Insecticide India - Initiating Coverage 26-08-14

Institutional
Equity
Research
Insecticides India Ltd (IIL)

Agro | India
Initiating Coverage
Current price (25 Aug)
Target price
Upside/(downside)
Market data
Mkt capitalisation
Average daily vol
52-week H/L
Shares O/S
Free float
Promotor holding
Foreign holding
Face value
BUY
FCF gains attest compelling valuation case, Initiate BUY

Insecticides India Ltd., (IIL) has emerged as one of Indias leading
agrochemical manufacturer and currently commands 6.7% market share (6th
largest amongst listed space). We see a compelling valuation case ahead from
a) utilisation scale-up from Dahej, b) broadening of sales in speciality
segment, c) RoCE expansion accruing from rising margins and d) a nearcomplete capex implying improved FCF generation. Our estimates suggest
33% EPS growth over F14-F17e unlike 14% seen over F11-F14. We find IILs
reach and B/S strength as ripe enough for strategic tie-ups that can trigger a
further upside. The stock on PEG basis trades at 60% discount to peers.
Initiate BUY with a 12xP/E target price of Rs898 (55% upside).
581
898
55
Rs
Rs
%
Rs bn
'000
Rs
mn
mn
%
%
Rs
7.2
50.0
626 / 200
12.7
3.2
74.7
3.2
10.0
Adaptable business model and improving margin trend: We estimate sales to

grow at 18% CAGR over F14-F17e largely driven by a) faster growth in herbicides
like Hijack and Hakama @ 20% CAGR & technicals at @ 27% CAGR and b) launch
Price performance (%)

Nifty (abs)
Stock (abs)
Relative to Index
August 26, 2014
INST IN; ISIL.BO
1m
1.5
26.8
25.3
Performance
800
(Rs)
3m
7.4
90.2
82.8
6m
26.7
142.2
115.5
1yr
44.4
77.4
33.0
of generic Diafenthuron. Increasing revenue share from speciality (2-3x higher

margin), herbicides and focus on B2B together with Dahej operation turning
profitable augurs well for ~100bps EBITDA expansion per year over next few years.
(%)
60
600
30
400
200
-30
-60
Source: Bloomberg, SSLe
Rel. to Nifty (RHS)
regions indicates that IIL has shown good traction despite possessing an average
portfolio with ~90% of their products having a clutch of ~15 generic competitors.
Capex cycle at an inflection point: Significant investment in manufacturing
capability (nearly 85% of F14 total gross block) between F11-F14 led to fall in RoCE
(down to 13% from 19%). With signs of stability tests succeeding (for high value
products), we expect Dahej scale-up (to 65%/75% by F16e/F17e) and no major
capex plans in mid-term to enhance RoCE/RoE back to earlier levels.
Market concerns on cash flow receding: Operating leverage from Dahej, easing
Aug-13 Nov-13 Feb-14 May-14 Aug-14

Insecticides (LHS)
Larger product basket improving on execution: Our channel check across
liquidity and capex normalising are in our belief likely to positively surprise the street
on operating cash flow and FCF in F16e/F17e. As earlier setback at Dahej remains
fresh in investor minds only a credible efficiency uptick would ensure greater
valuation upside, in our view.
Key risks: Deterioration in B/S (working capital), currency volatility, and a market
slowdown
Financial summary
Vivek Kumar
+91 22 4227 3312
vivek.kumar@sbicapsec.com
Y/E March (Rs mn)

Sales
growth (%)
EBITDA margin (%)
PAT (mn)
EPS (Rs)
growth (%)
P/E (x)
EV/EBIDTA (x)
Dividend yield (%)
RoE (%)
RoCE (%)
Source: Company, SSLe
SBICAP
Research on Bloomberg SBICAP <GO>, www.securities.com
F 13
6,167
18.2
11.2
394
31.1
19.4
12.9
9.4
0.9
20.0
12.7
F 14
8,641
40.1
9.0
478
37.7
21.3
5.8
5.4
1.6
20.8
12.9
F 15e
10,126
17.2
10.3
610
48.1
27.6
12.1
8.4
0.9
22.1
13.7
F 16e
11,990
18.4
11.2
833
65.7
36.5
8.8
6.5
1.3
24.4
15.5
F 17e
14,367
19.8
12.1
1,131
89.1
35.8
6.5
5.0
1.7
26.4
17.3
Please refer to our disclaimer given at the last page.
Insecticide India (IIL) Initiating coverage FCF gains attest compelling valuation case, Initiate BUY
SBICAP Securities Ltd
Contents
FCF gains attest compelling valuation case, Initiate at BUY
Company profile ..................................................................................
03
Investment thesis
What would help narrow the valuation discount vs. peers?.........................
04
Dahej turnaround Key to our investment case 05

