Elara Capital - Agri Inputs

A long harvest

India Crop Protection9 January 2012

Elara Securities (India) Private Limited

Anand Shah

[email protected]

+91 22 4062 6821

FoodProduction

CropProtection

Yield Population Land FoodProduction

CropProtection

Yield Population Land

Limited land

Growing population

growing needs

Yield improvement im

perative

Key agri input

Rise in fo

od productio

n

PRESENT FUTURE


Notes

Anand Shah • [email protected] • +91 22 4062 6821

Glo

ba

l M

ark

ets

Re

sea

rch


A long harvest

Landscape conducive for growth in agri-inputs

Compared to other countries, India faces a bigger challenge, since

with only 2.3% share in world’s total land area, it needs to ensure food

security of its population which is about 17.5% of world population.

Further, stagnant arable land, fragmentation of land holdings and low

productivity/yield vs. global peers and differential yields state-wise has

only compounded problems making it imperative to improve yields via

agri-inputs like crop protection (pesticides) products.

Higher rural incomes and govt focus to act as key catalysts

Over the last several years, government focus on agriculture has

increased through various schemes/allocations, better credit flow to

agriculture and higher MSPs (Minimum Support Prices) which has

improved farmers’ realisations from produce. We believe rising farm

incomes are likely to be re-routed in agri-inputs to sustain farm

incomes.

Bullish on crop protection theme

According to CMIE data, the Indian crop protection industry was

valued at INR137bn (domestic consumption) in FY2010. Going ahead,

we expect the crop protection industry to grow at ~10-12% CAGR

over FY12E-14E driven by higher MSPs, labour shortages driving

higher use of herbicides, growing farmer awareness about products,

government support for agriculture, higher usage in low input regions

and introduction of new specialty molecules.

Further, Indian players are expanding their horizons into higher

exports (to utilize excess capacities and insulate themselves from

seasonal demand fluctuations) and engaging into strategic tie-ups

with MNCs to diversify their product mix. Moreover, from 2010-2014,

patents on products worth USD4.3bn sales will go off-patent and may

provide huge opportunities for generic companies.

Valuation Over the last 3 months, crop protection companies have witnessed

steep correction, led by Rallis, largely due to expectations of a

weaker H2FY12E. However, we continue to like crop protection

companies due to their strong balance sheets (low debt-equity),

high free cash flow (FCF) generation over FY12E-14E and

reasonable valuations, post correction, offering an attractive entry

point.

We initiate coverage on Rallis India and PI Industries as our Top

picks in the sector, initiate on Dhanuka Agritech with Buy and

Insecticides India with Accumulate rating.

Price performance

Source: Bloomberg

Key Financials Company Rating Mcap CMP Target Upside P/E (x) EV/EBITDA (x) RoE (%)

INR mn USD mn (INR) (INR) (%) FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E

Rallis India # Buy 23,531 444 121 170 40 17.1 13.0 10.2 11.4 8.7 6.8 25.9 29.1 31.6

PI Industries Buy 12,349 233 493 669 36 16.3 10.4 7.7 9.6 7.0 5.1 27.6 30.5 31.3

Dhanuka Agri Buy 4,552 86 91 128 41 8.4 6.3 5.2 6.6 4.8 3.6 28.6 30.4 29.7

Insecticides India Accumulate 5,035 95 397 457 15 12.8 9.4 6.7 9.3 6.8 4.8 22.8 25.3 28.2

Source: Company, Elara Securities Estimate; Note: # Consolidated financials

India | Crop Protection 9 January 2012

Initiating Coverage

India Crop Protection

Valued at INR137bn, crop protection industry has grown ~11% CAGR

Source: CMIE, Elara Securities Research

Per hectare consumption of pesticides in India lags its peers

Source: Industry estimates, Elara Securities Research

Usage of herbicides has risen to ~20% driven by labour shortages


0

50

100

150

200

250

300

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Jan

-12

(Re

ba

sed

to

10

0)

Sensex PIIL Dhanuka

Rallis IIL

(10)

0

10

20

30

40

0

50

100

150

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

(%)

(IN

R b

n)

Domestic Consumption (LHS) YoY (RHS)

17.0 14.0

12.0

7.0 7.0

5.0 5.0

1.0 0.5

0

2

4 6

8 10

12

14 16

18

Ta

iwa

n

Ch

ina

Jap

an

USA

Ko

rea

Fra

nce

UK

Pa

kis

tan

Ind

ia

(kg

/ h

a)

Insecticides 55%

Herbicides 20%

Fungicides 20%

Others 5%

India 2009


2 Elara Securities (India) Private Limited

Table of Content

Executive Summary……………………………………………………………………………………………………………… 3

A long harvest………………………………………………………………………………………………………………………. 4

Landscape conducive for growth in agri-inputs……………………………………………………. 4

Higher rural incomes and govt focus to act as key catalysts……………………………….. 7

Bullish on crop protection theme……………………………………………………………………………. 9

Valuation & Recommendation Initiate with Rallis & PI Industries as top picks…………… 15

Annexure I: Distributor/Farmer meetings takeaways…………………………………………………….. 18

Annexure II: Insights into global crop protection industry……………………………………………. 22

Annexure III: Primer on Pesticides…………………………………………..………………………………………… 24

Company Section

Rallis India (Rallis)

Poised to grow…………………………………………………………………………………………………………………….. 27

Investment rationale……………………………………………………………………………………………………………. 30

Valuation & Recommendation…………………………………………………………………………………………… 35

PI Industries (PIIL)

Going one up with a niche model…………………………………………………………………………………….. 41



Dhanuka Agritech (Dhanuka)

Partnering its way to success…………………………………………………………………………………………….. 53



Insecticides India (IIL)

Expanding into new horizons……………………………………………………………………………………………. 63




Cro

p P

rote

cti

on


Executive Summary


Compared to other countries, India faces a bigger

challenge, since with only 2.3% share in world’s total

land area, it needs to ensure food security of its

population which is about 17.5% of world population.

Further, stagnant arable land, fragmentation of land

holdings and low productivity/yield vs. global peers and

differential yields state-wise has only compounded

problems making it imperative to improve yields via agri-

inputs like crop protection (pesticides) products.


Over the last several years, government focus on

agriculture has increased through various

schemes/allocations, better credit flow to agriculture and

higher MSPs which has improved farmers’ realisations

from produce. We believe rising farm incomes are likely

to be re-routed in agri-inputs to sustain farm incomes.

Recently the government announced a significant hike

of ~15%-40% in MSPs of rabi crop for 2012-13 crop cycle

which should help sustain profitability for farmers and

encourage them to increase acreage/production.


Given a backdrop where improving yields in farms is

imperative in order to remain self-sufficient in terms of

food requirements, we believe agri-inputs like crop

protection (pesticides) products are likely to play a key

role in the future. Higher crop productivity can be

achieved through better crop protection products, and

the key challenge is to prevent/reduce pest-related crop

losses. The per hectare pesticide consumption in India

stands at 0.5kg/ha, vis-à-vis 14kg/ha in China and

7kg/ha in USA under scoring ample scope for growth in

the industry.

Crop protection industry, valued at INR137bn, is growing at ~11% CAGR

According to CMIE data, the Indian crop protection

industry was valued at INR137bn (domestic

consumption) in FY2010. While the industry registered a

CAGR of ~8.2% over FY2000-10, growth has accelerated

to 11.2% CAGR over FY2005-10.

Going ahead, we expect the crop protection industry to

grow at ~10-12% CAGR over FY12-14E driven by higher

MSPs, labour shortages driving higher use of herbicides,

growing farmer awareness about products, government

support for agriculture, higher usage in low input

regions and introduction of new specialty molecules.

Expanding horizons

A focussed export-oriented strategy has helped crop

protection companies to utilise excess capacities, deliver

strong volume growth and insulate themselves from

seasonal demand fluctuations in the domestic market.

Further, from 2010-2014, patents on products worth

USD4.3bn sales will go off-patent and may provide huge

opportunities for generic companies. In the domestic

markets, many medium-large size domestic players are

engaging in strategic alliances/tie-ups to extend market

reach and diversify their product portfolios.

Recent underperformance offers attractive entry point

Over the last three months, crop protection companies

have witnessed steep correction and have

underperformed the benchmark indices by an average

of ~8-10%, led by Rallis, owing largely due to

expectations of a weaker H2FY12E due to poor rains in

AP (key pesticide consuming state) and drop in prices of

vegetables hurting farmer sentiments. However, we

highlight, we have already modeled a weaker H2FY12 in

our numbers and don’t rule out a significant cut in street

estimates which are ahead of our numbers.

Nonetheless, we continue to like crop protection

companies, despite expectations of weaker results in

near-term, due to their strong balance sheets (low debt-

equity), high free cash flow (FCF) generation over

FY12E-14E and reasonable valuations, post correction,

offering an attractive entry point.

Initiate on Rallis and PI Industries as Top Picks, Dhanuka Agritech with a Buy and Insecticides India with Accumulate rating

We initiate coverage on Rallis India (Rallis) with a Buy

rating and a TP of INR170 based on P/E of 16x to Sept-13

EPS of INR10.6 indicating an upside of ~40%.

We initiate coverage on PI Industries (PIIL) with a Buy

rating and a TP of INR669 based on P/E of 12x (25%

discount to Rallis) to Sept-13 EPS of INR55.7 indicating an

upside of ~36%.

We initiate coverage on Dhanuka Agritech (Dhanuka)

with a Buy rating and a TP of INR128 based on P/E of 8x

(50% discount to Rallis, ~15% premium to its historical

average of 7x P/E) to Sept-13 EPS of INR16 indicating an

upside of ~41%.

We initiate coverage on Insecticides India (IIL) with an

Accumulate rating and a Target Price of INR457 based

on P/E of 9x (45% discount to Rallis) to Sept-13 EPS of

INR50.8 indicating an upside of ~15%.






land area, it needs to ensure food security of its

population which is about 17.5% of world population.

Further, stagnant arable land, fragmentation of land

holdings and low productivity/yield vs. global peers and

differential yields state-wise has only compounded

problems making it imperative to improve yields via agri-

inputs like crop protection (pesticides) products.

Growing population…growing needs

India’s current population estimates for 2011 stands at

1.2bn. According to population projections based on

different average annual rate of growth, India’s

projected population is expected to reach 1.339bn by

2021 and 1.399bn by 2026. Further, it is projected that if

present trend (1.39% average annual growth rate)

continues, India’s population will reach 1.5bn by 2040.

Exhibit 1: Indian population to reach 1.4bn by 2026

Source: Indian Council for Research on International Economic Relations

(ICRIER) working paper – Mittal, 2008, Elara Securities Research

With rising population and growing per capita incomes,

domestic demand for food grains is expected to rise

significantly. According to ICAR (Indian Council of

Agricultural Research) vision 2030 document, demand

for food grains is expected to increase from 192 million

tonnes in 2000 to 355 million tonnes in 2030 growing at

an annual CAGR of 2.1%. Hence in the next 20 years,

production of food grains needs to be increased at an

absolute rate of ~5.5 million tonnes annually.

Exhibit 2: Domestic demand for food grains to reach

355 mn tonnes by 2030

Source: ICAR Vision 2030 document, Elara Securities Research

Further, according to a working paper by ICRIER (Mittal,

2008 - Demand–Supply Trends and Projections of Food

in India), a tightening demand-supply situation is likely to

build up for several food items in the coming years and

the country is likely to face shortages of close to 24 mn

tonnes in pulses, 18 mn tonnes in edible oils, and 3 mn

tonnes in cereals by 2021.

Exhibit 3: Steep supply shortages likely to build up in

cereals, pulses, edible oil and sugar by 2030

Source: ICRIER working paper – Mittal, 2008, Elara Securities Research

Limited land & low productivity

In such a scenario, there is an urgent need to boost

production of crops to tackle supply side issues.

However, agriculture in India continues to face several

hurdles in respect to achieving higher production

including – limited scope of expansion in arable land and

low productivity making improving yields imperative. We

1.2

0

1.3

4

1.4

0

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

2011 2021 2026

(bn

)

14

33

64

81

19

2

43

93

76

30

10

2

95

15

6

35

5

11

0 1

80

18

2

0

100

200

300

400

Pu

lse

s

Ce

rea

ls

Wh

ea

t

Ric

e

Fo

od

gra

ins

Fru

its

Ve

ge

tab

les

Milk

(mill

ion

to

nn

es)

2000 2030

1

21 21

(8) (7) (4)

9

27

(3)

(25) (18)

(40)

9

32

(17)

(39)

(27)

(74) (80)

(60)

(40)

(20)

0

20

40

Rice Wheat Total Cereals

Pulses Edible Oil

Sugar

(mill

ion

to

nn

es)

2011 2021 2026


A long harvest



Bullish on crop protection theme – Initiate with Rallis & PI Industries as top picks


Cro

p P

rote

cti

on


believe the same can be achieved through –focus on

irrigation facilities and credit availability, better farming

techniques, mechanisation and judicious use of agri-

inputs (seeds, fertilisers, irrigation and crop protection

products).

Limited arable land



land area, it needs to ensure food security of its people

which is about 17.5% of world population. This has led

to excessive pressure on land and fragmentation of land

holdings.

Due to increasing demand of land for housing, rising

level of urbanisation and industrialisation, increasingly

larger quantity of agricultural land is being shifted to

non-agricultural uses. Hence, net sown area has peaked

at ~140mn ha (hectares) since 1980s.

Exhibit 4: Net sown area peaked in 1980s

Source: Agricultural Statistics 2010, CMIE, Elara Securities Research

Dwindling land holding is an another challenge

While stagnation in arable land remains a worry, the

country faces bigger worry in terms of dwindling size of

operational land holdings making farming economically

unviable for majority of farmers. Fragmented and small

landholdings translate to lesser spending power by

individual farmers for agri-inputs.

In 1970s, medium and large holders were cultivating

nearly 60% of the cultivated land. However, currently the

production structure has shifted to marginal, small and

semi medium holdings. As per land holdings surveys by

the National Sample Survey Organization (NSSO) during

1960 to 2003, the average area of operational holdings

has decreased from 2.63 ha in 1960-61 to 1.06 ha in

2003. It is estimated that the operational holdings size

was 1.04 ha during 2007. Further, this survey also

showed that over 60% of farmers preferred to abandon

agriculture if an alternative was available.

Exhibit 5: Average land holding sizes have declined

to 1.06ha with operational holdings doubling


Scope for area expansion – data suggests otherwise

Data from past trends suggest that there is very little

scope for area expansion. According to data from

1994-95 to 2009-10, average growth rate of area under

production during the period for rice and total cereals

was marginally negative whereas wheat and total pulses

witnessed an average growth of 0.85% and 0.57%

respectively. Area under total food grains witnessed an

average annual decline of 0.02% during the same

period. In terms of non-food grains, area expanded at an

annual rate of 0.95% and oilseeds grew at 0.54%

annually over the period. Thus, the major thrust has to

be on enhancing per hectare productivity and

narrowing the yield gap.

Exhibit 6: Area under food grains declined at annual

rate of 0.02% during 1994-95 to 2009-10


Food production and availability has stagnated

Over the last six decades, India has made tremendous

progress in food grains production which rose from

50.8mn tonnes in 1950-51 to 209.8mn tonnes in

1999-2000. Several major factors contributed to such

high incremental growth - high yielding varieties and

hybrids, better irrigation facilities, improved use of

fertilisers and crop protection products, credit facilities

and higher minimum support prices (MSPs) encouraging

farmers to produce more.

13

3

13

8

13

9

13

8

13

9

14

1

14

2

14

3

14

1

14

1

14

1

13

3

14

1

14

1

14

1

14

0

14

1

126

128

130

132

134

136

138

140

142

144

19

61

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

(mill

ion

he

cta

res)

50

.77

57

.07

71

.04

93

.45

10

1.2

7

2.63

2.20

1.67

1.34 1.06

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

20

40

60

80

100

120

1960-61 1970-71 1981-82 1991-92 2003

(ha

)

(mill

ion

)

Number of operational holdings (LHS)

Average size of holding (RHS)

(0

.04

)

0.8

5

(3

.16

)

0.2

4

2.2

1

(0

.13

)

0.5

7

(0

.02

)

0.5

4

0.9

5

(4)

(3)

(2)

(1)

0

1

2

3

Ric

e

Wh

ea

t

Jow

ar

Ba

jra

Ma

ize

Ce

rea

ls

Pu

lse

s

Fo

od

gra

ins

Oils

ee

ds

No

n-F

oo

dg

rain

s

(CA

GR

%)



However, food production has stagnated over the last

decade (0.4% CAGR) with 2009-10 registering a

production of 218.11mn tonnes, a mere ~4% increase

over the previous decade.

Exhibit 7: Food production increased mere ~4% over

the last decade to 218.11mn tonnes


In terms of specific crops, production numbers over the

last decade suggests rice production was flat while

wheat, cereals and pulses grew at a slow pace of 0.4% to

0.9% CAGR – failing to keep pace with population

growth.

Exhibit 8: Food production lags population growth


Even per capita net availability of food grains peaked in

1991 and has declined at an annual rate of 0.8% during

the last two decades.

Exhibit 9: Per capita net availability of food grains

peaked in 1991


Productivity too depicts a poor picture

India witnessed a significant increase in terms of

productivity (yield - kg/per ha) during the last six decades

from 522 kg/ha in 1950-51 to 1,704 kg/ha in 1999-2000.

However, over the last decade yields have merely risen at

a CAGR of 0.5% to 1,798 kg/ha in 2009-10.

Exhibit 10: Yield improvement over last decade stood

at mere 0.5% CAGR


Further, in terms of comparative yields, India not only

lags countries like USA and China, a look at the state-

wise average yield shows prominent crop productivity

differences especially in paddy, wheat and pulses.

Exhibit 11: Yields in India lag behind other countries


Exhibit 12: Significant yield-gaps exist within states


50

.8

82

.2

10

8.4

12

9.6

17

6.4

19

6.8

21

2.9

17

4.8

21

3.2

19

8.4

20

8.6

21

7.3

23

0.8

23

4.5

21

8.1

0

50

100

150

200

250

19

50

-51

19

60

-61

19

70

-71

19

80

-81

19

90

-91

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

(mill

ion

to

nn

es)

(0.1)

0.6

(2.6)

1.2

3.8

0.4 0.9

0.4

(3)

(2)

(1)

0

1

2

3

4

5

Ric

e

Wh

ea

t

Jow

ar

Ba

jra

Ma

ize

Ce

rea

ls

Pu

lse

s

Fo

od

gra

ins

(CA

GR

%)

18

6.2

17

1.1

16

9.4

17

2.0

18

0.8

17

3.5

18

3.6

16

3.2

17

0.0

16

5.9

15

1.9

18

0.4

15

9.7

16

8.9

15

4.2

16

2.5

16

1.6

15

9.2

16

2.1

100

110

120

130

140

150

160

170

180

190

200

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

( K

gs

pe

r ye

ar)

52

2

67

2

75

7

94

4

1,0

23

1,5

46

1,7

04

1,7

34

1,5

35

1,7

27

1,6

52

1,7

15

1,7

56

1,8

60

1,9

09

1,7

98

0

500

1,000

1,500

2,000

19

50

-51

19

58

-59

19

64

-65

19

75

-76

19

80

-81

19

94

-95

19

99

-00

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

(Kg

pe

r h

ecta

re)

6,5

56

4,7

62

5,5

56

7,6

72

3,0

18

9,6

58

4,3

09

3,0

86

5,1

09

3,3

70

2,8

02

2,3

24

0

2,000

4,000

6,000

8,000

10,000

12,000

Paddy Wheat Maize

(mill

ion

to

nn

es)

China USA World Avg India

2,1

78

2,9

07

2,4

14

1,0

41

65

9

40

3

4,0

22

4,4

62

4,8

78

1,3

66

98

0

73

7

92

7

91

8

1,3

61

67

9

30

7

23

3

0

1,000

2,000

3,000

4,000

5,000

6,000

Paddy Wheat Maize Soybean Pulses Cotton

(mill

ion

to

nn

es)

All India Highest Lowest


Cro

p P

rote

cti

on



Over the last several years, government focus on

agriculture has increased through various

schemes/allocations, better credit flow to agriculture and

higher MSPs which has improved farmers’ realisations

from produce. We believe rising farm incomes are likely

to be re-routed in agri-inputs to sustain farm incomes.

Higher MSPs a windfall for farmers

In order to achieve a balance between the production of

cereals and non-cereals, the government offers minimum

support price (MSP) to farmers so that they get

remunerative prices and are not put to loss because of

higher production of food grains. During the period

FY2003-08, average annual increase in MSPs for crops in

India stood at 2%-5%. However, between FY2008-12E,

government has accelerated the rise in MSPs which have

risen, on average, in a range of ~8-16% putting more

money in the hands of farmers.

Exhibit 13: MSPs in major crops have risen ~8-16%

CAGR over FY08-12

Source: www.dacnet.nic.in, Elara Securities Research

Recently the government announced a significant hike

of ~15%-40% in MSPs of rabi crop for 2012-13 crop cycle

which should help sustain profitability for farmers and

encourage them to increase acreage/production.

Exhibit 14: MSPs for Rabi crops hiked by ~15-40% for

the 2012-13 crop cycle

Source: www.dacnet.nic.in, Elara Securities Research

Crop prices remunerative too

Over FY2005-11, food prices under major categories

were highly remunerative for farmers increasing a sharp

~60%-100% (indexed to FY2005 as base) over the period

with pulses exhibiting the highest inflation to the tune of

~96%. Even non-food crops like cotton witnessed steep

inflation of ~99% over the period.

Exhibit 15: WPI in major crops in India stood at ~60-

100% over FY2005-11


Rising govt. focus promising

During the last five years under the Eleventh Plan,

government has significantly increased its focus on

agriculture. A large number of GoI schemes with

substantial financial outlay like the Rashtriya Krishi Vikas

Yojana (RKVY), the National Food Security Mission

(NFSM), National Horticulture Board and the National

Horticulture Mission, etc. are being implemented. Hence,

the plan outlay on various schemes of the DAC

(Department of Agriculture and Cooperation) has

increased substantially from INR48.6bn (AE) in 2006-07

to INR 172.5bn (RE) in 2010-11.

Exhibit 16: Plan outlay on various schemes on DAC

has tripled over last five years

Source: www.dacnet.nic.in, Elara Securities Research; Note: RE = Revised

Estimates, BE = Budgeted Estimates

The increase is mainly due to substantially higher

allocation under Rashtriya Krishi Vikas Yojana (RKVY),

which was launched in 2007-08 with the aim to boost

4.0

4.3

4.3

2.7

2.7

3.9

2.5

4.7

1.6

13

.8

13

.0

13

.0

14

.9

16

.0

10

.5

8.4

15

.6

12

.9

0 2 4 6 8

10 12 14 16 18

Pa

dd

y

Jow

ar

Ba

jra

Gro

un

dn

ut

So

ya

be

an

Wh

ea

t

Ba

rle

y

Su

ga

rca

ne

Co

tto

n

(CA

GR

%)

FY03-08 FY08-12

15

26

33

24

35

39

0

10

20

30

40

50

Wh

ea

t

Ba

rle

y

Gra

m

Le

nti

l (M

asu

r)

Ra

pe

see

d

Sa

fflo

we

r

(%)

80

100

120

140

160

180

200

220

FY

20

05

FY

20

06

FY

20

07

FY

20

08

FY

20

09

FY

20

10

FY

20

11

Ba

se F

Y2

00

5 =

10

0

Cereals Pulses Vegetables

Fruits Raw cotton

17

.9

16

.8

20

.5

26

.6

38

.0

48

.6

70

.5

95

.3

10

8.7

17

2.5

17

1.2

0

40

80

120

160

200

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

RE

20

11

-12

BE

(IN

R b

n)



agricultural growth rate and incentivize states to increase

public investment in agriculture and allied sectors. Funds

utilisation under the scheme by states has improved with

plan outlay under RKVY increasing from INR67.2bn (RE)

in 2010-11to INR103.5bn (BE) proposed for 2011-12E.

Exhibit 17: RKVY plan outlay has been increased

from INR67.2bn to INR103.5bn in 2011-12 (BE)

Source: www.dacnet.nic.in, Elara Securities Estimates

Strong push/initiatives have boosted credit flow to agriculture sector

Credit has remained one of the key inputs for agricultural

development. A large number of formal institutional

agencies like co-operatives, regional rural banks (RRBs),

scheduled commercial banks (SCBs), non–banking

financial institutions (NBFIs), and self-help groups (SHGs),

etc. are involved in meeting the short- and long-term

credit needs of the farmers.

Several initiatives have been undertaken over the years

to strengthen the institutional credit mechanism for rural

India including the launch of Kisan Credit Cards (KCCs) in

1998-99, doubling agricultural credit plan within three

years (set in 2004) and agricultural debt waiver and debt

relief scheme announced in 2008. Such schemes have

had significant positive impact on flow of agricultural

credit which has increased almost ten-folds over the last

decade growing from INR463bn in 1999-00 to

INR4,468bn in 2010-11.

Exhibit 18: Ground level credit flow (GLC) to

agriculture has risen 10-folds in the last decade

Source: NABARD Annual Reports, Elara Securities Research

Effective 1998-99, banks have been issuing Kisan Credit

Cards (KCCs) to farmers on the basis of land holdings to

help farmers readily purchase agri-inputs. Over the last

few years, the KCC scheme has emerged as an effective

tool for catering to the short-term credit requirements of

farmers. The number of KCCs issued has increased from

0.78 million in 1998-99 to 100.9 million in 2010-11.The

KCC scheme has emerged as the most effective mode of

credit delivery to farmers in terms of timeliness, hassle-

free operations as also adequacy of credit with minimum

of transaction costs and documentation.

Exhibit 19: No of KCCs issued has grown from 0.8mn

in 1998-99 to 100.9mn in 2010-11

Source: NABARD Annual Reports, Elara Securities

GCF in agri showing steady uptrend

Productivity increase in agriculture is largely dependent

on capital formation. As a result of the initiatives taken by

the government, the share of total investment in gross

capital formation (GCF) in agriculture and allied sectors

has increased in recent years. GCF (investment) in

agriculture sector relative to GDP in the sector has

shown steady increase trend over the last several years

rising from 13.5% in FY2005 to 20.3% in FY2010.

