Bayer CropScience Ltd (BCS) (CMP: Rs.552.

15)

Stock Note December 31, 2009

Company Background:
Bayer CropScience Ltd (BCS) is a cropscience company having crop protection production facilities at Himatnagar and
Ankleshwar (both in Gujarat) where it manufactures a variety of agrochemical like fungicides, insecticides and herbicides. It
had a plant at Thane, which has been shut down and the facilities have been moved to the Ankleshwar plant. The Himatnagar
plant also caters to export related agrochemicals required by its Asia-Pacific and European group companies. Post the
acquisition of Aventis Cropscience Limited worldwide in 2001, BCS has become the leader in the Crop Protection business in
India. BCS is a 71% subsidiary of the Euro 35bn Bayer AG, Group, which is a world leader in Agrichemicals. BCS is a leader
in the Indian crop protection Sector with a market share of 17%. Other large shareholders include LIC, Birla Sun Life Insurance
Company Ltd and Bajaj Aliianz Life Insurance Company Ltd, which hold 3.67%, 2.51% and 2.48% respectively in BCS.

Bayer AG acquired Aventis CropScience globally in 2001 and became a global leader in crop protection, pest control, seeds
and plant biotechnology. With a sizeable existence in 122 countries and 22,000 dedicated employees, BCS remains a large
global player.

BCS is divided into 3 business groups: Crop Protection, Environmental Science and BioScience. BCS as a global innovator
and market leader in its industry believes that its technological and commercial expertise entails a duty to contribute to
Sustainable Development.

Business:
Crop protection:
This segment ensures a secure yield by giving protection from seed planting through to harvest. During its life cycle a crop will
encounter many enemies that can even destroy an entire harvest: pests, weeds, fungi. Researchers in Crop Protection are
committed to preventing this damage. BCS’s goal in this business is to secure harvests for farmers without creating a burden
on the environment.

Principal products and brands in crop protection

Insecticides (Confidor®/ Admire®, Calypso®, Decis®, Temik®, Oberon®)
Fungicides (Antracol®, Baycor®, Folicur®, Monceren®)
Herbicides (Atlantis®, Basta®, Topstar®, Whip Super®)
Seed treatment (Gaucho®, Raxil®)

Split of Crop Protection Sales - FY09

11% 1%

20%

68%

Insecticides Herbicides Fungicides Seed Treatment

(Source: Company Annual Report)

Environmental Science and Professional Pest Control:

The Bayer Environmental Science (BES) is a pioneer in the field of public health, being a major contributor in this segment
since several years. The business areas covered by BES, are diverse in order to address the specific needs of the customers,
covering three major segments: Vector Control, Professional Pest Control and Green Industry.

The commitment of BES is to consistently deliver high quality research products for the control of insect pests of public health.
Such products include pesticides to manage malaria vectors, cockroaches, rodents, termites, stored grain pests, houseflies
and other pests in general.

BioScience:
BioScience is a part of BCS, and is a global player in research, development and marketing of high quality seeds and
innovative plant-based solutions derived from modern breeding and plant biotechnology. BioScience offers an integrated
portfolio of high quality seeds, trait technologies and high performance crop protection products. BioScience activities are
focused on three areas: Vegetable Seeds, Agricultural Seeds and Research activities into novel plant-based solutions for
agriculture, nutrition, health and biomaterials. Bayer Bioscience, headquartered in Hyderabad India has about 400 employees,
and has research, production and an extensive sales network spread across the country.
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Seed Production, Conditioning and Distribution
Bayer BioScience has established seed production centers in four states – Andhra Pradesh, Karnataka, Tamil Nadu and
Haryana and plans to develop production centers in other states as well. It has four seed conditioning plants (one at Toopran,
two at Medchal and another at Tolichowki) in Hyderabad. Its warehouses are located throughout the country, including a
central warehouse at Toopran with 10,000 mt capacity. It has a well-established network of distributors across the country that
enables timely reach of seeds to farmers in remote areas.

Seeds constituted 14.4% of sales in FY09 (Rs.213.1 cr) vs. 14.1% in FY08 (Rs.175.9 cr).