Late entrant and aggressive growth .. 06
Growing share of specialty portfolio
07
Larger product basket improving on execution.
07
Inflection point in capex cycle..
09
Financial summary..
10
Improving sales and operating margins.
10
Stretched working capital to ease .
10
Market concerns on cash flow receding.................................................. ..
11
Key rating sensitivities.. .....................................................................
12
Valuation. .............................................................................................
13
Appendix (Exhibit 25-36).
14-17
August 26, 2014 | 2
Company profile
With a marginal beginning in 2002, Insecticide India has emerged as one of
Indias leading agrochemical manufacturer and currently commands 6.7% market
share (6th largest amongst listed space). The company has >120 branded
products, 15 technicals and roughly derives 63% of sales from insecticides, 24%
herbicides and 13% from fungicides/PGR & others. Over a period of time IIL has
successfully established Tractor Brand of insecticides for easy recognition.
Some of its flagship brands include; Thimet, Victor, Monocil, Pulsar, Hakama.
Recently, IIL joined hands with American Vanguard Corporation (AMVAC) USA
and Japanese company Nissan Chemical Industries Ltd., adding some of the
leading international brands like Nuvan, Pulsar and Hakama. IIL also has
established R&D and technical centre in JV with Japan-based Otsuka
AgriTechno Co. Ltd., (OAT) to invent new agro chemical molecules in India.
IIL has 4 formulation manufacturing assets across India and products are
distributed through a 4,800-strong distributor network. Over F10-F14, the sales
and profits have grown at CAGR of 23% and 14% respectively.
Exhibit 1: Insecticide India: sales mix (F14 Rs9.2bn gross)
PGR &
Others, 6%
Fungicides, 7%
IILs sales portfolio is closely aligned with
Indian crop protection industry;
Insecticides constitute 65% of sales,
herbicides 16%, fungicides 15% and
others at 4%, respectively
Herbicides , 24%
Insecticides, 63%
Exhibit 2: Key details of the manufacturing assets

Formulation
1. Chopanki,
Rajasthan
2. Samba, J&K
Commenced
operation
F 03
286 Utilisation rate ~50%
F 04
134 30% tax exemption till F16. Fully utilised
3. Udhampur, J&K F 12
4. Dahej, Gujarat
F 12
Technicals
1. Chopanki
F 08
2. Dahej
F 13
Manufacturing infrastructure for both

technicals and formulations
New technicals manufacturing facility at

Dahej to demonstrate strong scale benefits
going forward
Research & Development

Chopanki
F 06
Chopanki (under
OAT JV)
Investment
Comment
(Rs mn)
In - progress
Others
105 100% tax benefits till F17 and 30%

subsequent to F22. 100% utilised
555 The facility does not have any tax break.
Target is to manufacture high value products
125
1,105 Sizeable capacity to provide economies of
scale. We expect it to be a major growth
driver in coming years. Scalable to 10x in
asset turnover as per mgmt
Successfully registered 27 technicals with

additional 20 technicals in advanced stages
of registration
Expected to be operational by Dec'14. Under
Oatsuka JV, the center will focus on new
molecules for exports market
130 Corporate office and miscellaneous
August 26, 2014 | 3
What would help narrow the valuation discount vs. peers?

We expect adaptable business model, superior financial performance (growing size and profitability), strong operating leverage
from Dahej facility, broadening sales in high margin patented molecules and near complete capex cycle to drive substantial free
cash flows and B/S improvements.
Based on the P/E multiple approach (1-yr forward), we believe a discount of ~50% to comparable peers appears to be on the
higher side. On PEG basis, IIL is ~0.5x (F14 P/E to growth F14-F16e) quoting ~60% discount to peers. Hence, we see a
compelling valuation re-rating case ahead due to strengthening earnings quality (+30% CAGR) and ramp-up of specialty portfolio.
Exhibit 3: Revenue mix - inline with industry
Exhibit 4: Operating leverage from Dahej

40.0%
AP, 18%
Others, 33
%
25.0%
10.0%
Punjab, 18
%
-5.0%
Rajasthan,
8%
F13
F14e
F15e
F17e
-20.0%
Maharasht
ra, 11%
Haryana,
12%
Sales
Exhibit 5: Growing pie in specialty sales
EBITDA
Exhibit 6: Inflection point in capex cycle vs. ROCE

3,600
14
(Rs mn)
Nearly 85% to gross

block added in last 4 yrs
2,880
3,186
250
250
2,160
25%
20%
458
11
(%)
F16e
15%
475
547
10%
1,440
594
720
5%
363
0%
0
0
F10
F11
F12
F13
F14
F15e
F16e
F17e
Exhibit 7: Sales and EPS growth
F12
F13
F14
F15e F16e F17e
Exhibit 8: Valuation comparison
80
p
Companies
60
20
F13
EPS growth
F14
F15e
F16e
Sales growth
F17e
growth (PEG)
12.1x
1.0x
7,369
65.7
89.1
8.8x
6.5x
0.5x
PI Inds
65,192
22.6
27.5
21.2x
17.4x
1.3x
Rallis India
45,312
11.9
13.9
19.6x
16.8x
1.4x
139,724
31.9
36.0
10.2x
9.1x
0.8x
87,593 106.5 125.7