Exhibit 20: GCF in agri& allied activities as % of agri

GDP has risen to 20.3% from 13.5% five years ago

Source: DAC Annual Report 2011, Elara Securities Research

12.5

28.9 37.6

67.2

103.5

0

20

40

60

80

100

120

20

07

-08

20

08

-09

20

09

-10

20

10

-11

RE

20

11

-12

BE

(IN

R b

n)

46

3

52

8

62

0

69

6

87

0

1,2

53

1,8

05

2,2

94

2,5

47

3,0

19

3,8

45

4,4

68

4,7

50

0

1,000

2,000

3,000

4,000

5,000

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

T

(IN

R b

n)

0.8

5.9

14

.6

23

.9

32

.1

41

.4

51

.1

59

.1

67

.6

76

.1

84

.6

93

.7

10

0.9

0

20

40

60

80

100

120

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

(mn

)

76

1

86

6

90

7

1,0

50

1,2

87

1,3

34

13.5 14.6 14.6

16.0

19.7 20.3

10

12

14

16

18

20

22

0

200

400

600

800

1,000

1,200

1,400

1,600

FY

20

05

FY

20

06

FY

20

07

FY

20

08

FY

20

09

FY

20

10

(%)

(IN

R b

n)

GCF (LHS) GCF/GDP (RHS)


Cro

p P

rote

cti

on



Given a backdrop where improving yields in farms is

imperative in order to remain self-sufficient in terms of

food requirements, we believe agri-inputs like crop

protection (pesticides) products are likely to play a key

role in the future.

Proven success to reduce crop losses and boost yields

Higher crop productivity can be achieved through better

crop protection products, and the key challenge is to

prevent/reduce pest-related crop losses. On an average

around ~10%-30% of yields is lost due to pests. As per

the estimate by the Central Pollution Control Board, GoI,

the highest food grain loss is due to weeds (28%), by

diseases (25%), by insects (23%), during storage (10%)

and others (14%).

Exhibit 21: Highest crop losses caused by weeds

Source: Central Pollution Control Board, GoI, Elara Securities Research

A study by the Division of Agrochemicals, Indian

Agricultural Research Institute (IARI) in 2008, reported

avoidable losses ranging from 8% to 90% in different

crops. The highest avoidable loss was in cotton (49%-

90%) followed by 40%-88% in pulses. Further, in terms of

cost: benefit ratio it has been estimated that every rupee

spent on plant protection saves on an average the

produce worth five rupees. In terms of crops specifics - it

was highest in groundnut (1:28) followed by sugarcane

(1:13) and lowest in maize (1:3)

Exhibit 22: Study on avoidable losses and cost:

benefit ratio for pesticides indicates proven benefits

Crop Avoidable Losses (%) Cost: Benefit ratio

Cotton 49-90 1:7

Rice 21-51 1:7

Groundnut 29-42 1:28

Maize 20-25 1:3

Sugarcane 8-23 1:13

Pulses 40-88 1:4

Vegetables 30-60 1:7

Fruits 20-35 1:4

Source: Division of Agrochemicals, IARI (2008), Elara Securities Research

Low consumption indicates tremendous scope

One of the key reasons for high crop losses in India

vis-à-vis other countries remains low consumption of

crop protection products in India. The per hectare

pesticide consumption in India stands at 0.5kg/ha, vis-à-

vis 14kg/ha in China and 7kg/ha in USA under scoring

ample scope for growth in the industry.

The key reasons for low consumption have been lack of

affordability and awareness about potential losses and

product availability coupled with low reach and

accessibility of products. However, with rising MSPs

driving higher farm incomes and significant focus of

companies on education programmes for farmers, we

believe the scenario has changed significantly enabling

growth for crop protection products.

Exhibit 23: Per hectare consumption of pesticides in

India is significantly behind other countries


Labour shortage to provide additional lever

Labour shortage, due to factors such as better and more

employment in manufacturing and service sectors and

higher allocation to government schemes like Mahatma

Gandhi National Rural Employment Guarantee Act

(MNREGA), which provide assured employment, are

likely to drive a shift from manual weeding to higher use

of crop protection products like herbicides.

Exhibit 24: Higher allocation for MNREGA driving

labour shortages

Source: www.nrega.nic.in, Elara Securities Research

Weeds 28%

Diseases 25%

Insects 23%

Storage 10%

Others 14%

17.0

14.0

12.0

7.0 7.0

5.0 5.0

1.0 0.5

0

2

4

6

8

10

12

14

16

18

Ta

iwa

n

Ch

ina

Jap

an

USA

Ko

rea

Fra

nce

UK

Pa

kis

tan

Ind

ia

(kg

/ h

a)

11

3

12

0

30

0

39

1

40

1

40

0

86

12

6

29

9

33

5

35

8

0 50

100 150 200 250 300 350 400 450

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

(IN

R b

n)

Budget Outlay Central Release



Crop protection industry, valued at INR137bn, is growing at ~11% CAGR

According to CMIE data, the Indian crop protection

industry was valued at INR137bn (domestic

consumption) in FY2010. While the industry registered a

CAGR of ~8.2% over FY2000-10, growth has accelerated

to 11.2% CAGR over FY2005-10. Some factors which led

to the acceleration include higher MSPs, robust

commodity prices, rising demand for fruits & vegetables

and fast changing cropping pattern and cropping

intensity.

Exhibit 25: Valued at INR137bn, growth in crop

protection industry has accelerated over FY2005-10


Going ahead, we expect the crop protection industry to

grow at ~10%-12% CAGR over FY12E-14E driven by

higher MSPs, labour shortages driving higher use of

herbicides, growing farmer awareness about products,

government support for agriculture, higher usage in low

input regions and introduction of new specialty

molecules.

Highly fragmented market

India, the 4th

largest manufacturer of pesticides behind

USA, Japan and China, is one of the most dynamic

generic pesticide manufacturers in the world with highly

fragmented nature. According to industry data, there are

more than 60 technical grade pesticides being

manufactured indigenously by 125 producers consisting

of around 60 large and medium scale enterprises

(including about 10 MNCs). Most Indian technical

manufacturers are focussed on off-patent pesticides

which account for 70% of the domestic market. Further,

there are more than 500 pesticide formulators spread all

over the country. Pre-2005 process patent regime

encouraged many players to set up manufacturing

facilities. Moreover, the low capital requirement for a

formulation unit led to mushrooming of numerous units.

Prevalence of a dual structure in organised market

The organised crop protection industry in India exhibits a

dual structure (MNCs vs. domestic players) based on their

nature of expertise and operational activity.

Domestic players have concentrated on marketing

generic and off-patent products by focussing on

applied research. This included - developing

1) processes to manufacture off-patent products,

2) effective methods of delivering existing products

and 3) new formulations of generic products.

On the other hand, MNCs have typically focussed on

high-end specialty products thus dominating the

market for proprietary products (patented new

molecules). In the post-2005 scenario, the Indian

market has witnessed an inflow of new molecules

from MNCs which ride on superior R&D facilities and

finance.

AP leads state-wise consumption

In terms of value, Andhra Pradesh is the largest state for

the pesticides market accounting for 23% of total

consumption, followed by Punjab and Maharashtra.

Exhibit 26: Top 3 states AP, Punjab & Maharashtra

account for ~50% of consumption

Source: GoI, Ministry of Agriculture, Elara Securities Research

Rice and cotton account for half of crop protection

Pesticides consumption in different crops also shows a

skewed pattern with rice and cotton accounting for

~55%-60% of consumption of pesticides. During

2001-02, cotton crop consumed the largest quantum of

pesticides (35%) followed by paddy (23%) However,

during 2006-07, pesticides consumption in cotton

declined to 27%, while it increased to 29% in paddy. The

consumption pattern did not show any marked shift in

other crops. The decline in pesticide usages in cotton is

largely attributed to the introduction of GM genotypes

(Bt cotton) on a large scale in the country. On the other

hand, pesticides usage in paddy has been increasing

mostly due to increased popularity of hybrid varieties of

rice, which require higher level of protection.

(10)

(5)

0

5

10

15

20

25

30

35

0

20

40

60

80

100

120

140

160

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

(%)

(IN

R b

n)

Domestic Consumption (LHS) YoY (RHS)

Andhra Pradesh

23%

Punjab12%

Maharashtra12%

Karnataka7%

Gujarat7%

West Bengal6%

Haryana7%

Tamil Nadu & Kerala

6%

Others20%


Cro

p P

rote

cti

on


Exhibit 27: Cotton consumed the highest amount of

pesticides in 2001-02…

Source: Industry, Care Research, Elara Securities Research

Exhibit 28: Post BT cotton, Paddy has emerged as the

No1 crop in terms of pesticides consumption

Source: Industry, Care Research, Elara Securities Research

Product mix shifting towards herbicides

The Indian crop protection industry primarily comprises

of insecticides (against insects), fungicides (against

bacteria and fungi) and herbicides/weedicides (against

weeds/unwanted plants). During 1995, Indian market

was largely dominated by insecticides (80%) followed by

herbicides (11%) and fungicides (8%) owing to –

1) country’s tropical weather resulting into higher insect

infestation and 2) availability of cheap labour resulting

into manual weeding.

Exhibit 29: In 1995, insecticides dominated the

industry accounting for ~80% of the market

Source: Singh, O. P., 2005, GoI, Elara Securities Research

However, this trend has undergone a significant change

over the years, as the share of herbicides and fungicides

increased to 20% each in 2009 while share of

insecticides declined to 55%. While consumption of

herbicides increased due to labour issues both in terms

of availability and costs (rising wages) due to

government employment schemes like MNREGA, rising

demand for quality produce of fruits and vegetables

have spurred the use of fungicides.

Exhibit 30: Usage of herbicides has risen to ~20%


Exhibit 31: Labour shortage/rising wages due to

MNREGA is driving shift towards herbicides


It is worth noting that India is gradually shifting towards

the global consumption pattern where usage of

herbicides (45%) far exceeds insecticides (26%).

Exhibit 32: Globally, herbicides account for almost

~45% of consumption vs. India’s ~20%

Source: Phillips McDougall, Elara Securities Research

Cotton 35%

Paddy 23%

Wheat 8%

Vegetables 8%

Fruits 6%

Pulses & Oilseeds

7%

Chillies 4%

Others 9%

2001-02

Cotton 27%

Paddy 29%

Wheat 8%

Vegetables 9%

Fruits 6%

Pulses & Oilseeds

9%

Chillies 4%

Others 8%

2006-07

Insecticides 80%

Herbicides 11%

Fungicides 8%

Others 1%

India 1995

Insecticides 55%

Herbicides 20%

Fungicides 20%

Others 5%

India 2009

2.1

0

3.3

9

4.5

1

5.2

6

5.4

8

65 75

84 90

100

0

20

40

60

80

100

120

0

1

2

3

4

5

6

FY07 FY08 FY09 FY10 FY11 (I

NR

)

(No

of

ho

use

ho

lds

in c

r)

Employment Provided (LHS) Avg daily wages (RHS)

Insecticides 26%

Herbicides 45%

Fungicides 26%

Others 3%

World 2009



Exhibit 33: Porter’s five forces analysis of crop protection industry in India

Source: Elara Securities Research

Threat of Substitutes

Medium

Pesticides remain one of the

key inputs to improve yields

with no other substitute to

prevent crop losses.

However, lower pesticide

usage poses a threat due to

environmental concerns,

Integrated Pest

Management (IPM)

techniques, threat from

genetic modified (GM) crops

and organic products.

Bargaining Power of

Suppliers

Low

Most raw materials are

available easily, though

some are imported.

Prices tend to be cyclical

based on demand/supply

situation.

Inter Firm Rivalry

High

Industry highly fragmented with

60 medium/large

manufacturers and 500+

formulators.

Largely organised – competition

between companies in

generic/off-patent products is

high, though specialty

molecules/patented molecules

(largely MNC domain) have a

clear edge.

Bargaining Power of Buyers

Medium

Demand for credit is very

high – 60% of sales are on

credit (more at retail level) -

with major realisations

taking place immediately

after the harvest season.

Hence, bargaining power of

buyers is not too high –

though they prefer

brands/specialty molecules

over generics.

Barriers to Entry

Medium

Indian players are largely into

generic/off-patent products &

technical - capital requirement

for setting plant is low but big

distribution network and high

working capital are entry

barriers.

MNCs dominate the market for

proprietary products – R&D

investments are high creating a

major entry barrier.


Cro

p P

rote

cti

on


Expanding horizons

Rising exports emerging as a strong insulating factor against seasonal demand fluctuations

Demand for pesticides emanates from agricultural

production. Since crops are mainly sown in two cropping

seasons, namely Kharif (July - November) and Rabi

(October - February), demand for pesticides is seasonal.

Demand is skewed in favour of kharif crops such as

cotton and rice accounting for about ~60%-70% of

annual pesticide consumption with peak consumption

over July-November.

Over the last decade, between FY2000-10, Indian

exports (largely consisting of off-patent products) of crop

protection products have increased from INR10bn to

INR53bn growing at a CAGR of ~18%.

Exhibit 34: Exports in the industry have risen by

~18% CAGR over last decade to INR53bn


A focussed export-oriented strategy has helped crop

protection companies to utilise excess capacities, deliver

strong volume growth and insulate themselves from

seasonal demand fluctuations in the domestic market.

Further, rising exports in the industry are driven by –

Easy availability of raw materials, low-cost trained

and technically qualified workforce, low overheads

have made India an attractive sourcing destination

for global MNCs.

Many MNCs are also undertaking collaborative

research with local companies. For e.g. companies

like Rallis India and PI Industries have invested

substantial money in building facilities for CRAMs

undertaking manufacturing contracts.

Huge generic opportunity to play out

In the global crop protection industry, generics now

account for over USD18bn (CY2008) and account for

over 45% of the market. As R&D cost has increased,

demand has stagnated, and patents have expired on

many active ingredients, there has been a rapid growth

in companies producing generics.

Exhibit 35: Size of global crop protection generics

market has risen to USD18bn in 2008


One of the ways in which generic players have grown

over the years is to identify opportunities in products,

which are going off-patent and grab the market share

from innovator companies by offering a lower-priced

alternative to an existing proprietary product. From

2010-2014, patents on products worth USD4.3bn sales

will go off-patent and may provide huge opportunities

for generic companies.

Exhibit 36: From 2010-2014, patents on products

worth USD4.3bn sales will go off-patent


Strategic tie-ups/alliances and in-licensing on rise

Many medium-large size domestic players are engaging

in strategic alliances/tie-ups to extend market reach and

diversify their product portfolios. Such companies often

in-license marketing/distribution rights of

patented/specialty molecules from MNCs owing to their

strong distribution reach and connect with farmers.

Rallis- FMC, DuPont, Syngenta, Bayer and Nihon

Nohayaku.

Dhanuka Agritech–DuPont, FMC, Dow Agro,

Chemtura, Nissan Chemical, Sumitomo, Mitsui Japan

& Hokko Japan

PI Industries–Bayer, BASF and Kumiai Chemicals

12 14 15 17

21

28 29 31

50 53

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

(%)

(IN

R b

n)

Exports (LHS) YoY (RHS)

10

.3

8.4

10

.4

11

.6

12

.0

14

.0

18

.4

35.6

30.2

41.2 37.2

39.6 42.2

45.4

0

10

20

30

40

50

0

5

10

15

20

19

98

20

00

20

02

20

05

20

06

20

07

20

08

(%)

(USD

bn

)

Mkt Value (LHS) Mkt Share (RHS)

0.3 0.8

1.5 0.4

1.3 0.9

1.2

1.6 0.4

0.7 0.2 9.3

0

2

4

6

8

10

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

To

tal

(USD

bn

)



Risks/concerns for industry

High dependence on monsoons: Agricultural

production in India is highly dependent on rainfall

since the ratio of net irrigated area to net sown area

is only ~40% in India. Droughts/deficient monsoons

not only adversely impact kharif sowing season but

also kharif production and agricultural income.

Further, it also impacts agri-input purchasing

capacity and loan repaying ability of farmers.

Exhibit 37: Good rainfall is important for Kharif

output from rainfed areas

Source: Rallis India, Elara Securities Research

Unpredictability in demand: Apart from

agricultural production growth, demand growth of

crop protection products is a complex result of

various weather conditions, and unpredictable

events like pest infestation and attack of disease.

Hence, if weather conditions are conducive to pest

infestation, farmers are likely to use more pesticides.

Development of resistance to pesticides: Repeated

use of pesticides may lead to development of

resistance in target pest(s). Insecticide resistance

nullifies crop protection and has been recognised as

one of the major challenges confronting agriculture.

High working capital requirement: The Industry

requires high working capital investment due to –

1) high inventory and 2) long credit period. Due to

seasonal demand, companies often have to stack up

inventory well before the season which increases

the inventory holding cost. The industry has to

extend a long credit period because of intense

competition among the players and the low off-take.

Pesticides are the last link in the agricultural

operation. After having invested in seeds and

fertilizers, farmers have little surplus money for

purchasing pesticides and therefore, providing credit

is necessary to stimulate demand.

Risk from genetically modified crops: Genetically

modified crops are made with inbuilt immune

system that reduces dependence on usage of

agrochemicals. In India genetically modified crop

such as Bt cotton is used widely which resulted in a

decline in the usage of pesticides for cotton crop.

During FY09, Bt cotton is estimated to have covered

about 6.9 million hectares or 74% of the total cotton

cultivable area in India. Thus, the usage of such GM

crops poses a challenge to the pesticide industry and

increasing application of genetically modified and

biotech seeds will reduce the consumption of

pesticides.

Regulatory developments in environmental and

safety norms: The crop protection industry in India

is highly sensitive to Government’s policies. In May

2011, Supreme Court banned the production and

sale of Endosulfan (commonly used insecticide) in

the country as it was blamed for causing ailments in

humans following a petition filed by Democratic

Youth Federation of India -- the youth wing of the

Communist Party of India-Marxist.

Decline/stagnancy in MSPs: During the period

FY2003-08, average annual increase in Minimum

Support Prices (MSPs) for crops in India stood at

2-5%. However, between FY2008-12, government

has accelerated the rise in MSPs which have risen, on

average, in a range of ~8-16% putting more money

in the hands of farmers. Any reversal of such trends

or stagnancy in MSPs of crops would impact farmer

incomes thereby affecting spending on agri-inputs.

59

9

24

56

16

48

27

35

85 93

78

52 41

50

68

99

0

20

40

60

80

100

120

0

20

40

60

80

100

120

Pa

dd

y

Pe

arl

mill

et

Co

rn

Ce

rea

ls

Pu

lse

s

Fo

od

gra

ins

Oils

ee

ds

Co

tto

n

(%)

(%)

Area under Irrigation (LHS) Area under Rainfed (LHS)

Share in Kharif Output (RHS)


Cro

p P

rote

cti

on



Over the last two years, midcap crop protection stocks

have significantly outperformed the Sensex and BSE 500

Index. Hence, while the benchmark indices have

delivered negative returns, Rallis and Dhanuka have

almost doubled while PIIL and IIL have given 5x and 4x

returns respectively. We attribute this outstanding stock

performance to several factors including – 1) strong

growth in revenues and earnings, 2) expansion into new

horizons and new launches by all companies and 3)

significant P/E re-rating in all the stocks.

Exhibit 38: Mid cap crop protection stocks have

delivered multiple returns over the last two years

Source: Bloomberg, Elara Securities Research

However, over the last three months, crop protection

companies have witnessed steep correction and have

underperformed the benchmark indices by an average

of ~8-10%, led by Rallis, owing largely due to

expectations of a weaker H2FY12E due to

Potentially poor Rabi crop in key consumption states

like Andhra Pradesh (AP) where government has

advised farmers to shift from rainfed paddy to maize

and sunflower due to failure of North East

monsoons. Rainfall in AP was 49% below Long

Period Average (LPA) till end of December 2011.

Recent corrections in prices of vegetables particularly

potatoes, onions and tomatoes led by bumper kharif,

base effect and government efforts to bring inflation

under control. The same is expected to hurt farmer

sentiments impacting volume off-take of crop

protection chemicals.

Exhibit 39: Over the last 3 months, crop protection

stocks have witnessed steep correction

Source: Bloomberg, Elara Securities Research

Exhibit 40: Out of 36 regions, 23 have received

scanty rainfall over the last 3 months

Source: imd.gov.in, Elara Securities Research

91

43

2

94

32

4

40

(24

)

(14

)

(10

)

(100)

0

100

200

300

400

500

Ra

llis

PIIL

Dh

an

uka

IIL

Ba

ye

r C

rop

Un

ite

d P

ho

s

BSE

50

0

BSE

Se

nse

x

(%)

(32

)

(12

)

(9)

6

(11

)

(15

)

(4)

0

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

Ra

llis

PIIL

Dh

an

uka

IIL

Ba

ye

r C

rop

Un

ite

d P

ho

s

BSE

50

0

BSE

Se

nse

x

(%)

Valuation & Recommendation


Why positive? - strong FCF generation and attractive valuations

Initiate with Rallis India and PI Industries as Top Picks



Exhibit 41: Annual inflation particularly in vegetables

indicate a crash in prices hurting farmer sentiments

Source: agricoop.nic.in, Elara Securities Research; Note: As per weather watch

report released for data till 23rd Dec, 2011.

However, we highlight, we have already modeled a

weaker H2FY12 in our numbers and don’t rule out a

significant cut in street estimates which are ahead of our

numbers. Nonetheless, we do not foresee the same

weakness to persist in FY13E unless disrupted by a weak

monsoon and sustained steep fall in crop prices

(especially fruits and vegetables).

Exhibit 42: We are modeling in weakness in revenues

for H2FY12 due to lower volume off-take

Source: Company, Elara Securities Estimate

Exhibit 43: H2FY12 earnings likely to remain muted

due to margin pressures and weaker revenue


Strong FCF generation and attractive valuations makes us positive

We continue to like crop protection companies, despite

expectations of weaker results in near-term, due to their

strong balance sheets (very low debt-equity), high free

cash flow (FCF) generation over FY12E-14E and

reasonable valuations, post correction, offering an

attractive entry point.

Major capex over: Most companies have completed

their major capex plans in FY11-12E and incremental

capex in FY13-14E is likely to be minimal and

maintenance capex only.

Positive FCF generation over FY12E-14E: FCF

generation which was negative in FY11 due to high

capex phase and high working capital (seasonal

issues) is likely to turn significantly positive in FY13E-

FY14E due to benign capex and steady working

capital requirements.

Valuations look attractive: Post correction,

valuations have turned attractive. Despite modeling

conservative estimates, most stocks are trading at

P/E ranging from ~7x-11x (FY14E)

Exhibit 44: Strong FCF generation over FY12-14E as

capex to remain moderate


Exhibit 45: Valuations attractive given strong

earnings CAGR and return ratios of ~25%+

Source: Company, Elara Securities Estimate; Note: P/E based on FY14E EPS

1.5

(4.2)

14.2

(34.4)

(49.4)

(21.7)

8.9 11.2 9.6

(60)

(50)

(40)

(30)

(20)

(10)

0

10

20 R

ice

Wh

ea

t

Pu

lse

s

Po

tato

es

On

ion

s

To

ma

to

Fru

its

Milk

Oils

ee

ds

(%)

29

43

16

26

22

3

3

19

0

10

20

30

40

50

Rallis PIIL Dhanuka IIL

H1FY12 H2FY12

11

38

24

33

4

4

(8

)

5

(20)

(10)

0

10

20

30

40

50


H1FY12 H2FY12

78

2

58

3

11

8

12

5

3,0

27

1,8

19

1,0

22

60

9

0

500

1,000

1,500

2,000

2,500

3,000

3,500


(IN

R m

n)

Capex FCF

10

.2

7.7

5.2

6.7

0

2

4

6

8

10

12


(x)


Cro

p P

rote

cti

on


Initiate on Rallis India with Buy and Sept-13 TP of INR170

We initiate coverage on Rallis with a Buy rating and a TP

of INR170 based on P/E of 16x to Sept-13 EPS of INR10.6

indicating an upside of ~40%. We expect Rallis to sustain

premium valuations, albeit we have reduced the

premium to the 3 yr average P/E (15x) from ~20% (18x)

to ~5% (16x), owing to – 1) strong ~30% CAGR in

earnings over FY12E-14E, 2) best working capital

management among domestic peers, 3) strong return

ratios in range of ~25%-30% and 4) significant free cash

flow generation over FY12E-14E with culmination of all

major capex viz. Dahej expansion & Metahelix.

Initiate on PI Industries with Buy and Sept-13 TP of INR669

We initiate coverage on PI Industries (PIIL) with a Buy

rating and a TP of INR669 based on P/E of 12x (25%


upside of ~36%. Over the last 2 years, PIIL has witnessed

significant re-rating driven by its unique no-conflict

model, success of Nominee Gold, strong pipeline of in-

licensed products, sustained order book scale up in CSM

business and exponential growth in earnings. Going

ahead, we expect the re-rating to sustain driven by ~1)

robust ~46% CAGR in earnings over FY12E-14E, 2)

strong return ratios in excess of ~30% and

3) modest FCF generation over FY12E-14E.

Initiate on Dhanuka Agritech with Buy and Sept-13 TP of INR128

We initiate coverage on Dhanuka with a Buy rating and

a TP of INR128 based on P/E of 8x (50% discount to

Rallis, ~15% premium to its historical average of 7x P/E)

to Sept-13 EPS of INR16 indicating an upside of ~41%.

Going ahead, we expect Dhanuka to sustain valuations

in the range of ~7x-8x aided by – 1) strong tie-ups with

MNCs, 2) promising new product pipeline in specialty

products, 3) robust ~27% CAGR in earnings over FY12E-

14E, 4) strong return ratios in excess of ~30% and 5)

modest FCF generation over FY12E-14E.

Initiate on Insecticides India with Accumulate and Sept-13 TP of INR457

We initiate coverage on IIL with an Accumulate rating

and a Target Price of INR457 based on P/E of 9x (45%


upside of ~14%. Going ahead, we expect IIL to sustain its

re-rating from 6x-7x P/E to 10x driven by – 1) strong

~39% CAGR in earnings over FY12-14, 2) 50% jump in

formulations capacity and tripling of capacities in

technicals moving the company into a completely

different size trajectory and 3) modest FCF generation

over FY12-14.

