elara capital - agri inputs
TRANSCRIPT
A long harvest
India Crop Protection9 January 2012
Elara Securities (India) Private Limited
Anand Shah
+91 22 4062 6821
FoodProduction
CropProtection
Yield Population Land FoodProduction
CropProtection
Yield Population Land
Limited land
Growing population
growing needs
Yield improvement im
perative
Key agri input
Rise in fo
od productio
n
PRESENT FUTURE
Elara Securities (India) Private Limited
Notes
Anand Shah • [email protected] • +91 22 4062 6821
Glo
ba
l M
ark
ets
Re
sea
rch
Elara Securities (India) Private Limited
A long harvest
Landscape conducive for growth in agri-inputs
Compared to other countries, India faces a bigger challenge, since
with only 2.3% share in world’s total land area, it needs to ensure food
security of its population which is about 17.5% of world population.
Further, stagnant arable land, fragmentation of land holdings and low
productivity/yield vs. global peers and differential yields state-wise has
only compounded problems making it imperative to improve yields via
agri-inputs like crop protection (pesticides) products.
Higher rural incomes and govt focus to act as key catalysts
Over the last several years, government focus on agriculture has
increased through various schemes/allocations, better credit flow to
agriculture and higher MSPs (Minimum Support Prices) which has
improved farmers’ realisations from produce. We believe rising farm
incomes are likely to be re-routed in agri-inputs to sustain farm
incomes.
Bullish on crop protection theme
According to CMIE data, the Indian crop protection industry was
valued at INR137bn (domestic consumption) in FY2010. Going ahead,
we expect the crop protection industry to grow at ~10-12% CAGR
over FY12E-14E driven by higher MSPs, labour shortages driving
higher use of herbicides, growing farmer awareness about products,
government support for agriculture, higher usage in low input regions
and introduction of new specialty molecules.
Further, Indian players are expanding their horizons into higher
exports (to utilize excess capacities and insulate themselves from
seasonal demand fluctuations) and engaging into strategic tie-ups
with MNCs to diversify their product mix. Moreover, from 2010-2014,
patents on products worth USD4.3bn sales will go off-patent and may
provide huge opportunities for generic companies.
Valuation Over the last 3 months, crop protection companies have witnessed
steep correction, led by Rallis, largely due to expectations of a
weaker H2FY12E. However, we continue to like crop protection
companies due to their strong balance sheets (low debt-equity),
high free cash flow (FCF) generation over FY12E-14E and
reasonable valuations, post correction, offering an attractive entry
point.
We initiate coverage on Rallis India and PI Industries as our Top
picks in the sector, initiate on Dhanuka Agritech with Buy and
Insecticides India with Accumulate rating.
Price performance
Source: Bloomberg
Key Financials Company Rating Mcap CMP Target Upside P/E (x) EV/EBITDA (x) RoE (%)
INR mn USD mn (INR) (INR) (%) FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E
Rallis India # Buy 23,531 444 121 170 40 17.1 13.0 10.2 11.4 8.7 6.8 25.9 29.1 31.6
PI Industries Buy 12,349 233 493 669 36 16.3 10.4 7.7 9.6 7.0 5.1 27.6 30.5 31.3
Dhanuka Agri Buy 4,552 86 91 128 41 8.4 6.3 5.2 6.6 4.8 3.6 28.6 30.4 29.7
Insecticides India Accumulate 5,035 95 397 457 15 12.8 9.4 6.7 9.3 6.8 4.8 22.8 25.3 28.2
Source: Company, Elara Securities Estimate; Note: # Consolidated financials
India | Crop Protection 9 January 2012
Initiating Coverage
India Crop Protection
Valued at INR137bn, crop protection industry has grown ~11% CAGR
Source: CMIE, Elara Securities Research
Per hectare consumption of pesticides in India lags its peers
Source: Industry estimates, Elara Securities Research
Usage of herbicides has risen to ~20% driven by labour shortages
Source: Industry estimates, Elara Securities Research
0
50
100
150
200
250
300
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-1
1
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Jan
-12
(Re
ba
sed
to
10
0)
Sensex PIIL Dhanuka
Rallis IIL
(10)
0
10
20
30
40
0
50
100
150
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
(%)
(IN
R b
n)
Domestic Consumption (LHS) YoY (RHS)
17.0 14.0
12.0
7.0 7.0
5.0 5.0
1.0 0.5
0
2
4 6
8 10
12
14 16
18
Ta
iwa
n
Ch
ina
Jap
an
USA
Ko
rea
Fra
nce
UK
Pa
kis
tan
Ind
ia
(kg
/ h
a)
Insecticides 55%
Herbicides 20%
Fungicides 20%
Others 5%
India 2009
India Crop Protection
2 Elara Securities (India) Private Limited
Table of Content
Executive Summary……………………………………………………………………………………………………………… 3
A long harvest………………………………………………………………………………………………………………………. 4
Landscape conducive for growth in agri-inputs……………………………………………………. 4
Higher rural incomes and govt focus to act as key catalysts……………………………….. 7
Bullish on crop protection theme……………………………………………………………………………. 9
Valuation & Recommendation Initiate with Rallis & PI Industries as top picks…………… 15
Annexure I: Distributor/Farmer meetings takeaways…………………………………………………….. 18
Annexure II: Insights into global crop protection industry……………………………………………. 22
Annexure III: Primer on Pesticides…………………………………………..………………………………………… 24
Company Section
Rallis India (Rallis)
Poised to grow…………………………………………………………………………………………………………………….. 27
Investment rationale……………………………………………………………………………………………………………. 30
Valuation & Recommendation…………………………………………………………………………………………… 35
PI Industries (PIIL)
Going one up with a niche model…………………………………………………………………………………….. 41
Investment rationale……………………………………………………………………………………………………………. 44
Valuation & Recommendation…………………………………………………………………………………………… 48
Dhanuka Agritech (Dhanuka)
Partnering its way to success…………………………………………………………………………………………….. 53
Investment rationale……………………………………………………………………………………………………………. 56
Valuation & Recommendation…………………………………………………………………………………………… 59
Insecticides India (IIL)
Expanding into new horizons……………………………………………………………………………………………. 63
Investment rationale……………………………………………………………………………………………………………. 66
Valuation & Recommendation…………………………………………………………………………………………… 70
India Crop Protection
Cro
p P
rote
cti
on
3 Elara Securities (India) Private Limited
Executive Summary
Landscape conducive for growth in agri-inputs
Compared to other countries, India faces a bigger
challenge, since with only 2.3% share in world’s total
land area, it needs to ensure food security of its
population which is about 17.5% of world population.
Further, stagnant arable land, fragmentation of land
holdings and low productivity/yield vs. global peers and
differential yields state-wise has only compounded
problems making it imperative to improve yields via agri-
inputs like crop protection (pesticides) products.
Higher rural incomes and govt focus to act as key catalysts
Over the last several years, government focus on
agriculture has increased through various
schemes/allocations, better credit flow to agriculture and
higher MSPs which has improved farmers’ realisations
from produce. We believe rising farm incomes are likely
to be re-routed in agri-inputs to sustain farm incomes.
Recently the government announced a significant hike
of ~15%-40% in MSPs of rabi crop for 2012-13 crop cycle
which should help sustain profitability for farmers and
encourage them to increase acreage/production.
Bullish on crop protection theme
Given a backdrop where improving yields in farms is
imperative in order to remain self-sufficient in terms of
food requirements, we believe agri-inputs like crop
protection (pesticides) products are likely to play a key
role in the future. Higher crop productivity can be
achieved through better crop protection products, and
the key challenge is to prevent/reduce pest-related crop
losses. The per hectare pesticide consumption in India
stands at 0.5kg/ha, vis-à-vis 14kg/ha in China and
7kg/ha in USA under scoring ample scope for growth in
the industry.
Crop protection industry, valued at INR137bn, is growing at ~11% CAGR
According to CMIE data, the Indian crop protection
industry was valued at INR137bn (domestic
consumption) in FY2010. While the industry registered a
CAGR of ~8.2% over FY2000-10, growth has accelerated
to 11.2% CAGR over FY2005-10.
Going ahead, we expect the crop protection industry to
grow at ~10-12% CAGR over FY12-14E driven by higher
MSPs, labour shortages driving higher use of herbicides,
growing farmer awareness about products, government
support for agriculture, higher usage in low input
regions and introduction of new specialty molecules.
Expanding horizons
A focussed export-oriented strategy has helped crop
protection companies to utilise excess capacities, deliver
strong volume growth and insulate themselves from
seasonal demand fluctuations in the domestic market.
Further, from 2010-2014, patents on products worth
USD4.3bn sales will go off-patent and may provide huge
opportunities for generic companies. In the domestic
markets, many medium-large size domestic players are
engaging in strategic alliances/tie-ups to extend market
reach and diversify their product portfolios.
Recent underperformance offers attractive entry point
Over the last three months, crop protection companies
have witnessed steep correction and have
underperformed the benchmark indices by an average
of ~8-10%, led by Rallis, owing largely due to
expectations of a weaker H2FY12E due to poor rains in
AP (key pesticide consuming state) and drop in prices of
vegetables hurting farmer sentiments. However, we
highlight, we have already modeled a weaker H2FY12 in
our numbers and don’t rule out a significant cut in street
estimates which are ahead of our numbers.
Nonetheless, we continue to like crop protection
companies, despite expectations of weaker results in
near-term, due to their strong balance sheets (low debt-
equity), high free cash flow (FCF) generation over
FY12E-14E and reasonable valuations, post correction,
offering an attractive entry point.
Initiate on Rallis and PI Industries as Top Picks, Dhanuka Agritech with a Buy and Insecticides India with Accumulate rating
We initiate coverage on Rallis India (Rallis) with a Buy
rating and a TP of INR170 based on P/E of 16x to Sept-13
EPS of INR10.6 indicating an upside of ~40%.
We initiate coverage on PI Industries (PIIL) with a Buy
rating and a TP of INR669 based on P/E of 12x (25%
discount to Rallis) to Sept-13 EPS of INR55.7 indicating an
upside of ~36%.
We initiate coverage on Dhanuka Agritech (Dhanuka)
with a Buy rating and a TP of INR128 based on P/E of 8x
(50% discount to Rallis, ~15% premium to its historical
average of 7x P/E) to Sept-13 EPS of INR16 indicating an
upside of ~41%.
We initiate coverage on Insecticides India (IIL) with an
Accumulate rating and a Target Price of INR457 based
on P/E of 9x (45% discount to Rallis) to Sept-13 EPS of
INR50.8 indicating an upside of ~15%.
India Crop Protection
4 Elara Securities (India) Private Limited
Landscape conducive for growth in agri-inputs
Compared to other countries, India faces a bigger
challenge, since with only 2.3% share in world’s total
land area, it needs to ensure food security of its
population which is about 17.5% of world population.
Further, stagnant arable land, fragmentation of land
holdings and low productivity/yield vs. global peers and
differential yields state-wise has only compounded
problems making it imperative to improve yields via agri-
inputs like crop protection (pesticides) products.
Growing population…growing needs
India’s current population estimates for 2011 stands at
1.2bn. According to population projections based on
different average annual rate of growth, India’s
projected population is expected to reach 1.339bn by
2021 and 1.399bn by 2026. Further, it is projected that if
present trend (1.39% average annual growth rate)
continues, India’s population will reach 1.5bn by 2040.
Exhibit 1: Indian population to reach 1.4bn by 2026
Source: Indian Council for Research on International Economic Relations
(ICRIER) working paper – Mittal, 2008, Elara Securities Research
With rising population and growing per capita incomes,
domestic demand for food grains is expected to rise
significantly. According to ICAR (Indian Council of
Agricultural Research) vision 2030 document, demand
for food grains is expected to increase from 192 million
tonnes in 2000 to 355 million tonnes in 2030 growing at
an annual CAGR of 2.1%. Hence in the next 20 years,
production of food grains needs to be increased at an
absolute rate of ~5.5 million tonnes annually.
Exhibit 2: Domestic demand for food grains to reach
355 mn tonnes by 2030
Source: ICAR Vision 2030 document, Elara Securities Research
Further, according to a working paper by ICRIER (Mittal,
2008 - Demand–Supply Trends and Projections of Food
in India), a tightening demand-supply situation is likely to
build up for several food items in the coming years and
the country is likely to face shortages of close to 24 mn
tonnes in pulses, 18 mn tonnes in edible oils, and 3 mn
tonnes in cereals by 2021.
Exhibit 3: Steep supply shortages likely to build up in
cereals, pulses, edible oil and sugar by 2030
Source: ICRIER working paper – Mittal, 2008, Elara Securities Research
Limited land & low productivity
In such a scenario, there is an urgent need to boost
production of crops to tackle supply side issues.
However, agriculture in India continues to face several
hurdles in respect to achieving higher production
including – limited scope of expansion in arable land and
low productivity making improving yields imperative. We
1.2
0
1.3
4
1.4
0
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
2011 2021 2026
(bn
)
14
33
64
81
19
2
43
93
76
30
10
2
95
15
6
35
5
11
0 1
80
18
2
0
100
200
300
400
Pu
lse
s
Ce
rea
ls
Wh
ea
t
Ric
e
Fo
od
gra
ins
Fru
its
Ve
ge
tab
les
Milk
(mill
ion
to
nn
es)
2000 2030
1
21 21
(8) (7) (4)
9
27
(3)
(25) (18)
(40)
9
32
(17)
(39)
(27)
(74) (80)
(60)
(40)
(20)
0
20
40
Rice Wheat Total Cereals
Pulses Edible Oil
Sugar
(mill
ion
to
nn
es)
2011 2021 2026
India Crop Protection
A long harvest
Landscape conducive for growth in agri-inputs
Higher rural incomes and govt focus to act as key catalysts
Bullish on crop protection theme – Initiate with Rallis & PI Industries as top picks
India Crop Protection
Cro
p P
rote
cti
on
5 Elara Securities (India) Private Limited
believe the same can be achieved through –focus on
irrigation facilities and credit availability, better farming
techniques, mechanisation and judicious use of agri-
inputs (seeds, fertilisers, irrigation and crop protection
products).
Limited arable land
Compared to other countries, India faces a bigger
challenge, since with only 2.3% share in world’s total
land area, it needs to ensure food security of its people
which is about 17.5% of world population. This has led
to excessive pressure on land and fragmentation of land
holdings.
Due to increasing demand of land for housing, rising
level of urbanisation and industrialisation, increasingly
larger quantity of agricultural land is being shifted to
non-agricultural uses. Hence, net sown area has peaked
at ~140mn ha (hectares) since 1980s.
Exhibit 4: Net sown area peaked in 1980s
Source: Agricultural Statistics 2010, CMIE, Elara Securities Research
Dwindling land holding is an another challenge
While stagnation in arable land remains a worry, the
country faces bigger worry in terms of dwindling size of
operational land holdings making farming economically
unviable for majority of farmers. Fragmented and small
landholdings translate to lesser spending power by
individual farmers for agri-inputs.
In 1970s, medium and large holders were cultivating
nearly 60% of the cultivated land. However, currently the
production structure has shifted to marginal, small and
semi medium holdings. As per land holdings surveys by
the National Sample Survey Organization (NSSO) during
1960 to 2003, the average area of operational holdings
has decreased from 2.63 ha in 1960-61 to 1.06 ha in
2003. It is estimated that the operational holdings size
was 1.04 ha during 2007. Further, this survey also
showed that over 60% of farmers preferred to abandon
agriculture if an alternative was available.
Exhibit 5: Average land holding sizes have declined
to 1.06ha with operational holdings doubling
Source: Agricultural Statistics 2010, CMIE, Elara Securities Research
Scope for area expansion – data suggests otherwise
Data from past trends suggest that there is very little
scope for area expansion. According to data from
1994-95 to 2009-10, average growth rate of area under
production during the period for rice and total cereals
was marginally negative whereas wheat and total pulses
witnessed an average growth of 0.85% and 0.57%
respectively. Area under total food grains witnessed an
average annual decline of 0.02% during the same
period. In terms of non-food grains, area expanded at an
annual rate of 0.95% and oilseeds grew at 0.54%
annually over the period. Thus, the major thrust has to
be on enhancing per hectare productivity and
narrowing the yield gap.
Exhibit 6: Area under food grains declined at annual
rate of 0.02% during 1994-95 to 2009-10
Source: Agricultural Statistics 2010, CMIE, Elara Securities Research
Food production and availability has stagnated
Over the last six decades, India has made tremendous
progress in food grains production which rose from
50.8mn tonnes in 1950-51 to 209.8mn tonnes in
1999-2000. Several major factors contributed to such
high incremental growth - high yielding varieties and
hybrids, better irrigation facilities, improved use of
fertilisers and crop protection products, credit facilities
and higher minimum support prices (MSPs) encouraging
farmers to produce more.
13
3
13
8
13
9
13
8
13
9
14
1
14
2
14
3
14
1
14
1
14
1
13
3
14
1
14
1
14
1
14
0
14
1
126
128
130
132
134
136
138
140
142
144
19
61
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
(mill
ion
he
cta
res)
50
.77
57
.07
71
.04
93
.45
10
1.2
7
2.63
2.20
1.67
1.34 1.06
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0
20
40
60
80
100
120
1960-61 1970-71 1981-82 1991-92 2003
(ha
)
(mill
ion
)
Number of operational holdings (LHS)
Average size of holding (RHS)
(0
.04
)
0.8
5
(3
.16
)
0.2
4
2.2
1
(0
.13
)
0.5
7
(0
.02
)
0.5
4
0.9
5
(4)
(3)
(2)
(1)
0
1
2
3
Ric
e
Wh
ea
t
Jow
ar
Ba
jra
Ma
ize
Ce
rea
ls
Pu
lse
s
Fo
od
gra
ins
Oils
ee
ds
No
n-F
oo
dg
rain
s
(CA
GR
%)
India Crop Protection
6 Elara Securities (India) Private Limited
However, food production has stagnated over the last
decade (0.4% CAGR) with 2009-10 registering a
production of 218.11mn tonnes, a mere ~4% increase
over the previous decade.
Exhibit 7: Food production increased mere ~4% over
the last decade to 218.11mn tonnes
Source: Agricultural Statistics 2010, CMIE, Elara Securities Research
In terms of specific crops, production numbers over the
last decade suggests rice production was flat while
wheat, cereals and pulses grew at a slow pace of 0.4% to
0.9% CAGR – failing to keep pace with population
growth.
