended basis, the management expects overall margin
expansion of 100bps in FY16. We are building in a90bps improvement in FY16. Note
that Metahelix margins were quite disappointing in 3Q.
Exhibit 8: EBITDA margin improvement
20% 19.0% 18.7%
18%
16.2% 16.2% 16.4%
15.6% 15.3% 15.3%
15% 14.6%
13% 11.9%
10%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
4Q likely to be weak
High channel inventory, non-seasonal rains over the last few days and exports
pressure would continue to impact the 4Q results. The management indicated that
the 4Q results would be weak, after a disappointing 3Q.

Rallis India
Downgrade to SELL
Our earlier BUY stance on the stock was hinged on three pillars: (1) recovery in
domestic agrochemicals business growth rates to industry-level growth rates from
next year driven by new product launches in FY15; (2) sustained healthy growth rates
(~20%) in the exports business; and (3) continued sales growth momentum in
Metahelix aiding overall growth rates and driving margins higher.
On the first pillar, Rallis is lagging in terms of launching new novel products.
Our recent channel checks suggest that market growth is driven by the introduction of
new novel products, such as seen in case of Osheen for PI, Ulala for UPL, and
Rynapyxyr for Dupont. But, Rallis does not seem to be doing well in terms of getting
the new novel product launches through in-licensing. In addition, it has been facing
difficulties due to pricing pressure under its generics portfolio. Products such as
Takumi and Applaud which are some of its key brands are facing difficulties.
On the second pillar, we build in exports growth of about 15-16% YoY in

FY16/FY17. We believe Rallis may find it difficult to outperform from hereon, as it
faces more competition from Chinese and other domestic players. Apart from this, the
companys exports in Brazil seem to be facing additional challenges due to the
currency depreciation of the Brazilian Real. Rallis is trying to build a CSM franchise;
however, we believe a ramp-up will be more gradual.
On the third pillar, we were hoping that Metahelixs margins will improve
from hereon, due to a sales scale-up. However, the recent results seem to
suggest that the margins will take longer to ramp up. The management has guided
for 16% EBITDA margins by FY17 (vs our expectation of ~18% in FY17).
Whilst we retain our estimates, we do not have the conviction that Rallis will
outperform these estimates even in case of a normal monsoon/pest incidence next
year. Despite the weaker 3Q results, the stock price has increased ~20% since then,
leading to the stock trading 15% higher than its five-year historical valuations. We do
not see much upside from hereon and hence we turn SELLers.

Rallis India
Valuations factor in most of the positives

DCF methodology
We value Rallis using a DCF methodology with a WACC of 15%. Key things to look
into Rallis DCF model are the revenue growth trajectory, working capital intensity,
gross asset turnover, and EBITDA margins.
We have defined growth rates in two phases: For FY14-18 (phase 1) we assume
active growth rates, and we gradually fade away the growth rates from FY18 to FY26
(phase 2). From FY26 onwards, we assume 5% growth rates.
Revenue growth rates
Phase 1 (FY14-18): We assume revenue CAGR of 14% over FY14-18 driven by 9%
growth rates (vs 9% over FY10-14) in the domestic pesticides business and 14%
growth rate in FY14-18 (vs 28% in FY10-14) in the exports business. We expect the
Metahelix seeds business to register 28% CAGR over FY14-18.
Exhibit 9: Growth rate assumptions
FY10-15E FY15-18E Comments
We expect growth rates to improve driven
Domestic Pesticide Business 5% 15% by improved thrust on R&D and in-
licensing partnerships.
We believe that CRAMS business will be
Exports Business 24% 16%
gradual scale up from here on
Seeds business will continue to scale up
Seeds Business (Metahelix) 131% 25% given the companys pan-India
distribution and good R&D capabilities.
Plant Growth Nutrients 42% 28% Continued scale up from a low base.
Growth to be driven by improving
Soil Conditioners New business 20% adoption and awareness amongst
farmers.
Source: Company, Ambit Capital research. Note: * Pre-Metahelix, the seeds business was quite small
Exhibit 10: Growth rate assumption segment-wise

FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E
Domestic Pesticide Business 15% -3% 8% 15% -4% 15% 15% 15%
Exports Business 34% 48% 9% 24% 9% 16% 15% 16%
Seeds Business 44% 35% 38% 25% 25% 25%
Plant Growth Nutrients 80% 34% 34% 35% 30% 30% 30% 25%
Phase 2 (FY18-26): We assume revenue CAGR of 13% over FY18-26 with average
domestic pesticide business growth rate of 13% and exports business growth rate of
12%. We also expect 15% CAGR for the seeds business.
Phase 3 (FY26 onwards): We assume terminal growth rate of 6%. Given lower
penetration of agrochemicals (25%) and even further consumption (in terms of value),
we believe 6% growth rates are very conservative.
EBITDA margin improvement

