Agrochemical Sector IC Feb'14 Eisec

Institutional Resear Research ch February 4, 2014

Agrochemical Sector Report

Tag Line

j

i

j b@ i


Contents Executive Executi ve Summary ………....................................... ………....................................................................................... ..............................................................................................................………….. ..............................................................………….. 3 Are generic players gaining 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 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


Contents Executive Executi ve Summary ………....................................... ………....................................................................................... ..............................................................................................................………….. ..............................................................………….. 3 Are generic players gaining 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 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

Institutional Resear Research ch 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 estima ted 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 floo ds 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 oth er 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 m olecules 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 po wer to company. Performance of saved seed is substantially lower compared to origin al. 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 pos t CAGR of 8.8% and subset GM/Hybrid GM/Hybrid seeds posted 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 i s 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. 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 ri sk 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

Fertiliser

Labour

Seed

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 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

Crop Protection (US $ mn)

2002

29,420

2003

31,155

2004

35,400

2005

36,095

2006

35,575

2007

38,755

2008

46,130

2009

43,720

2010

44,195

2011

50,305

2012

53,732

Source: Eisec Research, Industry

Land

% 6. 7

100


Losses caused by different pests -FY12 Rodents & Others, 15% Weeds, 33% Diseases, 26%

) n b S U (

54 50 29 25

Insects, 26%

2002


80

6. 2 %

75


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 e nd of CY2012. India accounts for 3.8% of globa l 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 pest and disease occurrence in key crops, 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%

N.America 23%

Asia 25%

EU 29%

Global Pesticides consumption (Kg/ha)

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).

Lat-Am 19%

20

17

15 ) a h / g K (

13

12

10

7

7 5

5

5 0.6 0 Taiwan C hi hina Source: Eisec Research, Industry

Japan

USA

Korea

Fran ce ce

UK

India

Institutional Research February 4, 2014

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 li ke 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.

Agrochemicals are classified as Insecticides, Herbicides and Fungicides. Individual sales of various categories however depend on climatic conditions and crop.

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. Whil e 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 s tates (Non Top-8) has increased from 17% to 23%, indicating increasing penetration in other states.

Global v/s India Share of Pesticides Consumption - 2012

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 Others, 7%

India Others, 4%

Herbicides, 44%

Insecticides, 22%

Fungicides, 15%

State-wise Share of Pesticides Consumption trend 28%

21%

Fungicides, 27%

14%

Source: Eisec Research, Industry 7%

0% AP

PJB

MS

GUJ 2 00 1


KNTK 2 00 6

HRY 2 01 2

Herbicides, 16%

W.Ben

TN

Others

Insecticides, 65%


Largest selling molecule category wise - Global Product category

Top molecule - Global

Herbicides

Glyphosate, Triazines, Sulphonyl urea

Insecticides

Pyrethroids,Organophosphates,Neonicotenoids

Fungicides

Triazoles, Strobillurin, Dithiocarbamates

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.


India’s Changing Pesticides Consumption Pattern Largest selling molecule category wise - India Product category

Top molecule - India

Insecticides

Acephate, Monocrotophos, Cypermethrin

Fungicides

Mancozeb, Copper Oxychloride, Ziram

Herbicides

Glyphosate, Isoproturan,

Bio-pesticides

Spinosyns

Others

Zinc Phosphide, Aluminium Phosphide


80%

72%

67%

65%

60%

40%

20%

16%

12%

18%

16% 15%

15%

4% 0% 2002 Herbicides Source: Eisec Research, Industry

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.

Crop

Key consuming crops Global Soyabean 10%

Others 18%

Fruits & Vegetables 26%

Rice 9%

Cotton 6%

Cereals 18% Maize 13%

Sugarcane 2% Cereals 7% Plantation crops 8%

India

Fruits & Vegetables 14%

Others 1%

% of total area under cultivation

Cotton

5%

Rice

24%

50% 18%

Fruits & Vegetables

3%

14%

Plantation crops

2%

8%

cereals, millets and oilseeds

58%

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%.

Cotton 50% Rice 18%

Total market - US$ 54bn Sales of Total 6 CosUS$ 36bn


12,000

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.

% of total agrochem consumption

Sales of generic Top-4 Cos US$ 10bn

9,000 ) n m $ S U (

6,000 3,000 a t n e g n y S

r e y a B


F S A B

w o D

o t n a s n o M

t n o P u D

o m o t i m u S

I A M

m r a f u N

L P U

s r e h t O


Indian agrochemical market compared to global is highly fragmented and generic in nature. Over 80% of m arket 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

Other Players 23% Unorganized 50%

Top-4 27%


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

Seed treatment

Bayer Crop science Ltd

Seed treatment, plant growth regulators

Dhanuka Agritech Limited

PGRs, Surfactants

Dow AgroSciences India Pvt. Ltd.

Plant Growth Regulator

DuPont

Growth Enhancer

Excel Crop Care Limited

Seed treatment, Home & Garden

Gharda Chemicals Ltd.

Plant growth Regulator

Meghmani Organics Limited

Pesticide Intermediates

Monsanto India Ltd.

Seeds

Na ga rj un a Agr ich em L im ited

Fe rt il ize rs , Mi cro Nu tr ie nt s, Li qu id Fe rt il ize rs ,

PI Industries Ltd

Speciality Products

Rallis India

Rodenticides, Seed treatment, Agri services

Syngenta India

Seed treatment

United Phosphorous Limited

Fumigants, Rodenticides


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.


Insecticides Herbicides Fungicides Others

BASF India


Trend Are generic players gaining share or a re 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.

