Agrochemical Sector IC Feb'14 Eisec

Institutional Research February 4, 2014
Agrochemical Sector Report
Tag Line
Agrochemical Sector Report Sageraj Bariya
Initiating Coverage - Rallis India Ltd, UPL Ltd & Bayer CropScience Ltd
sagerajb@eisec.com
022-61925337 1
Contents
Executive Summary ....................................................................................................................................................... 3 Are generic players gaining share or are innovators exiting? ............................................................................................. 10 Slowing rate of new molecule introduction ........................................................................................................................ 10 Changing Business Model - Focus shifting from Agrochemical to Seed ................................................................................ 11 Is cost of inventing seed lower than agrochemicals? ............................................................................................................ 12 Future Outlook ........................................................................................................................... 13 Key Challenges ........................................................................................................................... 13
Companies Covered Rallis India Ltd ........................................................................ 17-30 UPL Ltd ............................................................. 31-42 Bayer CropScience Ltd ................................................ 43-50
Agrochemical Sector Report Initiating Coverage - Rallis India Ltd, UPL Ltd & Bayer CropScience Ltd
Institutional Research Agrochemical Sector Report February 4, 2014 Domestic market
on strong footing, Seed holds future
Executive Summary
The Indian Agrochemical Industry is estimated to be worth US $3.8 bn (~Rs 210 bn) at the end of CY2012. India accounts for 3.8% of global agrochemical industry. Even though Global agrochemical market grew by 6.5% in 2012, Indian agrochemical industry is estimated to have recorded lower growth in 2012-13. On a country level, the rainfall during the season (June-September-2013) came in at 106 % of long term average. There has been loss of sale on account floods and cyclone. But, these are near time concerns. We believe there is immense potential for incumbent dominant players on account of 1) low penetration level of agrochemicals 2) low market share of organized player 3) fragmentation of organized market 4) low cost manufacturing destination and 5) Global agrochemical majors looking at diversifying sourcing requirement. Low penetration level of agrochemicals - India's consumption of agrochemical is one of the lowest in the world, standing at 0.6kg per hectare. This compares very poorly with other countries that have less arable land under coverage. For instance, countries like Taiwan, Japan and Korea have higher consumption than India. We believe this again highlights the under usage of agrochemicals by Indian farmers and unexploited opportunity at bay for the agrochemical companies. Unorganized still dominate market - Indian agrochemical market compared to global is highly fragmented and generic in nature. Over 80% of market is dominated by non-patented molecules and Top-4 players' control roughly 27% of total market while 50% of market is served by unorganized players. That is where, we believe that major players are in a position to gain higher market share as well as charge a premium for its products. Contract Manufacturing huge opportunity - Global agrochemical companies have been reducing manufacturing capacity of low value products to concentrate on higher-value products. Conversely, they are maintaining their strong hold on off-patent Active Ingredients (AI) through outsourcing the same. For example, Germany's BASF has cut its range of AI from 300 in 2001 to 130 in 2006. Syngenta has also reduced its portfolio from 120 to 80. Bayer CropScience reduced its portfolio by 29 actives between 2000 and 2006. This in turn is driven by 2 major events (1) Japanese companies on account of natural calamities are looking at de-risking their manufacturing base (2) US & EU agrochemicals major have been outsourcing from china to the extent of 80-95% of their requirement and are looking for geographic diversification. Global Industry shifting to seed - Globally there has been shift in business model, from Agrochemicals to Seed. Given agrochemicals are last component that goes into farmer's investment chain, it faces lot of uncertainty. Another advantage seed offers is considerable pricing power to company. Performance of saved seed is substantially lower compared to original. Farmers have to buy new seed for every season from company, in turn giving pricing power to company. Seed the next growth frontier - Total Global Seed sales post CAGR of 8.8% and subset GM/Hybrid seeds posted CAGR of 19.6%. India Seed industry is estimated to be worth Rs 80 bn-100 bn (US $ 2 bn) and is 6th largest in the world. Indian seed industry is growing at 12-13% p.a. and the commercial seed segment accounts for a mere 25% of the total market. SRR is the percentage of area sown out of total area of crop planted in the season by using certified/ quality seeds/cultivars other than the farm saved seed. On country level SRR stands at 25.9%, indicating huge opportunity for organized industry. Patent expiry of molecules - Agrochemicals are protected by patents to encourage innovation akin to the Pharmaceutical industry. Going ahead, molecules worth US$ 5.2 bn are likely to go off patent throwing the market open for generic players.
Key Challenges
Lack of innovation due to high cost - As per study on average to develop new molecule it costs 10-years and Rs 10 bn. Indian companies are yet to focus on innovation due to high R&D cost. Dominance by unorganized player & risk of fake products - Indian agrochemical industry is almost 50% controlled by unorganized industry. Biotech seeds threat to agrochemicals - Scientific research has come up with seeds that have self-immunity towards natural adversaries. This can be a potential threat to the business of agrochemicals.
The Basics Agrochemicals are used to improve crop performance, yield or control pests, etc. As per Rallis India annual report, value of crop losses caused due to nonusage of pesticides was around Rs 1 trillion, accounting for approximately 1% of India's GDP (FY2012). Agrochemicals are the last input in any agricultural operation that protects all the other inputs as significant investment are already committed by then. It is estimated that India food grain production can be increased by 33% to Rs 4 trillion by use of Agrochemicals. Investment chain of farmer
Agrochemicals
Size & Scale - Global & India Global Agrochemical industry has grown at an average rate of 6.2% over CY200212 to US$ 53.7 bn. For CY2012, the industry registered a growth of 6.9% yoy compared to 13.8% growth witnessed in 2011. Global agrochemical sales are expected to register a CAGR of 6.7% over 2012-18 to US $ 80 bn.
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Eisec Research, Industry
Fertiliser
Labour
Seed
Crop Protection (US $ mn) 29,420 31,155 35,400 36,095 35,575 38,755 46,130 43,720 44,195 50,305 53,732
Land
100
6.7%
80
Losses caused by different pests -FY12

(US bn)
75
6.2%
54
Rodents & Others, 15% Weeds, 33% Diseases, 26% Insects, 26%
50 29 25
2002
2012
2018E
Global Agrochem sales by region On the other hand, the Indian Agrochemical Industry is estimated to be worth US $3.8 bn (~Rs 210 bn) at the end of CY2012. India accounts for 3.8% of global agrochem industry. Even thought Global agrochemical market grew by 6.5% in 2012, Indian agrochemical industry is estimated to have recorded low growth in 2012-13. Low growth was on account of 1) Delayed season in western, central and south central part of India leading to delay in sowing of key crops (like cotton and paddy) across impacted region. 2) Harvesting of rice in AP was impacted by Neelam Cyclone. 3) Rabi season witnessed low pest and disease occurrence in key crops, especially paddy and pulses. 4) Area under cultivation of key crops like cotton, paddy and coarse cereals was lower than last year leading to drop in demand for agrochemicals.
RoW 4%
Lat-Am 19%
N.America 23%
Asia 25%
EU 29%
Key Markets and Consumption North America and EU have been early promoters and adopters of agrochemical; hence they dominate overall market of global agrochemical sales with share of 23% and 29% respectively. Asian region is 2nd biggest with a share of 25%, followed by Lat-Am with 19% and Rest of the World having 4% share. Developed markets like US & EU are almost matured ones and hence future growth is likely to be very low and stable. Also we believe there has been underlying shift towards GM/Hybrid seed by market in those markets (discussed ahead in more detail).
(Kg / ha)
20 17 15 10
Global Pesticides consumption (Kg/ha)
13
12 7 7 5 5 0.6
5 0 Taiwan China
Japan
USA
Korea France
UK
India
Pesticides Classification and Market share - Global and India India's consumption of agrochemical is one of the lowest in the world, standing at 0.6kg per hectare. This compares very poorly with other countries that have less arable land under coverage. For instance, countries like Taiwan, Japan and Korea have higher consumption than India. We believe this again highlights the under usage of agrochemicals by Indian farmers and unexploited opportunity at bay for the agrochemical companies. India accounts for 16% of the world's total food grain production and uses only around 2% of agrochemicals. Low consumption can be attributed to: a) fragmented land holdings- low purchasing power, b) high dependence on monsoons and low level of irrigation, c) low awareness among farmers about the benefits of using pesticides and d) lower accessibility of products. In India, Andhra Pradesh (AP) is the largest consumer of pesticides, with a total share of around 24%. Top-3 states (AP, Maharashtra and Punjab) consume 48% (49% in 2001) of country's total agrochemical consumption in 2012. While Top-8 states consumed 77% of total agrochemical sold in India in 2012 compared to 81% in 2001. If one compares the consumption pattern of CY2001 with CY2012, contribution from other states (Non Top-8) has increased from 17% to 23%, indicating increasing penetration in other states. State-wise Share of Pesticides Consumption trend
28%
Agrochemicals are classified as Insecticides, Herbicides and Fungicides. Individual sales of various categories however depend on climatic conditions and crop. Globally herbicides dominate (44%) the consumption, while in India it stands at 16%. Insecticides dominate Indian market with share of 65%, against global average of 22%. This dichotomy is on account of climatic conditions, hence insecticides are more prevalent in Asian countries. Increased usage of GM/Hybrid seeds by North America has also led to reduction in consumption of insecticides. Global v/s India Share of Pesticides Consumption - 2012
Global
Others, 7% Insecticides, 22% Fungicides, 15% Herbicides, 44%
India
Others, 4% Herbicides, 16%
21%
Fungicides, 27%
14%
Insecticides, 65%

7%
0% AP PJB MS GUJ 2001 KNTK 2006 HRY 2012 W.Ben TN Others
Largest selling molecule category wise - Global

Product category Herbicides Insecticides Fungicides
India's changing Pesticides consumption pattern India has predominately been an insecticides market due to its tropical climate and availability of cheap labour (replacement for herbicides). However, over a period of time, there has been a minor, but certain shift in demand towards fungicides and herbicides. Indias Changing Pesticides Consumption Pattern
Top molecule - Global Glyphosate, Triazines, Sulphonyl urea Pyrethroids,Organophosphates,Neonicotenoids Triazoles, Strobillurin, Dithiocarbamates
Largest selling molecule category wise - India

Product category Insecticides Fungicides Herbicides Bio-pesticides Others
Top molecule - India Acephate, Monocrotophos, Cypermethrin Mancozeb, Copper Oxychloride, Ziram Glyphosate, Isoproturan, Spinosyns Zinc Phosphide, Aluminium Phosphide
80%
72%
67%
65%
60%
40% 16% 18% 15% 16% 15% 4% 0% 2002 Herbicides

20%
12%
2007 Fungicides Insecticides
2012 Others
Key consuming crops Globally, fruits & vegetables and cereals are the largest consumer of agrochemicals. In case of India Cotton and Paddy consumes highest with 50% and 18% share respectively. Key consuming crops
Crop Cotton Rice Fruits & Vegetables Plantation crops cereals, millets and oilseeds
Global
Soyabean 10% Fruits & Vegetables 26%
Sugarcane 2% Cereals 7% Plantation crops 8% Fruits & Vegetables 14% Rice 18%
India
Others 1%
% of total area under cultivation 5% 24% 3% 2% 58%
% of total agrochem consumption 50% 18% 14% 8% 7%
Market Structure, Competition and Players Globally agrochemical market is fairly consolidated and few large players control the market. Top-6 Innovator players (Syngenta, Bayer, BASF, Dow, Monsanto and DuPont) control 67% of total agrochemical market. If one were to include top-4 generic players too, market share would amount to 86%.
Total market - US$ 54bn
Others 18% Rice 9%
Cotton 50%
Cereals 18% Maize 13%
Cotton 6%
12,000
Sales of Total 6 CosUS$ 36bn Sales of generic Top-4 Cos US$ 10bn
Sumitomo
Monsanto
BASF
Syngenta
Dow
Bayer
MAI
UPL
DuPont
Nufarm
Others
There is dichotomy when one compares particular crops area under cultivation and share of total pesticides consumption. Like cotton covers 5% of total area under cultivation, however it consumes 50% of total pesticides sold in country. Similarly cereals and oilseeds cover 58% of total area under cultivation, but consume only 7% of total pesticides. This again highlights gross under penetration of agrochemicals in Indian market.
9,000
(US$ mn)
6,000 3,000 -
Indian agrochemical market compared to global is highly fragmented and generic in nature. Over 80% of market is dominated by non-patented molecules and Top-4 players' control roughly 27% of total market while 50% of market is served by unorganized players. Indian agrochem market
In order to counter competition from generic and unorganized sector, top companies have opted for strategy of (1) Larger product catalogue/offering of agrochemical (2) Diversify into agri related business - seed & seed treatment, plant growth nutrient, agriculture equipment and other agri related services.
Company BASF India Bayer Crop science Ltd Dhanuka Agritech Limited Dow AgroSciences India Pvt. Ltd. Insecticides Herbicides Fungicides Others Seed treatment Seed treatment, plant growth regulators PGRs, Surfactants Plant Growth Regulator Growth Enhancer Seed treatment, Home & Garden Plant growth Regulator Pesticide Intermediates Seeds Fertilizers, Micro Nutrients, Liquid Fertilizers, Speciality Products Rodenticides, Seed treatment, Agri services Seed treatment Fumigants, Rodenticides
Other Players 23% Unorganized 50%
DuPont Excel Crop Care Limited Gharda Chemicals Ltd. Meghmani Organics Limited Monsanto India Ltd. Nagarjuna Agrichem Limited PI Industries Ltd Rallis India Syngenta India
Top-4 27%
United Phosphorous Limited
According to Pesticide Monitoring Unit of GoI, there are about 125 technical grade manufacturers, more than 800 formulators and over 145,000 distributors in India in FY12.
Trend
Are generic players gaining share or are innovators exiting? - Share of generic has been increasing continuously over last decade. Share of generics have increased from 36% in 2004 to 40% in 2006 to 52% in 2011. This begs question whether generic companies are gaining upper hand and managing to increase their market share or Top-6 Innovators players are exiting the agrochemical business. Declining Marketshare of Innovators
100%
Slowing rate of new molecule introduction There has been visible drop in rate of introduction of new agrochemical / crop protection molecule over past 2 decade. Given low consumption rate in developing countries, it offers strong growth opportunities. Given ~50% of market is growing at reasonable pace, Agrochemical companies ought to spend more on agrochemical R&D. However that doesn't seem to be the case, as visible from declining rate of introduction of new molecule. New Active Ingredient Introductions
24
18
36% 75%
40% 52%
12
50%
33%
32% 25%
25% 31% 0% 2004 Proprietary

