India Agriculture Inputs Seeds of Prosperity 26-02-14!15!05

Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2014 http://research.standardchartered.com

l Equity Research l India | Emerging Companies l 26 February 2014

India agriculture inputs

Seeds of prosperity

India’s food grain yield is among the lowest in the world, yet demand is projected

to increase by 57mtpa over the next decade. This increase will far outstrip the

incremental supply (8mtpa), if yields remain at current levels.

The natural response is to increase yields by boosting agro-inputs, and this should

underpin the INR1tn market in fertilizers, micro-irrigation, pesticides and seeds.

We see growth and medium-term investment opportunity in pesticides and seeds;

and project this market to grow from INR 350bn in 2012 to INR 650bn by 2017

(CAGR 13%).

Our on-the-ground checks with 33 agro-input dealers across 7 states indicate that

brand and distribution are the key drivers of success for agro-input companies.

Our proprietary framework assesses agro-input companies on six key parameters

- Rallis and PI Industries emerge as our top picks. We initiate coverage on Kaveri

Seed (OP), UPL (OP) and Coromandel International (IL).

Click here to get The Scoop, an audiovisual summary of the report.

Share prices as of 25 February 2014 Source: Companies, FactSet, Standard Chartered Research estimates

India agriculture inputsSeeds of prosperity

Click here to get The Scoop, an audiovisual summary of the report

February 2014

Mkt cap Price hide column-old rating PT Up/(Dn)

Ticker (USD mn) (lc) New Old Rec New Chg (%) (lc) side (%) FY1E FY2E FY1E FY2E FY1E FY2E

Rallis India^ RALI IN 492.1 156.85 OP - OP 200.00 - 200.00 27.5 20.7 16.5 12.1 10.0 1.9 2.4

PI Industries^ PI IN 519.1 252.90 OP - OP 325.00 - 325.00 28.5 19.7 15.3 11.8 9.4 0.6 0.8

Kaveri Seed^ KSCL IN 567.0 513.00 OP - OP 600.00 - 600.00 17.0 17.3 13.5 15.4 11.1 1.2 1.5

UPL^ UPLL IN 1,351.2 185.15 OP - OP 235.00 - 235.00 26.9 9.5 8.2 5.9 5.3 1.6 1.6

Coromandel International^ CRIN IN 939.6 203.85 IL - IL 215.00 - 215.00 5.5 13.9 12.2 9.0 8.3 2.2 2.2

PER (x) EV/EBITDA (x) Div yield (%)Rating PT (lc)

Sumit Choudhary [email protected]

+91 22 4205 5916

RALI IN INR 157.00 INR 200.00

http://www.brainshark.com/standardcharter/vu?pi=zH1zHTyCmzH4SVz0

http://www.brainshark.com/standardcharter/vu?pi=zH1zHTyCmzH4SVz0

Equity Research l India agriculture inputs

26 February 2014 2

Contents

Executive summary 3

Yield – Only road to food self-sufficiency 5

Agro-inputs: Key beneficiary of reach for yield 9

Pesticides: Domestic tailwind and huge export opportunity 13

Brand and distribution driven market 17

Seeds: Set to accelerate 21

Our framework for evaluating companies 24

Sector valuation 27

Companies

Rallis India 28

PI Industries 37

Kaveri Seed 45

UPL 54

Coromandel International 64

Dhanuka Agritech 72

Jain Irrigation 76

Appendix 1: Overview of companies 80

Appendix 2: Hazardous pesticides 83

SCout is Standard Chartered’s premium research product that offers Strategic, Collaborative, Original ideas on Universal and Thematic opportunities


26 February 2014 3

Executive summary Yield: Only way to food self-sufficiency. We expect India’s food grain demand to

grow to 293mt by 2022 from 236mt in 2012. At current yields, the incremental

production (8mtpa) will be sharply lower vs incremental demand (57mtpa) over this

period. Much higher yields vs. history is required to sustain food self-sufficiency.

Lower arable land availability could magnify the need for higher yields (refer Fig. 9).

Higher use of agro-inputs is therefore key.

Figure 1: Food grain consumption and production in India

Source: OECD-FAO, Planning Commission, Ministry of Agriculture, Standard Chartered Research

Agro-inputs: Key beneficiary of reach for yield. We estimate India’s overall agro-

inputs market to be worth c.INR 1tn, comprising fertilizers, micro irrigation, pesticides

and seeds. In addition to the need for higher adoption of these inputs given requisite

yield increase, rising rural incomes provide a tailwind for the growth of the agro-inputs

market. We prefer the non-subsidised segment of this market, viz. pesticides and

seeds, given relatively lower exposure to policy and subsidy delay related issues. We

expect the pesticides and seeds market to grow at a CAGR of 13% from INR

350bn to INR 650bn over 2012-22.

Pesticides: Brand play. India’s pesticide usage levels are lower vs. global peers

(refer Fig 20). The domestic pesticides market is estimated at INR 105bn and

projected to grow at a CAGR of 9% to INR 180bn by FY18 (refer Fig 21). Exports are

a high-growth segment within the pesticides market and this segment is expected to

grow at a CAGR of 15% over FY12-20 to USD 5.8bn (refer Fig. 23). As revealed by

our on-the-ground survey of over 33 agro-input distributors across seven

states, brand strength and distribution push are the key determinants of farmer

preferences in the pesticides market. (refer Fig. 26).

Seeds: Set to accelerate. India’s seed market is the sixth largest globally yet

underpenetrated vs. global peers. We expect the seeds market to grow to INR 230bn

by 2017 from INR 110bn in 2012 (refer Fig 30). The seeds industry is attractive given

the high barrier to entry and non-linear growth. The introduction of genetically

modified seeds for more crops besides just cotton could provide further upside

potential, but we have not factored this into our projections.

150,000

170,000

190,000

210,000

230,000

250,000

270,000

290,000

310,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Foodgrains consumption (kt)

Foodgrain production with enhanced yields (kt)

Foodgrain production at constant yields (kt) Projected

benefit from yields


26 February 2014 4

Proprietary framework for ranking agro-input companies. Based on the findings

from our survey, we rank companies under coverage based on their brand and

distribution strengths. We also evaluate the relative attractiveness of the companies

based on four other parameters (product diversification, geographic diversification,

leverage and working capital) that can provide sustainable long-term advantages to

companies. Rallis and PI Industries fare well on our framework and are our top picks.

Figure 2: Ranking of companies under our coverage

Rallis PI Kaveri UPL** Coromandel*

Strength of brand 1 3 2 2 3

Distribution/ farmer engagement 1 2 4 4 2

Product diversification 1 4 5 2 3

Geographic diversification 3 1 4 1 NA

Leverage 2 3 1 4 NA

Working capital 2 3 1 4 NA

Overall Rank 1 2 3 4 NA

Source: Standard Chartered Research

Note: * CRIN financials not available separately for non-fertilizer business beyond EBITDA line.

Note: ** We have rated UPL’s India business only for ranking of exports, leverage/ working capital at global levels

While this framework is instrumental in identifying long-term winners, valuation

distortions can impact short-term stock preferences.

Initiate coverage on five companies. We initiate coverage on five companies:

Rallis, UPL, Coromandel International, PI Industries and Kaveri Seed. We also

present non-rated notes on Jain Irrigation and Dhanuka Agritech.


26 February 2014 5

Yield – Only road to food self-sufficiency Given a rising population, better demographics and economic growth, we expect

India’s food grain consumption to rise to 293mt from 236mt over the next decade.

At current yields, we expect food production to fall materially short of this

requirement (incremental production of only 8mtpa vs incremental demand of

57mtpa over the next decade).

Yields need to improve much faster than history, especially considering land

constraints.

India’s food grain demand

India has seen her food grain demand grow at a CAGR of 1.8% over the past decade

(2002-2012). According to OECD-FAO projections, India’s cereal (wheat, rice and

coarse cereals) consumption is expected to move to 266mt by 2022 from 217mt in

2012. According to the Planning Commission, consumption of pulses is likely to grow

to c.22mt by FY17 from 19mt in FY13. Overall, we expect food grain demand to grow

to 293mt by 2022 from 236mt – an incremental 57mtpa at a CAGR of 2.2%.

Figure 3: Food grain consumption in India

Source: OECD-FAO, Planning Commission, Ministry of Agriculture, Standard Chartered Research

We believe that higher food grain demand would be driven by multiple factors

including:

Population growth. India’s population grew at a CAGR of 1.5% over the past

decade and we project it to grow at a CAGR of 1.1% going forward.

Figure 4: India’s population growth

Source: Standard Chartered Research estimates

150,000

170,000

190,000

210,000

230,000

250,000

270,000

290,000

310,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

India foodgrain consumption (kt)

CAGR 1.8%

CAGR 2.2%

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

1,400

1,450

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

India population (mn)

CAGR 1.5%

CAGR 1.1%

Food grain consumption is set to increase by 57mtpa over the next

decade


26 February 2014 6

Demographic shift. As the bulk of India’s population pyramid continues to shift

towards the 15-59 age bracket, there would be higher food grain consumption per

capita over time.

Figure 5: Proportion of prime age citizens in India’s population


Government initiatives. While we have not explicity forecast growth in food grain

demand owing to recent legislations, we believe that the availability of cheaper food

grains through national food security programs will push up demand for food grains.

Please refer to Food security bill: A costly affair by Anubhuti Sahay for more details

on the recently launched national food security program.

Supply – Yield response needed

We believe that given the current yields and recent trends in land availability, meeting

the incremental food grain demand would be an uphill task. Against incremental

demand of 57mtpa of food grains over the next decade, at current yields, the

incremental production will be only 8mtpa.

Figure 6: Food grain consumption and production in India

Source: OECD-FAO, Planning Commission, Ministry of Agriculture, Standard Chartered Research estimates

56%

57%

58%

59%

60%

61%

62%

63%

64%

2000 2005 2010 2015 2020

Proportion of population in 15-59 age group

150,000

170,000

190,000

210,000

230,000

250,000

270,000

290,000

310,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Foodgrains consumption (kt)

Foodgrain production with enhanced yields (kt)

Foodgrain production at constant yields (kt) Projected

benefit from yields

If yields do not improve, food grain supply will fall materially short of

the incremental demand

https://research.standardchartered.com/configuration/ROW%20Documents/Food_security_bill__A_costly_affair_05_07_13_14_28.pdf


26 February 2014 7

In other words, at current yields, annual food production/capita will shrink to 188kg by

2022 from 207kg currently. This compares to current food grain production per capita

of 337kg globally.

Figure 7: Food grain production per capita globally

* At current yields.

Source: OECD-FAO, World Bank, Standard Chartered Research estimates

While we have assumed land under cultivation according to OECD projections for

cereals and have used similar growth in land usage for pulses, the projections of land

under cultivation look optimistic compared with patterns witnessed historically. In

case we assume total land under food grains to be constant, overall yield for food

grains will need to improve to 2.43 t/ha by 2022 from 2.09 t/ha in 2012.

Figure 8: Area under food grains

Source: OECD-FAO, Ministry of Agriculture, Standard Chartered Research estimates

While the above chart points to the optimism built into OECD (and our) agricultural

land projections, the trend of falling arable land in India over the past two decades

can potentially render maintaining even the current pace of agricultural land addition

difficult. Arable land availability in India has been on a downward trend over the past

two decades driven by factors such as land being rendered barren owing to nutrient

depletion and shift to industrial/urban usage. A reversal of this pattern would need (1)

1,135

492 458 448

354 291 266

337

207 188

0

200

400

600

800

1,000

1,200

US Russia Thailand Brazil China South Africa

Indonesia World India - 2012

India - 2022E*

Pro

du

ctio

n k

g p

er c

apit

a

Foodgrain production kg per capita

105,000

110,000

115,000

120,000

125,000

130,000

135,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Area under foodgrains (000 ha)

CAGR 0.01%

CAGR 0.6%

There is ample scope for yields to improve

Arable land constraints accentuate the need for material yield

response


26 February 2014 8

agriculture economics to look attractive enough for land to be migrated away from

industrial and urban usage and back to agriculture or (2) aggressive rehabilitation of

nutrient depleted land.

Figure 9: India’s arable land

Source: World Bank, Standard Chartered Research. Arable land includes land defined by the FAO as land under temporary

crops (double-cropped areas are counted once), temporary meadows for mowing or for pasture, land under market or kitchen gardens, and land temporarily fallow. Land abandoned as a result of shifting cultivation is excluded.

It is also worthwhile to mention that India already imports over 60% of her vegetable

oil demand (11,000kt vs demand of 18,000kt) and the need to bridge the vegetable

oil import gap could put further pressure on land available for food grains in the

country.

Weather volatility demands focus on agro-inputs. Given the high dependence on

rainfed irrigation, it is not surprising to find a high correlation between monsoons and

food grain production in India. Such high dependence on weather further

neccessitates improvement in irrigation facilities and use of agro-inputs to have an

adequate buffer in the system against weather-related weakness in production.

Figure 10: India monsoons vs. food grain production (1970-2012)

Source: OECD-FAO, IMD, Standard Chartered Research

154

155

156

157

158

159

160

161

162

163

164

1980

19

81

1982

19

83

1984

19

85

1986

19

87

1988

19

89

1990

19

91

1992

19

93

1994

19

95

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

Mn

hec

tare

s

India arable land

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-30% -20% -10% 0% 10% 20% 30% 40% 50%

Monsoon rain % yoy

Foodgrain production % yoy R2 = 72%

Agro-input usage needs to improve to reduce weather-related supply

uncertainty


26 February 2014 9

Agro-inputs: Key beneficiary of reach for yield We believe yield needs to improve faster than it did in the past decade, especially

considering that prospects of additional land coming under agriculture are minimal.

Yields in India are lower than for global peers for most crops and increasing agro-

input usage is key for enhancing yields.

Of the c.INR 1tn agro-inputs market, c.65% is in subsidised segments (fertilizer

and micro irrigation) that are saddled with high working capital and delays in

subsidy receipts. We prefer the non-subsidised pesticides/seeds markets.

The pesticides and seeds markets are estimated to grow to INR 650bn by 2017

from INR 350bn in 2012 at an impressive 13% CAGR.

Need for yield. To achieve the projections for food grain production in India as

provided in the previous section, overall yields will need to improve to 2.30 t/ha by

2022 from 2.09 t/ha in 2012. As mentioned in the section above, in case land under

cultivation does not increase as per OECD-FAO projections, yields would need to

improve even further to 2.43 t/ha by 2022. The required rate of improvement in yields

in this case would need to be significantly higher than what India has actually

achieved over the past decade.

Figure 11: India food grain yield

Source: OECD-FAO, PlanningCommission, Ministry of Agriculture, Standard Chartered Research estimates

Ample scope for yields to improve. India has significantly lower yields versus

global averages for most crops. While part of this yield differential could be explained

by the lower size of farm holdings in India, we believe that there is still significant

scope for yields to improve.

Figure 12: Comparison of Indian crop productivity

Mt/ ha World India China

Rice 4.2 2.3 6.6

Corn 5.0 2.2 5.0

Soybean 2.2 0.9 1.6

Rapeseed 1.9 1.1 1.9

Peanut 1.6 0.9 3.3

Sugarcane 74.0 67.0 69.8

Wheat 3.0 2.8 4.7

Source: Companies, Standard Chartered Research

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

2.5

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

t/h

a

Yield assuming no incremental land Yield

Faster yield response vs. history is required and higher agro-input

usage will help achieve this


26 February 2014 10

A number of factors including better and judicious use of fertilizers, pesticides and

speciality nutrients, higher share of irrigated land, farm mechanisation and higher

usage of seeds, including hybrid seeds can help in optimising yields.

Agro-input market in India. The overall agro-input market in India is estimated at c.

INR 1tn. We have estimated the market for fertilizers, pesticides, seeds and micro

irrigation only for the purpose of our analysis. The market is split as follows.

Figure 13: Market for pesticides, seeds, micro irrigation, fertilizers

Source: Ministry of Agriculture, FICCI, Assocham, Companies, Standard Chartered Research

Aside from the above inputs, there is relatively small, but fast growing market for

agro-inputs such as organic manures and plant growth nutrients in India, too.

Rising rural incomes to provide support. There has been a significant increase in

minimum support prices in recent years, boosting farmer incomes. In addition, the

government has increased its budget on rural welfare schemes manifold over the

past decade, boosting rural incomes.

Figure 14: Trend in MSPs for major crops in India

Source: Ministry of Agriculture, Standard Chartered Research

Crop protection market - domestic,

INR 115 bn

Crop protection market - export, INR

121 bn

Seed market, INR 113 bn

Fertilizer market, INR 598 bn

Micro Irrigation market, INR 33 bn

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

FY08 FY13 FY08 FY13 FY08 FY13 FY08 FY13 FY08 FY13

INR

per

MT

Wheat Maize Pulses (arhar) Cotton Paddy

Agro-input market in India has tailwind from rural welfare

schemes


26 February 2014 11

Figure 15: Trend in the government’s rural welfare scheme expenditure

Source: India Budget, Standard Chartered Research

Subsidised markets – Fertilizers and micro-irrigation

Fertilizers and micro-irrigation markets have traditionally been subsidised in India

owing to the need to promote higher usage and affordability among farmers.

Subsidies usually are a help in increasing demand; however, given the poor state of

government finances and inefficient processes, this has been a headwind rather than

a tailwind for the Indian agro-inputs sector. We also note that India features poorly in

our global sustanability report for agriculture, predominantly owing to increases in

subsidy levels. Refer Measuring sustainable development by John Calverley.

Fertilizers. While fertilizers is the biggest segment of the farm inputs market, the

segment is saddled with issues of high subsidies and is often hostage to the

government’s policy decisions. The urea (N) market is the largest in terms of tonnage

at 30mt, followed by phosphatic (DAP) fertilizers at 9mt and complex fertilizers at

7.3mt. Urea players are subsidised on the basis of a fixed RoE on their regulated

capital employed and retail prices are regulated by the government. Phosphatic and

potassium players are remunerated on a nutrient-based subsidy (NBS) and the

government periodically fixes the amount of subsidy for such fertilizers with the

manufacturers being free to price their products in the market. Owing to delays in

subsidy payments from the government, most fertilizer companies have been

struggling with high working capital requirements of late, curtailing their return ratios.

Average subsidy receivable days for the Indian fertilizer industry have increased to

over 110 days in FY13 from c. 50 days in FY08.

Figure 16: Average subsidy receivable days – Indian fertilizer industry

* For Chambal Fertilizers, Coromandel International, Rashtriya Chemical Fertilizers

Source: Company, Standard Chartered Research

0

50

100

150

200

250

300

350

400

450

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

INR

bn

Rural development - total disbursement

40

50

60

70

80

90

100

110

120

FY07 FY08 FY09 FY10 FY11 FY12 FY13

Average subsidy days receivables*

CAGR 17%

Subsidy delays and policy exposure makes fertilisers and micro-irrigation less attractive

https://research.standardchartered.com/configuration/ROW%20Documents/Measuring_sustainable_development_18_09_13_02_16.pdf


26 February 2014 12

Micro-irrigation (MIS). Micro-irrigation refers to the drip irrigation and sprinkler

irrigation markets. Jain Irrigation is the largest domestic company in the micro

irrigation segment and estimates the total micro-irrigation market to be worth INR

33bn with 5mn ha under coverage. According to the company, 17mn ha can be

brought under micro irrigation by 2017. While the potential for the MIS market in India

seems big, one concern for the micro irrigation industry is the high level of subsidies

provided by the government (between 50-70%). Like in the case of fertilizers, subsidy

payments are usually delayed, resulting in bloated balance sheets for most players.

Non-subsidised markets – Our preferred play

Owing to issues related to process inefficiencies and risk of delays in subsidy

payments or changes in government policies, we prefer playing the agro-input theme

through non-subsidised segments such as pesticides, seeds and other nutrients. The

combined size of the Indian pesticides and seeds market is estimated to grow to INR

650bn by 2017 from INR 350bn in 2012 – a CAGR of 13%. According to the

Federation of Indian Chambers of Commerce and Industry (FICCI), the domestic

pesticides market is estimated to grow at a CAGR of 9% over FY13-18 and

pesticides export market is estimated to grow at a CAGR of 15% up to FY20. We

estimate the seed market to grow at a CAGR of 15% over 2012-17 in line with

projections from Assocham.

Figure 17: Indian pesticides and seeds market size

Source: FICCI, Assocham, Standard Chartered Research estimates

0

100

200

300

400

500

600

700

2008 2009 2010 2011 2012 2017E

INR

bn

Domestic pesticides market

Pesticides export market

Seeds market

CAGR 17%

CAGR 13%

Pesticides and seeds are our preferred plays on agro-inputs

space


26 February 2014 13

Pesticides: Domestic tailwind and huge export opportunity Around 85% of India’s crop losses are due to causes that can be controlled by

pesticides (INR 1.2tn of avoidable crop losses annually).

Pesticide penetration is low in India (0.6kg/ha) vs. global peers (5-17 kg/ha).

The domestic pesticides market is expected to grow at a CAGR of 9% p.a. to INR

180bn by FY18. Rallis and UPL are the prominent domestic players.

Pesticide exports are projected to grow faster at 15% p.a. to USD 5.8bn by FY20.

PI and Rallis are best positioned to tap the export opportunity.

Direct impact on yields. According to estimates from Crop Care Federation of India

(CCFI), 85% of annual crop losses are due to pest infestation, diseases and weeds.

Total annual losses owing to these factors is estimated at INR 1.2tn. Total crop

losses across key crops such as rice, cotton and sugarcane are estimated to be in

the region of 20-30%.

Figure 18: Avoidable crop losses by cause Figure 19: Avoidable crop losses by key crop

Source: CCFI, Standard Chartered Research Source: CCFI, Standard Chartered Research

Low penetration of pesticides in the country. We estimate India’s domestic

pesticides market at INR 105bn for FY12. The country has a very low pesticides use

per acre of arable land as can be seen from the following chart.