Exhibit 46: Peer valuation

Company Mcap CAGR % (FY12-14E) OPM (%) RoE (%) P/E (x) EV/EBITDA (x)

USD mn Revenue PAT FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

Bayer AG 55,050 3.0 8.8 13.0 14.7 17.6 17.8 10.5 9.4 6.5 5.9

Syngenta AG 28,330 5.6 7.5 16.9 18.5 25.5 25.5 13.5 12.7 NA NA

BASF SE 66,893 (0.1) (5.0) 11.7 11.6 19.7 18.9 10.2 9.4 5.9 5.5

Monsanto 38,908 9.4 17.7 20.6 20.6 15.0 16.9 21.1 18.1 11.1 10.0

Dow Chemical 35,395 3.7 14.4 8.6 9.3 13.6 15.2 10.7 8.7 7.0 6.2

DuPont 43,443 7.9 9.9 13.5 14.5 30.8 27.6 11.1 9.6 7.8 7.1

Chemtura Corp 1,154 2.6 14.5 6.7 6.2 6.8 8.0 11.8 9.4 5.0 4.7

Global Average

4.6 9.7 13.0 13.6 18.4 18.6 12.7 11.1 7.2 6.6

United Phosphorous 1,151 11.7 16.2 16.3 15.7 18.6 18.0 6.9 6.3 4.2 3.9

Bayer Cropscience 556 NA NA 10.9 NA 22.0 NA 15.2 NA 9.1 NA

Rallis India 444 19.5 29.6 17.0 17.7 29.1 31.6 13.0 10.2 8.7 6.8

PI Industries 233 27.6 45.6 17.6 18.0 30.5 31.3 10.4 7.7 7.0 5.1

Dhanuka Agri 86 21.1 27.3 15.0 15.3 30.4 29.7 6.3 5.2 4.8 3.6

Insecticides Inida 95 29.4 38.6 10.8 11.2 25.3 28.2 9.4 6.7 6.8 4.8

Domestic Average

24.4 35.3 15.1 15.5 28.8 30.2 9.8 7.4 6.8 4.9

Source: Bloomberg, Elara Securities Estimates



Annexure I: Distributor/farmer meetings takeaways

To understand ground realities in the crop protection

industry, we went on the road to northern Maharashtra

covering cities like Aurangabad, Jalgaon, Akola,

Amravati and Nagpur.

Exhibit 47: Our route for distributor/farmer check to

understand crop protection market


We met more than 5 large distributors, several

dealers/retailers and farmer groups to understand –

1) demographic/income situation, 2) farming/crop

decision making process, 3) selection of product/brand

and 4) distributor/dealer profile. Our takeaways are

presented below in form of Q&A:

Demographic/income situation

How much is your daily income? Has it gone up?

Farmers basically earn in two seasons of Kharif

(June-Sept) and Rabi (Oct-Feb). An average farmer

owns about 5-10 acres of land and chooses crop

based on geographic conditions and market price

available. He makes around INR10,000 per acre (net

of expenses) in Khariff season and around

INR30-40,000 total in Rabi season amounting to

~INR100,000 annual income for a 5-acre plot. Most

farmers admitted their income had gone up

significantly over the last several years (around

~40%-50%) due to rising crop prices largely as yields

tend to vary based on monsoon.

How much of incremental income do you plough

back in agri-inputs?

Our meetings indicated that farmers tend to plough

back more money in agri-inputs when their

expectation of market price or yields/per acre is

higher and vice-versa. However, on an average,

more money is getting ploughed back in agri-inputs

particularly fertilisers (significantly gone up in 2011

due to higher prices) and pesticides (volumes on rise

due to labour issues especially in herbicides).

Any breakups for farm and non-farm – is the shift

happening towards non-farm?

In terms of income –most farmers earn majority

income from farming as there is limited time for

other activities. However, most farmers indicated

that farming as an occupation is losing its allure.

Several issues like lack of labour, higher labour costs

(biggest issue), rising land prices, rising cultivation

costs, and lack of government support (varies region-

wise) in terms of irrigation facilities and education of

farming techniques are leading to a shift from

farming activities particularly in the current

generation.

How are land prices behaving – have farmers been

selling land?

Land prices have shot up significantly and several

farmers indicated that they have sold some portion

of their land to capitalise on rising prices.

Farming/crop decision making process

Based on what factors do you decide the crop to be

sowed?

Crop is basically decided on – geographic

conditions, availability of irrigation facilities and

market price of the produce – generally farmers tend

to shift to crops which are able to command higher

prices.

What are the top crops sowed?

We travelled the Northern Maharashtra belt and

found that major crops sown in this region are

cotton (largest), soybean, chana and pulses (tur)

along with select fruits & vegetables.

What % of your produce do you sell at MSPs? –

MSPs basically just set the floor price. Generally, most

farmers sell all their produce at open market rates in

mandis. On an average mandi prices are 15%-20%

higher – but can be much higher as well in good

years when demand/supply gap is higher like last

year when cotton prices at mandi were ruling

INR6,500 per quintal vs. MSP of INR3,000 per quintal.

Are profits in farming declining due to higher labour

costs? – MNREGA impact?

Labour has become a major issue in farming. Rates

have gone up from INR30-50 three-four years ago to

INR200-300 in the current year (significantly ahead

of MNREGA’s rate of ~INR120 for current year).


Cro

p P

rote

cti

on


Further, most farmers cited significant lack of

availability of labour even at higher prices as many

workers have shifted to non-agri occupations.

Can you break up the usage of agri-inputs and

cost/profit of a crop?

Cotton (1 acre)

Seeds – require 750gms of Bt Cotton (1.5

packets) = INR900

Fertilisers – require 2 Bags of urea +

1-2 bags of DAP =INR2,500

Cultivation charges =~INR2,500

Pesticides = INR2,500 (5-6 sprays – varies

sometimes 3-4 sprays in other regions)

Total cost = INR8,500

Yield – irrigated – 10 quintals and rainfed – 5

quintals

Current mandi price – INR4,500

Total sales value in rainfed cotton = INR22,500

Net Income = INR22,500- INR8,500 = INR14,000

Soybean (1 acre)

Seeds = INR1,000

Sowing = INR300

Fertiliser (2 Bags – DAP/Urea) = INR1,500

Pesticides – Herbicide – INR500 (1 Spray),

Insecticide – INR1,000 (2 Sprays)

Harvesting =INR1,200

Total cost = INR5,500

Yield – irrigated – 10-12 quintals, rainfed – 6

quintals

Current mandi Price – INR2,000

Total sales value in rainfed soybean =INR12,000

Net Income = INR12,000-INR5,500 = INR6,500

Selection of product/brand

How influential is a distributor/dealer in making

purchase decision for pesticides?

Distributor/Dealer plays an important role in terms

of influencing the buying decision of farmers. While

several farmers come with a specific brand name,

often farmers cite their problem/pest and dealer

suggests product/brand accordingly.

What kind of pesticides do you use the most?

Usage of pesticide completely depends on the type

of pest infestation. However, sales of herbicides are

clearly on the rise as manual weeding has become

extremely expensive due to higher labour costs –

hence herbicide sprays are increasing. For e.g.

manual weeding requires 4-5 labour to cover 1 acre

which would cost minimum INR800-1,000.

However, farmer can spray a commonly used

herbicide called Glyphosate (INR300/Ltr – can cover

3 acres) which would require 1 labour (INR200 –

can cover 3 acres in a day). Hence, spraying

herbicides has become extremely economical vs.

manual weeding.

What is the key deciding factor in picking a product

– brand/price?

Most farmers cited brand and awareness via

education programmes ahead of pricing as key

factors in picking a product. We also noted that

farmers give a lot of importance to packaging.

In terms of dealers – marketing/field activities for

farmers to promote awareness/usage of product (to

create a pull factor) along with promotional

schemes/incentives were the key factors to push a

product.

Would you pay extra for MNC products?

Our meeting indicated that farmers definitely are

willing to pay higher for MNC products like Bayer,

Syngenta, Dow, DuPont etc especially in case of

specialty molecules where substitutes were not

available.



Dealer/distributor profile

How big is the dealership/distributor size? Can you

highlight some key characteristics?

Most distributors we met had an annual

turnover in range of INR50-150mn.

They stock multiple products (average 4-5) and

running items/big brands that are prevalent in

the region.

On an average each distributor would have

some 200-250 dealers under him.

Margins offered by pesticide companies would

range anywhere between 2.5%-10% (lower in

case of MNCs and slightly higher for Indian

companies). Moreover, most companies run

various schemes (foreign trips are very popular)

and incentives for dealers.

Most pesticide sales happen at 60-40 credit: cash

ratio as farmers can pay only on sale of produce

at the end of the season. Some defaults do

happen – but the number is negligible at this

stage. At dealer end – credit sales are much

higher and hence margins are also slightly

higher.

On an average INR20mn investment (working

capital) and INR10mn (fixed assets like office,

godowns, vehicles etc) would be required to set

up a distributorship registering a turnover of

INR100mn. On a gross basis, distributor earns

around ~15%.

Generally a distributor holds around ~2-3

months of inventory. However, most of these

goods move fast during the season and are

refilled immediately by companies. Also, most

items are on returnable basis.

How is the competition amongst dealers? – Any

discounts offered? – differentiating factor?

Competition amongst dealers is extremely high and

all products are sold lower than MRP. Generally

there is no major differentiating factor apart from

product availability, coverage/reach of farmers and

price offered (post discount).

Other observations

About pesticides

On an average, you need to spray

INR2,000-3,000 worth pesticides per acre.

Farmers often tend to use multiple

products/brands to tackle different pests and

hence combine products during sprays.

Weedicides/herbicides sales tend to pick up

when rains are higher.

While all segments have their own leaders –

market share can be lost to players who have

better distribution/pricing and offer more

incentives/schemes to dealers.

About specific products/brands in the region

Bayer’s Confidor was considered to be the top

most selling brand in this region.

Syngenta’s Polo (also called Pegasus) is

extremely popular – has raised prices this year

by ~15%-20% as it is a specialty product with no

alternative.

Tata (Rallis) brand also enjoys a preferred brand

status amongst farmers – its popular selling

brands include Asataf, Manik, Toran and Takumi.

About pricing of pesticides

Prices of pesticides tend to fall when more

products/brands are launched in the category.

For e.g. Confidor’s pricing has come down from

INR4,000+ when it was launched to INR1,500

now due to entry of local players.

MNC brands always charge higher than Indian

peers in same product formulation.

Price cuts also happen in industry – e.g. Rallis cut

Asataf (Acephate) prices significantly this year

and gained market share.

About other agri-inputs

Fertiliser prices have gone up significantly over

the last few years post decontrol which has

significantly hurt farmers. They also cited lack of

availability of fertilisers at the right time.

Seeds generally are bought at advance of ~7-8

months e.g. seeds required for sale in May

during Kharif are booked in August-September

itself. We also learnt that seeds are sometimes

sold in the black market due to significant

demand during peak season.


Cro

p P

rote

cti

on


Pictorial takeaways from our trip

Exhibit 48: Bayer’s Confidor was the top selling

product across dealers

Exhibit 49: Monsanto’s Roundup – a very popular

non-selective herbicide in the region

Exhibit 50: Popular MNC products include – Bayer’s

Fame, Syngenta’s Polo/Pegasus and Proclaim and

DuPont’s Coragen

Exhibit 51: Distributor shop in Amravati

Exhibit 52: Dealer explaining farmer group in

selection of pesticides

Exhibit 53: Insecticides India’s Monocil brand has

done extremely well in this region



Annexure II: Insights into global crop protection industry

According to a Phillips McDougall report, global crop

protection industry was valued at USD37.9bn in CY2009

registering a growth of ~4.3% CAGR over the last five

years. Further, the market is expected to continue to

grow at a steady ~3.5% CAGR and register a size of

USD43.5bn by CY2013.

Exhibit 54: Global crop protection industry is valued

at ~USD37.9bn in CY2009 growing at ~4% CAGR


Crop protection products in the global market are

divided into (1) patent-protected products originally

developed by leading companies in the field

(research-based companies); and (2) generic products,

which are similar to patent-expired (off-patent) source

products and are produced by generic companies.

Report estimates show ~25% of crop protection sales

were attributed to patented products and ~75% to off-

patent products including generics which accounted for

roughly ~45%.

Exhibit 55: Category-wise, patented products

constituted only ~25% of the global market


The crop protection chemicals market is concentrated in

the major developed countries such as United States and

Western European nations. Europe has the largest share

in the crop protection market followed by Asia, Latin

America and North America.

Industry reports suggest that the crop protection market

has reached saturation point in developed regions such

as North America and Western Europe whereas regions

such as Asia Pacific, Middle East and Latin America offer

high growth opportunities.

Exhibit 56: Europe is the largest market for crop

protection products accounting for ~29%


Highly consolidated market

The global crop protection market is fairly consolidated

with top six research based MNCs accounting for over

~70% of the market. Syngenta, Bayer and BASF are the

market leaders controlling around half of the global crop

protection market.

Exhibit 57: Top six research based MNCs control

~70% of the global crop protection market (CY2009)


Exhibit 58: Syngenta, Bayer and BASF together

control ~50% of the global market


27

.8

25

.8

25

.2

26

.7

30

.7

31

.2

30

.4

33

.4

40

.5

37

.9

(10)

(5)

0

5

10

15

20

25

0

5

10

15

20

25

30

35

40

45

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

(%)

(USD

bn

)

Size (LHS) YoY (RHS)

Generic 45%

Patented Products

25%

Off-Patent Products

30%

Europe 29%

Asia 25%

Latin America

19%

North America

23%

RoW 4%

8.5 8.3

5.1 3.9 3.5

2.4 2.1 1.8 1.4 1.1

0

2

4

6

8

10

Syn

ge

nta

Ba

ye

r

BA

SF

Do

w

Mo

nsa

nto

Du

Po

nt

MA

I

Nu

farm

Su

mit

om

o

Ary

sta

Lif

esc

ien

ce

(US$

bn

)

Syngenta 19%

Bayer 19%

BASF 12%

Dow 9%

Monsanto 8%

DuPont 5%

MAI 5%

Nufarm 4%

Sumitomo 3%

Arysta Lifescience

3%

Others 13%


Cro

p P

rote

cti

on


Global crop protection market is characterised by large

number of mergers and acquisitions. The period1995-

2002 saw significant consolidation taking place among

research-based companies, reducing the number of the

leading players from 16 in 1995 to 6 in 2001.

Exhibit 59: 1995-2001 witnessed large consolidation

industry resulting into just six large MNCs

Source: Syngenta Presentation, Elara Securities Research

Several forces have driven the consolidation in the

industry.

R&D and registration of new products have become

increasingly costly. The European Crop Protection

Association has estimated a total cost of USD200mn

for the development and bringing to market of a

new chemical crop protection product.

Several large companies have consolidated their

presence in existing geographies or ventured into

newer areas through acquisition of local companies.

Some companies have broadened their horizons

(pharmaceutical-agrochemical-seeds) over the entire

plant production spectrum.

Globalised trade patterns also necessitate a

company’s presence in all major markets to ensure

rapid market penetration with new products and

quicker recovery of R&D investments.

Exhibit 60: Drivers of consolidation

Source: Syngenta Presentation, Elara Securities Research

Category-wise breakup

Herbicides are the most widely used crop protection

products globally, followed by insecticides and

fungicides. Individual sales of various categories however

depend on climatic conditions and crop variance.

Herbicides are used in most of the regions of the

world. However, major markets for herbicides are

North America and Europe due to favourable

climatic conditions in these regions.

Insecticides are more prevalent in Asian countries.

This is due to higher growth of cotton, cereal, fruits

and vegetables in these regions which have higher

incidence of insect attacks. Increased usage of

genetically modified crops in North America has

reduced the usage of insecticides.

Fungicides are used in almost all agriculture markets

of the world as fungal growth is ubiquitous.

Exhibit 61: Herbicides dominate the crop protection

market with ~45% market share


In terms of crops, fruits and vegetables and cereals

account for the largest share of the crop protection

industry.

Exhibit 62: Crop-wise, Fruits & Vegetables account

for largest share of crop protection market


Insecticides 26%

Herbicides 45%

Fungicides 26%

Others 3%

Fruits & Vegetables

26%

Cereals 18%

Maize 13%

Soybean 10%

Rice 9%

Cotton 6%

Others 18%

Attractive returns to leading competitors

Barriers to entry

Patents & registration

Capital investment

Scale economies

Branding

Entrenched distribution

Portfolio leverage

Breadth & depth

Global reach

R&D

Innovation

Differentiation

Life-cycle management

Marketing

Integrated approach

Local battles, tailored strategies

Ciba

Sandoz

Merck

Zeneca

ISK Biosciences

Bayer

Rhone-Poulenc

Hoechst

Monsanto

Shell

Schering

DuPont

Cyanamid

BASF

Rohm & Hass

Dow

19

92

19

93

19

94

19

96

19

95

19

97

19

98

19

99

20

00

20

01

Novartis

Syngenta

Bayer

Aventis

Monsanto

DuPont

BASF

Dow

AHP



Annexure III: Primer on pesticides

A pesticide is any substance or mixture of substances

intended for preventing, destroying, repelling, or

mitigating pests like insects, weeds, rodents etc.

Pesticides are the last input in agricultural operations and

provide vital inputs to crop protection and boost

agricultural production by helping reduce crop losses.

Classification of pesticides

Pesticides can be broadly divided into two categories:

Technical grade: Technical grade refers to the

material, containing an active ingredient with no

chemical additions. Pesticides are first manufactured

as technical grade products, which have a high

commercial purity. In technical grade 85% or more

of active ingredients are used and rest is impurities,

which are produced during chemical synthesis.

Technical grades are never used directly and are

used to prepare various types of formulations.

Formulations: Formulations contain one or more

active ingredients (technical grade) mixed with other

inert ingredients in a form suitable to use. Inert

ingredients are purposely added to technical grade

ingredients to improve the physical characteristics

(sprayability, solubility, spreadability or stability). Inert

ingredients generally include fillers, talc, solvents,

adjuvant, distillate, wetting agents, petroleum and

so on. The main reason for the formulation of

pesticides is to manufacture a product, which is

biologically efficient, handy for regular use and

minimises environmental hazards.

Based on the types of pests they attack, pesticides are

classified as:

Insecticides: Used against insects which feed on

crops, leaves, roots, and other parts of plants

Herbicides (also known as weedicides): Used against

weeds or unwanted plants compete with the crop

for nutrients, light, water, space.

Fungicides: Used against bacteria, fungi, virus and

mycoplasma which cause various diseases in plants.

Biopesticides: These are derived from natural

substances like plants, animals, bacteria and certain

minerals and control pests by nontoxic mechanisms.

Bio-pesticides are considered eco-friendly and easy

to use. They are of low volume and high effect

formulations and require lower dosages as

compared to chemical pesticides. A growth area for

bio-pesticides is in the area of seed treatment and

soil amendments.

Others (Nematocides, Rodenticides etc): Used to

prevent the pest attacks in storage. Plant growth

regulators control or modify the plant growth

process and are most commonly used in cotton, rice

and fruits.

Stringent registration process

Since pesticides are toxic and hazardous to humans and

environment, and also enter into the food chain, the GoI

regulates manufacture, sale, transport, export/import

under Insecticides Act, 1968.

Under the Act, no pesticides are allowed for

production/import without registration.

Registration normally takes around 3-5 years and

costs around INR30-50mn for each product.

Apart from recommending the registration for

individual chemicals, the Committee also lays down

the details of packaging, labelling, approved

quantities of use, restrictions and precautions.

The Insecticide Act is enforced through two high-

powered bodies – the Central Insecticides Board

(CIB) and the Registration Committee (RC).

The Central Insecticides Board (CIB) advises the

central and state governments on technical matters.

The approval of the use of pesticides and new

formulations to tackle the pest problem in various

crops is given by the Registration Committee (RC)

while the Union Ministry of Health and Family

Welfare monitors and regulates pesticide residue

levels in food. It also sets maximum residue limits

(MRL) of pesticides on food commodities.

The industry is also governed by two Ministries –

The Ministry of Chemicals & Fertilisers, through

Department of Chemicals and Petrochemicals,

promotes production of pesticides

The Ministry of Agriculture regulates and monitors

the quality and supply of pesticides in the country.

However, on April 24, 2008, the Union Cabinet gave its

approval for the introduction of the Pesticides

Management Bill 2008, which will replace the existing

Insecticide Act 1968. The bill aims at improving the

quality of pesticides available to Indian farmers and

introducing new, safe and efficacious pesticides. The bill

seeks more effective regulation of import, manufacture,

export, sale, transport, distribution and use of pesticides

to prevent risk to human beings, animals, or

environment and to de-license retail sale of household

insecticides.


Cro

p P

rote

cti

on


Company Section



Notes


Glo

ba

l M

ark

ets

Re

sea

rch


Poised to grow

Domestic business steady, new launches hold the key

Over FY12E-14E, we expect the company’s domestic business

revenues to register 13.4% CAGR driven largely by a ~15% CAGR in

formulations business aided by – 1) Rallis’ brand, 2) strong distribution

network, 3) farmer connect activities like Rallis Kisan Kutumba (RKK), 4)

product launches and 5) strong alliances/tie-ups with MNCs to

market/distribute their products. Over the period FY07-12YTD, Rallis

has launched 22 products (9 products in H1FY12 alone) with an

average annual rate of 2-3 products each year.

International business to get a boost with Dahej facility

We expect international business to register ~28% CAGR in revenues

over FY12E-14E driven largely by significant scale up in contract

manufacturing activities and growth in registered product sales.

Hence, we expect the contribution of international business to total

revenues to rise from ~23% in FY11 to ~29% in FY14E. Management

has guided for cumulative revenues of ~INR5bn from Dahej plant over

FY11-14E indicating that at peak utilisation the facility can generate

annual revenues of ~INR2bn. Further, the plant will enjoy both

income tax and excise benefits.

Foray into seeds via Metahelix holds long term potential

Over the period FY12E-14E, we expect Metahelix to almost double its

revenues from INR0.9bn to INR1.7bn. Management expects breakeven

by FY12 and the acquisition is likely to be EPS accretive from FY13E

onwards. Our bullishness on Metahelix stems from the fact that -

Metahelix is the first Indian company to have a proprietary Bt trait,

CRY1C approved in cotton – a rival technology to Monsanto’s Bt trait.

Bt Cotton seed is ~INR20bn market in India catered to mostly by

Monsanto. Metahelix is targeting ~10% market share in the first 3-5

years of the launch amounting to an annual sales of ~INR2bn.

Valuation We initiate coverage on Rallis India (Rallis) with a Buy rating and a

TP of INR170 based on P/E of 16x to Sept-13 EPS of INR10.6

indicating an upside of ~40%. We expect Rallis to sustain premium

valuations, albeit we have reduced the premium to the 3 yr average

P/E (15x) from ~20% (18x) to ~5% (16x), owing to – 1) strong

~30% CAGR in earnings over FY12E-14E, 2) best working capital

management among domestic peers, 3) strong return ratios in

range of ~25%-30% and 4) significant free cash flow generation

over FY12E-14E with culmination of all major capex viz. Dahej

expansion & Metahelix acquisition.

Rallis 1 yr fwd P/E bands

Source: Bloomberg, Company, Elara Securities Research

Key Financials (Consolidated) Y/E Mar (INR mn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)

FY10 8,787 5.0 1,449 16.5 1,015 40.9 5.2 26.2 29.8 23.2 15.2

FY11 10,657 21.3 1,713 16.1 1,260 24.6 6.5 27.2 29.2 18.7 14.2

FY12E 13,143 23.3 2,136 16.3 1,378 11.5 7.1 25.9 27.7 17.1 11.4

FY13E 15,907 21.0 2,707 17.0 1,812 31.4 9.3 29.1 31.9 13.0 8.7

FY14E 18,768 18.0 3,317 17.7 2,315 28.1 11.9 31.6 35.7 10.2 6.8



Initiating Coverage

Rallis India

Rating : Buy Target Price : INR170

Upside : 40%

CMP : INR121 (as on 4 January 2012)

Key data*

Bloomberg /Reuters Code RALI IN/RALL.BO

Current /Dil. Shares O/S (mn) 194.4/194.4

Mkt Cap (INRbn/US$mn) 24/444

Daily Vol. (3M NSE Avg.) 266,168

Face Value (INR) 1

1 US$= INR53.0

Source: Bloomberg ; * As on 04 January 2012

Price & Volume

Source: Bloomberg

Share holding (%) Q3FY11 Q4FY11 Q1FY12 Q2FY12

Promoter 50.7 50.7 50.7 50.8

Institutional Investors 24.7 25.6 25.8 25.4

Other Investors 4.1 3.8 4.6 4.3

General Public 20.5 20.0 18.9 19.5

Source: BSE

Price performance (%) 3M 6M 12M

Sensex 0.6 (15.3) (21.8)

Rallis India (30.5) (21.7) (13.8)

PI Industries (13.6) 31.1 88.7

Dhanuka Agritech (8.8) 1.7 13.3

Insecticides India 5.6 19.1 78.6

Source: Bloomberg

0

50

100

150

200

250

Ap

r-0

5

Se

p-0

5

Fe

b-0

6

Jul-0

6

De

c-0

6

Ma

y-0

7

Oct-

07

Ma

r-0

8

Au

g-0

8

Jan

-09

Jun

-09

No

v-0

9

Ap

r-1

0

Se

p-1

0

Fe

b-1

1

Jul-1

1

De

c-1

1

(IN

R)

23x

19x

15x

11x

0

1,000

2,000

3,000

4,000

5,000

6,000

100

125

150

175

200

Jan-11 May-11 Sep-11 Jan-12

Vol. in 000s (RHS) Rallis India (LHS)

Rallis India


Valuation trigger

Source: Bloomberg, Elara Securities Estimate

Valuation overview

Methodology INR/Share

Consolidated PAT Sept -2013 (INR mn) 2,063

No of shares (mn) 194.5

EPS Sept-2013E 10.6

Assigned P/E multiple (x) 16.0

Fair value 170

CMP 121

Potential Upside (%) 40.3

Source: Elara Securities Estimate

Valuation driver – Rallis one year forward P/E chart


Investment summary

Leading player in crop protection

industry with strong parentage

Looking to broad base revenue mix

and emerge as a complete agri-inputs

solution provider

Strong balance sheet, best working

capital management in the industry

and high return ratios - ~25%-30%

Valuation trigger

1. Earnings to recover post weak

H2FY12, model in ~30% CAGR over

FY12E-14E

2. Margins to recover in FY13E-14E

driven by launches, higher export

revenues and improvement in

Metahelix margins

3. Significant capex behind, expect

strong FCF generation over FY12E-14E

Key risks

Poor monsoons, low pest infestation

and slowdown in off-take due to

impact on farmer profitability

Lower than expected scale up at the

Dahej facility and lower-than-expected

revenues from Metahelix

Competition in key products leading to

price cuts

Our assumptions

We have modeled in 19.5% CAGR in

revenues over FY12E-14E

Domestic business to grow ~13.5%

CAGR in revenues over FY12E-14E

aided by new launches

International business to grow ~28%

CAGR driven by scale up at Dahej

facility – modeling ~INR3.5bn

revenues over FY11-14E

Expect Metahelix to almost double

revenues from INR0.9bn to INR1.7bn

over FY12E-14E aided by launch of

proprietary Bt trait in cotton – CRY1C

40

60

80

100

120

140

160

180

200

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-1

0

Se

p-1

0

No

v-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-1

1

Se

p-1

1

No

v-1

1

Jan

-12

Ma

r-1

2

Ma

y-1

2

Jul-1

2

Sep

-12

No

v-1

2

Jan

-13

Margins to recover in FY13E-14E driven by

launches, higher export revenues and improvement

in Metahelix margins

Significant capex behind, expect strong FCF generation over

FY12E-14E

1

2

3

Earnings to recover post weak H2FY12,

model in ~30% CAGR over FY12E-14E

0

5

10

15

20

25

Ap

r-0

4

Au

g-0

4

De

c-0

4

Ap

r-0

5

Au

g-0

5

De

c-0

5

Ap

r-0

6

Au

g-0

6

De

c-0

6

Ap

r-0

7

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Rallis India

Cro

p P

rote

cti

on


Consolidated Financials (Y/E Mar) Income Statement (INR mn) FY11 FY12E FY13E FY14E