Exhibit 8: Food production lags population growth
Source: Agricultural Statistics 2010, CMIE, Elara Securities Research
Even per capita net availability of food grains peaked in
1991 and has declined at an annual rate of 0.8% during
the last two decades.
Exhibit 9: Per capita net availability of food grains
peaked in 1991
Source: Agricultural Statistics 2010, CMIE, Elara Securities Research
Productivity too depicts a poor picture
India witnessed a significant increase in terms of
productivity (yield - kg/per ha) during the last six decades
from 522 kg/ha in 1950-51 to 1,704 kg/ha in 1999-2000.
However, over the last decade yields have merely risen at
a CAGR of 0.5% to 1,798 kg/ha in 2009-10.
Exhibit 10: Yield improvement over last decade stood
at mere 0.5% CAGR
Source: Agricultural Statistics 2010, CMIE, Elara Securities Research
Further, in terms of comparative yields, India not only
lags countries like USA and China, a look at the state-
wise average yield shows prominent crop productivity
differences especially in paddy, wheat and pulses.
Exhibit 11: Yields in India lag behind other countries
Source: Agricultural Statistics 2010, CMIE, Elara Securities Research
Exhibit 12: Significant yield-gaps exist within states
Source: Agricultural Statistics 2010, CMIE, Elara Securities Research
50
.8
82
.2
10
8.4
12
9.6
17
6.4
19
6.8
21
2.9
17
4.8
21
3.2
19
8.4
20
8.6
21
7.3
23
0.8
23
4.5
21
8.1
0
50
100
150
200
250
19
50
-51
19
60
-61
19
70
-71
19
80
-81
19
90
-91
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
(mill
ion
to
nn
es)
(0.1)
0.6
(2.6)
1.2
3.8
0.4 0.9
0.4
(3)
(2)
(1)
0
1
2
3
4
5
Ric
e
Wh
ea
t
Jow
ar
Ba
jra
Ma
ize
Ce
rea
ls
Pu
lse
s
Fo
od
gra
ins
(CA
GR
%)
18
6.2
17
1.1
16
9.4
17
2.0
18
0.8
17
3.5
18
3.6
16
3.2
17
0.0
16
5.9
15
1.9
18
0.4
15
9.7
16
8.9
15
4.2
16
2.5
16
1.6
15
9.2
16
2.1
100
110
120
130
140
150
160
170
180
190
200
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
( K
gs
pe
r ye
ar)
52
2
67
2
75
7
94
4
1,0
23
1,5
46
1,7
04
1,7
34
1,5
35
1,7
27
1,6
52
1,7
15
1,7
56
1,8
60
1,9
09
1,7
98
0
500
1,000
1,500
2,000
19
50
-51
19
58
-59
19
64
-65
19
75
-76
19
80
-81
19
94
-95
19
99
-00
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
(Kg
pe
r h
ecta
re)
6,5
56
4,7
62
5,5
56
7,6
72
3,0
18
9,6
58
4,3
09
3,0
86
5,1
09
3,3
70
2,8
02
2,3
24
0
2,000
4,000
6,000
8,000
10,000
12,000
Paddy Wheat Maize
(mill
ion
to
nn
es)
China USA World Avg India
2,1
78
2,9
07
2,4
14
1,0
41
65
9
40
3
4,0
22
4,4
62
4,8
78
1,3
66
98
0
73
7
92
7
91
8
1,3
61
67
9
30
7
23
3
0
1,000
2,000
3,000
4,000
5,000
6,000
Paddy Wheat Maize Soybean Pulses Cotton
(mill
ion
to
nn
es)
All India Highest Lowest
India Crop Protection
Cro
p P
rote
cti
on
7 Elara Securities (India) Private Limited
Higher rural incomes and govt focus to act as key catalysts
Over the last several years, government focus on
agriculture has increased through various
schemes/allocations, better credit flow to agriculture and
higher MSPs which has improved farmers’ realisations
from produce. We believe rising farm incomes are likely
to be re-routed in agri-inputs to sustain farm incomes.
Higher MSPs a windfall for farmers
In order to achieve a balance between the production of
cereals and non-cereals, the government offers minimum
support price (MSP) to farmers so that they get
remunerative prices and are not put to loss because of
higher production of food grains. During the period
FY2003-08, average annual increase in MSPs for crops in
India stood at 2%-5%. However, between FY2008-12E,
government has accelerated the rise in MSPs which have
risen, on average, in a range of ~8-16% putting more
money in the hands of farmers.
Exhibit 13: MSPs in major crops have risen ~8-16%
CAGR over FY08-12
Source: www.dacnet.nic.in, Elara Securities Research
Recently the government announced a significant hike
of ~15%-40% in MSPs of rabi crop for 2012-13 crop cycle
which should help sustain profitability for farmers and
encourage them to increase acreage/production.
Exhibit 14: MSPs for Rabi crops hiked by ~15-40% for
the 2012-13 crop cycle
Source: www.dacnet.nic.in, Elara Securities Research
Crop prices remunerative too
Over FY2005-11, food prices under major categories
were highly remunerative for farmers increasing a sharp
~60%-100% (indexed to FY2005 as base) over the period
with pulses exhibiting the highest inflation to the tune of
~96%. Even non-food crops like cotton witnessed steep
inflation of ~99% over the period.
Exhibit 15: WPI in major crops in India stood at ~60-
100% over FY2005-11
Source: CMIE, Elara Securities Research
Rising govt. focus promising
During the last five years under the Eleventh Plan,
government has significantly increased its focus on
agriculture. A large number of GoI schemes with
substantial financial outlay like the Rashtriya Krishi Vikas
Yojana (RKVY), the National Food Security Mission
(NFSM), National Horticulture Board and the National
Horticulture Mission, etc. are being implemented. Hence,
the plan outlay on various schemes of the DAC
(Department of Agriculture and Cooperation) has
increased substantially from INR48.6bn (AE) in 2006-07
to INR 172.5bn (RE) in 2010-11.
Exhibit 16: Plan outlay on various schemes on DAC
has tripled over last five years
Source: www.dacnet.nic.in, Elara Securities Research; Note: RE = Revised
Estimates, BE = Budgeted Estimates
The increase is mainly due to substantially higher
allocation under Rashtriya Krishi Vikas Yojana (RKVY),
which was launched in 2007-08 with the aim to boost
4.0
4.3
4.3
2.7
2.7
3.9
2.5
4.7
1.6
13
.8
13
.0
13
.0
14
.9
16
.0
10
.5
8.4
15
.6
12
.9
0 2 4 6 8
10 12 14 16 18
Pa
dd
y
Jow
ar
Ba
jra
Gro
un
dn
ut
So
ya
be
an
Wh
ea
t
Ba
rle
y
Su
ga
rca
ne
Co
tto
n
(CA
GR
%)
FY03-08 FY08-12
15
26
33
24
35
39
0
10
20
30
40
50
Wh
ea
t
Ba
rle
y
Gra
m
Le
nti
l (M
asu
r)
Ra
pe
see
d
Sa
fflo
we
r
(%)
80
100
120
140
160
180
200
220
FY
20
05
FY
20
06
FY
20
07
FY
20
08
FY
20
09
FY
20
10
FY
20
11
Ba
se F
Y2
00
5 =
10
0
Cereals Pulses Vegetables
Fruits Raw cotton
17
.9
16
.8
20
.5
26
.6
38
.0
48
.6
70
.5
95
.3
10
8.7
17
2.5
17
1.2
0
40
80
120
160
200
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
RE
20
11
-12
BE
(IN
R b
n)
India Crop Protection
8 Elara Securities (India) Private Limited
agricultural growth rate and incentivize states to increase
public investment in agriculture and allied sectors. Funds
utilisation under the scheme by states has improved with
plan outlay under RKVY increasing from INR67.2bn (RE)
in 2010-11to INR103.5bn (BE) proposed for 2011-12E.
Exhibit 17: RKVY plan outlay has been increased
from INR67.2bn to INR103.5bn in 2011-12 (BE)
Source: www.dacnet.nic.in, Elara Securities Estimates
Strong push/initiatives have boosted credit flow to agriculture sector
Credit has remained one of the key inputs for agricultural
development. A large number of formal institutional
agencies like co-operatives, regional rural banks (RRBs),
scheduled commercial banks (SCBs), non–banking
financial institutions (NBFIs), and self-help groups (SHGs),
etc. are involved in meeting the short- and long-term
credit needs of the farmers.
Several initiatives have been undertaken over the years
to strengthen the institutional credit mechanism for rural
India including the launch of Kisan Credit Cards (KCCs) in
1998-99, doubling agricultural credit plan within three
years (set in 2004) and agricultural debt waiver and debt
relief scheme announced in 2008. Such schemes have
had significant positive impact on flow of agricultural
credit which has increased almost ten-folds over the last
decade growing from INR463bn in 1999-00 to
INR4,468bn in 2010-11.
Exhibit 18: Ground level credit flow (GLC) to
agriculture has risen 10-folds in the last decade
Source: NABARD Annual Reports, Elara Securities Research
Effective 1998-99, banks have been issuing Kisan Credit
Cards (KCCs) to farmers on the basis of land holdings to
help farmers readily purchase agri-inputs. Over the last
few years, the KCC scheme has emerged as an effective
tool for catering to the short-term credit requirements of
farmers. The number of KCCs issued has increased from
0.78 million in 1998-99 to 100.9 million in 2010-11.The
KCC scheme has emerged as the most effective mode of
credit delivery to farmers in terms of timeliness, hassle-
free operations as also adequacy of credit with minimum
of transaction costs and documentation.
Exhibit 19: No of KCCs issued has grown from 0.8mn
in 1998-99 to 100.9mn in 2010-11
Source: NABARD Annual Reports, Elara Securities
GCF in agri showing steady uptrend
Productivity increase in agriculture is largely dependent
on capital formation. As a result of the initiatives taken by
the government, the share of total investment in gross
capital formation (GCF) in agriculture and allied sectors
has increased in recent years. GCF (investment) in
agriculture sector relative to GDP in the sector has
shown steady increase trend over the last several years
rising from 13.5% in FY2005 to 20.3% in FY2010.
Exhibit 20: GCF in agri& allied activities as % of agri
GDP has risen to 20.3% from 13.5% five years ago
Source: DAC Annual Report 2011, Elara Securities Research
12.5
28.9 37.6
67.2
103.5
0
20
40
60
80
100
120
20
07
-08
20
08
-09
20
09
-10
20
10
-11
RE
20
11
-12
BE
(IN
R b
n)
46
3
52
8
62
0
69
6
87
0
1,2
53
1,8
05
2,2
94
2,5
47
3,0
19
3,8
45
4,4
68
4,7
50
0
1,000
2,000
3,000
4,000
5,000
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
-12
T
(IN
R b
n)
0.8
5.9
14
.6
23
.9
32
.1
41
.4
51
.1
59
.1
67
.6
76
.1
84
.6
93
.7
10
0.9
0
20
40
60
80
100
120
19
98
-99
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
(mn
)
76
1
86
6
90
7
1,0
50
1,2
87
1,3
34
13.5 14.6 14.6
16.0
19.7 20.3
10
12
14
16
18
20
22
0
200
400
600
800
1,000
1,200
1,400
1,600
FY
20
05
FY
20
06
FY
20
07
FY
20
08
FY
20
09
FY
20
10
(%)
(IN
R b
n)
GCF (LHS) GCF/GDP (RHS)
India Crop Protection
Cro
p P
rote
cti
on
9 Elara Securities (India) Private Limited
Bullish on crop protection theme
Given a backdrop where improving yields in farms is
imperative in order to remain self-sufficient in terms of
food requirements, we believe agri-inputs like crop
protection (pesticides) products are likely to play a key
role in the future.
Proven success to reduce crop losses and boost yields
Higher crop productivity can be achieved through better
crop protection products, and the key challenge is to
prevent/reduce pest-related crop losses. On an average
around ~10%-30% of yields is lost due to pests. As per
the estimate by the Central Pollution Control Board, GoI,
the highest food grain loss is due to weeds (28%), by
diseases (25%), by insects (23%), during storage (10%)
and others (14%).
Exhibit 21: Highest crop losses caused by weeds
Source: Central Pollution Control Board, GoI, Elara Securities Research
A study by the Division of Agrochemicals, Indian
Agricultural Research Institute (IARI) in 2008, reported
avoidable losses ranging from 8% to 90% in different
crops. The highest avoidable loss was in cotton (49%-
90%) followed by 40%-88% in pulses. Further, in terms of
cost: benefit ratio it has been estimated that every rupee
spent on plant protection saves on an average the
produce worth five rupees. In terms of crops specifics - it
was highest in groundnut (1:28) followed by sugarcane
(1:13) and lowest in maize (1:3)
Exhibit 22: Study on avoidable losses and cost:
benefit ratio for pesticides indicates proven benefits
Crop Avoidable Losses (%) Cost: Benefit ratio
Cotton 49-90 1:7
Rice 21-51 1:7
Groundnut 29-42 1:28
Maize 20-25 1:3
Sugarcane 8-23 1:13
Pulses 40-88 1:4
Vegetables 30-60 1:7
Fruits 20-35 1:4
Source: Division of Agrochemicals, IARI (2008), Elara Securities Research
Low consumption indicates tremendous scope
One of the key reasons for high crop losses in India
vis-à-vis other countries remains low consumption of
crop protection products in India. The per hectare
pesticide consumption in India stands at 0.5kg/ha, vis-à-
vis 14kg/ha in China and 7kg/ha in USA under scoring
ample scope for growth in the industry.
The key reasons for low consumption have been lack of
affordability and awareness about potential losses and
product availability coupled with low reach and
accessibility of products. However, with rising MSPs
driving higher farm incomes and significant focus of
companies on education programmes for farmers, we
believe the scenario has changed significantly enabling
growth for crop protection products.
Exhibit 23: Per hectare consumption of pesticides in
India is significantly behind other countries
Source: Industry estimates, Elara Securities Research
Labour shortage to provide additional lever
Labour shortage, due to factors such as better and more
employment in manufacturing and service sectors and
higher allocation to government schemes like Mahatma
Gandhi National Rural Employment Guarantee Act
(MNREGA), which provide assured employment, are
likely to drive a shift from manual weeding to higher use
of crop protection products like herbicides.
Exhibit 24: Higher allocation for MNREGA driving
labour shortages
Source: www.nrega.nic.in, Elara Securities Research
Weeds 28%
Diseases 25%
Insects 23%
Storage 10%
Others 14%
17.0
14.0
12.0
7.0 7.0
5.0 5.0
1.0 0.5
0
2
4
6
8
10
12
14
16
18
Ta
iwa
n
Ch
ina
Jap
an
USA
Ko
rea
Fra
nce
UK
Pa
kis
tan
Ind
ia
(kg
/ h
a)
11
3
12
0
30
0
39
1
40
1
40
0
86
12
6
29
9
33
5
35
8
0 50
100 150 200 250 300 350 400 450
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
-12
(IN
R b
n)
Budget Outlay Central Release
India Crop Protection
10 Elara Securities (India) Private Limited
Crop protection industry, valued at INR137bn, is growing at ~11% CAGR
According to CMIE data, the Indian crop protection
industry was valued at INR137bn (domestic
consumption) in FY2010. While the industry registered a
CAGR of ~8.2% over FY2000-10, growth has accelerated
to 11.2% CAGR over FY2005-10. Some factors which led
to the acceleration include higher MSPs, robust
commodity prices, rising demand for fruits & vegetables
and fast changing cropping pattern and cropping
intensity.
Exhibit 25: Valued at INR137bn, growth in crop
protection industry has accelerated over FY2005-10
Source: CMIE, Elara Securities Research
Going ahead, we expect the crop protection industry to
grow at ~10%-12% CAGR over FY12E-14E driven by
higher MSPs, labour shortages driving higher use of
herbicides, growing farmer awareness about products,
government support for agriculture, higher usage in low
input regions and introduction of new specialty
molecules.
Highly fragmented market
India, the 4th
largest manufacturer of pesticides behind
USA, Japan and China, is one of the most dynamic
generic pesticide manufacturers in the world with highly
fragmented nature. According to industry data, there are
more than 60 technical grade pesticides being
manufactured indigenously by 125 producers consisting
of around 60 large and medium scale enterprises
(including about 10 MNCs). Most Indian technical
manufacturers are focussed on off-patent pesticides
which account for 70% of the domestic market. Further,
there are more than 500 pesticide formulators spread all
over the country. Pre-2005 process patent regime
encouraged many players to set up manufacturing
facilities. Moreover, the low capital requirement for a
formulation unit led to mushrooming of numerous units.
Prevalence of a dual structure in organised market
The organised crop protection industry in India exhibits a
dual structure (MNCs vs. domestic players) based on their
nature of expertise and operational activity.
Domestic players have concentrated on marketing
generic and off-patent products by focussing on
applied research. This included - developing
1) processes to manufacture off-patent products,
2) effective methods of delivering existing products
and 3) new formulations of generic products.
On the other hand, MNCs have typically focussed on
high-end specialty products thus dominating the
market for proprietary products (patented new
molecules). In the post-2005 scenario, the Indian
market has witnessed an inflow of new molecules
from MNCs which ride on superior R&D facilities and
finance.
AP leads state-wise consumption
In terms of value, Andhra Pradesh is the largest state for
the pesticides market accounting for 23% of total
consumption, followed by Punjab and Maharashtra.
Exhibit 26: Top 3 states AP, Punjab & Maharashtra
account for ~50% of consumption
Source: GoI, Ministry of Agriculture, Elara Securities Research
Rice and cotton account for half of crop protection
Pesticides consumption in different crops also shows a
skewed pattern with rice and cotton accounting for
~55%-60% of consumption of pesticides. During
2001-02, cotton crop consumed the largest quantum of
pesticides (35%) followed by paddy (23%) However,
during 2006-07, pesticides consumption in cotton
declined to 27%, while it increased to 29% in paddy. The
consumption pattern did not show any marked shift in
other crops. The decline in pesticide usages in cotton is
largely attributed to the introduction of GM genotypes
(Bt cotton) on a large scale in the country. On the other
hand, pesticides usage in paddy has been increasing
mostly due to increased popularity of hybrid varieties of
rice, which require higher level of protection.