60
28%
2006 Proprietary off patent
2011 Generic
1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
23%
Agrochemical Active Ingredients in Development

80
40
20
0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
10
(US $mn)
Changing Business Model - Focus shifting from Agrochemical to Seed Increasing market share of generic and slowing rate of new molecule introduction point to distinct shift in strategy followed by Top-6 Innovator companies. This is visible in changing business model, wherein R&D spend on Seed has grown at higher rate compared to Agrochemical. R&D Expenditure Historical development
600
R&D expenditure US $mn
R&D Expenditure of Leading Agrochemical Companies

3600
2700
1800
2001
900
450
0
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Agrochemical R&D Seed and Trait R&D
150
0 Monsanto DuPont Syngenta BASF Seed and Traits Dow Bayer
Agrochemicals 1600
There has been marked increase in cost of innovation and bringing new molecule to market over period. A single new molecule required spent of US$ 152 mn in 1995 that grew by 21.1% to US$ 184 mn in 2000 and 39.1% from there to US$ 256 mn in 2008 (CAGR - 4.1% from 1995) Cost of Bringing a New Product to Market
280 256
2011
R&D expenditure US $mn
1200
800
400
210
184 152
(US$ mn)
140
Agrochemicals
70
On aggregate basis, global industry R&D spends on Seed has surpassed that of agrochemicals.
1995
2000
2008
11
Is cost of inventing seed lower than agrochemicals? If one were to believe there has been change in business models of Top-6 innovator players from agrochemical to seed, one needs to understand economics of inventing better seed. Studies show cost of inventing new plant traits/seed are lower than agrochemical. Cost of Bringing a New Product to Market
280 256
0 16 12
Year
Time from New Product Inception to First Introduction
8 4
210
1995
2000 Agrochemical
2005 -08 Seed
2011
(US$ mn)
140
136
Investment chain of farmer

70
Agrochemicals
0 Agrochemical
Fertiliser
Plant trait
Labour
As per industry, cost of inventing new plant trait/seed is in region of US$ 136mn, while that for agrochemical is US$ 256 mn. However, if one were to look at average time needed for new product introduction, it stands at 10 years for agrochemical and 13 years for seed. This raises another question, if old adage of "Time is Money" holds true, then why would company invest in seed compared to agrochemical.
Seed
Land
12
Future Outlook
Low penetration of pesticides: Estimated size of the Indian economy is US $ 2 trn of which Agriculture accounts for 18%. The Agrochemical industry's size is estimated US $3.8bn (~Rs210 bn), evenly split between organized and unorganized at the end of CY2012. Organized industry represents 0.1% of the country's total GDP and 0.5% of Agriculture GDP. India's pesticide consumption stands at abysmally low rate of 0.60kg/ha as compared to the global average of 3 kg/ha. We believe this demonstrate the gross under penetration of agrochemical and the opportunity that is available to the companies in the Sector. Contract Manufacturing: Most of manufacturers have been moving to developing economies as labour cost is cheap in those economies. Hence, we believe Indian Agrochemical Company with excess manufacturing capacity would have strong advantage in securing contract manufacturing assignment. Typical contract manufacturing assignments are long term in nature with fixed margin. Hence although fixed margin limits overall profitability of company, certainty of cash flow is very high. Diversification of manufacturing base: China has come to be known as factory of the world and this fact remains the same for agrochemicals. However, to diversify risks arising out of single location manufacturing base, many MNCs have been looking at other countries. Here, the Indian agrochemical manufacturers can position themselves as suitable alternatives to their Chinese counterparts. Patent expiry of molecules: Agrochemicals are protected by patents to encourage innovation akin to the Pharmaceutical industry. Going ahead, many molecules are likely to go off patent throwing the market open for generic players. As per Nufarm , total likely available opportunity through patent expiry between 2011-16 stands at US$ 5.2 bn (2010 sales value).
Key Challenges
Lack of innovation due to high cost: As per study on average to develop new molecule it cost 10-years and Rs 10 bn. Indian companies are yet to focus on innovation due to high R&D cost. Dominance by unorganized player & risk of Fake products: Indian agrochemical industry is almost 50% controlled by unorganized industry. Many of them sell fake products and thus giving bad name to overall agrochemical industry. This creates biggest hurdle for organized player to sell idea of agrochemical to farmers. Biotech seeds threat to agrochemicals: Scientific research has come up with seeds that have self-immunity towards natural adversaries. This can be a potential threat to the business of agrochemicals. Best example of such an introduction in the Indian market is "Bt Cotton", which resulted in a decline in the consumption of agrochemicals by cotton crop. However, Bt Cotton has been unable to develop immunity towards new type of pests and hence it still dominates 50% of total agrochemical consumption of country.
13
Seed the next growth frontier

Global Total Global agrochemical sales posted CAGR of 6.1% over 2002-11, while during same period, Total Seed sales post CAGR of 8.8% and subset GM seeds posted CAGR of 19.6%.
(US$ bn)
Year\ US$ mn 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 CAGR (02-11) Crop Agrochem Non-Crop Agrochem Total Agrochem GM seeds 25,150 26,710 30,725 31,190 30,425 33,390 40,475 37,860 38,315 44,015 6.40% 4,270 4,445 4,675 4,905 5,150 5,365 5,655 5,860 5,880 6,290 4.40% 29,420 31,155 35,400 36,095 35,575 38,755 46,130 43,720 44,195 50,305 6.10% 3,140 3,709 4,476 5,095 5,855 7,068 9,150 10,570 12,870 15,685 19.60% Conventional Seed Total Seeds 13,060 13,521 14,524 14,657 14,485 14,648 16,870 17,185 17,950 18,810 4.10% 16,200 17,230 19,000 19,752 20,340 21,716 26,020 27,755 30,820 34,495 8.80%
Global Seed Industry

14 11 8 7 4 6 12
Japan
China
Brazil
India
Germany
Italy
USA
Canada
NAFTA comprising of US, Canada and Mexico has seen drop in value of agrochemical sales over 2005-11. Given US has been the early proponent and adaptor of GM seed, there has been shift from usage of chemical.
US$ mn NAFTA Lat-America Europe Asia RoW 2005 9,300 5,200 9,350 9,300 1,750 2006 9,100 5,000 9,500 9,100 1,800 2007 9,200 5,900 11,000 9,300 1,850 2011 8,412 10,060 12,196 11,607 1,740 CAGR (2005-11) -1.70% 11.60% 4.50% 3.80% -0.10%
Argentina
Others
France
14
India India Seed industry is estimated to be worth Rs 8,000-10,000 cr (US $ 2 bn) and is 6th largest in the world. Indian seed industry is growing at 12-13% p.a. and the commercial seed segment accounts for a mere 25% of the total market. Hence, the growth opportunity for commercial seeds is substantial going ahead. As per one study wheat, groundnut, soybean and chickpea (high-volume lowvalue seeds) 80% of the cropping area is sown with farm-saved seeds that are old and obsolete varieties. Another study has concluded that more over 70% of seed used in India are through the farm-saved seed. In earlier days, India seed industry was driven by PSU enterprise and has share of 60%. However over the years positive government policies has attracted investments by private players and share of Private sector share has increased from to 80% in 2010. India's seed industry lacked any player as such till 1960, government established National Seeds Corporation (NSC) in 1963. NSC was key participate behind successful green revolution that started in 1968. High Yield Varieties of rice, wheat, jowar, maize, cotton, sunflower and few vegetables were growth driver. Till 1987, NSC remained dominate player and sector grew at CAGR of 8-10% to be at Rs 6000 mn. Government liberalized the sector in 1988 by introducing National Policy on Seed Development (NPSD). NPSD allowed import of seed , entry of MNC players and Indian players established their own R&D infrastructure. Number of companies operating in sector went up to 350-400 and size grew to be Rs 20 bn by 2000 and Rs 25 bn by 2002, a CAGR of 10%. Launch of Bt Cotton is considered to be key turning point for India Agriculture Industry. Bt cotton increased role of private company, introduced concept of technology to Indian market. Area under cultivation for cotton increased from 7.6 million hectars (mn ha) in 2002 to 12 mn ha in 2011. Demand for Bt Cotton Seed in value term increased from Rs 3750 mn (2002) to Rs 32,000 mn (2011), an increase of 8.5x over 10 years.
Crop-wise growth in distribution of seeds (%)

Period 1983-88 1991-2002 2002-2011 Overall CAGR Cereals 9.9 6.8 14.5 7.8 Pulses 16.1 2.6 16.4 8.7 Oilseeds (0.2) 2.2 17.4 8.5 Fibres (2.3) 4.7 (0.9) 2.2 Other (1.8) (0.1) 15.4 0.1 Total 6.1 5.1 14.9 7.0
From above table its clearly visible growth in seed was best during period of 2002-11, during period industry registered CAGR of 14.9%, compared to 5.1% (1991-2002) and 6.1% (1983-88). This growth was primarily driven by innovation, increased participation from private and MNC players (driven by strengthening of IPR norms). One of the biggest opportunity seed industry has is Seed Replacement Rate (SRR), SRR is the percentage of area sown out of total area of crop planted in the season by using certified/quality seeds/cultivars other than the farm saved seed. On country level SRR has improved from around 18.3% in 2001 to 25.9% in 2008, an increase of 760bps over years. However, SRR at 25.9% indicated that farmer still avoids buying new seed up to great extend
15
All India seed replacement rate (%) of major crops

Crop Wheat Paddy Maize Jowar Bajra Chickpea Urdbean Arhar Peanut RSM Soybean Sunflower Cotton 2001 13.0 19.2 21.0 18.4 45.9 4.2 16.6 8.7 5.2 38.4 12.4 13.7 21.2 2002 13.0 19.3 21.4 18.8 48.5 4.2 17.1 8.8 5.5 44.6 12.5 15.7 21.9 2003 13.0 19.2 24.4 26.7 51.0 7.1 20.5 13.6 11.0 67.0 15.6 19.6 19.8 2004 16.5 16.3 31.5 19.3 44.9 9.9 17.2 9.8 7.1 58.5 27.0 60.2 20.7 2005 17.6 21.3 35.4 19.0 55.4 9.4 15.7 10.5 6.9 55.4 28.9 67.7 21.8 2006 21.8 22.4 43.8 19.4 55.1 9.0 13.7 11.6 9.8 60.7 28.4 66.9 19.8 2007 25.2 25.9 44.2 19.9 48.5 11.9 23.9 16.1 14.3 58.6 33.4 62.9 15.3 2008 26.8 30.1 48.5 26.2 62.9 14.4 26.3 16.0 17.0 52.7 35.1 43.6 12.1 Average 18.4 21.7 33.8 21.0 51.5 8.8 18.9 11.9 9.6 54.5 24.2 43.8 19.1
Number of hybrids in major field crops developed by private and public sector in India
Crop Cotton Maize Paddy Pearl Sorghum Pigeon pea Sunflower Jute Mesta Castor Mustard Safflower
2001-02 Pvt 150.0 67.0 12.0 60.0 41.0 35.0 PSU 15.0 3.0 4.0 6.0 5.0 6.0
2003 to 2010 Pvt 43.0 36.0 11.0 22.0 12.0 1.0 13.0 PSU 10.0 25.0 15.0 7.0 8.0 2.0 10.0 23.0 11.0 4.0 11.0 9.0 1.0 2.0 Pvt 193.0 103.0 23.0 82.0 53.0 1.0 48.0 4.0 11.0 -
Total PSU 25.0 28.0 19.0 13.0 13.0 2.0 16.0 23.0 11.0 9.0 1.0 2.0
Share of Pvt (%) 88.5 78.6 54.8 86.3 80.3 33.3 75.0 30.8 91.7 -
Hence, even if SRR is increased from currently level of 25.9% to 50%, size of domestic industry would double (US$ 5 bn). We believe private sector would play biggest role in increasing SRR as historic performance shows increasing contribution of private sector.
Allowing private player entry into seed industry was one of the key turning point of the industry. Entry of private player led to strong growth and expansion of domestic seed industry. Private players have been to do it on back of their ability to bring new products to market, unlike PSU that are limited by resources.
16
Rallis India Ltd