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, A grochemical 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

Declining Marketshare of Innovators 100%

18

36% 75%

40%

52% 12

50%

33%

32%

6

25% 25% 31%

28%

23%

0% 2004 Proprietary

2006 Proprietary off patent

0 1 5 9 1

3 5 9 1

5 5 9 1

7 5 9 1

2011 Generic

9 5 9 1

1 6 9 1

3 6 9 1

5 6 9 1

7 6 9 1

9 6 9 1

1 7 9 1

3 7 9 1

5 7 9 1

7 7 9 1

9 7 9 1

1 8 9 1

3 8 9 1

5 8 9 1

7 8 9 1

9 8 9 1

1 9 9 1

3 9 9 1

5 9 9 1

7 9 9 1

9 9 9 1

1 0 0 2

3 0 0 2

Agrochemical Active Ingredients in Development 80

Source: Eisec Research, Industry 60

40

20

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


5 0 0 2

7 0 0 2

9 0 0 2

1 1 0 2


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

2001

R&D Expenditure of Leading Agrochemical Companies 3600

2700 ) n m $ S 1800 U (

900

n m 450 $ S U e r u t i 300 d n e p x e D 150 & R

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Agrochemical R&D

Seed and Trait R&D


0 Monsanto

DuPont

Syngenta

Agrochemicals 1600

BASF

Dow

Bayer

Seed and Traits

There has been marked increase in cost of innovation and bringing new molecule to market over period. A single ne w 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)

2011 Cost of Bringing a New Product to Market

n 1200 m $ S U e r 800 u t i d n e p x e 400 D & R

280

256

210

0 Monsanto

DuPont

Syngenta

Agrochemicals

BASF

Dow

Bayer

Seed and Traits

) n m $ 140 S U (

184 152

70


0

On aggregate basis, global industry R&D spends on Seed has surpassed that of agrochemicals.

1995 Source: Eisec Research, Industry

2000

2008


Is cost of inventing seed lower than agrochemicals?

Time from New Product Inception to First Introduction

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

16 12 r 8 a e Y

4

256 0 1995

210 ) n m $ S U (


2000

2005 -08

Agrochemical

2011

Seed

136

140

Investment chain of farmer Agrochemicals

70

0

Fertiliser Agrochemical

Plant trait


Labour

As per industry, cost of inventing new plant trait/seed is in region of U S$ 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 Source: Eisec Research, Industry


Future Outlook

Key Challenges

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.

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.

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).

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.


Seed the next growth frontier Global Seed Industry

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%. Year\ US$ mn

Crop Agrochem Non-Crop Agrochem Total Agrochem GM seeds

Conventional Seed Total Seeds

2002

25,150

4,270

29,420

3,140

13,060

16,200

2003

26,710

4,445

31,155

3,709

13,521

17,230

2004

30,725

4,675

35,400

4,476

14,524

19,000

2005

31,190

4,905

36,095

5,095

14,657

19,752

2006

30,425

5,150

35,575

5,855

14,485

20,340

2007

33,390

5,365

38,755

7,068

14,648

21,716

2008

40,475

5,655

46,130

9,150

16,870

26,020

2009

37,860

5,860

43,720

10,570

17,185

27,755

2010

38,315

5,880

44,195

12,870

17,950

30,820

2011

44,015

6,290

50,305

15,685

18,810

34,495

CAGR (02-11)

6.40%

4.40%

6.10%

19.60%

4.10%

8.80%


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

2005

2006

2007

2011

NAFTA

9,300

9,100

9,200

8,412

-1.70%

Lat-America

5,200

5,000

5,900

10,060

11.60%

Europe

9,350

9,500

11,000

12,196

4.50%

Asia

9,300

9,100

9,300

11,607

3.80%

RoW

1,750

1,800

1,850

1,740

-0.10%


CAGR (2005-11)

14

12

11 ) n b $ S U (

8 6

7

4

2

2

2

1

1

n a p a J

y n a m r e G

1

1

1

y l a t I

a n i t n e g r A

a d a n a C

A S U

a n i h C


e c n a r F

l i z a r B

a i d n I

s r e h t O


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 secto r 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 cul tivation for cotton increased from 7.6 million hectars (mn ha) in 2002 to 12 mn ha i n 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

Cereals

Pulses

Oilseeds

Fibres

Other

Total

1983-88

9.9

16.1

(0.2)

(2.3)

(1.8)

6.1

1991-2002

6.8

2.6

2.2

4.7

(0.1)

5.1

2002-2011

14.5

16.4

17.4

(0.9)

15.4

14.9

7.8

8.7

8.5

2.2

0.1

7.0

Overall CAGR


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


All India seed replacement rate (%) of major crops

Number of hybrids in major field crops developed by private and public sector in India

Crop

2001

2002

2003

2004

2005

2006

2007

2008

Wheat

13.0

13.0

13.0

16.5

17.6

21.8

25.2

26.8

Average 18.4

Paddy

19.2

19.3

19.2

16.3

21.3

22.4

25.9

30.1

21.7

Maize

21.0

21.4

24.4

31.5

35.4

43.8

44.2

48.5

33.8

Jowar

18.4

18.8

26.7

19.3

19.0

19.4

19.9

26.2

21.0

Bajra

45.9

48.5

51.0

44.9

55.4

55.1

48.5

62.9

51.5

4.2

4.2

7.1

9.9

9.4

9.0

11.9

14.4

8.8

Chickpea

Crop

PSU

Pvt

PSU

Share of Pvt (%)

Cotton

150.0

15.0

43.0

10.0

193.0

25.0

88.5

Maize

67.0

3.0

36.0

25.0

103.0

28.0

78.6

Paddy

12.0

4.0

11.0

15.0

23.0

19.0

54.8

60.0

6.0

22.0

7.0

82.0

13.0

86.3

41.0

5.0

12.0

8.0

53.0

13.0

80.3

1.0

2.0

1.0

2.0

33.3

35.0

6.0

13.0

10.0

48.0

16.0

75.0

23.0

-

23.0

-

16.6

17.1

20.5

17.2

15.7

13.7

23.9

26.3

18.9

8.7

8.8

13.6

9.8

10.5

11.6

16.1

16.0

11.9

Sorghum

Peanut

5.2

5.5

11.0

7.1

6.9

9.8

14.3

17.0

9.6

Pigeon pea

RSM

38.4

44.6

67.0

58.5

55.4

60.7

58.6

52.7

54.5

Sunflower

Soybean

12.4

12.5

15.6

27.0

28.9

28.4

33.4

35.1

24.2

Sunflower

13.7

15.7

19.6

60.2

67.7

66.9

62.9

43.6

43.8

Cotton

21.2

21.9

19.8

20.7

21.8

19.8

15.3

12.1

19.1

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.