Net Revenues 10,657 13,143 15,907 18,768

EBITDA 1,713 2,136 2,707 3,317

Add:- Non operating Income 346 300 343 396

OPBIDTA 2,059 2,436 3,050 3,712

Less :- Depreciation & Amortization 175 287 331 355

EBIT 1,885 2,149 2,719 3,357

Less:- Interest Expenses 40 120 89 59

PBT 1,845 2,029 2,629 3,299

Less :- Taxes 580 619 776 924

Less: Minority Interest 4 33 42 60

Adjusted PAT 1,260 1,378 1,812 2,315

Add/Less: - Extra-ordinaries - - - -

Reported PAT 1,260 1,378 1,812 2,315

Balance Sheet (INR mn) FY11 FY12E FY13E FY14E

Share Capital 194 194 194 194

Reserves 4,855 5,664 6,679 7,970

Minority Interest 21 21 21 21

Borrowings 1,172 1,172 872 572

Deferred Tax (Net) 32 32 32 32

Total Liabilities 6,275 7,084 7,799 8,791

Gross Block 5,293 7,455 7,974 8,306

Less:- Accumulated Depreciation 1,743 2,029 2,360 2,715

Net Block 3,551 5,426 5,613 5,591

Add:- Capital work in progress 1,695 239 162 171

Investments 256 256 256 256

Net Working Capital 774 1,163 1,768 2,773

Other Assets - - - -

Total Assets 6,275 7,084 7,799 8,791

Cash Flow Statement (INR mn) FY11 FY12E FY13E FY14E

Cash profit adjusted for non cash items 1,189 1,761 2,235 2,719

Add/Less : Working Capital Changes (226) (525) (565) (580)

Operating Cash Flow 963 1,236 1,670 2,139

Less:- Capex (2,641) (707) (442) (341)

Free Cash Flow (1,678) 529 1,228 1,799

Financing Cash Flow 452 (573) (958) (1,155)

Investing Cash Flow (1,432) (667) (394) (284)

Net change in Cash (17) (3) 318 701

Ratio Analysis FY11 FY12E FY13E FY14E

Income Statement Ratios (%)

Revenue Growth 21.3 23.3 21.0 18.0

EBITDA Growth 18.3 24.7 26.7 22.5

PAT Growth 24.6 11.5 31.4 28.1

EBITDA Margin 16.1 16.3 17.0 17.7

Net Margin 11.8 10.5 11.4 12.3

Return & Liquidity Ratios

Net Debt/Equity (x) 0.2 0.1 0.0 (0.1)

ROE (%) 27.2 25.9 29.1 31.6

ROCE (%) 29.2 27.7 31.9 35.7

Per Share data & Valuation Ratios

Diluted EPS (INR/Share) 6.5 7.1 9.3 11.9

EPS Growth (%) 24.2 9.3 31.5 27.8

DPS (INR/Share) 2.0 2.5 3.5 4.5

P/E Ratio (x) 18.7 17.1 13.0 10.2

EV/EBITDA (x) 14.2 11.4 8.7 6.8

EV/Sales (x) 2.3 1.8 1.5 1.2

Price/Book (x) 4.7 4.0 3.4 2.9

Dividend Yield (%) 1.7 2.1 2.9 3.7


Revenue & margins growth trend


Adjusted profits growth trend


Return ratios


16.1 16.3

17.0

17.7

15

16

16

17

17

18

18

0

5,000

10,000

15,000

20,000

FY11 FY12E FY13E FY14E

(%)

(IN

R m

n)

Revenues (LHS) EBITDA Margin (RHS)

24.6

11.5

31.4 28.1

0

5

10

15

20

25

30

35

0

500

1,000

1,500

2,000

2,500


(%)

(IN

R m

n)

Adj PAT (LHS) PAT Growth (RHS)

27.2 25.9

29.1

31.6

29.2 27.7

31.9

35.7

20

25

30

35

40


ROE (%) ROCE (%)

Rallis India


Dominant player in crop protection

Rallis India (Rallis), a subsidiary of Tata Chemicals (50.8%

stake), is the 2nd largest domestic crop protection

company in India. A comprehensive product portfolio of

pesticides, seeds (strengthened with Metahelix

acquisition) and plant growth nutrients, strong relations

with farmers (through initiatives like Rallis Kisan

Kutumba) and pan-India distribution network covering

80% districts aided by 1,500 dealers and 40,000 retailers

gives Rallis a strong edge. Further, the company also

enjoys credible presence in international markets.

Diversifying revenue mix to emerge as a complete agri-input solution provider

During FY11, Rallis derived ~96% (73% domestic, 23%

from exports) revenues from pesticides and ~2% each

from selling plant growth nutrients and seeds.

Exhibit 1: During FY11, Rallis derived ~96% of

revenues from selling crop protection chemicals

Source: Company, Elara Securities Research

In May 2007, the company had initiated a growth

agenda titled “Rallis poised” to target sustained profitable

growth. Rallis identified seven growth drivers under the

agenda – 1) New products, 2) Contract Manufacturing,

3) Brand Premium, 4) Value Enhancement (known as

DISHA), 5) Overseas market expansion (APOLLO), 6)

Adjacent Businesses (seeds and PGN, Agri Services) and

7) Inorganic growth. Further the company identified

process orientation, infrastructure support in

manufacturing units, fields and offices and a competent

team of employees as enablers supporting the growth

agenda.

This structured approach has helped Rallis post ~15%

CAGR in revenues and ~89% CAGR in EBITDA during

the period FY07-11.

Exhibit 2: Rallis initiated its growth agenda called

“Rallis poised” in May 2007 with 7 cornerstones

Source: Rallis Presentation, Elara Securities Research

Exhibit 3: Rallis poised has helped the company

register ~89% CAGR in EBITDA over FY07-11


Going ahead, Rallis is looking to strengthen its progress

to broad-base revenue mix and emerge as a complete

agri-inputs solution provider (Seeds, PGN, specialty

fertilisers and farming services).

Acquisition of Metahelix in Dec, 2010 has put Rallis

in a strong position to expand in seeds (adjacent

businesses) – it is expecting cumulative revenue of

INR10bn in first five years of operation.

Commencement of new manufacturing facility at

Dahej in Q1FY12 will help Rallis scale up revenues

under contract manufacturing – Rallis expects

cumulative revenue of INR5bn over FY12-14E.

Initiatives like MoPu (Grow More Pulses), a

programme where Rallis works with farmers to

improve productivity in pulses, is a step in providing

agri services to farming community.

Domestic Pesticides

73%

International Business - Pesticides

23%

Plant Growth

Nutrients 2%

Seeds 2%

13

4

59

1

1,1

09

1,4

49

1,7

13

0

5

10

15

20

25

30

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

FY07 FY08 FY09 FY10 FY11

(%)

(IN

R m

n)

EBITDA (LHS) Sales Growth (RHS)

Investment rationale

Domestic business steady, product launches hold key


Foray into seeds via Metahelix holds long term potential

Rallis India

Rallis India

Cro

p P

rote

cti

on


Exhibit 4: Rallis is looking to broad-base its revenue

mix into complete agri-inputs solution provider


Domestic business steady, new product launches hold the key

During FY11, Rallis derived ~73% revenues from

domestic pesticides business which included ~62%

revenues from domestic formulations and 11% from

domestic institutional business.

Under the formulations business, Rallis retails number of

strong brands across segments of insecticides, herbicides

and fungicides with the mix standing at 70-20-10

respectively. The institutional business provides technical

and bulk of various molecules, seed treatment chemicals

and household products to leading companies like

Bayer, Syngenta, Excel crop protection, United

Phosphorous, Gharda, Cheminova and Dhanuka.

Exhibit 5: Dependence on domestic business to

decline owing to growth in exports and Metahelix


During FY12E-14E, we expect the company’s domestic

business revenues to register 13.4% CAGR driven largely

by a ~15% CAGR in formulations business aided by – 1)

Rallis’ brand strength, 2) strong distribution network, 3)

farmer connect activities like RKK, 4) new product

launches and 5) strong alliances/tie-ups with MNCs to

market/distribute products.

Exhibit 6: Domestic pesticides business to register

~13.4% CAGR in revenues over FY12E-14E


Portfolio of premium brands with strong recall

Over the years, Rallis has built strong sustainable brands

in the crop protection market on the back of the Tata

brand, strong marketing initiatives, farmer connect

activities and innovative brand promotion efforts (new

packaging shapes, slogan designs, colour schemes etc.).

Company’s old brands like Rogor, Asataf, and Contaf,

established years ago, still find a place in minds of

farmers. According to a Gallup survey in 2010, Rallis

markets eight out of the top 12 brands in the Indian

market.

Exhibit 7: As per Gallup customer survey, 8 out of top

12 brands as per recall belong to Rallis

Brand Company

Confidor Bayer

Asataf Rallis

Rogor Rallis

Tatamida Rallis

Contaf Rallis

Antracol Bayer

Thiodon Bayer

Contaf Plus Rallis

Tata Mono Rallis

Tata Fen Rallis

Fujione Rallis

Bilzeb Bayer

Hostathion Bayer

Larvin Bayer

Metacid Bayer

Source: Unaided recall, Gallup customer engagement survey, Rallis

Strong connect with farmers through initiatives like Rallis Kisan Kutumba (RKK)

Over the years, Rallis has developed a strong rapport

with farmers further strengthened by initiatives like Rallis

Kisan Kutumba (RKK), started in 2007-08 to provide

farmers information on improving productivity. Key

activities undertaken in RKK initiative include – 1) regular

visits by Rallis staff, 2) organising crop seminars, 3)

demonstrations, 4) farmer exchange programmes and 5)

77 73 66 62 60

20 22 25 27 29

1 2 7 8 9

2 2 2 3 3

0

20

40

60

80

100

120

FY10 FY11 FY12E FY13E FY14E

(%)

Domestic Exports Seeds Others

7,2

32

8,4

21

9,3

16

10

,55

4

11

,97

3

0

5

10

15

20

25

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


(%)

(IN

R m

n)

Revenue (LHS) (Growth YoY (RHS)

Crop Protection

Others Crop

Protection

Seeds

& PGN

Contract

Manufacturing

Agri Services

Rallis India


advisory services. Rallis currently has farmer membership

of 0.5mn under the RKK programme and is expected to

go up to 1mn by FY12-end.

Exhibit 8: RKK initiative has helped Rallis strengthen

its farmer connect with ~1mn farmers by FY12


Alliances/tie-ups coupled with consistent new launches to help sustain growth momentum

Over the years, Rallis has entered into several alliances/

tie-ups with MNCs for marketing and distribution of

off-patent products in Indian markets which has helped

the company launch new and internationally renowned

products on a consistent basis and deliver margin

improvement by leveraging on distribution.

Exhibit 9: Strong alliances/tie-ups with various MNCs

to market and distribute their off-patent products

Company Rallis Product

Du Pont Daksh, Rekord

Syngenta India Preet, Anant, Sartaj, Prabhav, Paralac

Makhteshim Chemical Works Captan, Nova, Atrazine

Bayer India Spiro, Tatamida

Nihon Nohayaku Fuji1, Applaud, Fenpyroximate

FMC India Furadan, Tatafuran, Electra, Impeder

Gharda Chemicals Fateh, Koranda

Yara International Water Soluble NPK Fertilisers

Borax International Solubar


In Q1FY11, Rallis strengthened its relations with the

global leader Syngenta by signing an agreement for

marketing company’s fungicide Azoxystrobin in India

and potentially in other countries. Azoxystrobin is the

largest selling fungicide in the world and is effective in

dealing with diseases in crops like rice, vegetables and

fruits. Syngenta currently distributes Rallis India's

fungicide Hexaconazole in the global market under a

previously inked agreement, which will remain in effect.

Exhibit 10: Rallis has tied up with Syngenta to

distribute its world’s largest fungicide Azoxystrobin

Cooperate with each other in agrochemical markets

- In India and potential further countries

To enhance availability of innovative agrochemical products and technologies to the farming community

Source Azoxystrobin for marketing in India in Rallis brand

- AZ is the world’s best selling fungicide

Exclusive rights to specified combination products with Azoxystrobin

Supplies of Hexaconazole to Syngenta

Strengthen the Rallis ability to enrich its crop protection

solutions Add value to the farming community


Rallis has consistently focussed on rejuvenating its

product portfolio by launching new products either

through in-house R&D or through global alliances.

During the period FY07-12YTD, Rallis launched 22 new

products with an average annual rate of 2-3 products

each year. Rallis launched 9 new products in H1FY12

alone with 6 getting launched in Q2FY12 alone.

Exhibit 11: Rallis has consistently launched 2-3

products each year with 9 launched in H1FY12

Year Product launched

FY07 Nova, Applaud (I), Taqat (F)

FY08 Takumi (I), Sedna (I), Ishaan (F), Royal (I), Tebuconazole (F)

FY09 Mantis (Blasticide)

FY10 Ergon (F)

FY11 Taarak (H), Ralligold (PGN), Toran (I)

FY12 Neon (I), Sonic (I), Vaar (H), Honcho (H), Cylo (H), Saras (F), Taffin, Fycol, Ditaf

Source: Company, Elara Securities Researc; Note: I = Insecticdes, F=

Fungicides and H = Herbicides

Rallis’ turnover from new products launched in previous

four years to total turnover (termed as innovation

turnover index) is in range of ~25%-30%. However, the

index has come down to ~20% in FY11 due to exclusion

of Applaud from the index in FY11 but we expect it to

stabilise ahead at ~25%-30% driven by launches.

Exhibit 12: New products contribute ~25%-30% of

revenues for Rallis


24

28

25

31

25

28 30 30 30

31

20

10

15

20

25

30

35

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

(%)

35K

06-07

RKK

07-08

130K

08-09

250K

09-10

500K

10-11

1000K

11-12

Regular Contacts

throughout

crop cycle

Covered more than 300 k

farmers Crop Seminars

Demos

Farmer Exchange

Programmes

Embarked on the RRK concept Worked out and finalized the model

Identified 30 Pilot territories Initiated activities

Scale up the activities Adding 30 more territories For RKK activites

RKK activities to cover all territories

Enroll other Progressive Farmers

Strengthening Farmer Relationships Rallis Kisan Kutumba

Rallis India

Cro

p P

rote

cti

on



Rallis operates in the international markets across 50

countries catering via three core segments – 1) contract

manufacturing, 2) registered product sales and 3) bulk

sales via alliances. Over FY07-11, the international

business registered 13.3% CAGR and constituted ~23%

of overall revenues for Rallis in FY11.

Contract manufacturing to get a boost with scale up at Dahej and Ankleshwar facilities

Rallis has been associated with leading companies

worldwide for contract manufacturing of technical

grades/formulations and intermediaries on the back of

cost effective manufacturing. Most of the contracts are

typically for a five year term and are on take or pay basis,

significantly reducing the risk for Rallis resulting from non

off-take due to adverse weather conditions.

Contract manufacturing accounted for ~9% of

consolidated revenue for Rallis in FY11 and we expect

the same to rise to ~13% of consolidated revenues

growing at a CAGR of ~32% over FY12E-14E driven by

scale up at Dahej and Ankleshwar facilities.

Rallis started operations at its Ankleshwar plant in

Q2FY11 which is engaged in manufacturing of

metconazole (herbicide for rape-seed, wheat,

oilseed, fruits and vegetables) exclusively for Kureha

Corporation (Japanese chemicals player). Rallis has

recently enhanced capacity at this plant and expects

annual revenues of INR500-700mn over FY12E-14E.

Rallis has set up a 5,000MT per annum plant in

Dahej with 1st phase operational from Q1FY12 at an

investment of INR1.5bn. Management has

highlighted that 1/3rd

of this capacity is expected to

cater to contract manufacturing. It has already

received enquiries from a handful of MNC clients

and management expects to ramp up current

utilisation levels from ~40-50%, in Q2FY12, to full

utilisation by end of FY12E.

Registered product sales to grow ~34% CAGR over FY12E-14E

Apart from contract manufacturing, Rallis also sells

formulations under its own brand name post

registrations in almost 25 different countries spread in

regions like Latin America, USA, Japan, South East Asia,

Australia and Africa.

Registered product sales accounted for ~7% of

consolidated revenue for Rallis in FY11 and we expect

the same to rise to ~10% of consolidated revenues

growing at a CAGR of ~34% over FY12E-14E driven by –

1) new registrations (has applied for over 100

registrations across new and existing territories),

2) strategic alliances with global majors and 3) synergies

with parent Tata Chemical’s international network and

4) expansion of Dahej plant - 2/3rd of Dahej plant

capacity would cater to registered product sales outside

India.

Exhibit 13: We are modeling cumulative revenue of

INR3.5bn from Dahej plant over FY11-14E


Contribution of international business to rise to 29% of total revenue by FY14E

Going ahead, we expect international business to

emerge as one of the key growth drivers registering

~28% CAGR in revenues over FY12E-14E driven largely

by significant pick up in contract manufacturing activities

and growth in registered product sales. As a result, we

expect contribution of international business to total

revenues to rise from ~23% in FY11 to ~29% in FY14E.

We highlight management has guided for cumulative

revenues of ~INR5bn from Dahej plant over FY11-14E

indicating that at peak utilisation the facility can

generate annual revenues of ~INR2bn. Further, the plant

will enjoy both income tax and excise benefits for first

five years bringing down the tax rate.

Exhibit 14: International business to emerge as key

growth driver registering ~28% CAGR over FY12-14E


150 200 350

500 550

1,200

1,750

0

500

1,000

1,500

2,000


(IN

R m

n)

Ankleshwar Dahej

2,5

50

3,4

88

4,6

61

5,7

32

0

5

10

15

20

25

30

35

40

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


(%)

(IN

R m

n)


Rallis India


Foray into seeds has potential

In Dec 2010, Rallis acquired 53.5% stake in Metahelix Life

Sciences for an all cash deal of INR995mn funded via

internal accruals. Later Rallis increased its stake to 59.02%

for an additional INR250mn and in FY12 has further

increased its stake to 72.98%. Furthermore as per the

agreement, Rallis will enhance its shareholding to 100%

over a period of five years.

Overall, the initial deal was completed at 2x sales of

FY12E (we are modelling ~INR900mn revenue for FY12)

and Rallis expects the entity will exceed INR10bn

revenue cumulatively over a 5 year period.

Metahelix acquisition part of growth agenda under Rallis poised, gives entry into INR65bn seeds market

Rallis had identified seeds business as one of the key

pillars under Rallis Poised and Metahelix acquisition

would help it to offer a complete suite of agri-inputs for

farmers. Further, competencies of Rallis in terms of

farmer relations and channel partnerships through Rallis

Kisan Kutumbha and Tata Kisan Sanchar would help

leverage Metahelix’s portfolio.

The size of Indian seeds industry is pegged at INR65bn

and is growing annually at 12%-13%, but hybrid seeds,

which Metahelix manufactures, account for a mere 25%

of the market. Its key local competitors include - Rasi,

Nuziveedu, Ankur, and Mahyco along with the MNC

giant Monsanto.

Exhibit 15: The Indian seeds market is ~INR65bn in

size and Metahelix target segment cotton is INR20bn

Source: Company, Elara Securities Research; Note: Individual size in INR mn

During the period FY12-14E, we expect Metahelix to

almost double its revenues from INR0.9bn to INR1.7bn.

Management expects breakeven by FY12 and the

acquisition is likely to be EPS accretive from FY13E

onwards.

Exhibit 16: We expect Metahelix to double revenues

from FY12-14E aided by launch of proprietary Bt trait


Our bullishness on Metahelix stems from the fact that -

Metahelix is the first Indian company to have a

proprietary Bt trait, CRY1C approved in cotton – a rival

technology to Monsanto’s Bt trait.

Bt Cotton seed is ~INR20bn market in India catered to

mostly by Monsanto. For all practical purposes the price

of Bt cotton is fixed at INR650 (for Bollgard-1) and

INR750 (for Bollgard-2) in various states. This money is

shared between Monsanto and the seed companies that

licence its technology into their own hybrids. It is here

that Metahelix has an advantage as its cost of developing

the Bt cotton technology is only around 1/4th of

Monsanto’s. In the short term it means it will have the

freedom to sell at a lower price, but more importantly, in

the long term Metahelix can offer a lower technology

licence fee to other seed companies for its Bt cotton

thereby gaining market share from Monsanto.

Metahelix is targeting ~10% market share in the first 3-5

years of launch amounting to annual sales of ~INR2bn.

About Metahelix

Metahelix, a Bangalore based seeds research company,

leverages its expertise in crop genetics and plant

biotechnology to develop high performance hybrid

seeds. It has nationwide sales presence through its

wholly owned subsidiary Dhaanya Seeds selling its

products through ~1,000 distributors. It has a team of 50

scientists working in various aspects of seed research.

Metahelix has strong product portfolio with 13 products

(already in market) and 17 products in pipeline across 14

crops. Its core crops among field crops are rice, maize,

cotton and millets and among vegetables tomato, hot-

pepper and okra. The crop breeding programmes are

located at Bangalore (rice, maize & vegetable crops),

Hyderabad (rice and cotton) and Ahmedabad (millets).

Paddy, 1,200 , 19%

Wheat, 850 , 13%

Maize, 900 , 14%

Cotton, 2,000 , 31%

Vegetables, 1,000 , 15%

Sunflower, 150 , 2%

Sorghum & Millets, 250

, 4% Others,

150 , 2%

0.9

1.3

1.7

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

FY12E FY13E FY14E

(IN

R b

n)

http://www.dhaanya.com/

http://www.dhaanya.com/

Rallis India

Cro

p P

rote

cti

on


Weak H2FY12 but expect recovery in earnings in FY13-14E

During H1FY12 Rallis posted strong growth of ~29% YoY

in revenues but earnings growth was muted at ~11%

YoY. While revenues got a boost due to first year of

consolidation of Metahelix revenues (INR619mn in

H1FY12), modest growth of ~15% in domestic business

and commencement of Dahej facility in Q1FY12, Rallis

saw earnings growth flagging due to weaker gross

margins (adverse product mix due to erratic monsoons in

kharif season), higher depreciation charges due to Dahej

facility and interest costs (higher debt due to rise in

working capital).

Owing to significant deficiency (~50% below LPA) of

post season monsoons (Oct-Dec) in key crop protection

consuming state of Andhra Pradesh leading to lower

paddy acreage and squeeze in farmer profitability due to

crash in prices of vegetables like onions and potatoes,

we expect Rallis to post weaker H2FY12 with ~22%

revenue growth and ~4% earnings growth, albeit better

than peers on revenues owing to – 1) 9 products

launched in H1FY12, 2) scale up in Dahej facility (not in

the base) and 3) inclusion of Metahelix revenues (not in

the base).

Exhibit 17: H2FY12 to witness pressure on revenue

and earnings, albeit to be better than peers


Notwithstanding quarterly volatility, during the period

FY12E-14E, we expect Rallis to post modest ~19.5%

CAGR in consolidated revenues driven by – 1) 13.5%

CAGR in domestic business driven by new product

launches, 2) ~28% CAGR in international business aided

by scale up at Dahej facility and 3) doubling of Metahelix

revenues from INR0.9bn to INR1.7bn aided by launch of

proprietary Bt trait.

Exhibit 18: Revenue growth of ~19.5% CAGR over

FY12-14 aided by new launches, Dahej and Metahelix


Exhibit 19: Key revenue growth assumptions

(INR mn) FY11 FY12E FY13E FY14E

Pesticides Biz (A + B) 10,971 12,804 15,215 17,705

YoY % 20.1 16.7 18.8 16.4

Domestic (A) 8,421 9,316 10,554 11,973

YoY % 16.5 10.6 13.3 13.4

Formulations 7,132 7,988 9,186 10,564

YoY % 20.0 12.0 15.0 15.0

Institutional 1,289 1,328 1,368 1,409

YoY % 0.1 3.0 3.0 3.0

International (B) 2,550 3,488 4,661 5,732

YoY % 34.2 36.8 33.6 23.0

Contract Manufacturing 1,017 1,471 2,038 2,547

YoY % 35.2 44.6 38.5 25.0

Alliance/Bulk Sales 781 887 1,020 1,152

YoY % 30.0 13.5 15.0 13.0

Registered Product Sales 765 1,130 1,603 2,033

YoY % 40.0 47.7 41.9 26.9

Plant Growth Nutrients 238 298 387 504

YoY % 80.2 25.0 30.0 30.0

Total Seeds Biz (Incl Metahelix) 221 977 1,386 1,796

YoY % 343.0 341.1 42.0 29.5

Other (Subsidiary Sales) 35 39 42 47

YoY % (1.2) 10.0 10.0 10.0

Total Consolidated Revenues 11,466 14,117 17,031 20,052

YoY % 22.4 23.1 20.6 17.7


Margins to expand 140bps over FY12E-14E aided by higher margin products and exports contribution

Over the period FY12E-14E, we expect margins to

expand by 140bps from 16.3% in FY12E to 17.7% in

FY14E resulting in a robust ~25% growth in EBITDA

29

22

11

4

0

5

10

15

20

25

30

35

H1FY12 H2FY12

(%)

Sales Growth PAT Growth

8,7

87

10

,65

7

13

,14

3

15

,90

7

18

,76

8

0

5

10

15

20

25

0

5,000

10,000

15,000

20,000


(%)

(IN

R m

n)



Earnings to pick up post weak H2FY12, we model in ~30% CAGR over FY12E-14E

Valuations at steep discount offering attractive entry point

Initiate with Buy with a Sept-13 TP of INR170

Rallis India


aided by – 1) continued cost savings from third phase of

DISHA initiatives focussing on curtailing operating and

fixed expenses, 2) higher contribution of higher margin

new products under herbicides/weedicides category,

3) improvement in profitability of Metahelix (seed

companies enjoy higher operating margins at ~18%-20%

on average), 4) significant jump in export revenues aided

by Dahej scale up and 5) operating leverage.