(10)
(5)
0
5
10
15
20
25
30
35
0
20
40
60
80
100
120
140
160
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
(%)
(IN
R b
n)
Domestic Consumption (LHS) YoY (RHS)
Andhra Pradesh
23%
Punjab12%
Maharashtra12%
Karnataka7%
Gujarat7%
West Bengal6%
Haryana7%
Tamil Nadu & Kerala
6%
Others20%
India Crop Protection
Cro
p P
rote
cti
on
11 Elara Securities (India) Private Limited
Exhibit 27: Cotton consumed the highest amount of
pesticides in 2001-02…
Source: Industry, Care Research, Elara Securities Research
Exhibit 28: Post BT cotton, Paddy has emerged as the
No1 crop in terms of pesticides consumption
Source: Industry, Care Research, Elara Securities Research
Product mix shifting towards herbicides
The Indian crop protection industry primarily comprises
of insecticides (against insects), fungicides (against
bacteria and fungi) and herbicides/weedicides (against
weeds/unwanted plants). During 1995, Indian market
was largely dominated by insecticides (80%) followed by
herbicides (11%) and fungicides (8%) owing to –
1) country’s tropical weather resulting into higher insect
infestation and 2) availability of cheap labour resulting
into manual weeding.
Exhibit 29: In 1995, insecticides dominated the
industry accounting for ~80% of the market
Source: Singh, O. P., 2005, GoI, Elara Securities Research
However, this trend has undergone a significant change
over the years, as the share of herbicides and fungicides
increased to 20% each in 2009 while share of
insecticides declined to 55%. While consumption of
herbicides increased due to labour issues both in terms
of availability and costs (rising wages) due to
government employment schemes like MNREGA, rising
demand for quality produce of fruits and vegetables
have spurred the use of fungicides.
Exhibit 30: Usage of herbicides has risen to ~20%
Source: Industry estimates, Elara Securities Research
Exhibit 31: Labour shortage/rising wages due to
MNREGA is driving shift towards herbicides
Source: www.nrega.nic.in, Elara Securities Research
It is worth noting that India is gradually shifting towards
the global consumption pattern where usage of
herbicides (45%) far exceeds insecticides (26%).
Exhibit 32: Globally, herbicides account for almost
~45% of consumption vs. India’s ~20%
Source: Phillips McDougall, Elara Securities Research
Cotton 35%
Paddy 23%
Wheat 8%
Vegetables 8%
Fruits 6%
Pulses & Oilseeds
7%
Chillies 4%
Others 9%
2001-02
Cotton 27%
Paddy 29%
Wheat 8%
Vegetables 9%
Fruits 6%
Pulses & Oilseeds
9%
Chillies 4%
Others 8%
2006-07
Insecticides 80%
Herbicides 11%
Fungicides 8%
Others 1%
India 1995
Insecticides 55%
Herbicides 20%
Fungicides 20%
Others 5%
India 2009
2.1
0
3.3
9
4.5
1
5.2
6
5.4
8
65 75
84 90
100
0
20
40
60
80
100
120
0
1
2
3
4
5
6
FY07 FY08 FY09 FY10 FY11 (I
NR
)
(No
of
ho
use
ho
lds
in c
r)
Employment Provided (LHS) Avg daily wages (RHS)
Insecticides 26%
Herbicides 45%
Fungicides 26%
Others 3%
World 2009
India Crop Protection
12 Elara Securities (India) Private Limited
Exhibit 33: Porter’s five forces analysis of crop protection industry in India
Source: Elara Securities Research
Threat of Substitutes
Medium
Pesticides remain one of the
key inputs to improve yields
with no other substitute to
prevent crop losses.
However, lower pesticide
usage poses a threat due to
environmental concerns,
Integrated Pest
Management (IPM)
techniques, threat from
genetic modified (GM) crops
and organic products.
Bargaining Power of
Suppliers
Low
Most raw materials are
available easily, though
some are imported.
Prices tend to be cyclical
based on demand/supply
situation.
Inter Firm Rivalry
High
Industry highly fragmented with
60 medium/large
manufacturers and 500+
formulators.
Largely organised – competition
between companies in
generic/off-patent products is
high, though specialty
molecules/patented molecules
(largely MNC domain) have a
clear edge.
Bargaining Power of Buyers
Medium
Demand for credit is very
high – 60% of sales are on
credit (more at retail level) -
with major realisations
taking place immediately
after the harvest season.
Hence, bargaining power of
buyers is not too high –
though they prefer
brands/specialty molecules
over generics.
Barriers to Entry
Medium
Indian players are largely into
generic/off-patent products &
technical - capital requirement
for setting plant is low but big
distribution network and high
working capital are entry
barriers.
MNCs dominate the market for
proprietary products – R&D
investments are high creating a
major entry barrier.
India Crop Protection
Cro
p P
rote
cti
on
13 Elara Securities (India) Private Limited
Expanding horizons
Rising exports emerging as a strong insulating factor against seasonal demand fluctuations
Demand for pesticides emanates from agricultural
production. Since crops are mainly sown in two cropping
seasons, namely Kharif (July - November) and Rabi
(October - February), demand for pesticides is seasonal.
Demand is skewed in favour of kharif crops such as
cotton and rice accounting for about ~60%-70% of
annual pesticide consumption with peak consumption
over July-November.
Over the last decade, between FY2000-10, Indian
exports (largely consisting of off-patent products) of crop
protection products have increased from INR10bn to
INR53bn growing at a CAGR of ~18%.
Exhibit 34: Exports in the industry have risen by
~18% CAGR over last decade to INR53bn
Source: CMIE, Elara Securities Research
A focussed export-oriented strategy has helped crop
protection companies to utilise excess capacities, deliver
strong volume growth and insulate themselves from
seasonal demand fluctuations in the domestic market.
Further, rising exports in the industry are driven by –
Easy availability of raw materials, low-cost trained
and technically qualified workforce, low overheads
have made India an attractive sourcing destination
for global MNCs.
Many MNCs are also undertaking collaborative
research with local companies. For e.g. companies
like Rallis India and PI Industries have invested
substantial money in building facilities for CRAMs
undertaking manufacturing contracts.
Huge generic opportunity to play out
In the global crop protection industry, generics now
account for over USD18bn (CY2008) and account for
over 45% of the market. As R&D cost has increased,
demand has stagnated, and patents have expired on
many active ingredients, there has been a rapid growth
in companies producing generics.
Exhibit 35: Size of global crop protection generics
market has risen to USD18bn in 2008
Source: Phillips McDougall, Elara Securities Research
One of the ways in which generic players have grown
over the years is to identify opportunities in products,
which are going off-patent and grab the market share
from innovator companies by offering a lower-priced
alternative to an existing proprietary product. From
2010-2014, patents on products worth USD4.3bn sales
will go off-patent and may provide huge opportunities
for generic companies.
Exhibit 36: From 2010-2014, patents on products
worth USD4.3bn sales will go off-patent
Source: Phillips McDougall, Elara Securities Research
Strategic tie-ups/alliances and in-licensing on rise
Many medium-large size domestic players are engaging
in strategic alliances/tie-ups to extend market reach and
diversify their product portfolios. Such companies often
in-license marketing/distribution rights of
patented/specialty molecules from MNCs owing to their
strong distribution reach and connect with farmers.
Rallis- FMC, DuPont, Syngenta, Bayer and Nihon
Nohayaku.
Dhanuka Agritech–DuPont, FMC, Dow Agro,
Chemtura, Nissan Chemical, Sumitomo, Mitsui Japan
& Hokko Japan
PI Industries–Bayer, BASF and Kumiai Chemicals
12 14 15 17
21
28 29 31
50 53
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
(%)
(IN
R b
n)
Exports (LHS) YoY (RHS)
10
.3
8.4
10
.4
11
.6
12
.0
14
.0
18
.4
35.6
30.2
41.2 37.2
39.6 42.2
45.4
0
10
20
30
40
50
0
5
10
15
20
19
98
20
00
20
02
20
05
20
06
20
07
20
08
(%)
(USD
bn
)
Mkt Value (LHS) Mkt Share (RHS)
0.3 0.8
1.5 0.4
1.3 0.9
1.2
1.6 0.4
0.7 0.2 9.3
0
2
4
6
8
10
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
To
tal
(USD
bn
)
India Crop Protection
14 Elara Securities (India) Private Limited
Risks/concerns for industry
High dependence on monsoons: Agricultural
production in India is highly dependent on rainfall
since the ratio of net irrigated area to net sown area
is only ~40% in India. Droughts/deficient monsoons
not only adversely impact kharif sowing season but
also kharif production and agricultural income.
Further, it also impacts agri-input purchasing
capacity and loan repaying ability of farmers.
Exhibit 37: Good rainfall is important for Kharif
output from rainfed areas
Source: Rallis India, Elara Securities Research
Unpredictability in demand: Apart from
agricultural production growth, demand growth of
crop protection products is a complex result of
various weather conditions, and unpredictable
events like pest infestation and attack of disease.
Hence, if weather conditions are conducive to pest
infestation, farmers are likely to use more pesticides.
Development of resistance to pesticides: Repeated
use of pesticides may lead to development of
resistance in target pest(s). Insecticide resistance
nullifies crop protection and has been recognised as
one of the major challenges confronting agriculture.
High working capital requirement: The Industry
requires high working capital investment due to –
1) high inventory and 2) long credit period. Due to
seasonal demand, companies often have to stack up
inventory well before the season which increases
the inventory holding cost. The industry has to
extend a long credit period because of intense
competition among the players and the low off-take.
Pesticides are the last link in the agricultural
operation. After having invested in seeds and
fertilizers, farmers have little surplus money for
purchasing pesticides and therefore, providing credit
is necessary to stimulate demand.
Risk from genetically modified crops: Genetically
modified crops are made with inbuilt immune
system that reduces dependence on usage of
agrochemicals. In India genetically modified crop
such as Bt cotton is used widely which resulted in a
decline in the usage of pesticides for cotton crop.
During FY09, Bt cotton is estimated to have covered
about 6.9 million hectares or 74% of the total cotton
cultivable area in India. Thus, the usage of such GM
crops poses a challenge to the pesticide industry and
increasing application of genetically modified and
biotech seeds will reduce the consumption of
pesticides.
Regulatory developments in environmental and
safety norms: The crop protection industry in India
is highly sensitive to Government’s policies. In May
2011, Supreme Court banned the production and
sale of Endosulfan (commonly used insecticide) in
the country as it was blamed for causing ailments in
humans following a petition filed by Democratic
Youth Federation of India -- the youth wing of the
Communist Party of India-Marxist.
Decline/stagnancy in MSPs: During the period
FY2003-08, average annual increase in Minimum
Support Prices (MSPs) for crops in India stood at
2-5%. However, between FY2008-12, government
has accelerated the rise in MSPs which have risen, on
average, in a range of ~8-16% putting more money
in the hands of farmers. Any reversal of such trends
or stagnancy in MSPs of crops would impact farmer
incomes thereby affecting spending on agri-inputs.
59
9
24
56
16
48
27
35
85 93
78
52 41
50
68
99
0
20
40
60
80
100
120
0
20
40
60
80
100
120
Pa
dd
y
Pe
arl
mill
et
Co
rn
Ce
rea
ls
Pu
lse
s
Fo
od
gra
ins
Oils
ee
ds
Co
tto
n
(%)
(%)
Area under Irrigation (LHS) Area under Rainfed (LHS)
Share in Kharif Output (RHS)
India Crop Protection
Cro
p P
rote
cti
on
15 Elara Securities (India) Private Limited
Recent underperformance offers attractive entry point
Over the last two years, midcap crop protection stocks
have significantly outperformed the Sensex and BSE 500
Index. Hence, while the benchmark indices have
delivered negative returns, Rallis and Dhanuka have
almost doubled while PIIL and IIL have given 5x and 4x
returns respectively. We attribute this outstanding stock
performance to several factors including – 1) strong
growth in revenues and earnings, 2) expansion into new
horizons and new launches by all companies and 3)
significant P/E re-rating in all the stocks.
Exhibit 38: Mid cap crop protection stocks have
delivered multiple returns over the last two years
Source: Bloomberg, Elara Securities Research
However, over the last three months, crop protection
companies have witnessed steep correction and have
underperformed the benchmark indices by an average
of ~8-10%, led by Rallis, owing largely due to
expectations of a weaker H2FY12E due to
Potentially poor Rabi crop in key consumption states
like Andhra Pradesh (AP) where government has
advised farmers to shift from rainfed paddy to maize
and sunflower due to failure of North East
monsoons. Rainfall in AP was 49% below Long
Period Average (LPA) till end of December 2011.
Recent corrections in prices of vegetables particularly
potatoes, onions and tomatoes led by bumper kharif,
base effect and government efforts to bring inflation
under control. The same is expected to hurt farmer
sentiments impacting volume off-take of crop
protection chemicals.
Exhibit 39: Over the last 3 months, crop protection
stocks have witnessed steep correction
Source: Bloomberg, Elara Securities Research
Exhibit 40: Out of 36 regions, 23 have received
scanty rainfall over the last 3 months
Source: imd.gov.in, Elara Securities Research
91
43
2
94
32
4
40
(24
)
(14
)
(10
)
(100)
0
100
200
300
400
500
Ra
llis
PIIL
Dh
an
uka
IIL
Ba
ye
r C
rop
Un
ite
d P
ho
s
BSE
50
0
BSE
Se
nse
x
(%)
(32
)
(12
)
(9)
6
(11
)
(15
)
(4)
0
(35)
(30)
(25)
(20)
(15)
(10)
(5)
0
5
10
Ra
llis
PIIL
Dh
an
uka
IIL
Ba
ye
r C
rop
Un
ite
d P
ho
s
BSE
50
0
BSE
Se
nse
x
(%)
Valuation & Recommendation
Recent underperformance offers attractive entry point
Why positive? - strong FCF generation and attractive valuations
Initiate with Rallis India and PI Industries as Top Picks
India Crop Protection
16 Elara Securities (India) Private Limited
Exhibit 41: Annual inflation particularly in vegetables
indicate a crash in prices hurting farmer sentiments
Source: agricoop.nic.in, Elara Securities Research; Note: As per weather watch
report released for data till 23rd Dec, 2011.
However, we highlight, we have already modeled a
weaker H2FY12 in our numbers and don’t rule out a
significant cut in street estimates which are ahead of our
numbers. Nonetheless, we do not foresee the same
weakness to persist in FY13E unless disrupted by a weak
monsoon and sustained steep fall in crop prices
(especially fruits and vegetables).
Exhibit 42: We are modeling in weakness in revenues
for H2FY12 due to lower volume off-take
Source: Company, Elara Securities Estimate
Exhibit 43: H2FY12 earnings likely to remain muted
due to margin pressures and weaker revenue
Source: Company, Elara Securities Estimate
Strong FCF generation and attractive valuations makes us positive
We continue to like crop protection companies, despite
expectations of weaker results in near-term, due to their
strong balance sheets (very low debt-equity), high free
cash flow (FCF) generation over FY12E-14E and
reasonable valuations, post correction, offering an
attractive entry point.
Major capex over: Most companies have completed
their major capex plans in FY11-12E and incremental
capex in FY13-14E is likely to be minimal and
maintenance capex only.
Positive FCF generation over FY12E-14E: FCF
generation which was negative in FY11 due to high
capex phase and high working capital (seasonal
issues) is likely to turn significantly positive in FY13E-
FY14E due to benign capex and steady working
capital requirements.
Valuations look attractive: Post correction,
valuations have turned attractive. Despite modeling
conservative estimates, most stocks are trading at
P/E ranging from ~7x-11x (FY14E)
Exhibit 44: Strong FCF generation over FY12-14E as
capex to remain moderate
Source: Company, Elara Securities Estimate
Exhibit 45: Valuations attractive given strong
earnings CAGR and return ratios of ~25%+
Source: Company, Elara Securities Estimate; Note: P/E based on FY14E EPS
1.5
(4.2)
14.2
(34.4)
(49.4)
(21.7)
8.9 11.2 9.6
(60)
(50)
(40)
(30)
(20)
(10)
0
10
20 R
ice
Wh
ea
t
Pu
lse
s
Po
tato
es
On
ion
s
To
ma
to
Fru
its
Milk
Oils
ee
ds
(%)
29
43
16
26
22
3
3
19
0
10
20
30
40
50
Rallis PIIL Dhanuka IIL
H1FY12 H2FY12
11
38
24
33
4
4
(8
)
5
(20)
(10)
0
10
20
30
40
50
Rallis PIIL Dhanuka IIL
H1FY12 H2FY12
78
2
58
3
11
8
12
5
3,0
27
1,8
19
1,0
22
60
9
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Rallis PIIL Dhanuka IIL
(IN
R m
n)
Capex FCF
10
.2
7.7
5.2
6.7
0
2
4
6
8
10
12
Rallis PIIL Dhanuka IIL
(x)
India Crop Protection
Cro
p P
rote
cti
on
17 Elara Securities (India) Private Limited
Initiate on Rallis India with Buy and Sept-13 TP of INR170
We initiate coverage on Rallis with a Buy rating and a TP
of INR170 based on P/E of 16x to Sept-13 EPS of INR10.6
indicating an upside of ~40%. We expect Rallis to sustain
premium valuations, albeit we have reduced the
premium to the 3 yr average P/E (15x) from ~20% (18x)
to ~5% (16x), owing to – 1) strong ~30% CAGR in
earnings over FY12E-14E, 2) best working capital
management among domestic peers, 3) strong return
ratios in range of ~25%-30% and 4) significant free cash
flow generation over FY12E-14E with culmination of all
major capex viz. Dahej expansion & Metahelix.
Initiate on PI Industries with Buy and Sept-13 TP of INR669
We initiate coverage on PI Industries (PIIL) with a Buy
rating and a TP of INR669 based on P/E of 12x (25%
discount to Rallis) to Sept-13 EPS of INR55.7 indicating an
upside of ~36%. Over the last 2 years, PIIL has witnessed
significant re-rating driven by its unique no-conflict
model, success of Nominee Gold, strong pipeline of in-
licensed products, sustained order book scale up in CSM
business and exponential growth in earnings. Going
ahead, we expect the re-rating to sustain driven by ~1)
robust ~46% CAGR in earnings over FY12E-14E, 2)
strong return ratios in excess of ~30% and
3) modest FCF generation over FY12E-14E.