37,109 120.0 146.0
22.5x
19.0x
1.8x
17.9x
14.7x
1.1x
16.7x
14.1x
1.2x
Monsanto
F12
F17e
16.2x
Bayer Crop
F11
F16e
F 14 P/E to
36.1
UPL
P/E multiple
27.0
Insecticide India
40
EPS
Mkt Cap
(Rs mn) F16e F17e
21,909
Dhanuka Agri
(%)
F11
Peer average
404,206
(Discount)/Premium to peer
47%
62%
Source: Company, Bloomberg, SSLe
August 26, 2014 | 4
Dahej turnaround key to our investment case
Dahej facility can be a game changer in

coming years
Our base case analysis suggest Dahej can

add 28%/31%/32% revenues to our growth
estimate for F15e/F16e/F17e
We believe that the recently commercialised Dahej facility can be a game

changer as it will materially augment IILs manufacturing capabilities into high
value technicals (incrementally adding Diafenthuron, Monocrotophos) which
would help vertically integrate its existing brand formulations.
With the total manufacturing capacity of 10,000tonnes per annum the facility is
spread over 32 acres and has been set up at an investment cost of ~Rs1.7bn.
The company has commercialised its formulation block during 4QF12 while the
technical synthesis plant was operationalised only in early F14. The facility has
incurred EBITDA losses during F13 and F14 respectively due to its
underutilisation.
Our base case understanding suggests the revenue contribution from Dahej
would add 28%/31%/32% to our growth estimate for F15e/F16e/F17e.
Conservatively, it would achieve EBITDA neutral status in F15e (management
expects EBITDA to be positive from Dec14) and should significantly start
contributing ~14%/20% to overall company EBITDA in F16e/F17e respectively.
We believe augmentation of new capacities will be critical to IILs future

growth strategy. The management is looking to supplement the current
product portfolio with a robust pipeline of new products (scalable to 10x in
asset turnover).
Management is further targeting product registration for international market

in coming years which should start contributing to sales from F17e. IIL has
already identified a product basket and is under discussion with OAT to tap
growing paddy opportunity in Japan.
Backward integration of several existing branded formulations would lead to

improvement in margins.
Assuming an average utilisation rate of ~50%/65%/75% in F15e/F16e/F17e from

30% at present, we expect revenues of Rs2.9bn/Rs3.7bn/Rs4.5bn in our base
case (Exhibit 10).
Exhibit 9: Operating leverage from Dahej in overall financials
40.0%
25.0%
10.0%
We remain upwardly biased in our Dahej
EBITDA contribution estimates of
~14%/20% in F16e/F17e
-5.0%
F13
F14e
F15e
F16e
F17e
-20.0%
Sales
EBITDA
August 26, 2014 | 5
Exhibit 10: Sales trend we expect 29% CAGR growth

5000
3750
(Rs mn)
We expect revenues of
Rs2.9bn/Rs3.7bn/Rs4.5bn in our base
case, assuming pick-up in the utilisation
rate
2500
1250
0
F 12
F 13
F 14
F 15e
F 16e
F 17e
Late entrant and aggressive growth

Despite the drawbacks and challenges of being a late entrant into the fast
growing agrochemical sector India is growing @10% annually IIL has made
up for the lost opportunities to capture steady market share (Exhibit 10). It has
taken just over 12 years for IIL since commencement of operations to build a
sizeable revenue base which now has surpassed Dhanuka.
In our view, as a long term approach, the company has got its foothold in an
intensely competitive market by getting an expanded product basket for multiple
crops with irresistible offers and establishing a pan India distribution reach. We
also believe this to be a successful and adaptable business model. The company
has well marketed flagship brands like Thimet, Lethal, Monocil, Pulsar, Hakama
and Nuvan. As a late entrant, we feel IIL can maneuver the industrys learning
curve and is lean enough to forward integrate faster. This should strengthen its
business model in a manner that would help them outpace pioneers.
IIL has made up for the lost opportunities

to capture steady market share despite a
late entry
Exhibit 10: A comparison of revenue size (F14) vs. establishment history

Monsanto (65Y)
Dhanuka (29Y)
Insecticides (18Y)
PI Inds (68Y)
IIL is poised to forward integrate faster and

strengthen its business model
Rallis (66Y)
Bayer Cro p (56Y)
UPL (29Y)
0
20
40
60
80
100
120
(Rs bn)
Past asset turnover rate slated to recover

with Dahej picking up in utilisation
Exhibit 11: Asset turnover: IIL vs. sector

3.0x
2.5x
2.0x
investment phase
1.5x
1.0x
F08
F09
F10
Sector avg
F11
F12
F13
F14
Insecticide India

August 26, 2014 | 6
Exhibit 12: IILs revenue mix is in-line with industry

39%
40%
33%
30%
20%
25%
18%
18%
12%
Regional distribution of sales is in-line with

the industry and IIL continues to expand its
share in AP and Maharashtra
12%
13%
11%
8%
10%
5%
6%
0%
AP
Punjab
Haryana Maharashtra Rajasthan