Investment Rationale
Leader in Indian pesticides markets:
BCS is a market leader in the Indian Agrichemical Sector with a market share of 17%. Going ahead, there exists huge
opportunity for BCS to grow its domestic business considering that penetration of pesticides in the Indian market is low
compared to its Asian and Global peers. India produces approximately 16% of the world's total food grain, but utilises a mere
2% of pesticides. There exists under usage of agrichemicals by the Indian farmers and untapped opportunity available to the
agrochemical companies.

To maintain its leadership position, BCS is continuously strengthening its capacity to provide products and combined solutions
for the production of good quality food, feed, fibre and energy plants.

New innovative products – major driver of growth:

BCS's growth has been driven by its ability to introduce new products at minimal R&D costs on account of having access to its
global parent's strong product portfolio. Bayer AG has a strong R&D base. BCS has been introducing 3-5 products every year,
and the management has indicated that this trend would continue going forward as well. BCS spent Rs.13.8 cr on R&D in
FY09 (0.99% of sales).

Striving all the time for providing innovative and effective solutions to the farmers’ pest problems, BCS has evaluated 42 new
molecules and mixtures for use in various agricultural and horticultural crops and pest segments in the changing and dynamic
scenario, post introduction of Genetically Modified Bt-Cotton in the country.

BCS continued its initiatives in contract farming vigorously in crops like cotton, fresh fruits and vegetables and provided the
required guidance and inputs to farmers for plant protection and efficient crop management towards enhancing productivity
and tapping the huge export potential.

Maintaining the Bayer tradition in Research & Development, in 2008, BCS secured registrations and launched Fenamidone 10
+ Mancozeb 50 WP (Sectin 60 WP) – a broad-spectrum fungicide for use in Grape and Potato. During the year 2008, it has
also obtained approvals for various herbicides exclusively for Export to other countries viz. Aclonifen Technical, Fentrazamide
Technical and Fentrazamide 6.75 + Propanil 37.5 WP (Lecspro 44.25 WP).

In FY10 BCS has indicated the likely launches of globally renowned speciality acaricide Oberon 240 SC, to control mites
affecting tea, chilli, brinjal and apple etc., Fipronil 80 WG (Jump 80 WG), an insecticide for use in rice; Imidacloprid 350 SC
(Confidor Super), an insecticide for control of sucking pests in rice; Melody Duo 66.75 WP, a fungicide for use in grape and
potato.

Recent product launches:

Product Year Crop
Admire 70G CY06 Rice and Cotton
Monceren 250 SC CY06 Rice
Ethiprole 10 SC CY06 Rice
Fame 490 SC FY08 Rice and Cotton
Folicure 250 EC FY08 Rice, Chilli and Groundnut
Tebuconazole 250 WG FY08 Export
Fenamidone 10 + Mancozeb 50 WP (Sectin 60 WP) FY09 Grape and Potato
Sectin FY09 Potatao
Arixe Dhani FY09 Hybrid Rice
SurPass Goldmine Bt FY09 Bt Cotton hybrid
Oberon 240 SC, FY10E Tea, chilli, brinjal and apple
Fipronil 80 WG (Jump 80 WG) FY10E Rice
Imidacloprid 350 SC (Confidor Super) FY10E Rice
Melody Duo 66.75 WP FY10E Grape and Potato
Ethiprole 40 + Imidacloprid 40 WG (80 WG) - Rice
Spirotetramat 120 + Imidacloprid 360 SC (Movento Energy 480 SC) - Cotton
Fenoxaprop-p-ethyl 6.9% EC (Ricestar) - Seeded Rice
(Source: Company Annual Report)

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Pursuing its philos ophy of offering new and better cost-effective solutions to farmers to manage insect pests, diseases and
weed menace in various crops, BCS is evaluating a number of molecules for use in a variety of key crops. Launch of some of
its products in small packs to cater the needs of niche customers, promoting Health & Hygiene on ready to use
formulation/packs is also being planned. Going ahead, the company is likely to include fruits and vegetables (horticulture
crops) too.