Pvt

Total

PSU

Arhar


2003 to 2010

Pvt

Pearl

Urdbean

2001-02

Jute Mesta

11.0

-

11.0

-

Castor

4.0

9.0

4.0

9.0

30.8

Mustard

11.0

1 .0

11.0

1.0

91.7

2.0

-

2.0

-

Safflower Source: Eisec Research, Industry

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.


Rallis India Ltd

ACCUMULATE

True Blue Ace Recommendation CMP(Rs)

160

Target(Rs)

189

Upside %

18%

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

Share Holding (%) Promoter

50.0

Public

31.4

FII

12.5

DII

6.1

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 we re 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 a rea 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). •

•

•

Key Data Average Vol(6m)(000)

237.7

FV

1

Beta

0.6

Mcap (Rs Mn)

31,815

52 week H/L

185 / 110

Bloomberg /Reuters

RALI IN/RALL.BO

Group

B / S&P BSE 500

Sensex / Nifty

Risks to our call: •

20,209 / 6,002 •

Stock Performance (%) Abs(%)

•

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.

Sensex

RALLIS

3M

-3.1

3.4

Year

1Y

3.1

25.7

FY11

10,862

1,260

6.5

FY12

12,749

835

Analyst: Sageraj Bariya Email ID: [email protected] Phone No.: 022-61925337

Revenue (Rs mn)

PAT (Rs mn)

EPS (Rs) EBIDTA Margin (%)

P/E (x)

EV/EBIDTA (x)

PB (x)

ROE (%)

ROCE (%)

17.6

24.7

16.6

6.2

13.6

10.6

4.3

15.9

37.3

15.7

5.6

15.8

17.6

FY13

14,582

1,188

6.1

14.4

26.2

14.7

5.0

20.2

17.1

FY14E

17,348

1,531

7.9

15.4

20.3

11.2

4.4

23.0

20.1

FY15E

20,032

1,833

9.4

15.4

17.0

9.3

3.8

24.0

20.5


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 pi peline (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 Rall is to register a CAGR of 17% and 24% i n 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.


Background

Business Turnaround

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

Downfall Draught and overcapacity in industry lead to losses 1,200 1,000

Restructuring Sale of pharma, fertiliser business leadingto 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

800 r 600 c s R 400

5.0 %

0.0

200 0

100%

(5.0)

(200)

22%

29%

29%

29%

29%

(400)

(10.0) F Y2 00 1

F Y2 00 2

F Y2 00 3

75%

F Y2 00 4

F Y2 00 5

Sales

F Y2 00 6

F Y2 00 7

F Y2 00 8

F Y2 00 9

EBITDA %

Source: Company , Eisec Research

50% 78%

71%

71%

71%

71%

25%

0% FY11

FY12 Domestic

FY13

FY14E

FY15E

Export


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.

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.


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 a cquisition 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.

Founders

Background

K K Narayanan

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.

Gautham Nadig

Leads the business development, operations and investment at MLS. Served as chief executive officer (CEO) of Material SciencesCorp. (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.

Ganesh Kishore

Served as VP of the science and technology department and chief biotechnology officer at DuPont. Earlier, he was the chief technology officer of DuPont’s 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.

Ravi Krishna S

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.

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.


Revenue

Hidden value

2,000

1,500 n m s R 1,000

500

0 FY11

FY12

FY13

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 cl inical 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 Dr. Rashmi Barbhaiya - CEO and Managing Director

PAT 60

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

n m s R

Dr. Gopal Muralidharan -Chief of Technical Operations

0

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


The Tata group is a major shareholder in Advinus while Rallis holds 15% stake in it with company management holds mino rity 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.

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 wi th 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 .

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

Global Pesticides consumption (Kg/ha) 20

17

15

13

12

10

7

7 5

5

5 0.6 0 Taiwan

China

Japan

USA

Korea

France

UK

India


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-pl aced to seize this opportunity on the back of i ts 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 Ralli s is in a position to gain higher market share as well as charge a premium for its products.


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 distrib ution 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.

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

Strategic alliance Indofil M-45 (indofil)

Company

Product

Dupont

Indoxacarb

Tatamono (Rallis)

Acetamiprid Syngenta

Pretilachlor Thiomethozam Paraquat di Chloride Emmamaectine Clodinofop

Makhteshim

Atrataf

Captaf Novaluron Bayer

Thirodicarb

Nihon Nohayaku

Fuji 1

Imidaclorpid Buprofezin Fenpyroximate FMC

Carbofuran Carbosulfan Bifenthrin

Gharda Chemicals

Sulfosulfuron

Yara International

Calcium nitrate solution

Borax International

Boron 20%

Chloro + Cyper


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%


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

Innovation Index 40%

30%

20%

10%

New product launch & registration 0% 20.0

FY10

FY11

FY12

FY13

15.0


10.0

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" a nd "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.

5.0 0.0 FY10

FY11 Registration


FY12 Launch

FY13


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 $54bn in CY2012. Sales of patented product constituted approximately 1/4th of the total and another 1/4th is proprietary off patent (Patent of mole cule has expired but no credible generic brand has been able to garner significant market share from patented brand). Opportunity of even 10% of the total market size would translate into US$ 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

) n m s R (

6,000

60

4,500

45

3,000

30

1,500

15

0

0 FY12

Source: Company, EISEC Research

FY13 Export

FY14E % YoY

FY15E

) % (

Management believes there i s 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 i n very specific regions a nd 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 pl ant 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.