Initiate on Dhanuka Agritech with Buy and Sept-13 TP of INR128
We initiate coverage on Dhanuka with a Buy rating and
a TP of INR128 based on P/E of 8x (50% discount to
Rallis, ~15% premium to its historical average of 7x P/E)
to Sept-13 EPS of INR16 indicating an upside of ~41%.
Going ahead, we expect Dhanuka to sustain valuations
in the range of ~7x-8x aided by – 1) strong tie-ups with
MNCs, 2) promising new product pipeline in specialty
products, 3) robust ~27% CAGR in earnings over FY12E-
14E, 4) strong return ratios in excess of ~30% and 5)
modest FCF generation over FY12E-14E.
Initiate on Insecticides India with Accumulate and Sept-13 TP of INR457
We initiate coverage on IIL with an Accumulate rating
and a Target Price of INR457 based on P/E of 9x (45%
discount to Rallis) to Sept-13 EPS of INR50.8 indicating an
upside of ~14%. Going ahead, we expect IIL to sustain its
re-rating from 6x-7x P/E to 10x driven by – 1) strong
~39% CAGR in earnings over FY12-14, 2) 50% jump in
formulations capacity and tripling of capacities in
technicals moving the company into a completely
different size trajectory and 3) modest FCF generation
over FY12-14.
Exhibit 46: Peer valuation
Company Mcap CAGR % (FY12-14E) OPM (%) RoE (%) P/E (x) EV/EBITDA (x)
USD mn Revenue PAT FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E
Bayer AG 55,050 3.0 8.8 13.0 14.7 17.6 17.8 10.5 9.4 6.5 5.9
Syngenta AG 28,330 5.6 7.5 16.9 18.5 25.5 25.5 13.5 12.7 NA NA
BASF SE 66,893 (0.1) (5.0) 11.7 11.6 19.7 18.9 10.2 9.4 5.9 5.5
Monsanto 38,908 9.4 17.7 20.6 20.6 15.0 16.9 21.1 18.1 11.1 10.0
Dow Chemical 35,395 3.7 14.4 8.6 9.3 13.6 15.2 10.7 8.7 7.0 6.2
DuPont 43,443 7.9 9.9 13.5 14.5 30.8 27.6 11.1 9.6 7.8 7.1
Chemtura Corp 1,154 2.6 14.5 6.7 6.2 6.8 8.0 11.8 9.4 5.0 4.7
Global Average
4.6 9.7 13.0 13.6 18.4 18.6 12.7 11.1 7.2 6.6
United Phosphorous 1,151 11.7 16.2 16.3 15.7 18.6 18.0 6.9 6.3 4.2 3.9
Bayer Cropscience 556 NA NA 10.9 NA 22.0 NA 15.2 NA 9.1 NA
Rallis India 444 19.5 29.6 17.0 17.7 29.1 31.6 13.0 10.2 8.7 6.8
PI Industries 233 27.6 45.6 17.6 18.0 30.5 31.3 10.4 7.7 7.0 5.1
Dhanuka Agri 86 21.1 27.3 15.0 15.3 30.4 29.7 6.3 5.2 4.8 3.6
Insecticides Inida 95 29.4 38.6 10.8 11.2 25.3 28.2 9.4 6.7 6.8 4.8
Domestic Average
24.4 35.3 15.1 15.5 28.8 30.2 9.8 7.4 6.8 4.9
Source: Bloomberg, Elara Securities Estimates
India Crop Protection
18 Elara Securities (India) Private Limited
Annexure I: Distributor/farmer meetings takeaways
To understand ground realities in the crop protection
industry, we went on the road to northern Maharashtra
covering cities like Aurangabad, Jalgaon, Akola,
Amravati and Nagpur.
Exhibit 47: Our route for distributor/farmer check to
understand crop protection market
Source: Elara Securities Research
We met more than 5 large distributors, several
dealers/retailers and farmer groups to understand –
1) demographic/income situation, 2) farming/crop
decision making process, 3) selection of product/brand
and 4) distributor/dealer profile. Our takeaways are
presented below in form of Q&A:
Demographic/income situation
How much is your daily income? Has it gone up?
Farmers basically earn in two seasons of Kharif
(June-Sept) and Rabi (Oct-Feb). An average farmer
owns about 5-10 acres of land and chooses crop
based on geographic conditions and market price
available. He makes around INR10,000 per acre (net
of expenses) in Khariff season and around
INR30-40,000 total in Rabi season amounting to
~INR100,000 annual income for a 5-acre plot. Most
farmers admitted their income had gone up
significantly over the last several years (around
~40%-50%) due to rising crop prices largely as yields
tend to vary based on monsoon.
How much of incremental income do you plough
back in agri-inputs?
Our meetings indicated that farmers tend to plough
back more money in agri-inputs when their
expectation of market price or yields/per acre is
higher and vice-versa. However, on an average,
more money is getting ploughed back in agri-inputs
particularly fertilisers (significantly gone up in 2011
due to higher prices) and pesticides (volumes on rise
due to labour issues especially in herbicides).
Any breakups for farm and non-farm – is the shift
happening towards non-farm?
In terms of income –most farmers earn majority
income from farming as there is limited time for
other activities. However, most farmers indicated
that farming as an occupation is losing its allure.
Several issues like lack of labour, higher labour costs
(biggest issue), rising land prices, rising cultivation
costs, and lack of government support (varies region-
wise) in terms of irrigation facilities and education of
farming techniques are leading to a shift from
farming activities particularly in the current
generation.
How are land prices behaving – have farmers been
selling land?
Land prices have shot up significantly and several
farmers indicated that they have sold some portion
of their land to capitalise on rising prices.
Farming/crop decision making process
Based on what factors do you decide the crop to be
sowed?
Crop is basically decided on – geographic
conditions, availability of irrigation facilities and
market price of the produce – generally farmers tend
to shift to crops which are able to command higher
prices.
What are the top crops sowed?
We travelled the Northern Maharashtra belt and
found that major crops sown in this region are
cotton (largest), soybean, chana and pulses (tur)
along with select fruits & vegetables.
What % of your produce do you sell at MSPs? –
MSPs basically just set the floor price. Generally, most
farmers sell all their produce at open market rates in
mandis. On an average mandi prices are 15%-20%
higher – but can be much higher as well in good
years when demand/supply gap is higher like last
year when cotton prices at mandi were ruling
INR6,500 per quintal vs. MSP of INR3,000 per quintal.
Are profits in farming declining due to higher labour
costs? – MNREGA impact?
Labour has become a major issue in farming. Rates
have gone up from INR30-50 three-four years ago to
INR200-300 in the current year (significantly ahead
of MNREGA’s rate of ~INR120 for current year).
India Crop Protection
Cro
p P
rote
cti
on
19 Elara Securities (India) Private Limited
Further, most farmers cited significant lack of
availability of labour even at higher prices as many
workers have shifted to non-agri occupations.
Can you break up the usage of agri-inputs and
cost/profit of a crop?
Cotton (1 acre)
Seeds – require 750gms of Bt Cotton (1.5
packets) = INR900
Fertilisers – require 2 Bags of urea +
1-2 bags of DAP =INR2,500
Cultivation charges =~INR2,500
Pesticides = INR2,500 (5-6 sprays – varies
sometimes 3-4 sprays in other regions)
Total cost = INR8,500
Yield – irrigated – 10 quintals and rainfed – 5
quintals
Current mandi price – INR4,500
Total sales value in rainfed cotton = INR22,500
Net Income = INR22,500- INR8,500 = INR14,000
Soybean (1 acre)
Seeds = INR1,000
Sowing = INR300
Fertiliser (2 Bags – DAP/Urea) = INR1,500
Pesticides – Herbicide – INR500 (1 Spray),
Insecticide – INR1,000 (2 Sprays)
Harvesting =INR1,200
Total cost = INR5,500
Yield – irrigated – 10-12 quintals, rainfed – 6
quintals
Current mandi Price – INR2,000
Total sales value in rainfed soybean =INR12,000
Net Income = INR12,000-INR5,500 = INR6,500
Selection of product/brand
How influential is a distributor/dealer in making
purchase decision for pesticides?
Distributor/Dealer plays an important role in terms
of influencing the buying decision of farmers. While
several farmers come with a specific brand name,
often farmers cite their problem/pest and dealer
suggests product/brand accordingly.
What kind of pesticides do you use the most?
Usage of pesticide completely depends on the type
of pest infestation. However, sales of herbicides are
clearly on the rise as manual weeding has become
extremely expensive due to higher labour costs –
hence herbicide sprays are increasing. For e.g.
manual weeding requires 4-5 labour to cover 1 acre
which would cost minimum INR800-1,000.
However, farmer can spray a commonly used
herbicide called Glyphosate (INR300/Ltr – can cover
3 acres) which would require 1 labour (INR200 –
can cover 3 acres in a day). Hence, spraying
herbicides has become extremely economical vs.
manual weeding.
What is the key deciding factor in picking a product
– brand/price?
Most farmers cited brand and awareness via
education programmes ahead of pricing as key
factors in picking a product. We also noted that
farmers give a lot of importance to packaging.
In terms of dealers – marketing/field activities for
farmers to promote awareness/usage of product (to
create a pull factor) along with promotional
schemes/incentives were the key factors to push a
product.
Would you pay extra for MNC products?
Our meeting indicated that farmers definitely are
willing to pay higher for MNC products like Bayer,
Syngenta, Dow, DuPont etc especially in case of
specialty molecules where substitutes were not
available.
India Crop Protection
20 Elara Securities (India) Private Limited
Dealer/distributor profile
How big is the dealership/distributor size? Can you
highlight some key characteristics?
Most distributors we met had an annual
turnover in range of INR50-150mn.
They stock multiple products (average 4-5) and
running items/big brands that are prevalent in
the region.
On an average each distributor would have
some 200-250 dealers under him.
Margins offered by pesticide companies would
range anywhere between 2.5%-10% (lower in
case of MNCs and slightly higher for Indian
companies). Moreover, most companies run
various schemes (foreign trips are very popular)
and incentives for dealers.
Most pesticide sales happen at 60-40 credit: cash
ratio as farmers can pay only on sale of produce
at the end of the season. Some defaults do
happen – but the number is negligible at this
stage. At dealer end – credit sales are much
higher and hence margins are also slightly
higher.
On an average INR20mn investment (working
capital) and INR10mn (fixed assets like office,
godowns, vehicles etc) would be required to set
up a distributorship registering a turnover of
INR100mn. On a gross basis, distributor earns
around ~15%.
Generally a distributor holds around ~2-3
months of inventory. However, most of these
goods move fast during the season and are
refilled immediately by companies. Also, most
items are on returnable basis.
How is the competition amongst dealers? – Any
discounts offered? – differentiating factor?
Competition amongst dealers is extremely high and
all products are sold lower than MRP. Generally
there is no major differentiating factor apart from
product availability, coverage/reach of farmers and
price offered (post discount).
Other observations
About pesticides
On an average, you need to spray
INR2,000-3,000 worth pesticides per acre.
Farmers often tend to use multiple
products/brands to tackle different pests and
hence combine products during sprays.
Weedicides/herbicides sales tend to pick up
when rains are higher.
While all segments have their own leaders –
market share can be lost to players who have
better distribution/pricing and offer more
incentives/schemes to dealers.
About specific products/brands in the region
Bayer’s Confidor was considered to be the top
most selling brand in this region.
Syngenta’s Polo (also called Pegasus) is
extremely popular – has raised prices this year
by ~15%-20% as it is a specialty product with no
alternative.
Tata (Rallis) brand also enjoys a preferred brand
status amongst farmers – its popular selling
brands include Asataf, Manik, Toran and Takumi.
About pricing of pesticides
Prices of pesticides tend to fall when more
products/brands are launched in the category.
For e.g. Confidor’s pricing has come down from
INR4,000+ when it was launched to INR1,500
now due to entry of local players.
MNC brands always charge higher than Indian
peers in same product formulation.
Price cuts also happen in industry – e.g. Rallis cut
Asataf (Acephate) prices significantly this year
and gained market share.
About other agri-inputs
Fertiliser prices have gone up significantly over
the last few years post decontrol which has
significantly hurt farmers. They also cited lack of
availability of fertilisers at the right time.
Seeds generally are bought at advance of ~7-8
months e.g. seeds required for sale in May
during Kharif are booked in August-September
itself. We also learnt that seeds are sometimes
sold in the black market due to significant
demand during peak season.
India Crop Protection
Cro
p P
rote
cti
on
21 Elara Securities (India) Private Limited
Pictorial takeaways from our trip
Exhibit 48: Bayer’s Confidor was the top selling
product across dealers
Exhibit 49: Monsanto’s Roundup – a very popular
non-selective herbicide in the region
Exhibit 50: Popular MNC products include – Bayer’s
Fame, Syngenta’s Polo/Pegasus and Proclaim and
DuPont’s Coragen
Exhibit 51: Distributor shop in Amravati
Exhibit 52: Dealer explaining farmer group in
selection of pesticides
Exhibit 53: Insecticides India’s Monocil brand has
done extremely well in this region
India Crop Protection
22 Elara Securities (India) Private Limited
Annexure II: Insights into global crop protection industry
According to a Phillips McDougall report, global crop
protection industry was valued at USD37.9bn in CY2009
registering a growth of ~4.3% CAGR over the last five
years. Further, the market is expected to continue to
grow at a steady ~3.5% CAGR and register a size of
USD43.5bn by CY2013.
Exhibit 54: Global crop protection industry is valued
at ~USD37.9bn in CY2009 growing at ~4% CAGR
Source: Phillips McDougall, Elara Securities Research
Crop protection products in the global market are
divided into (1) patent-protected products originally
developed by leading companies in the field
(research-based companies); and (2) generic products,
which are similar to patent-expired (off-patent) source
products and are produced by generic companies.
Report estimates show ~25% of crop protection sales
were attributed to patented products and ~75% to off-
patent products including generics which accounted for
roughly ~45%.
Exhibit 55: Category-wise, patented products
constituted only ~25% of the global market
Source: Phillips McDougall, Elara Securities Research
The crop protection chemicals market is concentrated in
the major developed countries such as United States and
Western European nations. Europe has the largest share
in the crop protection market followed by Asia, Latin
America and North America.
Industry reports suggest that the crop protection market
has reached saturation point in developed regions such
as North America and Western Europe whereas regions
such as Asia Pacific, Middle East and Latin America offer
high growth opportunities.
Exhibit 56: Europe is the largest market for crop
protection products accounting for ~29%
Source: Phillips McDougall, Elara Securities Research
Highly consolidated market
The global crop protection market is fairly consolidated
with top six research based MNCs accounting for over
~70% of the market. Syngenta, Bayer and BASF are the
market leaders controlling around half of the global crop
protection market.
Exhibit 57: Top six research based MNCs control
~70% of the global crop protection market (CY2009)
Source: Phillips McDougall, Elara Securities Research
Exhibit 58: Syngenta, Bayer and BASF together
control ~50% of the global market
Source: Phillips McDougall, Elara Securities Research
27
.8
25
.8
25
.2
26
.7
30
.7
31
.2
30
.4
33
.4
40
.5
37
.9
(10)
(5)
0
5
10
15
20
25
0
5
10
15
20
25
30
35
40
45
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
(%)
(USD
bn
)
Size (LHS) YoY (RHS)
Generic 45%
Patented Products
25%
Off-Patent Products
30%
Europe 29%
Asia 25%
Latin America
19%
North America
23%
RoW 4%
8.5 8.3
5.1 3.9 3.5
2.4 2.1 1.8 1.4 1.1
0
2
4
6
8
10
Syn
ge
nta
Ba
ye
r
BA
SF
Do
w
Mo
nsa
nto
Du
Po
nt
MA
I
Nu
farm
Su
mit
om
o
Ary
sta
Lif
esc
ien
ce
(US$
bn
)
Syngenta 19%
Bayer 19%
BASF 12%
Dow 9%
Monsanto 8%
DuPont 5%
MAI 5%
Nufarm 4%
Sumitomo 3%
Arysta Lifescience
3%
Others 13%
India Crop Protection
Cro
p P
rote
cti
on
23 Elara Securities (India) Private Limited
Global crop protection market is characterised by large
number of mergers and acquisitions. The period1995-
2002 saw significant consolidation taking place among
research-based companies, reducing the number of the
leading players from 16 in 1995 to 6 in 2001.
Exhibit 59: 1995-2001 witnessed large consolidation
industry resulting into just six large MNCs
Source: Syngenta Presentation, Elara Securities Research
Several forces have driven the consolidation in the
industry.
R&D and registration of new products have become
increasingly costly. The European Crop Protection
Association has estimated a total cost of USD200mn
for the development and bringing to market of a
new chemical crop protection product.
Several large companies have consolidated their
presence in existing geographies or ventured into
newer areas through acquisition of local companies.
Some companies have broadened their horizons
(pharmaceutical-agrochemical-seeds) over the entire
plant production spectrum.
Globalised trade patterns also necessitate a
company’s presence in all major markets to ensure
rapid market penetration with new products and
quicker recovery of R&D investments.
Exhibit 60: Drivers of consolidation
Source: Syngenta Presentation, Elara Securities Research
Category-wise breakup
Herbicides are the most widely used crop protection
products globally, followed by insecticides and
fungicides. Individual sales of various categories however
depend on climatic conditions and crop variance.
Herbicides are used in most of the regions of the
world. However, major markets for herbicides are
North America and Europe due to favourable
climatic conditions in these regions.
Insecticides are more prevalent in Asian countries.
This is due to higher growth of cotton, cereal, fruits
and vegetables in these regions which have higher
incidence of insect attacks. Increased usage of
genetically modified crops in North America has
reduced the usage of insecticides.
Fungicides are used in almost all agriculture markets
of the world as fungal growth is ubiquitous.
Exhibit 61: Herbicides dominate the crop protection
market with ~45% market share
Source: Phillips McDougall, Elara Securities Research
In terms of crops, fruits and vegetables and cereals
account for the largest share of the crop protection
industry.