Bayer AG is accelerating the extension of its biotech and seed business. Following a record year in 2008, the company is
continuing its strategy of expansion, aiming systematically to expand its fast-growing business in seed and plant traits in the
coming years. The intention is to more than triple sales in the BioScience segment to around EUR 1.4 billion by 2018. In this
context the company is planning to invest some EUR 3.5 billion in research and infrastructure for its biotech and seed
business between now and 2018. Bayer CropScience internationally is currently investing the equivalent of roughly 27 percent
of sales in the development of new BioScience products – a figure that puts it among the leaders in the industry in terms of
research intensity. Almost 1,000 BioScience researchers and b reeders are working on over 50 projects.

Innovation and R&D – key focus areas for BCS:

In order to meet the challenges of food production and optimise use of agricultural resources against the background of a
continuously growing world population, intensive agricultural research is needed. BCS’s strong focus on innovation and
substantial investments in Research & Development enables it to contribute significantly to global food safety and resolution of
the aforesaid critical challenges.

The innovation focus will also help the Company to further gain the competitive advantage in a stringent product patent
regime, which is rapidly taking shape in India. Moreover, due to the R&D focus on environmentally safe products, the
Company remains well prepared to stay ahead of the competition amidst the constantly strengthening safety and residue
standards. BCS has launched several such products recently in the new chemistry segment and also has a strong pipeline,
which goes beyond the regulatory requirements of safety and residue levels.

BCS and GVK Biosciences Private, Hyderabad, India, have entered into a research cooperation in the area of early discovery
chemistry. The objective is to speed up the search for promising active ingredients for innovative crop protection products.
Under the agreement, BCS will integrate GVK BIO capacities in the early part of its Discovery chemistry process.

BCS wishes to further speed up the development of its successful crop protection R&D pipeline and look forward to working
with GVK BIO, Asia’s leading contract research organization. GVK Biosciences has built world-class capabilities in early
Discovery Chemistry.

BES division poised for growth:

The Environmental Science division has been maintaining its leading position as the market leader in the segments of public
health and professional pest control. BCS continues to sponsor major symposia and seminars to promote general awareness,
product knowledge and international trends in vector borne diseases management. Several techno commercial training
programmes on safe use and handling of products were conducted in FY09. Bayer keeps a stringent eye on Quality
Assurance, elevates the level of technological competence, and assures technical service to customers through long lasting
partnerships. BES regularly provides technical support and training to the customers and thus greatly contributes in providing
a pest free and disease free living.

The importance given to the public health is clear from the fact that in the Union Budget for FY10, the Govt has provided for
Rs.497 crore for Central Government Health Scheme, Rs.663.53 crore for allopathic hospitals and dispensaries, Rs.1176.42
crore for medical education, training and research and Rs.225.32 crore for Public Health Schemes and In dian Council of
Medical Research (Rs.184 crore). Provision of Rs. 196.69 crore has been made to upgrade Primary Health Centre,
Community Health Centres and Sub-Cenrtres.

In India, urban malaria has emerged as major public health problem in many small, medium and metropolitan cities.
Essentially a man made problem, urban malaria is the outcome of rapid and haphazard expansion of the cities, inadequate
piped water supply, storage of water in cisterns, disuse or scarce use of wells, developmental activities, aggregation of
migrant labour force and over all population movement. The developmental pace often outstrips mitigating measures
undertaken by the municipal and health authorities.

Under this division, the growing awareness on vector borne diseases in th e Public and Government Agencies is an
opportunity. Resistance to synthetic pyrethroids by mosquitoes is an opportunity to BCS to launch Bendiocarb 80% WP, a
carbamate insecticide, as resistance management tool. In the space spray market, BCS is planning to launch a state of art
product “Aqua K-Othrine” which will provide a solution for need of a greener product in the market.

This segment is flooded with cheap generics, which eat into market share. However, BCS has tied up with Pest Control India
Ltd and Godrej HiCare.

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Exports to garner higher revenues:
BCS’s exports registered a CAGR of 24.4% during CY05-FY09, while its contribution to the company's total sales was in the
range of 11-16%. Of the company's total export revenues, 80% of sales were to the Bayer AG group companies, indicating
high outsourcing by these group companies from BCS.