Phase 1 (FY14-18): We expect Metahelix and in turn consolidated margins to
gradually scale up, as inherently the margins for the seeds business are better. The
Metahelix business EBITDA margin is currently at ~8% vs Kaveri Seeds 30%. Overall
margins are likely to improve from 15.3% in FY14 to 17% in FY18 driven by scale
benefits from Metahelix.

Rallis India
Exhibit 11: Rallis EBITDA margins recovery over FY16/FY17 is likely to be slower than
expected
20.0% 18.7%
18.0% 16.2% 16.2% 16.4%
16.0% 14.6% 15.3% 15.3%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Phase 2 (FY18-26): We expect margins to largely remain reach around 19% driven
by rising scale of the business and improved product mix.
Phase 3 (FY26 onwards): We assume margins to remain stable at 19%.
Working capital
We expect working capital days to go up in FY15 and then gradually decline to close
to 20 days.
Exhibit 12: Rallis working capital cycle
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E
Inventories - Turnover 62 65 73 68 63 72 65 65 65
Sundry Debtors - Turnover 40 31 31 34 35 35 35 35 35
Sundry creditors -Turnover 77 83 79 65 60 63 61 62 62
Other current liabilities -Turnover 18 18 19 20 17 19 18 18 18
Working Capital Days 7 (5) 6 17 22 26 21 20 20
Capex needs
We expect capital employed turnover to improve marginally from 2.2x in FY14 to 2.4x
by FY18 driven by improvement in the product mix. We expect operating cash flows
to take care of the future capex needs. Free cash flows will rise, as incremental capex
continues to become a smaller part of the existing gross block.
Exhibit 13: Capex will be funded by internal accruals (` mn)
Cash flow from operations Capex (net) Free cash flow
5,000
4,000
3,000
2,000
1,000
-
FY15E
FY16E
FY17E
FY09
FY10
FY11
FY12
FY13
FY14
(1,000)
(2,000)

Rallis India
Terminal growth rate of 6%: We have taken a terminal growth rate of 6% for the
company post FY26. We take comfort from the fact that the US agrochemicals market
expanded at 8% CAGR from 1976 (where the Indian market is now in terms of
market size) to 1996. With Rallis strength of franchise, a long history of operations,
and low penetration levels for agri inputs, we believe 6% terminal growth is fair.
Exhibit 14: US agrochemical market size
9-Yr Moving
US$ mn Implied CAGR
Average CAGR
1934 28
1937 33 6%
1940 41 8%
1943 52 8% 7%
1946 69 10% 9%
1949 118 20% 12%
1952 188 17% 15%
1955 174 -3% 11%
1958 230 10% 8%
1961 302 10% 5%
1964 383 8% 9%
1967 609 17% 11%
1970 898 14% 13%
1973 1308 13% 15%
1976 1801 11% 13%
1979 2677 14% 13%
1982 4007 14% 13%
1985 4297 2% 10%
1988 4328 0% 5%
1991 5565 9% 4%
1994 6806 7% 5%
1997 8360 7% 8%
Median 10%
Source: Center for Integrated Pest Management, North Carolina State University
Using a WACC of 15% for Rallis, our 12-month DCF-based valuation of `255/share
implies 19x FY17 EPS estimates.
Exhibit 15: Rallis 12-month forward DCF valuation summary (` mn)
Parameter Value
Total PV of free cash flow (a) 21,994
PV of terminal value (b) 27,810
EV (a) + (b) 49,804
EV (US$ mn) 816
Net debt 112
Equity value 49,692
No. of shares (million) 195
Implied share price (`) 255
Current share price 242
Upside 5%

Rallis India
Exhibit 16: Sensitivity analysis of TP to terminal growth and WACC Equity estimates
WACC
255 12.5% 13.5% 14.5% 15.0% 16.0%
Terminal Growth
4.0% 313 273 241 227 204