Figure 20: Pesticides/ha of arable land

Source: FICCI, Standard Chartered Research

Weeds, 33%

Insects, 26%

Diseases, 26%

Rodents & Others, 15% 30% 30%

20% 20% 20%

0%

5%

10%

15%

20%

25%

30%

35%

Rice Cotton Sugarcane Potato Soybean

% c

rop

loss

INR 300bn

INR 99bn INR 44bn INR 42bn

INR 280bn

17

13 12

7 7

5 5

0.6

0

2

4

6

8

10

12

14

16

18

Taiwan China Japan USA Korea France UK India

kg/h

a


26 February 2014 14

In view of the above, it is not surprising that the domestic pesticides market is

projected by FICCI to grow at a CAGR of 9%.

Figure 21: Domestic crop protection market growth


Predominantly generic market. While globally there are players like Syngenta,

Bayer and BASF who invest significant capital in development of new molecules

providing them with a competitive edge, Indian companies in the pesticides space are

largely generic players. Most players in India either in-license off-patent molecules

from innovators globally or they develop their own generics to compete with other

brands in the market. There are a few exceptions where companies co-market or in-

license innovative molecules through arrangements with large global players.

The structure of crop protection industry is as follows:

Figure 22: Crop protection value chain


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

FY08 FY09 FY10 FY11 FY12 FY18E

INR

mn

Domestic crop protection market size

Technical (bulk) producers

(~125)

Formulators

(~800)

Distributors

(~145000)

Retailers

End users

Players: PI, Rallis, Dhanuka,

UPL, Coromandel

Players: Bayer, Syngenta, PI, Rallis, Dhanuka, UPL, Coromandel

Predominantly unorganised

players

Predominantly unorganised, Coromandel has a presence

through Manna Gromor Centres

Low penetration levels offer growth opportunities for the domestic

pesticides market


26 February 2014 15

Exports – High growth opportunity. We believe that Indian companies have a

strong potential to grow their exports for crop protection products. Pesticide exports

by Indian companies are estimated to be c.USD 2bn. According to FICCI, the export

market is projected to increase at a CAGR of 15% to reach USD 5.8bn by FY20. We

estimate the pesticides export market to double to INR 247bn by 2017 from INR

121bn in 2012.

Figure 23: Pesticides exports from India


Indian players’ competitive advantages in the export market include low-cost

manufacturing and availability of trained manpower and capacities for production.

The major export markets for Indian companies are the US, Europe and Asia

(predominantly Japan).

In addition to exporting generic pesticides to international markets, Indian companies

are also tying up with global pesticide manufacturers for contract manufacturing of

technical compounds. Industry sources believe that the contract manufacturing space

could grow substantially in the future owing to increased interest from Japanese

players (driven by a desire to diversify away the concentration risk in Japan) and

western players (driven by a need to cut costs and diversify their manufacturing base

away from China).

We believe that a robust export market can also help Indian companies diversify their

revenue stream away from only the domestic market given that the Indian market can

be impacted in times of unusual weather conditions.

Some of the prominent players in pesticide exports are Rallis and PI Industries. PI

Industries has shown significant growth in its custom synthesis and manufacturing

business (CSM) over the past few years, underscoring the strong potential of the

industry.

0

50

100

150

200

250

300

2008 2009 2010 2011 2012 2017E

INR

bn

Pesticides exports, especially custom manufacturing offers

strong growth potential


26 February 2014 16

Figure 24: PI Industries CSM revenue


Key players. We present an overview of the key players in the domestic pesticides

market below. A detailed overview of the players is given in Appendix 1.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY10 FY11 FY12 FY13

INR

mn

Figure 25: Key pesticide players in India

Company

FY13 revenues (INR bn)

FY13 EBITDA

(INR bn) Key points

International players

Bayer Cropscience 27.2 3.6 Access to innovator products

High brand recall Syngenta India NA NA

Domestic players

Rallis 14.6 2.1 High brand recall

Significant export presence

UPL 91.9 16.6 Wide portfolio – largest in India

Has global presence

PI Industries 11.5 1.8

Strong CSM presence

Co-marketing/ in-licensing model

for domestic

Dhanuka 5.8 0.8 Focused on brand building

Herbicides a focus area

Coromandel 90.3 7.7 Traditionally fertilizer player

High recall esp. in AP



26 February 2014 17

Brand and distribution driven market The pesticides market is unorganised and identifying key attributes that distinguish

winners can be difficult.

We conducted on the ground checks with over 33 dealers across seven states in

India to identify key differentiators between companies.

With the market being dominated by generic products, brands stood out as a

winning attribute almost unanimously across states. The strength of distribution

and farmer engagement were the other key winning attributes.

Rallis and UPL are among the top domestic branded players. Rallis and

Coromandel have differentiated distribution/farmer engagement models.

To identify the key attributes distinguishing the winners in the Indian crop protection

space, we spoke with over 33 agriculture distributors across various geographies in

India. The strength of a brand emerged as the single largest differentiator and

determinant of buyer behaviour.

Figure 26: State-wise key determinants of buyer behaviour

States Brand

Distribution/ farmer

engagement Chemical

composition

Other factors

(price, word of mouth etc)

Maharashtra

Karnataka

Andhra Pradesh

Gujarat

Punjab

Haryana

Uttar Pradesh

Rank Colour Rank Colour

1 3

2 4


Survey breadth and methodology. We surveyed 33 agro input distributors across

seven states in India. These seven states together accounted for 69% of India’s

agriculture output in FY13.

Brand and distribution/ farmer engagement are critical for

success in pesticides market


26 February 2014 18

Figure 27: Location of dealers surveyed

Source: RBI, Standard Chartered Research

Our questions to dealers were focussed on determining the key determinants of

buyer preferences and indentifying companies that are most distinguished based on

the winning factors thus determined.

Brand. From our survey, the strength of a brand emerged as the single most

important variable impacting buyer decisions across the states. During our visits and

conversations, we came across the instance of a branded product from Bayer,

Confidor, which sells at over 2x its generic peers. The fact that Confidor is rated

among the top brands in the Indian agrochemicals space despite this fact highlights

the strength of the brand.

Rallis featured as the most successful domestic brand, followed by UPL, from our

survey. Most dealers were of the view that level of brand stickiness is medium to high

among their customers.

Aurangabad

(4 dealers)

Nashik

(1 dealer)

Ahmedabad

(3 dealers)

Vadali

(1 dealer)Rajkot

(1 dealer)

Ludhiana

(3 dealers)

Chandigarh

(2 dealers)Kurukshetra

(1 dealer)

Sirsa

(4 dealers)

Bilhaur

(1 dealer)

Hamirpur

(1 dealer)

Saharanpur

(2 dealers)

Bangalore

(3 dealers)Mysore

(1 dealer)

Hubli

(1 dealer)

Rajanagaram

(2 dealers)

Jaggampet

(2 dealers) > 10

5 - 10

< 5

NA

% of India's agriculture output

Brand emerged as key differentiator across the seven

states we surveyed


26 February 2014 19

Figure 28: Brand performance ranking

Distributors brand performance ranking

States 1 2 3 4

Maharashtra Syngenta Bayer Dow Rallis

Karnataka Bayer Rallis Syngenta Dupont

Andhra Pradesh Bayer Syngenta Rallis Coromandel

Gujarat Bayer Rallis UPL Dupont

Punjab Bayer Syngenta Indofil Rallis

Haryana Syngenta Bayer Rallis Monsanto

Uttar Pradesh Bayer UPL Rallis Syngenta


Distribution. As seen in Fig. 28 above, the width of distribution and farmer

engagement is key for industry players to be able to differentiate their offerings. This

is understandable given the generic nature of the Indian crop protection market and

the lack of exclusivity from retailers and dealers. A summary of distribution networks

of companies under our coverage is given below.

Figure 29: Distribution network strength

Rallis PI Kaveri UPL Coromandel

No. of dealers c.2,500 >9,000 c.15,000 c.7,000 > 7,000

No. of retailers >40,000 >40,000 NA NA NA


We believe that while breadth of reach through third-party retail channels is

important, there is sustainable advantage to be achieved through direct farmer

outreach programs. According to our dealer survey, the demonstration of product

strength through field trials has proved to be the most successful method when

launching a new product in most of the markets. Therefore, we believe that

companies that have stronger farmer engagement programs are better placed vs.

their peers and such programs can be instrumental in establishing brand equity.

Two examples of farmer outreach programs are in the case of Rallis and Coromandel

Fertilizers.

I. Rallis Kisan Kutumbha: The Rallis Kisan Kutumbha (RKK) is one of the most

extensive privately run farmer outreach programs in the country and has a strength

of c.1mn farmers currently. Under this program, Rallis maintains a comprehensive

data base of the member farmers including their cropping patterns, yields and input

usage. Rallis provides on the ground support including regular farm visits, providing

extensive technical advice, appraising farmers of latest developments and

organizing seminars for interaction with agronomists and experts. In addition to this,

Rallis also sets up demo farms at the member farmer areas to demonstrate the

difference in yields owing to adoption of best practices and agro inputs. Besides

providing a strong relationship with farmers and an avenue to promote Rallis’ own

products, RKK also allows the company to get inputs and market demand

assessment from farmers for determining future product launch pipeline.

Farmer engagement programmes that build relationship and trust are as critical as breadth of distribution


26 February 2014 20

II. Manna Gromor Centres (Coromandel Fertilizers): Manna Gromor Centres are

retail outlets promoted by Coromandel Fertilizers. The company currently has over

600 centres spread across Andhra Pradesh and Karnataka, servicing close to 2mn

farmers. The company targets to have 1,000 centres over the next few years. We

visited a few MGCs and from our visits, some of the differentiated services being

offered by MGCs to local farmers are as follows:

a) Farmer helpline

b) Transparent pricing and sale price disclosures

c) Advice on best and optimum pesticide usages

d) Comprehensive farm solutions under one roof.


26 February 2014 21

Seeds: Set to accelerate We expect India’s seed market to grow at a CAGR of 15% to INR 230bn in 2017

from INR 110bn in 2012.

We view the industry as attractive owing to low penetration of hybrid seeds, high

barriers to entry and potential for non-linear growth.

Kaveri Seed and Rallis are our preferred picks to play this theme.

According to the International Seed Federation (ISF), India’s seed market is the sixth

largest in the world and is estimated at c. USD 2bn (INR 113bn) for 2012. According

to Assocham, the seeds market is expected to grow at a 15% CAGR over the

medium term and we estimate the market to grow to INR 230bn by 2017.

The size of India’s seed market looks low in comparison to global emerging market

peers as shown in the chart below.

Figure 30: India’s seed market

Source: ISF, Assocham, Standard Chartered Research

Figure 31: Seed market vs. land area

Source: ISF, OECD-FAO, Standard Chartered Research

0

50

100

150

200

250

2008 2009 2010 2011 2012 2017E

INR

bn

Seed market

0

2,000

4,000

6,000

8,000

10,000

12,000

0 20 40 60 80 100 120 140 160 180

Do

mes

tic

seed

mar

ket

(U

SD

mn

)

Arable land (mn hectares)

China

India

Russia

Brazil

Argentina

Turkey

Ample scope for increasing hybrid seed penetration in India


26 February 2014 22

While cotton has been dominating the hybrid market with 80% hybridization, crops

such as rice have an extremely low hybridization rate (less than 5%). We believe that

going forward, stronger emphasis on yield would necessitate higher use of hybrids in

the country.

High barrier to entry. The key differentiator for seed companies is the strength of

their research and development (R&D) franchise. Typically, development of a new

seed takes 8-10 years between controlled atmosphere evaluation and commercial

production, given seeds cannot be manufactured but only grown as part of biological

processes. In addition, it takes another 3-4 years to generate acceptability of the

seed among farmers. Therefore, once a seed variety is established in the market, it

becomes difficult for a new entrant to challenge it for a long period of time and the

innovator enjoys a strong competitive advantage.

Non-linear growth. Typically, farmers test a seed in a small section of their farms to

assess its viability and merits under local conditions. Once they are comfortable, the

growth in area under new seed for a given farmer can be exponential. This offers

opportunities for non-linear growth to companies that have seeds under testing with

farmers.

An instance of non-linear growth can be seen from the pattern of growth of Bt Cotton

acreage in India since its introduction in 2002. Bt Cotton is the only large scale

genetically modified seed being used in India currently.

Figure 32: Bt cotton market in India

Source: ISAAA, Standard Chartered Research

Genetically modified seeds can provide the next leg up

Genetically modified (GM) seeds have relatively little adoption in India at the moment

given GM seeds have been only approved for use in cotton so far. However,

persistent low productivity, high food inflation and the strong impact of GM seeds

witnessed on the cotton crop would necessitate the introduction of GM seeds in India

over the medium term, in our view. However, it is difficult to predict the timing of such

approvals given that attempts to introduce GM seeds have been met with strong

resistance from various interest groups in the past. We are not currently building in

any upside from the adoption of GM seeds into our forecasts.

0.8 0.8 5.3

13.0

38.4

62.1

76.2

83.5

93.6

0

10

20

30

40

50

60

70

80

90

100

0

5,000

10,000

15,000

20,000

25,000

30,000

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Are

a in

lakh

ha

INR

mn

Bt cotton market India Bt cotton area hectares

Seed market offers non-linear growth and higher barrier to entry


26 February 2014 23

Figure 33: Productivity of cotton after introduction of Bt cotton

Source: Cotton Advisory Board, Standard Chartered Research

Issues related to GM seeds – Currently, use of GM seeds is banned in India except

in the case of cotton. Also, Bt gene currently used for GM cotton seeds is patented by

Monsanto and domestic players pay a royalty to Monsanto for the use of this gene.

Even in future, if and when Bt is introduced in other crops, domestic players would

need to pay a royalty for use of specific patented genes. The impact of GM on

pesticides and other agro inputs is another issue that needs to be assessed further in

the event GM is allowed into the country. Note that while initially after the introduction

of Bt Cotton, pesticide usage for the cotton crop declined, however, newer varieties

of pests (sucking pests) have since emerged, necessitating introduction of new

pesticide molecules.

Key players. We present an overview of the key players in the seeds market below.

A detailed overview of the players is given in Appendix 1.

Figure 34: Key seed players in India

Company

FY13 revenues (INR bn)

FY13 EBITDA (INR bn) Key points

International players

Syngenta NA NA Focus on maize and rice seeds

Predominantly a seeds player

Only listed subsidiary of Monsanto

globally

Monsanto 4.4 0.7

Domestic players

Nuziveedu Seeds NA NA Largest cotton seed player – unlisted

Kaveri Seed 7.1 1.4 No. 2 player in cotton seeds market –

only listed seeds pure play

Rallis 14.6 2.1 Through 80% subsidiary – Metahelix

Advanta Seeds 10.7* 1.7* Associate of UPL

Significant export presence

* Advanta seeds revenue and EBITDA is CY ended 2012


0

100

200

300

400

500

600

FY

91

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

Yie

ld k

gs

per

hec

tare

Cotton yield kgs (per hectare)

Eventual introduction of GM seeds can boost seed market but can also

impact pesticides demand


26 February 2014 24

Our framework for evaluating companies We value companies under our coverage on six key parameters – brand,

distribution, product mix, export mix, leverage and working capital.

Rallis fares the best on the two attributes (brand and distribution/ farmer

engagement) that are considered key differentiators based on our on-the-ground

dealer survey.

Rallis and PI Industries emerge as our top two picks based on their financial and

operational factors mentioned above.

While this framework is instrumental in identifying long-term winners, valuation

distortions can impact short-term stock preferences.

Based on our understanding of industry fundamentals, we introduce our proprietary

framework to evaluate the relative attractiveness of the listed agro-input players in

India. We assess each company individually and rank each of the five companies

under our coverage between 1 to 5 with 1 being the most attractive. To narrow down

on the attributes, we have used findings from our on-the-ground survey of agro-input

dealers and ranked companies based on their brand and distribution/farmer

engagement strength. In addition, we use attributes such as product and

geographical diversification to assess the ability of a business to withstand domestic

weather-related volatility; and leverage and working capital to the assess their

financial strength.

Our overall ranking for companies under our coverage is shown below.

Figure 35: Ranking of companies under our coverage

Rallis PI Kaveri UPL** Coromandel*

Strength of brand 1 3 2 2 3

Distribution/ farmer engagement 1 2 4 4 2

Product diversification 1 4 5 2 3

Geographic diversification 3 1 4 1 NA

Leverage 2 3 1 4 NA

Working capital 2 3 1 4 NA

Overall Rank 1 2 3 4 NA


Note: * CRIN financials not available separately for non-fertilizer business beyond EBITDA line.

Note: ** We have rated UPL’s India business only for ranking of exports, leverage/ working capital at global levels

We believe that our framework can serve as a useful tool in assessing the long-term

winners in the Indian agro-input space. We, however, recognize that valuations would

also play a crucial role in determining short-term preferences within our coverage

universe.

A detailed assessment of the six factors considered by us above is given below.

Strength of brand. We rate companies with stronger brand perception higher. Based

on our survery of agro-input distributors, Rallis stands out as the player with the

highest brand recall in our coverage universe, followed by UPL. Kaveri Seed is seen

as one of the top 2 brands in cotton seeds.

Our framework evaluates companies based on six operational and financial

parameters- Rallis and PI emerge as top picks


26 February 2014 25

Figure 36: Ranking based on brand and distribution strength


No. of districts with recall 7 1 2 2 1

Rank 1 3 2 2 3

No. of districts with recall based on our survey of 33 dealers across 7 states in the country


Distribution/ farmer engagement. While the companies under our coverage have

varying degrees of reach through distributors and retailers, we also assess

differentiated farmer outreach programs adopted by companies to rank them. On this

basis, Rallis – with the RKK program – stands out as a differentiated player with a

competitive edge while Coromandel’s focus on farmer engagement through Manna

Gromor Centres (MGC) makes it stand out. RKK is a farmer engagement program

with over 1mn members and aims to provide on-site assitance to its members.

Similarly, Coromandel’s MGC initiative helps it engage directly with the farmers

though its 650 retail outlets. PI Industries with its differentiated product offering

(exclusive molecules) has a differentiated offering, in our view.

Figure 37: Ranking based on brand and distribution strength


No. of dealers c.2,500 >9,000 c.15,000 c.7,000 > 7,000

No. of retailers >40,000 >40,000 NA NA NA

Differentiated strategy Rallis Kisan Kutumbha

Focus on in-licensing

NA NA Manna Gromor

Centre

Rank 1 2 4 4 2


Product mix diversification. We believe that players with a more diverse product

mix would have a better and more stable revenue profile vs. players with a single

product focus. This is owing to (1) the higher number of touch points with the

consumer and (2) the ability to offset seasonal and cyclical weakness in one product

line with other products. Rallis and UPL feature best on this measure.

Figure 38: Ranking based on product mix diversification


Pesticides X X

X X

Seeds X

X X

PGN X X

X X

Organic manure X

X X

Rank 1 4 5 2 3

Source: Standard Chartered Research.


26 February 2014 26

Geographic diversification. In addition to product diversification, players with

exposure to export markets fare well, given their ability to better withstand the

volatility owing to weather-related issues in one geography. UPL, PI Industries and

Rallis fare best on this metric within our coverage universe. In addition, the presence

in the fast growing contract manufacturing segment of the export market can provide

strong growth given favourable industry dynamics. Rallis and PI are the two players

that have a significant presence in this segment.

Figure 39: Ranking based on geographic diversification


Exports/ Sales 29% 55% NA 56% NA

Rank 3 1 4 1 NA

Source: Companies, Standard Chartered Research. Note: UPL standalone export numbers taken for this analysis.

Leverage. Companies with lower leverage are better positioned to withstand any

volatility owing to weather-related hardships, deserving higher rankings.

Figure 40: Ranking based on leverage and working capital

Rallis PI Kaveri UPL CRIN

Net debt/ EBITDA (FY13) 0.5x 1.1x -1.0x 1.4x NA

Rank 2 3 1 4 NA


Working capital. A higher working capital intensity can be a sign of potential weak

product demand leading to higher stickiness of inventory or more linient terms of

trade to dealers. Kaveri Seed and Rallis fare best on this parameter.

Figure 41: Rating based on leverage and working capital


Net working capital days (FY13) 45 84 31 105 NA

Rank 2 3 1 4 NA



26 February 2014 27

Sector valuation Valuations for Indian agro-input companies are at the higher end of their historical

trading range.

Nevertheless, we believe that valuations could sustain at current levels owing to

significantly better EPS growth and RoEs for the industry vs. history.

We have considered the four companies under our coverage that are pure plays on

sub-sectors that we prefer (pesticides, seeds and pesticides export) for the purpose

of assessing sector valuations.The companies are Rallis, UPL, PI Industries and

Kaveri Seed. Valuations for the sector are given below.

Figure 42: Agro-input sector valuation

Source: Bloomberg, Standard Chartered Research

As can be seen above, sector valuations are currently towards the higher end of their

historical trading range. Nevertheless, given the high EPS growth and RoE trends,

we believe that current valuations are sustainable.

Figure 43: Sector valuation vs. EPS growth Figure 44: Sector valuation vs. forward RoE

Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

While we remain convinced of the structural strength of the Indian agro inputs market

one key cyclical risk to valuations is obviously the weather, given the high correlation

Indian farmer incomes have with the monsoons (please refer to Fig. 10).

0

2

4

6

8

10

12

14

16

18

20

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

PE

R m

ult

iple

Agri sector custom index forward PER

Average

+1 SD

-1 SD

-20%

0%

20%

40%

60%

0

10

20

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

EP

S g

row

th

PE

R m

ult

iple

Agri sector custom index forward PER Average +1 SD -1 SD Agri sector EPS growth

20%

25%

30%

0

10

20

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

RO

E

PE

R m

ult

iple

Agri sector custom index forward PER Average +1 SD -1 SD Agri sector ROE


26 February 2014 28

Rallis India

The power of branding

Rallis is the strongest domestic brand in India’s pesticides

space. Brand is the key differentiator for agro-input

companies, based on our survey of dealers across India.

Rallis has the widest range of products among companies

in our coverage universe, providing it with the ability to

withstand cyclical pressures in any given product line.

Rallis’ exports business provides a hedge against domestic

cyclicality, while growth unfolds in its nascent seeds and

organic manure businesses.