Going ahead, BCS’s exports would be driven by the increase in outsourcing by the various Bayer group companies due to the
cost advantage, regulatory leeway and quality offered by BCS. Globally, Bayer AG has a revenue base of Euro 4 bn from crop
protection sales. BCS could benefit from outsourcing done by Bayer AG.

Domestic and Exports as % of Total Revenues

89.0% 18.0%
%

%
87.0% 14.0%

85.0% 10.0%
CY05 CY06 FY08 FY09
Period
Domestic Revenues - LHS Export revenues - RHS

(Source: Company Annual Report)

Land Bank - Hidden Value:
BCS has an idle land bank at Thane, where it has closed one of its plant and extended a VRS scheme to its employees there
(it has written off Rs.30.5 cr towards VRS expenses in FY08). As per reports, it has around 132 acres having a market value
on conservative basis of approximately Rs.8 cr per acre, totalling a land value of around Rs.1056 cr (per share value of
Rs.267.3). The management plans to sell this land at appropriate valuations.

BCS and Lanxess India Private Limited (LIPL) had entered into a Memorandum of Understanding (MOU) dated November 18,
2004 wherein the economic interest in identified land and building at Thane was transferred to LIPL effective July 01, 2004 but
the transfer of ownership was not effected pending approval from the Collector of Thane. Pursuant to the Exit Agreement
dated February 28, 2008 between BCS and LIPL, which replaced the earlier MOU, LIPL has exited the aforesaid land and
building in a phased manner by 2009 and accordingly, BCS has agreed to pay in a phased manner rupees equivalent to Euro
160 lacs, to LIPL. Out of the aforesaid amount payable, BCS has already paid Rs.2,384 lacs equivalent to Euro 40 lacs in
February 2008.

Improving profitability:
BCS has posted a strong 27.3% CAGR in sales to Rs.1,394 cr over CY05-FY09 on the back of new product launches. New
products in the last recent years have been contributing ~23% to the total sales. During CY06-FY08, EBITDA Margins fell from
13.1% to 7.7% due to high raw material prices and staff cost. However, with a fall in commodity prices, this trend has reversed
and EBIDTA margins improved to 11.9% in FY09.

1500.0 170.0

1200.0 125.0
Rs.Cr.

Rs.Cr.

900.0 80.0

600.0 35.0
CY05 CY06 FY08 FY09
Period

Sales-LHS OP-RHS PAT-RHS

(Source: Company)

With debt equity ratio improving over the years from 0.42 in CY05 to 0.08 in FY09 it is likely that BCS would soon become a
debt free company. Also the RoCE has improved drastically from 22.3% in CY05 to 35.1% in FY09.

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Capex plans:
BCS believes that in the medium to long term, GM rice technologies could attribute significantly to increasing rice productivity.
Hence, it has taken up Rs.43 cr capex plan in FY10 and also intends to launch two to three products, including BT rice. It is
also working on bio-research technology as well. BT rice is a variant that has been modified by means of biotechnology with
genes from Bacillus thuringiensis (Bt) to produce toxins for resistance to insects.

BCS will continue to launch a minimum of two to three products in the market every year and going forward this will also
reduce their monsoon dependency as well. It will continue to concentrate on development of stress resistant products like
monsoon resistant, insect resistant, etc., to reduce the effect of unforeseen factors on BCS's products range.

New tie-ups and orders to drive growth:

BCS has tied up with rural retail operators like Haryali Kissan Bazaar, Tata Chemicals, ITC, Freshfields, Pest Control of India
and Godrej in its bid to further augment its sales. Commendably, BCS has bagged an order worth Rs.13.7 cr from these
companies to cater to their rural markets. BCS also does packing and supplies active ingredients in Jammu & Kashmir for
achieving tax efficiencies. It also buys finished seeds, as it does not have the production facility for seeds. These new
initiatives by BCS could help its growth trajectory.