True Blue Ace
Recommendation CMP(Rs) Target(Rs) Upside % Share Holding (%) Promoter Public FII DII Key Data Average Vol(6m)(000) FV Beta Mcap (Rs Mn) 52 week H/L Bloomberg /Reuters Group Sensex / Nifty Stock Performance (%) Abs(%) 3M 1Y Sensex -3.1 3.1 RALLIS 3.4 25.7 Year FY11 FY12 Analyst: Sageraj Bariya Email ID: sagerajb@eisec.com Phone No.: 022-61925337 FY13 FY14E FY15E 237.7 1 0.6 31,815 185 / 110 RALI IN/RALL.BO B / S&P BSE 500 20,209 / 6,002 50.0 31.4 12.5 6.1 160 189 18%
ACCUMULATE
Established in 1815, as Rallis Brothers, Rallis India came under Tata fold in 1962. The company is one of the oldest and second largest pesticide agrochemical company in the country. With agrochemical exports getting boost after setting up of Dahej Plant in 2010, overall revenue mix between domestic (~70%) & international business (~30%) is likely to remain same going ahead. Post acquisition of Metahelix, non-agrochemical revenue has seen continuous increase in contribution to overall revenue pie, from zero in FY09 to 11% in FY13. It is likely to see further increase of 300bps to 14% by FY15.
Investment Rationale
Best place to take advantage of domestic opportunity - India's consumption of agrochemical is one of the lowest in
the world, standing at 0.6kg per hectare. We believe that Rallis is well-placed to seize this opportunity on the back of its strong business model that revolves around - distribution network, strong brands and robust new product pipeline. Contract Manufacturing - opportunity abundant - Total global sales of agrochemicals were estimated to be worth US $54bn in CY2012. Exports on average have been contributing 1/3rd of total revenue for the past several years. Rallis Dahej plant will help the company grow its export business. We expect export to post CAGR of 17% over FY13-15. Seed - The next growth frontier - India Seed industry is estimated to be worth Rs 80 bn-100 bn and is growing at 1213% p.a. and the commercial seed segment accounts for a mere 25% of the total market. 80% of the cropping area is sown with farm-saved seeds that are old and obsolete varieties. Sighting seed to be next growth driver, Rallis acquired seed Research & Marketing company Metahelix. Management had guided for Rs 10 bn revenue, on accumulative basis by the end of FY2015,CAGR of 66%, however we are building in CAGR of 37% (FY13-15) in our estimate. We believe at current price stock is trading at attractive valuation and hence recommend Accumulate with target price of Rs 189 (20x FY15E EPS).
Risks to our call:

Seed business continues to make losses - Rallis's seed business is currently loss making, as it is under investment
phase. Although we are not building in any profit from segment, but continuation of loss would affect negatively.
Weather: Agrochemicals are the last input in any agricultural operation and protect the final output i.e. crop. Hence,
vagaries in season could affect the demand for agrochemicals and in turn impact our estimates.
Difficulty in getting Exports: If the company is unable to get new customer/order and in turn unable to meet our
export target, the company may post dismal performance and pose a downside risk to our estimates.
Revenue (Rs mn) 10,862 12,749 14,582 17,348 20,032 PAT (Rs mn) 1,260 835 1,188 1,531 1,833 EPS (Rs) EBIDTA Margin (%) 6.5 4.3 6.1 7.9 9.4 17.6 15.9 14.4 15.4 15.4 P/E (x) 24.7 37.3 26.2 20.3 17.0 EV/EBIDTA (x) 16.6 15.7 14.7 11.2 9.3 PB (x) 6.2 5.6 5.0 4.4 3.8 ROE (%) ROCE (%) 13.6 15.8 20.2 23.0 24.0 10.6 17.6 17.1 20.1 20.5
17
Executive Summary
Investment Rationale
Rallis India is one of the oldest and second largest pesticide agrochemical companies in the country with a market share of around ~7% and belongs to the Tata Group. Rallis derives around 75% of its Revenues from its domestic business through sale of own branded formulations. Rallis has come a long way since its restructuring (FY2007-10) period, where it divested it non-core business (Pharma & Gelatin) and generated cash (land sell-off & preferential allotment) for investing in core agrochemical business. Best place to take advantage of domestic opportunity - India's consumption of agrochemical is one of the lowest in the world, standing at 0.6kg per hectare. This compares very poorly with other countries that have less arable land under coverage. For instance, Taiwan - 17kg/ha, Japan & Holland - 11kg/ha,S.Korea 7kg/ha,USA-4.2kg/ha. We believe that Rallis is well-placed to seize this opportunity on the back of its strong business model that revolves around distribution network (Rallis has one of the best distribution networks in the country with reach of 30,000 retailers covering around 80% of India's districts), strong brands (In market research survey done 7 out of 12 brands belong to Rallis) and robust new product pipeline (New product launches has been a key strategy behind Rallis continuous strong performance). According to industry estimates, the unorganized market accounts for another 50% of the industry. And that is where, we believe that Rallis is in a position to gain higher market share as well as charge a premium for its products. Contract Manufacturing - opportunity abundant - Global agrochemical companies have been reducing manufacturing capacity of low value products to concentrate on higher-value products. Conversely, they are maintaining their strong hold on off-patent Active Ingredients (AI) through outsourcing the same. For example, Germany's BASF has cut its range of AI from 300 in 2001 to 130 in 2006. Syngenta has also reduced its portfolio from 120 to 80. Bayer has reduced its portfolio by 29 actives between 2000 and 2006. Key Driver for contract manufacturing is 1) Japanese companies on account of natural calamities are looking at de-risking their manufacturing base. 2) US & EU agrochemicals major have been outsourcing from china to the extent of 80-95% of their requirement and are looking for geographic diversification.
The next growth frontier - Seed Business - India Seed industry is estimated to be worth Rs 8,000-10,000 cr (US$ 2 bn) and is 6th largest in the world. Indian seed industry is growing at 12-13% p.a. and the commercial seed segment accounts for a mere 25% of the total market. Hence, the growth opportunity for commercial seeds is substantial going ahead. As per one study wheat, groundnut, soybean and chickpea (high-volume low value seeds) 80% of the cropping area is sown with farm-saved seeds that are old and obsolete varieties. Another study has concluded that more over 70% of seed used in India are through the farm-saved seed. Rallis acquisition of Metahelix places company in sweet spot to capitalize on seed opportunity.
Outlook and Valuation

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

Difficulty in getting Exports: If the company is unable to get new customer/ order and in turn unable to meet our export target, the company may post dismal performance and pose a downside risk to our estimates. Seed business continues to make losses: Rallis's seed business is currently loss making, as it is under investment phase. Although we are not building in any profit from segment, but continuation of loss would affect negatively. Weather: Agrochemicals are the last input in any agricultural operation and protect the final output i.e. crop. Hence, vagaries in season could affect the demand for agrochemicals and in turn impact our estimates.
18
Background
Rallis India is one of the oldest and the second largest pesticide agrochemical company in the country with a market share of around ~7% and belongs to the Tata Group. The company also has a credible presence in the international market. Pesticide accounts for 89% of the company's Total Revenues, while plant nutrients and seeds constitute the balance. Historically contribution from the Domestic business was at ~75% levels while Exports accounted for the balance. Revenue Mix
100% 22% 75%
Source: Company , Eisec Research
Downfall Draught and overcapacity in industry lead to losses 1,200 1,000 800
Rs cr
Business Turnaround
Restructuring Sale of pharma, fertiliser business leading to drop in sales. Sale of asset and issuance of preference share for rationalisation of debt. Focus on core focus on internal cost cutting, introduction of new products and brand building Result continuing benefit of internal cost cutting and focuson export 15.0 10.0 5.0 0.0 (5.0) (10.0) FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 EBITDA % FY2007 FY2008 FY2009 Sales
%
600 400 200 0 (200)
29%
29%
29%
(400)
29%
50% 78% 25% 71% 71% 71% 71%
R&D Rallis has a pipeline of new molecules under the various categories. Rallis and the Council of Scientific and Industrial Research (CSIR), New Delhi jointly hold commercial rights of these molecules, as this project is initiated under the PublicPrivate-Partnership (PPP) scheme of New Millennium India Technology Leadership Initiative. The government through soft loans (3% interest rate) funds this research. These molecules are at various stages of field trials and molecules have International Patent. Agrochemical R&D is very similar to that of pharmaceutical, any molecule can turn out to be a multi-billion dollar opportunity or prove to be a complete failure. Success of a single molecule, we believe, will put the company into an altogether new growth trajectory. However, it's difficult at current juncture to factor in any possible upside or downside from this.
0% FY11 FY12 Domestic

FY13
FY14E Export
FY15E
Business restructuring aids turnaround During FY2001-04, the company was involved in too many businesses which diluted management's focus and was loss making. Since then, it has come a long way. Rallis initiated several measures to restructure its business following which it managed to turn the corner. Some of the measures initiated by the company included the following:

Selling of non-core business like Pharma and Gelatin; Merger of subsidiaries to reduce operating expenses; Disposing land to generate cash; and Issuance of Preference share worth Rs88cr to Tata group companies.
19
Seed Business Rallis India acquired 77% stake in Bangalore-based seeds Research Company, Metahelix Life Sciences (MLS) for Rs 1.2 bn. valuing the company at ~1.2x FY2012E revenues of Rs 1 Bn. Company funded the acquisition through internal cash. With Rallis focusing on increasing its share of farmers' agri-spend, there exists huge opportunity in the seed industry with the acquisition of MLS. The seed industry is growing at a healthy 12-13% p.a. Notably, MLS enjoys the foremost advantage of being the first Indian company to have proprietary Bt trait, which is basically a proprietary new variant of Bt Cotton (pending govt clearance since Dec-2010). MLS also offers technology, strong brand and goodwill of existing products coupled with a robust product pipeline and presence in the international markets. About Metahelix MLS has been developing high-performance hybrid seeds in rice, maize, cotton millets and vegetables for the Indian markets with transgenic traits for insect, viral and fungal protection. It also provides plant transformation, regulatory sciences and molecular marker services. MLS has also taken its key products under rice and maize to international markets like Vietnam, Thailand, Indonesia and Philippines. Its subsidiary, Dhaanya Seeds, has been involved in commercialising the hybrid seeds and traits. MLS was founded by five scientists in 2000, which has increased to become a team of 50 scientists comprising 20 Phd's and 30 agronomics and plant genomic specialists. MLS has research facilities in Bangalore, Hyderabad and Aurangabad. The company has 3,000 contract farmers, a seed processing plant and a ware house at Hyderabad. Dhaanya Seeds has a field force of 120 agronomists who reach out to more than 1,000 distributors across the country.
Founders
Background Serves as Managing Director of MLS; Narayanan, a plant molecular biologist and breeder, is a Ph.D. in plant breeding and genetics from the Tamil Nadu Agricultural University at Coimbatore, India. He later carried out post-doctoral research at the Department of Biological Sciences in Stanford University under a Rockefeller Foundation Fellowship. Leads the business development, operations and investment at MLS. Served as chief executive officer (CEO) of Material Sciences Corp. (MSC) in 1997 and as its president in 1991. Nadig also served as senior scientist in the bioinformatics division at the Monsanto Research Center, Bangalore and later was a consultant to Monsanto's Plant Biotech Group for the nutrition programme at Saint Louis. Nadig was also chairman of the board of MSC in 1998.Nadig graduated with an M.Sc in nuclear physics from the Bangalore University and did his Ph.D. in molecular biophysics from the Indian Institute of Science, Bangalore followed by a brief post-doctoral stint at the Department of Chemistry, Pennsylvania State University, USA. Served as VP of the science and technology department and chief biotechnology officer at DuPont. Earlier, he was the chief technology officer of DuPonts agriculture and nutrition platform. Kishore previously served as the co-president of the nutrition and consumer segment and assistant chief scientist and chief biotechnologist at Monsanto Company, which he joined in 1980. He is the inventor of more than 65 issued patents. Kishore received postdoctoral training in chemistry and biology and also served as a Robert A. Welch Fellow at The University of Texas at Austin. Kishore is a Ph.D. in biochemistry from the Indian Institute of Science. He has a master's and bachelor's degree in biochemistry, physics and chemistry from the University of Mysore, India. Prior to joining MLS, Ravi was with the business development group in E.I. DuPont India Private Limited, Gurgaon and earlier led the seed business at PHI Seeds Limited, Hyderabad. He also worked with Advanta India (previously ITC Zeneca Ltd) in different positions before leading the marketing and business development function. In previous roles, Ravi was responsible for new business initiatives and has considerable experience in marketing and business development. Ravi is a post-graduate in dairy technology and a business graduate from the Indian Institute of Management, Ahmedabad.
K K Narayanan
Gautham Nadig
Ganesh Kishore
Ravi Krishna S
20
Revenue
2,000
Hidden value Advinus Therapeutics - During 2005, the company transferred its Knowledge Services Business, a Research & Development Centre at Bangalore to Advinus Therapeutics Pvt Ltd for a consideration of Rs26cr. Advinus is India's finest Clinical Research Organisation (CRO) involved in business of New Drug Discovery (Pharma & Agriculture) and clinical trials. The company is the first of its kind in India to offer end-to-end development services to the global Pharma, Agro and Biotech industries. Advinus was named as India's best emerging CRO in drug discovery services, according to a survey conducted by Proximare, a management consulting firm based in New Jersey that exclusively serves pharmaceutical and biotechnology companies with strategic issues. We believe Advinus has one of the best management teams in place to capitalise on the R&D outsourcing opportunity
Advinus - Executive Committee
1,500
Rs mn
1,000
500
0 FY11 FY12 FY13
PAT
60
Dr. Rashmi Barbhaiya - CEO and Managing Director
Ex-President of R&D - Ranbaxy Research Lab Ex-Vice President in the Pharmaceutical Research Institute, Bristol-Meyers Squibb (BMS).
Dr. Kasim Mookhtiar - EVP and CSO Ex-Bristol-Meyers Squibb & Ranbaxy Lab
Rs mn
Dr. Gopal Muralidharan -Chief of Technical Operations
20 years of experience in research and managerial in North America
Advinus - Scientific Advisory Board
(60)
Christopher M. Cimarusti, Ph.D Perry B. Molinoff, MD
(120) FY11 FY12 FY13