IIL
Others
Industry
Growing share of specialty portfolio

IIL relationship with the MNC partners has taken-off recently after collaborating
with AMVAC in F07 for its leading brand Thimet (the technical is now
manufactured in-house). That relationship spun a further roll-out of Nuvan in F13.
Additionally, it has also tied-up with one Japanese company (Nissan) for Pulsar
and Hakama brands. The company has started selling these brands only in F13
and which contributed ~6% of total sales in F14. Given the early stage of brand
maturity we expect this to rapidly grow at 33% CAGR to reach 13% of sales by
F17e (Exhibit 14). The company is further working to register three more
products from Nissan (one in herbicide by F15) for Indian market. While IIL will
be beefing up its overall distribution network, it will aggressively focus on roll-outs
in new specialty molecules through foreign partners. These specialty molecules
offer 2-3x higher margin potential compared to IILs composite average.
Hakama, Pulsar and Nuvan amongst key

specialty brands launched in F13
Given the early stage of brand maturity we

expect rapid growth of 33% CAGR through
F17e
During Sep12, IIL has signed a JV with Otsuka Agritech of Japan for setting up
an R&D center in India with an aim to focus on research in new molecules for
international markets. IIL holds 30% voting right in the JV and expects to invent
4-5 such molecules in next five years. IIL and OAT will each have exclusive
rights to develop and commercialise the products across the world divided into
their specific regions of access. IIL will also have the opportunity to manufacture
the products invented by JV for exports market.
Specialty molecules offer 2-3x higher

margins potential compared to composite
average
Larger product basket improving on execution

While Indian agro chemical companies have largely shifted from plain generics to
R&D driven specialty portfolio, the success has largely depended on the ability to
get wider market share. We conducted channel checks across regions. This was
not exhaustive yet indicative of the fact that IIL has been making strides with its
execution in specific crop portfolios as compared to others with larger composite
product basket.
IIL has shown good traction despite possessing an average portfolio with ~90%
of their products having a clutch of ~15 generic competitors. Overall portfolio
market share of IIL compared with the industry at present is 6.7%. Some of the
findings also indicate that the credit facility has not been dealer friendly
compared to peers (e.g. Hijack in herbicide). In our view, this is region specific
and largely a cautious strategy of the management to avoid bad debts.
Our channel check suggests improving

execution
This is a good execution delivery considering the fact that until F13 the company
had limited visibility amongst specialty products.
In our view, IIL's execution should improve in the domestic market as the scale
improves on account of Dahej facility and emergence of a high quality portfolio
mix through introductions of new molecules. Apart from the near term additional
roll-out of specialty portfolio the company is also working towards the
development of new molecules through R&D tie-up with Otsuka Agro Japan with
a target to bring five molecules in next five years.
August 26, 2014 | 7
Exhibit 13: Portfolio market share progress

8
Fair pick-up in the market share started

recently
(%)
7
6
5
4
F10
F11
F12
F13
F14
Exhibit 14: Growing proportion of sales from limited competition molecules

14
Uptrending sales from specialty segment;

to reach 13% in F17e from 6% in F13
(%)
11
0
F11
F12
F13
F14
F15e
F16e
F17e
Exhibit 15: Large proportion of IILs products has high competition

100%
Molecules like Quizalofop-ethyl,
Thifluzamide, Dichlorvos andDiafenthuron
will face limited competition
90%
75%
50%
25%
4%
1%
0-5 player
6-10
5%
0%
11-15
>15
80
70
60
50
40
30
20
10
0
240
We project 13% growth in the sales

realisation per product
(no.)
180
Over 14 new launches planned over next

three years
120
60
0
F11
F12
F13
Product basket (LHS)
F14
F15e
F16e
(Rs mn)
Exhibit 16: Product portfolio and sales achieved per product
F17e
Sales per product (RHS)

August 26, 2014 | 8
Exhibit 17: Top 5 and top 10 accounts for 26% and 36% of sales
Portfolio concentration evenly spread with

top 5 accounting for 26% of the sales
(broadly in-line with industry trend)
Brands
Thimet
Molecule
Phorate 10%
Segment
Insecticide
Key crops
% Sales Launch
Paddy, Sorghum, Sugarcane,
7.8%
F07
Vegetables
Paddy, Pulses, Cotton
5.6%
F12
Monocil
Insecticide
Nuvan*
Monocrotophos
36%
Dichlorvos 76%
Insecticide
Paddy, Soyabean, Cucurbits,

Sugarcane
5.5%
F13
Hijack
Glyphosate 41%
Herbicide
3.7%
F10
Lethal
Dichlorvos 76%
Insecticide
Annual and perennial

grasses and broad leaf
weeds in Tea
Cabbage, Onion, Apple,
Tobacco
3.6%
F06
Victor
Imidacloprid
17.8%
Insecticide
Cotton, rice, oil seeds and

vegetables, chilli, mango
2.5%
F06
Hakama*
Quizalofop-ethyl
5%
Herbicide
Soybean, Cotton, Groundnut,