We initiate coverage of Rallis with an Outperform rating and

a March-2015 price target of INR 200.

OUTPERFORM (initiating coverage)

Quality play across multiple agriculture inputs. As revealed in

our survey of more than 30 agro-input dealers across seven states

in India, Rallis enjoys the strongest brand recall among domestic

players, providing the company with a competitive edge. In

addition, the company has one of the widest range of product

offerings among Indian players, including its exports business,

which provides stability to its overall business model.

Unique farmer connect. Rallis has one of the most far-reaching

farmer connect programmes (Rallis Kisan Kutumbha) in India. In

our view, the programme helps the company gain unique insights

into the domestic demand scenario, while enabling cross-selling of

multiple products through a consultative approach with farmers.

Non-pesticides portfolio set for strong growth. Rallis has a

stated strategy to increase the contribution from its non-pesticides

business to 40% (15% currently) over the next few years.

According to management, this would be achieved through higher

growth of nascent businesses, such as seeds and contract

manufacturing, which can also be margin-accretive.

Hidden value in land. While we do not ascribe any value to Rallis’

land holdings, the company has idle land bank in Navi Mumbai

and Secunderabad, which, we believe, can be monetised to

unlock value for its shareholders.

Initiate with Outperform. We initiate coverage of Rallis with an

Outperform rating and a March-2015 price target of INR 200,

based on 17x 12-month forward PER.

Risks. Key risks include: (1) adverse weather conditions, (2)

adverse FX movement, and (3) irrational expansion.

Source: Company, Standard Chartered Research estimates

Share price performance

Source: Company, FactSet

PRICE as of 25 Feb 2014

INR 157.00

PRICE TARGET

INR 200.00

Bloomberg code Reuters code

RALI IN RALL.BO

Market cap 12-month range

INR 30,532mn (USD 492mn) INR 109.55 - 184.90

EPS adj est change NA

Year-end: March 2013 2014E 2015E 2016E

Sales (INR mn) 14,582 17,474 20,832 24,531

EBITDA (INR mn) 2,106 2,579 3,133 3,805

EBIT (INR mn) 1,790 2,207 2,749 3,411

Pre-tax profit (INR mn) 1,723 2,152 2,717 3,382

Net profit adj. (INR mn) 1,190 1,475 1,844 2,283

FCF (INR mn) 649 1,487 1,406 1,823

EPS adj. (INR) 6.12 7.58 9.48 11.74

DPS (INR) 2.30 3.03 3.79 4.70

Book value/share (INR) 31.92 35.95 41.00 47.25

EPS growth adj. (%) 2.3 23.9 25.1 23.8

DPS growth (%) 4.5 31.9 25.1 23.8

EBITDA margin (%) 14.4 14.8 15.0 15.5

EBIT margin (%) 12.3 12.6 13.2 13.9

Net margin adj. (%) 8.2 8.4 8.9 9.3

Div. payout (%) 37.6 40.0 40.0 40.0

Net gearing (%) 16.9 10.6 8.4 4.0

ROE (%) 20.3 22.3 24.6 26.6

ROCE (%) 25.8 29.8 33.1 36.1

EV/sales (x) 1.9 1.8 1.5 1.3

EV/EBITDA (x) 13.0 12.1 10.0 8.1

PBR (x) 3.6 4.4 3.8 3.3

PER adj. (x) 22.0 20.7 16.6 13.4

Dividend yield (%) 1.7 1.9 2.4 3.0

110

150

190

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

Rallis India BSE SENSEX 30 INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mth

Ordinary shares -3 -4 29

Relative to index -2 -5 19

Relative to sector - - -

Major shareholder Tata Group (50.1%)

Free float 50%

Average turnover (USD) 583,088


+91 22 4205 5916

RALI IN INR 157.00 INR 200.00


26 February 2014 29

Investment thesis High-quality play across the breadth of India’s agriculture inputs space

We view Rallis as a high-quality play on India’s agriculture inputs space. The

company has some of the strongest brands in the country – its products comprise

seven of the top-ten pesticide brands in India.

Figure 45: Rallis – Brand positioning

Source: Company

Following our conversations with dealers (33 dealers in seven states across India),

Rallis emerged as the strongest domestic brand in most of the states.

Figure 46: Rallis – Brand presence

Distributors’ brand performance ranking

States 1 2 3 4

Maharashtra Syngenta Bayer Dow Rallis

Karnataka Bayer Rallis Syngenta Dupont

Andhra Pradesh Bayer Syngenta Rallis Coromandel

Gujarat Bayer Rallis UPL Dupont

Punjab Bayer Syngenta Indofil Rallis

Haryana Syngenta Bayer Rallis Monsanto

Uttar Pradesh Bayer UPL Rallis Syngenta


In addition, we believe that Rallis’ strong range of products through multiple offerings,

such as seeds, organic manure, agricultural implements and pesticides, provides the

company with multiple touch-points with the farmer.

Figure 47: Rallis’ presence across multiple products

Product Rallis’ presence

Pesticides Herbicides, insecticides and fungicides

Seeds Through Metahelix, an 80% subsidiary of Rallis

Organic manure Through 51% subsidiary, Zero Waste Agro



26 February 2014 30

Unique farmer connect

Rallis has a wide reach among farmers through its on-the-ground sales force and

farmer outreach programmes. The company also has a practice of conducting

focused group discussions (FGDs) with farmers to gauge their product requirements.

According to management, Rallis conducted FGDs with over 4,000 farmers in more

than 20,000 villages over the seven years up to FY12. We believe such a strategy

provides the company with unique insights into farmer requirements.

Apart from FGDs, Rallis has numerous farmer outreach programmes (see figure

below):

Figure 48: Rallis’ farmer outreach programmes

Rallis Kisan Kutumbha Database of more than 1mn famers and their cropping patterns

and input preferences

Samrudh Krishi For grapes, cumin and chilly farmers

Grow More Pulses (MoPu) 0.9mn acres covered with 0.16mn farmers engaged in FY13 –

support for crop productivity and marketing of pulses


Such farmer outreach programmes help Rallis cross-sell its products such as seeds

and could prove to be an enabler of strong growth and premium pricing, in our view.

Exports business provides a hedge against domestic volatility

The exports business constitutes c.30% of Rallis’ overall revenues. The business

involves exports of generic pesticides, including registering molecules internationally.

In addition, the company also has a presence in the contract manufacturing space for

international players. Rallis has partnered with numerous players for contract

manufacturing in agrochemicals, fine and specialty chemicals, and polymer/

pharmaceutical intermediates. Moreover, we expect the company’s foray into the

CSM business to help generate strong growth in its exports business.

Figure 49: Rallis – International revenue growth


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY10 FY11 FY12 FY13 FY14E FY15E FY16E

INR

mn

International revenue

CAGR 23%


26 February 2014 31

Non-pesticide business set for solid growth

Management has a stated strategy to increase the share of its non-pesticide portfolio

to 40% over the next few years, from c.15% in FY13. We believe that while a part of

this shift in the mix would come from inorganic growth, a major portion would also be

driven by organic growth. We expect the share of the non-pesticides business to

organically increase to 26% by FY16E.

Rallis acquired a majority stake in Metahelix Life Sciences, a seed research and

manufacturing company, in December 2010. We believe that given its potential to

leverage on Rallis’ strong distribution strength and brand presence, the seed

business can deliver significant growth going forward. In addition, EBITDA margin of

Rallis’ seeds business is currently lower than its industry peers (we estimate its FY13

EBITDA margin of 14%, versus Kaveri Seeds’ EBITDA margin of more than 20%)

and expected to increase as Metahelix gains scale. We have not assumed any

upside from any potential introduction of GM seeds in non-cotton crops in future.

Figure 50: Metahelix – Revenue growth


Hidden value in land. While we do not ascribe any value to the land bank owned by

Rallis, we note that the company has idle land in two locations: (1) c.25 acres in Navi

Mumbai; and (2) c.90 acres in Secunderabad. We believe these can be monetised in

future, especially if the company needs additional resources for inorganic expansion.

Valuation We value Rallis on a 12-month forward PER multiple of 17x, to arrive at our March-

2015 price target of INR 200 per share. Our target multiple is in line with the historical

PER for Rallis. We believe that a 17x target multiple is justified, given (1) the

expected RoE improvement (to 27% in FY16E from 20% in FY13); and (2) the

expected robust EPS CAGR of 24% during FY13-16E.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY12 FY13 FY14E FY15E FY16E

INR

mn

Metahelix revenue

CAGR 37%


26 February 2014 32

Figure 51: Rallis – Historical PER band


Risks Key risks to our investment view arise from the following:

Adverse weather: Like all agriculture businesses, Rallis is also exposed to

significant swings in domestic weather conditions, particularly the monsoon. In

addition, the company is also exposed, albeit to a lesser extent, to fluctuations and

changes in cropping patterns in international geographies owing to its presence in

markets such as the US and Latin America.

Adverse foreign exchange movements: Rallis imports a sizable portion of its raw

materials, and, therefore, adverse foreign exchange movement could impact its

profitability. However, we believe that the company’s exports business could act as a

cushion in such a scenario.

Irrational expansion: Management has a stated target of achieving 40% revenue

from its non-pesticide business over the next few years. While we think this is the

correct strategy to follow, we believe any haste on its part to achieve this target

through expensive acquisitions would be detrimental to our investment case.

Business description Rallis is a Tata Group company engaged in a wide gamut of agricultural inputs. The

company is one of the largest players in the Indian agriculture inputs space, with

revenue of INR 14.6bn in FY13. The key business divisions of Rallis are as follows:

Pesticides: This division has a wide range of insecticides, fungicides and herbicides,

which target Indian agricultural conditions, with emphasis on crops such as rice,

cotton and vegetables. In the pesticides segment, Rallis introduces its own generic

molecules, in addition to in-licensing and co-marketing products from global players.

Some of its international partners include FMC, Syngenta, Nihon Nohyaku and

DuPont.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0


PE

R m

ult

iple

Rallis India forward PER Average +1 SD -1 SD

Target PER 17x


26 February 2014 33

Some of Rallis’ popular products are given below:

Figure 52: Rallis – Popular products

Product Rallis presence

Insecticides Takumi, Mida, Reeva, Rogor, Asataf, Manik

Fungicides Contaf, Master, Fujione

Herbicides Fateh, Tata Metri, Tata Panida


Rallis has a distribution network that covers 80% of India’s districts, with c.2,500

dealers and more than 40,000 retailers across India.

Domestic institutional business: This division is engaged in providing technical

and bulk composition of various molecules to companies such as Bayer, Syngenta,

UPL, Cheminova, among others.

International business: Rallis’ international business is engaged in the competitive

generic pesticide segment in more than 50 countries globally. The growth strategy is

through partnerships, new registrations and contract manufacturing. For contract

manufacturing, Rallis has the largest pesticide manufacturing capacity in the country,

with a production capacity of more than 10,000MT of technical grade pesticide and

30,000 tonnes of formulations annually.

Non-pesticides portfolio: Rallis’ non-pesticide portfolio comprises divisions such as

seeds, organic manure and plant growth nutrients. The company plans to increase

the proportion of non-pesticide sales to 40% over the next few years.

Metahelix: Rallis has an 80.46% stake in Metahelix, which is predominantly engaged

in the development and sale of hybrid seeds through its 100% subsidiary, Dhanya

Seeds. Dhanya is a technology-driven, hybrid seeds business, with seeds

predominantly in rice, maize, pearl millet and vegetable crops.

Zero Waste Agro Organics (ZW): Rallis has a 51.02% stake in ZW, which is an

organic soil conditioner manufacturing company. Rallis has a majority representation

on the board of the company.

Management: An overview of Rallis’ key management is given below:

Figure 53: Rallis – Board of directors

Gopalakrishnan Chairman

V Shankar Managing Director and CEO

Homi R Khusrokhan Director

B D Banerjee Director

Eknath A Kshirsagar Director

Prakash R Rastogi Director

Bharat Vasani Director

R Mukundan Director

Y K Alagh Director

Y S P Thorat Director

Source: Company


26 February 2014 34

Financials We present below the key assumptions used to project Rallis’ financials:

Domestic formulation and institutional business: We assume a CAGR of 11% in

FY14-16E in our projections. This is in line with the growth which the company has

been witnessing in FY08-14E.

International business: Despite the renewed focus of management on the custom

synthesis business and the company having recently entered into new geographies

like Latin America, we project a 17% CAGR in the international business in FY14-

16E, versus a 20% CAGR generated in FY08-14E.

Non crop business: We project the non-crop business to grow at a CAGR of 41% in

FY14-16E. This would largely be driven by growth in the company’s seeds portfolio.

We estimate that the seeds business (predominantly the hybrid seed selling business

through Metahelix) will constitute more than 60% of Rallis’ non-crop business

revenue by FY16E.

Given these assumptions, we estimate the non-crop portfolio will comprise 26% of

Rallis’ total revenues by FY16E.

Figure 54: Non-crop business revenue and non-crop business revenue as % of

total


Revenues: We expect Rallis’ overall revenues to increase at a CAGR of 18% in

FY14-16E owing to our aforementioned assumptions.

Figure 55: Rallis – Revenue and revenue CAGR


2% 4%

11%

15%

18%

22%

26%

0%

5%

10%

15%

20%

25%

30%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


as % o

f revenu

e

INR

mn

Non-corp revenue As % of total company revenue

0

5,000

10,000

15,000

20,000

25,000

30,000


INR

mn

Revenue

CAGR 18%


26 February 2014 35

Margins: We estimate EBITDA margin for the seeds business will increase to 19%

by FY16E from 16% in FY14E. Pure-play seed companies such as Kaveri Seeds

currently have an EBITDA margin of more than 20%. We believe that as Metahelix’s

business gathers scale, margins should increase to similar levels as other pure-play

seed players in the industry. We estimate EBITDA margins for the crop protection

business will continue to be in the 14-15% range over FY14-16E.

Figure 56: Seeds and overall EBITDA margins


EPS growth: Given our revenue and margin projections, we believe that Rallis’ EPS

would increase to INR 11.74 by FY16E from INR 7.58 in FY14E, implying a CAGR of

24% over the two-year period. We also expect its RoE to improve to 27% by FY16E

from 22% in FY14E.

17%

14%

16% 17%

19%

16%

14% 15% 15% 16%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%


EB

ITD

A m

arg

in

Seed business EBITDA margin (%) Overall EBITDA margin (%)


26 February 2014 36


Income statement (INR mn) Cash flow statement (INR mn)

Year-end: Mar 2012 2013 2014E 2015E 2016E Year-end: Mar 2012 2013 2014E 2015E 2016E

Sales 12,749 14,582 17,474 20,832 24,531 EBIT 1,743 1,790 2,207 2,749 3,411

Gross profit 5,356 5,803 6,902 8,228 9,690 Depreciation & amortisation 287 315 371 383 394

SG&A (2,332) (2,616) (2,883) (3,437) (4,048) Net interest (139) (178) (125) (103) (99)

Other income - - - - - Tax paid (487) (535) (667) (842) (1,048)

Other expenses (1,280) (1,396) (1,812) (2,042) (2,231) Changes in working capital (587) (412) 141 (322) (355)

EBIT 1,743 1,790 2,207 2,749 3,411 Others (125) 112 60 40 20

Net interest (139) (178) (125) (103) (99) Cash flow from operations 692 1,094 1,987 1,906 2,323

Associates - - - - -

Other non-operational 62 110 70 70 70 Capex (986) (445) (500) (500) (500)

Exceptional items - - - - - Acquisitions & Investments - - - - -

Pre-tax profit 1,666 1,723 2,152 2,717 3,382 Disposals - - - - -

Taxation (487) (535) (667) (842) (1,048) Others 410 186 (500) (500) (500)

Minority interests (15) 2 (10) (30) (50) Cash flow from investing (576) (259) (1,000) (1,000) (1,000)

Net profit 1,164 1,190 1,475 1,844 2,283 Dividends (428) (447) (690) (863) (1,069)

Issue of shares (83) (66) 0 0 0

Net profit adj. 1,164 1,190 1,475 1,844 2,283 Change in debt 369 (227) (500) 0 0

EBITDA 2,030 2,106 2,579 3,133 3,805 Other financing cash flow (22) 35 10 30 50

Cash flow from financing (164) (705) (1,180) (833) (1,019)

EPS (INR) 5.98 6.12 7.58 9.48 11.74

EPS adj. (INR) 5.98 6.12 7.58 9.48 11.74 Change in cash (48) 129 (193) 73 304

DPS (INR) 2.20 2.30 3.03 3.79 4.70 Exchange rate effect - - - - -

Avg fully diluted shares (mn) 194 194 194 194 194 Free cash flow (294) 649 1,487 1,406 1,823

Balance sheet (INR mn) Financial ratios and otherYear-end: Mar 2012 2013 2014E 2015E 2016E Year-end: Mar 2012 2013 2014E 2015E 2016E

Cash 112 258 66 138 443 Operating ratios

Short-term investments 30 10 10 10 10 Gross margin (%) 42.0 39.8 39.5 39.5 39.5

Accounts receivable 1,035 1,648 1,915 2,283 2,688 EBITDA margin (%) 15.9 14.4 14.8 15.0 15.5

Inventory 2,717 2,672 3,112 3,710 4,369 EBIT margin (%) 13.7 12.3 12.6 13.2 13.9

Other current assets 442 304 304 304 304 Net margin adj. (%) 9.1 8.2 8.4 8.9 9.3

Total current assets 4,336 4,893 5,407 6,446 7,814 Effective tax rate (%) 29.2 31.0 31.0 31.0 31.0

Sales growth (%) 17.4 14.4 19.8 19.2 17.8

PP&E 3,961 3,903 4,031 4,148 4,254 Net income growth (%) -7.7 2.3 23.9 25.1 23.8

Intangible assets 1,808 1,997 1,997 1,997 1,997 EPS growth (%) -7.7 2.3 23.9 25.1 23.8

Associates and JVs - - - - - EPS growth adj. (%) -7.7 2.3 23.9 25.1 23.8

Other long-term assets 1,109 1,110 1,610 2,110 2,610 DPS growth (%) 10.0 4.5 31.9 25.1 23.8

Total long-term assets 6,878 7,009 7,638 8,254 8,860

Efficiency ratios

Total assets 11,214 11,902 13,045 14,700 16,674 ROE (%) 22.0 20.3 22.3 24.6 26.6

ROCE (%) 26.8 25.8 29.8 33.1 36.1

Short-term debt 685 1,206 706 706 706 Asset turnover (x) 1.2 1.3 1.4 1.5 1.6

Accounts payable 2,471 2,503 3,351 3,995 4,705 Op. cash/EBIT (x) 0.4 0.6 0.9 0.7 0.7

Other current liabilities 1,194 1,180 1,180 1,180 1,180 Depreciation/capex (x) 0.3 0.7 0.7 0.8 0.8

Total current liabilities 4,350 4,889 5,238 5,882 6,591 Inventory days 123.6 112.0 99.8 98.8 99.3

Accounts receivable days 30.0 33.6 37.2 36.8 37.0

Long-term debt 856 107 107 107 107 Accounts payable days 127.1 103.4 101.1 106.4 107.0

Convertible bonds - - - - -

Deferred tax 131 286 286 286 286 Leverage ratios

Other long-term liabilities 333 364 364 364 364 Net gearing (%) 25.8 16.9 10.6 8.4 4.0

Total long-term liabilities 1,320 758 758 758 758 Debt/capital (%) - - - - -

Interest cover (x) 11.9 9.7 16.0 26.0 32.2

Total liabilities 5,669 5,647 5,996 6,640 7,349 Debt/EBITDA (x) - - - - -

Current ratio (x) 1.0 1.0 1.0 1.1 1.2

Shareholders’ funds 5,530 6,207 6,992 7,973 9,188

Minority interests 14 47 57 87 137 Valuation

EV/sales (x) 2.3 1.9 1.8 1.5 1.3

Total equity 5,545 6,254 7,049 8,060 9,325 EV/EBITDA (x) 14.7 13.0 12.1 10.0 8.1

EV/EBIT (x) 17.1 15.3 14.2 11.4 9.1

Total liabilities and equity 11,214 11,902 13,045 14,700 16,674 PER (x) 24.5 22.0 20.7 16.6 13.4

PER adj. (x) 24.5 22.0 20.7 16.6 13.4

Net debt (cash) 1,429 1,055 748 676 371 PBR (x) 4.3 3.6 4.4 3.8 3.3

Year-end shares (mn) 194 194 194 194 194 Dividend yield (%) 1.5 1.7 1.9 2.4 3.0


26 February 2014 37

PI Industries

A different kettle of fish

PI Industries (PI) has a differentiated business model

through exposure to high growth contract manufacturing

business and its domestic pesticides business.

PI is one of our two top picks in the Indian agro-input

universe and we forecast an FY14-16E earnings CAGR of

29%.

Order book (2.4x) and customer relationships provide CSM

growth visibility while the focus on innovative in-licensed

molecules makes PI’s domestic business attractive, in our

view.

We initiate coverage with an Outperform rating and a March

2015 target price of INR 325.


Well-established CSM business. PI is the largest listed player

(by turnover) in the high growth custom synthesis and

manufacturing (CSM) space in India. The company also has an

order book of USD 365mn in the CSM space (c.2.4x FY14E

revenue), which provides strong visibility for revenue.

Differentiated domestic model. PI differentiates itself in the

domestic branded pesticides market by focussing on unique

molecules through in-licensing and co-marketing tie ups with

innovators. The company gets exclusive marketing rights for such

molecules in India and works to develop the market through its

sales and distribution channels.

High RoE, turning FCF positive. We estimate an RoE of 29%

over FY14-16E. We expect the company to generate free cash

flow from FY14E onwards and forecast an impressive FY14-16E

EPS CAGR of 29%.

Initiate with Outperform rating. We initiate coverage of PI with

an Outperform rating and a 12-month forward DCF-based price

target of INR 325. Our target price translates to a 12-month

forward PER of 15x. PI is one of our two top picks in the Indian

agro-inputs space.

Risks. Key risks include: (1) adverse weather; (2) adverse foreign

exchange movements; (3) increased competition in the CSM

space; and (4) concentration risk.