The next growth frontier - Seed Business India Seed industry is esti mated 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 y ears positive government policies has attracted investments by private players and share of Private sector share has increased from to 80% in 2010.

Cereals

Pulses

Oilseeds

Fibres

Other

Total

(0.2)

(2.3)

(1.8)

6.1

(0.1)

5.1

1983-88

9.9

16.1

1991-2002

6.8

2.6

2.2

4.7

2002-2011

14.5

16.4

17.4

(0.9)

15.4

14.9

7.8

8.7

8.5

2.2

0.1

7.0

Overall CAGR

Crop

2001

2002

2003

2004

2005

2006

2007

2008

Wheat

13.0

13.0

13.0

16.5

17.6

21.8

25.2

26.8

Average 18.4

Paddy

19.2

19.3

19.2

16.3

21.3

22.4

25.9

30.1

21.7

Maize

21.0

21.4

24.4

31.5

35.4

43.8

44.2

48.5

33.8

Jowar

18.4

18.8

26.7

19.3

19.0

19.4

19.9

26.2

21.0

Bajra

51.5

45.9

48.5

51.0

44.9

55.4

55.1

48.5

62.9

Chickpea

4.2

4.2

7.1

9.9

9.4

9.0

11.9

14.4

8.8

Urdbean

16.6

17.1

20.5

17.2

15.7

13.7

23.9

26.3

18.9

Arhar

8.7

8.8

13.6

9.8

10.5

11.6

16.1

16.0

11.9

Peanut

5.2

5.5

11.0

7.1

6.9

9.8

14.3

17.0

9.6

38.4

44.6

67.0

58.5

55.4

60.7

58.6

52.7

54.5

RSM Soybean

12.4

12.5

15.6

27.0

28.9

28.4

33.4

35.1

24.2

Sunflower

13.7

15.7

19.6

60.2

67.7

66.9

62.9

43.6

43.8

Cotton

21.2

21.9

19.8

20.7

21.8

19.8

15.3

12.1

19.1


Crop-wise growth in distribution of seeds (%) Period

All India seed replacement rate (%) of major crops


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/qual ity 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), Manageme nt 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.


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 ti me got delayed to 9-Sept. This led to delay in spraying activi ty 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.

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%

75%

8%

11%

13%

15%

29%

29%

29%

63%

61%

58%

57%

FY12

FY13

FY14E

FY15E

29%

50%

25%

Changing revenue mix 24,000

0%

19,000 ) n m s R (

Domestic Crop Care

Export

Seed & Service


14,000

9,000

4,000 FY12 Domestic - Agrochemical Source: Company, EISEC Research

FY13 Export- Agrochemical

FY14E

FY15E

Seeds & Other - Domestic

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.


EBITDA margin

Adj PAT 2,000

20

18

1,500

15

) n m s 1,000 R (

13

500

10 FY12

FY13

FY14E

-

FY15E

FY12

FY13

FY14E

FY15E

Source: Company, EISEC Research Source: Company, EISEC Research

EBITDA 3,200

Return ratios 30

2,400 ) n m s R (

24 1,600 ) 18 % (

800 12 FY12

FY13

FY14E

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.

6 FY12

FY13 RoCE


FY14E RoE

FY15E


Outlook & Valuation

Risk to our call

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 registe r 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

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

30

20

250

10 200 0 150

100

8 0 - l u J

8 0 - t c O

9 0 - n a J

9 0 - r p A

9 0 - l u J

9 0 - t c O

P/E

50

-

8 0 - r p A

8 0 - r p A

8 0 - l u J

8 0 - t c O

Price

9 0 - n a J

9 0 - r p A

9 0 - l u J

9 0 - t c O

10.0x

0 1 n a J

0 1 r p A

0 1 l u J

0 1 t c O

14.0x

1 1 n a J

1 1 r p A

1 1 l u J

1 1 t c O

18.0x

2 1 n a J

2 1 r p A

2 1 l u J

2 1 t c O

22.0x

3 1 n a J

3 1 r p A

3 1 l u J

3 1 t c O

26.0x

4 1 n a J

0 1 n a J

0 1 r p A

0 1 l u J

0 1 t c O

1 1 n a J

1 1 r p A

5-year avg

1 1 l u J

1 1 t c O

2 1 n a J

2 1 r p A

2 1 l u J

3-year avg

2 1 t c O

3 1 n a J

3 1 r p A

3 1 l u J

3 1 t c O

4 1 n a J


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

FY11

FY12

10,862

12,749

14,582

FY13

20.6

17.4

14.4

8,948 1,915

10,719 2,030

12,476 2,106

17.6

15.9

14.4

FY14E 17,348 19.0

14,676 2,672 15.4

FY15E 20,032 15.5

16,947 3,085 15.4

171

287

315

383

448

1,744 37

1,743 146

1,790 185

2,289 137

2,637 99

138 -

69 (172)

117 -

84 -

138 -

2,236

2,675

1,845

1,494

1,723

(% of Net Sales)

17.0

13.1

11.8

12.9

13.4

Tax

581

487

535

704

843

PAT before MI

31.5 1,264

29.2 1,007

31.0 1,188

31.5 1,531

31.5 1,833

MI & Share of Asso Adj PAT

(3.9) 1,260

0.0 835

0.0 1,188

0.0 1,531

0.0 1,833

(% of PBT)

% chg

Cash Flow (Y/E Mar)

39.1

FY11

(33.7)

FY12

42.3

FY13

28.9

19.7

FY14E

FY15E

Balance Sheet (Y/E Mar)