Green gram, Black gram, and
all other broad leaf crops and
vegetables
2.4%
F13
Milquat
Paraquat
Dichloride 24%
Herbicide
Potato, Cotton, Rubber,

Wheat, Grapes and Apple
1.8%
F07
Racer
Pretilachlor 50%
Herbicide
Paddy
1.5%
F05
Pulsor*
Thifluzamide 24% Fungicide
Paddy
1.5%
F13
Top 10
36%
* through MNC partner
Inflection point in capex cycle

IIL has significantly invested into manufacturing capability (nearly 85% of F14
total gross block) between F11-F14 a majority of which was in Dahej. Higher cost
absorption for Dahej (commercialised in 4QF12) resulted in RoCE compression
from 19% to 13%. However, with successful stability test on few of high value
products conducted, it expects to ramp up the production. This should support its
overall earnings momentum. Company envisages no major investment plans in
next 4-5 years except for maintenance capex which would continue in the region
of Rs200-250mn per year. This together with uptrending operating performance
at Dahej and shift into a high margin portfolio will enhance RoCE/RoE in coming
years.
Exhibit 18: RoE/RoCE to trend upwards
28
(%)
21
We estimate steady improvement in
RoE/RoCE to 26%/17% by F17e
14
7
0
F11
F12
F13
ROCE
F14e
F15e
F16e
F17e
ROE
August 26, 2014 | 9
Financial Summary
We estimate sales to grow at 18% CAGR over F14-17e driven largely by a)
faster growth in herbicides like Hijack and Hakama @ 20% CAGR &
technicals at @ 27% CAGR and b) launch of generic Diafenthuron. We
foresee increasing revenue share from specialty (2-3x higher margin),
herbicides and focus on B2B segments. Together with Dahej operation
turning profitable the improved product mix makes IIL poised for 80-100bps
EBITDA expansion per year over next few years.
Exhibit 19: Segment sales growth trend
Rs mn
Insecticides
Technicals
Herbicides
Fungicides
PGR & Others
Gross Sales
F13
F14
F15e
F16e
F17e
3,487
687
1,595
380
354
6,502
4,885
923
2,222
633
562
9,225
5,720
1,108
2,608
700
675
10,810
6,555
1,440
3,171
826
810
12,802
7,617
1,872
3,879
999
972
15,339
CAGR (F1417e)
16%
27%
20%
16%
20%
18%
Exhibit 20: EPS growth trend

100
We estimate revenues and earnings
CAGR of 18% and 33%, respectively by
F17e
89.1
(Rs)
75
65.7
48.1
50
25.5
26.0
F11
F12
31.1
37.7
25
0
F13
F14
F15e
F16e
F17e
OPM to expand 80-100bps per year over

next few years
(Rs mn)
16,000
16
12,000
13
8,000
10
4,000
(%)
Exhibit 21: Sales and operating margin trend
4
F11
F12
F13
F14
Sales (LHS)
F15e
F16e
F17e
OPM (RHS)
Stretched working capital to ease
During F11-13 WC stress led higher

interest cost to meet operation cash
requirement
Between F11-13, working capital cycle was stretched for IIL leading to higher
interest cost to meet operational cash requirement. The stretch arose from a rise
in the inventory holding period from 99 days to 127 days. Going forward, with
improving brand perception and enlarged scale benefits, we expect overall
liquidity to ease. We do not anticipate any significant increase in the receivables
days even though IILs overall size of operation may grow at 18% pace. This is
largely from continuance of a strict control over credit facilities extended to
dealers. During F14, the net working capital day improved to ~64 days from 78
days in F13.
August 26, 2014 | 10
Exhibit 22: Working capital cycle improving

140
105
78
70
Going forward, with improving brand

perception and enlarged scale benefits, we
expect overall liquidity to ease
64
63
53
62
60
58
35
0
F11
F12
F13
Debtors Days
F14
Inventory Days
F15e
F16e
Creditors Days
F17e
WCC
Market concerns on cash flow receding

Operating leverage from Dahej, easing liquidity and capex normalising are in our
belief likely to positively surprise the street on operating cash flow and FCF in
F16e/F17e. As earlier setback at Dahej remains fresh in investor minds only a
credible efficiency uptick would ensure greater valuation upside, in our view.
Effective working capital management and rising profits should help the company
improve its B/S. We estimate net gearing to reduce to 25% in F17e from a high of
98% in F13.
Exhibit 23: Free Cash generation
800
(Rs mn)
400
Operating cash flow and FCF to positively
surprise in F16e/F17e
F11
F12
F13
F14
F15e
F16e
F17e
(400)
(800)
(1,200)
Exhibit 24: Net debt to equity trend is estimated to soften