David C. U'Prichard, Ph.D
Ex-Bristol-Meyers Squibb (BMS) - worked in drug discovery and development Professor of Pharmacology at the University of Pennsylvania. More than 30 years of experience in academic and industrial sectors President of Druid Consulting LLC, consultant to the pharmaceutical and biotechnology industries
21
The Tata group is a major shareholder in Advinus while Rallis holds 15% stake in it with company management holds minority stake. Advinus is currently loss making and under investment mode. Rallis does not plan to sell its stake as it considers it as a strategic investment. We have not taken any value of Advinus in our valuation of Rallis however any developments on this front would have minor impact on Rallis. Real Estate Rallis has considerable amount of surplus real estate that it can divest if the need arises. The company in the past had sold real estate to raise funds for its core business. As per media reports, the company currently has excess land of 85 acres in Hyderabad and 22 acres in Thane, Maharashtra. We have conservatively estimated value of the same in the region of Rs 4.6 bn translating into Rs 24 per share. Our valuations take in 30% premium to Rallis last sell transaction of 31 acre property at Hyderabad for Rs 900 mn to Peninsula in FY2008. We have not factored any value of Real Estate in our valuation
Investment Rational
Best place to take advantage of domestic opportunity India's consumption of agrochemical is one of the lowest in the world, standing at 0.6kg per hectare. This compares very poorly with other countries that have less arable land under coverage. For instance, Taiwan - 17kg/ha, Japan & Holland - 11kg/ha,S.Korea - 7kg/ha,USA-4.2kg/ha . Global Pesticides consumption (Kg/ha)
20 15 10 7 5 0.6 0 Taiwan China Japan USA Korea France UK India 7 5 5 17 13 12
India accounts for 16% of the world's total food grain production and uses only around 2% of agrochemicals. We believe this again highlights the under usage of agrochemicals by Indian farmers and unexploited opportunity at bay for the agrochemical companies. We believe that Rallis is well-placed to seize this opportunity on the back of its strong business model that revolves around - distribution network, strong brands and robust new product pipeline. According to industry estimates, the unorganized market accounts for another 50% of the industry. And that is where, we believe that Rallis is in a position to gain higher market share as well as charge a premium for its products.
22
1) Distribution network - Rallis has one of the best distribution networks in the country with reach of 30,000 retailers covering around 80% of India's districts. Rallis derives around 61% of its Revenues from its domestic agrochemical business through sale of own branded formulations and supply of bulk to other branded sellers. We believe that Rallis distribution network is its key strength and the differentiating feature vis-a-vis competition. Hence, many MNC global players have inked strategic alliances with Rallis for distribution of their products (pesticides and seeds) in the domestic market. Strategic alliance
Company Dupont Syngenta Product Indoxacarb Acetamiprid Pretilachlor Thiomethozam Paraquat di Chloride Emmamaectine Clodinofop Atrataf Captaf Novaluron Thirodicarb Imidaclorpid Fuji 1 Buprofezin Fenpyroximate Carbofuran Carbosulfan Bifenthrin Sulfosulfuron Chloro + Cyper Calcium nitrate solution Boron 20%
2) Strong Product & Brand portfolio - We believe Rallis has one of the best brand portfolios in the industry. In market research survey done 7 out of 12 brands belong to Rallis. This clearly shows brand power and product effectiveness of Rallis.
Rallis Brand Strengths in Indian Crop Protection Market Awareness of brands - 2009
Indofil M-45 (indofil) Tatamono (Rallis) Applaud (Rallis) Proclaim (Syngenta) Antracol (Bayer) Fame (Bayer) Contaf Plus (Rallis) Tatamida (Rallis) Asataf (Rallis) Rogor (Rallis) Contaf (Rallis) Confidor (Bayer) 0% 10% 20% 30% 40% 50% 60%
Makhteshim
Bayer Nihon Nohayaku
FMC
Gharda Chemicals Yara International Borax International

23
3) Robust new product pipeline - New product launches has been a key strategy behind Rallis continuous strong performance. On an average, the company has been registering 5-6 products and launching 3-4 products every year. Pertinently, new product launches were possible due to Rallis strong reach and goodwill among the farmers and the Tata brand associated with it which has enabled it to conduct the field trials. The Indian registration process is regarded as one of the most stringent ones in Asia (excluding Japan). Each new formulation typically takes 2-3 years for approval from the time of registration, as it has to undergo extensive field trials with respect to chemistry, toxicology, metabolism, efficacy, soil residue and packaging/ labeling New product launch & registration
Innovation Index
40%
30%
20%
10%
0%
20.0 15.0 10.0 5.0 0.0 FY10 FY11 Registration
FY10
FY11
FY12
FY13
FY12 Launch
FY13
Rallis uses Innovation Index to measure its performance of new product launches. Innovation index shows sales contribution from products launched in last 4 years. Index has typically average at 25-30% of sales. In FY12 & 13, Rallis's key brand "Applaud" and "Takumi" completed 4 years and hence came out of Innovation index that led to fall in innovation index. We believe Rallis's constant focus on new products would continue to yield results going ahead on the back of its strong R&D and Registration pipeline. We believe its matter of time before contribution from new launches start kicking.
24
Contract Manufacturing - Low margin, Steady cash flow - opportunity abundant Global agrochemical companies have been reducing manufacturing capacity of low value products to concentrate on higher-value products. Conversely, they are maintaining their strong hold on off-patent Active Ingredients (AI) through outsourcing the same. For example, Germany's BASF has cut its range of AI from 300 in 2001 to 130 in 2006. Syngenta has also reduced its portfolio from 120 to 80. Bayer CropScience reduced its portfolio by 29 actives between 2000 and 2006. Total global sales of agrochemicals were estimated to be worth US $54bn in CY2012. Sales of patented product constituted approximately 1/4th of the total and another 1/4th is proprietary off patent (Patent of molecule has expired but no credible generic brand has been able to garner significant market share from patented brand). Opportunity of even 10% of the total market size would translate into US$ 3 bn Hence, Rallis plans to selectively target this opportunity by supplying AI to the industry top players. Rallis has a credible presence in the international market through exports. Exports on average have contributed 1/3rd of total revenue over long term. Over FY2011-13, Rallis Exports registered a CAGR of 27.3%. To attract client and for focus on export, Rallis set up a new plant at Dahej for manufacturing for the export market. Revenue - Domestic & Export
6,000 60
Management believes there is huge scope for contract manufacturing give the size of the opportunity. This in turn is driven by 2 major events Japanese companies on account of natural calamities are looking at de-risking their manufacturing base. US & EU agrochemicals major have been outsourcing from china to the extent of 80-95% of their requirement and are looking for geographic diversification.
Agrochemicals being crop specific have varying demand based on the specific type of pest that hampers growth of the crop. Hence, one crop might need different type of insecticides or fungicide or herbicide in different regions. In addition, there are many crops that are grown in very specific regions and may require less amount of agrochemicals which may not be economical to produce and profitable to sell to the big global players. Therefore, the smaller regional players very often dominate these niche segments. Rallis plans to meet the requirements of such niche demand. Rallis has is set up a new plant at Dahej (Phase-1) for manufacturing AI for the export market as well as to meet its own formulation consumption. Total capex of the Dahej plant is estimated at Rs150-200cr. Management has hinted about the Dahej Phase-2 and to attract new customer has recently started new chemistry reaction plant (pilot plant) at its existing Dahej plant.
4,500
45
(Rs mn)
3,000
30
1,500
15
0 FY12 FY13 Export FY14E % YoY FY15E
Source: Company, EISEC Research
(%)
25
The next growth frontier - Seed Business India Seed industry is estimated to be worth Rs 8,000-10,000 cr (US $ 2 bn) and is 6th largest in the world. Indian seed industry is growing at 12-13% p.a. and the commercial seed segment accounts for a mere 25% of the total market. Hence, the growth opportunity for commercial seeds is substantial going ahead. As per one study wheat, groundnut, soybean and chickpea (high-volume low value seeds) 80% of the cropping area is sown with farm-saved seeds that are old and obsolete varieties. Another study has concluded that more over 70% of seed used in India are through the farm-saved seed. In earlier days, India seed industry was driven by PSU enterprise and has share of 60%. However over the years positive government policies has attracted investments by private players and share of Private sector share has increased from to 80% in 2010.
All India seed replacement rate (%) of major crops

Crop Wheat Paddy Maize Jowar Bajra Chickpea Urdbean Arhar Peanut RSM Soybean Sunflower Cotton 2001 13.0 19.2 21.0 18.4 45.9 4.2 16.6 8.7 5.2 38.4 12.4 13.7 21.2 2002 13.0 19.3 21.4 18.8 48.5 4.2 17.1 8.8 5.5 44.6 12.5 15.7 21.9 2003 13.0 19.2 24.4 26.7 51.0 7.1 20.5 13.6 11.0 67.0 15.6 19.6 19.8 2004 16.5 16.3 31.5 19.3 44.9 9.9 17.2 9.8 7.1 58.5 27.0 60.2 20.7 2005 17.6 21.3 35.4 19.0 55.4 9.4 15.7 10.5 6.9 55.4 28.9 67.7 21.8 2006 21.8 22.4 43.8 19.4 55.1 9.0 13.7 11.6 9.8 60.7 28.4 66.9 19.8 2007 25.2 25.9 44.2 19.9 48.5 11.9 23.9 16.1 14.3 58.6 33.4 62.9 15.3 2008 26.8 30.1 48.5 26.2 62.9 14.4 26.3 16.0 17.0 52.7 35.1 43.6 12.1 Average 18.4 21.7 33.8 21.0 51.5 8.8 18.9 11.9 9.6 54.5 24.2 43.8 19.1
Crop-wise growth in distribution of seeds (%)

Period 1983-88 1991-2002 2002-2011 Overall CAGR Cereals 9.9 6.8 14.5 7.8 Pulses 16.1 2.6 16.4 8.7 Oilseeds (0.2) 2.2 17.4 8.5 Fibres (2.3) 4.7 (0.9) 2.2 Other (1.8) (0.1) 15.4 0.1 Total 6.1 5.1 14.9 7.0
One of the biggest opportunity seed industry has is Seed Replacement Rate (SRR), SRR is the percentage of area sown out of total area of crop planted in the season by using certified/quality seeds/cultivars other than the farm saved seed. On country level SRR has improved from around 18.3% in 2001 to 25.9% in 2008, an increase of 760bps over years. However, SRR at 25.9% indicated that farmer still avoids buying new seed up to great extend.
Sighting seed to be next growth driver, Rallis acquired seed Research & Marketing company Metahelix along with its R&D subsidiary Dhaanya Seeds. In case of Seed business during acquisition (FY2010), Management had guided for Rs 10 bn revenue, on a cumulative basis by the end of FY2015. Till date Metahelix has registered total cumulative revenue of Rs 3.8 bn (FY10-13). To achieve the target of Rs 10 bn, company would need to achieve CAGR of ~66% over next 2 years. Given seed industry is expected to grow at 12-13%, we keep moderate expectation for Rallis Seed business and estimate it to register CAGR of 37% over FY2013-15. However any positive contribution on EBITDA margin would only be possible once business achieves revenue of Rs 3.5 bn plus.
26
Improving financials
Based on 9MFY2014 performance of Rallis, where in revenues grew by 20.7% and EBITDA margin marginally improved by 51bps to 16.4%, we expect domestic business to post CAGR of 13% over FY2013-15. Our estimate of domestic business growth is same as that during FY2007-10 and 800bps higher compared to FY2010-13 (5% CAGR). Even though India has received good rainfall during the current season, there has been a case of excess rain on district level. Monsoon withdrawal that typically starts from 1-Sept, this time got delayed to 9-Sept. This led to delay in spraying activity by farmer, similarly 3Q has witness cyclone Helen and Leher hit coastal Andhra Pradesh largest agrochemical market of country. Due to this Industry has collectively lost sales approximately worth Rs 12-13 bn in 9mFY14. Changing revenue mix
24,000
Going ahead, we expect the company's Total Revenues to post moderate CAGR of 17% over FY2013-15E on the back of 17% & 37% growth in Exports & Seed business, while domestic is expected to grow at modest pace of 13%. Management is hopeful of receiving a major leg up in export business by end of Q1FY15, as new order materialize.
100% 8% 29%
11% 29%
13%
15%
75%
29%
29%
50% 63% 25%
61%
58%
57%
0% FY12 FY13 Export FY14E Seed & Service FY15E
19,000
(Rs mn)
Domestic Crop Care

14,000
9,000
4,000 FY12 Domestic - Agrochemical

FY13 Export - Agrochemical
FY14E
FY15E
Based on 9MFY14 performance we are building in 100bp improvement in EBITDA margin over FY13. We expect Rallis to t have steady EBITDA margin of 15.4% in FYT14 & FY15 respectively. We believe our EBITDA Margins are achievable considering that Rallis has posted average margin of 16.7% over FY09-13 (Max - 19.4%, Min - 14.4%). We estimate EBITDA to register a CAGR of 21% over FY2013-15E compared to Sales CAGR of 17% over same period.
Seeds & Other - Domestic
27
EBITDA margin
20
Adj PAT
2,000
18
1,500
(Rs mn)
FY12 FY13 FY14E FY15E
15
1,000
13
500
10
FY12 FY13 FY14E FY15E
Source: Company, EISEC Research Source: Company, EISEC Research
EBITDA
3,200
Return ratios
30
2,400
(Rs mn)
24
1,600
(%)
18
800
12
FY12
FY13
FY14E
FY15E
6 FY12 FY13 RoCE

FY14E RoE
FY15E
We expect benefit of increasing EBITDA margin to flow down to PAT leading to CAGR of 24% over FY13-15. Going ahead, we estimate the company to further improve its RoE to 23% and 24% in FY2014 and FY2015 respectively from 20% in FY13. While, RoCE is likely to improve from 19.4% in FY13 to 24% & 26% in FY14 & FY15.
28
Outlook & Valuation