Exhibit 20: DISHA initiatives under third phase to

curtail operating and fixed expenses

DRIVING INNOVATIVE SOLUTIONS FOR HYPER ACHIEVERMENTS


Exhibit 21: Margins to witness uptick driving a robust

~25% CAGR in EBITDA over FY12E-14E


Earnings growth strong at ~30% CAGR driven by lower tax, depreciation and interest costs

During the period FY12E-14E, we expect Rallis to post

strong ~30% CAGR in earnings aided by – 1) ~19.5%

CAGR in revenues, 2) 140bps expansion in margin,

3) ~200-250bps savings in tax rate due to rising revenues

from Dahej facility which is an export oriented unit

(EOU) enjoying income tax and excise benefits,

4) YoY moderation in depreciation charges from ~64%

rise in FY12E due to commencement of Dahej facility and

5) halving of interest cost driven by reduction in debt

due to high free cash flow generation in FY12E-14E.

Exhibit 22: Expect recovery in earnings post weak

~9% YoY growth in FY12


Exhibit 23: FY14E EPS (INR) sensitivity to sales CAGR

and net margin expansion over FY12E-14E

FY

12

-14

ne

t m

arg

in

exp

an

sio

n

FY14 EPS FY12-14 sales CAGR

13.5% 16.5% 19.5% 22.5% 25.5%

125bps 10.2 10.8 11.3 11.9 12.5

155bps 10.5 11.1 11.6 12.2 12.8

185bps 10.8 11.3 11.9 12.5 13.1

215bps 11.0 11.6 12.2 12.8 13.5

245bps 11.3 11.9 12.5 13.1 13.8


Valuations at steep discount offering attractive entry point

Over the last 3 months, Rallis India has witnessed steep

correction of ~30% significantly underperforming Sensex

(down ~6%) and its peers which have corrected

~10%-15%. We attribute this correction to concerns over

a weaker H2FY12. However, we highlight the same is

exaggerated and the steep correction offers an attractive

entry point in the stock.

Exhibit 24: Rallis has corrected from P/E of ~18-20x

to ~15x (3 yr avg) offering a great entry point


1,4

49

1,7

13

2,1

36

2,7

07

3,3

17

16.5

16.1 16.3

17.0

17.7

15.0

15.5

16.0

16.5

17.0

17.5

18.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500


(%)

(IN

R m

n)

EBITDA (LHS) OPM (RHS)

1,0

15

1,2

60

1,3

78

1,8

12

2,3

15

40.9

24.2

9.3

31.5 27.8

0

9

18

27

36

45

0

500

1,000

1,500

2,000

2,500


(%)

(IN

R m

n)

PAT (LHS) YoY (RHS)

0

5

10

15

20

25

Ap

r-0

4

Au

g-0

4

De

c-0

4

Ap

r-0

5

Au

g-0

5

De

c-0

5

Ap

r-0

6

Au

g-0

6

De

c-0

6

Ap

r-0

7

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Wave1 Wave 2 Wave 3

Pricing

Logistics

Finance

Operating Expenses

Fixed Expenses

Manufacturing

Procurement

Utility

Rallis India

Cro

p P

rote

cti

on


Initiate with a Buy with a Sept-2013 TP of INR170

Over the last few years, Rallis has witnessed significant

re-rating from an average multiple of ~10-12x to

~16-18x driven by – 1) consistent operational growth

(~89% CAGR in EBITDA over FY07-11), 2) sharp

improvement in return ratios (from 13.5% in FY08 to

~29% in FY11) and 3) lower dependence on domestic

pesticide business by building Dahej facility for exports

and acquiring Metahelix (seeds business).

Going ahead, we expect Rallis to sustain premium

valuations, albeit we have reduced the premium to the 3

yr average P/E (15x) from ~20% (18x) to ~5% (16x).

Hence, we initiate coverage on Rallis with a Buy rating

and a Target Price of INR170 based on P/E of 16x to

Sept-13 EPS of INR10.6 indicating an upside of ~40%.

Exhibit 25: Rallis trading at lower end of its historical

P/E band of ~15x-19x


We believe Rallis will continue to command premium

valuations owing to – 1) strong ~30% CAGR in earnings

over FY12E-14E, 2) best working capital management

among domestic peers, 3) strong return ratios in range

of ~25%-30% and 4) significant free cash flow

generation over FY12E-14E as major capex (Dahej

expansion & Metahelix acquisition) is over.

Exhibit 26: Rallis has the best working capital

management in the industry, a near –ve cycle


Exhibit 27: Major capex behind, expect strong FCF

generation over FY12E-14E


Further, the stock is likely to get downside support on

the back of:

Land bank: Rallis has considerable surplus land

which it can divest, like in the past, if need arises to

raise cash. It has around 85 acres in Hyderabad and

22 acres in Thane, Maharashtra. Media reports and

past deals (Rallis sold 31 acres to Peninsula for

INR0.9bn in 2008) suggest an estimated value of

~INR3bn, amounting to INR15 per share for just the

Hyderabad land.

Strategic stake in Advinus Therapeutics: During

2005, Rallis transferred its Knowledge Services

Business, a Research & Development Centre at

Bangalore to Advinus Therapeutics Pvt Ltd for a

consideration of INR260mn. Advinus is India's finest

Clinical Research Organisation (CRO) involved in

business of New Drug Discovery (pharma &

agriculture) and clinical trials. Advinus was formed

by a group of entrepreneurs and scientists led by Dr

Barbhaiya and Dr Kasim Mookhtiar in 2005. The Tata

group is a major shareholder in Advinus; Rallis holds

15% stake while the company management holds

minority stake. The company clocked ~INR1bn

revenue in FY11. Recently, buoyed by the success of

discovering a novel molecule for the treatment of

type II diabetes, Advinus Therapeutics is seeking

buyers for the molecule that may generate over

USD1bn business.

0

50

100

150

200

250

Ap

r-0

5

Se

p-0

5

Fe

b-0

6

Jul-0

6

De

c-0

6

Ma

y-0

7

Oct-

07

Ma

r-0

8

Au

g-0

8

Jan

-09

Jun

-09

No

v-0

9

Ap

r-1

0

Se

p-1

0

Fe

b-1

1

Jul-1

1

De

c-1

1

Sh

are

Pri

ce

(IN

R)

23x

19x

15x

11x

36

42

90

10

3

65

11

3

75

80

86

10

7

78

74

72

10

7

10

2

0

20

40

60

80

100

120

Rallis Bayer PI Ind Dhanuka IIL

(Da

ys)

Debtor Creditor Inventory

2,6

41

70

7

44

2

34

1 9

63

1,2

36

1,6

70

2,1

39

(1

,67

8)

52

9 1

,22

8

1,7

99

(2,000)

(1,000)

0

1,000

2,000

3,000


(IN

R m

n)

Capex Op Cash Flow Free Cash Flow

Rallis India


Board of Directors & Management

R Gopalakrishnan, Chairman

Gopalakrishnan is a graduate from Calcutta University

and completed engineering from IIT. From 1967, he

served HUL for over three decades in various capacities

including vice-chairman of HUL. In 1998, he joined Tata

Sons as executive director. He is also the chairman of

AutoComp systems, Advinus Therapeutics, vice-chairman

of Tata Chemicals, and director of Tata Power and Tata

Technologies. Gopalakrishnan also serves as an

independent director on the boards of Indian

subsidiaries of Akzo Nobel and BP Castrol.

V Shankar, MD & CEO

Shankar is a Chartered Accountant from The Institute of

Chartered Accountants of India, Cost Accountant from

ICWAI, Company Secretary and holds BCom (Hons) and

LLB. He has been the CEO of Rallis India since June, 2007

and has been MD since Jan, 2009 before serving as a

COO of Rallis from Dec, 2005 to April, 2008. Prior to

joining Rallis in Dec, 2005, Shankar served as COO of

Phosphates Business of Tata Chemicals prior to which he

worked with HUL from 1986 to 2004 and served in

various capacities.

Homi R Khusrokhan, Director

Khusrokhan is a qualified CA and also holds MSc (Econ)

in accounting and finance from London School of

Economics. He has been Non-Independent Non-

Executive Director of Rallis India Ltd. since March, 2003.

He was with Glaxo Laboratories (India) for 29 years, has

served as MD of Burroughs Wellcome since 1995, both

Glaxo and Wellcome in India from 1996-2000 and

GlaxoSmithKline for 5 years. He has been a special

advisor on Board of Satyam Computer since Feb, 2009

and has served as the MD of Tata Chemicals (2006-2008)

and Tata Tea (2001-2004).

B D Banerjee, Director

Banerjee, a PG with Honours in Philosophy from

Presidency College, Calcutta University, has been a

Director of Rallis since June 2004. He serves as the

Chairman and MD of Oriental Insurance Co Ltd and the

National Insurance Co Ltd and as the MD of General

Insurance Corporation of India. In a career spanning over

37 years in the Insurance Industry, Mr. Banerjee played

an important role in the establishment, growth and

consolidation of the non-life Insurance sector in India.

Bharat Vasani, Director

Vasani, BCom, LLB and Member of the Institute of

Company Secretaries of India, has been additional

Director of Rallis India since March, 2007. He serves as

Group General Counsel of the Tata Group and has been

with Tata Sons since December 2000. With over 28 years'

experience as a corporate lawyer, Vasani has worked

with Phillips India Ltd, NOCIL and Dow Chemical

International Ltd. He. He serves as Director of Tata Sky

Ltd, Infiniti Retail Ltd, Tata Securities Ltd, TML Financial

Services Ltd, Tara Systems & Technologies Ltd.

Prakash Rastogi, Director

Rastogi is an Independent Non-Executive Director of

Rallis India. He was till recently, the Vice Chairman and

Managing Director of Clariant India Ltd. He worked with

Sandoz India from 1974 till 1994 when he was Vice

President and Head of the Chemicals Division before it

was de-merged to become Clariant.

Company description

Rallis India Limited (Rallis), a subsidiary of Tata Chemicals (50.8% stake), is the 2nd

largest domestic crop protection

company in India. A comprehensive product portfolio of pesticides, seeds (strengthened with Metahelix acquisition)

and plant growth nutrients, strong relations with farmers (through initiatives like Rallis Kisan Kutumba) and

pan-india distribution network covering 80% districts aided by 1,500 dealers and 40,000 retailers gives Rallis a

strong edge over its peers. Further, the company also enjoys credible presence in international markets.

During FY11, Rallis derived ~96% (73% domestic, 23% from exports) revenues from pesticides and ~2% each from

selling plant growth nutrients and seeds. Going ahead, Rallis is looking to strengthen its progress under Rallis poised

agenda to broad-base its revenue mix and emerge as a complete agri-inputs solution provider (Seeds, PGN, specialty

fertilisers and farming services).

Rallis India

Cro

p P

rote

cti

on

39 39 Elara Securities (India) Private Limited

Coverage History

Date Rating Target Price Closing Price

1

4-Jan-2012 Buy INR170 INR121

Guide to Research Rating

BUY Absolute Return >+20%

ACCUMULATE Absolute Return +5% to +20%

REDUCE Absolute Return -5% to +5%

SELL Absolute Return < -5%

40

60

80

100

120

140

160

180

200

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12

Not Covered Covered

1

Rallis India


Notes


Glo

ba

l M

ark

ets

Re

sea

rch


Going one up with a niche model

Unique and differentiated business model

PI Industries (PIIL) is one of the leading players in crop protection

industry and largely operates in two core segments – agri-inputs and

custom synthesis and manufacturing (CSM). Unlike peers, PIIL has

undertaken a conscious strategy to develop a no-conflict business

model by staying away from aggressively selling generics and

competing directly with the MNCs. With utmost respect for IPs, PIIL has

developed strong relations with MNCs which it leverages to in-license

molecules to sell in domestic markets and provide custom synthesis

solutions to MNCs for their patented molecules.

Niche portfolio and pipeline to aid ~25% CAGR in agri-inputs

In its agri-inputs division, PIIL manufactures/markets a niche portfolio

of agro-chemicals, specialty fertilisers and plant nutrients (24 products

including 5-6 in-licensed molecules). Over FY12E-14E, we expect PIIL to

register ~25% CAGR in agri-inputs revenues driven by volume

expansion in existing products like Nominee Gold and Biovita,

expansion of distribution network and a strong pipeline of in-licensed

products (2 launches each year over FY12E-14E).

Strong order book and new facility to drive ~33% CAGR in CSM

Over the last decade, PIIL has emerged as the largest CSM player in

agro chemicals. We believe the company’s CSM business is unique and

enjoys strong competencies as its product pipeline in CSM is largely

focussed on patented, high value, complex chemistry and early stage

molecules (longer life cycles). Over FY12E-14E, we are modeling CSM

division revenues to grow at a CAGR of ~33% driven by – 1) unique

no-conflict business model backed by utmost respect for IPs, 2) strong

relations with MNCs, 3) healthy and growing order book of

USD325mn (6x FY11 revenues) and 4) upcoming facility to start in

Q1FY13 (can support INR2.5-3bn revenues at peak levels).

Valuation We initiate coverage on PIIL with a Buy rating and a Target Price of

INR669 based on P/E of 12x (25% discount to Rallis) to Sept-13 EPS

of INR55.7 indicating an upside of ~36%. Over the last 2 years, PIIL

has witnessed significant re-rating driven by its unique no-conflict

model, success of Nominee Gold, strong pipeline of in-licensed

products, sustained order book scale up in CSM business and

exponential growth in earnings. Going ahead, we expect the

re-rating to sustain driven by ~1) robust ~46% CAGR in earnings

over FY12E-14E, 2) strong return ratios in excess of ~30% and

3) modest FCF generation over FY12E-14E.

PIIL 1 yr fwd P/E bands


Key Financials (Standalone) Y/E Mar (INR mn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)

FY10 5,417 17.3 860 15.9 409 77.3 16.3 33.4 22.5 30.2 16.1

FY11 7,186 32.6 1,225 17.0 641 56.6 25.6 35.3 26.1 19.3 12.0

FY12E 8,652 20.4 1,482 17.1 756 18.0 30.2 27.6 24.6 16.3 9.6

FY13E 11,275 30.3 1,985 17.6 1,188 57.1 47.4 30.5 28.3 10.4 7.0

FY14E 14,079 24.9 2,528 18.0 1,604 35.0 64.0 31.3 32.2 7.7 5.1



Initiating Coverage

PI Industries


Upside : 36%


Key data*

Bloomberg /Reuters Code PI IN/PIIL.BO

Current /Dil. Shares O/S (mn) 25/25



Face Value (INR) 5

1 US$= INR53


Price & Volume

Source: Bloomberg


Promoter 71.3 71.3 63.7 63.7



General Public 9.0 9.4 8.6 7.9

Source: BSE


Sensex 0.6 (15.3) (21.8)


Rallis India (30.5) (21.7) (13.8)



Source: Bloomberg

0

100

200

300

400

500

600

700

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct-

09

De

c-0

9

Fe

b-1

0

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct-

10

De

c-1

0

Fe

b-1

1

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct-

11

De

c-1

1

(IN

R)

15x

12x

9x

6x

0

200

400

600

800

200

300

400

500

600

700


Vol. in 000s (RHS) PI Industries (LHS)

PI Industries


Valuation trigger


Valuation overview


Standalone PAT Sept -2013 (INR mn) 1,396


EPS Sept-2013E 55.7


Fair value 669

CMP 493



Valuation driver – PIIL one year forward P/E chart


Investment summary

Unique no-conflict business model –

one of its kind in crop protection

industry

Strong portfolio of in-licensed products

backed by robust pipeline (2 new

launches each year over FY12-14)

Strong order book of USD325mn in

CSM business (6x FY11 revenues)

lending high revenue visibility.

Valuation trigger

1. Upcoming facility in CSM to start in

Q1FY13, to support INR2.5-3bn

revenues at peak levels (2x FY11).

2. Margins to expand over FY12E-14E by

90bps driven by higher contribution

from in-licensed products and scale up

in CSM business.



FY12E-14E

Key risks




Delay in upcoming CSM facility

Any order cancellation in existing CSM

order book

Our assumptions

We have modelled in 28% CAGR in


Agri-inputs revenues to grow ~25%

CAGR driven by volume expansion in

existing products and new launches

CSM business to grow a strong ~33%

CAGR in revenues driven by robust

order book and upcoming CSM facility

0

100

200

300

400

500

600

700

800

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-1

0

Se

p-1

0

No

v-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-1

1

Se

p-1

1

No

v-1

1

Jan

-12

Ma

r-1

2

Ma

y-1

2

Jul-1

2

Sep

-12

No

v-1

2

Jan

-13

Margins to expand over FY12E-14E by 90bps driven by higher contribution from

in-licensed products and scale up in CSM business



1

2

3

Upcoming facility in CSM to start in Q1FY13, to support INR2.5-3bn revenues at peak levels

(2x FY11)

0

2

4

6

8

10

12

14

16

18

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct-

09

De

c-0

9

Fe

b-1

0

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct-

10

De

c-1

0

Fe

b-1

1

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct-

11

De

c-1

1

PI Industries

Cro

p P

rote

cti

on


Standalone Financials (Y/E Mar) Income Statement (INR mn) FY11 FY12E FY13E FY14E

Net Revenues 7,186 8,652 11,275 14,079

EBITDA 1,225 1,482 1,985 2,528


OPBIDTA 1,232 1,495 2,001 2,547


EBIT 1,080 1,319 1,739 2,252


PBT 898 1,131 1,584 2,138

Less :- Taxes 257 375 396 535

Adjusted PAT 641 756 1,188 1,604

Add/Less: - Extra-ordinaries (0) 298 - -

Reported PAT 641 1,054 1,188 1,604



Reserves 1,913 3,241 4,290 5,711

Borrowings 2,484 2,030 1,720 1,270



Gross Block 3,591 4,272 5,011 5,166

Less:- Accumulated Depreciation 1,073 1,249 1,511 1,806

Net Block 2,518 3,024 3,500 3,360

Add:- Capital work in progress 321 427 125 116

Investments 20 20 20 20

Net Working Capital 2,055 2,249 2,814 3,933

Other Assets - - - -

Total Assets 4,913 5,719 6,458 7,429


Cash profit adjusted for non cash items 1,029 1,444 1,617 2,052


Operating Cash Flow 159 1,212 998 1,403

Less:- Capex (913) (788) (437) (146)

Free Cash Flow (754) 424 562 1,257

Financing Cash Flow 781 (406) (553) (704)

Investing Cash Flow 6 11 15 17

Net change in Cash 32 29 23 570



Revenue Growth 32.6 20.4 30.3 24.9

EBITDA Growth 42.5 21.0 33.9 27.4

PAT Growth 56.6 18.0 57.1 35.0

EBITDA Margin 17.0 17.1 17.6 18.0

Net Margin 8.9 8.7 10.5 11.4


Net Debt/Equity (x) 1.1 0.6 0.4 0.1

ROE (%) 35.3 27.6 30.5 31.3

ROCE (%) 26.1 24.6 28.3 32.2



EPS Growth (%) 56.6 18.0 57.1 35.0

DPS (INR/Share) 2.2 3.0 4.8 6.3

P/E Ratio (x) 19.3 16.3 10.4 7.7

EV/EBITDA (x) 12.0 9.6 7.0 5.1

EV/Sales (x) 2.1 1.6 1.2 0.9

Price/Book (x) 5.2 3.7 2.8 2.1

Dividend Yield (%) 0.5 0.6 1.0 1.3






Return ratios


17.0 17.1

17.6

18.0

17

17

18

18

19

0

5,000

10,000

15,000


(%)

(IN

R m

n)


56.6

18.0

57.1

35.0

0

10

20

30

40

50

60

0

500

1,000

1,500

2,000


(%)

(IN

R m

n)


35.3

27.6

30.5

31.3

26.1 24.6

28.3

32.2

20

25

30

35

40


ROE (%) ROCE (%)

PI Industries


Unique and differentiated business model in crop protection industry

PI Industries (PIIL) is one of the leading players in crop

protection industry and largely operates in two core

segments – agri-inputs (primarily dealing in agro

chemicals, specialty fertilisers and plant nutrients) and

custom synthesis and manufacturing (CSM), which

involves process research and contract manufacturing

activities. With more than 50 years of brand history,

strong distribution network of 25,000 retailers and 4,500

distributors, niche portfolio of 24 products and exclusive

tie-ups with several MNCs for distribution in India, PIIL

has established itself as one of the top five domestic crop

protection companies.

Focussing on core business of agri-inputs and CSM

Over FY12E, we expect PIIL to clock ~62% of revenues

from agri-inputs and ~38% from CSM. It is notable that

PIIL divested its polymer compounding division in April

2011 to French specialty chemical MNC Rhodia SA for

INR0.73bn. Set up in the 1990s, polymer division

contributed around ~10% of revenues in FY11. While the

business was witnessing modest growth in revenues, its

margins (~8-10%) were under pressure due to high

volatility in raw material prices. Hence, PIIL divested the

business in order to increase its focus on its core

competencies of agri-inputs and CSM and reduce debt

which had risen due to capex in core business.

Exhibit 1: Post divestment of polymer division,

agri-inputs constitutes ~62% of PIIL’s revenue in FY12


Unique no-conflict business model has yielded significant results over FY07-11

Unlike its peers engaged in selling generics with a

portfolio of 70-80 products, PIIL has undertaken a

conscious strategy to develop a no-conflict business

model whereby it has sacrificed significant revenue

potential in agri-inputs by staying away from

aggressively selling generics (PIIL has a niche portfolio of

24 products only) and competing directly with MNCs in

the domestic and export markets. With utmost regard for

IPs, PIIL has developed strong relations with MNCs which

it leverages to in-license molecules to sell in domestic

markets and provide custom synthesis solutions to MNCs

for their patented molecules.

Exhibit 2: PIIL has developed a unique no-conflict

business model with high regard for IPs


Its unique business model has yielded exponential

performance for PIIL over the last five years whereby it

has witnessed 23%, 43% and 95% CAGR in revenue,

EBITDA and PAT over FY07-11.

Exhibit 3: Driven by its no-conflict business model,

PIIL has witnessed exponential growth over FY07-11


Agri Inputs 62%

CSM 38%

45 63

231

409

641

0

100

200

300

400

500

600

700

0

5

10

15

20

25

30

35


(IN

R m

n)

(Yo

Y %

)

PAT (RHS) Sales (LHS)

CSM Agri Inputs

Deals in agro chemicals,

plant nutrients and

specialty fertilisers

Has a niche portfolio of

24 products

Over 50 years of

experience, 25,000+

retail base and 4,500

distributors

Has consciously stayed

away from MNC domain

and aggressively selling

generics to build a no-

conflict business model

Strong process research

and low cost

manufacturing with

utmost respect for IPs

Significant relations with

MNCs

Order book of

USD325mn - 6x FY11

sales

Product pipeline largely

focused on patented,

high value, complex

chemistry and early

stage molecules (longer

life cycles)


Unique and differentiated business model in crop protection industry

Niche portfolio and strong pipeline to drive growth in agri-inputs

Growth in CSM to be aided by strong order book and upcoming facility

PI Industries

PI Industries

Cro

p P

rote

cti

on


Niche portfolio and strong pipeline to drive growth in agri-inputs

Under its agri-inputs division, PIIL manufactures and

markets various agro-chemicals, specialty fertilisers and

plant nutrients from its 3 formulations and 2 technical

facilities based in Jammu and Panoli, Gujarat.

However, unlike its peers which sell a basket of 70-80

products, PIIL has a niche portfolio of 24 products which

include 5-6 in-licensed molecules (tie ups with MNCs to

co-market their products in India). Top 10 products of

PIIL account for 80% of revenue and segment-wise it

derives ~50% revenue from insecticides, ~30% from

herbicides and rest from fungicides, plant nutrients and

specialty fertilisers.

Exhibit 4: PIIL derives ~50% of its revenues from

insecticides but herbicides is growing faster


PIIL sells products that are innovative and need concept

selling through strong technical knowledge. The

formulation quality and physical appearance are

markedly different from the competing same molecule

formulations (e.g. suspension color, shine of the

products). Hence, most of its brands occupy No1 or No2

slot in their respective categories. Some of its key

products include Nominee gold (rice herbicide –

INR1bn+ revenues), Biovita (plant nutrient – INR0.5bn+

revenues), Foratox (insecticide) and Roket (insecticide).

Exhibit 5: Product portfolio of PIIL in agri-inputs

Segment Key Brands Key Crops

Insecticides Foratox, Jumbo, Lepido, Fosmite, Simba, Maxima

Cotton, Rice, Fruits & Vegetables

Herbicides Nominee Gold, Solaro, Jupiter, Alcor

Rice, Wheat, Soybean & Sugarcane

Fungicides Kitazin, Sanit Rice, Potato, Grapes, Chillies, Fruits & Vegetables

Plant Nutrients

Biovita, Dispel Multi-crop


Higher mix of in-licensed products key to growth

Agri-inputs division clocked revenue of INR4.1bn in FY11

and accounted for ~64% of overall revenues (excluding

polymer division sales). While ~60% of revenues came

from generics (largely where PIIL also manufactures the

technical), remaining ~40% came from in-licensed

products which are all purchase and sales transactions.

PIIL purchases these products from its principals at a

certain price and formulates/manufactures and packs

them under its own brand to sell in Indian markets at

PIIL’s price point. Most of these deals have an exclusive

license lasting 8-10 years minimum.

Exhibit 6: PIIL derives ~40% of revenues from higher

margin in-licensed products (3 years ago was ~10%)


Strong relations with MNCs: PIIL sells around 5-6

in-licensed products in tie-ups to MNCs like Bayer,

BASF and Kumiai Chemicals.

Success of Nominee Gold indicates huge

potential: The potential of in-licensed products can

be gauged from success of Nominee Gold, a rice

herbicide, which was launched in FY10 in a tie up

with Kumiai Chemicals and has become a

blockbuster in just two years clocking over ~INR1bn

revenues.

Two new launches in FY12 with Bayer and BASF:

PIIL launched two new in-licensed products in FY12 -

one insecticide launched in tie-up with Bayer called

Voltage (Spiromesifen) and one fungicide launched

in tie-up with BASF called Clutch. Both are high

potential products with insecticide catering to crops

like tea, chillies, etc. and fungicide catering to

vegetables.

Strong pipeline: PIIL has filed for registration of 3

new molecules (expected to commercially launch in

FY13) and signed 4 new agreements with respective

patent holders to evaluate these products in India.

Overall PIIL has a pipeline of 7-8 new molecules and

the management expects the contribution of

in-licensed products to rise to ~50% and gradually to

70%-80% over a 3-5 year period.

Insecticides 50%

Herbicides 30%

Others 20%

Generics 60%

In-licensed 40%

PI Industries


Over FY12E-14E, we expect PIIL to register ~25% CAGR

in revenues of agri-inputs division driven by volume

expansion in key existing products like Nominee Gold

and Biovita, expansion of distribution network in new

markets and a strong pipeline of in-licensed products

(expect 2 new launches each year over FY12E-14E).

Exhibit 7: Agri inputs division to clock ~25% CAGR in



Growth in CSM to be aided by strong order book and upcoming facility

Apart from selling agri-inputs, PIIL also operates CSM

division which entails dealing in custom synthesis (CSM)

and contract manufacturing (CRAMs) of chemicals

including techno commercial evaluation of chemical

processes, process development, lab & pilot scale up as

well as commercial production.