Exhibit 62: Crop-wise, Fruits & Vegetables account
for largest share of crop protection market
Source: Phillips McDougall, Elara Securities Research
Insecticides 26%
Herbicides 45%
Fungicides 26%
Others 3%
Fruits & Vegetables
26%
Cereals 18%
Maize 13%
Soybean 10%
Rice 9%
Cotton 6%
Others 18%
Attractive returns to leading competitors
Barriers to entry
Patents & registration
Capital investment
Scale economies
Branding
Entrenched distribution
Portfolio leverage
Breadth & depth
Global reach
R&D
Innovation
Differentiation
Life-cycle management
Marketing
Integrated approach
Local battles, tailored strategies
Ciba
Sandoz
Merck
Zeneca
ISK Biosciences
Bayer
Rhone-Poulenc
Hoechst
Monsanto
Shell
Schering
DuPont
Cyanamid
BASF
Rohm & Hass
Dow
19
92
19
93
19
94
19
96
19
95
19
97
19
98
19
99
20
00
20
01
Novartis
Syngenta
Bayer
Aventis
Monsanto
DuPont
BASF
Dow
AHP
India Crop Protection
24 Elara Securities (India) Private Limited
Annexure III: Primer on pesticides
A pesticide is any substance or mixture of substances
intended for preventing, destroying, repelling, or
mitigating pests like insects, weeds, rodents etc.
Pesticides are the last input in agricultural operations and
provide vital inputs to crop protection and boost
agricultural production by helping reduce crop losses.
Classification of pesticides
Pesticides can be broadly divided into two categories:
Technical grade: Technical grade refers to the
material, containing an active ingredient with no
chemical additions. Pesticides are first manufactured
as technical grade products, which have a high
commercial purity. In technical grade 85% or more
of active ingredients are used and rest is impurities,
which are produced during chemical synthesis.
Technical grades are never used directly and are
used to prepare various types of formulations.
Formulations: Formulations contain one or more
active ingredients (technical grade) mixed with other
inert ingredients in a form suitable to use. Inert
ingredients are purposely added to technical grade
ingredients to improve the physical characteristics
(sprayability, solubility, spreadability or stability). Inert
ingredients generally include fillers, talc, solvents,
adjuvant, distillate, wetting agents, petroleum and
so on. The main reason for the formulation of
pesticides is to manufacture a product, which is
biologically efficient, handy for regular use and
minimises environmental hazards.
Based on the types of pests they attack, pesticides are
classified as:
Insecticides: Used against insects which feed on
crops, leaves, roots, and other parts of plants
Herbicides (also known as weedicides): Used against
weeds or unwanted plants compete with the crop
for nutrients, light, water, space.
Fungicides: Used against bacteria, fungi, virus and
mycoplasma which cause various diseases in plants.
Biopesticides: These are derived from natural
substances like plants, animals, bacteria and certain
minerals and control pests by nontoxic mechanisms.
Bio-pesticides are considered eco-friendly and easy
to use. They are of low volume and high effect
formulations and require lower dosages as
compared to chemical pesticides. A growth area for
bio-pesticides is in the area of seed treatment and
soil amendments.
Others (Nematocides, Rodenticides etc): Used to
prevent the pest attacks in storage. Plant growth
regulators control or modify the plant growth
process and are most commonly used in cotton, rice
and fruits.
Stringent registration process
Since pesticides are toxic and hazardous to humans and
environment, and also enter into the food chain, the GoI
regulates manufacture, sale, transport, export/import
under Insecticides Act, 1968.
Under the Act, no pesticides are allowed for
production/import without registration.
Registration normally takes around 3-5 years and
costs around INR30-50mn for each product.
Apart from recommending the registration for
individual chemicals, the Committee also lays down
the details of packaging, labelling, approved
quantities of use, restrictions and precautions.
The Insecticide Act is enforced through two high-
powered bodies – the Central Insecticides Board
(CIB) and the Registration Committee (RC).
The Central Insecticides Board (CIB) advises the
central and state governments on technical matters.
The approval of the use of pesticides and new
formulations to tackle the pest problem in various
crops is given by the Registration Committee (RC)
while the Union Ministry of Health and Family
Welfare monitors and regulates pesticide residue
levels in food. It also sets maximum residue limits
(MRL) of pesticides on food commodities.
The industry is also governed by two Ministries –
The Ministry of Chemicals & Fertilisers, through
Department of Chemicals and Petrochemicals,
promotes production of pesticides
The Ministry of Agriculture regulates and monitors
the quality and supply of pesticides in the country.
However, on April 24, 2008, the Union Cabinet gave its
approval for the introduction of the Pesticides
Management Bill 2008, which will replace the existing
Insecticide Act 1968. The bill aims at improving the
quality of pesticides available to Indian farmers and
introducing new, safe and efficacious pesticides. The bill
seeks more effective regulation of import, manufacture,
export, sale, transport, distribution and use of pesticides
to prevent risk to human beings, animals, or
environment and to de-license retail sale of household
insecticides.
India Crop Protection
Cro
p P
rote
cti
on
25 Elara Securities (India) Private Limited
Company Section
India Crop Protection
26 Elara Securities (India) Private Limited
Notes
Anand Shah • [email protected] • +91 22 4062 6821
Glo
ba
l M
ark
ets
Re
sea
rch
Elara Securities (India) Private Limited
Poised to grow
Domestic business steady, new launches hold the key
Over FY12E-14E, we expect the company’s domestic business
revenues to register 13.4% CAGR driven largely by a ~15% CAGR in
formulations business aided by – 1) Rallis’ brand, 2) strong distribution
network, 3) farmer connect activities like Rallis Kisan Kutumba (RKK), 4)
product launches and 5) strong alliances/tie-ups with MNCs to
market/distribute their products. Over the period FY07-12YTD, Rallis
has launched 22 products (9 products in H1FY12 alone) with an
average annual rate of 2-3 products each year.
International business to get a boost with Dahej facility
We expect international business to register ~28% CAGR in revenues
over FY12E-14E driven largely by significant scale up in contract
manufacturing activities and growth in registered product sales.
Hence, we expect the contribution of international business to total
revenues to rise from ~23% in FY11 to ~29% in FY14E. Management
has guided for cumulative revenues of ~INR5bn from Dahej plant over
FY11-14E indicating that at peak utilisation the facility can generate
annual revenues of ~INR2bn. Further, the plant will enjoy both
income tax and excise benefits.
Foray into seeds via Metahelix holds long term potential
Over the period FY12E-14E, we expect Metahelix to almost double its
revenues from INR0.9bn to INR1.7bn. Management expects breakeven
by FY12 and the acquisition is likely to be EPS accretive from FY13E
onwards. Our bullishness on Metahelix stems from the fact that -
Metahelix is the first Indian company to have a proprietary Bt trait,
CRY1C approved in cotton – a rival technology to Monsanto’s Bt trait.
Bt Cotton seed is ~INR20bn market in India catered to mostly by
Monsanto. Metahelix is targeting ~10% market share in the first 3-5
years of the launch amounting to an annual sales of ~INR2bn.
Valuation We initiate coverage on Rallis India (Rallis) with a Buy rating and a
TP of INR170 based on P/E of 16x to Sept-13 EPS of INR10.6
indicating an upside of ~40%. We expect Rallis to sustain premium
valuations, albeit we have reduced the premium to the 3 yr average
P/E (15x) from ~20% (18x) to ~5% (16x), owing to – 1) strong
~30% CAGR in earnings over FY12E-14E, 2) best working capital
management among domestic peers, 3) strong return ratios in
range of ~25%-30% and 4) significant free cash flow generation
over FY12E-14E with culmination of all major capex viz. Dahej
expansion & Metahelix acquisition.
Rallis 1 yr fwd P/E bands
Source: Bloomberg, Company, Elara Securities Research
Key Financials (Consolidated) Y/E Mar (INR mn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)
FY10 8,787 5.0 1,449 16.5 1,015 40.9 5.2 26.2 29.8 23.2 15.2
FY11 10,657 21.3 1,713 16.1 1,260 24.6 6.5 27.2 29.2 18.7 14.2
FY12E 13,143 23.3 2,136 16.3 1,378 11.5 7.1 25.9 27.7 17.1 11.4
FY13E 15,907 21.0 2,707 17.0 1,812 31.4 9.3 29.1 31.9 13.0 8.7
FY14E 18,768 18.0 3,317 17.7 2,315 28.1 11.9 31.6 35.7 10.2 6.8
Source: Company, Elara Securities Estimate
India | Crop Protection 9 January 2012
Initiating Coverage
Rallis India
Rating : Buy Target Price : INR170
Upside : 40%
CMP : INR121 (as on 4 January 2012)
Key data*
Bloomberg /Reuters Code RALI IN/RALL.BO
Current /Dil. Shares O/S (mn) 194.4/194.4
Mkt Cap (INRbn/US$mn) 24/444
Daily Vol. (3M NSE Avg.) 266,168
Face Value (INR) 1
1 US$= INR53.0
Source: Bloomberg ; * As on 04 January 2012
Price & Volume
Source: Bloomberg
Share holding (%) Q3FY11 Q4FY11 Q1FY12 Q2FY12
Promoter 50.7 50.7 50.7 50.8
Institutional Investors 24.7 25.6 25.8 25.4
Other Investors 4.1 3.8 4.6 4.3
General Public 20.5 20.0 18.9 19.5
Source: BSE
Price performance (%) 3M 6M 12M
Sensex 0.6 (15.3) (21.8)
Rallis India (30.5) (21.7) (13.8)
PI Industries (13.6) 31.1 88.7
Dhanuka Agritech (8.8) 1.7 13.3
Insecticides India 5.6 19.1 78.6
Source: Bloomberg
0
50
100
150
200
250
Ap
r-0
5
Se
p-0
5
Fe
b-0
6
Jul-0
6
De
c-0
6
Ma
y-0
7
Oct-
07
Ma
r-0
8
Au
g-0
8
Jan
-09
Jun
-09
No
v-0
9
Ap
r-1
0
Se
p-1
0
Fe
b-1
1
Jul-1
1
De
c-1
1
(IN
R)
23x
19x
15x
11x
0
1,000
2,000
3,000
4,000
5,000
6,000
100
125
150
175
200
Jan-11 May-11 Sep-11 Jan-12
Vol. in 000s (RHS) Rallis India (LHS)
Rallis India
28 Elara Securities (India) Private Limited
Valuation trigger
Source: Bloomberg, Elara Securities Estimate
Valuation overview
Methodology INR/Share
Consolidated PAT Sept -2013 (INR mn) 2,063
No of shares (mn) 194.5
EPS Sept-2013E 10.6
Assigned P/E multiple (x) 16.0
Fair value 170
CMP 121
Potential Upside (%) 40.3
Source: Elara Securities Estimate
Valuation driver – Rallis one year forward P/E chart
Source: Elara Securities Research
Investment summary
Leading player in crop protection
industry with strong parentage
Looking to broad base revenue mix
and emerge as a complete agri-inputs
solution provider
Strong balance sheet, best working
capital management in the industry
and high return ratios - ~25%-30%
Valuation trigger
1. Earnings to recover post weak
H2FY12, model in ~30% CAGR over
FY12E-14E
2. Margins to recover in FY13E-14E
driven by launches, higher export
revenues and improvement in
Metahelix margins
3. Significant capex behind, expect
strong FCF generation over FY12E-14E
Key risks
Poor monsoons, low pest infestation
and slowdown in off-take due to
impact on farmer profitability
Lower than expected scale up at the
Dahej facility and lower-than-expected
revenues from Metahelix
Competition in key products leading to
price cuts
Our assumptions
We have modeled in 19.5% CAGR in
revenues over FY12E-14E
Domestic business to grow ~13.5%
CAGR in revenues over FY12E-14E
aided by new launches
International business to grow ~28%
CAGR driven by scale up at Dahej
facility – modeling ~INR3.5bn
revenues over FY11-14E
Expect Metahelix to almost double
revenues from INR0.9bn to INR1.7bn
over FY12E-14E aided by launch of
proprietary Bt trait in cotton – CRY1C
40
60
80
100
120
140
160
180
200
Jan
-10
Ma
r-1
0
Ma
y-1
0
Jul-1
0
Se
p-1
0
No
v-1
0
Jan
-11
Ma
r-1
1
Ma
y-1
1
Jul-1
1
Se
p-1
1
No
v-1
1
Jan
-12
Ma
r-1
2
Ma
y-1
2
Jul-1
2
Sep
-12
No
v-1
2
Jan
-13
Margins to recover in FY13E-14E driven by
launches, higher export revenues and improvement
in Metahelix margins
Significant capex behind, expect strong FCF generation over
FY12E-14E
1
2
3
Earnings to recover post weak H2FY12,
model in ~30% CAGR over FY12E-14E
0
5
10
15
20
25
Ap
r-0
4
Au
g-0
4
De
c-0
4
Ap
r-0
5
Au
g-0
5
De
c-0
5
Ap
r-0
6
Au
g-0
6
De
c-0
6
Ap
r-0
7
Au
g-0
7
De
c-0
7
Ap
r-0
8
Au
g-0
8
De
c-0
8
Ap
r-0
9
Au
g-0
9
De
c-0
9
Ap
r-1
0
Au
g-1
0
De
c-1
0
Ap
r-1
1
Au
g-1
1
De
c-1
1
Rallis India
Cro
p P
rote
cti
on
29 Elara Securities (India) Private Limited
Consolidated Financials (Y/E Mar) Income Statement (INR mn) FY11 FY12E FY13E FY14E
Net Revenues 10,657 13,143 15,907 18,768
EBITDA 1,713 2,136 2,707 3,317
Add:- Non operating Income 346 300 343 396
OPBIDTA 2,059 2,436 3,050 3,712
Less :- Depreciation & Amortization 175 287 331 355
EBIT 1,885 2,149 2,719 3,357
Less:- Interest Expenses 40 120 89 59
PBT 1,845 2,029 2,629 3,299
Less :- Taxes 580 619 776 924
Less: Minority Interest 4 33 42 60
Adjusted PAT 1,260 1,378 1,812 2,315
Add/Less: - Extra-ordinaries - - - -
Reported PAT 1,260 1,378 1,812 2,315
Balance Sheet (INR mn) FY11 FY12E FY13E FY14E
Share Capital 194 194 194 194
Reserves 4,855 5,664 6,679 7,970
Minority Interest 21 21 21 21
Borrowings 1,172 1,172 872 572
Deferred Tax (Net) 32 32 32 32
Total Liabilities 6,275 7,084 7,799 8,791
Gross Block 5,293 7,455 7,974 8,306
Less:- Accumulated Depreciation 1,743 2,029 2,360 2,715
Net Block 3,551 5,426 5,613 5,591
Add:- Capital work in progress 1,695 239 162 171
Investments 256 256 256 256
Net Working Capital 774 1,163 1,768 2,773
Other Assets - - - -
Total Assets 6,275 7,084 7,799 8,791
Cash Flow Statement (INR mn) FY11 FY12E FY13E FY14E
Cash profit adjusted for non cash items 1,189 1,761 2,235 2,719
Add/Less : Working Capital Changes (226) (525) (565) (580)
Operating Cash Flow 963 1,236 1,670 2,139
Less:- Capex (2,641) (707) (442) (341)
Free Cash Flow (1,678) 529 1,228 1,799
Financing Cash Flow 452 (573) (958) (1,155)
Investing Cash Flow (1,432) (667) (394) (284)
Net change in Cash (17) (3) 318 701
Ratio Analysis FY11 FY12E FY13E FY14E
Income Statement Ratios (%)
Revenue Growth 21.3 23.3 21.0 18.0
EBITDA Growth 18.3 24.7 26.7 22.5
PAT Growth 24.6 11.5 31.4 28.1
EBITDA Margin 16.1 16.3 17.0 17.7
Net Margin 11.8 10.5 11.4 12.3
Return & Liquidity Ratios
Net Debt/Equity (x) 0.2 0.1 0.0 (0.1)
ROE (%) 27.2 25.9 29.1 31.6
ROCE (%) 29.2 27.7 31.9 35.7
Per Share data & Valuation Ratios
Diluted EPS (INR/Share) 6.5 7.1 9.3 11.9
EPS Growth (%) 24.2 9.3 31.5 27.8
DPS (INR/Share) 2.0 2.5 3.5 4.5
P/E Ratio (x) 18.7 17.1 13.0 10.2
EV/EBITDA (x) 14.2 11.4 8.7 6.8
EV/Sales (x) 2.3 1.8 1.5 1.2
Price/Book (x) 4.7 4.0 3.4 2.9
Dividend Yield (%) 1.7 2.1 2.9 3.7
Source: Company, Elara Securities Estimate
Revenue & margins growth trend
Source: Company, Elara Securities Estimate
Adjusted profits growth trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
16.1 16.3
17.0
17.7
15
16
16
17
17
18
18
0
5,000
10,000
15,000
20,000
FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Revenues (LHS) EBITDA Margin (RHS)
24.6
11.5
31.4 28.1
0
5
10
15
20
25
30
35
0
500
1,000
1,500
2,000
2,500
FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Adj PAT (LHS) PAT Growth (RHS)
27.2 25.9
29.1
31.6
29.2 27.7
31.9
35.7
20
25
30
35
40
FY11 FY12E FY13E FY14E
ROE (%) ROCE (%)
Rallis India
30 Elara Securities (India) Private Limited
Dominant player in crop protection
Rallis India (Rallis), a subsidiary of Tata Chemicals (50.8%
stake), is the 2nd largest domestic crop protection
company in India. A comprehensive product portfolio of
pesticides, seeds (strengthened with Metahelix
acquisition) and plant growth nutrients, strong relations
with farmers (through initiatives like Rallis Kisan
Kutumba) and pan-India distribution network covering
80% districts aided by 1,500 dealers and 40,000 retailers
gives Rallis a strong edge. Further, the company also
enjoys credible presence in international markets.
Diversifying revenue mix to emerge as a complete agri-input solution provider
During FY11, Rallis derived ~96% (73% domestic, 23%
from exports) revenues from pesticides and ~2% each
from selling plant growth nutrients and seeds.
Exhibit 1: During FY11, Rallis derived ~96% of
revenues from selling crop protection chemicals
Source: Company, Elara Securities Research
In May 2007, the company had initiated a growth
agenda titled “Rallis poised” to target sustained profitable
growth. Rallis identified seven growth drivers under the
agenda – 1) New products, 2) Contract Manufacturing,
3) Brand Premium, 4) Value Enhancement (known as
DISHA), 5) Overseas market expansion (APOLLO), 6)
Adjacent Businesses (seeds and PGN, Agri Services) and
7) Inorganic growth. Further the company identified
process orientation, infrastructure support in
manufacturing units, fields and offices and a competent
team of employees as enablers supporting the growth
agenda.