Q2FY10 Performance:
BCS’s net sales increased by 15.9% y-o-y to Rs.482.2 cr in Q2FY10. The growth in sales was despite the fact that the Indian
agriculture witnessed one of the worst droughts in its history. Q2FY10 was one of the worst quarters for the agrichem industry,
which suffered from a poor monsoon and the price-erosion of products. Against this backdrop, BCS’s operating profit stood at
Rs.88.2 cr, a growth of 10.7% y-o-y. The OPM for the quarter stood at 18.3%, compared to 19.2% in Q2FY09. The high cost of
purchased goods was the key reason behind the decline in the OPM. Other income witnessed a drop of 24.9% to Rs.5.9 cr,
while the interest outgo increased by 32.3% to Rs.3.7 cr y-o-y in Q2FY10. The PAT for BCS increased by 10.8% y-o-y to
Rs.56.6 cr. However, the adjusted PAT grew by only 4.6%, as it had to provide for an exceptional item worth Rs.3.2 cr related
to VRS. It earned EPS of Rs.13.5 in Q2FY10.

Quarter 1 and 2 are typically the best quarters historically for BCS based on the cropping seasons in India.

Risks and concerns:

§ The entry of generics in public health segment, slowing down of global economy, availability of funds for health segment,
tolerances of some pests to insecticides are some of the risks and threats seen in the Environmental Science business.

§ BCS has ~13-14% revenues coming from exports and any adverse forex fluctuation could affect its earnings.

§ Agrochemicals are the last input in any agricultural operation and protect the final output i.e. crop. In case of India, most of
the agricultural production is rain fed and hence highly dependent on monsoon. Hence, vagaries in season could affect the
demand for agrochemicals and in turn impact our estimates.

§ BCS faces sales returns regularly. Any unusually large sales return could adversely impact sales and margins.

§ Market need and acceptance of new technologies by farming community is essential before commercial launch of new
products.

§ Any inordinate delay in sale of land at Thane could result in dampening of the interest in the stock.

Financial Performance Rs.Cr.

Particulars Q2FY10 Q2FY09 % Chg Q1FY10 % Chg FY09 FY08 % Chg
Net Sales 482.2 416.0 15.9% 577.6 -16.5% 1394.0 1163.4 19.8%
Other Operating Income 24.7 19.2 28.9% 24.2 2.4% 88.6 75.0 18.2%
Total Operating Income 507.0 435.1 16.5% 601.8 -15.8% 1482.6 1238.3 19.7%
Expenditure
Raw Materials consumed 304.3 255.0 19.4% 400.5 -24.0% 891.8 772.7 15.4%
Staff Cost 35.5 32.5 9.2% 37.3 -5.0% 134.3 122.1 10.0%
Other Expenditure 79.0 68.0 16.1% 80.9 -2.4% 290.5 253.7 14.5%
Total Opex 418.8 355.5 17.8% 518.7 -19.3% 1316.7 1148.5 14.6%
Operating Profit 88.2 79.7 10.7% 83.0 6.2% 165.9 89.9 84.6%
OPM % 18.3% 19.2% 14.4% 11.9% 7.7%
Other Income 5.9 7.9 -24.9% 11.0 -46.4% 21.6 23.0 -6.4%
Interest Expenses 3.7 2.8 32.3% 1.5 141.2% 12.6 7.6 67.2%
Depreciation 5.8 5.7 2.3% 5.9 -1.4% 24.0 26.3 -8.8%
Profit before EOI and tax 84.6 79.1 7.0% 86.6 -2.3% 150.9 79.1 90.8%

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EOI 3.2 0.0 -! 0.0 - 0.0 11.1 -100.0%
PBT 81.4 79.1 3.0% 86.6 -6.0% 150.9 68.0 121.9%
PBTM % 16.9% 19.0% 15.0% 10.8% 5.8%
Tax 28.0 28.0 0.0% 30.6 -8.6% 56.3 18.9 198.7%
Effective Tax Rate % 33.1% 35.4% 35.3% 37.3% 23.8%
PAT 53.4 51.1 4.6% 56.0 -4.6% 94.5 49.1 92.4%
PATM % 11.1% 12.3% 9.7% 6.8% 4.2%
EPS 13.5 12.9 4.6% 14.2 -4.6% 23.9 12.4 92.4%
Equity Capital 39.5 39.5 0.0% 39.5 0.0% 39.5 39.5 0.0%
(Source: Company)

Conclusion
The conditions of the crop protection market have been quite favorable in the recent years. Good commodity prices, increasing
demand for vegetables, labour shortage and government focus on food security have supported the market growth. Farmer’s
positive mind-set to invest in profitable crops and low overall channel inventories has further added to the positive sentiments.