INR 253.15

PRICE TARGET

INR 325.00


PI IN PIIL.BO


INR 32,208mn (USD 519mn) INR 117.65 - 266.55



Sales (INR mn) 11,514 16,234 20,559 25,370

EBITDA (INR mn) 1,829 3,033 3,833 4,850

EBIT (INR mn) 1,609 2,714 3,450 4,395


Net profit adj. (INR mn) 973 1,775 2,288 2,944

FCF (INR mn) (990) 1,125 175 889

EPS adj. (INR) 7.59 12.83 16.54 21.28

DPS (INR) 1.00 1.50 2.00 2.50


EPS growth adj. (%) -7.8 69.0 28.9 28.7

DPS growth (%) 0.0 50.0 33.3 25.0

EBITDA margin (%) 15.9 18.7 18.6 19.1

EBIT margin (%) 14.0 16.7 16.8 17.3

Net margin adj. (%) 8.5 10.9 11.1 11.6

Div. payout (%) 13.1 11.6 12.0 11.7

Net gearing (%) - - - -

ROE (%) 22.7 29.2 29.2 29.2

ROCE (%) 27.5 36.3 37.8 38.7

EV/sales (x) 1.4 2.2 1.8 1.4

EV/EBITDA (x) 8.8 11.8 9.4 7.3

PBR (x) 3.2 5.1 3.9 3.1

PER adj. (x) 14.4 19.7 15.3 11.9

Dividend yield (%) 0.9 0.6 0.8 1.0

100

190

280


PI Industries BSE SENSEX 30 INDEX (rebased)


Ordinary shares 14 14 99

Relative to index 16 12 84


Major shareholder Parteek Finance & Inv. Co. Ltd. (54.3%)

Free float 41%



+91 22 4205 5916

PI IN INR 253.15 INR 325.00


26 February 2014 38

Investment thesis Well established custom research player

PI has deep-rooted relationships with international agrochemical players and has

emerged as one of the foremost players in India’s CSM space. We see CSM as one

of the most promising segments of the Indian agro-input market, and expect India’s

pesticide exports to grow at a 2012-17E CAGR of 15%. PI is well placed owing to its

legacy relationships and strength in the space, in our view. It also has an order book

of USD 365mn in the CSM space (2.4x FY14E revenue), which provides strong

visibility for revenue.

Figure 57: PI’s CSM revenue


Differentiated strategy for domestic pesticides

PI differentiates itself in India’s branded pesticides market through the introduction of

exclusive molecules via in-licensing/co-marketing tie ups with global innovators. It

obtains exclusive marketing rights for such molecules in India and then works to

develop the market through its sales and distribution channels. We believe this focus

on exclusive molecules gives PI a sustainable competitive advantage versus its

peers.

Figure 58: PI’s domestic revenue


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY11 FY12 FY13 FY14E FY15E FY16E

INR

mn

CSM revenue

CAGR 49%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000


INR

mn

Domestic revenue

CAGR 12%


26 February 2014 39

High RoE model, turning cash flow positive to be trigger

PI has a high RoE model and we project an RoE of 29% over FY14-16E. While rapid

expansion of capacity has prevented the company from turning free cash flow

positive in the past, we expect it to turn free cash flow positive from FY14E onwards.

Figure 59: PI free cash flow profile

Note: FCF = Cash flow from operations – capex.


Valuation We value PI on a DCF model to arrive at our March 2015 price target of INR 325.

Figure 60: DCF valuation of PI

INR mn FY14E FY15E FY16E FY17E FY18E FY19E FY20E

Oper. EBIT 2,684 3,420 4,365 5,264 6,362 7,690 9,297

(Less) taxes -874 -1,127 -1,450 -1,780 -2,198 -2,715 -3,351

Net int. income/(exp) -112 -93 -93 -93 -93 -93 -93

Marginal tax rate -33% -33% -33% -33% -33% -33% -33%

Tax shield adjustments 37 31 31 31 31 31 31

NOPAT 1,846 2,324 2,946 3,515 4,194 5,006 5,977

(Add) depreciation and amortisation 320 384 455 520 580 639 699

(Less) capex -1,000 -1,500 -1,500 -1,250 -1,250 -1,250 -1,250

(Less) working capital 30 -996 -1,009 -1,064 -1,277 -1,533 -1,839

Other adjustments

Free cash flow 1,196 211 892 1,721 2,246 2,862 3,586

NPV (explicit FCF) 7,738

Terminal growth rate (%) 5.0%

NPV (terminal value) 37,478

WACC (%) 11.5%

Firm value 45,216

(Less) net debt 783

Equity value 44,433

Equity value/share 324

Source: Bloomberg, Standard Chartered Research estimates

-1,500

-1,000

-500

0

500

1,000

1,500

FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

INR

mn

Free cash flow


26 February 2014 40

Our price target translates to 15x 12-month forward PE. While our price target is

towards the higher end of PI’s historical valuation range, we believe it is justified

given the company’s strong growth outlook and RoE profile.

Figure 61: PI historical PE band


Risks Key risks to our investment view are:

Adverse weather: Like all agriculture businesses, PI’s India business is exposed to

significant swings in weather conditions, particularly monsoons. While we believe PI

is relatively hedged given its significant CSM business, adverse weather conditions in

India could still impact PI’s overall performance.

Adverse foreign exchange movements: Given that the CSM business is export

oriented, any adverse movements in foreign exchange rates could impact the

performance of PI.

Increased competition: While we believe there is a high amount of stickiness in the

CSM business owing to the entrenched partnership model with customers, we

understand that other companies (such as Rallis) are also targeting growth in this

space. While we believe the overall CSM opportunity is large enough for more

players, any adverse impact on growth or margins owing to increased competition

could be a risk to our view.

Client concentration: Given the limited number of innovators in the pesticides space

PI’s CSM business has a high level of customer and product concentration.

Business description PI is an over 60-year old company that is engaged in two key segments: CSM and

domestic pesticides. The company was founded in 1947 as Mewar Oil & General

Mills. It diversified into the CSM business in 1990s and set up its first manufacturing

site in Panoli, Gujarat.

0

5

10

15

20

25


PE

R m

ult

iple

PI Industries forward PER Average +1 SD -1 SD

Target PER 15x


26 February 2014 41

CSM division: We expect the division to contribute the majority of FY14 revenue.

PI’s offerings in this segment include contract research and contract manufacturing.

The company’s customer base is predominantly in Europe and Japan and includes

some of the largest players in the global agrochemicals market. PI has also

established a joint research facility for developing processes for the manufacture of

electronic chemicals with Sony Corporation.

PI has a strategy to engage with its customers early in the discovery process and is

involved through the lifecycle of commercialisation of molecules. The process of

conversion of an enquiry to actual opportunity can take two to five years.

Figure 62: Sample process – CSM


The company has manufacturing facilities in Panoli and Jambusar in Gujarat that

cater to the CSM business.

Domestic pesticides business: The company’s domestic pesticide business

manufactures and markets pesticide formulations. In addition to the sale of generic

molecules, PI has a differentiated strategy of focusing on in-licensed and co-

marketing innovative molecules. The company estimates that sales of exclusive in-

licensed molecules make up over 60% of its sales.

PI has a strong distribution network in India, with 9,000 dealers and over 40,000 retail

touch points. It also has 29 stock points, including its own depots and C&F agents

who work on a hub-and-spoke distribution model.

Customer Enquiry

Pre Feasibility Study

Sign Secrecy Agreement

Process Evaluation

Bench Scale Trails

Desktop costing

Customer Approval

Pilot / Kilo Lab Scale up

Process & cost review

Sample validation

SOP & Plant Design

Customer approval / agreement

Detailed plant engg.

Plant erection & installation

Raw material procurement

Commercial Production

Dec-06

Feb-07

Mar-07

May-07

Jun-07

Aug-07

Nov-07

Apr-09

• Enquiry recd

• 1st sample sent to customer

• Sample approved by customer

• Scale up study undertaken

• 1st Commercial Order (SMT)

• 2nd Commercial Order (57 MT)

[Supply up to Mar, 08]

• 3rd Commercial Order (200 MT)

[Supply up to Mar, 09]

• Signed Agreement of 1500 mt

(USD 36 mn) for 3 yrs

Sample process timeline


26 February 2014 42

Management: An overview of PI’s board of directors is given below:

Figure 63: PI board of directors

Salil Singhal Chairman and Managing Director

Mayank Singhal Managing Director and CEO

Rajnish Sarna Executive Director

P.N. Shah Director

Raj Kaul Director

Narayan K. Seshadri Director

Bimal Kishore Raizada Director

Pravin K. Laheri Director

Ramni Nirula Director

Anurag Surana Director

Venkatrao S. Sohoni Additional Director

Source: Company

Financials We present below key assumptions used to project PI’s financials.

Revenue: We project an FY13-16E revenue CAGR of 30%. This is driven by a 41%

revenue CAGR in the CSM business and a 15% CAGR in the domestic pesticide

business. Its strong order book, at 2.4x FY14E CSM revenue (excluding short-term

orders) provides visibility on CSM revenue growth. Management indicates it also has

a pipeline of one to two more products in the domestic business for FY15 and three

new molecules are near commercialisation in the CSM business.

Figure 64: PI revenue and revenue CAGR, FY11-16E


Margins: We expect EBITDA margin to remain around 19% over the forecast period.

While PI recorded a material improvement in margins in 9M FY14 owing to operating

leverage, we have not assumed any improvement in margins going forward. As per

the company, margins in the CSM business are 200-300bps higher than those in its

domestic business. An increasing proportion of CSM business could therefore lead to

profitability and higher margins above our assumptions.

0

5,000

10,000

15,000

20,000

25,000

30,000


INR

mn

CSM revenue Domestic revenue

CAGR 29%


26 February 2014 43

Figure 65: PI EBITDA and EBITDA margins


EPS growth: Given our revenue and margin projections, we estimate EPS to rise

from INR 7.65 in FY13E to 21.45 in FY16E, implying a CAGR of 41%. We also

expect RoE to improve from 23% in FY13E to 29% over FY14-16E.

Figure 66: EPS


8%

14%

16% 16% 17% 16%

19% 19% 19%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

1,000

2,000

3,000

4,000

5,000

6,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Marg

in (%

)

INR

mn

EBITDA EBITDA margin (%)

0

5

10

15

20

25


Per

sh

are

EPS

CAGR 49%


26 February 2014 44




Sales 8,791 11,514 16,234 20,559 25,370 EBIT 1,315 1,609 2,714 3,450 4,395


SG&A (719) (886) (1,055) (1,336) (1,649) Net interest (157) (155) (64) (35) (2)

Other income 10 20 30 30 30 Tax paid (398) (477) (874) (1,127) (1,450)

Other expenses (1,843) (2,294) (2,917) (3,673) (4,387) Changes in working capital (281) (374) 30 (996) (1,009)

EBIT 1,315 1,609 2,714 3,450 4,395 Others 276 (3) 0 0 0

Net interest (157) (155) (64) (35) (2) Cash flow from operations 928 819 2,125 1,675 2,389


Other non-operational (45) (3) 0 0 0 Capex (1,015) (1,809) (1,000) (1,500) (1,500)



Taxation (398) (477) (874) (1,127) (1,450) Others 13 275 0 0 0

Minority interests - - - - - Cash flow from investing (1,001) (1,534) (1,000) (1,500) (1,500)

Exceptional items after tax 321 0 0 0 0

Net profit 1,036 973 1,775 2,288 2,944 Dividends (125) (135) (241) (321) (401)

Issue of shares 206 1,225 2 0 0

Net profit adj. 1,036 973 1,775 2,288 2,944 Change in debt 85 (296) (800) 0 0

EBITDA 1,488 1,829 3,033 3,833 4,850 Other financing cash flow 0 0 0 0 0

Cash flow from financing 166 794 (1,039) (321) (401)

EPS (INR) 8.30 7.65 12.93 16.67 21.45

EPS adj. (INR) 8.24 7.59 12.83 16.54 21.28 Change in cash 92 79 86 (146) 488


Avg fully diluted shares (mn) 126 128 138 138 138 Free cash flow (87) (990) 1,125 175 889


Cash 94 161 247 101 589 Operating ratios

Short-term investments - - - - - Gross margin (%) 44.0 41.4 41.0 41.0 41.0



Other current assets 407 642 751 940 1,151 Net margin adj. (%) 11.8 8.5 10.9 11.1 11.6


Sales growth (%) 22.1 31.0 41.0 26.6 23.4

PP&E 3,735 5,311 5,992 7,108 8,153 Net income growth (%) 59.1 -6.0 82.4 28.9 28.7

Intangible assets 50 74 74 74 74 EPS growth (%) 42.1 -7.8 69.0 28.9 28.7

Associates and JVs - - - - - EPS growth adj. (%) 57.8 -7.8 69.0 28.9 28.7

Other long-term assets 214 115 115 115 115 DPS growth (%) 150.0 0.0 50.0 33.3 25.0


Efficiency ratios

Total assets 8,010 11,347 13,406 16,337 19,953 ROE (%) 38.4 22.7 29.2 29.2 29.2

ROCE (%) 32.6 27.5 36.3 37.8 38.7

Short-term debt 1,277 1,321 721 721 721 Asset turnover (x) 1.2 1.2 1.3 1.4 1.4

Accounts payable 958 2,396 3,336 4,224 5,213 Op. cash/EBIT (x) 0.7 0.5 0.8 0.5 0.5

Other current liabilities 877 833 1,216 1,292 1,377 Depreciation/capex (x) 0.2 0.1 0.3 0.3 0.3



Long-term debt 1,191 851 651 651 651 Accounts payable days 74.8 90.8 109.2 113.7 115.1



Other long-term liabilities 124 147 147 147 147 Net gearing (%) - - - - -

Total long-term liabilities 1,643 1,481 1,281 1,281 1,281 Debt/capital (%) - - - - -

Interest cover (x) 6.6 7.4 19.1 27.9 35.6


Current ratio (x) 1.3 1.3 1.4 1.4 1.6


Minority interests - - - - - Valuation

EV/sales (x) 1.6 1.4 2.2 1.8 1.4

Total equity - - - - - EV/EBITDA (x) 9.6 8.8 11.8 9.4 7.3

EV/EBIT (x) 10.9 10.0 13.2 10.4 8.1


PER adj. (x) 11.6 14.4 19.7 15.3 11.9

Net debt (cash) 2,374 2,011 1,125 1,271 783 PBR (x) 4.1 3.2 5.1 3.9 3.1



26 February 2014 45

Kaveri Seed

Sprouting up

Kaveri Seeds (KSL) is the only listed pure play in the Indian

seed industry and one of the largest players in hybrid

cotton seeds.

KSL has a high RoE business model, with the strongest

balance sheet in our agro-inputs coverage universe.

Any potential approval for genetically modified seeds could

provide room for a structural re-rating in the seed space

and we believe KSL would be a key beneficiary.

We initiate coverage of KSL with an Outperform rating,

based on a March 2015 price target of INR 600.


Only listed pure play in the Indian seed industry. KSL is the

only listed pure play in the Indian seeds markets and is the second

largest player in the hybrid cotton seed market. In addition, KSL

has exposure to multiple other hybrid seeds markets including

maize and rice. KSL is among the fastest growing companies in

our agro-inputs coverage universe with a FY13-16E EPS CAGR of

35%.

High RoE model with no leverage. KSL has a strong, net cash

balance sheet with a high RoE business model. We estimate

KSL’s RoE at 48% for FY14E and expect it to remain high at 39%

in FY16E (lower RoE being driven by higher cash balance). We

believe that such a strong RoE model can command superior

multiples for a sustained period of time.

Upside potential from the introduction of genetically modified

seeds. We have not assumed the introduction of genetically

modified (GM) seeds in crops other than cotton in our forecasts.

That said, we believe KSL stands to gain in the event that the

government permits the use of GM seeds in crops other than

cotton, providing visibility on the company’s long-term growth.

Initiate with Outperform. We initiate coverage of KSL with an

Outperform rating and a March 2015 price target of INR 600 per

share based on a one-year forward PER of 13x.

Risks. Some of the key risks for KSL are (1) adverse weather

conditions, (2) increased competition, (3) product concentration,

and (4) irrational use of cash.





INR 513.00

PRICE TARGET

INR 600.00


KSCL IN KVRI.BO


INR 35,146mn (USD 566mn) INR 219.98 - 558.00



Sales (INR mn) 7,120 9,956 12,390 14,991

EBITDA (INR mn) 1,393 2,153 2,858 3,511

EBIT (INR mn) 1,271 1,992 2,668 3,288



FCF (INR mn) 592 1,118 2,053 2,647

EPS adj. (INR) 18.43 29.57 37.90 46.43

DPS (INR) 3.20 5.91 7.58 9.29


EPS growth adj. (%) 99.2 60.4 28.2 22.5

DPS growth (%) 300.0 84.8 28.2 22.5

EBITDA margin (%) 19.6 21.6 23.1 23.4

EBIT margin (%) 17.8 20.0 21.5 21.9

Net margin adj. (%) 17.8 20.3 21.0 21.2

Div. payout (%) 17.1 20.0 20.0 20.0

Net gearing (%) - - - -

ROE (%) 43.7 48.0 43.3 38.8

ROCE (%) 42.6 46.7 44.2 39.8

EV/sales (x) 1.8 3.3 2.6 2.0

EV/EBITDA (x) 9.1 15.4 11.1 8.5

PBR (x) 4.8 7.0 5.0 3.7

PER adj. (x) 11.0 17.3 13.5 11.0

Dividend yield (%) 1.6 1.2 1.5 1.8

200

400

600


Kaveri Seed BSE SENSEX 30 INDEX (rebased)


Ordinary shares 26 62 89

Relative to index 28 60 75


Major shareholder G V Bhaskar Rao (25.1%)

Free float 36%



+91 22 4205 5916

KSC L IN INR 513.00 INR 600.00


26 February 2014 46

Investment thesis Only listed pure play on the Indian seed market

KSL is the only listed pure play in the Indian seed market and we believe the

company is well positioned for growth given the recent success of its hybrid seeds.

We understand that KSL is the second largest player in the hybrid cotton seed

market over the past couple of years following a successful product launch and brand

promotion campaign by the company.

Figure 67: KSL – Cotton seeds’ sales growth


High RoE generating model with no leverage

KSL has a strong balance sheet with a net cash balance sheet of INR 1.4bn as of

March 2013. In addition, the company has a strong RoE model with FY13 RoE of

43%. While we forecast RoEs to decline to 39% by FY16E, most of the decline is

owing to a higher amount of cash on books. We believe such a strong RoE model

can command superior multiples for a sustained period of time.

Figure 68: KSL – RoE and cash as a % of net worth


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000


INR

mn

Cotton seed sales

29%

43%

48%

43%

39%

50%

42% 42%

50%

58%

0%

10%

20%

30%

40%

50%

60%

70%


RoE Cash as % of networth

CAGR 47%


26 February 2014 47

One of the largest germplasm banks in India

KSL management believes the company has one of the largest germplasm banks in

India. It has over 600 acres of dedicated research farms set up in areas with varying

agro-climatic conditions. In addition, the company has around 57 research trial

centres across key locations in India. The company has a track record of 169 filings

with the Protection of Plant Variety and Farmer’s Rights Authority (PPVFRA).

Figure 69: KSL’s research filings

No. of PPVFRA filings 169

Distinctiveness, Uniformity & Stability (DUS) test cleared 48

Registrations 14


GM seeds could provide strong growth visibility

We believe KSL’s current valuations do not capture the upside potential in the event

that the government permits GM seeds for crops other than cotton. We believe that

any such move by the government could be a significant positive for KSL and will

provide visibility on the company’s long-term growth. We have not built in the

approval of GM seeds in non-cotton crops into our forecasts.

Valuation We value KSL on a 12-month forward PER of 13x to arrive at our March 2015

valuation of INR 600 per share. While a multiple of 13x is higher than the historical

PE range for KSL, we believe this is sustainable, given our expectation of 35% EPS

CAGR between FY13-16E and consistent 40% RoE delivered by KSL.

Figure 70: KSL – Historical PER band


Our PER based valuation is in line with our 12-month forward DCF valuation for KSL.

0

2

4

6

8

10

12

14

16


PE

R m

ult

iple

Kaveri Seeds forward PER Average +1 SD -1 SD

Target PER 13x


26 February 2014 48

Figure 71: KSL – DCF valuation

INR mn FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E

Oper. EBIT 1,992 2,668 3,288 3,805 4,408 5,019 5,720 6,523 7,441

(Less) Taxes -63 -226 -353 -625 -980 -1,415 -1,762 -2,254 -2,850

Net int. income/(exp) 0 0 0 0 0 0 0 0 0

Marginal Tax Rate -3% -8% -10% -15% -20% -25% -27% -30% -33%

Tax shield adjustments 0 0 0 0 0 0 0 0 0

NOPAT 1,929 2,443 2,935 3,180 3,428 3,605 3,959 4,269 4,591

(Add) Depreciation and amortisation 161 190 223 256 289 322 355 388 421

(Less) Capex -300 -400 -400 -400 -400 -400 -400 -400 -400

(Less) Working Capital -769 -333 -356 -311 -358 -360 -407 -462 -523

Other adjustments

Free Cash Flows 1,021 1,899 2,401 2,725 2,958 3,167 3,506 3,795 4,088

NPV (Explicit FCFs) 13,484

Terminal growth rate (%) 4.5%

NPV (Terminal Value) 22,204

WACC (%) 13.5%

Firm value 35,688

(Less) net debt/ (cash) -5,394

Equity value 41,081

Equity value/share 600

Source: Bloomberg, Standard Chartered Research estimates

Risks Some of the key risks to our thesis on KSL are as follows:

Adverse weather: In addition to adverse weather impacting demand, there is a risk

of seed supplies (raw material) for KSL being impacted by unforeseen weather

conditions. While the company maintains some inventory of its seeds, a severe

weather condition can have a material impact on KSL’s profitability, in our view.