Over the last decade, PIIL has emerged as the largest

CSM player in agro chemicals driven by its unique

no-conflict model, utmost regard for IPs and strong

relations with MNCs across geographies (especially

Europe and Japan). During FY06-11, CSM division has

witnessed revenue CAGR of ~35% and clocked revenue

of ~INR2.3bn accounting for ~36% revenues in FY11

(excluding polymer division).

Exhibit 9: CSM division has witnessed revenue CAGR

of ~35% over FY06-11


Unique model backed by strong competencies

PIIL’s CSM business is unique and enjoys strong

competencies vis-à-vis other CRAMs players (toll

manufacturers) as PIIL’s product pipeline in CSM is largely

focussed on patented, high value, complex chemistry

and early stage molecules (longer life cycles).

3.0

4.1

5.3

6.8

8.3

0

5

10

15

20

25

30

35

40

0

1

2

3

4

5

6

7

8

9


(%)

(IN

R b

n)

Revenue (LHS) YoY (RHS)

0.5 0.7

1.4

1.9

2.3

0.0

0.5

1.0

1.5

2.0

2.5

0

10

20

30

40

50

60

70

80

90


(INR

bn

)

(%)

Revenue (RHS) YoY (LHS)

Exhibit 8: How CSM business works...and PI lends value

General work-flow in CSM

Customer enquiry

Pre-feasibility study

Sign secrecy agreement

Process evaluation

Process & cost review

Sample validation

SOP & validation

Customer approval/agreement

Bench scale trials

Desktop costing

Customer approval

Pilot/Kilo lab scale up

Detailed plant engg.

Plant erection & installing

Raw material procurement

Commercial production

Typical order flow from inception to commercialisation

Dec-09

Feb-10

Mar-10

Jun-10

Aug-10

Nov-10

Apr-11

Enquiry received

Sample approved by

customer

1st sample sent

to customer 1

st Commercial

Order (5MT)

3rd

Commercial Order (200MT)

(Supply up to Mar-12)

2nd

Commercial Order (57 MT) (Supply up to

Mar-11)

Signed Agreement of

1500 mt. ($36m) for 3 yrs)


PI Industries

Cro

p P

rote

cti

on


Strong process research capabilities: PIIL is well

supported by strong research capabilities in process

research scale up and contract manufacturing and

world class research and manufacturing set up. It

has 5 multi-product plants at its Panoli facility

supported by captive gas based power plant. It also

has a dedicated R&D facility at Udaipur and strong

scientific capabilities including 100 scientists.

Involvement from early stage in life cycle: PIIL

essentially works with innovators in the area of

process research for newly discovered molecules for

scale up and commercialisation. This positions PIIL at

the early stage in the life cycle of a molecule

enabling it to capitalise on complete product life

cycle. PIIL is the only CSM business in the country

where up to 95% of the molecules are patented or

are at an early stage of commercialisation.

Generally, 1st/2nd supplier: As a prudent strategy

innovator companies keep 2-3 sources across

geographies mainly for IP protection and

compliance. PIIL enjoys the status of 1st/2nd source

supplier for most of its molecules under contract.

Strong order book of ~USD325mn

PIIL has a strong order book of ~USD325mn, as on

Q2FY12, in its CSM division executable over next 2-4

years. This is close to ~6x FY11 CSM revenues of

INR2.3bn. Order breakup in terms of geography stood at

– 65%-70% from Europe, 20% from Japan and rest from

other continents.

Exhibit 10: Majority clients in CSM are either

European or Japanese players


Currently, majority clients are agro-chem (60%-70%).

However, revenues from imaging, electronics and

pharma are on the rise. On an average, at any given

point in time, PIIL has around 10-12 products at

commercial stage and 24-25 products under R&D phase.

Average revenue potential for PIIL in CSM for a product,

on average, is USD5-20m. Generally, more than 60% of

products under development and process research move

to commercial phase (manufacturing).

Upcoming facility at Jambusar to back order book

PIIL is setting up a new facility at Jambusar, Gujarat. It

has already taken 22.3 acre land in Sterling SEZ and

expected capex for the facility is ~INR1.25bn. The plant is

expected to commence operations by Q1FY13 and will

enjoy full income tax and excise benefits. PIIL has already

tied up with customers/contracts for this plant as

indicated by the scale up in order book.

Management has highlighted that the upcoming facility

at peak utilisation can generate around ~INR2.5-3bn in

revenues (2-2.5x asset turnover). Hence, with existing

investment of INR1.5-2bn in CSM division coupled with

Jambusar facility, PIIL is well placed to generate

~INR6-7bn at peak utilisation levels – 2.5x-3x FY11

revenues.

Strong 33% CAGR in CSM revenues over FY12E-14E

Over FY12E-14E, we are modelling CSM division

revenues to grow at a CAGR of ~33% driven by –

1) unique no-conflict business model backed by utmost

respect for IPs, 2) strong relations with MNCs, 3) healthy

and growing order book of USD325mn (6x FY11

revenues) and 4) upcoming facility to start in Q1FY13

(can support INR2.5-3bn revenues at peak levels).

Further, we highlight volume commitment and

take-or-pay clause in supply agreement ensures risk of

failure of a molecule lies with the innovator and PI

receives fixed return on investment.

Exhibit 11: Modeling CSM division revenues to grow

at a CAGR of ~33% over FY12E-14E


Europe 65%

Japan 20%

Others 15%

1.9 2.3

3.3

4.5

5.8

0

5

10

15

20

25

30

35

40

45

0

1

2

3

4

5

6

7


(%)

(IN

R b

n)


PI Industries


Weak H2FY12 but expect recovery in earnings in FY13-14E

During H1FY12 PIIL posted a strong growth of ~ 43%

YoY in revenues (~60% like-to-like excluding polymer

revenues) aided by a robust ~36% YoY growth in

agri-inputs (grew only ~10%-12% in Q2FY12 due to poor

mix owing to erratic monsoons) and ~135% YoY growth

in CSM division (partially aided by low base) on account

of robust commercial production of existing pipeline.

Recurring earnings (excluding exceptional gain of

INR300mn from sale of polymer division) grew a robust

~38% YoY aided by ~120bps expansion in margins

(despite weaker margins in agri-inputs in Q2FY12 due to

weaker product mix) due to higher contribution of CSM

business (enjoys higher margins vs. agri-inputs).

However, owing to significant deficiency (~50% below

LPA) of post season monsoons (Oct-Dec) in key crop

protection consuming state of Andhra Pradesh leading

to lower paddy acreage and squeeze in farmer

profitability due to crash in prices of vegetables like

onions and potatoes, we expect PIIL to post weaker

H2FY12E with ~3% revenue growth (14% like-to-like)

and ~4% earnings growth as – 1) base effect catches up

in CSM division (modeling in just ~5% YoY growth in

H2FY12E), 2) OPM contracts ~100bps due to weaker

revenue growth and poor product mix (lower usage of

herbicides/fungicides).


and earnings



FY12E-14E, we expect PIIL to post a robust ~28% CAGR

in revenues driven by – 1) 25% CAGR in agri-inputs

business aided by volume expansion in existing products

and robust pipeline of new products and 2) ~33% CAGR

in CSM division aided by unique no-conflict business

model, strong order book of USD325mn and upcoming

facility at Jambusar in Q1FY13.

Exhibit 13: Revenue CAGR of ~28% over FY12-14E

aided by CAGR of 25% in agri-inputs and 33% in CSM


Exhibit 14: Key revenue growth assumptions


Revenue (INR mn)

Agri-Inputs 4,120 5,333 6,811 8,275

CSM 2,320 3,307 4,464 5,803

Polymer 746 12 - -

Total Revenue 7,186 8,652 11,275 14,078

YoY Growth (%)

Agri-Inputs 37.5 29.5 27.7 21.5

CSM 21.5 42.5 35.0 30.0

Polymer 45.9 - - -

Total Revenue 32.6 20.4 30.3 24.9

% of Total

Agri-Inputs 57 62 60 59

CSM 32 38 40 41

Polymer 10 0 - -


Margins to expand ~90bps over FY12-14E aided by rising mix of CSM revenues and in-licensed products

Over the period FY12E-14E, we expect margins to

expand by 90bps (management guidance of ~100-

200bps) from 17.1% in FY12E to 18% in FY14E driving a

robust ~31% growth in EBITDA aided by:

Higher contribution from in-licensed products in

agri inputs – Margins from in-licensed products are

at ~25%-30% double of those in generics at ~15%.

Driven by launches and growth in existing in-

licensed products, we expect contribution of in-

43

3

38

4

0

5

10

15

20

25

30

35

40

45

H1FY12 H2FY12

(%)


5,4

17

7,1

86

8,6

52

11

,27

5

14

,07

9

0

5

10

15

20

25

30

35

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


(%)

(IN

R m

n)



Earnings to pick up post weak H2FY12, model in ~46% CAGR over FY12E-14E

Unique model and strong order book to sustain valuations


PI Industries

Cro

p P

rote

cti

on


licensed products in overall agri-inputs to rise to

~50% by FY14E boosting divisional margins.

Rising contribution of CSM – CSM business enjoys

~20% margins, around ~300-400bps higher than

margins in agri-inputs which stand at ~16.5%-17%.

Over FY12E-14E, we expect contribution of CSM to

overall revenues to rise from ~38% to ~41% firming

up margins.

Exhibit 15: Modelling in recovery in agri-inputs

margins and stable margins in CSM over FY12-14


Exhibit 16: Overall OPM to expand 90bps YoY driving

robust ~31% CAGR in EBITDA


Earnings growth strong at ~46% CAGR driven by lower tax and interest costs

During the period FY12E-14E, we expect PIIL to post a

strong ~46% CAGR in earnings aided by – 1) ~25%

CAGR in revenues, 2) 90bps expansion in margins,

3) ~200-250bps savings in tax rate due to scale up at

upcoming facility in Jambusar which will benefit from

income tax and excise benefits, 4) halving of interest

costs driven by reduction in debt due to repayment (on

account of cash flow received from sale of polymer

division) and high free cash flow generation over

FY12E-14E.

Exhibit 17: Model in strong earnings CAGR of ~46%

over FY12E-14E post 18% YoY growth in FY12



and net margin expansion over FY12E-14E F

Y1

2-1

4 n

et

ma

rgin

exp

an

sio

n


21.5% 24.5% 27.5% 30.5% 33.5%

205bps 55.1 57.8 60.6 63.5 66.5

235bps 56.6 59.4 62.3 65.3 68.3

265bps 58.1 61.0 64.0 67.1 70.2

295bps 59.7 62.6 65.7 68.8 72.0

325bps 61.2 64.2 67.4 70.6 73.9



Over the last 3 months, PIIL has witnessed a correction of

~15% significantly underperforming Sensex (down

~6%). We attribute this correction to concern over a

weaker H2FY12. We highlight that we have already

factored in a weaker H2 but do not expected it to persist

in FY13 unless disrupted by a weak monsoon and

sustained steep fall in crop prices (especially fruits and

vegetables).

Exhibit 19: PIIL has witnessed steep correction over

the last 3 months retracing back to P/E of 10-12x


15.6

16.6

15.5

16.4 16.7

18.5

20.0 19.9 19.8 20.0

15

16

17

18

19

20

21


(%)

Agri-Inputs CSM

86

0

1,2

25

1,4

82

1,9

85

2,5

28

15.9

17.0 17.1

17.6 18.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

15

515

1,015

1,515

2,015

2,515

3,015


(%)

(IN

R m

n)


40

9

64

1

75

6

1,1

88

1,6

04

0

10

20

30

40

50

60

70

80

90

15

215

415

615

815

1,015

1,215

1,415

1,615

1,815


(%)

(IN

R m

n)

PAT (LHS) YoY (RHS)

0

2

4

6

8

10

12

14

16

18

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct-

09

De

c-0

9

Fe

b-1

0

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct-

10

De

c-1

0

Fe

b-1

1

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct-

11

De

c-1

1

(x)

PI Industries


Over the last 2 years, PIIL has witnessed significant

re-rating driven by success of a unique no-conflict model,

strong pipeline of in-licensed products and blockbuster

success of Nominee Gold, sustained order book scale up

in CSM business and exponential growth in earnings.

Exhibit 20: Over the last 2 years, PIIL has witnessed

significant re-rating to a P/E band of 12-15x


Going ahead, we expect the re-rating in PIIL to sustain

driven by ~1) robust ~46% CAGR in earnings over

FY12E-14E, 2) strong return ratios in excess of ~30% and

3) modest FCF generation over FY12E-14E as major

capex (in upcoming CSM facility) will be incurred in FY12.

We initiate coverage on PIIL with a Buy rating and a

Target Price of INR669 based on P/E of 12x (25%


upside of ~36%.

Exhibit 21: Major capex to get complete in FY12,

expect modest FCF generation over FY12E-14E


Exhibit 22: Strong return ratios to support re-rating in

valuations


Upsides from tie-up with Sony not factored in our numbers but holds long-term potential

In January 2011 PIIL set up a joint research laboratory at

Udaipur (first of its kind) with one of the largest

electronics companies in the world - Sony Corporation of

Japan for carrying out research in the area of synthetic

organic chemicals for applications in the electronics

industry.

We believe this is a unique initiative further

strengthening the credibility of PIIL in CSM business.

However, we have not factored in any numbers from the

venture and the same holds an upside element to our

estimates.

0

100

200

300

400

500

600

700

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct-

09

De

c-0

9

Fe

b-1

0

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct-

10

De

c-1

0

Fe

b-1

1

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct-

11

De

c-1

1

Sh

are

Pri

ce

(IN

R)

15x

12x

9x

6x

91

3

78

8

43

7

14

6

15

9

1,2

12

99

8 1

,40

3

(7

54

)

42

4

56

2

1,2

57

(1,000)

(500)

0

500

1,000

1,500

2,000


(IN

R m

n)


35.3

27.6

30.5

31.3

26.1 24.6

28.3

32.2

20

22

24

26

28

30

32

34

36

38


ROE (%) ROCE (%)

PI Industries

Cro

p P

rote

cti

on



Salil Singhal, Chairman

Singhal has lead PIIL since 1979. A reputed agro

chemical leader, he has served as the chairman of

Pesticides Association of India (now Crop Care

Federation of India) for 20 years, a member of the

Executive Committee of FICCI as also chairman of its

Environment Committee for 5 years. Currently, he is Co-

Chairman of CII National Council on Agriculture, and has

been a member of the National Council of CII for the past

5 years. Singhal also serves on the Boards of Wolkem

India Ltd, Historic Resorts Hotels Pvt Ltd, The Lake Palace

Hotels and Motels Pvt Ltd, Secure Meters Ltd, Somany

Ceramics Ltd, PILL Finance & Investment Ltd, Usha Martin

and Secure International Holdings Pte Ltd.

Mayank Singhal, MD & CEO

An Engineering Management Graduate from the UK, he

joined PIIL in 1996. He was appointed as Jt. MD in 2004

and MD & CEO effect from December, 2009. Singhal has

worked at plant level for 2 years and has been

responsible for the rapid growth and expansion of the

Company’s manufacturing and marketing. He is also a

Director on the Boards of PI Life Science Research Ltd,

PILL Finance and Investment Ltd and Samaya Investment

and Trading Pvt Ltd.

Anurag Surana, Whole-time Director

Surana joined PIIL in 1995. He has handled the polymer

compounding business and later managed the entire

manufacturing operations of the Company at Panoli. His

current responsibilities include managing the company’s

custom synthesis business and overseeing

manufacturing operations and projects. He is also a

Director on the Boards of PI Life Science Research Ltd,

PILL Finance and Investments Ltd and WILL Investments

Ltd.

P N Shah, Director

Past President of the Institute of Chartered Accountants

of India (ICAI), Shah is a partner of Shah & Co, a CA Firm

and has an in-depth understanding of various Corporate

and Taxation Laws. Currently, he is also on the Board of

Indo Count Industries Ltd, Secure Meters Ltd, Taparia

Tools Ltd, Wolkem India Ltd and Pranavaditya Spinning

Mills Ltd.

Narayan K Seshadri, Director

A Chartered Accountant, Seshadri started his career with

Arthur Anderson in the business consultancy area.

Subsequently, he joined KPMG and became the

Managing Partner of the business advisory practice of

the firm in India. His expertise is in the areas of strategy

planning good management practices and financial

engineering. He is also on the Board of Halcyon

Resources and Management Pvt Ltd, Development Credit

Bank, DHFL Venture Capital India Pvt Ltd, HGB Holdings

Pvt Ltd, Magma Fincrop Ltd, Kalpataru Power

Transmission Ltd, WABCO TVS India Ltd, SBI Capital

Markets Ltd, Radiant Life Care Pvt Ltd., Halcyon

Enterprises Pvt Ltd, IRIS Business Services Ltd and TVS

Investments Ltd.

Raj Kaul, Director

While Kaul began his career with NELCO a TATA

Company, he joined the agro chemical business world at

Ciba India Ltd, and later moved to Bayer India now

known as Bayer Crop Sciences where he was its

Executive Director & CEO for their crop protection

business. He was later transferred to Bayer AG

(Leverkusen, Germany) and headed M&A division of M/s.

Bayer Crop Sciences. Under his tenure, he concluded

over 200 M&A transactions for Bayer Crop Sciences in

the area of agro chemicals and Bio-technology, and

brings his global knowledge and understanding of the

agro chemical business to the Board. Currently, he is also

on the Board of Gowan Company, Yuma in Arizona

(USA).

Company description

Incorporated in 1947, PI Industries Limited (PIIL), erstwhile Pesticides India, was set up by late Mr P.P Singhal as

edible oil refinery unit and later ventured into agro chemicals formulations business. PIIL is one of the leading

players in crop protection industry and largely operates in two core segments – agri-inputs (primarily dealing in

agro chemicals, specialty fertilisers and plant nutrients) and custom synthesis (CSM), which involves process research

and contract manufacturing activities.

With more than 50 years of brand history, strong distribution network of 25,000 retailers and 4,500 distributors,

niche portfolio of 24 products and exclusive tie-ups with several MNCs for distribution in India, PIIL has established

itself as one of the top five domestic crop protection companies. During FY12, we expect PIIL to derive ~62%

revenue from Agri-inputs and ~38% from CSM. We highlight, PIIL divested its polymer compounding division in

April 2011 to French specialty chemical MNC Rhodia SA for a consideration of INR0.73bn.

PI Industries


Coverage History


1







0

100

200

300

400

500

600

700


Not Covered Covered

1


Glo

ba

l M

ark

ets

Re

sea

rch


Partnering its way to success

Strong portfolio and distribution to act as a base for growth

Dhanuka Agritech (Dhanuka) is solely into selling formulations in the

domestic markets. It enjoys a strong pan India distribution network

with 6,500 direct accounts and a reach of 10mn farmers. Over the

years, Dhanuka has developed strong relations with farmers via

various connect initiatives imparting technical and product knowledge

to boost pesticide consumption across segments and crops. With a

strong portfolio of 80+ brands and presence across all major crops,

Dhanuka features amongst the top five agro chemical players in the

branded domestic market.

Contribution of herbicides to rise to ~39% by FY14E

While insecticides constitute the largest chunk (48%) of revenues for

Dhanuka, herbicides has emerged as a faster growing segment

(owing to success of Targa Super, accounts for ~18-20% of revenues)

for Dhanuka and we expect the same trend to continue aided by

rising use of herbicides due to labour shortages, volume expansion in

existing products and new launches in this segment. Hence, we expect

herbicides to register a robust ~30% CAGR over FY12E-14E and its

contribution in overall products to rise to ~39% from current ~33%.

MNC tie-ups to provide additional lever

Over the years, Dhanuka has entered into various tie-ups and strategic

alliances with global agro-chem players to market/distribute their

products in India. Dhanuka’s top 3 selling products - Targa Super (18-

20% of revenues), Caldan (10%) and Omite (5%) are all tie-ups with

MNCs and overall such tie-up products account for ~55% of revenues.

Such products enjoy better margins (~15-30%) vis-à-vis pure generics

(10-15%) and enjoy a higher acceptability amongst farmers. In FY12,

Dhanuka has already launched 4 new products under tie-ups and

Dhanuka has a high-potential product pipeline with 5-6 specialty

products to be launched over the next 2-3 years.

Valuation We initiate coverage on Dhanuka with a Buy rating and a Target

Price of INR128 based on P/E of 8x (50% discount to Rallis, ~15%

premium to its historical average of 7x P/E) to Sept-13 EPS of INR16

indicating an upside of ~41%. Going ahead, we expect Dhanuka to

sustain valuations in the range of ~7x-8x aided by – 1) strong tie-

ups with MNCs, 2) promising new product pipeline in specialty

products, 3) robust ~27% CAGR in earnings over FY12E-14E,

4) strong return ratios in excess of ~30% and 5) modest FCF

generation due to benign capex over FY12E-14E.

Dhanuka 1 yr fwd P/E bands



FY10 4,075 21.1 577 14.2 363 56.6 7.3 43.9 39.4 12.5 8.9

FY11 4,862 19.3 711 14.6 511 40.7 10.2 38.2 34.0 8.9 7.2

FY12E 5,329 9.6 755 14.2 544 6.4 10.9 28.6 28.3 8.4 6.6

FY13E 6,491 21.8 973 15.0 720 32.4 14.4 30.4 31.8 6.3 4.8

FY14E 7,809 20.3 1,197 15.3 882 22.5 17.6 29.7 33.3 5.2 3.6



Initiating Coverage

Dhanuka Agritech


Upside : 41%


Key data*

Bloomberg /Reuters Code DAGRI IN/DHNP.BO

Current /Dil. Shares O/S (mn) 50/50



Face Value (INR) 2

1 US$= INR53


Price & Volume

Source: Bloomberg


Promoter 75.0 75.0 75.0 75.0




Source: BSE


Sensex 0.6 (15.3) (21.8)


Rallis India (30.5) (21.7) (13.8)



Source: Bloomberg

0

50

100

150

200

Ap

r-0

5

Se

p-0

5

Fe

b-0

6

Jul-0

6

De

c-0

6

Ma

y-0

7

Oct-

07

Ma

r-0

8

Au

g-0

8

Jan

-09

Jun

-09

No

v-0

9

Ap

r-1

0

Se

p-1

0

Fe

b-1

1

Jul-1

1

De

c-1

1

(IN

R)

13x

10x

7x

4x

0

200

400

600

800

60

70

80

90

100

110

120


Vol. in 000s (RHS) Dhanuka Agritech (LHS)

Dhanuka Agritech


Valuation trigger


Valuation overview


Standalone PAT Sept -2013 (INR mn) 801


EPS Sept-2013E 16.0


Fair value 128

CMP 91



Valuation driver – Dhanuka’s one year forward P/E chart


Investment summary

One of the largest distribution

network in crop protection – 6,500

direct accounts and farmer reach of

10mn.

Strong portfolio of products across

segments, crops and geographies.

Strong FCF generation over

FY12E-14E as capex expected to

remain benign

Valuation trigger

1. FY13E-14E to witness launch of 3-4

new specialty molecules (2 with Nissan

and 1 with DuPont).


110bps driven by launch of new

specialty molecules and operating

leverage.



FY12E-14E

Key risks




Delay in launching new specialty

molecules

Our assumptions

We have modeled in 21% CAGR in


We expect herbicides to grow the

fastest at ~30% CAGR and its

contribution to rise to ~39% in FY14E

Model in a benign capex of

INR100-150mn (in-line with

management guidance)

40

50

60

70

80

90

100

110

120

130

140

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-1

0

Se

p-1

0

No

v-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-1

1

Se

p-1

1

No

v-1

1

Jan

-12

Ma

r-1

2

Ma

y-1

2

Jul-1

2

Sep

-12

No

v-1

2

Jan

-13

Margins to expand over FY12E-14E by 110bps

driven by launch of new specialty molecules and

operating leverage

Earnings to recover post weak H2FY12, model in

~27% CAGR over FY12E-14E

1

2

3

FY13E-14E to witness launch of 3-4 new

specialty molecules (2 with Nissan and 1

with DuPont)

0

5

10

15

20

25

Ap

r-0

4

Au

g-0

4

De

c-0

4

Ap

r-0

5

Au

g-0

5

De

c-0

5

Ap

r-0

6

Au

g-0

6

De

c-0

6

Ap

r-0

7

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Dhanuka Agritech

Cro

p P

rote

cti

on

Elara Securities (India) Private Limited 55


Net Revenues 4,862 5,329 6,491 7,809

EBITDA 711 755 973 1,197


OPBIDTA 786 815 1,045 1,254


EBIT 737 766 989 1,192


PBT 673 711 941 1,153

Less :- Taxes 161 167 221 271

Adjusted PAT 511 544 720 882


Reported PAT 511 544 720 882



Reserves 1,605 2,002 2,535 3,195

Borrowings 602 527 452 377



Gross Block 630 666 729 801

Less:- Accumulated Depreciation 247 295 352 414

Net Block 383 371 378 387


Investments 0 0 0 0


Other Assets 7 7 7 7

Total Assets 2,334 2,657 3,115 3,699


Cash profit adjusted for non cash items 614 649 818 967


Operating Cash Flow (159) 322 549 591

Less:- Capex (43) (62) (52) (66)

Free Cash Flow (203) 260 497 525

Financing Cash Flow 225 (247) (269) (302)


Net change in Cash 29 20 243 248



Revenue Growth 19.3 9.6 21.8 20.3

EBITDA Growth 23.3 6.2 28.9 23.0

PAT Growth 40.7 6.4 32.4 22.5

EBITDA Margin 14.6 14.2 15.0 15.3

Net Margin 10.5 10.2 11.1 11.3


Net Debt/Equity (x) 0.3 0.2 0.1 (0.1)

ROE (%) 38.2 28.6 30.4 29.7

ROCE (%) 34.0 28.3 31.8 33.3



EPS Growth (%) 40.7 6.4 32.4 22.5

DPS (INR/Share) 2.0 2.5 3.2 3.8

P/E Ratio (x) 8.9 8.4 6.3 5.2

EV/EBITDA (x) 7.2 6.6 4.8 3.6

EV/Sales (x) 1.0 0.9 0.7 0.6

Price/Book (x) 2.7 2.2 1.7 1.4

Dividend Yield (%) 2.2 2.7 3.5 4.2






Return ratios


14.6

14.2

15.0

15.3

14

14

15

15

16

0

2,000

4,000

6,000

8,000

10,000


(%)

(IN

R m

n)


40.7

6.4

32.4

22.5

0

10

20

30

40

50

0

200

400

600

800

1,000


(IN

R m

n)


38.2

28.6

30.4 29.7

34.0

28.3

31.8 33.3

20

25

30

35

40


ROE (%) ROCE (%)

Dhanuka Agritech


Strong portfolio and distribution network to act as a base for growth

Dhanuka Agritech, a 25 years old agro chemical

company, is solely into selling formulations (no presence

in technicals) in the domestic markets (no exports). It

enjoys a strong pan India distribution network with

6,500 direct accounts (10-15% are distributors, rest

dealers) and a reach of 10mn farmers. The company has

three state of the art facilities located at Sanand

(Gujarat), Udhampur (J&K) and Gurgaon (Haryana)

catering to the demand for Dhanuka brand of products.