FY11

FY12

FY13

FY14E

FY15E

Equity Share Capital

194

194

194

194

194

0

0

0

0

0

Reserves & Surplus

4,855

5,336

6,013

6,907

7,944

Shareholders fund

5,049

5,530

6,207

7,102

8,138

Long term debt

844

856

107

90

90

Others

239

478

698

698

698

4,035

4,350

4,889

5,233

6,106

Total Liabilities

10,167

11,214

11,902

13,122

15,032

Net Fixed Assets

5,071

5,769

5,899

6,453

7,102

Investment

1,273

1,109

1,105

1,105

1,105

146

112

258

1,248

2,482

Preference capital

Current Liabilities & Prov

Cash & equivalents Total Current Assets Total Assets

3,823

4,336

4,898

5,564

6,825

10,167

11,214

11,902

13,122

15,032

Key Ratios

FY11

FY12

FY13

FY14E

FY15E

17.6

15.9

14.4

15.4

15.4

Profit before tax

1845

1494

1723

2236

2675

EBITDA margin (%)

(-) Tax

(706)

(407)

(360)

(704)

(843)

Net Profit Margin

11.6

7.9

8.1

8.8

9.1

171

287

315

383

448

RoE

13.6

15.8

20.2

23.0

24.0

(-)Change in Working Cap

(314)

(507)

(321)

326

687

(+)Others

(113)

80

86

137

99

ROCE

10.6

17.6

17.1

20.1

20.5

76.9

77.8

66.9

70.0

71.0

120.7

91.7

78.8

79.0

80.0

39.1

32.0

44.0

42.0

40.0

0.2

0.2

0.0

0.0

0.0

(+) Depreciation

OCF (-) Capex (-) investment

1443

2377

3066

Inventory (days)

(466)

(349)

(937)

(1096)

Payable (days)

(275)

(50)

0

0

883

946

(1278) (60)

(-) others) CFI (+) Net debt (+) Net Equity

(1338)

(741)

(399)

(937)

(1096)

849

369

(227)

(17)

0

0

0

0

0

0

Receivables (days) Debt to Equity

Valuation parameter

(353)

(473)

(495)

(296)

(637)

EPS

6.5

4.3

6.1

7.9

9.4

(+)Others

(38)

(138)

(172)

(137)

(99)

P/E

24.7

37.3

26.2

20.3

17.0

CFF

458

(242)

(895)

(450)

(736)

2

(38)

149

990

1234

P/S

2.9

2.4

2 .1

1.8

1 .6

P/BV

6.2

5.6

5.0

4.4

3.8

16.6

15.7

14.7

11.2

9.3

(-) Dividend Payout

Inc./(Dec.) in Cash Opng Cash balances

119

146

112

258

1248

C/s Cash balances

121

108

261

1248

2482

EV / EBITDA


UPL Ltd

REDUCE

M&A strategy not paying off well Recommendation CMP(Rs)

185

Target(Rs)

195

Upside %

5%


28.9

Public

17.1

FII

44.9

DII

9.1

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 facil ities 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 he re on account of 1) stagnation of growth in developed market (US & EU), 2) as more countries switch to GM & Hybri d seeds 3) increasing competition amo ngst 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 •


2338.4

FV

2

Beta

0.8

Mcap (Rs Mn)

81,071

52 week H/L

218 / 113

Bloomberg /Reuters

UPLL IN/UNPO.BO

Group

A / S&P BSE 100

Sensex / Nifty

20,209 / 6,002


•


•

Sensex

UPL

3M

-3.1

15.2

Year

1Y

3.1

42.7

FY11


Generic Market becoming generic, seed is future - Share of generic has been i ncreasing continuously over last decade. Share of generics have increased from 36% in 2004 to 40% in 2006 to 52% in 2011. There has been visi ble 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 s pends 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.

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)

PAT (Rs mn)

EPS (Rs)

EBIDTA Margin (%)

P/E (x)

EV/EBIDTA (x)

PB (x)

ROE (%)

ROCE (%)

57,607

4,774

10.3

18.6

17.9

7.0

2.3

14.2

12.4

FY12

76,713

5,365

11.6

18.0

15.9

7.2

2.0

13.6

11.7

FY13

91,945

7,719

17.4

18.1

10.6

5.5

1.8

17.5

11.5

FY14E

105,112

8,861

20.3

18.1

9.1

5.0

1.6

18.4

11.7

FY15E

116,424

9,971

22.9

18.2

8.1

4.2

1.4

18.4

12.5


Executive Summary Investment Concerns

Outlook and Valuation

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.

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 li kely to increase by 30% in 2030 and by 50% in 2050.

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 v isible 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 U PL, margins have taken hit. Over the years EBITDA margins have come d own 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.

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 s tock 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.


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.

Revenue Breakup 100%

Total market - US$ 54bn

24

27

32

32

29

21

26

27

15

14

18

18

22

19

75%

Sales of Total 6 CosUS$ 36bn

12,000

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, A rgentina, Colombia, etc.

) % 50% (

Sales of generic Top-4 Cos US$ 10bn

9,000 ) n m $ 6,000 S U (

21

22

25

22

22

19

20

FY10

FY11

FY12

FY13

25% 24

3,000

0% FY09

a t n e g n y S

r e y a B

F S A B

w o D

o t n a s n o M

t n o P u D

o m o t i m u S

I A M

m r a f u N

L P U

s r e h t O


The global Agrichem industry, valued at US $54bn (CY2011), is dominated by the Top-6 Innovators, viz. Bayer, Syngenta, Monsanto, BASF, DuPont and Dow, which enjoy large ma rket share of patented (23%) and off patent market (25%). Thus, almost 25% of the total pie worth US$ 13 bn (controlled by the Top-6 Innovators through proprietary off-patent products) provides high growth opportunity for larger integrated generic players like UPL

N.America Source: Company , Eisec Research

India

EU

RoW

Lat-AM


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 pl ants 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 busi ness as a strategy to diversify and further boost revenues. The global Se eds business is estimated to be worth US$40bn a nd 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 Ro E & 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


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 m arket share or Top-6 Innovators players are exiting the agrochemical business. Declining Marketshare of Innovators

Slowing rate of new molecule introduction There has been visible drop in rate of introduction of new a grochemical / 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.