5.0% 340 292 255 240 213
rate
6.0% 375 317 273 255 225

7.0% 422 349 296 275 240
7.0% 422 349 296 275 240
Cross-cycle valuation: Premium to historical valuations

justified
Rallis is currently trading at 25x one-year forward, a 20% premium to its five-year
average P/E of 21x. We believe such a premium to historical valuations is not
justified, as the companys positioning in its core domestic agrochemical business has
weakened. Over the last five years, Rallis has disappointed consensus estimates,
delivering a PAT CAGR of just 15% and more recently just 6% growth so far in FY15,
with a drop in standalone margins along with the addition of the Metahelix business.
Whilst earnings growth for the next two years looks attractive at 28% CAGR, off a low
FY15 base, we expect earnings growth to normalise to 18% beyond FY18.
Exhibit 17: One-year forward P/E Exhibit 18: EBITDA Growth vs RoCE
32 EBITDA Growth RoCE (RHS)
28% 28%
26% 25%
24 24% 22% 26%
22%
20% 24%
21 24%
16 16% 19%
12% 22% 22%
6% 22%
8 8% 20%
20%
20%
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
4% 4%
2% 20%
0% 18%
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
One-yr fwd P/E 5-yr avg P/E
Exhibit 19: EPS growth vs RoE
EPS Growth RoE (RHS)

36% 27% 28%
33%
28%
26%
26% 26%
25%
16% 24%
18% 23%4%
23%
6% 5% 22%
19% 20%
-4% 21% 20%
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
-14% 18%
-13%

Rallis India
Financial assumptions
Exhibit 20: Financial Assumptions
Particulars (in ` mn unless Change (%)
FY14 FY15E FY16E FY17E
mentioned) FY15E FY16E FY17E
Growth Rate
Domestic Pesticides Business 10,161 9,551 10,984 12,631 -4% 15% 15%
International Pesticides Business 5,079 5,551 6,424 7,403 9% 16% 15%
Seeds Business 2,378 3,282 4,102 5,128 38% 25% 25%
Plant Growth Nutrients 581 755 981 1,275 30% 30% 30%
Financials
Net Sales 17,466 18,473 21,723 25,527 6% 18% 18%
Adjusted EBITDA 2,636 2,785 3,479 4,145 6% 25% 19%
Adjusted EBITDA margin (%) 15% 15% 16% 16% -2 94 22
Depreciation 407 497 534 597 22% 7% 12%
Interest 150 100 67 47 -33% -33% -30%
PAT 1,522 1,583 2,093 2,577 4% 32% 23%
PAT margin (%) 8.7% 8.6% 9.6% 10.1% -15 106 46
Cash Flow Parameters
CFO 1,756 1,903 2,609 2,875 8% 37% 10%
Capex (584) (1,000) (700) (1,200) 71% -30% 71%
FCF 2,341 2,903 3,309 4,075 24% 14% 23%
Ratios
Cash Conversion Cycle 22 26 21 20 18% -18% -6%
Gross Block Turnover 2.2 2.1 2.2 2.4 -5% 7% 7%
Capital Employed Turnover 2.2 2.2 2.2 2.3 -3% 4% 3%
Profitability Ratios
RoCE 22% 20% 23% 24% -180 299 163
RoE 23% 21% 24% 25% -197 311 123
RoIC 22% 20% 25% 29% -123 482 379
Exhibit 21: Ambit vs consensus

Matrix Ambit Consensus Deviation Comments
Sales
FY15E 18,473 18,865 -2.1% Our FY15 estimates are lower than consensus
estimates, as we expect 4Q to be disappointing again.
FY16E 21,723 22,064 -1.5% Our growth rates for FY16 are similar to consensus
but are on a lower revenue base projection of FY15
FY17E 25,527 25,527 0.0%
and hence a 1.5% deviation.
Reported EBITDA
FY15E 2,785 2,835 -1.7%
Our margin estimates are slightly higher than
FY16E 3,479 3,484 -0.1%
consensus.
FY17E 4,145 4,145 0.0%
Reported EBITDA margin
FY15E 15.1% 15.0% 10bps
Our margin estimates are slightly higher than
FY16E 16.0% 15.8% 20bps
consensus.
FY17E 16.2% 16.2% same
Reported EPS
FY15E 8.1 8.5 -4.2%
We expect 4QFY15 to disappoint vs consensus
FY16E 10.8 10.8 -0.4%
expectations. Management commentary stays bearish.
FY17E 13.2 13.2 0.4%
Source:

Rallis India
Key catalysts
4Q weakness
We believe Rallis could further disappoint in 4Q, as pressure on both the domestic
and international business continues. This could lead to further downgrades in
consensus estimates and downward pressure on the stock price.
Sustained bad performance in domestic business
Rallis has been underperforming its peers over the last few years. We notice the pick-
up in R&D spends over the last few years and uptick in new launches (five launches in
FY15) have increased aggression on improving innovation rates, which stagnated to
14-20% over last three years. We build in 15% growth in FY16 and FY17 vs 9% CAGR
over FY10-14 driven by uptick in innovation rates. Pricing risks on key products could
further drag down performance on both sales value and margins.
Metahelix business continues to drag overall margin performance

The Metahelix business which has been scaling up well is likely to witness margin
improvement over the next few years. Metahelixs margins failing to move up due to
lower sales or higher R&D/field trial expenses for new launches over FY15-17 could
pose risks to earnings estimates, but we assign a very low probability for the same to
happen.
Lower-than-expected pick-up in CSM business
We believe there is significant optimism built around the CSM business. We believe it
is a long gestation process and it will take more years for the CSM business to start
contributing materially to the consolidated numbers. Any slippages here would lead
to a correction in consensus multiples.
Key risks
Revival of domestic agrochemical business growth with success of new
products launched in FY15
Rallis has recently launched three new products in India and it plans to launch four
more in 2HFY15. The companys innovation index has been stagnant at 15% over the
last two years. As a result, the domestic business has lagged that of its peers. The
recovery of domestic sales growth would drive re-rating of the stock.
Scale up of Metahelix margins faster than expected
Metahelixs margins scaling up to healthy double digits would be a key catalyst.
Kaveri Seeds generated EBITDA margins of ~22% despite generating gross margins
similar to Metahelixs seeds business. Gradual bridging of the difference (from current
mid to high single-digit EBITDA margin for Metahelix) would drive overall profitability
growth from hereon. We are building in a scale up in margins to 18% by FY17.
Anything incremental from there would be an upside.
Exhibit 22: Explanation for the flags on the first page
Segment Score Comments
We find Rallis to be clean on our accounting checks driven by best-in-class
Accounting GREEN working capital and high cash conversion ratio. The company is also audited by
a quality audit company.
Earnings are volatile, depending on the monsoons and other climatic
Predictability AMBER conditions. The business also has strong seasonality, leading to volatility in
margins.
Earnings Consensus EPS estimates have been revised downwards post recent quarter
RED
momentum miss on earnings
Source: Company, Bloomberg, Ambit Capital research

Rallis India
Rallis Consolidated Balance Sheet Summary

Shareholders' equity 241 299 319 354 396
Reserves and surpluses 6,013 6,986 8,013 9,371 11,044
Total net worth 6,254 7,285 8,332 9,725 11,440
Debt 1,314 768 768 568 368
Deferred tax liability 281 315 315 315 315
Total liabilities 7,850 8,369 9,416 10,609 12,124
Gross block 7,507 8,368 9,368 10,068 11,268
Net block 5,554 6,042 6,545 6,711 7,314
CWIP 345 211 211 211 211
Investments (non-current) 197 251 251 251 251
Cash & cash equivalents 258 89 405 1,390 2,000
Debtors 1,648 1,679 1,729 2,052 2,403
Inventory 2,672 3,295 3,598 3,823 4,496
Loans & advances 305 428 430 481 580
Total current assets 5,800 6,468 7,243 8,971 10,947
Current liabilities 3,370 3,873 4,052 4,637 5,530
Provisions 677 730 782 898 1,069
Total current liabilities 4,047 4,603 4,834 5,535 6,599
Net current assets 1,753 1,865 2,409 3,436 4,347
Miscellaneous expenditure - - - - -
Total assets 7,849 8,368 9,416 10,609 12,124
Rallis Consolidated Income statement Summary

Net Sales 14,582 17,466 18,473 21,723 25,527
% growth 14.4% 19.8% 5.8% 17.6% 17.5%
Operating expenditure 12,476 14,829 15,687 18,244 21,383
EBITDA 2,106 2,636 2,785 3,479 4,145
% growth 3.8% 25.2% 5.7% 24.9% 19.1%
Depreciation 315 407 497 534 597
EBIT 1,791 2,230 2,289 2,946 3,547
Interest expenditure 185 150 100 67 47
Non-operating income 117 64 69 76 87
Adjusted PBT 1,723 2,144 2,258 2,955 3,587
Tax 535 617 655 827 969
Adjusted PAT 1,188 1,527 1,603 2,128 2,619
% growth 18.0% 28.5% 5.0% 32.7% 23.1%
Extraordinary income/ (expense) - - - - -
Reported PAT after minority interest 1,190 1,519 1,583 2,093 2,577