120%
Net gearing to reduce to 25% in F17e from

a high of 98% in F13.
90%
60%
30%
0%
F11
F12
F13
F14
F15e
F16e
F17e
August 26, 2014 | 11
Key Risk
Deterioration in B/S: 90% of IILs debt is largely locked into working capital
resources. Hence any stretch in its overall working capital cycle from F14 level of
67 days would lead to higher interest cost thereby impacting our forecasted
earning growth of 30%. Of late the company, to mitigate this risk, has taken a few
initiatives like a) effective distribution via retailers to ensure product availability
and reducing the distribution cost and b) increasing presence in institutional
segment from current 10% share via sales of bulk technical from Dahej.
Currency movement: IIL imports ~30% of raw material consumed and have a
policy to hedge ~25% at the time of buying the material. Additionally, short-term
forex debts account for half of its gross borrowings and are exposed to currency
fluctuation. At the F14 numbers, the cumulative foreign currency exposure which
was not hedged amounted to Rs2.7bn (Rs2.0bn in F13) or ~30% of sales. While
we highlight that any sharp depreciation of INR vs. US$ would have material
impact, the company is taking prudent steps to reduce its net exposure.
Exhibit 25: Impact from adverse currency movement 8-15% of PBT
2.5
(35.0)
(4.0)
(70.0)
(10.5)
(%)
(Rs mn)
0.0
Stretch in working capital, adverse
currency fluctuation, market slowdown
remains key risk to our rating
(17.0)
(105.0)
F11
F12
Forex loss (LHS)
F13
F14
% to PBT (RHS)
Market slowdown from weather: The crop protection industry faces risks of
seasonal weather. With nearly 55% of the area under agriculture being rainfed,
its spatial distribution can have a direct impact on pest infestation, choice of
crops sown by farmers and total cultivated area.
Genetically Modified (GM) seeds: Genetically modified crops possess selfimmunity towards natural adversaries which have the potential to negatively
impact the business of agrochemicals.
August 26, 2014 | 12
Valuation
Based on the P/E multiple approach (1-yr

forward), we believe a discount of ~ 30%
to comparable peers appears to be on the
higher side and should narrow
We believe IILs current valuation does not adequately reflect the emerging
business growth dynamics and its adaptable business model. Based on the P/E
multiple approach (1-yr forward), we believe a discount of ~50% to comparable
peers appears to be on the higher side and that it should progressively narrow in
coming years. On PEG basis, IIL is ~0.5x (F14 P/E to growth over F14-F17e).
We see the compelling valuation case ahead attributable to:
1. Strengthening earnings quality (+30% CAGR) on improved product mix,
2. Strong operating leverage from scaling up Dahej operation (to contribute
19% to F17e EBITDA from -14.9% in F14),
3. Broadening of sales in specialty segment together with new product line-ups
through existing tie-ups,
4. RoCE expansion from 12.9% to 17.3% by F17e accruing from uptrending
margin performance,
5. Inflection point with near-complete capex implies improved FCF generation.
We expect Rs594mn FCF by F17e from negative Rs195mn in F14.
We believe announcement of any future strategic tie-ups and B/S strength could
drive greater upside. At a P/E of 8.8x F16e and 6.5x F17e EPS, the stock is
trading at a significant, 50-60% discount, to its peers although the company
continues to grow in size.
We see clear upside in stock and hence initiate coverage on with a BUY rating
and price target of Rs898 (12x on 12-months rolling forward EPS), implying 55%
potential upside.
Exhibit 26: Valuation with respect to peers
Mkt Cap
(Rs mn)
Companies
Dhanuka Agri
Insecticide India
Compelling valuation case as IIL is ~0.5x
on PEG basis (F14 P/E to growth over
F14-F17e)
PI Inds
Rallis India
UPL
Bayer Crop
Monsanto
Peer average
EPS
F16e
P/E multiple
F17e
F16e
F17e
F 14 P/E to
growth (PEG)
21,909
27.0
36.1
16.2x
12.1x
1.0x
7,369
65.7
89.1
8.8x
6.5x
0.5x
65,192
22.6
27.5
21.2x
17.4x
1.3x
45,312
11.9
13.9
19.6x
16.8x
1.4x
139,724
31.9
36.0
10.2x
9.1x
0.8x
87,593
106.5
125.7
22.5x
19.0x
1.8x
37,109
120.0
146.0
404,206
(Discount)/Premium to peer
17.9x
14.7x
1.1x
16.7x
14.1x
1.2x
47%
54%
62%
Source: Company, Bloomberg, SSLe
Exhibit 27: P/E distribution (1 Yr forward)

18
16
+2SD = 15.69
14
12
(x)
10
Emerging business dynamics, adaptable
business model and clear upside prompts
coverage initiation. BUY with price target
of Rs898 (55% upside)
Mean = 9.69
8
6
4
-2SD = 3.69
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14