100% 36% 75%

40%

New Active Ingredient Introductions 52% 24

50%

33%

32% 25%

18

25% 31%

28%

23%

12

2011

6

0% 2004 Proprietary

2006 Proprietary off patent

Generic

Source: Company , Eisec Research 0 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 5 5 5 5 5 6 6 6 6 6 7 7 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2



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.

60

R&D Expenditure – Historical development 600

2001

40 450 n m $ S 300 U

20

150

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0


Lowering rate of introduction of new molecules directly impacts futu re 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.

Monsanto

DuPont

Syngenta

Agrochemicals

1600

BASF

Dow

Bayer

Dow

Bayer

Seed and Traits

2011

1200 n m $ S U

800

400

0 Monsanto

DuPont

Syngenta

Agrochemicals


BASF Seed and Traits


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.

2700

Cost of Bringing a New Product to Market

) n m $ S 1800 U (

280

256

210

900

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Agrochemical R&D

Seed and Trait R&D

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 256

210 ) n m $ 140 S U (

184 152

70

0 1995 Source: Eisec Research, Industry

2000

136

140

70


280

) n m $ S U (

2008

0 Agrochemical

Plant trait


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.


Time from New Product Inception to First Introduction 16

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.

12 r 8 a e Y

4

Acquisition history

0 1995 Source: Eisec Research, Industry

2000

2005 -08

Agrochemical

2011

Seed

Given agrochemicals are last component that goes into farmer's investment chain, it faces lot of uncertainty. Farmer would buy agrochemi cal, 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 Source: Eisec Research, Industry

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

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


UPL's two-fold acquisition strategy has been primarily responsible for such stupendous growth. The company's strategy entails:

24

Acquiring original brands from the Innovators - Innovators have been selling out old brands to focus on new brands (molecules) or seed.

18

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.

) % ( 12

•

•



UPL also targets a 3-4 year payback period at the time of the acquisition.

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.

6

5 0 Y F

6 0 Y F

7 0 Y F

8 0 Y F

RoE

9 0 Y F

0 1 Y F

1 1 Y F

2 1 Y F

3 1 Y F

RoCE


We believe margin decrease have been on account of following reasons,

32

1) Most of acquisitions have been in developed market, where labour cost is high and further cost reduction is challenging.

24

2) MNCs sold off outdated molecule once farmers had switched to better offering.

) 16 % (

3) Farmers shifting to better option - seeds (that require less or nil usage of pesticides).

8

4) Generic market as such witness high competition in turn leading to price reduction.

5 0 Y F

6 0 Y F

7 0 Y F

8 0 Y F

9 0 Y F

0 1 Y F

EBITDA margin Source: Company, EISEC Research

1 1 Y F

2 1 Y F

3 1 Y F

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.


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. Si milarly, 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%.

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 beli eve 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

Revenue Breakup

) n m s R (

36,000

10

27,000

5

18,000

FY12

9,000

FY13 RoE


N.America

India FY12


FY13

EU FY14E

RoW FY15E

Lat-AM

FY14E RoCE

FY15E


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 lo ss 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 s tock from here on and hence recommend Reduce on th e stock with target price of Rs195 (9x FY15E EPS). However ongoing buyback may continue to support s tock price around current levels.

P/E Chart 28

21

14

7

4 4 5 5 6 6 7 7 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - r t r t r t r t p c p c p c p c A O A O A O A O

1yr fwd P/E

8 0 - r p A

8 0 - t c O

9 0 - r p A

9 0 - t c O

3yr Avg

0 0 1 1 2 2 3 3 1 - 1 - 1 - 1 - 1 - 1 - 1 - 1 r t r t r t r t p c p c p c p c A O A O A O A O

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.


Financial Summary P&L Statement (Y/E Mar) Net Sales

FY11

FY12

FY13

FY14E

FY15E

57,607

76,713

91,945

105,112

116,424

6.5

33.2

19.9

15.2

9.9

Total Expenditure

10,699

13,840

16,618

19,146

21,189

EBIDTA

10,699

13,840

16,618

19,146

21,189

18.6

18.0

18.1

18.1

18.2

2,138

2,924

3,537

3,976

4,231

EBIT

8,561

10,916

13,081

15,171

16,958

Interest

3,120

4,146

4,290

5,063

5,110

Other Income

1,375

923

1,000

1,206

946

% chg

(% of Net Sales) Depreciation& Amortisation

Exceptional item PBT

(140) 6,675

(406) 7,287

(352) 9,439

(600)

0

10,714

12,794

41,731

46,452

50,018

58,101

10,023

23,772

28,123

29,800

16,500

1,646

6,956

7,972

8,041

8,071

Other Liabilities Current Liabilities & Prov

33,854

31,230

41,983

47,363

54,465

Total Liabilities

82,784

103,689

124,531

135,223

137,137

Net Block

23,776

35,286

38,668

39,193

39,462

6,878

9,906

10,187

10,187

10,187

Total Current Assets

52,130

58,497

75,676

85,844

87,489

Total Assets

82,784

103,689

124,531

135,223

137,137

9,971

12.4

43.9

14.8

12.5

2,138

37,261

Total Loans

4,049

8,861

(+) Depreciation

Shareholders fund

83,439

7,719

(885)

871 57,230

74,882

5,365

(-) Tax

871 49,147

10,961

4,774

FY14E

885 45,567

60,193

20.8

FY13

924 40,808

15,482

7.2

FY12

924 36,337

7,002

23.3

FY11

Reserves & Surplus

51,495

1.0

6,816

Equity Share Capital

36,471

15.0

Profit before tax

SOURCES OF FUNDS

15,659

7,942

Cash Flow (Y/E Mar)

FY15E

Cash & equivalents

2,772

7,407

(0.3)