Increase in competition: While KSL has generated strong growth in the past and

maintained its margins, any innovation-driven increase in competitive intensity can

adversely affect revenue growth and margins in the future. In addition, any retaliation

from incumbent players in the cotton hybrid seeds business can adversely affect

KSL’s margins and profitability.

Product concentration: KSL has a high level of product concentration, with cotton

seeds comprising c.60% of its seed sales. Within cotton seeds, Andhra Pradesh is

the biggest market for KSL, increasing the geographic concentration risk for the

company.

Irrational use of cash: While KSL management has been conservative with its use

of cash so far, we would like to see an explicit strategy for the use of the incremental

cash by the company. Any irrational use of cash could be a threat to our investment

thesis.


26 February 2014 49

Business description Background. KSL is the largest listed seeds company in India. The company was

set up in 1976 as a proprietorship by first generation entrepreneur, G V Bhaskar Rao.

Subsequently, the company was incorporated in 1986 and listed in 2007.

In addition to hybrid seeds, the company is involved in nascent micronutrients and

bio-products businesses.

Research-driven approach. The company has a research-driven approach to

launching new and innovative hybrid varieties in the market. The company’s R&D

comprises of a bio-technology lab, a modern seed-testing lab and a company owned

central research farm for generation and evaluation of breeding material. In addition

the company has satellite farms for crop specific research, breeder seed production

and related functions. The R&D division of KSL is recognised by the Department of

Scientific and Industrial Research (DSIR). The company claims to have one of the

largest germplasm banks in the country.

Product portfolio. KSL has 169 applications with the PPVFRA, the authority for

approving new varieties of seeds in India. The company operates across multiple

plant varieties in the seeds segment. A brief overview of KSL’s product portfolio is

given below:

Figure 72: KSL – Product portfolio

Seeds Micro nutrients Exotic vegetables

Food crops: Cotton, corn,

rice, bajra, jowar, sunflower

Foliar spray and soil

application formulations, plant

growth promoters, bio-

pesticides

Vegetables: Green capsicum,

red/ yellow bell peppers, hybrid

tomato, cherry tomato,

parthenocarpic cucumber

Vegetables: Tomato, okra,

chilly, gourds

Herbs: Chives, sage, cilantro,

parsley


Within the seeds portfolio, cotton is the predominant segment for KSL and comprised

c.60% of the company’s seed sales in FY13. It may be worth noting that growth in

cotton seeds is a relatively nascent phenomena for the company and in FY11, the

cotton division comprised c.40% of the company’s seed sales. Since then, overall

sales for the company have trebled, with cotton seeds being the biggest driver.

Figure 73: KSL – Seed sales breakdown


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY11 FY12 FY13

INR

mn

Cotton seeds Maize Rice Hybrid

Bajra Sunflower Other seeds


26 February 2014 50

Microteck and KexVeg. The Microteck division of the company produces

micronutrient mixtures, organic products and bio-pesticides. We believe this division

can deliver strong growth in the coming years, given poor soil conditions in the

country and the potential for higher application of green agriculture inputs in the

country. The KexVeg subsidiary of KSL is focused on producing high-value exotic

vegetables and herbs. KexVeg has started commercial cultivation of high-value

exotic Indian vegetables and European herbs in an exploratory built-up area of 5ha of

mega green houses. The company plans to increase this business multi-fold over the

next few years.

Management: A brief profile of KSL’s management is given below:

Figure 74: KSL – Board of directors

G V Bhaskar Rao Chairman and Managing Director

G Vanaja Devi Wholetime Director

R Venu Manohar Rao Wholetime Director

C Vamsheedhar Wholetime Director

C Mithun Chand Wholetime Director

G Pawan Director

Yeshwant Laxman Nene Director

M Srikanth Reddy Director

S Raghuvardhan Reddy Director

S M Ilyas Director

P Vara Prasad Rao Director

K Purushotham Director

Source: Company

Financials We present below the key assumptions used to project KSL’s financials.

Revenues: We forecast KSL’s seed division sales to grow at a CAGR of 23%

between FY14-16E. While the cotton seeds business has seen a strong CAGR of

c.90% between FY11-14E, we have assumed a growth rate of 22% p.a. between

FY14-16E for cotton seed sales. We assume a lower growth rate versus history

owing to our assumption of lower market share gains going forward versus what KSL

has achieved in the past. The second largest category for the company is maize

where we have assumed a 25% CAGR over FY14-16E versus a 36% CAGR

expected to be achieved over FY11-14E. We have assumed that the micronutrients

business will grow at a CAGR of 20% over FY14-16E.

As a result of our assumptions above, we expect KSL’s overall revenues to grow to

INR 15.0bn in FY16E from INR 10.0bn in FY14E.


26 February 2014 51

Figure 75: KSL – Revenue growth


Margins: The biggest cost for KSL (44% of revenues in FY13) is the cost of

materials. This cost comprises the cost of breeding seeds. Selling and distribution

expenses are the other significant cost for KSL, at 20% of revenues for FY13. In

addition, KSL also paid royalty amounting to c.11% of seed sales in FY13. KSL

earned an EBITDA margin of 20% in FY13 and we expect margins to improve to 22%

by FY14E owing to operating leverage.

Figure 76: KSL – EBITDA and EBITDA margins


EPS growth: As a consequence of our revenue and margin projections provided

above, we believe KSL’s EPS will increase from INR 18 in FY13 to 46 by FY16E,

implying a 35% CAGR over the three-year period. We expect KSL’s RoEs to decline

to 39% by FY16E from 43% in FY13. However, most of the decline is attributable to

accumulation of cash on the balance sheet.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


INR

mn

Consolidated revenue

23%

21%

20%

22%

23% 23%

17%

18%

19%

20%

21%

22%

23%

24%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


Marg

in IN

R m

n

EBITDA EBITDA margin

CAGR 45%


26 February 2014 52

Figure 77: KSL – EPS growth


Leverage and working capital: KSL has a strong balance sheet with net cash of

INR 1.4bn in FY13. We expect the net cash balance to increase to INR 5.4bn by

FY16E. Overall net working capital days for KSL have increased to 31 days in FY13

from 18 in FY12. We have assumed net working capital at 50 days of sales for FY14-

16E.

46% 49%

100%

60%

28%

23%

0%

20%

40%

60%

80%

100%

120%

0

5

10

15

20

25

30

35

40

45

50


Gro

wth

Per

sh

are

EPS EPS growth


26 February 2014 53




Sales 3,724 7,120 9,956 12,390 14,991 EBIT 670 1,271 1,992 2,668 3,288


SG&A (257) (325) (559) (685) (822) Net interest (7) 34 96 154 246

Other income - - - - - Tax paid (29) (38) (63) (226) (353)

Other expenses (1,389) (2,370) (3,721) (4,452) (5,334) Changes in working capital 401 (317) (769) (333) (356)

EBIT 670 1,271 1,992 2,668 3,288 Others (53) 13 0 0 0

Net interest (7) 34 96 154 246 Cash flow from operations 1,082 1,086 1,418 2,453 3,047


Other non-operational - - - - - Capex (51) (494) (300) (400) (400)

Exceptional items (53) 13 0 0 0 Acquisitions & Investments - - - - -

Pre-tax profit 610 1,319 2,088 2,822 3,534 Disposals - - - - -

Taxation (29) (38) (63) (226) (353) Others (107) 82 0 0 0

Minority interests - - - - - Cash flow from investing (158) (412) (300) (400) (400)

Net profit 581 1,281 2,026 2,596 3,181 Dividends (55) (219) (474) (608) (744)

Issue of shares (7) (27) 0 0 0

Net profit adj. 634 1,267 2,026 2,596 3,181 Change in debt (61) (187) 0 0 0

EBITDA 770 1,393 2,153 2,858 3,511 Other financing cash flow 0 0 0 0 0

Cash flow from financing (123) (433) (474) (608) (744)

EPS (INR) 8.48 18.69 29.57 37.90 46.43

EPS adj. (INR) 9.25 18.43 29.57 37.90 46.43 Change in cash 801 241 644 1,445 1,903


Avg fully diluted shares (mn) 69 69 69 69 69 Free cash flow 1,031 592 1,118 2,053 2,647


Cash 96 143 786 2,232 4,134 Operating ratios

Short-term investments 1,106 1,290 1,290 1,290 1,290 Gross margin (%) 62.2 55.7 63.0 63.0 63.0

Accounts receivable 285 686 1,637 2,037 2,464 EBITDA margin (%) 20.7 19.6 21.6 23.1 23.4


Other current assets 140 113 113 113 113 Net margin adj. (%) 17.0 17.8 20.3 21.0 21.2


Sales growth (%) 59.4 91.2 39.8 24.4 21.0

PP&E 1,066 1,445 1,584 1,794 1,971 Net income growth (%) 36.8 120.4 58.2 28.2 22.5

Intangible assets 7 11 11 11 11 EPS growth (%) 36.8 120.4 58.2 28.2 22.5

Associates and JVs - - - - - EPS growth adj. (%) 49.2 99.2 60.4 28.2 22.5

Other long-term assets 151 77 77 77 77 DPS growth (%) 60.0 300.0 84.8 28.2 22.5


Efficiency ratios

Total assets 5,886 8,676 10,953 14,342 18,275 ROE (%) 27.0 43.7 48.0 43.3 38.8

ROCE (%) 30.4 42.6 46.7 44.2 39.8

Short-term debt 192 23 23 23 23 Asset turnover (x) 0.8 1.0 1.0 1.0 0.9

Accounts payable 1,100 2,486 3,273 4,073 4,928 Op. cash/EBIT (x) 1.6 0.9 0.7 0.9 0.9




Long-term debt 26 8 8 8 8 Accounts payable days 192.0 207.5 285.3 292.5 296.2



Other long-term liabilities 29 37 37 37 37 Net gearing (%) - - - - -

Total long-term liabilities 55 45 45 45 45 Debt/capital (%) - - - - -

Interest cover (x) 20.5 84.3 nm nm nm


Current ratio (x) 1.4 1.4 1.6 1.7 1.8


Minority interests - - - - - Valuation

EV/sales (x) 1.5 1.8 3.3 2.6 2.0

Total equity - - - - - EV/EBITDA (x) 7.3 9.1 15.4 11.1 8.5

EV/EBIT (x) 8.4 10.0 16.6 11.9 9.0


PER adj. (x) 9.7 11.0 17.3 13.5 11.0

Net debt (cash) (984) (1,402) (2,046) (3,491) (5,394) PBR (x) 3.3 4.8 7.0 5.0 3.7



26 February 2014 54

UPL

Cash flow is king

We initiate coverage of UPL with an Outperform rating and

a March-2015 price target of INR 235.

UPL’s recent foray into the high-value Brazilian market

provides the company with a strong growth potential.

Improvement in margins and stabilisation of working

capital should help UPL become FCF positive, in our view.

We believe that current valuations do not capture UPL’s

growth potential.


Play on global crop protection industry. UPL is the only listed

Indian player to have direct access to all major agro-input markets

globally. In addition, we believe its recent foray into the Brazilian

market provides a growth opportunity.

Stabilising working capital and free cash flow position.

Delivery of free cash flow would be key to UPL’s re-rating, in our

view. We believe that its overall working capital has stabilised and,

with a focus on margins, the company should be in a position to

reduce its net debt by c.INR 12bn over FY14-16E.

Buyback program demonstrates confidence in cash flow. UPL

recently completed a buyback of 14mn shares at an average

acquisition price of INR 202 per share. We believe that such return

of cash demonstrates management’s confidence in cash flow.

Initiate with Outperform. We initiate coverage of UPL with an

Outperform rating and a March-2015 price target of INR 235 per

share, based on a 12-month forward EV/EBITDA of 5.5x, which

translates into a 12-month forward PER of 9.5x.

Risks. Key risks to our thesis, besides delay in free cash flow

delivery, include: (1) adverse weather conditions, (2) adverse

foreign exchange movement, (3) exposure to Latin America and

(4) irrational expansion.





INR 185.35

PRICE TARGET

INR 235.00


UPLL IN UPLL.BO


INR 83,843mn (USD 1,351mn) INR 111.00 - 217.70



Sales (INR mn) 91,945 102,733 109,484 118,906

EBITDA (INR mn) 16,618 18,492 19,707 21,403

EBIT (INR mn) 13,081 14,537 15,071 16,160



FCF (INR mn) 6,133 2,359 6,726 7,216

EPS adj. (INR) 17.12 19.52 22.63 24.76

DPS (INR) 2.50 3.00 3.00 3.50


EPS growth adj. (%) 42.3 14.0 15.9 9.4

DPS growth (%) 0.0 20.0 0.0 16.7

EBITDA margin (%) 18.1 18.0 18.0 18.0

EBIT margin (%) 14.2 14.1 13.8 13.6

Net margin adj. (%) 8.4 8.1 8.9 8.9

Div. payout (%) 14.6 15.4 13.3 14.1

Net gearing (%) 54.4 55.6 39.8 26.9

ROE (%) 17.6 17.1 17.5 16.6

ROCE (%) 16.9 17.8 18.0 17.9

EV/sales (x) 0.9 1.1 1.0 0.8

EV/EBITDA (x) 4.9 5.9 5.3 4.6

PBR (x) 1.1 1.5 1.3 1.2

PER adj. (x) 7.2 9.5 8.2 7.5

Dividend yield (%) 2.0 1.6 1.6 1.9

100

170

240


UPL BSE SENSEX 30 INDEX (rebased)


Ordinary shares -9 16 50

Relative to index -8 15 39


Major shareholder Nerka Chemicals Private Limited (22.3%)

Free float 71%

Average turnover (USD) 5,473,179


+91 22 4205 5916

UPLL IN INR 185.35 INR 235.00


26 February 2014 55

Investment thesis Play on global crop protection industry

According to management, the global market for agrochemical products was valued

at USD 47.3bn in 2012, growing 7.4% over 2011.

Figure 78: Global crop protection in the agrochemical market


UPL is the only listed Indian player to have direct access to all major agro-input

markets globally. Some of the company’s key markets are given below:

Figure 79: UPL’s global presence

Market % of UPL revenues FY13 Market size/UPL market share

US 20% (North America) USD 8.5bn/5% (US only)

India 19% USD 2bn/17%

Brazil 27% (Latin America) USD 10bn/3% (Brazil only)

Europe 18% USD 12bn/3%

China NA USD 3.5bn/1%

Indonesia NA USD 400mn/4%

Japan NA USD 4bn/1%


In addition, UPL has demonstrated a track record of stronger-than-industry growth

rates across key geographies it operates in.

Figure 80: UPL’s growth vs. market (2010-13 CAGR)

Market Industry CAGR 2010-13 UPL CAGR 2010-13

North America 5% 15%

South America 14% 58%

Europe 3% 3%

India 10% 15%

Rest of the world 10% 16%

Source: Company

40.5 37.9 38.3

44.0

47.3

0

5

10

15

20

25

30

35

40

45

50

2008 2009 2010 2011 2012

US

D b

n

Global crop protection market size


26 February 2014 56

Recent foray into Brazil provides growth opportunity

Brazil has emerged as one of the largest markets globally for agro-inputs, with an

estimated market size of USD 10bn. UPL forayed into this market through the

acquisition of DVA, a local player in the pesticides market, in FY12. We expect Latin

America to be one of the fastest-growing markets for UPL, driven by faster growth in

Brazil, as the company improves its penetration and supplier reach in the market.

Figure 81: UPL’s Latin America revenue growth


Stabilising working capital and improved cash flows to drive performance

We believe management’s recent focus on margin expansion will help improve RoEs.

In addition, we believe UPL’s overall working capital levels, after having risen to 134

days in FY12 from 83 days in FY10, have now stabilised at 110 days and are unlikely

to deteriorate materially from here.

Figure 82: UPL’s working capital days and EBITDA margins

* FCF defined as cash flow from operations – investing cash flows


Due to improving cash flows, we believe that UPL will be able to reduce its net debt

to c.INR 16bn by FY16E from INR 28bn in FY14E, thus lowering its net debt/EBITDA

ratio to 0.8x by FY16E from 1.5x in FY14E.

28%

15%

10%

15%

0%

5%

10%

15%

20%

25%

30%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000


Gro

wth

INR

mn

Latin America revenue Growth (%)

14,224

-2,926

-17,978

6,722

2,359 6,726

7,216

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

0

20

40

60

80

100

120

140

160


FC

F (IN

R m

n)

Day

s

Net working capital days FCF*


26 February 2014 57

Figure 83: UPL’s net debt and net debt/EBITDA ratio


Buyback demonstrates confidence in cash flow

We believe UPL’s recently concluded buyback of 14mn shares for INR 2.8bn

demonstrates management’s confidence in the company’s cash flow.

We believe a sustained delivery of cash flow and stable/improving margins will

be key to a re-rating of the stock going forward.

Valuation We value UPL on a 12-month forward EV/EBITDA of 5.5x to arrive at our March-

2015 price target of INR 235 per share. Our valuation translates into a 12-month

forward PER of 9.5x. Our target PER is in line with the forward PERs of listed global

generic companies, such as Nufarm and Auriga (Cheminova), and is in-line with

UPL’s historical trading band.

Figure 84: UPL’s historical PER chart


0.9x

1.5x

0.3x

0.6x

1.8x

1.4x

1.5x

1.1x

0.8x

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

1.8x

2.0x

0

5,000

10,000

15,000

20,000

25,000

30,000


Mu

ltiple IN

R m

n

Net debt Net debt / EBITDA

0

2

4

6

8

10

12

14

16

18

20


PE

R m

ult

iple

UPL forward PER Average +1 SD -1 SD

Target PER 9.55x


26 February 2014 58

Figure 85: International comps

Price Market cap PER (x) EV/EBITDA (x) Div yield ROCE

Ticker Name (LCY) (USD mn) CY14E CY15E CY14E CY15E CY13E (%) CY12 (%)

NUF AU Nufarm Ltd/Australia 3.9 924 10.2 8.9 6.4 5.9 2.2 10.8

AURIB DC Auriga Industries 179.5 844 10.2 8.5 6.5 5.7 2.0 14.5

Median

10.2 8.7 6.4 5.8 2.1 12.6

Note: Share price data as of 25 February 2014.

Source: Bloomberg.

Risks Key risks to our investment view, besides a delay in delivery of free cash flow, arise

from the following:

Adverse weather: Like all agriculture businesses, UPL is also exposed to significant

swings in global weather conditions. However, given its wide geographical spread,

the company is somewhat insulated from isolated weather-related disruptions. That

said, its exposure to such widespread geographies and markets also makes

forecasting inherently difficult for a company like UPL.

Adverse foreign exchange movements: UPL could be severely impacted by

adverse foreign exchange movements, especially a sharp appreciation in the rupee,

given its reporting currency is INR while the company operates in a multitude of

foreign currencies.

Latin American exposure: UPL derives 27% of its revenues from Latin America,

with a majority coming from Brazil. While management is relatively comfortable with

this exposure, any significant macroeconomic stress including capital controls in the

Latin American economies could have a negative impact on UPL.

Irrational expansion: UPL has been following an acquisition-driven model, and any

irrational and sizeable acquisition could dent our investment thesis.

Business description UPL manufactures agrochemicals and industrial chemicals. The company has 23

manufacturing units globally. UPL started business in India as a red phosphate

manufacturer, but diversified into the global arena in 1993 with its first acquisition.

Since then, the company has systematically grown its footprint through organic and

inorganic means, having made 19 large and small acquisitions over the past two

decades.

Business segments: UPL’s business activity can be split into two categories:

Agro inputs: This segment constitutes more than 90% of revenues and has the

following sub-divisions.

Crop protection: This division manufactures and markets pre-harvest and post-

harvest agrochemicals. Aside from insecticides, herbicides and fungicides, the

company also offers the following products in the crop protection space.

DECCO: DECCO stands for Decay Control chemicals and consists of high-quality

coatings for fruits and vegetables. The DECCO film coating provides long-lasting

shine and controls shrinkage and dehydration, thereby making transportation easier

for longer periods of time. According to management, all the ingredients used in


26 February 2014 59

manufacturing DECCO are approved as food grade materials by the Food and Drug

Administration, the EU and the Prevention of Food Adulteration Authority (in India).

Grain fumigants: This is UPL’s post-harvest solution, where fumigants are used to

enhance efficiency of stored foodgrains. The product offered in this segment includes

QuickPhos.

Seeds: UPL offers seeds through its listed associate company (49.81%-owned),

Advanta Seeds. Advanta is an Indian plant genetics company with a global presence.

The company is present in Asia, Africa, Australia, South America, North America and

Europe. Advanta is a world leader in sorghum (grain, forages and sweet) and has a

strong position in tropical corn, sunflower, canola, sweet corn and vegetables. The

associate company is currently embarking upon a growth strategy in the emerging

markets of Africa, Asia and Latin America.

Non-agro inputs: This division constituted less than 10% of total revenues for UPL

in FY13. Through this division, UPL manufactures and markets caustic chlorine,

white phosphorus, industrial chemicals and specialty chemicals.

Acquisition-driven model: UPL has made 19 acquisitions in the past two decades.

Management prides itself in buying assets below replacement cost and in its ability to

turn around acquired companies. Two companies that were loss-making at the time

of acquisition have both turned profitable within 18 months to three years of

acquisition. However, one drawback of such an acquisition-driven strategy is that it

makes assessment of organic growth difficult.

Geographical spread: The key geographies in which UPL operates are enumerated

below:

India: The Indian market constituted 19% of UPL’s revenues in FY13 and is one of

its oldest markets. The company enjoyed a 17% market share in India in FY13 and is

the largest domestic player. UPL has more than 50 product registrations in India, with

some key brands being Lancer Gold, Ulala, Saaf, Saathi and Lagaam.

North America: North America accounted for 20% of UPL’s FY13 revenues. The

company had a 5% market share in FY13 in the US. Some of its key brands are

Manzate, Aquathol, Microthial, Sur Flan, Asulam, Ultra Blazer and Tricor.

Europe: Europe constituted 18% of UPL’s FY13 revenues. The company had a 3%

market share in Europe in FY13. UPL has four manufacturing units in France and is

also present through subsidiaries. Some of its brands in Europe include Beet Up and

Napropamide.