This structured approach has helped Rallis post ~15%
CAGR in revenues and ~89% CAGR in EBITDA during
the period FY07-11.
Exhibit 2: Rallis initiated its growth agenda called
“Rallis poised” in May 2007 with 7 cornerstones
Source: Rallis Presentation, Elara Securities Research
Exhibit 3: Rallis poised has helped the company
register ~89% CAGR in EBITDA over FY07-11
Source: Company, Elara Securities Research
Going ahead, Rallis is looking to strengthen its progress
to broad-base revenue mix and emerge as a complete
agri-inputs solution provider (Seeds, PGN, specialty
fertilisers and farming services).
Acquisition of Metahelix in Dec, 2010 has put Rallis
in a strong position to expand in seeds (adjacent
businesses) – it is expecting cumulative revenue of
INR10bn in first five years of operation.
Commencement of new manufacturing facility at
Dahej in Q1FY12 will help Rallis scale up revenues
under contract manufacturing – Rallis expects
cumulative revenue of INR5bn over FY12-14E.
Initiatives like MoPu (Grow More Pulses), a
programme where Rallis works with farmers to
improve productivity in pulses, is a step in providing
agri services to farming community.
Domestic Pesticides
73%
International Business - Pesticides
23%
Plant Growth
Nutrients 2%
Seeds 2%
13
4
59
1
1,1
09
1,4
49
1,7
13
0
5
10
15
20
25
30
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY07 FY08 FY09 FY10 FY11
(%)
(IN
R m
n)
EBITDA (LHS) Sales Growth (RHS)
Investment rationale
Domestic business steady, product launches hold key
International business to get a boost with Dahej facility
Foray into seeds via Metahelix holds long term potential
Rallis India
Rallis India
Cro
p P
rote
cti
on
31 Elara Securities (India) Private Limited
Exhibit 4: Rallis is looking to broad-base its revenue
mix into complete agri-inputs solution provider
Source: Rallis Presentation, Elara Securities Research
Domestic business steady, new product launches hold the key
During FY11, Rallis derived ~73% revenues from
domestic pesticides business which included ~62%
revenues from domestic formulations and 11% from
domestic institutional business.
Under the formulations business, Rallis retails number of
strong brands across segments of insecticides, herbicides
and fungicides with the mix standing at 70-20-10
respectively. The institutional business provides technical
and bulk of various molecules, seed treatment chemicals
and household products to leading companies like
Bayer, Syngenta, Excel crop protection, United
Phosphorous, Gharda, Cheminova and Dhanuka.
Exhibit 5: Dependence on domestic business to
decline owing to growth in exports and Metahelix
Source: Company, Elara Securities Estimate
During FY12E-14E, we expect the company’s domestic
business revenues to register 13.4% CAGR driven largely
by a ~15% CAGR in formulations business aided by – 1)
Rallis’ brand strength, 2) strong distribution network, 3)
farmer connect activities like RKK, 4) new product
launches and 5) strong alliances/tie-ups with MNCs to
market/distribute products.
Exhibit 6: Domestic pesticides business to register
~13.4% CAGR in revenues over FY12E-14E
Source: Company, Elara Securities Estimate
Portfolio of premium brands with strong recall
Over the years, Rallis has built strong sustainable brands
in the crop protection market on the back of the Tata
brand, strong marketing initiatives, farmer connect
activities and innovative brand promotion efforts (new
packaging shapes, slogan designs, colour schemes etc.).
Company’s old brands like Rogor, Asataf, and Contaf,
established years ago, still find a place in minds of
farmers. According to a Gallup survey in 2010, Rallis
markets eight out of the top 12 brands in the Indian
market.
Exhibit 7: As per Gallup customer survey, 8 out of top
12 brands as per recall belong to Rallis
Brand Company
Confidor Bayer
Asataf Rallis
Rogor Rallis
Tatamida Rallis
Contaf Rallis
Antracol Bayer
Thiodon Bayer
Contaf Plus Rallis
Tata Mono Rallis
Tata Fen Rallis
Fujione Rallis
Bilzeb Bayer
Hostathion Bayer
Larvin Bayer
Metacid Bayer
Source: Unaided recall, Gallup customer engagement survey, Rallis
Strong connect with farmers through initiatives like Rallis Kisan Kutumba (RKK)
Over the years, Rallis has developed a strong rapport
with farmers further strengthened by initiatives like Rallis
Kisan Kutumba (RKK), started in 2007-08 to provide
farmers information on improving productivity. Key
activities undertaken in RKK initiative include – 1) regular
visits by Rallis staff, 2) organising crop seminars, 3)
demonstrations, 4) farmer exchange programmes and 5)
77 73 66 62 60
20 22 25 27 29
1 2 7 8 9
2 2 2 3 3
0
20
40
60
80
100
120
FY10 FY11 FY12E FY13E FY14E
(%)
Domestic Exports Seeds Others
7,2
32
8,4
21
9,3
16
10
,55
4
11
,97
3
0
5
10
15
20
25
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Revenue (LHS) (Growth YoY (RHS)
Crop Protection
Others Crop
Protection
Seeds
& PGN
Contract
Manufacturing
Agri Services
Rallis India
32 Elara Securities (India) Private Limited
advisory services. Rallis currently has farmer membership
of 0.5mn under the RKK programme and is expected to
go up to 1mn by FY12-end.
Exhibit 8: RKK initiative has helped Rallis strengthen
its farmer connect with ~1mn farmers by FY12
Source: Rallis Presentation, Elara Securities Research
Alliances/tie-ups coupled with consistent new launches to help sustain growth momentum
Over the years, Rallis has entered into several alliances/
tie-ups with MNCs for marketing and distribution of
off-patent products in Indian markets which has helped
the company launch new and internationally renowned
products on a consistent basis and deliver margin
improvement by leveraging on distribution.
Exhibit 9: Strong alliances/tie-ups with various MNCs
to market and distribute their off-patent products
Company Rallis Product
Du Pont Daksh, Rekord
Syngenta India Preet, Anant, Sartaj, Prabhav, Paralac
Makhteshim Chemical Works Captan, Nova, Atrazine
Bayer India Spiro, Tatamida
Nihon Nohayaku Fuji1, Applaud, Fenpyroximate
FMC India Furadan, Tatafuran, Electra, Impeder
Gharda Chemicals Fateh, Koranda
Yara International Water Soluble NPK Fertilisers
Borax International Solubar
Source: Company, Elara Securities Research
In Q1FY11, Rallis strengthened its relations with the
global leader Syngenta by signing an agreement for
marketing company’s fungicide Azoxystrobin in India
and potentially in other countries. Azoxystrobin is the
largest selling fungicide in the world and is effective in
dealing with diseases in crops like rice, vegetables and
fruits. Syngenta currently distributes Rallis India's
fungicide Hexaconazole in the global market under a
previously inked agreement, which will remain in effect.
Exhibit 10: Rallis has tied up with Syngenta to
distribute its world’s largest fungicide Azoxystrobin
Cooperate with each other in agrochemical markets
- In India and potential further countries
To enhance availability of innovative agrochemical products and technologies to the farming community
Source Azoxystrobin for marketing in India in Rallis brand
- AZ is the world’s best selling fungicide
Exclusive rights to specified combination products with Azoxystrobin
Supplies of Hexaconazole to Syngenta
Strengthen the Rallis ability to enrich its crop protection
solutions Add value to the farming community
Source: Company, Elara Securities Research
Rallis has consistently focussed on rejuvenating its
product portfolio by launching new products either
through in-house R&D or through global alliances.
During the period FY07-12YTD, Rallis launched 22 new
products with an average annual rate of 2-3 products
each year. Rallis launched 9 new products in H1FY12
alone with 6 getting launched in Q2FY12 alone.
Exhibit 11: Rallis has consistently launched 2-3
products each year with 9 launched in H1FY12
Year Product launched
FY07 Nova, Applaud (I), Taqat (F)
FY08 Takumi (I), Sedna (I), Ishaan (F), Royal (I), Tebuconazole (F)
FY09 Mantis (Blasticide)
FY10 Ergon (F)
FY11 Taarak (H), Ralligold (PGN), Toran (I)
FY12 Neon (I), Sonic (I), Vaar (H), Honcho (H), Cylo (H), Saras (F), Taffin, Fycol, Ditaf
Source: Company, Elara Securities Researc; Note: I = Insecticdes, F=
Fungicides and H = Herbicides
Rallis’ turnover from new products launched in previous
four years to total turnover (termed as innovation
turnover index) is in range of ~25%-30%. However, the
index has come down to ~20% in FY11 due to exclusion
of Applaud from the index in FY11 but we expect it to
stabilise ahead at ~25%-30% driven by launches.
Exhibit 12: New products contribute ~25%-30% of
revenues for Rallis
Source: Company, Elara Securities Research
24
28
25
31
25
28 30 30 30
31
20
10
15
20
25
30
35
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
(%)
35K
06-07
RKK
07-08
130K
08-09
250K
09-10
500K
10-11
1000K
11-12
Regular Contacts
throughout
crop cycle
Covered more than 300 k
farmers Crop Seminars
Demos
Farmer Exchange
Programmes
Embarked on the RRK concept Worked out and finalized the model
Identified 30 Pilot territories Initiated activities
Scale up the activities Adding 30 more territories For RKK activites
RKK activities to cover all territories
Enroll other Progressive Farmers
Strengthening Farmer Relationships Rallis Kisan Kutumba
Rallis India
Cro
p P
rote
cti
on
33 Elara Securities (India) Private Limited
International business to get a boost with Dahej facility
Rallis operates in the international markets across 50
countries catering via three core segments – 1) contract
manufacturing, 2) registered product sales and 3) bulk
sales via alliances. Over FY07-11, the international
business registered 13.3% CAGR and constituted ~23%
of overall revenues for Rallis in FY11.
Contract manufacturing to get a boost with scale up at Dahej and Ankleshwar facilities
Rallis has been associated with leading companies
worldwide for contract manufacturing of technical
grades/formulations and intermediaries on the back of
cost effective manufacturing. Most of the contracts are
typically for a five year term and are on take or pay basis,
significantly reducing the risk for Rallis resulting from non
off-take due to adverse weather conditions.
Contract manufacturing accounted for ~9% of
consolidated revenue for Rallis in FY11 and we expect
the same to rise to ~13% of consolidated revenues
growing at a CAGR of ~32% over FY12E-14E driven by
scale up at Dahej and Ankleshwar facilities.
Rallis started operations at its Ankleshwar plant in
Q2FY11 which is engaged in manufacturing of
metconazole (herbicide for rape-seed, wheat,
oilseed, fruits and vegetables) exclusively for Kureha
Corporation (Japanese chemicals player). Rallis has
recently enhanced capacity at this plant and expects
annual revenues of INR500-700mn over FY12E-14E.
Rallis has set up a 5,000MT per annum plant in
Dahej with 1st phase operational from Q1FY12 at an
investment of INR1.5bn. Management has
highlighted that 1/3rd
of this capacity is expected to
cater to contract manufacturing. It has already
received enquiries from a handful of MNC clients
and management expects to ramp up current
utilisation levels from ~40-50%, in Q2FY12, to full
utilisation by end of FY12E.
Registered product sales to grow ~34% CAGR over FY12E-14E
Apart from contract manufacturing, Rallis also sells
formulations under its own brand name post
registrations in almost 25 different countries spread in
regions like Latin America, USA, Japan, South East Asia,
Australia and Africa.
Registered product sales accounted for ~7% of
consolidated revenue for Rallis in FY11 and we expect
the same to rise to ~10% of consolidated revenues
growing at a CAGR of ~34% over FY12E-14E driven by –
1) new registrations (has applied for over 100
registrations across new and existing territories),
2) strategic alliances with global majors and 3) synergies
with parent Tata Chemical’s international network and
4) expansion of Dahej plant - 2/3rd of Dahej plant
capacity would cater to registered product sales outside
India.
Exhibit 13: We are modeling cumulative revenue of
INR3.5bn from Dahej plant over FY11-14E
Source: Company, Elara Securities Estimate
Contribution of international business to rise to 29% of total revenue by FY14E
Going ahead, we expect international business to
emerge as one of the key growth drivers registering
~28% CAGR in revenues over FY12E-14E driven largely
by significant pick up in contract manufacturing activities
and growth in registered product sales. As a result, we
expect contribution of international business to total
revenues to rise from ~23% in FY11 to ~29% in FY14E.
We highlight management has guided for cumulative
revenues of ~INR5bn from Dahej plant over FY11-14E
indicating that at peak utilisation the facility can
generate annual revenues of ~INR2bn. Further, the plant
will enjoy both income tax and excise benefits for first
five years bringing down the tax rate.
Exhibit 14: International business to emerge as key
growth driver registering ~28% CAGR over FY12-14E
Source: Company, Elara Securities Estimate
150 200 350
500 550
1,200
1,750
0
500
1,000
1,500
2,000
FY11 FY12E FY13E FY14E
(IN
R m
n)
Ankleshwar Dahej
2,5
50
3,4
88
4,6
61
5,7
32
0
5
10
15
20
25
30
35
40
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Revenue (LHS) (Growth YoY (RHS)
Rallis India
34 Elara Securities (India) Private Limited
Foray into seeds has potential
In Dec 2010, Rallis acquired 53.5% stake in Metahelix Life
Sciences for an all cash deal of INR995mn funded via
internal accruals. Later Rallis increased its stake to 59.02%
for an additional INR250mn and in FY12 has further
increased its stake to 72.98%. Furthermore as per the
agreement, Rallis will enhance its shareholding to 100%
over a period of five years.
Overall, the initial deal was completed at 2x sales of
FY12E (we are modelling ~INR900mn revenue for FY12)
and Rallis expects the entity will exceed INR10bn
revenue cumulatively over a 5 year period.
Metahelix acquisition part of growth agenda under Rallis poised, gives entry into INR65bn seeds market
Rallis had identified seeds business as one of the key
pillars under Rallis Poised and Metahelix acquisition
would help it to offer a complete suite of agri-inputs for
farmers. Further, competencies of Rallis in terms of
farmer relations and channel partnerships through Rallis
Kisan Kutumbha and Tata Kisan Sanchar would help
leverage Metahelix’s portfolio.
The size of Indian seeds industry is pegged at INR65bn
and is growing annually at 12%-13%, but hybrid seeds,
which Metahelix manufactures, account for a mere 25%
of the market. Its key local competitors include - Rasi,
Nuziveedu, Ankur, and Mahyco along with the MNC
giant Monsanto.
Exhibit 15: The Indian seeds market is ~INR65bn in
size and Metahelix target segment cotton is INR20bn
Source: Company, Elara Securities Research; Note: Individual size in INR mn
During the period FY12-14E, we expect Metahelix to
almost double its revenues from INR0.9bn to INR1.7bn.
Management expects breakeven by FY12 and the
acquisition is likely to be EPS accretive from FY13E
onwards.
Exhibit 16: We expect Metahelix to double revenues
from FY12-14E aided by launch of proprietary Bt trait
Source: Company, Elara Securities Estimate
Our bullishness on Metahelix stems from the fact that -
Metahelix is the first Indian company to have a
proprietary Bt trait, CRY1C approved in cotton – a rival
technology to Monsanto’s Bt trait.
Bt Cotton seed is ~INR20bn market in India catered to
mostly by Monsanto. For all practical purposes the price
of Bt cotton is fixed at INR650 (for Bollgard-1) and
INR750 (for Bollgard-2) in various states. This money is
shared between Monsanto and the seed companies that
licence its technology into their own hybrids. It is here
that Metahelix has an advantage as its cost of developing
the Bt cotton technology is only around 1/4th of
Monsanto’s. In the short term it means it will have the
freedom to sell at a lower price, but more importantly, in
the long term Metahelix can offer a lower technology
licence fee to other seed companies for its Bt cotton
thereby gaining market share from Monsanto.
Metahelix is targeting ~10% market share in the first 3-5
years of launch amounting to annual sales of ~INR2bn.
About Metahelix
Metahelix, a Bangalore based seeds research company,
leverages its expertise in crop genetics and plant
biotechnology to develop high performance hybrid
seeds. It has nationwide sales presence through its
wholly owned subsidiary Dhaanya Seeds selling its
products through ~1,000 distributors. It has a team of 50
scientists working in various aspects of seed research.
Metahelix has strong product portfolio with 13 products
(already in market) and 17 products in pipeline across 14
crops. Its core crops among field crops are rice, maize,
cotton and millets and among vegetables tomato, hot-
pepper and okra. The crop breeding programmes are
located at Bangalore (rice, maize & vegetable crops),
Hyderabad (rice and cotton) and Ahmedabad (millets).
Paddy, 1,200 , 19%
Wheat, 850 , 13%
Maize, 900 , 14%
Cotton, 2,000 , 31%
Vegetables, 1,000 , 15%
Sunflower, 150 , 2%
Sorghum & Millets, 250
, 4% Others,
150 , 2%
0.9
1.3
1.7
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
FY12E FY13E FY14E
(IN
R b
n)
Rallis India
Cro
p P
rote
cti
on
35 Elara Securities (India) Private Limited
Weak H2FY12 but expect recovery in earnings in FY13-14E
During H1FY12 Rallis posted strong growth of ~29% YoY
in revenues but earnings growth was muted at ~11%
YoY. While revenues got a boost due to first year of
consolidation of Metahelix revenues (INR619mn in
H1FY12), modest growth of ~15% in domestic business
and commencement of Dahej facility in Q1FY12, Rallis
saw earnings growth flagging due to weaker gross
margins (adverse product mix due to erratic monsoons in
kharif season), higher depreciation charges due to Dahej
facility and interest costs (higher debt due to rise in
working capital).
Owing to significant deficiency (~50% below LPA) of
post season monsoons (Oct-Dec) in key crop protection
consuming state of Andhra Pradesh leading to lower
paddy acreage and squeeze in farmer profitability due to
crash in prices of vegetables like onions and potatoes,
we expect Rallis to post weaker H2FY12 with ~22%
revenue growth and ~4% earnings growth, albeit better
than peers on revenues owing to – 1) 9 products
launched in H1FY12, 2) scale up in Dahej facility (not in
the base) and 3) inclusion of Metahelix revenues (not in
the base).