FY14E

Other non-current assets

2,032

6,007

% chg

FY13

9,596

1,280

5,945

Adj PAT

FY12

3,199

731

PAT % chg

FY11

Investments

Tax


FY15E

7,693

9,791

10,714

12,794

(1,242)

(1,438)

(2,772)

(3,199)

2,924

3,537

3,976

4,231

FY11

FY12

FY13

EBITDA margin

18.6

18.0

8.5

7.1

RoE

14.2

Net Profit Margin

FY14E

FY15E

18.1

18.1

18.2

8.6

8.4

8.6

13.6

17.5

18.4

18.4

(-)Change in Working Cap

(1,884)

(11,271)

1,043

(9,342)

(+)Others

1,964

3,516

4,059

5,150

4,954

ROCE

12.4

11.7

11.5

11.7

12.5

OCF

8,148

1,620

16,992

7,726

17,323

Inventory (days)

91.9

102.1

89.5

110.0

108.0

(-) Capex

(6,960)

(5,665)

(4,457)

(4,500)

(4,500)

Payable (days)

88.5

100.0

111.9

100.0

100.0

(-) investment

(1,848)

(933)

(3,690)

0

0

0

0

0

0

0

Receivables (days)

96.7

132.9

116.2

115.0

115.0

(8,809)

(6,599)

(8,147)

(4,500)

(4,500)

Debt to Equity

(0.3)

0.4

0.2

0.3

0.2

2,888

2,180

6,372

1,677

(13,300)

0

0

(2,235)

(3,066)

0

(-) Dividend Payout

(1,091)

(1,156)

(1,427)

(1,295)

(1,325)

(+)Others

(2,113)

(3,305)

(3,527)

(5,063)

(5,110)

CFF

(316)

(2,282)

(817)

(7,747)

(19,735)

Inc./(Dec.) in Cash

(977)

(7,260)

(4,521)

(6,912)

(-) others) CFI (+) Net debt (+) Net Equity

8,028

(1,457)

Key Ratios (Y/E Mar)

Opng Cash balances

16,162

15,487

8,227

15,482

10,961

Closing cash

15,185

8,227

16,255

10,961

4,049

Valuation parameter EPS

10.3

11.6

17.4

20.3

22.9

P/E

17.9

15.9

10.6

9.1

8.1

P/S

1.5

1.1

0.9

0.8

0.7

P/BV

2.3

2.0

1.8

1.6

1.4

EV / EBITDA

7.0

7.2

5.5

5.0

4.2


Bayer CropScience Ltd

SELL

Parental advantage priced in Recommendation CMP(Rs)

1586

Target(Rs)

1521

Upside %

-4%


69.0

Public

11.7

FII

8.5

DII

11.7

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, Agrochem ical and Seeds. BCS has leadership position i n 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 •


19.5

FV

10

Beta

0.3

Mcap (Rs Mn)

62,400

52 week H/L

1829 / 1065

Bloomberg /Reuters

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 l ow penetration (less than 3%) of hybrid ri ce 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%. Ho wever 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.

BYRCS IN/BAYE.BO

Group

B / S&P BSE 500

Sensex / Nifty

20,209 / 6,002


•

Leader in Indian market - BCS is a market leader in the Indi an Agrochemical Sector with a ma rket 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.


•

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.

Sensex

BAYER

3M

-3.1

-9.1

Year

1Y

3.1

35.7

FY11

21,373

1,337

33.9

10.4

46.8

26.1

9.3

21.7

14.5

FY12

22,723

1,731

43.8

11.1

36.2

22.8

7.9

23.6

12.9

FY13

27,253

2,564

64.9

13.2

24.4

14.5

3.2

18.8

15.2

FY14E

32,946

3,107

84.8

13.2

18.7

11.5

3.3

16.8

16.0

FY15E

37,249

3,308

90.3

13.2

17.6

9.7

2.8

17.2

16.8


Revenue (Rs mn)

PAT (Rs mn)

EPS (Rs) EBIDTA Margin (%)

P/E (x)

EV/EBIDTA (x)

PB (x)

ROE (%) ROCE (%)


Executive Summary Rating Rationale

Outlook and Valuation

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 th at 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 indust ry 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.

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 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 slo w 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.

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.


Background

Leader in Indian market

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.

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.

Crop wise revenue mix

Global Agrochem sales by region

Paddy 12%

RoW 4%

Cotton 10% other 63% Vegetables 10%

Fruits 5%

Lat-Am 19%

N.America 23%

Asia 25%

EU 29%

Global Pesticides consumption (Kg/ha) 20

17


15

13

) a h / 10 g K (

12 7

7 5

5

5 0.6 0 Taiwan C hina Source: Company , Eisec Research

Japan

USA

Korea

France

UK

I ndia


Changing Business model - Focus on Seed and Outsourcing Increasing focus on seed

Leader in Rice seed market

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.

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.

Revenue Mix 3%

1% 11%

100%

15%

20%

75%

Bayer AG's seed business is carried out 2 entities in India namely, 1) Bayer BioScience India (BSI) a nd 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.

18% 16%

50%

Structure of India’s hybrid rice seed market by volume and value 100%

68% 25%

Other companies

48% 75%

0% FY09 Insecticides Herbicides Source: Company , Eisec Research

Fungicides

FY13 Seeds Others

e g a t n e c r e P

Advanta Ganga Kaveri PHI Seeds

Other companies

Advanta Ganga Kaveri PHI Seeds

50%

Nath Seeds

Nath Seeds

25%

Bayer Cropscience

Bayer Cropscience

Volume

Value

0% Source: Company , Eisec Research


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 agrochemi cal 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


New Product Launches FY10 Agrochemical Glamore Nativo Adora Seed Arize Prime surpass SP 7007 BG II ProAgro 9477

Rice Fungicide Rice Rice Hybrid Seed Cotton Hybrid Seed Millet Hybrid Seed

FY12

FY13

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

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

Seed

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

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


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.