The agriculture sector has been the focus area of governments & industries for long time. Food security has been top priority for the government while reduction in food loss is one of the easiest ways to boost food production. While usage of agrochemicals can reduce the loss of food production, there is a limit. Hence the need of the hour is increasing crop yield with help of using better quality seed. Country has already seen one green revolution and is in dire need of another. We believe that Rallis is well placed to capitalise on emerging opportunities in domestic agrochemical and seed business. Besides, EBITDA Margins have shown turnaround from lows of 14.4% in FY13 and are likely to show a minimum improvement of 100bp in FY14 & FY15. Going ahead, we expect Contract Manufacturing along with Seed to drive the company's next level of growth. Overall, we estimate Rallis to register a CAGR of 17% and 24% in Net Sales and Profit over FY2013-15E, respectively. On the valuation front, at current price (Rs159), the stock is trading at 17x FY2015E Earnings and 9.3x FY2015E EV/EBITDA. Historically, Rallis has traded at an average 20x one-year forward EPS over the last 5-years. We Initiate Coverage on the stock with an Accumulate rating and Target Price of Rs189 (20x FY15E EPS). P/E Chart
250
Risk to our call

Difficulty in getting Exports: If the company is unable to get new customer/ order and in turn unable to meet our export target, the company may post dismal performance and pose a downside risk to our estimates. Seed business continuous to make losses - Rallis's Seed Business is currently loss making, as it is under investment phase. Although we are not building in any profit from segment, we estimate losses to be minimal, any variance from the same could negatively affect our estimate earning. Weather: Agrochemicals are the last input in any agricultural operation and protect the final output i.e. crop. Hence, vagaries in season could affect the demand for agrochemicals and in turn impact our estimates. P/E Chart
40
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200
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150
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P/E
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10.0x
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29
Financial Summary
P&L Statement (Y/E Mar) Net Sales % chg Total Expenditure EBIDTA (% of Net Sales) Dep & Amort EBIT Interest Other Income Exceptional item PBT (% of Net Sales) Tax (% of PBT) PAT before MI MI & Share of Asso Adj PAT % chg Cash Flow (Y/E Mar) Profit before tax (-) Tax (+) Depreciation (-)Change in Working Cap (+)Others OCF (-) Capex (-) investment (-) others) CFI (+) Net debt (+) Net Equity (-) Dividend Payout (+)Others CFF Inc./(Dec.) in Cash Opng Cash balances C/s Cash balances FY11 10,862 20.6 8,948 1,915 17.6 171 1,744 37 138 1,845 17.0 581 31.5 1,264 (3.9) 1,260 39.1 FY11 1845 (706) 171 (314) (113) 883 (1278) (60) (1338) 849 0 (353) (38) 458 2 119 121 FY12 12,749 17.4 10,719 2,030 15.9 287 1,743 146 69 (172) 1,494 13.1 487 29.2 1,007 0.0 835 (33.7) FY12 1494 (407) 287 (507) 80 946 (466) (275) (741) 369 0 (473) (138) (242) (38) 146 108 FY13 14,582 14.4 12,476 2,106 14.4 315 1,790 185 117 1,723 11.8 535 31.0 1,188 0.0 1,188 42.3 FY13 1723 (360) 315 (321) 86 1443 (349) (50) (399) (227) 0 (495) (172) (895) 149 112 261 FY14E 17,348 19.0 14,676 2,672 15.4 383 2,289 137 84 2,236 12.9 704 31.5 1,531 0.0 1,531 28.9 FY14E 2236 (704) 383 326 137 2377 (937) 0 (937) (17) 0 (296) (137) (450) 990 258 1248 FY15E 20,032 15.5 16,947 3,085 15.4 448 2,637 99 138 2,675 13.4 843 31.5 1,833 0.0 1,833 19.7 FY15E 2675 (843) 448 687 99 3066 (1096) 0 (1096) 0 0 (637) (99) (736) 1234 1248 2482
Balance Sheet (Y/E Mar) Equity Share Capital Preference capital Reserves & Surplus Shareholders fund Long term debt Others Current Liabilities & Prov Total Liabilities Net Fixed Assets Investment Cash & equivalents Total Current Assets Total Assets Key Ratios EBITDA margin (%) Net Profit Margin RoE ROCE Inventory (days) Payable (days) Receivables (days) Debt to Equity
FY11 194 0 4,855 5,049 844 239 4,035 10,167 5,071 1,273 146 3,823 10,167 FY11 17.6 11.6 13.6 10.6 76.9 120.7 39.1 0.2
FY12 194 0 5,336 5,530 856 478 4,350 11,214 5,769 1,109 112 4,336 11,214 FY12 15.9 7.9 15.8 17.6 77.8 91.7 32.0 0.2
FY13 194 0 6,013 6,207 107 698 4,889 11,902 5,899 1,105 258 4,898 11,902 FY13 14.4 8.1 20.2 17.1 66.9 78.8 44.0 0.0
FY14E 194 0 6,907 7,102 90 698 5,233 13,122 6,453 1,105 1,248 5,564 13,122 FY14E 15.4 8.8 23.0 20.1 70.0 79.0 42.0 0.0
FY15E 194 0 7,944 8,138 90 698 6,106 15,032 7,102 1,105 2,482 6,825 15,032 FY15E 15.4 9.1 24.0 20.5 71.0 80.0 40.0 0.0
Valuation parameter EPS P/E P/S P/BV EV / EBITDA 6.5 24.7 2.9 6.2 16.6 4.3 37.3 2.4 5.6 15.7 6.1 26.2 2.1 5.0 14.7 7.9 20.3 1.8 4.4 11.2 9.4 17.0 1.6 3.8 9.3
30
UPL Ltd
M&A strategy not paying off well
Recommendation CMP(Rs) Target(Rs) Upside % Share Holding (%) Promoter Public FII DII Key Data Average Vol(6m)(000) FV Beta Mcap (Rs Mn) 52 week H/L Bloomberg /Reuters Group Sensex / Nifty Stock Performance (%) Abs(%) 3M 1Y Sensex -3.1 3.1 UPL 15.2 42.7 Year FY11 FY12 Analyst: Sageraj Bariya Email ID: sagerajb@eisec.com Phone No.: 022-61925337 FY13 FY14E FY15E 2338.4 2 0.8 81,071 218 / 113 UPLL IN/UNPO.BO A / S&P BSE 100 20,209 / 6,002 28.9 17.1 44.9 9.1 185 195 5%
REDUCE
UPL is a leading global generic player in the agrochemical Industry. UPL ranks among the Top-5 post patent agrochemical manufacturers in the world and has a manufacturing facilities spread across the world in India, France, Spain, UK, Vietnam, Argentina, Netherlands, Italy and China. However, we believe generics are expected to face tough time from here on account of 1) stagnation of growth in developed market (US & EU), 2) as more countries switch to GM & Hybrid seeds 3) increasing competition amongst generics as market growth tapers down. Hence we recommend Reduce on the stock with target price of Rs195 (9x FY15E EPS). However ongoing buyback may continue to support stock price around current levels.
Investment Concerns
Generic Market becoming generic, seed is future - Share of generic has been increasing continuously over last decade.
Share of generics have increased from 36% in 2004 to 40% in 2006 to 52% in 2011. There has been visible drop in rate of introduction of new agrochemical / crop protection molecule over past 2 decade. We believe this is conscious strategy being followed by Innovator firms, as they have started focusing on Seed. This is visible in changing business model, wherein R&D spends on Seed has grown at higher rate compared to Agrochemical. Total Global agrochemical sales posted CAGR of 6.1% over 2002-11, while during same period, total Seed sales post CAGR of 8.8% and subset GM seeds posted CAGR of 19.6%. In nutshell global agrochemical business is becoming low to no growth with too many players fighting for market share. M&A strategy not paying off - UPL's strong revenue growth was possible on back of aggressive M&A strategy. Recent M&A amongst top-4 players globally, indicates lack of growth as reason behind consolidation in global agrochemical industry. Although, acquisitions have bolstered size of UPL, margins have taken hit. Over the years EBITDA margins have come down from highs of 28% in FY06 and stabilized in region of ~18% over FY10-13. While RoE/RoCE has averaged at 12/15%, during mentioned period.
Risks to our call:

Consolidated in Industry - there is has been consolidation in global agrochemical industry, if pace increases and in
turn reducing competition, pricing power could return to generics and boosting overall profitability of UPL.
Farmer switch back to agrochemical - Global agrochemical growth has been affected as farmers have shifted to
better seed that reduces consumption of agrochemical, any switch back to agrochemical would be positive for UPL.
Revenue (Rs mn) 57,607 76,713 91,945 105,112 116,424 PAT (Rs mn) 4,774 5,365 7,719 8,861 9,971 EPS (Rs) EBIDTA Margin (%) 10.3 11.6 17.4 20.3 22.9 18.6 18.0 18.1 18.1 18.2 P/E (x) 17.9 15.9 10.6 9.1 8.1 EV/EBIDTA (x) 7.0 7.2 5.5 5.0 4.2 PB (x) 2.3 2.0 1.8 1.6 1.4 ROE (%) ROCE (%) 14.2 13.6 17.5 18.4 18.4 12.4 11.7 11.5 11.7 12.5
31
Executive Summary
Investment Concerns
UPL is a leading global generic player in the Agrochemical Industry. UPL ranks among the Top-5 post patent agrochemical manufacturers in the world and has a manufacturing facilities spread across the world in India, France, Spain, UK, Vietnam, Argentina, Netherlands, Italy and China. Total global agrochemical market is worth US $50bn, of which a mere US$ 26 bn is currently being catered to by the generic players. Furthermore, 49% of the same is controlled by the six largest generic players including UPL. Generic Market becoming generic - Share of generic has been increasing continuously over last decade. Share of generics have increased from 36% in 2004 to 40% in 2006 to 52% in 2011, total global agrochemical sales posted CAGR of 6.1% over 2002-11. There has been visible drop in rate of introduction of new agrochemical / crop protection molecule over past 2 decade, that generic companies target post patent-expiry. In nutshell global agrochemical business is becoming low to no growth with too many players fighting for market share Changing Business Model - Given low consumption rate in developing countries, it offers strong growth opportunities. Given 3/4th of market is growing at reasonable pace, Agrochemical companies ought to spend more on agrochemical R&D. However that doesn't seem to be the case, as visible from declining rate of introduction of new molecule. Focus shifting from Chemical to Seed - Increasing market share of generic and slowing rate of new molecule introduction point to distinct shift in strategy followed by Top-6 Innovator companies. This is visible in changing business model, wherein R&D spend on Seed has grown at higher rate compared to Agrochemical. Total Global agrochemical sales posted CAGR of 6.1% over 2002-11, while during same period, Total Seed sales post CAGR of 8.8% and subset GM seeds posted CAGR of 19.6%. M&A strategy not paying off - UPL's strong revenue growth was possible on back of aggressive M&A strategy. Recent M&A amongst top-4 players globally, indicates lack of growth as reason behind consolidation in global agrochemical industry. Although, acquisitions have bolstered size of UPL, margins have taken hit. Over the years EBITDA margins have come down from highs of 28% in FY06 and stabilized in region of ~18% over FY10-13. While RoE/RoCE has averaged at 12/15%, during mentioned period.

The Agriculture Sector, has been grabbing lot of attention in recent times. As per UN report, global demand for major grains like wheat, rice and soya is estimated to grow at CAGR of 1.4% over 2012-27 driven by demand from Food, Feed and Fuel. Total food requirement is likely to increase by 30% in 2030 and by 50% in 2050. However, we believe generics are expected to face tough time from here on back of 1) stagnation in growth in developed market (US & EU), 2) countries switching to GM & Hybrid seeds 3) increasing competition amongst generics as market growth tapers down. UPL has been growing on back of M&A, from here on key growth drivers are likely to be emerging markets like India, Brazil and other Latin American countries. On the valuation front, Over the 3-year period of FY2008-13, UPL traded at an average one-year forward PE of 9x. We expect UPL sales to register CAGR of 12.5% over FY2013-15, with marginally improvement in EBITDA margins, Adj PAT is likely to show a CAGR of 13.7% over mentioned period. With RoCE and RoE at 12.5% and 18.4% in FY15E, at current levels of FY15E earnings, the stock is trading at fair valuation. We believe there is limited upside to the stock from here on and hence recommend Reduce on the stock with target price of Rs195 (9x FY15E EPS). However ongoing buyback may continue to support stock price around current levels.
Risk
Consolidated in Industry - there is has been consolidation in global agrochemical industry, if pace increases and in turn reducing competition, pricing power could return to generics and boosting overall profitability of UPL. Farmer switch back to agrochemical - Global agrochemical growth has been affected as farmers have shifted to better seed that reduces consumption of agrochemical, any switch back to agrochemical would be positive for UPL.
32
A Global Generic Play