August 26, 2014 | 13
Appendix
Exhibit 28: Management details
Hari Chand Aggarwal
Rajesh Aggarwal
Nikunj Aggarwal
Chairman
Managing Director
Whole-time Director
Navneet Goel
Non-Executive Independent Director
Navin Shah
Gopal Chandra Agarwal
Anil Kumar Singh
Virjesh Kumar Gupta
Exhibit 29: Indian agro chemical market split Crop wise (US$2.0bn)
Other, 11%
Cotton, 15%
Soyabeen+ Oil
Seeds, 9%
Pulses, 7%
Top seven crops contribute to 90% of the
market
Rice, 24%
Wheat, 7%
Fruits , 9%
Veg, 18%
Source: Industry, SSLe
Exhibit 30: Global trend in pesticide consumption
13.5
9.0
4.5
World
India
Pakistan
Germany
US
Europe
France
Korea
Japan
0.0
Taiwan
Under-penetration of agrochemicals in
India with pesticide consumption
amongst the lowest globally
(Kg per hectare)
18.0
Exhibit 31: Crop protection market trend

100%
75%
6%
6%
22%
22%
21%
25%
52%
46%
F10
F14
50%
Herbicides grew at faster momentum of
10-12% CAGR as labour shortage
continues
25%
0%
Insecticide
Herbicide
Fungicide
PGR and others

August 26, 2014 | 14
Exhibit 32: IIL technical product basket
IIL started the manufacturing of

technicals in 2007. Today more than 10
technicals are manufactured.
Insecticides
Fungicides
Herbicides
Fipronil
Thiophanate Methyl
Glyphosate
Lambdacyhalothrin
Sulfosulfuron
Imidacloprid
Metsulfuron Methyl
Thiamethoxam
Dichlorvos
Chlorpyriphos
Bifenthrin
Diafenthiuron
Exhibit 33: Revenue and profit trend for past 13 quarters

Rs mn
Quarter financials
Quarter composition trend
F12
F13
F14
F15
F12
F13
F14
1Q
1,218
1,488
1,976
2,524
23%
24%
23%
2Q
2,097
2,300
3,403
40%
37%
39%
3Q
1,055
1,188
1,909
20%
19%
22%
4Q
847
1,190
1,352
16%
19%
16%
1Q
128
207
248
25%
30%
30%
2Q
242
293
289
47%
42%
35%
3Q
79
105
194
15%
15%
24%
4Q
68
88
86
13%
13%
11%
1Q
91
117
142
27%
35%
35%
2Q
164
159
138
50%
47%
35%
3Q
4Q
48
28
46
16
68
52
15%
8%
14%
5%
17%
13%
F15
Net Sales
EBITDA
339
Profits
174
Exhibit 34: IIL key brands
Established the Tractor Brand of

insecticides for easy recognition of all IIL
products
August 26, 2014 | 15
Exhibit 35: IILs transition phase
As a late entrant, we feel IIL is poised to

forward integrate faster and strengthen
its business model
August 26, 2014 | 16
Exhibit 36: Pan India Distribution reaches with 25 depots

Over 60,000 dealers
4,800 distributors
25 depots
August 26, 2014 | 17
Financials
Income Statement
Y/E Mar (Rsmn)
Net sales
growth (%)
Operating expenses
EBITDA
growth (%)
Depreciation &amortisation
EBIT
Other income
Interest paid
Extraordinary/Exceptional ite
PBT
Tax
Effective tax rate (%)
Net profit
Minority interest
Reported Net profit
Non-recurring items
Adjusted Net profit
growth (%)
F 13
6,167
18.2
5,474
693
23.0
58
635
2
132
(41)
464
111
23.9
353
353
41
394
19.4
Key Financials ratios

Y/E Mar
F 13
Profitability and return ratios (%)
EBITDAM
11.2
EBITM
10.3
NPM
6.4
RoE
20.0
RoCE
12.7
RoIC
10.4
F14
8,641
40.1
7,859
782
12.8
67
715
5
154
(79)
487
87
17.9
399
399
79
478
21.3
F15e
10,126
17.2
9,078
1,047
34.0
112
936
4
168
772
162
21.0
610
610
610
27.6
F16e
11,990
18.4
10,642
1,348
28.7
125
1,223
14
182
1,054
221
21.0
833
833
833
36.5
F17e
14,367
19.8
12,622
1,745
29.4
139
1,606
24
199
1,431
301
21.0
1,131
1,131
1,131
35.8
F14
F15e
F16e
F17e
9.0
8.3
5.5
20.8
12.9
10.4
10.3
9.2
6.0
22.1
13.7
12.2
11.2
10.2
6.9
24.4
15.5
15.5
12.1
11.2
7.9
26.4
17.3
19.1
Per share data (Rs)

O/s shares
EPS
FDEPS
CEPS
BV
DPS
12.7
31.1
31.1
35.6
167.3
3.5
12.7
37.7
37.7
43.0
194.4
3.5
12.7
48.1
48.1
56.9
240.2
5.4
12.7
65.7
65.7
75.5
298.6
7.3
12.7
89.1
89.1
100.1
377.8
9.9
Valuation ratios (x)

PE
P/BV
EV/EBITDA
EV/Sales
12.9
2.4
9.4
1.1
5.8
1.1
5.4
0.5
12.1
2.4
8.4
0.9
8.8
1.9
6.5
0.7
6.5
1.5
5.0
0.6
Other key ratios