BCS has guided for double-digit growth in FY10, provided that prices remain stable. It also expects Bt Rice to be a significant
contributor to its revenue, going ahead. BCS has 42 molecules under testing for launch; the company has been launching 2-3
new products every year and expect the same trend to continue in the future.

We expect new product launches to be a key driver for BCS’s domestic business. BCS has its export revenues from Bayer AG
Group companies and these are set to increase given the cost advantage and quality offered by BCS. With the ushering in of
WTO and implementation of patent regime, BCS is planning to introduce some excellent high technology products in crop
protection and environment science divisions.

BCS reported Q2FY10 results better than the street’s expectations and compared to its peers despite poor monsoon. Overall,
the monsoon has been below normal in India (21% deficient). However, late rainfall (in early October) has helped the country
increase its water reservoir level, and brought it at the long-term average. Due to this, the Rabi season could see good sowing,
as farmers who lost their crops in the Kharif season would like to take advantage of the elongated season.

Based on quick estimates, though the stock is currently not cheap (compared to smaller local peers) at 17.2x FY10(E) EPS
and 14.4x FY11(E) EPS, the increased spending on agriculture, continued introductions of innovative products by BCS and
possibility of land sale at Thane could keep interest alive in the stock. We feel that the stock could be bought at the current
levels in a small way and added aggressively on falls in the Rs.449-490 band for a target of Rs.649-688 (17-18x FY11(E)
EPS) over 1-2 quarters. We have not assigned any separate value for the land sale at this point.

Company Sales OPM% PATM% EPS Sales OPM%PATM% EPS FV BV CMP P/E P/BV D/E
FY09 H1FY10 FY09 FY09 H1FY10# FY09 FY09
Excel Crop Care* 730.2 10.4% 4.7% 31.0 342.3 13.9% 7.4% 22.9 5.0 127.2 137.1 4.7 3.2 1.1 1.1
Meghmani Organics* 791.4 11.6% 6.9% 1.5 385.6 16.2% 5.6% 1.0 1.0 17.6 15.3 10.7 7.5 0.9 0.4
Monsanto India 390.2 23.0% 18.8% 85.2 314.6 18.0% 15.1% 55.1 10.0 365.5 1670.1 19.7 15.2 4.6 0.0
Nagarjuna Agrichem 605.4 19.2% 8.1% 33.1 338.9 17.3% 8.4% 19.2 10.0 101.4 258.8 8.6 7.4 2.8 0.2
Rallis India* 836.7 14.9% 9.6% 53.4 480.0 18.8% 12.0% 43.8 10.0 217.6 927.5 17.6 10.7 4.3 0.2
BCS 1394.0 11.9% 6.8% 23.9 1059.8 16.2% 10.3% 27.7 10.0 114.2 530.3 23.1 10.0 4.8 0.1
* = Consolidated FY09 numbers, H1FY10 numbers for Excel Crop Care & Rallis India = Standalone (Source: Company, Capitaline Database)
# = P/E calculated on annualised EPS

Estimates
Particulars FY08 FY09 FY10* FY11*
Operating Income 1163.4 1394 1624.0 1798.2
PBIDT (before other income) 89.9 165.9 195.8 230.1
PBIDTM% 7.7% 11.9% 12.1% 12.8%
PAT 49.1 94.5 127.1 150.8
PATM% 4.2% 6.8% 7.8% 8.4%
EPS 12.4 23.9 32.2 38.2
PE (x) 44.4 23.1 17.2 14.4
* = Quick Estimates (Source: Company, HDFC Sec Research)

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Analyst: Sneha Venkatraman (sneha.venkatraman@hdfcsec.com)
RETAIL RESEARCH Fax: (022) 3075 3435
Corporate Office : HDFC Securities Limited, I Think Techno Campus, Building –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp.
Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Fax: (022) 30753435 Website: www.hdfcsec.com
Email: hdfcsecretailresearch@hdfcsec.com

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