EBITDA (%) 16

12

8

4

0

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

4 0 0 2 Y C

5 0 0 2 Y C

6 0 0 2 Y C

* 8 0 0 2 Y F

9 0 0 2 Y F

0 1 0 2 Y F

1 1 0 2 Y F

2 1 0 2 Y F

3 1 0 2 Y F

E 4 1 0 2 Y F

E 5 1 0 2 Y F

Source: Company , Eisec Research | * - 15month

EBITDA margins have been on upswing as contri bution 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

2,400

40

1,600

20

33,000 ) n m s R (

22,000

11,000

800

0

FY2011

FY2012 Domestic


FY2013 Export

FY2014E

FY2015E

-

(20) FY2011

FY2012

FY2013 Adj PAT


FY2014E % yoy

FY2015E


Outlook & Valuation

P/E Chart

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 recomm end Reduce on the stock. FY2015E Target P/E Core EPS Target price

16.0 78.7 1,259

add cash per share

262

Total Value of share

1,521

CMP

1,586

Return (%)

(4)

2,000

1,500

`

1,000

500

6 0 - n a J

6 0 - l u J

7 0 - n a J

7 0 - l u J

Price

8 0 - n a J

8 0 - l u J

5x

9 0 - n a J

9 0 - l u J

9x

0 1 n a J

13x

0 1 l u J

1 1 n a J

17x

1 1 l u J

2 1 n a J

2 1 l u J

3 1 n a J

3 1 l u J

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.


Financial Summary P&L Statement (Y/E Mar) Net Sales % chg

Total Expenditure EBIDTA (% of Net Sales)

Depreciation& Amortisation EBIT

FY11 21,373

FY12 22,723

FY13 27,253

FY14E 32,946

FY15E 37,249

24.0

6.3

19.9

20.9

19,142

20,196

23,654

28,597

32,332

13.1

2,231

2,527

3,599

4,349

4,917

10.4

11.1

13.2

13.2

13.2

327

340

366

513

571


FY11

FY12

FY13

FY14E

FY15E

SOURCES OF FUNDS Equity Share Capital

395

395

395

366

366

Reserves & Surplus

6,335

7,532

18,918

17,281

20,354

Shareholders fund

20,720

6,730

7,927

19,313

17,647

Total Loans

0

0

0

0

0

Deferred Tax Lia

0

0

18

18

18

1,904

2,187

3,233

3,836

4,346

Interest

83.0

17.0

37.0

40.7

44.8

Current Liabilities & Prov

Other Income

205

453

689

842

636

Total Liabilities

10,480

4,819

6,130

7,062

18,407

24,150

23,795

27,800

38

579

0

0

3,440

2,449

2,157

2,024

3,954

PBT

1,988

2,044

15,632

4,637

4,938

CWIP-Tangibles

61

80

1,271

2,500

200

Tax

672

654

4,015

1,530

1,629

Intangibles

36

29

29

19

9

PAT

1,316

1,390

11,617

3,107

3,308

CWIP-Intangibles

0

8

0

0

0

3.4

5.6

735.8

(73.3)

6.5

728

756

780

780

780

1,337

1,731

2,564

3,107

3,308

29.5

48.1

21.2

6.5

FY12

FY13

FY14E

FY15E

Exceptional item

% chg

Adj PAT( After Minority Int.) % chg

Cash Flow (Y/E Mar) Profit before tax (-) Tax (+) Depreciation (-)Change in Working Cap (+)Others

(1.2) FY11 1,988 (555)

(740)

15,632

4,637

4,938

(1,226)

(1,530)

(1,629)

327

450

(640)

(637)

(1,197)

103

(50)

(12,288)

OCF

1,223

(-) Capex

1,927

(-) investment

2,044

(11,747)

1,067 (496)

462

513 193 (41)

1,383

3,771

6,456

(1,517)

24

1,381

(2,186)

1,951

885

4,270

0

571 (1,053) 66 2,892 (211) 0

(-) others) CFI (+) Net debt (+) Net Equity (-) Dividend Payout (+)Others CFF Inc./(Dec.) in Cash Opng Cash balances C/s Cash balances

(55) 0

(1,085) 0

(1,517)

(211)

0

0

0

0

(4,550)

0

(184)

(183)

(193)

(231)

(223)

(85)

(17)

(20)

(41)

(45)

(324) 2,850

(1,285) 667

(213) 5,440

(4,822) (2,568)

Net Block

8,867 15,597

Investments Deffered tax

60

104

0

0

0

7,642

10,682

10,172

11,298

13,271

Total Current Assets

11,272

14,981

19,913

18,471

22,857

Total Assets

15,597

18,407

24,150

23,795

27,800

Other non-current assets

Key Ratios

FY11

FY12

FY13

FY14E

FY15E

EBITDA margin

10.4

11.1

13.2

13.2

13.2

6.3

7.6

9.4

9.4

8.9

21.7

23.6

18.8

16.8

17.2

Net Profit Margin RoE ROCE

14.5

12.9

15.2

16.0

16.8

Inventory (days)

67.1

75.2

66.9

70.0

70.0

Payable (days)

56.3

48.3

32.8

40.0

40.0

Receivables (days)

40.9

43.2

38.7

40.0

41.0

Debt to Equity

(0.5)

(0.5)

(0.5)

(0.4)

(0.5)

Valuation parameter Adj EPS

33.9

43.8

64.9

84.8

90.3

P/E

46.8

36.2

24.4

18.7

17.6

2,413

P/S

2.9

2.8

2 .3

1.8

1.6

9.3

7.9

3.2

3.3

2.8

14.5

11.5

9.7

(268)

777

3,627

4,294

9,741

7,173

P/BV

3,627

4,294

9,734

7,173

9,586

EV / EBITDA

26.1

22.8

Agrochemical Sector IC Feb'14 Eisec

Recommend Documents