UPL is a leading global generic player in the Agrochemical Industry. UPL ranks among the Top-5 post patent agrochemical manufacturers in the world and has a manufacturing facilities spread across the world in India, France, Spain, UK, Vietnam, Argentina, Netherlands, Italy and China. Total off-patent market is worth US $54bn, of which a mere US$ 18 bn is currently being catered to by the generic players. Furthermore, 56% of the same is controlled by the six largest generic players including UPL.
Total market - US$ 54bn
UPL operates in major markets like USA, EU, Latina America and India, which helps in diversifying its revenue stream along with mitigating the risks arising from operating in a single country or region. Over the years revenue mix has changed, from US & EU dominating with 56% of revenue in FY2009 to 39% in FY2013. With revenue contribution of 27%, the company has carved LatinAmerican Market as separate geography, mainly comprising of Brazil, Argentina, Colombia, etc. Revenue Breakup
100% 24 75% 15 32
(%)
27
32
26
27 14 18 19 20 FY13
12,000 9,000
(US$ mn)
Sales of Total 6 CosUS$ 36bn Sales of generic Top-4 Cos US$ 10bn
29
21 18
50% 21 25% 24 22 FY10 N.America India 22 FY11 EU RoW 22 25
22 19 FY12 Lat-AM
6,000 3,000 Monsanto Sumitomo BASF Syngenta Dow Bayer MAI UPL DuPont Nufarm Others
0% FY09
The global Agrichem industry, valued at US $54bn (CY2011), is dominated by the Top-6 Innovators, viz. Bayer, Syngenta, Monsanto, BASF, DuPont and Dow, which enjoy large market share of patented (23%) and off patent market (25%). Thus, almost 25% of the total pie worth US$ 13 bn (controlled by the Top-6 Innovators through proprietary off-patent products) provides high growth opportunity for larger integrated generic players like UPL
33
Advanta India
UPL has expansive product portfolio which helps in further diversifying its Revenue mix. UPL's product portfolio comprises: (a) Pre-harvesting crop protection, (b) Post harvesting crop protection and (c) Non-crop protection.
Pre-harvesting crop protection is basically adopted by the farmers to avert,
destroy or control pests or unwanted type of plants or animals that cause harm to crops or hampers the normal growth process of crops. Crop protection is done prior to crops getting harvested. UPL derives maximum of its Revenue from the Farm Crop Protection Segment - further classified into insecticides, herbicides and fungicides, which aids further diversification of Revenues. Post harvesting crop protection, as the name suggests, is done post the crops are harvested and stored. Pertinently, crops can be completely destroyed during transportation or storage by pests. But, adoption of crop protection methods (usage of agrochemicals) post harvesting minimises crop loss and increases food availability. Non-Crop Protection Segment entails protecting turfs and ornamental lawns, nurseries at home and office, and domestic and industrial pest management. These segments contribute the least to the company's Total Revenues.
Globally, all the agrochemical companies have ventured into the Seed business as a strategy to diversify and further boost revenues. The global Seeds business is estimated to be worth US$40bn and has registered CAGR of 9% over past 10 years. Global Seed Industry is dominated by the same Top-5 innovator companies that are also leaders in the Agrochemical space. In order to offer farmers a complete package of seed and agrochemical, UPL acquired 100% stake in the Netherland-based Advanta Seeds in 2006 for a consideration of Euro100mn (approx Rs560cr). Later through an IPO, UPL diluted its stake in the company to 49.9%. Advanta is in the business of hybrid seeds and operates in geographies like Americas (USA, Argentina), Australia and Asia (India, Thailand). Advanta's key offering pertains to crops like rice, cotton, sunflower, sorghum, corn, canola and vegetables. For CY2012, the company posted Revenues of Rs 10 bn and Net Profit of Rs 594 mn, with RoE & RoCE of 10.7% & 8.9% respectively.
(Rs mn) Sales EBITDA EBITDA (%) PAT RoE (%) RoCE (%) Dec-08 6,405 769 12.0 488 10.3 5.1 Dec-09 6,984 413 5.9 252 4.8 1.6 Dec-10 7,092 210 3.0 (297) (6.3) (0.2) Dec-11 9,486 1,317 13.9 123 2.4 7.2 Dec-12 10,679 1,678 15.7 594 10.7 8.9
34
Generic Market becoming generic

Share of generic has been increasing continuously over last decade. Share of generics have increased from 36% in 2004 to 40% in 2006 to 52% in 2011. This begs question whether generic companies are gaining upper hand and managing to increase their market share or Top-6 Innovators players are exiting the agrochemical business. Declining Marketshare of Innovators
100% 36% 75% 40% 52%
24
Slowing rate of new molecule introduction There has been visible drop in rate of introduction of new agrochemical / crop protection molecule over past two decade. Given low consumption rate in developing countries, it offers strong growth opportunities. Given ~50% of market is growing at reasonable pace, Agrochemical companies ought to spend more on agrochemical R&D. However that doesn't seem to be the case, as visible from declining rate of introduction of new molecule.
New Active Ingredient Introductions
50%
33%
32% 25%
18
25% 31% 0% 2004 Proprietary

0
28%
23%
12
2006 Proprietary off patent
2011 Generic
1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
35
Changing Business Model - Focus shifting from Chemical to Seed

Agrochemical Active Ingredients in Development
80
Increasing market share of generic and slowing rate of new molecule introduction point to distinct shift in strategy followed by Top-6 Innovator companies. This is visible in changing business model, wherein R&D spend on Seed has grown at higher rate compared to Agrochemical. R&D Expenditure Historical development
600
60
40
450
2001
20
US $mn
300
0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
150
US $mn
Lowering rate of introduction of new molecules directly impacts future growth potential of generic companies like UPL. Generic companies essentially play on cost competitive advantage once molecule is off patent. If there are fewer molecules likely to go off patent, future growth becomes question market for generic companies. In nutshell global agrochemical business is becoming low to no growth with too many players fighting for market share.
Agrochemicals
1600
2011
1200
800
400
Agrochemicals
36
On aggregate basis, total industry R&D spends on Seed has surpassed that of agrochemicals. R&D Expenditure of Leading Agrochemical Companies
3600
Is cost of inventing seed lower than agrochemicals?

If one were to believe there has been change in business models of Top-6 innovator players from agrochemical to seed, one needs to understand economics of inventing better seed. Studies show cost of inventing new plant traits/seed are lower than agrochemical. Cost of Bringing a New Product to Market
280 256
2700
(US $mn)
1800
900
210
(US$ mn)
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Agrochemical R&D
140
136
Seed and Trait R&D
70
There has been marked increase in cost of innovation and bringing new molecule to market over period. A single new molecule costed US$ 152 mn in 1995 that grew by 21% to US$ 184 mn in 2000 and 39% from there to US$ 256 mn in 2008 (CAGR - 4.1% from 1995) Cost of Bringing a New Product to Market
280 256
0 Agrochemical
Plant trait
210
184 152
(US$ mn)
140
As per industry, cost of inventing new plant trait/seed is in region of US$ 136mn, while that for agrochemical is US$ 256 mn. However, if one were to look at average time needed for new product introduction, it stands at 10 years for agrochemical and 13 years for seed. This raises another question, if old adage of "Time is Money" holds true, then why would company invest in seed compared to agrochemical.
70
0 1995
2000
2008
37
Time from New Product Inception to First Introduction

16 12
Year
M&A key strategy to drive growth or norm in industry?

UPL has been one of the fastest growing global agrochemical company in the sector. Over FY2008-13, UPL revenue registered a CAGR of 20%. This was on back of aggressive M&A strategy followed by the company. Acquisition of product/brand/molecule/company has been key corner stone of UPL's growth strategy, over past 2 decade UPL has acquired 26 companies or product across the world. Acquisition history
Company / Product/Brand/Molecule MTM Agrochemicals Ltd Agrodan A/S Devrinol Devrinol RoW Devrinol Japan Surflan Ultra Brazer Lenacil, Cloradizon Ag Value Inc. Cequisa SWAL Corporation Reposo S.A. Advanta B.V. Corpserve (Pty) Limited Asulam, Trichlorfon & ODM Bensulfuron-methyl Propanil Cerexagri Supertin, Vendex Icona Evofarm RiceCo Mancozeb Product from DuPont DVA Agro Do Brasil (51%) Sipcam Isagro Brazil (50%) SD Agchem
Source - Company, Media reports, Eisec research
8 4 0 1995 2000 Agrochemical 2005 -08 Seed 2011
Given agrochemicals are last component that goes into farmer's investment chain, it faces lot of uncertainty. Farmer would buy agrochemical, only once he is sure that crop would grow. Another advantage seed offers is considerable pricing power to company. Performance of saved seed is substantially lower compared to original. Farmers have to buy new seed for every season from company, in turn giving pricing power to company. Investment chain of farmer
Agrochemicals
Fertiliser
Labour
Seed
Land
Country UK Denmark USA RoW (Ecl Japan & USA) Japan USA Worldwide Europe USA Europe India Argentina Netherlands South Africa Worldwide with exception Worldwide (excl Asia Pacific) Worldwide Worldwide Worldwide Argentina Colombia USA Global Brazil Brazil Netherlands
Year 1994 1996 1996 1997 2000 2004 2004 2004 2005 2006 2006 2006 2006 2006 2006 2006 2006 2007 2007 2007 2008 2010 2010 2011 2011 2012
38
UPL's two-fold acquisition strategy has been primarily responsible for such stupendous growth. The company's strategy entails: Acquiring original brands from the Innovators - Innovators have been selling out old brands to focus on new brands (molecules) or seed. Acquiring small/ regional players - Acquires small players dominant in a region/single product/small product portfolios but lacking scale and capability to become a global player. UPL also targets a 3-4 year payback period at the time of the acquisition.
24
18
(%)
12
Although, acquisitions have bolstered size of UPL, margins have taken hit. Over the years EBITDA margins have come down from highs of 28% in FY06 and stabilized in region of ~18% over FY10-13. While RoIC has averaged at 15.5%, during mentioned period.
32
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
RoE
RoCE
24
(%)
16
We believe margin decrease have been on account of following reasons, 1) Most of acquisitions have been in developed market, where labour cost is high and further cost reduction is challenging. 2) MNCs sold off outdated molecule once farmers had switched to better offering. 3) Farmers shifting to better option - seeds (that require less or nil usage of pesticides). 4) Generic market as such witness high competition in turn leading to price reduction.
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Recent global events indicates lack of growth as reason behind consolidation Towards end of 2009 and early 2010, Global rank #1 Japanese agrochemical major Sumitomo acquired stake in Australia based Nufarm (Global rank #3). In October 2011, ChemChina acquired Israel based Makhteshim Agan Industries Ltd (Global rank #2). We believe this M&A has been driven more by lack of growth opportunity. Ancillary benefit of M&A is consolidation of manufacturing facility, helping company achieving better cost and overall consolidation of market share leads to better pricing power.
EBITDA margin
39
Financials
During 9MFY14 Company posted growth of 16.8%, of which 6% was on account of exchange, while of the balance 10% was volume and 1% was price hike. Given India has witness strong rainfall, growth in India business has been strong at 25%. North American market that witness delayed winter in posted 7% growth. Latin American market witness regular sowing and sales registered a growth of 19%. Management has guided for 12-15% growth in FY2014E excluding acquisitions at the end of 1HFY14, however same has been revised downward in Q3FY14 to 10-12%. We estimate Sales to record CAGR of 12.5% over FY2013-15E (excluding acquisitions), as FY14 grows by 15% on account of currency impact. North American market has seen switch over to GM seed, hence growth is likely to be in range of 2-4% over long term. Similarly, though EU market has not switched to GM seed, growth in sector has been muted over past few years as it has reached saturation level. EU agrochemical industry has registered CAGR of 4.2% over 2005-12.Going forward India & Lat-Am market (driven by Brazil) are likely to witness high growth. Brazil currently forms ~3-5% of UPL's total revenue base, while India contributes 19%. Revenue Breakup
36,000
Though over the year EBITDA margins have dropped, however over FY10-13 it has stabilized in region of ~18%. For 1HFY14, EBITDA margin came in at 18.4%. Management has guided for 100bps expansion, we believe company would be able to maintain margin at current level for FY14 & 15. Profitability to remain concern - Management plans to continue its investment in registration of molecules along with debottlenecking of capacity. Total capex is likely to be Rs 4-4.5bn for each year in FY14 & FY15, with 1/3rd being spent on registration, while balance being regular plant capacity & maintenance expansion. Given nature of business, working capital requirements are likely to remain high. This is likely to restrict overall profitability of the company. RoCE/RoE is likely to persist in range ~12%/~ 18% Profitability
20
15
10
27,000
(Rs mn)
18,000
FY12 FY13 RoE

FY14E RoCE
FY15E
9,000
N.America FY12
India FY13
EU FY14E
RoW FY15E
Lat-AM
40
Outlook & Valuation

The Agriculture Sector, has been grabbing lot of attention. As per UN report, global demand for major grains like wheat, rice and soya is estimated to grow at CAGR of 1.4% over 2012-27 driven by demand from Food, Feed and Fuel. Total food requirement is likely to increase by 30% in 2030 and by 50% in 2050. Food security is also top priority for most governments, while reducing food loss is one of the easiest ways to boost food inventory. As per Rallis India report estimate of 2012, value of crop losses caused due to non-usage of pesticides was around Rs 100,000cr, accounting for approximately 1% of India's GDP (FY2012). Pertinently, usage of Pesticides or Agrochemicals can reduce the loss of food production. Hence, we believe that the Agrochemical companies would continue to do well in wake of heightened food security risks and strong demand is likely to be witnessed across the world. Overall, we expect the global Agrochemical industry to perform well from here on. However, we believe generics are expected to face tough time from here on back of 1) stagnation in growth in developed market (US & EU), 2) as more countries switch to GM & Hybrid seeds 3) increasing competition amongst generics as market growth tapers down. UPL has been growing on back of M&A, from here on key growth drivers are likely to be emerging markets like India, Brazil and other Latin American countries. On the valuation front, Over the 3-year period of FY2008-13, UPL traded at an average one-year forward PE of 9x. We expect UPL sales to register CAGR of 12.5% over FY2013-15, with marginally improvement in EBITDA margins, Adj PAT is likely to show a CAGR of 13.7% over mentioned period. With RoCE and RoE at 12.5% and 18.4% in FY15E, at current levels of FY15E earnings, the stock is trading at fair valuation. We believe there is limited upside to the stock from here on and hence recommend Reduce on the stock with target price of Rs195 (9x FY15E EPS). However ongoing buyback may continue to support stock price around current levels.
28
P/E Chart
21
14
Oct-04 Apr-04 Oct-05 Apr-05 Oct-06 Apr-06 Oct-07 Apr-07 Oct-08 Apr-08 Oct-09 Apr-09 Oct-10 Apr-10 Oct-11 Apr-11 Oct-12 Apr-12 Apr-13 Oct-13
1yr fwd P/E
3yr Avg
5yr Avg
Risk to our call