Latin America: Latin America accounted for 27% of UPL’s FY13 revenues. This

market gained significance for the company after its recent entry into Brazil through

the acquisition of DVA and Sipam Isagro. UPL had a 3% share in the USD 10bn

Brazilian market in FY13 and management is targeting high growth in this market by

pushing some of its existing brands and pursuing more aggressive marketing

strategies.

Rest of the world: RoW constituted 14% of UPL’s FY13 revenues and includes

markets such as Australia, China, Japan and Indonesia.


26 February 2014 60

Management: An overview of UPL’s management is given below:

Figure 86: UPL – Board of directors

R D Shroff Promoter & Executive Chairman and Managing Director

S R Shroff Promoter and Non-Executive Vice Chairman

J R Shroff Promoter and Non-Executive Director

V R Shroff Promoter and Non-Executive Director

A C Ashar Non-Promoter and Executive Director

P V Krishna Independent and Non-Executive Director

Pradeep Goyal Independent and Non-Executive Director

K Banerjee Non-Promoter Executive Director

Reena Ramachandran Independent and Non-Executive Director

Pradip Madhavji Independent and Non-Executive Director

Vinod Sethi Independent and Non-Executive Director

Suresh P Prabhu Independent and Non-Executive Director

Source: Company

Financials We present below some of the key assumptions while projecting UPL’s financials.

Revenues: Projecting overall revenue growth is inherently difficult, given UPL’s

acquisitive nature and its multiple products over diverse geographies at varying

growth rates. We summarise our assumptions for various geographies in which UPL

operates as follows:

India: We project UPL’s revenues for the India business to grow at a CAGR of 14%

over FY13-16E. This compares with the 17% CAGR achieved over FY08-13. Our

projections for India’s growth are largely in line with our market growth expectations.

North America: We project revenues for the North American business to grow at a

CAGR of 3.3% over FY13-16E. This compares with the 15% CAGR achieved over

FY08-13. Our revenue growth projections are based on an assumption of USD-INR

at 60.5 for FY14 and 62 through the FY15-16 forecast period.

Europe: We project revenues for the European business to grow at a CAGR of 6.4%

over FY13-16E. This compares with more than 8% CAGR achieved over FY08-13.

Our revenue growth projections are based on an assumption of EUR-INR at 81 for

FY14 and 84 through the FY15-16 forecast period.

Latin America: We project revenues for the Latin American business to grow at a

CAGR of 13% over FY13-16E. This compares with the 15% growth rate expected for

FY14E. The growth will primarily be driven by the Brazilian market, in our view.

RoW: We project revenues for the RoW business to grow at a CAGR of 3.2% over

FY13-16E. This compares with c.8.4% CAGR achieved over FY08-13.


26 February 2014 61

Figure 87: UPL’s revenue growth split across geographies


Margins: UPL’s EBITDA margin has been stable at c.18% over FY10-13. We project

its EBITDA margin to remain at 18% through our FY14-16 forecast period.

Figure 88: EBITDA (INR mn) and EBITDA margin (%)


EPS growth: Given our aforementioned revenue and margin projections, we expect

UPL’s EPS to increase to INR 24.76 by FY16E from INR 17.12 in FY13, implying a

CAGR of 13% over the period. We also expect its RoE to sustain around 17% levels

over our forecast period.

Figure 89: EPS (INR) and EPS growth (%)


10%

7%

30%

20%

12%

7% 9%

0%

5%

10%

15%

20%

25%

30%

35%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


Gro

wth

INR

mn

India revenue North America revenue

Europe revenue Lat Am revenue

RoW revenue Revenue growth (%)

18.2%

18.1%

18.0%

18.1%

18.0% 18.0% 18.0%

17.9%

18.0%

18.0%

18.1%

18.1%

18.2%

18.2%

18.3%

0

5,000

10,000

15,000

20,000

25,000


EB

ITD

A m

argin

INR

mn

EBITDA EBITDA margin (%)

15%

9%

-3%

42%

14%

16%

9%

-10%

0%

10%

20%

30%

40%

50%

0

5

10

15

20

25

30


Gro

wth

Per

sh

are

EPS EPS growth


26 February 2014 62

Leverage and working capital: UPL had a net debt of INR 22bn in FY13, implying a

net-debt-to-EBITDA ratio of 1.4x. We expect net debt to rise to INR 28bn in FY14

with a net-debt-to-EBITDA ratio of 1.5x. We note that a large part of the increase in

its net debt position is attributable to foreign exchange movements (INR 1.5bn) and

buyback (INR 2.8bn). In addition, we expect the net working capital days to increase

to 110 in FY14 from 105 in FY13, leading to an impact in the net debt position. We

expect net working capital days to remain at 110 days.

We note that UPL has a high cash balance of INR 19.4bn as of FY13 versus gross

debt of INR 42bn. While we understand that some of this cash is required, given its

operations are spread across more than 50 operating companies across nations, we

would like to see UPL use some of its cash to pay down debt. We note that the

company has repaid some of its gross debt (INR 5.2bn reduction despite FX

revaluation loss) in YTD FY14 and has also undertaken an initiative to return some of

the cash to shareholders through the recently concluded buyback.


26 February 2014 63




Sales 76,713 91,945 102,733 109,484 118,906 EBIT 10,916 13,081 14,537 15,071 16,160

Gross profit 36,133 45,072 51,366 54,742 59,453 Depreciation & amortisation 2,924 3,537 3,955 4,636 5,243

SG&A (17,237) (21,084) (23,475) (25,438) (27,836) Net interest (3,223) (3,290) (3,409) (2,902) (2,610)

Other income - - - - - Tax paid (1,280) (2,032) (2,615) (2,921) (3,387)

Other expenses (7,980) (10,906) (13,355) (14,233) (15,458) Changes in working capital (13,120) 155 (5,463) (2,608) (3,640)

EBIT 10,916 13,081 14,537 15,071 16,160 Others (858) (13) (146) 450 450

Net interest (3,223) (3,290) (3,409) (2,902) (2,610) Cash flow from operations (4,640) 11,438 6,859 11,726 12,216

Associates (351) 360 350 350 350

Other non-operational - - - - - Capex (13,113) (5,305) (4,500) (5,000) (5,000)



Taxation (1,280) (2,032) (2,615) (2,921) (3,387) Others (225) 589 0 0 0

Minority interests (54) 16 100 100 100 Cash flow from investing (13,338) (4,716) (4,500) (5,000) (5,000)

Exceptional items after tax (453) (389) (596) 0 0

Net profit 5,556 7,746 8,366 9,698 10,612 Dividends (1,155) (1,323) (1,504) (1,504) (1,755)

Issue of shares 70 (2,162) (2,826) 0 0

Net profit adj. 5,556 7,746 8,366 9,698 10,612 Change in debt 7,104 8,142 (8,000) (3,000) (2,000)

EBITDA 13,840 16,618 18,492 19,707 21,403 Other financing cash flow 2,319 (157) 100 100 100

Cash flow from financing 8,339 4,500 (12,230) (4,404) (3,655)

EPS (INR) 12.03 17.12 19.52 22.63 24.76

EPS adj. (INR) 12.03 17.12 19.52 22.63 24.76 Change in cash (9,639) 11,222 (9,871) 2,322 3,561

DPS (INR) 2.50 2.50 3.00 3.00 3.50 Exchange rate effect - - 892 22 0

Avg fully diluted shares (mn) 462 452 429 429 429 Free cash flow (17,753) 6,133 2,359 6,726 7,216


Cash 7,002 15,482 6,503 8,847 12,409 Operating ratios

Short-term investments 1,250 2,837 2,837 2,837 2,837 Gross margin (%) 47.1 49.0 50.0 50.0 50.0



Other current assets 6,017 8,519 9,382 9,956 10,756 Net margin adj. (%) 7.2 8.4 8.1 8.9 8.9


Sales growth (%) 33.2 19.9 11.7 6.6 8.6

PP&E 13,951 15,668 17,933 18,421 18,177 Net income growth (%) -0.4 39.4 8.0 15.9 9.4

Intangible assets 21,335 23,000 23,736 23,782 23,782 EPS growth (%) -3.4 42.3 14.0 15.9 9.4

Associates and JVs - - - - - EPS growth adj. (%) -3.4 42.3 14.0 15.9 9.4

Other long-term assets 10,903 11,487 11,487 11,487 11,487 DPS growth (%) 25.0 0.0 20.0 0.0 16.7


Efficiency ratios

Total assets 103,689 124,531 130,985 138,321 147,860 ROE (%) 14.1 17.6 17.1 17.5 16.6

ROCE (%) 18.0 16.9 17.8 18.0 17.9

Short-term debt 10,119 13,910 14,711 14,762 14,762 Asset turnover (x) 0.8 0.8 0.8 0.8 0.8

Accounts payable 15,035 21,176 28,146 29,996 32,577 Op. cash/EBIT (x) -0.4 0.9 0.5 0.8 0.8




Long-term debt 23,772 28,123 21,744 18,818 16,818 Accounts payable days 117.5 141.0 175.2 193.8 192.1


Deferred tax 940 1,170 1,170 1,170 1,170 Leverage ratios

Other long-term liabilities 3,517 4,459 4,459 4,459 4,459 Net gearing (%) 60.8 54.4 55.6 39.8 26.9


Interest cover (x) 2.6 3.0 3.1 3.6 4.1


Current ratio (x) 1.8 1.8 1.6 1.6 1.7


Minority interests 2,499 2,342 2,442 2,542 2,642 Valuation

EV/sales (x) 1.1 0.9 1.1 1.0 0.8


EV/EBIT (x) 7.9 6.3 7.5 6.9 6.1


PER adj. (x) 12.1 7.2 9.5 8.2 7.5

Net debt (cash) 26,889 26,551 29,952 24,733 19,172 PBR (x) 1.4 1.1 1.5 1.3 1.2



26 February 2014 64

Coromandel International

Wait for better weather

CRIN is one of the oldest and most renowned fertiliser

players in India. The company has a growing non-fertiliser

portfolio built through organic and in-organic means.

We believe it will be a challenge for CRIN to achieve its 50%

non-fertilizer EBITDA target organically until at least FY17,

unless fertiliser profit falls or gypsum prices surge.

CRIN ranks highly in our framework for its farmer-connect

initiative. We expect this to boost the company’s brand

position and growth.

We initiate coverage with an In-Line rating as valuation is full,

in our opinion.

IN-LINE (initiating coverage)

Migration to lucrative segments: CRIN has a mix of fertiliser and

non-fertiliser businesses. Owing to high working capital and

volatility in the fertiliser business, CRIN management has a stated

goal of at least 50% EBITDA contribution from its non-subsidised

business in the next few years. However, achieving this target

organically could be a challenge until at least FY17, unless

fertiliser profitability declines or gypsum profitability rises strongly.

Unique farmer-connect initiative: CRIN’s differentiated strategy

hinges on a retail initiative to achieve farmer connect. It has c.650

retail stores and intends to increase the store count to 1,000 in the

next few years. Its retail initiative, albeit small at present, could

help CRIN push its own products against other branded items, and

enhance non-subsidised profitability.

Integrated fertiliser business held down by industry concerns:

CRIN’s highly integrated fertiliser business enables it to capture

most parts of the fertiliser value chain, but fertilisers are not our

preferred investment theme in the Indian agro-inputs industry,

given subsidy and policy dependence issues.

Valuation is full; initiate with In-Line rating: We view current

valuation as fully priced in and thus initiate coverage of the stock

with an In-Line rating and a March-2015 price target of INR 215.

Key risks: We view the following as key risks to our investment

view: (1) any policy changes in the fertiliser business; (2) adverse

weather conditions; and (3) irrational expansion.





INR 204.05

PRICE TARGET

INR 215.00


CRIN IN CORF.BO


INR 58,297mn (USD 940mn) INR 14.00 - 268.90



Sales (INR mn) 90,337 102,623 112,558 118,750

EBITDA (INR mn) 7,679 8,961 9,779 10,533

EBIT (INR mn) 6,968 7,980 8,731 9,417



FCF (INR mn) 231 3,058 1,278 3,261

EPS adj. (INR) 15.23 14.70 16.65 18.59

DPS (INR) 4.50 4.50 4.50 4.50


EPS growth adj. (%) -32.4 -3.4 13.2 11.7

DPS growth (%) -35.7 0.0 0.0 0.0

EBITDA margin (%) 8.5 8.7 8.7 8.9

EBIT margin (%) 7.7 7.8 7.8 7.9

Net margin adj. (%) 4.8 4.1 4.3 4.6

Div. payout (%) 29.5 30.5 26.9 24.1

Net gearing (%) 104.7 85.1 74.7 60.9

ROE (%) 18.8 17.9 17.7 17.2

ROCE (%) 20.6 21.1 21.4 21.9

EV/sales (x) 1.0 0.8 0.7 0.7

EV/EBITDA (x) 12.2 9.0 8.3 7.6

PBR (x) 2.4 2.3 2.0 1.8

PER adj. (x) 16.7 13.9 12.3 11.0

Dividend yield (%) 1.8 2.2 2.2 2.2

160

210

260


Coromandel International BSE SENSEX 30 INDEX (rebased)


Ordinary shares -16 -6 -1

Relative to index -15 -7 -8


Major shareholder Muruguppa Group (63.8%)

Free float 36%



+91 22 4205 5916

CRIN IN INR 204.05 INR 215.00


26 February 2014 65

Investment thesis Migration to more lucrative segments

CRIN has a mix of fertiliser and non-fertiliser businesses, and we expect its non-

fertiliser business to contribute c.34% of EBITDA in FY14. To balance the portfolio,

management has a stated goal of at least 50% EBITDA contribution from its non-

subsidised business.

We believe its migration to more lucrative businesses will eventually lead to a re-

rating of CRIN’s valuation. However, it could be difficult to achieve this target

organically without (1) lower fertiliser profitability than we have forecast, or (2) a

surge in gypsum profitability.

Figure 90: CRIN: non-fertiliser EBITDA and EBITDA as % of total EBITDA

YE March


Unique farmer-connect initiative

CRIN has a differentiated strategy from its peers in achieving farmer connect with a

retail initiative. It has c. 650 retail stores under the Manna Gromor Centre (MGC)

initiative. CRIN intends to increase the store count to 1,000 in the next few years. We

believe the MGC initiative will help CRIN push its own products against other

branded items, and enhance non-subsidised business profitability. The strength of its

MGC franchise was corroborated by our recent on-the-ground visits to MGC stores in

Andhra Pradesh, where MGCs are gaining market share from local dealers. We were

particularly impressed by the width of products offered under the same roof and by its

farmer-connect initiative, which includes a farmer helpline.

Highly integrated fertiliser business weighed down by industry concerns

CRIN’s highly integrated fertiliser business enables it to capture most parts of the

fertiliser value chain. In addition, it has high brand recall in Gromor and Godavari,

especially in key markets such as Andhra Pradesh.

However, the fertiliser industry in India has suffered from issues ranging from high

inventory levels to high subsidy receivables, which could dampen business sentiment

in the medium term, in our view.

27%

38%

34%

37%

40%

10%

15%

20%

25%

30%

35%

40%

45%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


As %

of to

tal EB

ITD

A

INR

mn

Non-fertilizer EBITDA As % of total EBITDA


26 February 2014 66

Valuation appears to be full; our forecast trails consensus

While we view CRIN as a high-quality play and agree with its strategy to diversify

away from the subsidy business over time, our EPS forecast for FY15 is c.17% below

consensus. We believe our valuation is fully reflected in the current share price level.

Valuation We value CRIN on an SOTP basis, ascribing different valuation multiples to its

fertiliser and non-fertiliser businesses.

Figure 91: CRIN: SOTP valuation

YE March FY16E EBITDA Multiple Valuation

Fertilisers 6,353 6.5x 41,297

Non-fertilisers 4,180 10.0x 41,795

EV

83,092

Less : Net debt

-20,459

Equity value

62,633

Per share

215


We value the fertiliser business at an EV/ EBITDA multiple of 6.5x and the non-

fertiliser business at 10x EV/ EBITDA. Our total valuation translates into 12-month

forward PER of 11.5x, largely in line with the historical average PER at which CRIN

has traded.

Figure 92: CRIN: historical PE band


0

5

10

15

20

25


PE

R m

ult

iple

Coromandel Intl. forward PER Average +1 SD -1 SD

Target PER 11.5x


26 February 2014 67

Risks Key risks to our investment view of CRIN relate to the following:

Policy changes and subsidy delays: CRIN derives c. 80% of revenue from the

fertiliser business. Relatively open import markets after the NBS implementation and

freely implemented pricing have capped fertiliser business profitability, in our view. In

addition, as the government still provides a significant subsidy in the fertiliser

segment, there is a risk that closer monitoring of prices or a reduction in subsidies

could adversely impact profitability in its fertiliser division.

Adverse weather: Like all agricultural companies, CRIN is exposed to significant

swings in domestic weather conditions, particularly monsoons.

Irrational expansion: While we support management’s goal of increasing the

proportion of non-subsidised revenue and profitability, any irrational acquisition made

to fulfil this ambition would have negative implications for the stock.

Business description CRIN is a flagship company of the Murugappa group and operates in the agriculture

inputs segment. It started as a fertiliser JV among IMC, Chevron and EID Parry in

1961. Since then, CRIN’s capacity has grown multi-fold through organic and

inorganic expansion in order to reach its targeted fertiliser capacity of c.5mn MT by

FY14. The company operates the following key divisions:

Fertilisers

This division engages predominantly in the production and trading of phosphatic and

complex fertilisers. CRIN sells its products under multiple brands, including Gromor

and Godavari, which are among the most respected in the industry. We estimate the

fertiliser division will comprise 80% of total revenue and 66% of EBITDA in FY14E.

Manufacturing facilities are located in Vishakapatnam, Kakinada, Ennore and

Ranipet. All plants enjoy strategic coastal locations, which enable cost savings on

inland transportation in importing raw materials. The plants are also close to fertiliser

target markets, which helps reduce cost in transporting finished goods.

Figure 93: CRIN: strategic locations of plants

Source: Company

Ranipet

Ennore

Kakinada

Visak


26 February 2014 68

CRIN’s multiple strategic alliances across the industry spectrum assure raw material

supplies.

Figure 94: CRIN: global strategic alliances

Input Tie-up

MOP 0.5mn mt supply agreement: Potash-Canada

Rock-phosphate 0.9mn mt supply agreement: Israel, Togo, Algeria

WSF and MAP JV with SQM, Chile

Phosphoric acid 14% equity in FOSKOR, Africa

15% stake in Trifert, Tunisia

Ammonia and sulphur Pact with QAFCO for supply of ammonia

0.61mn mt ammonia and 0.3mn mt sulphur: Mitsui Japan

Urea 0.25mn mt supply pact with QAFCO


Fertiliser production declined in FY13, when a high quantum of imported inventory in

the system affected domestic producers. The company believes the inventory

situation is improving.

Crop protection: CRIN manufactures and markets crop protection products,

including insecticides, fungicides, herbicides and plant growth regulators. Its crop

protection portfolio includes several popular brands that enjoy leadership status in

India and abroad. CRIN also exports its products and has tie-ups with companies

such as Nihon Nohyaku, Syngenta, DuPont, BASF, FMC and Otsuka to market their

products in India.

Coromandel produces its crop protection products at plants in Ankleshwar and Navi

Mumbai (technicals), Ranipet and Jammu (formulations).

In December 2011, the company acquired a c.75% stake in Sabero Organics Gujarat

(Sabero) and is now in the process of integrating Sabero into itself. The majority of

Sabero’s revenue comes from exports to Latin American markets. However, Sabero

had been struggling under environmental restrictions that prevented it from operating

above 55% capacity utilisation. Since the takeover, CRIN has obtained approval for

Sabero to operate at up to 75% utilisation; it has also applied for a further increase in

capacity utilisation.

Speciality nutrients: This division, which comprises water soluble fertilisers and

micronutrients, has strong growth potential, owing to growing drip irrigation acreage

and deteriorating soil quality in the country. The company has dedicated exclusive

field force to promote the growth of this segment to optimise its potential. It has a

water soluble fertiliser business through a 50/50 JV with SQM (Coromandel SQM).

Retail: CRIN retails agriculture products through its Manna Gromor Centres (MGCs).

The company has over 650 MGCs across the country, with a strong presence in

Andhra Pradesh. Its MGC initiative not only promotes and sells CRIN’s fertilisers, but

also third-party agro-inputs such as pesticides, PGN and agricultural implements.


26 February 2014 69

Management: CRIN’s management team is listed below:

Figure 95: CRIN: board of directors

A Vellayan Chairman

V Ravichandran Vice Chairman

Kapil Mehan Managing Director

M M Venkatachalam Director

B V R Mohan Reddy Director

Ranjana Kumar Director

Uday Chander Khanna Director

J S Sarma Director

Source: Company

Financials We present below the key assumptions in our forecast of CRIN’s financials.

Fertiliser business: We assume an increase in manufactured fertiliser production

from 1.9mt in FY13 to 2.6mt by FY16E. We assume lower realisations in FY14E, in

line with the trend witnessed YTD. Owing to a reduction in fertiliser trading volumes

to negligible levels, we believe EBITDA per tonne will improve from INR 1,379 in

FY13 to over INR 1,850 by FY15E.

Figure 96: CRIN: fertiliser revenue and EBITDA

Data include Liberty group financials from 4QFY13


Non-fertiliser business: We assume an 18.5% CAGR in FY13-16E in CRIN’s non-

fertiliser portfolio and flattish growth in overall margins. We project a stronger-than-

industry growth rate, owing to the nascent stage of its retail initiative.

We see the Sabero business turning in 45% revenue growth in FY14E, owing to

improved capacity utilisation and project 10% revenue CAGR in FY14-16E. We

project Sabero’s EBITDA margin will improve from 11% in FY14E to 12% over

FY15/16E.

7,669

5,095

5,899 6,148

6,353

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

75,000

77,000

79,000

81,000

83,000

85,000

87,000

89,000

91,000

93,000


INR

mn

INR

mn

Fertilizer revenue Fertilizer EBITDA


26 February 2014 70

Figure 97: CRIN: non-fertiliser business revenue and EBITDA

Sabero’s financials are included from 4QFY12


As a consequence of our above assumptions, we project non-fertiliser EBITDA

contribution will improve from 34% in FY14E to 40% by FY16E.