Exhibit 1: Dhanuka enjoys a pan India distribution

with 6,500 direct accounts


Wide presence across segments and crops

With a strong portfolio of 80+ brands and presence

across all major crops including cotton, rice, wheat,

sugarcane, fruits, vegetables and plantation crops,

Dhanuka features amongst the top five agro chemical

players in the branded domestic market.

Dhanuka’s product portfolio includes 18 herbicides, 39

insecticides, 21 fungicides and 18 other products (Plant

growth regulators, bio-fertilisers etc.).

Exhibit 2: Dhanuka’s premium products portfolio


Exhibit 3: Paddy, pulses and vegetables account for

~65% of revenues for Dhanuka in terms of crops


In terms of geographies, West accounts for the

maximum revenues followed by South especially Andhra

Pradesh (No1 market for pesticides overall).

Exhibit 4: West is the biggest market for Dhanuka

followed by South


Paddy 27%

Pulses 20%

Vegetables 18%

Cotton 15%

Others 20%

North 22%

South 27%

East 14%

West 37%

30 Branch offices/Warehouses

6,500 Direct customers

65,000 Retail outlets

1,000 Manpower

500 Techno commercial personnel

More than 80 products

More than 400 SKUs

Jammu

Gurgaon

Sanand

Production facilities


Strong portfolio and distribution network to act as a base for growth



Dhanuka Agritech

Dhanuka Agritech

Cro

p P

rote

cti

on


Strong relations with farmers through various initiatives to support growth

Over the years, Dhanuka has developed strong relations

with farmers via various connect initiatives imparting

technical and product knowledge to boost pesticide

consumption across segments and crops.

Exhibit 5: Dhanuka’s farmer connect initiatives


Dhanuka Suvidha Kendras: In 2010, Dhanuka

entered into Agri retail business based on the

concept of franchsier-franchisee under the name of

Dhanuka Suvidha. The outlets provide quality inputs

and agri-services to farmers under a single-window

system. Dhanuka has set up 11 franchises in UP,

Uttarakhand and Gujarat and aims to extend this

concept to other states as well.

Dhanuka Chaupal: Dhanuka has established

Dhanuka Chaupal for providing soil and water

testing facilities, and training-cum-education to

farmers. With the encouraging results obtained in

Haryana, Dhanuka is looking to extend the concept

to other states in India.

Dhanuka Doctors: Dhanuka, besides engaging

prominent professionals, also engages over 2,000

Dhanuka Doctors as per need, temporarily every

year, for working closely with farmers at large. The

field activities include – on field demonstrations and

field days, educational campaigns and group

meetings, circulation of product literature and

workshop and seminars.

Dhanuka Kheti Ki Nai Takneek: Under its farming

technique campaign and integrated crop solution

for farmers, Dhanuka runs numerous initiatives

educating farmers regarding judicious use of

pesticides, rain water harvesting and adopting better

agricultural practices to increase per hectare yield.


Labour shortage, due to factors such as better and more

employment opportunities in manufacturing and service

sectors and higher allocation to government schemes

like NREGA, which provide assured employment, are

likely to drive a shift from manual weeding to higher use

of crop protection products like herbicides.

Exhibit 6: Labour shortage/rising wages due to

NREGA is driving shift towards herbicides


In FY11, Dhanuka derived 48% from insecticides, 33%

from herbicides, 13% from fungicides and 6% from other

products. While insecticides constitute the largest chunk

of revenues for Dhanuka, herbicides has emerged as a

faster growing segment (owing to success of Targa

Super, accounts for ~18-20% of revenues) for Dhanuka

and we expect the same trend to continue aided by

rising use of herbicides due to labour shortages, volume

expansion in existing products and new launches in this

segment. Dhanuka’s herbicide portfolio includes

products like Targa Super (tie-up with Nissan), Weedmar,

Craze, Qurin (tie with DuPont) and Wrap-up & Zargon

(tie-up with Dow).

Exhibit 7: In FY11, insecticides accounted for highest

chunk of revenues followed by herbicides


Farmer connect

initiatives

Dhanuka Doctors

Dhanuka Suvidha Kendras

Dhanuka Chaupals

Dhanuki Kheti ki

Nai Takneek

2.1

0

3.3

9

4.5

1

5.2

6

5.4

8

65 75

84 90

100

0

20

40

60

80

100

120

0

1

2

3

4

5

6


(INR

)

(No

of

ho

use

ho

lds

in c

r)

Employment Provided (LHS) Avg daily wages (RHS)

Insecticides 48%

Herbicides 33%

Fungicides 13%

Others 6%

Dhanuka Agritech


Hence, we expect herbicides to register a robust ~30%

CAGR over FY12E-14E and its contribution in overall

products to rise to ~39%.

Exhibit 8: Contribution of herbicides to rise driven by

success of Targa Super and new launches



Over the years, Dhanuka has entered into various tie-ups

and strategic alliances with global agro-chem players like

DuPont, FMC, Dow Agro, Chemtura, Nissan Chemical,

Sumitomo, Mitsui Japan & Hokko Japan to

market/distribute their products in India. Most of these

tie-ups are based on annual purchase contracts

(technical) from the MNC whereby Dhanuka receives the

right to market and distribute the product in India under

its own brand name.

While MNC is able to leverage Dhanuka’s pan India

distribution reach to garner higher volume off-take,

Dhanuka benefits from a wider bouquet of specialty

products addressing varied farmer needs across crops.

Exhibit 9: Leveraging on its distribution, Dhanuka

has built strong co-marketing tie-ups with MNCs

Tie-Up Product

DuPont (USA) Dunet, Qurin, Dhawa Gold, Cursor, Hi Dice, Hook

FMC Corp (USA) Aatank, Markar, Nabood, Brigade

Dow Agro (USA) Wrapup, Zargon, One-up

Chemtura (USA) Dimilin, Omite, Vitavax, Banmite

Nissan Chemical (Japan) Targa Super

Sumitomo (Japan) Caldan, Sheathmar

Mitsui (Japan) Nukil, Bombard

Hokko (Japan) Kasu-B


Dhanuka’s top 3 selling products - Targa Super (18-20%

of revenues), Caldan (10%) and Omite (5%) are all tie-ups

with MNCs and overall such tie-up products account for

~55% of revenues. Such products enjoy better margins

(~15-30%) vis-à-vis pure generics (10-15%) and enjoy a

higher acceptability amongst farmers.

Exhibit 10: More than ~55% of revenues are

accounted for by specialty/tie-up products


Promising pipeline of specialty products

In FY12, Dhanuka has already launched 4 new products

under tie-ups and Dhanuka has a high-potential product

pipeline with 5-6 specialty products to be launched over

the next 2-3 years.

Management highlighted that it is working on 2 new

herbicides with Nissan (one is patented product) which

would be catering to untouched market segment and

would add tremendous value to Dhanuka’s portfolio –

one would be for sugarcane, other will be for broadleaf

crops like soybean, cotton and groundnut. It is also

working on a fungicide with DuPont in paddy segment.

Most of these products would be exclusively with

Dhanuka and after introduction would have 8-10 years

of dominating lifecycle. However, we highlight, most

new products take around 2-3 years to establish before

volume off-take starts equating into substantial revenues.

Exhibit 11: Dhanuka has launched 3-4 specialty

products in FY12 and more to come soon

Year Product Segment Tie-Up Crop

FY12

Banmite (I) Chemtura Tea segment, floriculture product

Bombard (I) Mitsui Paddy and Cotton

Brigade

FMC Tea

FY13-14

NA (H) Nissan Sugarcane

NA (H) Nissan Soybean, Cotton and Groundnut

NA (F) DuPont Paddy

Source: Company, Elara Securities Research; Note: I = Insecticides, H =

Herbicides and F = Fungicides

27 33 34 37 39

52 48 47 45 43

14 13 13 13 14

8 6 6 5 5

0

20

40

60

80

100


(%)

Herbicides Insecticides Fungicides Others

Specialty Products

52%

Generics 48%

Lower margin products (10-15%)

Higher margin (15-30%) - tie ups with MNCs

Dhanuka Agritech

Cro

p P

rote

cti

on


Modeling ~27% CAGR in earnings over FY12E-14E post weak H2FY12

During H1FY12, Dhanuka posted a modest growth of

16% YoY growth in revenues and 24% YoY growth in

earnings aided by volume expansion in its key products,

~60bps expansion in operating margins due to better

product mix and ~450bps decline in tax rate aided by

higher production from Udhampur facility (enjoys tax

benefits).






onions and potatoes, we expect Dhanuka to post weaker

H2FY12 with ~3% YoY revenue growth (decline in Q3

revenues) and a dip in earnings growth by ~8%. We

highlight Dhanuka will be slightly more impacted vs. its

peers due to its high exposure to Andhra Pradesh (~20%

of revenues) and margins will taper down due to weaker

revenue growth.


and earnings



FY12E-14E, we expect Dhanuka to post a modest ~21%

CAGR in revenues driven by – 1) its strong distribution

reach, 2) volume expansion in its key products like Targa

Super, Caldan and Omite and 3) robust pipeline of new

products (3 launched in FY12, 2 with Nissan and 1 with

DuPont to be launched in FY13-14E).

We highlight our estimates are conservative (INR8.7bn

gross revenue in FY14E) vs. management plant to reach

INR10bn gross revenues by FY14E.

Exhibit 13: Revenue CAGR of ~21% over FY12E-14E


We expect margins to expand by 110bps (in-line with

management guidance) from 14.2% in FY12E to 15.3%

in FY14E driving a robust ~27% CAGR in earnings aided

by superior product mix (higher contribution from

specialty products and herbicides) and operating

leverage.

Exhibit 14: Overall OPM to expand 110bps YoY

driving robust ~27% CAGR in PAT




FY

12

-14

ne

t m

arg

in

exp

an

sio

n


15% 18% 21% 24% 27%

70bps 15.4 16.2 17.0 17.9 18.8

90bps 15.7 16.5 17.3 18.2 19.1

110bps 15.9 16.8 17.6 18.5 19.4

130bps 16.2 17.1 18.0 18.9 19.8

150bps 16.5 17.4 18.3 19.2 20.1


16

3

24

(8) (15)

(10)

(5)

0

5

10

15

20

25

30

H1FY12 H2FY12

(%)


4,0

75

4,8

62

5,3

29

6,4

91

7,8

09

0

5

10

15

20

25

0

2,000

4,000

6,000

8,000

10,000


(%)

(IN

R m

n)

Revenue (LHS) YoY (RHS) 3

63

51

1

54

4

72

0

88

2

13.5

14.0

14.5

15.0

15.5

0

200

400

600

800

1,000


(%)

(IN

R m

n)

PAT (LHS OPM (RHS)


Modeling ~27% CAGR in earnings over FY12E-14E post weak H2FY12

Strong tie-ups and new launches to support valuations


Dhanuka Agritech



Over the last 3 months, Dhanuka has witnessed a

correction of ~10% underperforming Sensex (down

~6%). We attribute this correction to concern over a

weaker H2 in FY12. We highlight, we have already

modeled a weaker H2 but do not foresee the same

weakness to persist in FY13E unless disrupted by a weak

monsoon and sustained steep fall in crop prices

(especially fruits and vegetables).

Hence, we initiate coverage on Dhanuka with a Buy

rating and a Target Price of INR128 based on P/E of 8x

(50% discount to Rallis, ~15% premium to its historical

average of 7x P/E) to Sept-13 EPS of INR16 indicating an

upside of ~39%.

Exhibit 16: Dhanuka trades at an average P/E band

of ~7x-10x


Going ahead, we expect Dhanuka to sustain valuations

in the range of ~7x-8x aided by – 1) strong tie-ups with

MNCs, 2) promising new product pipeline in specialty

products, 3) robust ~27% CAGR in earnings over FY12E-

14E, 4) strong return ratios in excess of ~30% and

5) modest FCF generation due to benign capex over

FY12E-14E (INR100-150mn for installing product lines

and inventory warehouse and packaging automation).

Exhibit 17: Benign capex program do aid strong FCF

generation over FY12E-14E


Exhibit 18: Strong return ratios in excess of ~30% to

help sustain valuations in range of ~7x-8x


Potential upsides from capacity expansion, inorganic venture in seeds or land sale not yet discounted

Capacity expansion at Sanand: Dhanuka had

planned INR300mn capex at Sanand to double its

formulations capacity. However, the same has been

shelved pending approvals from Gujarat

government and we haven’t factored the same in

our numbers. We highlight the firm has bought

around 16.5 acres of land in Sanand for the

proposed expansion.

New unit planned at Dahej: Dhanuka plans to

backward integrate into technicals manufacturing

through a new plant at Dahej for which it has

applied for a 37 acre land with Gujarat government.

However, pending approvals, the plant is on hold

and we haven’t factored the same in our numbers.

Management also indicated that once approved, it

may look to dilute 10-15% stake through FPO to

fund the expansion.

Acquisition of seeds Company: Dhanuka is looking

to acquire ~25% stake in a seeds company and has

already given the mandate to a Mumbai based

consultant. Deal is likely to be materialized in the

next six months and the seeds company will mostly

be either from Maharashtra or Hyderabad.

Potential land sale: Dhanuka shut down its Sohna,

Gurgaon plant in FY11 and is eventually looking to

shift its production from Gurgaon to Dahej (once

land approvals flow in). Any potential land sale at

Gurgaon could unlock significant value for the

company.

0 20 40 60 80

100 120 140 160 180 200

Ap

r-0

5

Se

p-0

5

Fe

b-0

6

Jul-0

6

De

c-0

6

Ma

y-0

7

Oct-

07

Ma

r-0

8

Au

g-0

8

Jan

-09

Jun

-09

No

v-0

9

Ap

r-1

0

Se

p-1

0

Fe

b-1

1

Jul-1

1

De

c-1

1

Sh

are

Pri

ce

(IN

R)

13x

10x

7x

4x

43

62

52

66

(1

59

)

32

2

54

9

59

1

(2

03

)

26

0

49

7

52

5

(300)

(200)

(100)

0

100

200

300

400

500

600

700


(IN

R m

n)


38.2

28.6

30.4 29.7

34.0

28.3

31.8 33.3

20

25

30

35

40


ROE (%) ROCE (%)

Dhanuka Agritech

Cro

p P

rote

cti

on



R G Agarwal, Chairman

Agarwal serves as Non-Independent Executive Chairman

of the Board of Dhanuka Agritech. He is a Commerce

Graduate. He promoted Dhanuka Group in the year

1980, by acquisition of a sick unit (then named as

Northern Minerals Ltd, now merged with Dhanuka

Agritech) situated in Gurgaon. That time, the unit was

suffering losses and was at the verge of closure. But

under his able leadership, the unit started to earn profits

from very first year of acquisition. In 1985, he promoted

Dhanuka Agritech formerly known as Dhanuka

Pesticides Limited. He is also Director on the Boards of

Hindon Mercantile, Megh Garm Fab Pvt Ltd, HD Realtors

Pvt Ltd and Dhanuka Infotech Pvt Ltd He has also been

re-elected as Chairman of Crop Care Federation of India.

M K Dhanuka, Managing Director (MD)

M K Dhanuka serves as MD and Non-Independent

Executive Director of Dhanuka Agritech. He is the

promoter of the Company and mainly looks after Finance

matters, purchases of Technicals and overall supervision

of the Company. He holds Bachelor's Degree in

Commerce from Delhi University and has experience of

33 years in the Pesticides Industry. He has also been the

President of Haryana Pesticides Manufacturers

Association since 2006. His other directorships include

Golden Overseas Limited., Dhanuka Laboratories.,

Madhuri Designs-n- Export Pvt Ltd and Dhanuka Infotech

Pvt Ltd.

Rahul Dhanuka, Executive Director

R Dhanuka, a graduate in Chemistry from Delhi

University and MBA from SP Jain Institute of

Management, has an overall industry experience of 13

years. He is working in Dhanuka Agritech as the

Marketing Director and is responsible for national sales

and marketing. Due to his expertise, the

company has been able to penetrate the very interiors of

rural India. He has been instrumental in bringing new

systems and policies in the company, implementation of

ERP and for strategic business relationships with all the

collaborators.

Indresh Narain, Non Executive Independent Director

Narain has rich experience in Banking and retired as

Head of Compliance and Legal, HSBC Group. He has

advised the board on uncountable occasions on

numerous matters including those related to banking,

legal and compliances. He is also a Director on the Board

of Cholamandalam DBS Finance, Intex Technologies

(India) and Mindteck India.

Mridual Dhanuka, Director

M Dhanuka, son of M K Dhanuka, is a B Tech in Chemical

Engineering and MBA from NITIE, Mumbai. He has a

valuable experience of 6 years in managerial cadre in

Dhanuka Agritech in field of production. He joined the

company in 2007 and has been instrumental in

streamlining technical processes, systems and

procedures and establishing quality control in the

company. He is a Director on Boards of Dhanuka

Laboratories, Dhanuka Infotech Pvt Ltd, Otsuka Chemical

India Pvt Ltd and MD Buildtech Pvt Ltd.

Sachin Bhartiya, Director

Bharitya, a qualified CA, has rich experience in the field

of corporate finance and brings with him a blend of

lending and advisory background. He was worked

professionally with IDBI, GE Capital (India) and IL&FS. In

a career spanning a decade, he has originated and

executed a number of transactions both as a lender and

advisor for debt and equity. He is also a Director on the

Boards of Shaily Engineering Plastics, Radiant Hospitality

Services Pvt Ltd, UNIBIC India Pvt Ltd and Light House

Advisors India Pvt Ltd.

Company description

Dhanuka Agritech Limited, co-founded by Mr. R G Agarwal and Mr. M K Dhanuka, is a 25 years old agro chemical

company solely into selling formulations (no presence in technicals) in the domestic markets (no exports). It enjoys a

strong pan India distribution network with 6,500 direct accounts (10-15% are distributors, rest dealers) and a reach

of 10mn farmers. The company has three state of the art facilities located at Sanand (Gujarat), Udhampur (J&K) and

Gurgaon (Haryana) catering to the demand for Dhanuka brand of products.

With a strong portfolio of 80+ brands and presence across all major crops including cotton, rice, wheat, sugarcane,

fruits, vegetables and plantation crops, Dhanuka features amongst the top five agro chemical players in the

branded domestic market. Over the years, Dhanuka has entered into various tie-ups and strategic alliances with

global agro-chem players like DuPont, FMC, Dow Agro, Chemtura, Nissan Chemical, Sumitomo, Mitsui Japan &

Hokko Japan to market/distribute their products in India.

Dhanuka Agritech


Coverage History


1







40

50

60

70

80

90

100

110

120


Not Covered Covered

1


Glo

ba

l M

ark

ets

Re

sea

rch


Expanding into new horizons

New launches and acquisitions driving success in formulations

Insecticides India (IIL) is a strong player in the generics formulation

market in India, retailing around 106 products. Company’s ability to

consistently launch new products and acquire off-shelf brands and

turn them around through aggressive marketing strategies has been

the cornerstone of its high growth. Overall, the top 4 brands for IIL

(Monocil, Victor, Lethal and Thimet) are likely to account for ~33% of

total formulation sales for IIL in FY12E. Going ahead, over FY12E-14E,

we expect the contribution of top 4 brands to increase by ~200bps

and formulations to register revenue CAGR of ~21%.

Significant capacity expansion to help boost growth in technicals

During FY11-12, IIL has invested close to ~INR700mn in augmenting

capacities by putting up 3 new facilities at – 1) formulations and

technicals unit at Dahej (Gujarat) and 2) formulations unit at

Udhampur (J&K). IIL’s overall capacity in formulations has increased by

~50% and technicals capacity has more than tripled to 12,800MT.

Going ahead, IIL is planning to manufacture 7-8 different technicals

from the Dahej plant consuming around ~50% of production in-house

and rest for external sales. Hence, over FY12E-14E, we expect IIL to

sustain ~93% CAGR in revenue from technicals aided by a ~15%

improvement in realisations and tripling of capacities.

Model in strong earnings CAGR of ~39% over FY12E-14E

Driven by robust ~29% CAGR in revenues, modest 70 bps expansion

in OPM and ~100-150bps savings in tax rate, we expect IIL to post a

strong ~39% CAGR in earnings over FY12E-14E. Margins will get a

boost aided by -1) addition of profitable molecules like Monocil,

2) significant capacity expansion in technicals of which ~50% is likely

to be used in-housed helping driving huge savings in raw material

costs and 3) operating leverage as utilisation levels improve.

Valuation We initiate coverage on IIL with an Accumulate rating and a Target

Price of INR457 based on P/E of 9x (45% discount to Rallis) to

Sept-13 EPS of INR50.8 indicating an upside of ~15%. Going ahead,

we expect IIL to sustain its re-rating from 6x-7x P/E to 10x driven by

– 1) strong ~39% CAGR in earnings over FY12E-14E, 2) 50% jump

in formulations capacity and tripling of capacities in technicals

moving the company into a completely different size trajectory and

3) modest FCF generation over FY12E-14E as IIL has completed

majority capex for next 3-4 years.

IIL’s 1 yr fwd P/E bands



FY10 3,774 43.3 353 9.3 282 35.9 22.2 24.9 25.6 17.8 14.7

FY11 4,501 19.3 451 10.0 322 14.2 25.4 22.9 25.3 15.6 11.9

FY12E 5,540 23.1 580 10.5 392 21.8 30.9 22.8 24.9 12.8 9.3

FY13E 7,083 27.9 768 10.8 535 36.4 42.2 25.3 27.2 9.4 6.8

FY14E 9,280 31.0 1,041 11.2 753 40.8 59.4 28.2 31.7 6.8 4.8



Initiating Coverage

Insecticides India

Rating : Accumulate Target Price : INR457

Upside : 15%


Key data*

Bloomberg /Reuters Code INST IN/ISIL.BO

Current /Dil. Shares O/S (mn) 12.6/12.6



Face Value (INR) 10

1 US$= INR53.0


Price & Volume

Source: Bloomberg


Promoter 74.7 74.7 74.7 74.7




Source: BSE


Sensex 0.6 (15.3) (21.8)


Rallis India (30.5) (21.7) (13.8)



Source: Bloomberg

0

100

200

300

400

500

600

Ma

y-0

7

No

v-0

7

Ma

y-0

8

No

v-0

8

Ma

y-0

9

No

v-0

9

Ma

y-1

0

No

v-1

0

Ma

y-1

1

No

v-1

1

(IN

R)

13x

10x

7x

4x

0

1,000

2,000

3,000

4,000

100

200

300

400

500


Vol. in 000s (RHS) Insecticides India (LHS)

Insecticides India


Valuation trigger


Valuation overview


Standalone PAT Sept -2013 (INR mn) 644


EPS Sept-2013E 50.8


Fair value 457

CMP 397



Valuation driver – IIL’s one year forward P/E chart


Investment summary

Strong distribution network with 106

products in formulations.

Backward integration in technicals

manufacturing.

Modest FCF generation over

FY12E-14E as major capex complete.

Valuation trigger

1. Significant capacity addition in both

formulations and technicals has come

on-stream in FY12.


70bps aided by in-house production of

technicals, launch of Monocil and

operating leverage.



FY12E-14E.

Key risks



impact on farmer profitability.

Low utilisation levels and ramp up at

new facilities.

Price cuts in its formulations due to

intense competition.

Our assumptions

We have modeled in 29% CAGR in

revenues over FY12E-14E.

We expect IIL’s formulations business

to grow by ~21% CAGR over

FY12E-14E aided by capacity

expansions and new launches.

We expect IIL’s technicals business to

grow by ~93% CAGR over FY12E-14E

aided by tripling of capacities and

~15% CAGR in price realisation.

50

100

150

200

250

300

350

400

450

500

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-1

0

Se

p-1

0

No

v-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-1

1

Se

p-1

1

No

v-1

1

Jan

-12

Ma

r-1

2

Ma

y-1

2

Jul-1

2

Sep

-12

No

v-1

2

Jan

-13

Margins to expand over FY12E-14E by 70bps aided by

in-house production of technicals, launch of Monocil

and operating leverage



12

3

Significant capacity addition in both formulations and

technicals has come on-stream in FY12

0

2

4

6

8

10

12

Ma

y-0

7

Se

p-0

7

Jan

-08

Ma

y-0

8

Se

p-0

8

Jan

-09

Ma

y-0

9

Se

p-0

9

Jan

-10

Ma

y-1

0

Se

p-1

0

Jan

-11

Ma

y-1

1

Se

p-1

1

Insecticides India

Cro

p P

rote

cti

on



Net Revenues 4,501 5,540 7,083 9,280

EBITDA 451 580 768 1,041


OPBIDTA 452 582 770 1,043


EBIT 437 555 728 993


PBT 413 497 677 953

Less :- Taxes 90 104 142 200

Adjusted PAT 322 392 535 753


Reported PAT 322 392 535 753



Reserves 1,421 1,761 2,222 2,871

Borrowings 380 580 480 380



Gross Block 365 1,007 1,090 1,160

Less:- Accumulated Depreciation 51 78 120 170

Net Block 314 929 969 990


Investments 1 1 1 1


Other Assets 35 35 35 35

Total Assets 1,948 2,489 2,850 3,399


Cash profit adjusted for non cash items 319 483 633 837

Add/Less : Working Capital Changes 67 (317) (310) (426)

Operating Cash Flow 386 167 323 411

Less:- Capex (594) (101) (65) (61)

Free Cash Flow (208) 66 259 350

Financing Cash Flow 108 105 (202) (214)


Net change in Cash (50) 172 57 137



Revenue Growth 19.3 23.1 27.9 31.0

EBITDA Growth 27.8 28.8 32.4 35.5

PAT Growth 14.2 21.8 36.4 40.8

EBITDA Margin 10.0 10.5 10.8 11.2

Net Margin 7.2 7.1 7.6 8.1


Net Debt/Equity (x) 0.2 0.2 0.1 (0.0)

ROE (%) 22.9 22.8 25.3 28.2

ROCE (%) 25.3 24.9 27.2 31.7



EPS Growth (%) 14.2 21.8 36.4 40.8

DPS (INR/Share) 2.5 3.5 5.0 7.0

P/E Ratio (x) 15.6 12.8 9.4 6.7

EV/EBITDA (x) 11.9 9.3 6.8 4.8

EV/Sales (x) 1.2 1.0 0.7 0.5

Price/Book (x) 3.3 2.7 2.1 1.7

Dividend Yield (%) 0.6 0.9 1.3 1.8






Return ratios


10.0

10.5

10.8

11.2

9

10

10

11

11

12

0

2,000

4,000

6,000

8,000

10,000


(%)

(IN

R m

n)


14.2

21.8

36.4 40.8

0

10

20

30

40

50

0

200

400

600

800


(%)

(IN

R m

n)


22.9 22.8

25.3

28.2

25.3 24.9

27.2

31.7

15

20

25

30

35


ROE (%) ROCE (%)

Insecticides India


New launches and acquisitions cornerstone of success in formulations

Insecticides India (IIL) is a strong player in the

formulation market in India, retailing around 106

products (key brands include Victor, Lethal, Thimet and

Monocil) spread across segments and crops. The

company has a strong distribution network of 8,000

distributors, 50,000 dealers and 29 depots across India.