Consolidated in Industry - there is has been consolidation in global agrochemical industry, if pace increases and in turn reducing competition, pricing power could return to generics and boosting overall profitability of UPL. Farmer switch back to agrochemical - Global agrochemical growth has been affected as farmers have shifted to better seed that reduces consumption of agrochemical, any switch back to agrochemical would be positive for UPL.
41
Financial Summary
P&L Statement (Y/E Mar) Net Sales % chg Total Expenditure EBIDTA (% of Net Sales) Depreciation& Amortisation EBIT Interest Other Income Exceptional item PBT Tax PAT % chg Adj PAT % chg FY11 57,607 6.5 10,699 10,699 18.6 2,138 8,561 3,120 1,375 (140) 6,675 731 5,945 15.0 4,774 (0.3) FY12 76,713 33.2 13,840 13,840 18.0 2,924 10,916 4,146 923 (406) 7,287 1,280 6,007 1.0 5,365 12.4 FY13 91,945 19.9 16,618 16,618 18.1 3,537 13,081 4,290 1,000 (352) 9,439 2,032 7,407 23.3 7,719 43.9 FY14E 105,112 15.2 19,146 19,146 18.1 3,976 15,171 5,063 1,206 (600) 10,714 2,772 7,942 7.2 8,861 14.8 FY15E 116,424 9.9 21,189 21,189 18.2 4,231 16,958 5,110 946 0 12,794 3,199 9,596 20.8 9,971 12.5
Balance Sheet (Y/E Mar) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders fund Total Loans Other Liabilities Current Liabilities & Prov Total Liabilities Net Block Investments Other non-current assets Cash & equivalents Total Current Assets Total Assets 924 36,337 37,261 10,023 1,646 33,854 82,784 23,776 6,878 36,471 15,659 52,130 82,784 924 40,808 41,731 23,772 6,956 31,230 103,689 35,286 9,906 51,495 7,002 58,497 103,689 885 45,567 46,452 28,123 7,972 41,983 124,531 38,668 10,187 60,193 15,482 75,676 124,531 871 49,147 50,018 29,800 8,041 47,363 135,223 39,193 10,187 74,882 10,961 85,844 135,223 871 57,230 58,101 16,500 8,071 54,465 137,137 39,462 10,187 83,439 4,049 87,489 137,137 FY11 FY12 FY13 FY14E FY15E
Cash Flow (Y/E Mar) Profit before tax (-) Tax (+) Depreciation (-)Change in Working Cap (+)Others OCF (-) Capex (-) investment (-) others) CFI (+) Net debt (+) Net Equity (-) Dividend Payout (+)Others CFF Inc./(Dec.) in Cash Opng Cash balances Closing cash
FY11 6,816 (885) 2,138 (1,884) 1,964 8,148 (6,960) (1,848) 0 (8,809) 2,888 0 (1,091) (2,113) (316) (977) 16,162 15,185
FY12 7,693 (1,242) 2,924 (11,271) 3,516 1,620 (5,665) (933) 0 (6,599) 2,180 0 (1,156) (3,305) (2,282) (7,260) 15,487 8,227
FY13 9,791 (1,438) 3,537 1,043 4,059 16,992 (4,457) (3,690) 0 (8,147) 6,372 (2,235) (1,427) (3,527) (817) 8,028 8,227 16,255
FY14E 10,714 (2,772) 3,976 (9,342) 5,150 7,726 (4,500) 0 0 (4,500) 1,677 (3,066) (1,295) (5,063) (7,747) (4,521) 15,482 10,961
FY15E 12,794 (3,199) 4,231 (1,457) 4,954 17,323 (4,500) 0 0 (4,500) (13,300) 0 (1,325) (5,110) (19,735) (6,912) 10,961 4,049
Key Ratios (Y/E Mar) EBITDA margin Net Profit Margin RoE ROCE Inventory (days) Payable (days) Receivables (days) Debt to Equity
FY11 18.6 8.5 14.2 12.4 91.9 88.5 96.7 (0.3)
FY12 18.0 7.1 13.6 11.7 102.1 100.0 132.9 0.4
FY13 18.1 8.6 17.5 11.5 89.5 111.9 116.2 0.2
FY14E 18.1 8.4 18.4 11.7 110.0 100.0 115.0 0.3
FY15E 18.2 8.6 18.4 12.5 108.0 100.0 115.0 0.2
Valuation parameter EPS P/E P/S P/BV EV / EBITDA 10.3 17.9 1.5 2.3 7.0 11.6 15.9 1.1 2.0 7.2 17.4 10.6 0.9 1.8 5.5 20.3 9.1 0.8 1.6 5.0 22.9 8.1 0.7 1.4 4.2
42
Bayer CropScience Ltd

Parental advantage priced in
Recommendation CMP(Rs) Target(Rs) Upside % Share Holding (%) Promoter Public FII DII Key Data Average Vol(6m)(000) FV Beta Mcap (Rs Mn) 52 week H/L Bloomberg /Reuters Group Sensex / Nifty Stock Performance (%) Abs(%) 3M 1Y Sensex -3.1 3.1 BAYER -9.1 35.7 19.5 10 0.3 62,400 1829 / 1065 BYRCS IN/BAYE.BO B / S&P BSE 500 20,209 / 6,002 69.0 11.7 8.5 11.7 1586 1521 -4%
SELL
Bayer CropScience (BCS) is a 69% subsidiary of the global major, Bayer AG Germany, a diversified chemical and healthcare player. BCS India has 2 primary business, Agrochemical and Seeds. BCS has leadership position in India agrochemical space with market share of ~13%, it has production facilities in Himatnagar to manufacture a varieties of agrochemical like fungicides, insecticides and herbicides. In seed business, it is sole distributor of Bayer seeds in India. Given its leadership position in Indian agrochemical & rice seed business, Bayer is well placed to take advantage of upcoming seed revolution. However at current price, we believe current valuation are factoring in best case scenario and hence recommend Reduce on stock.
Rating Rationale
Leader in Indian market - BCS is a market leader in the Indian Agrochemical Sector with a market share of 13%. It also
has 4% market share in Indian seed market. India consumes on average 0.6kg of pesticides per hectare (ha) compared to 7kg/ha in USA and 12kg/ha in Japan. We believe that there exists a huge opportunity for BCS to grow its domestic agrochemical business. Increasing focus on seed - Seed contributed approximately 1% of total revenue in FY2009 which was at 15% in FY2013 and is likely to keep increasing in foreseeable future. Given low penetration (less than 3%) of hybrid rice seed in India market, there is a huge potential for BCS to exploit. Valuation factoring in best case scenario - over FY2011-13, BCS Sales & Adj PAT posted a CAGR of 12.9% & 38.5%. However going forward, we expect margin to contract as BCS's EBITDA margin have never remained above 13% in past decade. At current price stock is trading at 18.7x FY14 and 17.6x FY15x earnings estimate.
Risks to our call:

Sustained current level of EBITDA margin - if company is able to hold or improve it from current level of margin it
would be have positive impact on valuation. Higher than expected growth - We are building in CAGR of 16% in domestic business over FY13-15, any growth above that would positively impact company valuation and stock price.
Year FY11 FY12 FY13 FY14E FY15E Revenue (Rs mn) 21,373 22,723 27,253 32,946 37,249 PAT (Rs mn) 1,337 1,731 2,564 3,107 3,308 EPS (Rs) EBIDTA Margin (%) 33.9 43.8 64.9 84.8 90.3 10.4 11.1 13.2 13.2 13.2 P/E (x) 46.8 36.2 24.4 18.7 17.6 EV/EBIDTA (x) 26.1 22.8 14.5 11.5 9.7 PB (x) 9.3 7.9 3.2 3.3 2.8 ROE (%) ROCE (%) 21.7 23.6 18.8 16.8 17.2 14.5 12.9 15.2 16.0 16.8
Analyst: Sageraj Bariya Email ID: sagerajb@eisec.com Phone No.: 022-61925337
43
Executive Summary
Rating Rationale
Leader in Indian market - BCS is a market leader in the Indian Agrochemical Sector with a market share of 13%. India produces approximately 16% of the world's total food grain, but utilizes a mere 2% of pesticides. Given India consumes on average 0.6kg of pesticides per hectare (ha) compared to 7kg/ha in USA and 12kg/ha in Japan, we believe that there exists huge opportunity for BCS to grow its domestic business. BCS domestic business has grown at average rate of 16.6% over FY09-13, higher than industry rate of ~15%. We believe this is likely to continue going ahead on account of new product introduction and strong brand reputation evident from high market share. Increasing focus on seed - BCS has traditionally been an agrochemical seller. Seed contributed approximately 1% of total revenue in FY2009 which was at 15% in FY2013 and is likely to keep increasing in foreseeable future. BCS seed division has grown at higher pace compared to its domestic agrochemical business. BCS's seed business has grown at CAGR of 17.5% over FY09-13 against CAGR of 16.6% in domestic agrochemical business during the same time. Globally, developed countries have already started witnessing slow or negative growth in agrochemical business. Globally, market has been shifting towards GM & Hybrid seeds as it eliminates need of agrochemicals. Strong Financial performance to continue - All time best performance - BCS posted a 14.8% CAGR in Sales to Rs 29 bn over FY2011-13, driven by 27.8% CAGR in export, while domestic growth was muted at 11.5%. Over FY2011-13, EBITDA Margins expanded from 10.4% in FY2011 to 13.2% in FY2013 as contribution from high margin seed business increased. Going forward, we expect Sales to register CAGR of 16.9% over FY13-15, driven by 15.9% & 20% CAGR in domestic & export segment over same period. EBITDA margins have been on upswing as contribution from seed business has increased, we are maintaining same level going ahead. However on account of one time revision in life of asset and higher future capex is likely to bump up depreciation impacting EBIT. Hence, Adj PAT is likely to grow at CAGR of 13.6% over FY13-15.

We do believe BCS is well placed to take advantage of low agrochemical penetration and upcoming seed revolution. Overall, we estimate BCS to register a CAGR of 16.9% and 13.6% in Net Sales and Adj Profit over FY2013-15E, respectively. However at current price stock is trading at 18.7x FY14 and 17.6x FY15x earnings estimate. We estimate BCS core EPS to be Rs 69.4 & 78.7 in FY14 & FY15 respectively. At target P/E of 16x and adding surplus cash, we arrive at target price of Rs1521 against CMP of Rs 1586. Hence we recommend Reduce on the stock.
Risk
Improvement in EBITDA margin - if company is able to improve its EBITDA margin from current level it would be have positive impact on valuation. Higher than expected growth - We are building in CAGR of 16% in domestic business over FY13-15, any growth above that would positively impact company valuation and stock price.
44
Background
Bayer CropScience (BCS) is a 69% subsidiary of the global major, Bayer AG Germany. Bayer AG is diversified chemical, healthcare and seed player. Bayer AG acquired Aventis CropScience globally in 2002 and boosted its global leadership position in crop protection, pest control segment. BCS is one of the leading player in india agrochemical industry with market share of~13%. BCS has production facilities in Himatnagar where it manufactures a variety of agrochemical like fungicides, insecticides and herbicides. Crop wise revenue mix
Paddy 12% Cotton 10% other 63% Vegetables 10% Fruits 5%
Leader in Indian market

BCS is a market leader in the Indian Agrochemical Sector with a market share of 13%. India produces approximately 16% of the world's total food grain, but utilizes a mere 2% of pesticides. Given India consumes on average 0.6kg of pesticides per hectare (ha) compared to 7kg/ha in USA and 12kg/ha in Japan, we believe that there exists huge opportunity for BCS to grow its domestic business. BCS domestic business has grown at average rate of 16.6% over FY0913, higher than industry rate of ~15%. We believe this is likely to continue going ahead on account of new product introduction and strong brand reputation evident from high market share. Global Agrochem sales by region
RoW 4%
Lat-Am 19%
N.America 23%
Asia 25%
EU 29%
Global Pesticides consumption (Kg/ha)

20 17
15
13
(Kg / ha)
12 7 7 5 5 0.6
10 5 0 Taiwan China Japan USA Korea France UK India
45
Changing Business model - Focus on Seed and Outsourcing

Increasing focus on seed BCS has traditionally been an agrochemical seller. Seed contributed approximately 1% of total revenue in FY2009 which stands at 15% in FY2013 and is likely to keep increasing in foreseeable future. Globally, developed countries have already started witnessing slow or negative growth in agrochemical business. Globally, market has been shifting towards GM & Hybrid seeds as it minimise need of agrochemicals. Revenue Mix
100% 1% 11% 20% 3% 15% 18% 16% 68% 25% 48%
75%
Percentage
Leader in Rice seed market As per National Seeds Association of India 2009 data, India hybrid rice market was estimated to be worth US$ 45 mn annually. In volume terms rice market is estimate to be of 40,000 metric tonnes per annum of which less than 3% is hybrid. Given abysmal low penetration of hybrid rice in India (<3%) that is bound to increase as government and farmers looks to increase yield. Bayer AG's seed business is carried out 2 entities in India namely, 1) Bayer BioScience India (BSI) and 2) Bayer CropScience (BSC). BSI carries out operation of R&D and manufacturing seeds, while BSC takes care of marketing & distribution. Bayer has above 40% share in India's hybrid rice market both value and volume wise, as per 2009 study. We believe given Bayer's leadership position, company would be best positioned to take advantage and benefit from the same. Structure of Indias hybrid rice seed market by volume and value
100%
Other companies Advanta Ganga Kaveri PHI Seeds Nath Seeds Other companies Advanta Ganga Kaveri PHI Seeds Nath Seeds
75%
50%
0% FY09 Insecticides Herbicides