Exhibit 17: H2FY12 to witness pressure on revenue
and earnings, albeit to be better than peers
Source: Company, Elara Securities Estimate
Notwithstanding quarterly volatility, during the period
FY12E-14E, we expect Rallis to post modest ~19.5%
CAGR in consolidated revenues driven by – 1) 13.5%
CAGR in domestic business driven by new product
launches, 2) ~28% CAGR in international business aided
by scale up at Dahej facility and 3) doubling of Metahelix
revenues from INR0.9bn to INR1.7bn aided by launch of
proprietary Bt trait.
Exhibit 18: Revenue growth of ~19.5% CAGR over
FY12-14 aided by new launches, Dahej and Metahelix
Source: Company, Elara Securities Estimate
Exhibit 19: Key revenue growth assumptions
(INR mn) FY11 FY12E FY13E FY14E
Pesticides Biz (A + B) 10,971 12,804 15,215 17,705
YoY % 20.1 16.7 18.8 16.4
Domestic (A) 8,421 9,316 10,554 11,973
YoY % 16.5 10.6 13.3 13.4
Formulations 7,132 7,988 9,186 10,564
YoY % 20.0 12.0 15.0 15.0
Institutional 1,289 1,328 1,368 1,409
YoY % 0.1 3.0 3.0 3.0
International (B) 2,550 3,488 4,661 5,732
YoY % 34.2 36.8 33.6 23.0
Contract Manufacturing 1,017 1,471 2,038 2,547
YoY % 35.2 44.6 38.5 25.0
Alliance/Bulk Sales 781 887 1,020 1,152
YoY % 30.0 13.5 15.0 13.0
Registered Product Sales 765 1,130 1,603 2,033
YoY % 40.0 47.7 41.9 26.9
Plant Growth Nutrients 238 298 387 504
YoY % 80.2 25.0 30.0 30.0
Total Seeds Biz (Incl Metahelix) 221 977 1,386 1,796
YoY % 343.0 341.1 42.0 29.5
Other (Subsidiary Sales) 35 39 42 47
YoY % (1.2) 10.0 10.0 10.0
Total Consolidated Revenues 11,466 14,117 17,031 20,052
YoY % 22.4 23.1 20.6 17.7
Source: Company, Elara Securities Estimate
Margins to expand 140bps over FY12E-14E aided by higher margin products and exports contribution
Over the period FY12E-14E, we expect margins to
expand by 140bps from 16.3% in FY12E to 17.7% in
FY14E resulting in a robust ~25% growth in EBITDA
29
22
11
4
0
5
10
15
20
25
30
35
H1FY12 H2FY12
(%)
Sales Growth PAT Growth
8,7
87
10
,65
7
13
,14
3
15
,90
7
18
,76
8
0
5
10
15
20
25
0
5,000
10,000
15,000
20,000
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Revenue (LHS) (Growth YoY (RHS)
Valuation & Recommendation
Earnings to pick up post weak H2FY12, we model in ~30% CAGR over FY12E-14E
Valuations at steep discount offering attractive entry point
Initiate with Buy with a Sept-13 TP of INR170
Rallis India
36 Elara Securities (India) Private Limited
aided by – 1) continued cost savings from third phase of
DISHA initiatives focussing on curtailing operating and
fixed expenses, 2) higher contribution of higher margin
new products under herbicides/weedicides category,
3) improvement in profitability of Metahelix (seed
companies enjoy higher operating margins at ~18%-20%
on average), 4) significant jump in export revenues aided
by Dahej scale up and 5) operating leverage.
Exhibit 20: DISHA initiatives under third phase to
curtail operating and fixed expenses
DRIVING INNOVATIVE SOLUTIONS FOR HYPER ACHIEVERMENTS
Source: Rallis Presentation, Elara Securities Research
Exhibit 21: Margins to witness uptick driving a robust
~25% CAGR in EBITDA over FY12E-14E
Source: Company, Elara Securities Estimate
Earnings growth strong at ~30% CAGR driven by lower tax, depreciation and interest costs
During the period FY12E-14E, we expect Rallis to post
strong ~30% CAGR in earnings aided by – 1) ~19.5%
CAGR in revenues, 2) 140bps expansion in margin,
3) ~200-250bps savings in tax rate due to rising revenues
from Dahej facility which is an export oriented unit
(EOU) enjoying income tax and excise benefits,
4) YoY moderation in depreciation charges from ~64%
rise in FY12E due to commencement of Dahej facility and
5) halving of interest cost driven by reduction in debt
due to high free cash flow generation in FY12E-14E.
Exhibit 22: Expect recovery in earnings post weak
~9% YoY growth in FY12
Source: Company, Elara Securities Estimate
Exhibit 23: FY14E EPS (INR) sensitivity to sales CAGR
and net margin expansion over FY12E-14E
FY
12
-14
ne
t m
arg
in
exp
an
sio
n
FY14 EPS FY12-14 sales CAGR
13.5% 16.5% 19.5% 22.5% 25.5%
125bps 10.2 10.8 11.3 11.9 12.5
155bps 10.5 11.1 11.6 12.2 12.8
185bps 10.8 11.3 11.9 12.5 13.1
215bps 11.0 11.6 12.2 12.8 13.5
245bps 11.3 11.9 12.5 13.1 13.8
Source: Elara Securities Estimate
Valuations at steep discount offering attractive entry point
Over the last 3 months, Rallis India has witnessed steep
correction of ~30% significantly underperforming Sensex
(down ~6%) and its peers which have corrected
~10%-15%. We attribute this correction to concerns over
a weaker H2FY12. However, we highlight the same is
exaggerated and the steep correction offers an attractive
entry point in the stock.
Exhibit 24: Rallis has corrected from P/E of ~18-20x
to ~15x (3 yr avg) offering a great entry point
Source: Bloomberg, Company, Elara Securities Research
1,4
49
1,7
13
2,1
36
2,7
07
3,3
17
16.5
16.1 16.3
17.0
17.7
15.0
15.5
16.0
16.5
17.0
17.5
18.0
0
500
1,000
1,500
2,000
2,500
3,000
3,500
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
EBITDA (LHS) OPM (RHS)
1,0
15
1,2
60
1,3
78
1,8
12
2,3
15
40.9
24.2
9.3
31.5 27.8
0
9
18
27
36
45
0
500
1,000
1,500
2,000
2,500
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
PAT (LHS) YoY (RHS)
0
5
10
15
20
25
Ap
r-0
4
Au
g-0
4
De
c-0
4
Ap
r-0
5
Au
g-0
5
De
c-0
5
Ap
r-0
6
Au
g-0
6
De
c-0
6
Ap
r-0
7
Au
g-0
7
De
c-0
7
Ap
r-0
8
Au
g-0
8
De
c-0
8
Ap
r-0
9
Au
g-0
9
De
c-0
9
Ap
r-1
0
Au
g-1
0
De
c-1
0
Ap
r-1
1
Au
g-1
1
De
c-1
1
Wave1 Wave 2 Wave 3
Pricing
Logistics
Finance
Operating Expenses
Fixed Expenses
Manufacturing
Procurement
Utility
Rallis India
Cro
p P
rote
cti
on
37 Elara Securities (India) Private Limited
Initiate with a Buy with a Sept-2013 TP of INR170
Over the last few years, Rallis has witnessed significant
re-rating from an average multiple of ~10-12x to
~16-18x driven by – 1) consistent operational growth
(~89% CAGR in EBITDA over FY07-11), 2) sharp
improvement in return ratios (from 13.5% in FY08 to
~29% in FY11) and 3) lower dependence on domestic
pesticide business by building Dahej facility for exports
and acquiring Metahelix (seeds business).
Going ahead, we expect Rallis to sustain premium
valuations, albeit we have reduced the premium to the 3
yr average P/E (15x) from ~20% (18x) to ~5% (16x).
Hence, we initiate coverage on Rallis with a Buy rating
and a Target Price of INR170 based on P/E of 16x to
Sept-13 EPS of INR10.6 indicating an upside of ~40%.
Exhibit 25: Rallis trading at lower end of its historical
P/E band of ~15x-19x
Source: Bloomberg, Company, Elara Securities Research
We believe Rallis will continue to command premium
valuations owing to – 1) strong ~30% CAGR in earnings
over FY12E-14E, 2) best working capital management
among domestic peers, 3) strong return ratios in range
of ~25%-30% and 4) significant free cash flow
generation over FY12E-14E as major capex (Dahej
expansion & Metahelix acquisition) is over.
Exhibit 26: Rallis has the best working capital
management in the industry, a near –ve cycle
Source: Company, Elara Securities Research
Exhibit 27: Major capex behind, expect strong FCF
generation over FY12E-14E
Source: Bloomberg, Company, Elara Securities Research
Further, the stock is likely to get downside support on
the back of:
Land bank: Rallis has considerable surplus land
which it can divest, like in the past, if need arises to
raise cash. It has around 85 acres in Hyderabad and
22 acres in Thane, Maharashtra. Media reports and
past deals (Rallis sold 31 acres to Peninsula for
INR0.9bn in 2008) suggest an estimated value of
~INR3bn, amounting to INR15 per share for just the
Hyderabad land.
Strategic stake in Advinus Therapeutics: During
2005, Rallis transferred its Knowledge Services
Business, a Research & Development Centre at
Bangalore to Advinus Therapeutics Pvt Ltd for a
consideration of INR260mn. Advinus is India's finest
Clinical Research Organisation (CRO) involved in
business of New Drug Discovery (pharma &
agriculture) and clinical trials. Advinus was formed
by a group of entrepreneurs and scientists led by Dr
Barbhaiya and Dr Kasim Mookhtiar in 2005. The Tata
group is a major shareholder in Advinus; Rallis holds
15% stake while the company management holds
minority stake. The company clocked ~INR1bn
revenue in FY11. Recently, buoyed by the success of
discovering a novel molecule for the treatment of
type II diabetes, Advinus Therapeutics is seeking
buyers for the molecule that may generate over
USD1bn business.
0
50
100
150
200
250
Ap
r-0
5
Se
p-0
5
Fe
b-0
6
Jul-0
6
De
c-0
6
Ma
y-0
7
Oct-
07
Ma
r-0
8
Au
g-0
8
Jan
-09
Jun
-09
No
v-0
9
Ap
r-1
0
Se
p-1
0
Fe
b-1
1
Jul-1
1
De
c-1
1
Sh
are
Pri
ce
(IN
R)
23x
19x
15x
11x
36
42
90
10
3
65
11
3
75
80
86
10
7
78
74
72
10
7
10
2
0
20
40
60
80
100
120
Rallis Bayer PI Ind Dhanuka IIL
(Da
ys)
Debtor Creditor Inventory
2,6
41
70
7
44
2
34
1 9
63
1,2
36
1,6
70
2,1
39
(1
,67
8)
52
9 1
,22
8
1,7
99
(2,000)
(1,000)
0
1,000
2,000
3,000
FY11 FY12E FY13E FY14E
(IN
R m
n)
Capex Op Cash Flow Free Cash Flow
Rallis India
38 Elara Securities (India) Private Limited
Board of Directors & Management
R Gopalakrishnan, Chairman
Gopalakrishnan is a graduate from Calcutta University
and completed engineering from IIT. From 1967, he
served HUL for over three decades in various capacities
including vice-chairman of HUL. In 1998, he joined Tata
Sons as executive director. He is also the chairman of
AutoComp systems, Advinus Therapeutics, vice-chairman
of Tata Chemicals, and director of Tata Power and Tata
Technologies. Gopalakrishnan also serves as an
independent director on the boards of Indian
subsidiaries of Akzo Nobel and BP Castrol.
V Shankar, MD & CEO
Shankar is a Chartered Accountant from The Institute of
Chartered Accountants of India, Cost Accountant from
ICWAI, Company Secretary and holds BCom (Hons) and
LLB. He has been the CEO of Rallis India since June, 2007
and has been MD since Jan, 2009 before serving as a
COO of Rallis from Dec, 2005 to April, 2008. Prior to
joining Rallis in Dec, 2005, Shankar served as COO of
Phosphates Business of Tata Chemicals prior to which he
worked with HUL from 1986 to 2004 and served in
various capacities.
Homi R Khusrokhan, Director
Khusrokhan is a qualified CA and also holds MSc (Econ)
in accounting and finance from London School of
Economics. He has been Non-Independent Non-
Executive Director of Rallis India Ltd. since March, 2003.
He was with Glaxo Laboratories (India) for 29 years, has
served as MD of Burroughs Wellcome since 1995, both
Glaxo and Wellcome in India from 1996-2000 and
GlaxoSmithKline for 5 years. He has been a special
advisor on Board of Satyam Computer since Feb, 2009
and has served as the MD of Tata Chemicals (2006-2008)
and Tata Tea (2001-2004).
B D Banerjee, Director
Banerjee, a PG with Honours in Philosophy from
Presidency College, Calcutta University, has been a
Director of Rallis since June 2004. He serves as the
Chairman and MD of Oriental Insurance Co Ltd and the
National Insurance Co Ltd and as the MD of General
Insurance Corporation of India. In a career spanning over
37 years in the Insurance Industry, Mr. Banerjee played
an important role in the establishment, growth and
consolidation of the non-life Insurance sector in India.
Bharat Vasani, Director
Vasani, BCom, LLB and Member of the Institute of
Company Secretaries of India, has been additional
Director of Rallis India since March, 2007. He serves as
Group General Counsel of the Tata Group and has been
with Tata Sons since December 2000. With over 28 years'
experience as a corporate lawyer, Vasani has worked
with Phillips India Ltd, NOCIL and Dow Chemical
International Ltd. He. He serves as Director of Tata Sky
Ltd, Infiniti Retail Ltd, Tata Securities Ltd, TML Financial
Services Ltd, Tara Systems & Technologies Ltd.
Prakash Rastogi, Director
Rastogi is an Independent Non-Executive Director of
Rallis India. He was till recently, the Vice Chairman and
Managing Director of Clariant India Ltd. He worked with
Sandoz India from 1974 till 1994 when he was Vice
President and Head of the Chemicals Division before it
was de-merged to become Clariant.
Company description
Rallis India Limited (Rallis), a subsidiary of Tata Chemicals (50.8% stake), is the 2nd
largest domestic crop protection
company in India. A comprehensive product portfolio of pesticides, seeds (strengthened with Metahelix acquisition)
and plant growth nutrients, strong relations with farmers (through initiatives like Rallis Kisan Kutumba) and
pan-india distribution network covering 80% districts aided by 1,500 dealers and 40,000 retailers gives Rallis a
strong edge over its peers. Further, the company also enjoys credible presence in international markets.
During FY11, Rallis derived ~96% (73% domestic, 23% from exports) revenues from pesticides and ~2% each from
selling plant growth nutrients and seeds. Going ahead, Rallis is looking to strengthen its progress under Rallis poised
agenda to broad-base its revenue mix and emerge as a complete agri-inputs solution provider (Seeds, PGN, specialty
fertilisers and farming services).
Rallis India
Cro
p P
rote
cti
on
39 39 Elara Securities (India) Private Limited
Coverage History
Date Rating Target Price Closing Price
1
4-Jan-2012 Buy INR170 INR121
Guide to Research Rating
BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
40
60
80
100
120
140
160
180
200
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12
Not Covered Covered
1
Rallis India
40 Elara Securities (India) Private Limited
Notes
Anand Shah • [email protected] • +91 22 4062 6821
Glo
ba
l M
ark
ets
Re
sea
rch
Elara Securities (India) Private Limited
Going one up with a niche model
Unique and differentiated business model
PI Industries (PIIL) is one of the leading players in crop protection
industry and largely operates in two core segments – agri-inputs and
custom synthesis and manufacturing (CSM). Unlike peers, PIIL has
undertaken a conscious strategy to develop a no-conflict business
model by staying away from aggressively selling generics and
competing directly with the MNCs. With utmost respect for IPs, PIIL has
developed strong relations with MNCs which it leverages to in-license
molecules to sell in domestic markets and provide custom synthesis
solutions to MNCs for their patented molecules.
Niche portfolio and pipeline to aid ~25% CAGR in agri-inputs
In its agri-inputs division, PIIL manufactures/markets a niche portfolio
of agro-chemicals, specialty fertilisers and plant nutrients (24 products
including 5-6 in-licensed molecules). Over FY12E-14E, we expect PIIL to
register ~25% CAGR in agri-inputs revenues driven by volume
expansion in existing products like Nominee Gold and Biovita,
expansion of distribution network and a strong pipeline of in-licensed
products (2 launches each year over FY12E-14E).
Strong order book and new facility to drive ~33% CAGR in CSM
Over the last decade, PIIL has emerged as the largest CSM player in
agro chemicals. We believe the company’s CSM business is unique and
enjoys strong competencies as its product pipeline in CSM is largely
focussed on patented, high value, complex chemistry and early stage
molecules (longer life cycles). Over FY12E-14E, we are modeling CSM
division revenues to grow at a CAGR of ~33% driven by – 1) unique
no-conflict business model backed by utmost respect for IPs, 2) strong
relations with MNCs, 3) healthy and growing order book of
USD325mn (6x FY11 revenues) and 4) upcoming facility to start in
Q1FY13 (can support INR2.5-3bn revenues at peak levels).
Valuation We initiate coverage on PIIL with a Buy rating and a Target Price of
INR669 based on P/E of 12x (25% discount to Rallis) to Sept-13 EPS
of INR55.7 indicating an upside of ~36%. Over the last 2 years, PIIL
has witnessed significant re-rating driven by its unique no-conflict
model, success of Nominee Gold, strong pipeline of in-licensed
products, sustained order book scale up in CSM business and
exponential growth in earnings. Going ahead, we expect the
re-rating to sustain driven by ~1) robust ~46% CAGR in earnings
over FY12E-14E, 2) strong return ratios in excess of ~30% and
3) modest FCF generation over FY12E-14E.