Along with formulations, IIL is also backward integrated

into manufacturing technicals and engaged into selling

household pesticides. Post its major capacity expansion

in FY11-12, IIL has 4 formulation units located at

Chopanki (Rajasthan), Samba (J&K), Dahej (Gujarat) and

Udhampur (J&) and 2 technical manufacturing units

located at Chopanki and Dahej.

During FY11, IIL derived ~84% revenue for formulations,

~10% from technicals and rest from trading and

non-crop sales (household pesticides).

Exhibit 1: IIL derived ~84% revenue from

formulations in FY11


Consistent new launches to build in-house portfolio

IIL has a built a strong set of in-house brands including

key brands like Victor, Indan 4G, Kaiser, Sharp, Bravo,

Arrow and Hijack. IIL has consistently launched new

brands positioning them as value for money brands,

especially in segments where MNC products are going

off-patent. On an average, IIL has launched 5-6 new

brands each year.

Even in FY12, IIL has launched 7 new brands (excluding

Monocil which it acquired) including 5 insecticides

(Shark, Metro, Rambo, Super Star and Victor Gold), 1

acaricide (Dynamite Plus) and 1 fungicide (Ultra).

Exhibit 2: IIL has consistently launched new products

to spur growth in in-house brands


Exhibit 3: IIL has launched 7 new products in FY12


Successful in developing brands through acquisitions and tie-ups

Over the years, IIL has successfully adopted the inorganic

route in order to augment its in-house portfolio.

Company’s ability to consistently launch new products to

cater to market demands and acquire off-shelf brands

and turn them around through aggressive marketing

strategies has been the cornerstone of its high growth

over the last several years.

Acquired Lethal & others from Montari

Industries: In 2003, IIL acquired the agro chemical

brands of Montari Industries including Lethal,

Tractor and Milchlor. Post acquisition it spent

significant amounts in branding and marketing

these products to revive the portfolio. Testament to

its success, Lethal has emerged as one of IIL’s top 4

Formulations, 84%

Technicals, 10%

Traded Goods, 6%

5 5

7

3

8

7

0

2

4

6

8

10

FY07 FY08 FY09 FY10 FY11 FY12


New launches and acquisitions cornerstone of success in formulations


Post weak H2FY12, model strong earnings CAGR of ~39% over FY12E-14E

Insecticides India

Insecticides India

Cro

p P

rote

cti

on


brands growing at a CAGR of ~20%+ over FY07-11

and registering sales of ~INR400mn in FY11.

Exhibit 4: Top 3 out of 4 brands for IIL are a function

of acquisition or tie-up


Tied up with AMVAC for Thimet: In 2006, IIL

entered into Technical and marketing MoU with

AMVAC, USA (American Vanguard Corporation) to

manufacture and market Thimet (Insecticide –

Phorate) in India. Thimet is the largest selling brand

of IIL and has grown at a CAGR of ~14% over

FY07-11 registering sales of ~INR420mn in FY11.

Acquired Monocil from Nocil: In 2011, IIL acquired

another brand called Monocil from Nocil. Monocil is

a systemic insecticide (Monocrotophos) which

controls a broad spectrum of pests in a wide range

of crops. The brand was off-shelf during the past

five-six years as the product did not fit into the core

strategy of Nocil’s product mix. However, IIL’s

justification to buy the brand was Monocil’s high

brand recall which was evident from the success of

Monocil in just months of getting launched – IIL

booked ~1mn litres (revenues of ~INR350mn).

Hence, top 4 brands for IIL called MVLT (Monocil, Victor,

Lethal and Thimet) are likely to account for ~33% of total

formulation sales for IIL in FY12E. Going ahead, over

FY12E-14E, we expect the contribution of top 4 brands

to increase marginally by ~200bps and formulations to

register revenue CAGR of ~21%.

Exhibit 5: Formulation sales to witness ~21% CAGR

over FY12-14E aided by key brands & new launches



During FY11, IIL had around three manufacturing plants

– 1) formulations unit at Chopanki (Rajasthan) and

Samba (J&K) and 2) technicals manufacturing unit at

Chopanki. Overall, IIL had a total formulation

manufacturing capacity of 11,450KL of EC (emulsifiable

concentrate), 6,600MT of WDP (wettable dispersible

powder) and 13,600MT of granules and technicals

manufacturing capacity of 3,800MT.

Invested ~INR700mn over FY11-12 to build new facilities at Dahej and Udhampur

During FY11-12, IIL has invested close to ~INR700mn

(funded via IPO proceeds and mix of debt and internal

accruals) in augmenting its capacities by putting up

three new manufacturing facilities at – 1) formulations

and technicals manufacturing unit at Dahej (Gujarat)

and 2) formulations unit at Udhampur (J&K).

With the capacity expansion, IIL’s overall capacity in

formulations has increased by more than ~50% to

18,450KL of EC, 9,700MT of WDP and 27,600MT of

granules and technicals manufacturing capacity has

more than tripled to 12,800MT.

Exhibit 6: IIL has increased its formulations capacity

by ~50%+ and tripled its technicals capacity in FY12


Dahej formulations facility: Dahej formulations

facility, a multi-purpose plant, will have a total

capacity of 4,000KL in EC, 12,500MT in WDP and

2,500MT in granules. IIL invested ~INR100mn

(funded via IPO proceeds) in the plant and it has

commenced operations from Q1FY12. IIL will

produce Monocil from this plant.

Dahej technicals facility: IIL’s technical facility at

Dahej has a capacity of 9,000MT and the company

has invested ~INR550mn (funded via mix of debt

and internal accruals) in the plant. IIL will use ~50%

of technicals manufactured in-house leading to

significant cost savings in terms of raw materials. The

Acquired brands from Montari in 2003 - Lethal, Tractor and

Milchlor

Tie up with AMVAC USA in 2006 - Thimet

Acquired brand from NOCIL in 2011 - Monocil

3,4

20

4,0

10

4,9

52

6,0

24

7,2

05

24.9

17.3

23.5 21.7

19.6

0

5

10

15

20

25

30

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


(%)

(IN

R m

n)

Formulations revenue (LHS) YoY (RHS)

11

,45

0

6,6

00

13

,60

0

3,8

00

18

,45

0

9,7

00

27

,60

0

12

,80

0

0

5,000

10,000

15,000

20,000

25,000

30,000

EC (KL) WDP (MT) Granules (MT)

Technicals (MT)

FY11 FY12

Insecticides India


plant has just commenced operations in Q2FY12

and is likely to witness significant scale up in FY13.

Udhampur formulations facility: IIL’s Udhampur

facility has a total capacity of 3,000KL of EC, 2,000MT

of WDP and 600MT of granules. IIL has invested

~INR60mn in the plant and it has commenced

operations from Q2FY12. The plant will enjoy both

income tax and excise benefits and IIL plants to

produce its most profitable specialty molecules from

this unit.

Looking to tap into export markets

IIL at present has very little exports which caters to only

Nepal and Bangladesh but with production

commencing from its Dahej plant, IIL is looking to tap

international markets like the Middle East,

commonwealth of independent states (CIS) countries,

African and far east countries in the first phase. IIL has

already started applications for patents in Taiwan and

Thailand and is looking to sell a combination of

formulation brands and technicals. To start with, it will

go ahead with 15 products and is targeting revenues of

~INR500mn from exports in FY13.

Tripling of capacities in technicals to aid ~93% CAGR in revenues over FY12E-14E in technicals

IIL forayed into technicals manufacturing (backward

integration) during FY08 by setting up its first plant at

Chopanki. Foray into the technicals segment involves

complex chemical processes, technological superiority,

and higher initial investment vis-à-vis formulations

business.

Over FY09-11, IIL has posted a revenue CAGR of ~95% to

~INR500mn from manufacturing technicals from its

Chopanki unit (consumed almost ~60% of technicals in-

house) aided by higher capacities and ~40%

improvement in price realisations of the technicals sold.

Going ahead, IIL is planning to manufacture 7-8 different

technicals from the Dahej plant consuming around

~50% of production in-house and rest for external sales.

Hence, over FY12E-14E, we expect IIL to sustain ~93%

CAGR in revenue from technicals aided by a ~15%

improvement in realisations and tripling of capacities.

We are modeling in utilisation levels to drop to ~19% in

FY12E and gradually improve to ~50% in FY14E and

expect the company to utilize almost ~65% production

in-house.

Exhibit 7: Revenues from technicals to more than

triple over FY12-14E, in-line with capacity expansion


Post weak H2FY12, model strong earnings CAGR of ~39% over FY12-14E

During H1FY12, IIL posted a strong growth of 26% YoY

growth in revenues and 33% YoY growth in earnings,

significantly ahead of its peers. While revenue growth

was aided by addition of Monocil in Q1FY12 (registered

revenues of ~INR300mn in H1FY12 – not in the base),

earnings growth was aided by ~40bps expansion in

OPM and ~300bps reduction in tax rate

(commencement of Udhampur plant which enjoys tax

benefits).






onions and potatoes, we expect IIL to post weaker

H2FY12 with ~19% YoY revenue growth and a muted

earnings growth of ~5%. However, we highlight results

are likely to better than its peers aided by – 1) addition of

Monocil launched in Q1FY12 and commencement of

Dahej and Udhampur facilities in Q2FY12. Nonetheless,

higher depreciation charges and interest costs will keep

the earnings muted.


and earnings


37

8

49

8

58

9 1

,05

6

2,1

87

0

50

100

150

200

0

500

1,000

1,500

2,000

2,500


(%)

(IN

R m

n)

Technicals revenue (LHS) YoY (RHS)

26

19

33

5

0

5

10

15

20

25

30

35

H1FY12 H2FY12

(%)


Insecticides India

Cro

p P

rote

cti

on



FY12E-14E, we expect IIL to post a robust ~29% CAGR in

revenues driven by – 1) ~21% CAGR in formulations

aided by volume expansion in its top 4 brands, new

launches and capacity expansions at Dahej and

Udhampur facilities and 2) ~93% CAGR in technicals

revenue aided by tripling of capacities with

commencement of Dahej facility (~65% production to be

consumed in-house).

Driven by strong growth in technicals, we expect the

contribution of technicals in total revenue to rise from

~10% in FY11 to almost ~22% in FY14E.

Exhibit 9: Revenue CAGR of ~29% over FY12E-14E

aided largely by significant capacity expansion


Exhibit 10: Contribution of technicals to total

revenue to rise to ~22% by FY14E


We expect margins to expand by 70bps over FY12E-14E

from 10.5% in FY12 to 11.2% in FY14E driving a robust

~34% CAGR in EBITDA during the period. Margins will

get a boost aided by -1) addition of profitable molecules

like Monocil which enjoy higher margins vis-à-vis mass

generics, 2) significant capacity expansion in technicals

of which ~50% is likely to be used in-housed helping

curtail distributor margins on technicals sourced from

outside driving huge savings in raw material costs and

3) operating leverage as utilisation levels improve.

Exhibit 11: Margins to expand ~70 bps driving robust

~34% CAGR in EBITDA over FY12E-14E


Hence, driven by robust ~29% CAGR in revenues,

modest 70 bps expansion in OPM and ~200-250bps

savings in tax rate (specialty molecules production to be

shifted to Udhampur which will enjoy both income tax

and excise benefits), we expect IIL to post a strong ~39%

CAGR in earnings over FY12E-14E.

Exhibit 12: Model in robust ~39% CAGR in earnings

over FY12E-14E




FY

12

-14

ne

t m

arg

in

exp

an

sio

n


23% 26% 29% 32% 35%

65bps 51.4 53.9 56.5 59.2 61.9

85bps 52.7 55.3 58.0 60.7 63.5

105bps 54.0 56.7 59.4 62.2 65.1

125bps 55.4 58.1 60.9 63.7 66.7

145bps 56.7 59.5 62.3 65.3 68.3


3,7

74

4,5

01

5,5

40

7,0

83

9,2

80

0

10

20

30

40

50

0

2,000

4,000

6,000

8,000

10,000


(%)

(IN

R m

n)

Net revenue (LHS) YoY (RHS)

83.9 84.9 80.8 73.1

10.4 10.1 14.2 22.2

5.7 5.0 5.0 4.7

0

20

40

60

80

100


(%)

Formulations Technicals Others

35

3

45

1

58

0

76

8

1,0

41

9.3

10.0

10.5

10.8

11.2

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

0

200

400

600

800

1,000

1,200


(%)

(IN

R m

n)


28

2

32

2

39

2 5

35

75

3

0

5

10

15

20

25

30

35

40

45

0

100

200

300

400

500

600

700

800


(%)

(IN

R m

n)

PAT (LHS) YoY (RHS)

Insecticides India


Initiate with an Accumulate with a Sept-2013 TP of INR457

Over the last two years, IIL has witnessed significant

re-rating from average P/E multiple of 6x-7x to ~10x

driven by – 1) modest earnings CAGR of ~25% over

FY09-11 and 2) significant investments into capacity

expansions to the tune of ~INR700mn driving ~50%

increase in formulations and tripling of capacities in

technicals. We highlight IIL’s gross block has tripled over

FY10-12 due to its aggressive capex.

Exhibit 14: IIL has re-rated from an average P/E of 6x-

7x to ~10x


Going ahead, we expect IIL to sustain its re-rating driven

by – 1) strong ~39% CAGR in earnings over FY12E-14E,

2) tripling of capacities in technicals moving the

company into a completely different size trajectory and

3) modest FCF generation over FY12E-14E as IIL has

completed majority capex for next 3-4 years.

Exhibit 15: Major capex completed in FY11-12, expect

modest FCF generation over FY12E-14E


Hence, we initiate coverage on IIL with an Accumulate

rating and a Target Price of INR457 based on P/E of 9x

(45% discount to Rallis) to Sept-13 EPS of INR50.8

indicating an upside of ~15%.

Tie-up with Japanese firm for new molecule and QIP to fund further capex not factored in our numbers

Media reports suggest that IIL is looking to tie-up

with a Japanese firm to market a fungicide product

exclusively in India. The product will be applicable

on rice crop and is likely to be a patented product.

Any such launches, especially in specialty molecule

segment is likely to carry upside risks to our

estimates.

Media reports suggest that IIL is in talks with P/E

firms and other institutional investors to raise

INR700mn to fund further proposed expansion of

setting up a new plant in Rajasthan to further

increase formulations capacity by ~30-50% and

double technicals manufacturing capacity. We

highlight promoters hold ~75% stake in the

company. We have neither modeled the capacity

expansion plan nor dilution on account of fund

raising.

0

100

200

300

400

500

600

Ma

y-0

7

No

v-0

7

Ma

y-0

8

No

v-0

8

Ma

y-0

9

No

v-0

9

Ma

y-1

0

No

v-1

0

Ma

y-1

1

No

v-1

1

Sh

are

Pri

ce

(IN

R)

13x

10x

7x

4x

59

4

10

1

65

61

38

6

16

7 3

23

41

1

(2

08

)

66

25

9

35

0

(400)

(200)

0

200

400

600

800


(IN

R m

n)



IIL has witnessed significant re-rating over last two years

Strong earnings growth and increased capacities to sustain re-rating

Initiate with an Accumulate with a Sept-13 TP of INR457

Insecticides India

Cro

p P

rote

cti

on



H C Aggarwal, Chairman

H C Aggarwal joined IIL’s board on October, 2001 and

was appointed the Chairman and MD on October, 2003.

However, he resigned as MD in November, 2006 and

serves as the Chairman of the company now. He belongs

to a business family of Delhi and has more than 3

decades of experience in pesticides business. Aggarwal

set up HIM Pulverizing Mills in 1972 and served as the

MD till 2004. He was awarded Udyog Bharti Award in

2004 by Indian Achievers Forum, New Delhi and has

served as President of NIPMA for 5 terms and director of

Crop Care Federation of India (CCFI).

Rajesh Aggarwal, Managing Director (MD)

R Aggarwal, a commerce graduate, is the promoter of IIL.

He incorporated the company in 1996 and was

appointed as the MD of IIL in 2006. Prior to IIL, he

worked in HIM Pulverizing Mills looking after production

and marketing and has very good knowledge in the

respective domains.

Sanjeev Bansal, Whole-time Director

Bansal is Whole-Time Director of IIL. After doing

graduation, he entered into the field of marketing. He

has been involved in the trading of Agro Commodities

and has experience of more than 18 years in the field of

marketing of Agro commodity. He was appointed as

whole time Director of the company in 2001 and looks

after day to day administration.

Year Key Milestone

1996 Incorporated as private limited company

2001 Converted into public limited company

2002 Commissioned formulation plant at Chopanki (Rajasthan)

2003 Acquired all the brands of Montari Industries Ltd

2004 Commissioned second formulation plant at Samba (Jammu)

2005 Set up R&D Laboratory at Chopanki and was granted ISO 9001-2000 certification

2006 Acquired the exclusive right to sell the Thimet brand in India from American Vanguard Corporation, USA

2007 Came out with an IPO to raise INR369.2mn

R&D facility and technical plant commenced in Chopanki

Expansion of formulations completed at Samba unit

2011 Acquired Monocil brand from Nocil Ltd.

Two new formulation plants- Dahej and Udhampur commence operations

Entered into an agreement with National Research Development Corporation, Government of India for providing technological support for research & development of a specific formulation

Company description

Incorporated by Mr Rajesh Aggarwal in 1996, Insecticides India Limited (IIL) commenced operations in 2002 after

setting up of Chopanki unit. In 2007, IIL came out with an IPO raising INR370mn. IIL is a strong player in the

formulation market in India, retailing around 106 products (key brands include Victor, Lethal, Thimet and Monocil)

spread across segments and crops. The company has a strong distribution network of 8,000 distributors, 50,000

dealers and 29 depots across India. Along with formulations, IIL is also backward integrated into manufacturing

technicals and engaged into selling household pesticides.

During FY11, IIL derived ~84% revenue for formulations, ~10% from technicals and rest from trading and

non-crop sales (household pesticides). Post its major capacity expansion in FY11-12, IIL has 4 formulation units

located at Chopanki (Rajasthan), Samba (J&K), Dahej (Gujarat) and Udhampur (J&) and 2 technical manufacturing

units located at Chopanki and Dahej. Driven by strong growth in technicals, we expect the total contribution of

technicals in total revenue to rise from ~10% in FY11 to almost ~22% in FY14E.

Insecticides India


Coverage History


1

4-Jan-2012 Accumulate INR457 INR397






50

100

150

200

250

300

350

400

450


Not Covered Covered

1

Insecticides India

Cro

p P

rote

cti

on


Notes

Insecticides India


Notes

Insecticides India

Cro

p P

rote

cti

on


Notes



Disclosures & Confidentiality for non U.S. Investors

The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information

purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and

the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. Nothing in this

document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to

in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an

independent evaluation of an investment in the securities of companies referred to in this document (including the merits and

risks involved) and should consult its own advisors to determine the merits and risks of such an investment. Nevertheless, Elara

or any of its affiliates is committed to provide independent and transparent recommendation to its client and would be happy

to provide any information in response to specific client queries. Elara or any of its affiliates have not independently verified all

the information given in this Note and expressly disclaim all liability for any errors and/or omissions, representations or

warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this

information. Elara or any of its affiliates, their directors and the employees may from time to time, effect or have effected an

own account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may

perform or seek to perform investment banking or other services for or solicit investment banking or other business from any

company referred to in this Note. Each of these entities functions as a separate, distinct and independent of each other. This

Note is strictly confidential and is being furnished to you solely for your information. This Note should not be reproduced or

redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for

any purpose. This Note is not directed or intended for distribution to, or use by, any person or entity who is a citizen or

resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use

would be contrary to law, regulation or which would subject Elara or any of its affiliates to any registration or licensing

requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and

persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon

request, the Recipient will promptly return all material received from the company and/or the Advisors without retaining any

copies thereof. The Information given in this document is as of the date of this report and there can be no assurance that

future results or events will be consistent with this information. This Information is subject to change without any prior notice.

Elara or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from

time to time. However, Elara is under no obligation to update or keep the information current. Neither Elara nor any of its

affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct,

indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the

information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an

indication that there has been no change in the business or state of affairs of the company since the date of publication of this

Note. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency

and should not be treated as endorsement of the views expressed in the report. Elara Securities (India) Private Limited

generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in

the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views

expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their

securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations

or views expressed in this report.

Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed

to Elara Securities (India) Private Limited / the company.

Disclaimer for non U.S. Investors

The information contained in this note is of a general nature and is not intended to address the circumstances of any

particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no

guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.

No one should act on such information without appropriate professional advice after a thorough examination of the

particular situation.


Glo

ba

l M

ark

ets

Re

sea

rch

77 77

Disclosures for U.S. Investors

The research analyst did not receive compensation from Rallis India Limited, P I Industries Limited, Dhanuka Agritech Limited

and Insecticides India Limited.

Elara Capital Inc.’s affiliate did not manage an offering for Rallis India Limited, P I Industries Limited, Dhanuka Agritech Limited

and Insecticides India Limited.

Elara Capital Inc.’s affiliate did not receive compensation from Rallis India Limited, P I Industries Limited, Dhanuka Agritech

Limited and Insecticides India Limited in the last 12 months.

Elara Capital Inc.’s affiliate does not expect to receive compensation from Rallis India Limited, P I Industries Limited, Dhanuka

Agritech Limited and Insecticides India Limited in the next 3 months.

Disclaimer for U.S. Investors

This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its

completeness, accuracy or adequacy and it should not be relied upon as such.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument.

Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed

herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.

Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the

investor and the investor may get back less than the amount invested. Where an investment is described as being likely to

yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.

Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in

rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The

information contained in this report does not constitute advice on the tax consequences of making any particular

investment decision. This material does not take into account your particular investment objectives, financial situations or

needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before

acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances

and, if necessary, seek professional advice.

Certain statements in this report, including any financial projections, may constitute “forward-looking statements.” These

“forward-looking statements” are not guarantees of future performance and are based on numerous current assumptions

that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these

“forward-looking statements” and financial information.



India Elara Securities (India) Pvt. Ltd. Kalpataru Synergy,6th Level,East Wing, Opp Grand Hyatt, Santacruz East, Mumbai – 400 055, India

Tel : +91 22 4062 6868

Europe Elara Capital Plc. 29 Marylebone Road, London NW1 5JX, United Kingdom

Tel : +4420 7486 9733

USA Elara Securities Inc. 477 Madison Avenue, 220, New York, NY 10022, USA

Tel :212-430-5870

Asia / Pacific Elara Capital (Singapore) Pte.Ltd. 30 Raffles Place #20-03, Chevron House Singapore 048622

Tel : +65 6536 6267

Harendra Kumar MD - Institutional Equities & Global Research [email protected] +91 22 4062 6871

Sales

Joseph K. Mammen Global Head Sales & Trading

London +44 78 5057 7329 [email protected] +44 20 7467 5578

Anuja Sarda London +44 77 3819 6256 [email protected] +44 20 7299 2577

David Somekh New York +1 646 808 9217 [email protected] +1 212 430 5872

Nikhil Bhatnagar New York +1 718 501 2504 [email protected] +1 212 430 5876

Samridh Sethi New York +1 718 300 0767 [email protected] +1 212 430 5873

Amit Mamgain India +91 98676 96661 [email protected] +91 22 4062 6843

Koushik Vasudevan India +91 98676 96668 [email protected] +91 22 4062 6841

Prashin Lalvani India +91 9833477685 [email protected] +91 22 4062 6844

Saira Ansari India +91 98198 10166 [email protected] +91 22 4062 6812

Sales Trading & Dealing

Ananthanarayan Iyer India +91 98334 99217 [email protected] +91 22 4062 6856

Dharmesh Desai India +91 98211 93333 [email protected] +91 22 4062 6852

Manoj Murarka India +91 99675 31422 [email protected] +91 22 4062 6851

Vishal Thakkar India +91 98694 07973 [email protected] +91 22 4062 6857

Research

Abhinav Bhandari Analyst Construction, Infrastructure [email protected] +91 22 4062 6807

Aliasgar Shakir Analyst Mid caps [email protected] +91 22 4062 6816

Alok Deshpande Analyst Oil & Gas [email protected] +91 22 4062 6804

Anand Shah Analyst Mid caps – Consumption & Agri [email protected] +91 22 4062 6821

Ashish Kumar Economist

[email protected] +91 22 4062 6836

Henry Burrows Analyst Derivative Strategist [email protected] +91 22 4062 6854

Himani Singh Analyst FMCG, Hotels, Hospitals [email protected] +91 22 4062 6801

Mohan Lal Analyst Media , Automobiles [email protected] +91 22 4062 6802

Pankaj Balani Analyst Derivative Strategist [email protected] +91 22 4062 6811

Parees Purohit Analyst Banking & Financials [email protected] +91 22 4062 6859

Pralay Das Analyst Information Technology, Strategy [email protected] +91 22 4062 6808

Ravindra Deshpande Analyst Metals & Cement [email protected] +91 22 4062 6805

Ravi Sodah Analyst Cement [email protected] +91 22 4062 6817

Sumant Kumar Analyst FMCG [email protected] +91 22 4062 6803

Surajit Pal Analyst Pharmaceuticals, Real Estate [email protected] +91 22 4062 6810

Mona Khetan Associate Strategy [email protected] +91 22 4062 6814

Pooja Sharma Associate Automobiles [email protected] +91 22 4062 6819

Stuart Murray Associate Oil & Gas [email protected] +91 22 4062 6898

Access our reports on Bloomberg: Type ESEC <GO>

Also available on Thomson & Reuters

Member (NSE, BSE) Regn Nos: CAPITAL MARKET SEBI REGN. NO.: BSE: INB 011289833, NSE: INB231289837 DERIVATIVES SEBI REGN. NO.: NSE: INF 231289837

CLEARING CODE: M51449. Website: www.elaracapital.com Investor Grievance Email ID: [email protected]

Elara Capital - Agri Inputs

Documents

Transcript of Elara Capital - Agri Inputs