Fungicides
FY13 Seeds Others
50%
25%
Bayer Cropscience
Bayer Cropscience
0% Volume
Value
46
New Products drive growth BCS's growth has primarily been driven by its ability to introduce new agrochemical products at minimal R&D costs on and on account of having access to its global parent's strong product portfolio. Notably, Bayer AG also has a strong R&D base. Over past 4 years, BCS has been introducing 3-4 products every year under agrochemical and seed business. Going forward, BCS plans to introduce 6-8 new crop protection molecules and 13-14 new seed over next 3 years. New product introduction
8 6 4 2 0 FY10 FY11 Agrochem
FY11 Agrochemical Solitude Ricestar Nativo 75 WG Glamore 80 WG Ricestar 6.9 EC 8 new label extensions 7 other molecules Seed Arise swift Arize 6444 Gold SurPass Aasha FY12 Agrochemical Accord Plus 6 new label extensions Ethiprole 10% SC Seed Arize 6444 Gold Surpass SP 7007 BG II Proagro 9450 FY13 Agrochemical Solomon 300 OD Jump 80 WG QuickBayt 10 new label extensions Seed ProAgro 5121 Arize 6129 Gold ProAgro 7701 Gold ProAgro 9444 Gold SurPass - First Class
Source: Eisec Research
Soyabean Rice Rice Rice Rice Export Rice Hybrid Seed Rice Hybrid Seed Cotton Hybrid Seed
Herbicide Export Rice Hybrid Seed Cotton Hybrid Seed Millet Hybrid Seed
FY12 Seed
FY13
New Product Launches

FY10 Agrochemical Glamore Nativo Adora Seed Arize Prime surpass SP 7007 BG II ProAgro 9477
Brinjal Housefly control Bengal gram, Brinjal, Apple, Tea, Soybean, Tomato & Cotton Mustard Hybrid Seed Rice Hybrid Seed Millet Hybrid Seed Millet Hybrid Seed Cotton Hybrid Seed
Rice Fungicide Rice Rice Hybrid Seed Cotton Hybrid Seed Millet Hybrid Seed
47
Manufacturer-cum-Marketer to pure Marketer BCS has embarked on strategy of turning itself from manufacturer & marketer of agrochemical to pure marketer of agrochemical. In effort to this, BCS has been selling of its various plants over the years and moving towards outsourcing model. In 2012 BCS sold of its Thane plant for Rs 12.5 bn and in 2013 BCS sold of its Ankleshwar, Gujarat plant for Rs 1.3bn Fund raised through real estate sell off was return to shareholder through buyback in which promoter also participated and balance was retained for further investment in existing business operation and expansion. Strong Financial performance to continue All time best performance - BCS posted a 14.8% CAGR in Sales to Rs 29 bn over FY2011-13, driven by 27.8% CAGR in export, while domestic growth was muted at 11.5%. Over FY2011-13, EBITDA Margins expanded from 10.4% in FY2011 to 13.2% in FY2013 as contribution from high margin seed business increased. Going forward, we expect Sales to register CAGR of 16.9% over FY13-15, driven by 15.9% & 20% CAGR in domestic & export segment over same period. Revenue Mix
44,000
EBITDA (%)
16
12
CY2004
CY2005
CY2006
FY2008*
Source: Company , Eisec Research | * - 15month
EBITDA margins have been on upswing as contribution from seed business has increased, we are maintaining same level going ahead. However on account of one time revision in life of asset and higher future capex is likely to bump up depreciation impacting EBIT. Hence, Adj PAT is likely to grow at CAGR of 13.6% over FY13-15.
3,200 60
33,000
2,400
( Rs mn)
22,000
FY2014E
1,600
11,000
800
FY2011
FY2012 Domestic
FY2013 Export
FY2014E
FY2015E
FY2011
FY2012
FY2013 Adj PAT
FY2014E % yoy
FY2015E
FY2015E
FY2009
FY2010
FY2011
FY2012
FY2013
40
20
(20)
48
Outlook & Valuation

The Agriculture Sector has been under governments & industries focus for long time now. Food security has been top priority for the government while reduction in food loss is one of the easiest ways to boost food production. While usage of agrochemicals can reduce the loss of food production, there is a limit. Hence the need of the hour is increasing crop yield with help of using better quality seed. Country has already seen one green revolution and is in dire need of another. BCS is a market leader in the Indian Agrochemical Sector with a market share of 13%. Given India consumes on average 0.6kg of pesticides per hectare (ha) compared to 7kg/ha in USA and 12kg/ha in Japan, we believe that there exists huge opportunity for BCS to grow its domestic business. Seed contributed approximately 1% of total revenue in FY2009 which was at 15% in FY2013 and is likely to keep increasing in foreseeable future. Given low penetration (less than 3%) of hybrid rice seed in India market, there is a huge potential for BCS to exploit. We do believe BCS is well placed to take advantage of low penetration of agrochemical penetration and upcoming seed revolution. Overall, we estimate BCS to register a CAGR of 16.9% and 13.6% in Net Sales and Adj Profit over FY2013-15E. However at current price stock is trading at 18.7x FY14 and 17.6x FY15x earnings estimate. We estimate BCS core EPS to be Rs 69.4 & 78.7 in FY14 & FY15 respectively. At target P/E of 16x and adding surplus cash, we arrive at target price of Rs1521 against CMP of Rs 1586. Hence we recommend Reduce on the stock.
FY2015E 16.0 78.7 1,259 262 1,521 1,586 (4)
2,000
P/E Chart
1,500
` 1,000
500
Jan-06
Jan-08
Jan-10
Jan-07
Jan-09
Jan-11
Jan-12
Jan-13
Jul-06
Jul-08
Jul-10
Jul-07
Jul-09
Jul-11
Jul-12
Price
5x
9x
13x
17x
21x
Risk to our call

Improvement in EBITDA margin - if company is able to improve its EBITDA margin from current level it would be have positive impact on valuation. Higher than expected growth - We are building in CAGR of 16% in domestic business over FY13-15, any growth above that would positively impact company valuation and stock price. Decrease in competition - Any decrease in competitive activity could prove bonus for BCS.
Target P/E Core EPS Target price add cash per share Total Value of share CMP Return (%)
Jul-13
49
Financial Summary
P&L Statement (Y/E Mar) Net Sales FY11 21,373 FY12 22,723 FY13 27,253 FY14E 32,946 FY15E 37,249
Balance Sheet (Y/E Mar) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders fund Total Loans Deferred Tax Lia Current Liabilities & Prov Total Liabilities Net Block CWIP-Tangibles Intangibles CWIP-Intangibles Investments Deffered tax Other non-current assets Total Current Assets Total Assets Key Ratios EBITDA margin Net Profit Margin RoE ROCE Inventory (days) Payable (days) Receivables (days) Debt to Equity 395 6,335 6,730 0 0 8,867 15,597 3,440 61 36 0 728 60 7,642 11,272 15,597 FY11 10.4 6.3 21.7 14.5 67.1 56.3 40.9 (0.5) 395 7,532 7,927 0 0 10,480 18,407 2,449 80 29 8 756 104 10,682 14,981 18,407 FY12 11.1 7.6 23.6 12.9 75.2 48.3 43.2 (0.5) 395 18,918 19,313 0 18 4,819 24,150 2,157 1,271 29 0 780 0 10,172 19,913 24,150 FY13 13.2 9.4 18.8 15.2 66.9 32.8 38.7 (0.5) 366 17,281 17,647 0 18 6,130 23,795 2,024 2,500 19 0 780 0 11,298 18,471 23,795 FY14E 13.2 9.4 16.8 16.0 70.0 40.0 40.0 (0.4) 366 20,354 20,720 0 18 7,062 27,800 3,954 200 9 0 780 0 13,271 22,857 27,800 FY15E 13.2 8.9 17.2 16.8 70.0 40.0 41.0 (0.5) FY11 FY12 FY13 FY14E FY15E
% chg Total Expenditure EBIDTA (% of Net Sales) Depreciation& Amortisation EBIT Interest Other Income Exceptional item PBT Tax PAT % chg Adj PAT( After Minority Int.) % chg
Cash Flow (Y/E Mar) Profit before tax (-) Tax (+) Depreciation (-)Change in Working Cap (+)Others OCF (-) Capex (-) investment (-) others) CFI (+) Net debt (+) Net Equity (-) Dividend Payout (+)Others CFF Inc./(Dec.) in Cash Opng Cash balances C/s Cash balances
24.0 19,142 2,231 10.4 327 1,904 83.0 205 38 1,988 672 1,316 3.4 1,337 (1.2)
FY11 1,988 (555) 327 (640) 103 1,223 1,927 24 1,951 (55) 0 (184) (85) (324) 2,850 777 3,627
6.3 20,196 2,527 11.1 340 2,187 17.0 453 579 2,044 654 1,390 5.6 1,731 29.5
FY12 2,044 (740) 450 (637) (50) 1,067 (496) 1,381 885 (1,085) 0 (183) (17) (1,285) 667 3,627 4,294
19.9 23,654 3,599 13.2 366 3,233 37.0 689 (11,747) 15,632 4,015 11,617 735.8 2,564 48.1
FY13 15,632 (1,226) 462 (1,197) (12,288) 1,383 6,456 (2,186) 4,270 0 0 (193) (20) (213) 5,440 4,294 9,734
20.9 28,597 4,349 13.2 513 3,836 40.7 842 0 4,637 1,530 3,107 (73.3) 3,107 21.2
FY14E 4,637 (1,530) 513 193 (41) 3,771 (1,517) 0 (1,517) 0 (4,550) (231) (41) (4,822) (2,568) 9,741 7,173
13.1 32,332 4,917 13.2 571 4,346 44.8 636 0 4,938 1,629 3,308 6.5 3,308 6.5
FY15E 4,938 (1,629) 571 (1,053) 66 2,892 (211) 0 (211) 0 0 (223) (45) (268) 2,413 7,173 9,586
Valuation parameter Adj EPS P/E P/S P/BV EV / EBITDA 33.9 46.8 2.9 9.3 26.1 43.8 36.2 2.8 7.9 22.8 64.9 24.4 2.3 3.2 14.5 84.8 18.7 1.8 3.3 11.5 90.3 17.6 1.6 2.8 9.7
50
Stock rating (1 year target scale) <0% 0-10% 10-30% >30% Sell Reduce Accumulate Buy
DISCLAIMER
This document has been prepared by the investment research department of East India Securities Limited (EISEC), for the purpose of information only. This document is not to be reproduced, copied, redistributed or published or made available to others, in whole or in part without prior permission from EISEC. This document should not be construed as a solicitation, to any person, to buy or sell a security. Recipients of this document should be aware that past performance is not necessarily a guide for future performance. Although the information contained in this document has been obtained from reliable sources, its accuracy or completeness has not been fully verified by EISEC independently and cannot be guaranteed. Neither EISEC nor any of its affiliates, its directors or its employees accepts any responsibility, of any nature, for the information, statements and opinion given or expressed herein or for any omission or for any liability arising from the use of this document. Opinions expressed are our current opinions as of the date appearing on this material and are subject to change without notice. EISEC directors, employees and its clients may have holdings in the stocks mentioned in the report.
Corporate Office : 6A, 32 Corporate Avenue, Near Paper box factory, Off Mahakali caves road, Andheri E, Mumbai 400093 Tel: 91 22 61925339 Head Office : DA-14, Salt Lake City, Sector-I, Kolkata-700064 Tel: +91 33 40205901 Web: www.eisec.com
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Institutional Research February 4, 2014

Agrochemical Sector Report

Agrochemical Sector Report Sageraj Bariya

Institutional Research February 4, 2014

Institutional Research Agrochemical Sector Report February 4, 2014 Domestic market

on strong footing, Seed holds future

Institutional Research February 4, 2014

Losses caused by different pests -FY12

Institutional Research February 4, 2014

Global Pesticides consumption (Kg/ha)

Institutional Research February 4, 2014

Source: Eisec Research, Industry

0% AP PJB MS GUJ 2001 KNTK 2006 HRY 2012 W.Ben TN Others

Source: Eisec Research, Industry

Institutional Research February 4, 2014

Largest selling molecule category wise - Global

Largest selling molecule category wise - India

40% 16% 18% 15% 16% 15% 4% 0% 2002 Herbicides

2007 Fungicides Insecticides

Institutional Research February 4, 2014

% of total area under cultivation 5% 24% 3% 2% 58%

% of total agrochem consumption 50% 18% 14% 8% 7%

Others 18% Rice 9%

Cereals 18% Maize 13%

Source: Eisec Research, Industry

Source: Eisec Research, Industry

Institutional Research February 4, 2014

Other Players 23% Unorganized 50%

Source: Eisec Research, Industry

United Phosphorous Limited

Source: Eisec Research, Industry

Source: Eisec Research, Industry

Institutional Research February 4, 2014

25% 31% 0% 2004 Proprietary

2006 Proprietary off patent

Source: Eisec Research, Industry

Agrochemical Active Ingredients in Development

Institutional Research February 4, 2014

R&D Expenditure of Leading Agrochemical Companies

0 Monsanto DuPont Syngenta BASF Seed and Traits Dow Bayer

R&D expenditure US $mn

0 Monsanto DuPont Syngenta BASF Seed and Traits Dow Bayer

Source: Eisec Research, Industry

Institutional Research February 4, 2014

Time from New Product Inception to First Introduction

2005 -08 Seed

Investment chain of farmer

Institutional Research February 4, 2014

Institutional Research February 4, 2014

Seed the next growth frontier

Global Seed Industry

Source: Eisec Research, Industry

Source: Eisec Research, Industry

Source: Eisec Research, Industry

Institutional Research February 4, 2014

Crop-wise growth in distribution of seeds (%)

Source: Eisec Research, Industry

Institutional Research February 4, 2014

All India seed replacement rate (%) of major crops

Source: Eisec Research, Industry

Institutional Research February 4, 2014

Rallis India Ltd

Risks to our call:

Institutional Research February 4, 2014

Agrochemical Sector IC Feb'14 Eisec

Agrochemical Sector IC Feb'14 Eisec