EPS growth: As a consequence of our above revenue and margin projections, we

expect EPS to move from INR 14.7 in FY14E to INR 18.6 by FY16E.

Figure 98: CRIN: EPS and EPS growth


0

5,000

10,000

15,000

20,000

25,000

30,000


INR

mn

Non-fertilizer revenue Non-fertilizer EBITDA

-40%

-30%

-20%

-10%

0%

10%

20%

0

5

10

15

20

25


Gro

wth

INR

per

sh

are

EPS EPS growth (%)


26 February 2014 71




Sales 99,016 90,337 102,623 112,558 118,750 EBIT 9,947 6,968 7,980 8,731 9,417

Gross profit 20,587 23,401 25,656 28,139 29,687 Depreciation & amortisation 597 711 981 1,048 1,116

SG&A (2,541) (3,009) (4,059) (4,425) (4,678) Net interest (481) (1,401) (1,830) (1,789) (1,665)

Other income - - - - - Tax paid (2,766) (1,231) (1,660) (2,083) (2,326)

Other expenses (8,099) (13,424) (13,616) (14,983) (15,592) Changes in working capital (10,984) 415 (435) (2,858) (1,781)

EBIT 9,947 6,968 7,980 8,731 9,417 Others (313) (17) (276) 0 0

Net interest (481) (1,401) (1,830) (1,789) (1,665) Cash flow from operations (4,000) 5,446 4,759 3,050 4,761

Associates 0 0 0 0 0

Other non-operational - - - - - Capex (8,344) (5,215) (1,701) (1,772) (1,500)



Taxation (2,766) (1,231) (1,660) (2,083) (2,326) Others (369) 732 0 0 0

Minority interests 43 (17) (150) 0 0 Cash flow from investing (8,713) (4,483) (1,701) (1,772) (1,500)

Exceptional items after tax (355) 0 (126) 0 0

Net profit 6,388 4,320 4,213 4,859 5,426 Dividends (1,978) (1,274) (1,504) (1,532) (1,532)

Issue of shares 26 (5,084) 520 1,166 0

Net profit adj. 6,388 4,320 4,213 4,859 5,426 Change in debt 13,811 24 0 (1,000) (2,000)

EBITDA 10,544 7,679 8,961 9,779 10,533 Other financing cash flow 158 905 (169) (894) 0

Cash flow from financing 12,017 (5,428) (1,153) (2,260) (3,532)

EPS (INR) 22.64 15.27 14.75 16.70 18.65

EPS adj. (INR) 22.51 15.23 14.70 16.65 18.59 Change in cash (695) (4,466) 1,905 (982) (271)


Avg fully diluted shares (mn) 284 284 287 292 292 Free cash flow (12,343) 231 3,058 1,278 3,261


Cash 9,847 5,346 7,251 6,269 5,997 Operating ratios

Short-term investments 0 2 2 2 2 Gross margin (%) 20.8 25.9 25.0 25.0 25.0



Other current assets 20,612 20,423 19,922 21,827 23,015 Net margin adj. (%) 6.5 4.8 4.1 4.3 4.6


Sales growth (%) 29.6 -8.8 13.6 9.7 5.5

PP&E 14,555 17,897 18,416 18,868 19,252 Net income growth (%) -7.9 -32.4 -2.5 15.3 11.7

Intangible assets 3,671 4,867 5,068 5,340 5,340 EPS growth (%) -8.2 -32.5 -3.4 13.2 11.7

Associates and JVs - - - - - EPS growth adj. (%) -7.9 -32.4 -3.4 13.2 11.7

Other long-term assets 2,168 2,610 2,610 2,610 2,610 DPS growth (%) 0.0 -35.7 0.0 0.0 0.0


Efficiency ratios

Total assets 79,651 84,121 88,619 93,668 97,089 ROE (%) 29.3 18.8 17.9 17.7 17.2

ROCE (%) 36.0 20.6 21.1 21.4 21.9

Short-term debt 23,571 18,490 18,490 18,490 18,490 Asset turnover (x) 1.5 1.1 1.2 1.2 1.2

Accounts payable 21,163 24,014 25,452 27,902 29,429 Op. cash/EBIT (x) -0.4 0.8 0.6 0.3 0.5




Long-term debt 5,863 10,969 10,969 9,969 7,969 Accounts payable days 84.6 123.2 117.3 115.3 117.5


Deferred tax 675 1,877 1,877 1,877 1,877 Leverage ratios

Other long-term liabilities 516 487 487 487 487 Net gearing (%) 81.1 104.7 85.1 74.7 60.9


Interest cover (x) 7.9 3.3 3.3 3.7 4.2


Current ratio (x) 1.2 1.2 1.3 1.3 1.3


Minority interests 158 1,063 894 0 0 Valuation

EV/sales (x) 1.0 1.0 0.8 0.7 0.7


EV/EBIT (x) 9.5 13.4 10.1 9.3 8.5


PER adj. (x) 12.9 16.7 13.9 12.3 11.0

Net debt (cash) 19,587 24,112 22,207 22,189 20,461 PBR (x) 3.2 2.4 2.3 2.0 1.8



26 February 2014 72

India l Emerg ing Companies 26 February 2014

Dhanuka Agritech NOT RATED

NON-COVERED COMPANY VISIT NOTE

Standard Chartered Equity Research does not cover this company and nothing herein should be interpreted to be a recommendation

or price target with respect to the company.


INR 200.00

Key points

Dhanuka Agritech (DAGRI) is a manufacturing and branding company for pesticides in India.

The company claims to have the second-largest rural distribution network in India with 7,500 dealers.

DAGRI management believes that herbicides would be the fastest growing segment in the Indian pesticides market – driven by high rural wages and shortage of labour.

DAGRI delivered a CAGR of 19% in revenue and 20% in EBITDA terms between FY08-13.

Bloomberg code: DAGRI IN PER historical (x) 15.5x

Mkt cap (USD mn) 161 Yield historical (%) 1.4%

12m range (INR) 112-218 P/B historical (x) 3.8x

3m value traded (USDm) 0.4 ROE (%) 27.0%

No. of shares (m) 50.01 Net gearing (%) 8%

Est. free float (%) 25% Net debt (cash) (INR mn) 205

Established 1985 Historical EPS (INR) 12.88

Listed 1991 EPS 3-yr CAGR (%) 18%

Secondary placement NA EPS 7-yr CAGR (%) 46%

Auditors, since Dinesh Mehta & Co Historical DPS (INR) 2.8

Year-end March DPS 3-yr CAGR (%) 26%

Major shareholder M/s Golden Overseas Pvt. Ltd — 16.47%

Source: Annual report

What DAGRI does

DAGRI is one of the largest players in the domestic pesticides

industry. The company has a marketing network of 7,500 dealers

with a reach to over 70,000 retailers across India. DAGRI also has

a tie-up with multiple international partners for in-licensing/ co-

marketing of their products in India.

Why we visited DAGRI

Given our positive view on the Indian agro-inputs sector, as

highlighted in our report India agriculture: Seeds of prosperity, we

visited DAGRI as one of the players in the pesticides market.

Focussing in marketing and herbicides

DAGRI management is focused on building brand for its business

through innovative markets and farmer connect initiatives such as

Dhanuka Doctors. The company has 1,500 professionals who

provide on-site assistance to farmers and also help in promoting

DAGRI’s products.

In addition, the company believes that herbicides can be a key

beneficiary of high rural wages and tight labor availability in rural

India.

Valuations and share price performance

DAGRI trades at 11.4x FY14E PER based on Bloomberg

consensus expectations. The share price has outperformed the

BSE Sensex by 47% over the past 12 months.

Share price performance (INR)

Source: FactSet

110120130140150160170180190200210


Dhanuka Agritech BSE SENSEX 30 INDEX (Rebased)


110

110

150

170

190

210


+91 22 4205 5916


26 February 2014 73

Visit note Strong sector growth

The Indian pesticides market is poised for a strong structural

growth in our opinion, as highlighted in our report India

agriculture inputs: Seeds of prosperity. We anticipate the

domestic pesticides market to grow at a CAGR of 9% over

FY13-17E, driven by the need to improve yields and

stagnating land supply in the country.

Company overview

DAGRI manufactures a wide range of pesticides covering

herbicides, insecticides, fungicides, and plant growth

regulators. The company reaches out to more than 10mn

farmers across India through a network of more than 7,500

distributors/ dealers selling to over 70,000 retailers across

India, as per the management.

DAGRI has three manufacturing units located at Gurgaon

(Haryana), Sanand (Gujarat) and Udhampur (J&K).

Focus on speciality molecules

More than half of DAGRI’s sales comprise specialty molecules

and the remaining comprises generics. DAGRI’s largest

product by turnover is Targa Super (herbicide) and is in a

technical tie-up with Nissan Chemical Industries Ltd., Japan.

DAGRI has technical tie-ups with three US and five Japanese

companies.

The company launched five new molecules in FY13 and three

in 1HFY14. The company has another 6-7 products in the

pipeline and expects to launch two products every year.

DAGRI management also has a strong focus on herbicides

driven by the belief that herbicides would be a stronger growth

area within the Indian pesticides universe. In 1HFY14,

herbicide sales grew by over 50% for the company.

Differentiated marketing strategy

As highlighted in our report India agriculture inputs: Seeds of

prosperity, the Indian pesticides market is dominated by brand

perception and distribution strength. To this extent, DAGRI

management believes that it has one of the strongest

distribution networks in the country. In addition, as per the

management, the company has tried to differentiate its

offering through a team of 1,500 Dhanuka Doctors who work

as on-site consultants for farmers. A team of scientists and

experts works on quality improvement in existing products,

counseling to farming community, training Dhanuka Doctors,

field trials, conducting seminars, coordinating with various

research institutions and universities and data analysis.

Potential to unlock land value over medium term

DAGRI has 6 acres of land in Gurgaon, on which the Gurgaon

plant is located. The company is trying to move the production

from Gurgaon to a new facility in Keswana and expects the

process to take 2-3 years. The company has mentioned that

post migration of production, it would think of options to

dispose of the surplus land in Gurgaon.

Balance sheet

DAGRI has a strong balance sheet with zero long-term debt.

Overall net debt to EBITDA ratio as on Sep ’13 stood at 0.21x.

The company generated an RoE of 27% in FY13.

Management

The company is predominantly managed by the founding

family. The founding promoters, R.G. Agarwal and M.K.

Dhanuka oversee the whole operations as the Chairman and

Managing Director respectively and have been involved with

the Company since inception. Some other key executives are

Rahul Dhanuka, Director (Marketing), Mridul Dhanuka,

Director (Operations) and Harsh Dhanuka, SGM (Marketing).


26 February 2014 74

Valuation Figure 99: Comps table

Ticker

Name

Price

(LCY)

Market cap

(USDm)

PER (x) EV/EBITDA Div yield

FY14E

ROCE

FY13 FY14E FY15E FY16E FY14E FY15E FY16E

RALI IN Rallis India 157 492 20.7x 16.6x 13.4x 12.1x 10.0x 8.1x 1.9 25.8

BYRCS IN Bayer India 1,478 875 19.2x 16.2x 12.3x 13.6x 11.5x 9.3x 0.5 19.7

UPLL IN UPL Ltd. 185 1,351 9.5x 8.2x 7.5x 5.9x 5.3x 4.6x 1.6 16.9

MCHM IN Monsanto India 1,319 368 17.7x 15.2x NA 14.1x 12.3x NA 2.3 17.0

CRIN IN Coromandel 204 940 13.9x 12.3x 11.0x 9.0x 8.3x 7.6x 2.2 20.6

DAGRI IN Dhanuka Agritech 201 162 11.4x 9.7x 7.7x 8.6x 7.3x 5.8x 1.9 27.5

Median 15.8x 13.7x 11.0x 10.6x 9.2x 7.6x 1.9 20.1

Source:

Standard Chartered Research estimates for Rallis, UPL and Coromandel. Valuations for Non Rated companies are from Bloomberg, as of 25 February 2014

Company background

Figure 100: Company background

Main shareholders

Promoters: 75.0%

FII’s: 8.4%

Others: 16.6%

Management and directors

Mr. Ram Gopal Agarwal - Chairman

Mr. Mahendra Kumar Dhanuka - Managing Director

V.K. Bansal - Chief Financial Officer

Mr. Arun Kumar Dhanuka - Executive Director

Mr. Rahul Dhanuka - Executive Director

Mr. Mridul Dhanuka - Executive Director

Shareholders with >1% shareholding

2020 EQUITY INVESTORS,LIMITED

Source: Company, NSC

Key charts Figure 101: DAGRI new product launches Figure 102: DAGRI distribution network

FY12 - 13 FY13 - 14

Fluid Danfuron

Fuzi Super Protocol

Lustre Defend

Dhanzyme Gold granules

Source: Company Source: Company

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Distributors Dhanuka Doctors

FY 2008

FY 2013


26 February 2014 75

Trend analysis and six-year financial data

Growth

Margins

Cash flow

Balance sheet

Returns

Income statement (INR mn)

Year end: Mar 2008 2009 2010 2011 2012 2013

Sales revenue 2,482 3,366 4,081 4,910 5,292 5,823

Gross profit 1,070 1,430 1,718 1,650 1,866 2,012

EBITDA 327 478 583 759 794 819

Depreciation & amortisation -21 -27 -31 -49 -45 -45

EBIT 306 451 552 711 749 774

Net interest (expense) / income -42 -95 -62 -38 -49 34

Others 0 0 0 0 0 0

Income tax -95 -124 -127 -161 -129 -163

PAT 169 232 363 511 571 644

Minorities 0 0 0 0 0 0

Net income 169 232 363 511 571 644

Cash flow (INR mn)

Year end: Mar 2008 2009 2010 2011 2012 2013

Operating profit 306 451 552 711 749 774

Depreciation & amortisation 21 27 31 49 45 45

Working capital -320 -255 -304 -290 -95 -218

Others -40 -95 -50 -27 -51 37

Operational cash flow -33 128 229 442 649 638

Tax paid -95 -124 -127 -161 -129 -163

After-tax operational cash flow -128 4 103 281 520 475

Capex -57 -14 -137 -4 -3 -245

Net interest -42 -95 -62 -38 -49 34

Debt 90 10 62 -1 -116 -123

Dividends -46 -55 -64 -100 -110 -140

Others 139 171 116 -59 -160 12

Net flow -44 20 18 78 83 12

Balance sheet (INR mn)

Year end: Mar 2008 2009 2010 2011 2012 2013

Tangible assets 228 244 382 381 388 619

Other LT assets 7 6 4 138 187 202

Stocks 697 936 1,113 1,419 1,388 1,599

Debtors 628 747 956 1,377 1,512 1,507

Cash and liquid assets 40 34 20 50 240 136

Other ST assets 293 414 484 212 242 141

Total Assets 1,894 2,380 2,960 3,576 3,956 4,205

Current creditors 189 378 409 522 543 450

Current borrowings 319 248 216 402 403 337

Long-term borrowings 186 267 361 174 57 0

Others 686 804 1,002 774 808 790

Total liabilities 1,380 1,697 1,989 1,871 1,810 1,577

Shareholders’ funds 514 683 971 1,705 2,146 2,628

Minority interests 0 0 0 0 0 0

Equity 514 683 971 1,705 2,146 2,628

Total capital employed 1,019 1,198 1,548 2,280 2,606 2,964

Key data & ratio

Year end: Mar 2008 2009 2010 2011 2012 2013

EPS (INR) 3.69 5.06 7.92 10.22 11.42 12.88

Chg % 61% 37% 57% 29% 12% 13%

DPS (INR) 1.00 1.20 1.40 2.00 2.20 2.80

CFPS (INR) -2.78 0.08 2.24 5.61 10.39 9.49

BVPS (INR) 11.20 14.88 21.16 34.08 42.90 52.53

Wtd avg shares 46 46 46 50 50 50

ROE (%) 37.1% 38.8% 43.9% 38.2% 29.7% 27.0%

Post-tax ROCE (%) 23.0% 29.5% 31.0% 28.7% 25.4% 21.9%

Capex/sales (%) 2.3% 0.4% 3.4% 0.1% 0.0% 4.2%

Capex/depreciation (%) 266.0% 52.5% 440.3% 8.9% 5.7% 540.4%

Net debt/equity (%) 0.9 0.7 0.6 0.3 0.1 0.1

Total debt/Total capital (%) 49.6% 43.0% 37.3% 25.2% 17.7% 11.4%

Net interest cover (%) 7.33 4.75 8.91 18.61 15.38 -22.62

Source: Company

Source: Company

0%

20%

40%

60%

80%

FY08 FY09 FY10 FY11 FY12 FY13

Sales growth (%)

Earnings growth (%)

12%

13%

14%

14%

14%

13%

11%

12%

13%

14%

15%


EB

IT m

arg

in

-400

-200

0

200

400

600


INR

mn

Op cash flow generated

Capex

0.9

0.7

0.6

0.3

0.1 0.1

0.0

0.2

0.4

0.6

0.8

1.0


Net

deb

t / e

qu

ity

0%

10%

20%

30%

40%

50%


ROE (%) RoCE (%)


26 February 2014 76

India l Emerg ing Companies 26 February 2014

Jain Irrigation Systems NOT RATED

NON-COVERED COMPANY VISIT NOTE

Standard Chartered Equity Research does not cover this company and nothing herein should be interpreted to be a recommendation

or price target with respect to the company.


INR 58.20

Key points

Jain Irrigation (JI) is the largest player in the micro irrigation segment in India. The company also has a presence in the food processing and pipe industries.

India’s micro-irrigation industry has witnessed a strong 22% CAGR over FY08-13.

The company has been plagued with high working capital issues in the past and management has made efforts to re-engineer its business model over the past two years.

JI has floated an associate NBFC.

Bloomberg code: JI IN PER historical (x) NA

Mkt cap (USD mn) 410 Yield historical (%) 0.75

12m range (INR) 46-75 P/B historical (x) 1.2

3m value traded (USDm) 1.8 ROE (%) 6.5%

No. of shares (m) 435.6 Net gearing (%) 165%

Est. free float (%) 70% Net debt (cash) (INR mn) 35,973

Established 1989 Historical EPS (INR) 0.07

Listed 1993 EPS 3-yr CAGR (%) NA

Secondary placement NA EPS 7-yr CAGR (%) NA

Auditors, since Haribhakti & co., 2010

Historical DPS (INR) 0.50

Year-end March DPS 3-yr CAGR (%) -18%

Major shareholder Jalgaon Investments Pvt. Ltd — 22.18%

Source: Annual report

What JI does

JI is the largest micro irrigation player in India with an estimated

FY13 market share of 55%, as per the company. JI has a 35%

share in the sprinkler irrigation market. In addition to micro

irrigation, the company also has a presence in food processing

and pipe products.

Why we visited JI

Given our positive view on the Indian agro-inputs sector, as

highlighted in our report Indian agricultural inputs: Seeds of

prosperity, we visited JI as a key player in the micro irrigation

segment.

In addition, the company has increased efforts to improve its

working capital and leverage situation. We visited the company to

understand the current working capital situation as well.

Reinventing business model

Over the past two years, JI has migrated to a structure whereby

the dealers pay the entire amount due to the company between

90-180 days from the sale and the company in turn incentivizes

dealers by arranging low cost funding or cash discounts. The

company expects this effort to help it in alleviating the overall

balance sheet stress.

Valuations and share price performance

JI trades at 15.8x FY14E PER based on Bloomberg consensus

estimates. The share price has underperformed the Nifty by 13%

over the past 12 months.

Share price performance (Bt)

Source: FactSet

45505560657075


Jain Irrigation Systems BSE SENSEX 30 INDEX (Rebased)


+91 22 4205 5916


26 February 2014 77

Visit note Strong sector growth

The Indian micro irrigation segment has witnessed a 22%

CAGR over FY08-13. As highlighted in our sector note India

agriculture inputs: Seeds of prosperity, owing to the high level

of variability in Indian monsoon patterns, development of

irrigation facilities is pertinent for agriculture growth. However,

owing to exposure to subsidy delays and policy changes,

micro irrigation is not our preferred play on the agro-inputs

space.

Company overview

JI is the prominent player in India’s micro irrigation space with

a market share of 55% in drip irrigation and 35% in sprinkler

irrigation, according to management. The addition to micro

irrigation, which comprised 46% of FY13 revenues, the

company operates in the following segments:

Pipe products: This segment comprises supply of PVC

and PE pipes and constituted 22% of revenues for JI in

FY13. The company estimates that it has c.15% in the

domestic PVC business in FY13. PE pipes are used for

applications such as sewage and effluent disposal and are

also replacing cement/metal pipes in select industrial

segments including cable ducts, sprinklers, gas distribution

and water conveyance.

Food products: This segment comprises food processing

and is largely made up of dehydrated fruits and onions for

sale in domestic and international markets. Food products

comprised 20% of revenues for JI in FY13.

Solar products: This is a relatively small segment for JI

with revenues being less than 5% of overall revenues for

FY13. The current range of products includes domestic,

commercial and industrial solar powered pumping systems,

CFL/LED based lighting systems, etc.

Reinventing business model

According to the company, typically 50-70% of sale value of

MIS pumps is subsidized by the government. In the past, the

company had suffered delays in recouping these subsidies,

leading to strained cash flows. Over the past two years, the

company has migrated to a structure whereby the dealers pay

the entire amount due to the company between 90-180 days

from the sale and the company in turn incentivizes dealers

through arranging low cost funding or cash discounts. As a

result of this effort, the company has seen its debtor days

reduce from 168 in FY12 to 142 days in FY13, according to

management. The company has also seen an erosion in its

margins (excluding other income), which have reduced from

19% in FY12 to 15.4% in FY13, as per management.

NBFC to help alleviate stress

JI floated a group NBFC company, Sustainable Agri-

Commercial Finance (SACF) in 2012. Currently JI has a 49%

stake in SACF with the balance being held by the promoters

of JI and IFC. While the NBFC’s balance sheet is currently

small in scale, JI expects to accelerate disbursements from

the NBFC over the medium term to its dealers and suppliers.