D/E (x)
DSO (days)
1.0
60.9
1.0
51.6
0.9
51.6
0.8
51.6
0.7
51.6
6.4
1.6
2.0
20.0
5.5
1.8
2.0
20.8
6.0
1.9
2.0
22.1
6.9
1.9
1.8
24.4
7.9
1.9
1.7
26.4
Du Pont Analysis - RoE

NPM (%)
Asset turnover (x)
Equity multiplier (x)
RoE (%)
Balance Sheet
Y/E Mar (Rsmn)
Cash & Bank balances
Other Current assets
Investments
F 13
47
4,106
-
F14
90
5,175
111
F15e
572
5,303
111
F16e
1,091
6,070
111
F17e
1,816
7,040
111
Net fixed assets

Goodwill & intangible assets
Other non-current assets
Total assets
1,852
316
6,321
2,243
294
7,914
2,382
294
8,661
2,506
294
10,072
2,618
294
11,878
Current liabilities
Borrowings
Other non-current liabilities
Total liabilities
1,960
2,132
108
4,199
2,886
2,426
136
5,448
2,839
2,639
136
5,615
3,277
2,872
136
6,286
3,821
3,129
136
7,087
Share capital
Reserves & surplus
Shareholders' funds
Minority interest
Total equity & liabilities
127
1,995
2,122
6,321
127
2,339
2,466
7,914
127
2,920
3,046
8,661
127
3,660
3,787
10,072
127
4,664
4,791
11,878
-
Cash Flow Statement

Y/E Mar (Rsmn)
Pre-tax profit
Depreciation
Chg in working capital
Total tax paid
Other operating activities
Operating CF
Capital expenditure
Chg in investments
Other investing activities
Investing CF
FCF
Equity raised/(repaid)
Debt raised/(repaid)
Dividend (incl. tax)
Other financing activities
Financing CF
Net chg in cash & bank bal.
Closing cash & bank bal
F 13
464
55
(613)
(38)
(132)
(475)
(475)
(607)
529
(45)
(8)
476
(131)
47
F14
487
67
(123)
(56)
374
(458)
(111)
(568)
(195)
294
(45)
(12)
238
43
90
F15e
772
112
(174)
(162)
548
(250)
(250)
298
212
(68)
39
183
481
572
F16e
1,054
125
(330)
(221)
628
(250)
(250)
378
234
(93)
0
141
519
1,091
F17e
1,431
139
(425)
(301)
844
(250)
(250)
594
257
(126)
0
131
725
1,816
August 26, 2014 | 18
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Institutional

Insecticides India Ltd (IIL)

FCF gains attest compelling valuation case, Initiate BUY

Adaptable business model and improving margin trend: We estimate sales to

Price performance (%)

August 26, 2014

INST IN; ISIL.BO

of generic Diafenthuron. Increasing revenue share from speciality (2-3x higher

Source: Bloomberg, SSLe

Rel. to Nifty (RHS)

Aug-13 Nov-13 Feb-14 May-14 Aug-14

Larger product basket improving on execution: Our channel check across

Y/E March (Rs mn)

Please refer to our disclaimer given at the last page.

SBICAP Securities Ltd

Dahej turnaround Key to our investment case 05

Growing share of specialty portfolio

Larger product basket improving on execution.

Inflection point in capex cycle..

Improving sales and operating margins.

Stretched working capital to ease .

Market concerns on cash flow receding.................................................. ..

Key rating sensitivities.. .....................................................................

Appendix (Exhibit 25-36).

August 26, 2014 | 2

SBICAP Securities Ltd

Source: Company, SSLe

Exhibit 2: Key details of the manufacturing assets

286 Utilisation rate ~50%

134 30% tax exemption till F16. Fully utilised

Manufacturing infrastructure for both

New technicals manufacturing facility at

Research & Development

105 100% tax benefits till F17 and 30%

Successfully registered 27 technicals with

Source: Company, SSLe

August 26, 2014 | 3

SBICAP Securities Ltd

What would help narrow the valuation discount vs. peers?

Exhibit 4: Operating leverage from Dahej

Exhibit 5: Growing pie in specialty sales

Exhibit 6: Inflection point in capex cycle vs. ROCE

Nearly 85% to gross

Exhibit 7: Sales and EPS growth

F15e F16e F17e

Exhibit 8: Valuation comparison

87,593 106.5 125.7

Source: Company, Bloomberg, SSLe

August 26, 2014 | 4

SBICAP Securities Ltd

Dahej turnaround key to our investment case

Dahej facility can be a game changer in

Our base case analysis suggest Dahej can

We believe that the recently commercialised Dahej facility can be a game

We believe augmentation of new capacities will be critical to IILs future

Management is further targeting product registration for international market

Backward integration of several existing branded formulations would lead to

Assuming an average utilisation rate of ~50%/65%/75% in F15e/F16e/F17e from

Source: Company, SSLe

August 26, 2014 | 5

SBICAP Securities Ltd

Exhibit 10: Sales trend we expect 29% CAGR growth

Source: Company, SSLe

Late entrant and aggressive growth