Rallis India
Rallis Consolidated Cash flow Statement Summary

Net profit before tax 1,723 2,144 2,258 2,955 3,587
Depreciation 315 407 497 534 597
Others 103 71 31 (9) (40)
Tax (360) (591) (655) (827) (969)
(Incr)/decr in net working capital (333) (274) (227) (43) (301)
Cash flow from operations 1,447 1,756 1,903 2,609 2,875
Capex (net) (349) (584) (1,000) (700) (1,200)
(Incr)/decr in investments 34 (76) - - -
Other income (expenditure) (84) (99) 69 76 87
Cash flow from investments (399) (759) (931) (624) (1,113)
Net borrowings (227) (546) - (200) (200)
Issuance/buyback of equity - - - - -
Interest paid (179) (124) (100) (67) (47)
Dividend paid (496) (521) (556) (735) (904)
Cash flow from financing (899) (1,191) (656) (1,001) (1,151)
Net change in cash 149 (194) 317 984 610
Free cash flow (before investments) 1,796 2,341 2,903 3,309 4,075
Rallis Consolidated Ratio analysis / Valuation parameters

Year to March FY13 FY14 FY15E FY16E FY17
EBITDA margin (%) 14.4% 15.1% 15.1% 16.0% 16.2%
Net prof. (bef min
8.1% 8.7% 8.7% 9.8% 10.3%
int) margin (%)
Net debt: equity (x) * 0.14 0.06 0.01 (0.11) (0.17)
RoCE (pre-tax) (%) 20.3% 21.6% 19.8% 22.8% 24.4%
RoE (%) 20.2% 22.8% 20.8% 23.9% 25.2%
P/E (x) 41.4 31.0 29.9 22.6 18.3
EV/Sales (x) 3.9 3.2 3.1 2.6 2.2
EV/EBITDA (x) 26.9 21.5 20.4 16.3 13.7

Rallis India
Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
Research
Analysts Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 nitinbhasin@ambitcapital.com
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadeshmehta@ambitcapital.com
Achint Bhagat Cement / Infrastructure (022) 30433178 achintbhagat@ambitcapital.com
Aditya Bagul Consumer (022) 30433264 adityabagul@ambitcapital.com
Aditya Khemka Healthcare (022) 30433272 adityakhemka@ambitcapital.com
Ashvin Shetty, CFA Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Deepesh Agarwal Power Utilities / Capital Goods (022) 30433275 deepeshagarwal@ambitcapital.com
Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Karan Khanna Strategy (022) 30433251 karankhanna@ambitcapital.com
Krishnan ASV Real Estate (022) 30433205 vkrishnan@ambitcapital.com
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankajagarwal@ambitcapital.com
Paresh Dave, CFA Healthcare (022) 30433212 pareshdave@ambitcapital.com
Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 paritaashar@ambitcapital.com
Prashant Mittal, CFA Derivatives (022) 30433218 prashantmittal@ambitcapital.com
Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 rakshitranjan@ambitcapital.com
Ravi Singh Banking / Financial Services (022) 30433181 ravisingh@ambitcapital.com
Ritesh Gupta, CFA Midcaps Chemical / Retail (022) 30433242 riteshgupta@ambitcapital.com
Ritesh Vaidya Consumer (022) 30433246 riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Automobile (022) 30433292 ritumodi@ambitcapital.com
Sagar Rastogi Technology (022) 30433291 sagarrastogi@ambitcapital.com
Sumit Shekhar Economy / Strategy (022) 30433229 sumitshekhar@ambitcapital.com
Sandeep Gupta Media / Midcaps (022) 30433211 sandeepgupta@ambitcapital.com
Tanuj Mukhija, CFA E&C / Infra / Industrials (022) 30433203 tanujmukhija@ambitcapital.com
Utsav Mehta, CFA Technology (022) 30433209 utsavmehta@ambitcapital.com
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 sarojini@panmure.com
Dharmen Shah India / Asia (022) 30433289 dharmenshah@ambitcapital.com
Dipti Mehta India / USA (022) 30433053 diptimehta@ambitcapital.com
Hitakshi Mehra India (022) 30433204 hitakshimehra@ambitcapital.com
Nityam Shah, CFA USA / Europe (022) 30433259 nityamshah@ambitcapital.com
Parees Purohit, CFA UK / USA (022) 30433169 pareespurohit@ambitcapital.com
Praveena Pattabiraman India / Asia (022) 30433268 praveenapattabiraman@ambitcapital.com
Shaleen Silori India (022) 30433256 shaleensilori@ambitcapital.com
USA / Canada
Ravilochan Pola - CEO Americas +1(646) 361 3107 ravipola@ambitpte.com
Production
Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com
Sharoz G Hussain Production (022) 30433183 sharozghussain@ambitcapital.com
Joel Pereira Editor (022) 30433284 joelpereira@ambitcapital.com
Nikhil Pillai Database (022) 30433265 nikhilpillai@ambitcapital.com
E&C = Engineering & Construction