Balance sheet

As a consequence of accumulated subsidies and receivables,

JI had a net debt of INR 36bn as of FY13. The net debt to

EBITDA ratio for FY13 was 5x and net debt/ equity ratio was

1.7x.

Management

The company was founded by the Jain family, which

continues to retain management control of JI. The promoters

held a 30% stake in the company as on 31 December 2013.

Catalysts for change

The company expects alleviation of the working capital

situation along with return to a growth model along with

stabilized margins to be a key catalyst for change going

forward.


26 February 2014 78

Key charts Figure 103: JI receivable days Figure 104: JI net working capital days


Figure 105: Revenue break up (FY13) Figure 106: Historical revenue growth


Company background (Optional)

Figure 107: Company background

Main shareholders

Promoters: 27.5%

FIIs:52.4%

DIIs: 1.6%

Others: 18.5%

Management and directors

Bhavarlal H. Jain – Chairman

Ashok B. Jain – Vice Chairman

Anil B. Jain – CEO & Managing Director

Manoj L. Lodha – President -Finance

Shareholders with >1% shareholding

MKCP Institutional Investor

Macquarie Bank Limited

International Finance Corporation

Government Pension Fund Global

Emerging Markets Growth Fund Inc.

Templeton Funds-Templeton Foreign Fund

Pictet Water

The State Teachers Retirement System of OHIO

Dunearn Investments (Mauritius) Pte

Lantau Institutional Investor (Mauritius) Ltd

Wellington Management Company, LLP

Templeton Institutional Funds

Templeton Global Smaller Companies Fund

General Electric Pension Trust

Templeton International Smaller Companies Fund

Source: Company

108 111 108

149

168

142

0

20

40

60

80

100

120

140

160

180


Day

s

204

200

185 187

191

196

175

180

185

190

195

200

205

210


Day

s

India 57%

Europe 17%

North America

11%

Rest of World 15%

0

10,000

20,000

30,000

40,000

50,000

60,000

FY07 FY08 FY09 FY10 FY11 FY12 FY13

INR

mn

Micro Irrigation Piping Products Food Products

Solar Products Other Products


26 February 2014 79

Trend analysis and six-year financial data

Growth

Margins

Cash flow

Balance sheet

Returns

Income statement (INR mn)

Year end: Mar 2008 2009 2010 2011 2012 2013

Sales revenue 22,159 28,584 34,200 41,528 49,206 50,217

Gross profit 5,786 9,954 9,955 11,557 17,147 17,260

EBITDA 3,490 5,016 5,937 7,658 9,366 7,735

Depreciation & amortisation -558 -684 -1,020 -1,222 -1,441 -1,696

EBIT 2,932 4,332 4,917 6,437 7,925 6,040

Net interest (expense) / income -1,327 -1,809 -2,155 -2,678 -4,074 -4,688

Others 169 70 51 56 100 19

Income tax -517 -664 -1,194 -1,213 0 -80

PAT 1,349 1,331 2,487 2,881 2,286 45

Minorities -25 -37 -12 -74 -51 -14

Net income 1,324 1,294 2,476 2,807 2,235 31

Cash flow (INR mn)

Year end: Mar 2008 2009 2010 2011 2012 2013

Operating profit 2,932 4,332 4,917 6,437 7,925 6,040

Depreciation & amortisation 558 684 1,020 1,222 1,441 1,696

Working capital -5,881 -1,956 -2,372 -5,121 -5,836 -2,270

Others -609 -1,981 -977 -2,365 -5,314 -6,054

Operational cash flow -2,999 1,079 2,588 173 -1,785 -589

Tax paid -517 -664 -1,194 -1,213 0 -80

After-tax operational cash flow -3,517 415 1,394 -1,041 -1,784 -669

Capex -4,376 -4,837 -4,179 -4,733 -5,906 -2,881

Net interest -1,327 -1,809 -2,155 -2,678 -4,074 -4,688

Debt 4,166 5,413 6,278 5,405 8,144 314

Dividends -159 -181 -342 -386 -405 -227

Others 4,355 924 3,078 2,411 2,976 7,183

Net flow -856 -75 4,073 -1,021 -1,048 -968

Balance sheet (INR mn)

Year end: Mar 2008 2009 2010 2011 2012 2013

Tangible assets 7,593 11,483 14,747 18,298 21,568 23,785

Other LT assets 3,337 3,658 3,801 5,173 7,427 7,977

Stocks 8,099 9,859 10,638 14,864 14,614 17,231

Debtors 6,556 8,663 10,099 16,924 22,712 19,547

Cash and liquid assets 1,036 1,174 5,053 4,144 3,308 2,359

Other ST assets 3,039 3,352 3,883 4,153 5,219 7,310

Total Assets 29,661 38,189 48,220 63,557 74,848 78,208

Current creditors 5,134 5,982 7,045 12,696 13,497 13,379

Current borrowings 6,145 8,452 8,646 19,677 25,671 23,982

Long-term borrowings 6,611 9,717 15,802 10,175 12,326 14,329

Others 2,389 4,362 3,990 4,926 5,320 4,838

Total liabilities 20,279 28,513 35,482 47,475 56,813 56,528

Shareholders’ funds 8,732 8,971 12,167 15,558 17,537 21,680

Minority interests 649 705 571 524 498 0

Equity 9,381 9,676 12,738 16,082 18,034 21,680

Total capital employed 22,137 27,845 37,186 45,935 56,031 59,991

Key data & ratio

Year end: Mar 2008 2009 2010 2011 2012 2013

EPS (INR) 4.02 3.58 6.58 7.37 5.52 0.07

Chg % 42% -11% 84% 12% -25% -99%

DPS (INR) 0.44 0.50 0.90 1.00 1.00 0.50

CFPS (INR) -10.68 1.15 3.71 -2.73 -4.40 -1.56

BVPS (INR) 24.24 24.79 32.01 40.33 43.28 47.66

Wtd avg shares 329 362 376 381 405 428

ROE (%) 19.4% 13.6% 22.1% 19.5% 13.1% 0.2%

Post-tax ROCE (%) 13.8% 14.7% 11.5% 12.6% 15.5% 10.3%

Capex/sales (%) 19.7% 16.9% 12.2% 11.4% 12.0% 5.7%

Capex/depreciation (%) 784.8% 707.1% 409.9% 387.4% 409.9% 169.9%

Net debt/equity (%) 1.3 1.9 1.6 1.7 2.0 1.7

Total debt/Total capital (%) 57.6% 65.3% 65.7% 65.0% 67.8% 63.9%

Net interest cover (%) 2.21 2.39 2.28 2.40 1.95 1.29

Source: Company

Source: Company

-200%

-100%

0%

100%

200%


Sales growth (%)

Earnings growth (%)

13%

15%

14%

16% 16%

12%

10%

11%

12%

13%

14%

15%

16%

17%


EB

IT m

arg

in

-6,000

-4,000

-2,000

0

2,000


INR

mn

Op cash flow generated

Capex

1.3

1.9

1.6

1.7 2.0

1.7

0.0

0.5

1.0

1.5

2.0

2.5


Net

deb

t / e

qu

ity

0%

5%

10%

15%

20%

25%


ROE (%) RoCE (%)


26 February 2014 80

Appendix 1: Overview of companies We present an overview of the key players in the Indian agri-inputs industry.

Bayer Cropscience. Bayer Cropscience (BYRCS IN, NR) is the subsidiary of Bayer

Corp. The company is divided into three business groups: Crop Protection,

Environmental Science and BioScience. The crop protection division offers

insecticides, fungicides, herbicides, seed treatment and PGNs in India. Bayer has

some of the most prominent brands in the Indian insecticides space including

Confidor and Admire.

Figure 108: BYRCS key financials

(INR mn) FY11 FY12 FY13 9M14

Revenue 21,373 22,723 27,253 26,925

EBITDA 2,231 2,527 3,599 3,510

EBITDA margin (%) 10% 11% 13% 13%

PAT (ex extraordinary) 1,354 1,969 -130 2,610

Net profit margin (%) 6% 9% 0% 10%

Net debt -2,581 -4,335 -9,778 -9,692*

*Net debt as on Sep 2013


Syngenta. Syngenta India is part of the Syngenta AG group, based in Switzerland. In

India, the company provides crop protection and seed processing activities. The

company is one of the prominent players in the Indian crop protection business; it

offers a range of products in the insecticides, fungicides and herbicides sub

segments. Its seed processing division has plants established across India, which

mainly process sunflower and corn seeds to meet domestic requirements.

Monsanto. Monsanto India (MCHM IN, NR) is the only listed subsidiary of Monsanto

outside the US. The company is present predominantly on the herbicides side of the

Indian crop protection market. MCHM is a dominant player in the seeds market in

India.

Figure 109: MCHM key financials


Revenue

Agrichem business 1,002 1,128 1,568

Seeds business 2,693 2,674 2,975

Others 52 58 59

Total revenue, net excise 3,634 3,738 4,424 5,067

EBITDA 652 550 697 1,426

EBITDA margin (%) 18% 15% 16% 28%

PAT (ex extraordinary) 550 499 673 1,289


Net debt -1,685 -2,148 -2,713 -2,434*




26 February 2014 81

Rallis. Rallis (RALI IN, OP) is a Tata group company and has some of the most

prominent brands in the Indian crop inputs space. The company has unique farmer

outreach programs such as Rallis Kisan Kutumbha and More Pulses. Rallis

predominantly provides generic agro-chemicals within the crop protection space. The

company also has an 80% stake in a seeds company, Metahelix.

Figure 110: RALI key financials


Revenue 10,862 12,749 14,582 14,151

EBITDA 1,915 1,858 2,106 2,196

EBITDA margin (%) 18% 15% 14% 16%

PAT (ex extraordinary) 1,260 992 1,190 1,326


Net debt 997 1,399 1,045 -55*



UPL. UPL (UPLL IN, OP) is one of the largest players in the Indian agrochemical

market and has a significant presence globally through its multiple acquisitions and

offices worldwide. Some of the prominent brands for UPL in India are Mancozeb and

Ulala.

Figure 111: UPLL key financials


Revenue 58,980 76,713 91,945 74,889

EBITDA 10,699 13,840 16,618 13,475

EBITDA margin (%) 18% 18% 18% 18%

PAT (ex extraordinary) 5,840 6,008 8,135 6,491


Net debt 6,259 24,318 22,559 NA


Coromandel International. Coromandel (CRIN IN, IL) has traditionally been one of

the strongest players in the domestic fertilizer sector. In addition, the company also

has a presence in the crop protection market and has also recently acquired Sabero

Organics to strengthen its presence in the generic pesticides segment.

Figure 112: CRIN key financials


Revenue 76,393 99,016 90,337 78,693

EBITDA 10,556 10,544 7,679 6,260

EBITDA margin (%) 14% 11% 9% 8%

PAT (ex extraordinary) 6,937 6,743 4,320 2,883


Net debt 5,574 20,149 24,076 17,778*




26 February 2014 82

PI Industries. PI Industries (PI IN, OP) is a generic crop protection player. In

addition, the company also has a conscious strategy of introducing innovator

molecules through co-marketing and in-licensing arrangements with international

players. Some of the prominent brands for PI are Nominee Gold and Osheen.

Figure 113: PI key financials


Revenue 7,200 8,791 11,514 12,322

EBITDA 1,152 1,434 1,806 2,345

EBITDA margin (%) 16% 16% 16% 19%

PAT (ex extraordinary) 651 715 973 1,385


Net debt 2,306 2,306 1,999 902*



Dhanuka Agri. Dhanuka Agritech (DAGRI IN, NR) is a generic crop protection

player. The company has a strategy of using a team of crop specialists – Dhanuka

Doctors – to assist farmers improve crop productivity and thereby help build a brand

for the company.

Figure 114: DAGRI key financials


Revenue 4,910 5,292 5,823 5,867

EBITDA 759 794 819 939

EBITDA margin (%) 15% 15% 14% 16%

PAT (ex extraordinary) 511 571 644 707


Net debt 526 220 201 375*



Nuziveedu Seeds Ltd. Nuziveedu Seeds is one of the strongest players in Bt cotton

seeds in India. The company has a wide distribution and dealer network spread

across 17 states in India.


26 February 2014 83

Appendix 2: Hazardous pesticides The Indian media has many times highlighted the high pesticide content in food

items. Given the lack of data, we find it difficult to estimate the most current quantum

of hazardous pesticides in use. Yet, we have attempted to assess the overall trend in

the use of hazardous pesticides in India.

WHO has advised the use of color codes for pesticide containers, based on their

toxity levels. This classification is explained below.

Figure 115: WHO classification of hazardous pesticides

WHO class

LD50 for the rat (mg/ kg of body weight) Color identification band on label Oral lethal dose Dermal lethal dose

Ia. Extremely hazardous <5 <50 Bright Red

Ib. Highly hazardous 5-50 50-200 Bright Yellow

II. Moderately hazardous 50-2,000 200-2000 Bright Blue

III. Slightly hazardous > 2,000 > 2000 Bright Green

U. Unlikely to present acute hazard >=5,000

Source: WHO, Standard Chartered Research

We have taken a look at the pattern of usage of red and yellow label pesticides in

India over the years from FY02 to FY09. Unfortunately, adequate data beyond FY09

is not available at the moment, but note that the overall proportion of Ia (extremely

hazardous) and Ib (highly hazardous) pesticides has been declining over the period

we have studied.

Figure 116: Trend in usage of extremely hazardous (red label) pesticides in India

Consumption of extremely hazardous (as classified by WHO) pesticides in India (in tones) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

Methyl Parathion 3,008 3,028 3,200 3,142 1,472 1,460 1,286 1,450

Phorate 2,215 2,316 3,010 2,155 2,630 1,418 1,897 1,534

Phosphamidon 1,100 1,020 1,480 883 549 500 140 194

Bromodiolone 79 83 50 58 9 17 78 14

Total extremely hazardous pesticides consumption in India

6,402 6,447 7,740 6,238 4,660 3,395 3,401 3,192

As % of total consumption 13.6% 13.3% 18.9% 15.3% 10.5% 8.8% 10.1% 9.1%



26 February 2014 84

Figure 117: Trend in usage of highly hazardous (yellow label) pesticides in India

Consumption of highly hazardous (as classified by WHO) pesticides in India (in tones) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

Dichlorvos 1,070 1,250 818 1,295 1,849 613 70 149

Monocrotophos 2,815 3,205 3,115 3,500 1,465 1,950 1,386 1,593

Oxydemeton methyl 512 382 213 352 166 163 107 204

Triazophos 114 108 115 105 0 13 144 13

Carbofuran 419 308 500 495 469 515 288 472

Cyfluthrin 0 0 5 34 0 16 7 110

Methomyl 41 38 10 28 13 13 26 60

Propetamphos 0 0 0 0 9 169 8 17

Thiometon 1 1 1 28 2 11 31 157

Ediphenphos 22 25 20 6 18 18 1 5

Total highly hazardous pesticides consumption in India

4,994 5,317 4,797 5,843 3,991 3,481 2,069 2,781

As % of total consumption 10.6% 11.0% 11.7% 14.4% 9.0% 9.0% 6.1% 7.9%


While there is certainly a need to address the indiscriminate and unauthorized use of

banned and restricted pesticides in the country, it may be worthwhile to note that

according to a 2011 study of over 15,000 samples of vegetables, fruits, spices,

cereals, pulses, soil, animal feed, tea, honey, meat, egg and milk, residues were

found in 6.8% of the samples and residues exceeded maximum residual limit in 1.2%

of samples.

Figure 118: Comparison of the results of the monitoring of pesticide residues

in fruits and vegetables

Year Country Samples analyzed Above MRL

2007

India 3,000 117 (3.9%)

EU 64,271 2,843 (4.4%)

UK 2,139 66 (3.1%)

US-FDA 672 19 (2.8%)

2008

India 6,031 137 (2.3%)

EU 60,805 2,380 (3.9%)

UK 2,309 49 (2.1%)

US-FDA 1,046 12 (1.1%)

2009-10 India 6,353 102 (1.6%)

2010-11 India 7,232 140 (1.8%)

Source: Industry, Standard Chartered Research


26 February 2014 85

Disclosures appendix The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, ”SCB”) and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES. Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

Where “disclosure date” appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the date of the report, unless otherwise stated.

165.60

199.06

232.51

265.97

299.42

332.88

Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13

INR Recommendation and price target history for Coromandel International

Date Recommendation Price target Date Recommendation Price target Date Recommendation Price target

Source: FactSet prices, SCB recommendations and price targets

107.75

129.55

151.35

173.15

194.95

216.75


INR Recommendation and price target history for UPL



111.75

125.92

140.09

154.26

168.43


INR Recommendation and price target history for Rallis India




26 February 2014 86

52.20

94.27

136.34

178.41

220.48


INR Recommendation and price target history for PI Industries



62.23

158.43

254.64

350.84

447.05

543.25


INR Recommendation and price target history for Kaveri Seed



Recommendation Distribution and Investment Banking Relationships

% of covered companies

currently assigned this rating % of companies assigned this rating with which SCB has provided

investment banking services over the past 12 months

OUTPERFORM 53.2% 14.5%

IN-LINE 35.2% 12.8%

UNDERPERFORM 11.6% 8.3%

As of 31 December 2013 Research Recommendation

Terminology Definitions

OUTPERFORM (OP) The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months

IN-LINE (IL) The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next 12 months

UNDERPERFORM (UP) The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months

SCB uses an investment horizon of 12 months for its price targets. Additional information, including disclosures, with respect to any securities referred to herein will be available upon request. Requests should be sent to [email protected]. Global Disclaimer: Standard Chartered Bank and/or its affiliates ("SCB”) makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to in the document. The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statements regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections, and price target(s), if any, contained in this document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us from doing so. Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to or immediately following its publication. SCB is not a legal or tax adviser, and is not purporting to provide legal or tax advice. Independent legal and/or tax advice should be sought for any queries relating to the legal or tax implications of any investment. SCB, and/or a connected company, may have a position in any of the securities, instruments or currencies mentioned in this document. SCB and/or any member of the SCB group of companies or its respective officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities or financial instruments referred to in this document and on the website or have a material interest in any such


26 February 2014 87

securities or related investment, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such investments. SCB has in place policies and procedures and physical information walls between its Research Department and differing public and private business functions to help ensure confidential information, including ‘inside’ information is not disclosed unless in line with its policies and procedures and the rules of its regulators. Data, opinions and other information appearing herein may have been obtained from public sources. SCB makes no representation or warranty as to the accuracy or completeness of such information obtained from public sources. You are advised to make your own independent judgment (with the advice of your professional advisers as necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading, hedging or investment decision. SCB accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplary damages) from use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services. This material is for the use of intended recipients only and in any jurisdiction in which distribution to private/retail customers would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely for distribution to professional and institutional investors. Country-Specific Disclosures - If you are receiving this document in any of the countries listed below, please note the following: United Kingdom and European Economic Area: SCB is authorised in the United Kingdom by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This communication is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC. Nothing in this document constitutes a personal recommendation or investment advice as defined by Directive 2004/39/EC. Australia: The Australian Financial Services Licence for Standard Chartered Bank is Licence No: 246833 with the following Australian Registered Business Number (ARBN: 097571778). Australian investors should note that this document was prepared for “wholesale clients” only within the meaning of section 761G of the Australian Corporations Act 2001 (Act) and the Corporations Regulations. This document is not directed at persons who are “retail clients” as defined in the Australian Corporations Act 2001. Brazil: SCB disclosures pursuant to the Securities and Exchange Commission of Brazil (“CVM”) Instruction 483/10: This research has not been produced in Brazil. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS DOCUMENT HAVE NOT BEEN AND WILL NOT BE REGISTERED PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL AND MAY NOT BE OFFERED OR SOLD IN BRAZIL EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS AND IN COMPLIANCE WITH THE SECURITIES LAWS OF BRAZIL. Germany: In Germany, this document is being distributed by Standard Chartered Bank Germany Branch which is also regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Hong Kong: This document, except for any portion advising on or facilitating any decision on futures contracts trading, is being distributed in Hong Kong by, and is attributable to, Standard Chartered Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority. India: This document is being distributed in India by Standard Chartered Securities (India) Limited which is a SEBI registered broker and a member of the Bombay Stock Exchange Limited and The National Stock Exchange of India Limited. Korea: This document is being distributed in Korea by, and is attributable to, Standard Chartered Securities Korea Limited which is regulated by the Financial Supervisory Service. Malaysia: This document is being distributed in Malaysia by Standard Chartered Bank Malaysia Berhad only to institutional investors or corporate customers. Recipients in Malaysia should contact Standard Chartered Bank Malaysia Berhad in relation to any matters arising from, or in connection with, this document. Singapore: This document is being distributed in Singapore by Standard Chartered Bank Singapore Branch only to accredited investors, expert investors or institutional investors, as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact Standard Chartered Bank Singapore Branch in relation to any matters arising from, or in connection with, this document. South Africa: SCB is licensed as a Financial Services Provider in terms of Section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002. SCB is a Registered Credit Provider in terms of the National Credit Act 34 of 2005 under registration number NCRCP4. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 1095 Avenue of the Americas, New York, N.Y. 10036, US, tel + 1 212 667 0700. WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS. © Copyright 2014 Standard Chartered Bank and its affiliates. All rights reserved. All copyrights subsisting and arising out of all materials, text, articles and information contained herein is the property of Standard Chartered Bank and/or its affiliates, and may not be reproduced, redistributed, amended, modified, adapted, transmitted in any form, or translated in any way without the prior written permission of Standard Chartered Bank.

Click here to download the Standard Chartered Research app for iPad

http://itunes.apple.com/us/app/global-research-for-ipad/id536066200?ls=1&mt=8

http://itunes.apple.com/us/app/global-research-for-ipad/id536066200?ls=1&mt=8

India Agriculture Inputs Seeds of Prosperity 26-02-14!15!05

Documents

Transcript of India Agriculture Inputs Seeds of Prosperity 26-02-14!15!05