Rallis India
Rallis India (RALI IN, BUY) - Stock price performance

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RALLIS INDIA LTD
PI INDUSTRIES (PI IN, BUY) - Stock price performance
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Mar-14
May-14
Sep-14
Nov-14
Mar-15
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
PI INDUSTRIES LTD

Rallis India
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Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
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Ambit Capital - Agri Inputs - Diverging Growth Rates (Sector Update) (POSITIVE)

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Ambit Capital - Agri Inputs - Diverging Growth Rates (Sector Update) (POSITIVE)

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Agri Inputs

Diverging growth rates Key Recommendations

Channel inventory levels a concern for next years growth? ..9

Agri valuations re-rated significantly .13

Agri Inputs/Pharma/Consumer Similarities and differences .16

Results Summary 3QFY15 17

PI Industries: He who toils ...31

Rallis India: Why did it rally?...... 47

March 11, 2015 Ambit Capital Pvt. Ltd. Page 2

Agri Inputs performance continued to

Exhibit 2: India Agri Inputs Results Summary 3QFY15

March 11, 2015 Ambit Capital Pvt. Ltd. Page 3

Agrochemicals Growth divergence in FY15

however, adoption of value-added novelty products and response to good

March 11, 2015 Ambit Capital Pvt. Ltd. Page 4

March 11, 2015 Ambit Capital Pvt. Ltd. Page 5

High MSPs not the only factor driving

Rapid growth in patented molecules

March 11, 2015 Ambit Capital Pvt. Ltd. Page 6

Change into pest-specific chemistry a key driver

Rising labour shortage promoting adoption of

March 11, 2015 Ambit Capital Pvt. Ltd. Page 7

Source: FICCI Source: FICCI

Source: RBI Source: ICAR

Source: Monsanto annual report

March 11, 2015 Ambit Capital Pvt. Ltd. Page 8

Channel inventory levels a concern for

Players with excess inventories of generics to face pressure on margins

March 11, 2015 Ambit Capital Pvt. Ltd. Page 9

Expect healthy double-digit growth rates

Agri demand is becoming more resilient

March 11, 2015 Ambit Capital Pvt. Ltd. Page 10

Agrochem growth (%) Monsoon Departure vs. Normal (%)

Global commodity price crash

Channel inventory levels a concern for next years growth?

March 11, 2015 Ambit Capital Pvt. Ltd. Page 11

Exhibit 17: Management commentaries on inventory

Players with excess inventories of generics to face pressure on margins

Drop in cotton acreages could be a concern?

March 11, 2015 Ambit Capital Pvt. Ltd. Page 12

Agri valuations re-rated significantly

Relative valuations MNCs trading at a premium

PI Industries High growth to sustain, supporting

March 11, 2015 Ambit Capital Pvt. Ltd. Page 13

Rallis No more re-rating; valuations could moderate

March 11, 2015 Ambit Capital Pvt. Ltd. Page 14

March 11, 2015 Ambit Capital Pvt. Ltd. Page 15

March 11, 2015 Ambit Capital Pvt. Ltd. Page 16

Results Summary 3QFY15

March 11, 2015 Ambit Capital Pvt. Ltd. Page 17

Rallis India weak set of results

March 11, 2015 Ambit Capital Pvt. Ltd. Page 18

Sharda Cropchem on a steady growth path

Employee expenses 56 56 58 -0.1% 174 120 44.5%

March 11, 2015 Ambit Capital Pvt. Ltd. Page 19

Insecticides India weak results post channel inventory

March 11, 2015 Ambit Capital Pvt. Ltd. Page 20

Dhanuka Agritech muted growth

March 11, 2015 Ambit Capital Pvt. Ltd. Page 21

Bayer Cropscience growing leader

March 11, 2015 Ambit Capital Pvt. Ltd. Page 22

UPL Ltd strong India growth

Exhibit 26: UPLs consolidated 3QFY15 results snapshot

March 11, 2015 Ambit Capital Pvt. Ltd. Page 23