PIIL 1 yr fwd P/E bands
Source: Bloomberg, Company, Elara Securities Research
Key Financials (Standalone) Y/E Mar (INR mn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)
FY10 5,417 17.3 860 15.9 409 77.3 16.3 33.4 22.5 30.2 16.1
FY11 7,186 32.6 1,225 17.0 641 56.6 25.6 35.3 26.1 19.3 12.0
FY12E 8,652 20.4 1,482 17.1 756 18.0 30.2 27.6 24.6 16.3 9.6
FY13E 11,275 30.3 1,985 17.6 1,188 57.1 47.4 30.5 28.3 10.4 7.0
FY14E 14,079 24.9 2,528 18.0 1,604 35.0 64.0 31.3 32.2 7.7 5.1
Source: Company, Elara Securities Estimate
India | Crop Protection 9 January 2012
Initiating Coverage
PI Industries
Rating : Buy Target Price : INR669
Upside : 36%
CMP : INR493 (as on 4 January 2012)
Key data*
Bloomberg /Reuters Code PI IN/PIIL.BO
Current /Dil. Shares O/S (mn) 25/25
Mkt Cap (INRbn/US$mn) 12/232
Daily Vol. (3M NSE Avg.) 7,985
Face Value (INR) 5
1 US$= INR53
Source: Bloomberg ; * As on 04 January 2012
Price & Volume
Source: Bloomberg
Share holding (%) Q3FY11 Q4FY11 Q1FY12 Q2FY12
Promoter 71.3 71.3 63.7 63.7
Institutional Investors 5.8 5.7 3.9 8.3
Other Investors 14.0 13.6 23.9 20.2
General Public 9.0 9.4 8.6 7.9
Source: BSE
Price performance (%) 3M 6M 12M
Sensex 0.6 (15.3) (21.8)
PI Industries (13.6) 31.1 88.7
Rallis India (30.5) (21.7) (13.8)
Dhanuka Agritech (8.8) 1.7 13.3
Insecticides India 5.6 19.1 78.6
Source: Bloomberg
0
100
200
300
400
500
600
700
Ap
r-0
9
Jun
-09
Au
g-0
9
Oct-
09
De
c-0
9
Fe
b-1
0
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct-
10
De
c-1
0
Fe
b-1
1
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct-
11
De
c-1
1
(IN
R)
15x
12x
9x
6x
0
200
400
600
800
200
300
400
500
600
700
Jan-11 May-11 Sep-11 Jan-12
Vol. in 000s (RHS) PI Industries (LHS)
PI Industries
42 Elara Securities (India) Private Limited
Valuation trigger
Source: Bloomberg, Elara Securities Estimate
Valuation overview
Methodology INR/Share
Standalone PAT Sept -2013 (INR mn) 1,396
No of shares (mn) 25.05
EPS Sept-2013E 55.7
Assigned P/E multiple (x) 12.0
Fair value 669
CMP 493
Potential Upside (%) 35.6
Source: Elara Securities Estimate
Valuation driver – PIIL one year forward P/E chart
Source: Elara Securities Research
Investment summary
Unique no-conflict business model –
one of its kind in crop protection
industry
Strong portfolio of in-licensed products
backed by robust pipeline (2 new
launches each year over FY12-14)
Strong order book of USD325mn in
CSM business (6x FY11 revenues)
lending high revenue visibility.
Valuation trigger
1. Upcoming facility in CSM to start in
Q1FY13, to support INR2.5-3bn
revenues at peak levels (2x FY11).
2. Margins to expand over FY12E-14E by
90bps driven by higher contribution
from in-licensed products and scale up
in CSM business.
3. Earnings to recover post weak
H2FY12, model in ~46% CAGR over
FY12E-14E
Key risks
Poor monsoons, low pest infestation
and slowdown in off-take due to
impact on farmer profitability
Delay in upcoming CSM facility
Any order cancellation in existing CSM
order book
Our assumptions
We have modelled in 28% CAGR in
revenues over FY12E-14E
Agri-inputs revenues to grow ~25%
CAGR driven by volume expansion in
existing products and new launches
CSM business to grow a strong ~33%
CAGR in revenues driven by robust
order book and upcoming CSM facility
0
100
200
300
400
500
600
700
800
Jan
-10
Ma
r-1
0
Ma
y-1
0
Jul-1
0
Se
p-1
0
No
v-1
0
Jan
-11
Ma
r-1
1
Ma
y-1
1
Jul-1
1
Se
p-1
1
No
v-1
1
Jan
-12
Ma
r-1
2
Ma
y-1
2
Jul-1
2
Sep
-12
No
v-1
2
Jan
-13
Margins to expand over FY12E-14E by 90bps driven by higher contribution from
in-licensed products and scale up in CSM business
Earnings to recover post weak H2FY12,
model in ~46% CAGR over FY12E-14E
1
2
3
Upcoming facility in CSM to start in Q1FY13, to support INR2.5-3bn revenues at peak levels
(2x FY11)
0
2
4
6
8
10
12
14
16
18
Ap
r-0
9
Jun
-09
Au
g-0
9
Oct-
09
De
c-0
9
Fe
b-1
0
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct-
10
De
c-1
0
Fe
b-1
1
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct-
11
De
c-1
1
PI Industries
Cro
p P
rote
cti
on
43 Elara Securities (India) Private Limited
Standalone Financials (Y/E Mar) Income Statement (INR mn) FY11 FY12E FY13E FY14E
Net Revenues 7,186 8,652 11,275 14,079
EBITDA 1,225 1,482 1,985 2,528
Add:- Non operating Income 7 13 17 19
OPBIDTA 1,232 1,495 2,001 2,547
Less :- Depreciation & Amortization 152 176 262 295
EBIT 1,080 1,319 1,739 2,252
Less:- Interest Expenses 182 188 155 114
PBT 898 1,131 1,584 2,138
Less :- Taxes 257 375 396 535
Adjusted PAT 641 756 1,188 1,604
Add/Less: - Extra-ordinaries (0) 298 - -
Reported PAT 641 1,054 1,188 1,604
Balance Sheet (INR mn) FY11 FY12E FY13E FY14E
Share Capital 193 125 125 125
Reserves 1,913 3,241 4,290 5,711
Borrowings 2,484 2,030 1,720 1,270
Deferred Tax (Net) 323 323 323 323
Total Liabilities 4,913 5,719 6,458 7,429
Gross Block 3,591 4,272 5,011 5,166
Less:- Accumulated Depreciation 1,073 1,249 1,511 1,806
Net Block 2,518 3,024 3,500 3,360
Add:- Capital work in progress 321 427 125 116
Investments 20 20 20 20
Net Working Capital 2,055 2,249 2,814 3,933
Other Assets - - - -
Total Assets 4,913 5,719 6,458 7,429
Cash Flow Statement (INR mn) FY11 FY12E FY13E FY14E
Cash profit adjusted for non cash items 1,029 1,444 1,617 2,052
Add/Less : Working Capital Changes (870) (232) (619) (649)
Operating Cash Flow 159 1,212 998 1,403
Less:- Capex (913) (788) (437) (146)
Free Cash Flow (754) 424 562 1,257
Financing Cash Flow 781 (406) (553) (704)
Investing Cash Flow 6 11 15 17
Net change in Cash 32 29 23 570
Ratio Analysis FY11 FY12E FY13E FY14E
Income Statement Ratios (%)
Revenue Growth 32.6 20.4 30.3 24.9
EBITDA Growth 42.5 21.0 33.9 27.4
PAT Growth 56.6 18.0 57.1 35.0
EBITDA Margin 17.0 17.1 17.6 18.0
Net Margin 8.9 8.7 10.5 11.4
Return & Liquidity Ratios
Net Debt/Equity (x) 1.1 0.6 0.4 0.1
ROE (%) 35.3 27.6 30.5 31.3
ROCE (%) 26.1 24.6 28.3 32.2
Per Share data & Valuation Ratios
Diluted EPS (INR/Share) 25.6 30.2 47.4 64.0
EPS Growth (%) 56.6 18.0 57.1 35.0
DPS (INR/Share) 2.2 3.0 4.8 6.3
P/E Ratio (x) 19.3 16.3 10.4 7.7
EV/EBITDA (x) 12.0 9.6 7.0 5.1
EV/Sales (x) 2.1 1.6 1.2 0.9
Price/Book (x) 5.2 3.7 2.8 2.1
Dividend Yield (%) 0.5 0.6 1.0 1.3
Source: Company, Elara Securities Estimate
Revenue & margins growth trend
Source: Company, Elara Securities Estimate
Adjusted profits growth trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
17.0 17.1
17.6
18.0
17
17
18
18
19
0
5,000
10,000
15,000
FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Revenues (LHS) EBITDA Margin (RHS)
56.6
18.0
57.1
35.0
0
10
20
30
40
50
60
0
500
1,000
1,500
2,000
FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Adj PAT (LHS) PAT Growth (RHS)
35.3
27.6
30.5
31.3
26.1 24.6
28.3
32.2
20
25
30
35
40
FY11 FY12E FY13E FY14E
ROE (%) ROCE (%)
PI Industries
44 Elara Securities (India) Private Limited
Unique and differentiated business model in crop protection industry
PI Industries (PIIL) is one of the leading players in crop
protection industry and largely operates in two core
segments – agri-inputs (primarily dealing in agro
chemicals, specialty fertilisers and plant nutrients) and
custom synthesis and manufacturing (CSM), which
involves process research and contract manufacturing
activities. With more than 50 years of brand history,
strong distribution network of 25,000 retailers and 4,500
distributors, niche portfolio of 24 products and exclusive
tie-ups with several MNCs for distribution in India, PIIL
has established itself as one of the top five domestic crop
protection companies.
Focussing on core business of agri-inputs and CSM
Over FY12E, we expect PIIL to clock ~62% of revenues
from agri-inputs and ~38% from CSM. It is notable that
PIIL divested its polymer compounding division in April
2011 to French specialty chemical MNC Rhodia SA for
INR0.73bn. Set up in the 1990s, polymer division
contributed around ~10% of revenues in FY11. While the
business was witnessing modest growth in revenues, its
margins (~8-10%) were under pressure due to high
volatility in raw material prices. Hence, PIIL divested the
business in order to increase its focus on its core
competencies of agri-inputs and CSM and reduce debt
which had risen due to capex in core business.
Exhibit 1: Post divestment of polymer division,
agri-inputs constitutes ~62% of PIIL’s revenue in FY12
Source: Company, Elara Securities Research
Unique no-conflict business model has yielded significant results over FY07-11
Unlike its peers engaged in selling generics with a
portfolio of 70-80 products, PIIL has undertaken a
conscious strategy to develop a no-conflict business
model whereby it has sacrificed significant revenue
potential in agri-inputs by staying away from
aggressively selling generics (PIIL has a niche portfolio of
24 products only) and competing directly with MNCs in
the domestic and export markets. With utmost regard for
IPs, PIIL has developed strong relations with MNCs which
it leverages to in-license molecules to sell in domestic
markets and provide custom synthesis solutions to MNCs
for their patented molecules.
Exhibit 2: PIIL has developed a unique no-conflict
business model with high regard for IPs
Source: Company, Elara Securities Research
Its unique business model has yielded exponential
performance for PIIL over the last five years whereby it
has witnessed 23%, 43% and 95% CAGR in revenue,
EBITDA and PAT over FY07-11.
Exhibit 3: Driven by its no-conflict business model,
PIIL has witnessed exponential growth over FY07-11
Source: Company, Elara Securities Research
Agri Inputs 62%
CSM 38%
45 63
231
409
641
0
100
200
300
400
500
600
700
0
5
10
15
20
25
30
35
FY07 FY08 FY09 FY10 FY11
(IN
R m
n)
(Yo
Y %
)
PAT (RHS) Sales (LHS)
CSM Agri Inputs
Deals in agro chemicals,
plant nutrients and
specialty fertilisers
Has a niche portfolio of
24 products
Over 50 years of
experience, 25,000+
retail base and 4,500
distributors
Has consciously stayed
away from MNC domain
and aggressively selling
generics to build a no-
conflict business model
Strong process research
and low cost
manufacturing with
utmost respect for IPs
Significant relations with
MNCs
Order book of
USD325mn - 6x FY11
sales
Product pipeline largely
focused on patented,
high value, complex
chemistry and early
stage molecules (longer
life cycles)
Investment rationale
Unique and differentiated business model in crop protection industry
Niche portfolio and strong pipeline to drive growth in agri-inputs
Growth in CSM to be aided by strong order book and upcoming facility
PI Industries
PI Industries
Cro
p P
rote
cti
on
45 Elara Securities (India) Private Limited
Niche portfolio and strong pipeline to drive growth in agri-inputs
Under its agri-inputs division, PIIL manufactures and
markets various agro-chemicals, specialty fertilisers and
plant nutrients from its 3 formulations and 2 technical
facilities based in Jammu and Panoli, Gujarat.
However, unlike its peers which sell a basket of 70-80
products, PIIL has a niche portfolio of 24 products which
include 5-6 in-licensed molecules (tie ups with MNCs to
co-market their products in India). Top 10 products of
PIIL account for 80% of revenue and segment-wise it
derives ~50% revenue from insecticides, ~30% from
herbicides and rest from fungicides, plant nutrients and
specialty fertilisers.
Exhibit 4: PIIL derives ~50% of its revenues from
insecticides but herbicides is growing faster
Source: Company, Elara Securities Research
PIIL sells products that are innovative and need concept
selling through strong technical knowledge. The
formulation quality and physical appearance are
markedly different from the competing same molecule
formulations (e.g. suspension color, shine of the
products). Hence, most of its brands occupy No1 or No2
slot in their respective categories. Some of its key
products include Nominee gold (rice herbicide –
INR1bn+ revenues), Biovita (plant nutrient – INR0.5bn+
revenues), Foratox (insecticide) and Roket (insecticide).
Exhibit 5: Product portfolio of PIIL in agri-inputs
Segment Key Brands Key Crops
Insecticides Foratox, Jumbo, Lepido, Fosmite, Simba, Maxima
Cotton, Rice, Fruits & Vegetables
Herbicides Nominee Gold, Solaro, Jupiter, Alcor
Rice, Wheat, Soybean & Sugarcane
Fungicides Kitazin, Sanit Rice, Potato, Grapes, Chillies, Fruits & Vegetables
Plant Nutrients
Biovita, Dispel Multi-crop
Source: Company, Elara Securities Research
Higher mix of in-licensed products key to growth
Agri-inputs division clocked revenue of INR4.1bn in FY11
and accounted for ~64% of overall revenues (excluding
polymer division sales). While ~60% of revenues came
from generics (largely where PIIL also manufactures the
technical), remaining ~40% came from in-licensed
products which are all purchase and sales transactions.
PIIL purchases these products from its principals at a
certain price and formulates/manufactures and packs
them under its own brand to sell in Indian markets at
PIIL’s price point. Most of these deals have an exclusive
license lasting 8-10 years minimum.
Exhibit 6: PIIL derives ~40% of revenues from higher
margin in-licensed products (3 years ago was ~10%)
Source: Company, Elara Securities Research
Strong relations with MNCs: PIIL sells around 5-6
in-licensed products in tie-ups to MNCs like Bayer,
BASF and Kumiai Chemicals.
Success of Nominee Gold indicates huge
potential: The potential of in-licensed products can
be gauged from success of Nominee Gold, a rice
herbicide, which was launched in FY10 in a tie up
with Kumiai Chemicals and has become a
blockbuster in just two years clocking over ~INR1bn
revenues.
Two new launches in FY12 with Bayer and BASF:
PIIL launched two new in-licensed products in FY12 -
one insecticide launched in tie-up with Bayer called
Voltage (Spiromesifen) and one fungicide launched
in tie-up with BASF called Clutch. Both are high
potential products with insecticide catering to crops
like tea, chillies, etc. and fungicide catering to
vegetables.
Strong pipeline: PIIL has filed for registration of 3
new molecules (expected to commercially launch in
FY13) and signed 4 new agreements with respective
patent holders to evaluate these products in India.
Overall PIIL has a pipeline of 7-8 new molecules and
the management expects the contribution of
in-licensed products to rise to ~50% and gradually to
70%-80% over a 3-5 year period.
Insecticides 50%
Herbicides 30%
Others 20%
Generics 60%
In-licensed 40%
PI Industries
46 Elara Securities (India) Private Limited
Over FY12E-14E, we expect PIIL to register ~25% CAGR
in revenues of agri-inputs division driven by volume
expansion in key existing products like Nominee Gold
and Biovita, expansion of distribution network in new
markets and a strong pipeline of in-licensed products
(expect 2 new launches each year over FY12E-14E).
Exhibit 7: Agri inputs division to clock ~25% CAGR in
revenues over FY12E-14E
Source: Company, Elara Securities Estimate
Growth in CSM to be aided by strong order book and upcoming facility
Apart from selling agri-inputs, PIIL also operates CSM
division which entails dealing in custom synthesis (CSM)
and contract manufacturing (CRAMs) of chemicals
including techno commercial evaluation of chemical
processes, process development, lab & pilot scale up as
well as commercial production.
Over the last decade, PIIL has emerged as the largest
CSM player in agro chemicals driven by its unique
no-conflict model, utmost regard for IPs and strong
relations with MNCs across geographies (especially
Europe and Japan). During FY06-11, CSM division has
witnessed revenue CAGR of ~35% and clocked revenue
of ~INR2.3bn accounting for ~36% revenues in FY11
(excluding polymer division).
Exhibit 9: CSM division has witnessed revenue CAGR
of ~35% over FY06-11
Source: Company, Elara Securities Research
Unique model backed by strong competencies
PIIL’s CSM business is unique and enjoys strong
competencies vis-à-vis other CRAMs players (toll
manufacturers) as PIIL’s product pipeline in CSM is largely
focussed on patented, high value, complex chemistry
and early stage molecules (longer life cycles).
3.0
4.1
5.3
6.8
8.3
0
5
10
15
20
25
30
35
40
0
1
2
3
4
5
6
7
8
9
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R b
n)
Revenue (LHS) YoY (RHS)
0.5 0.7
1.4
1.9
2.3
0.0
0.5
1.0
1.5
2.0
2.5
0
10
20
30
40
50
60
70
80
90
FY07 FY08 FY09 FY10 FY11
(INR
bn
)
(%)
Revenue (RHS) YoY (LHS)
Exhibit 8: How CSM business works...and PI lends value
General work-flow in CSM
Customer enquiry
Pre-feasibility study
Sign secrecy agreement
Process evaluation
Process & cost review
Sample validation
SOP & validation
Customer approval/agreement
Bench scale trials
Desktop costing
Customer approval
Pilot/Kilo lab scale up
Detailed plant engg.
Plant erection & installing
Raw material procurement
Commercial production
Typical order flow from inception to commercialisation
Dec-09
Feb-10
Mar-10
Jun-10
Aug-10
Nov-10
Apr-11
Enquiry received
Sample approved by
customer
1st sample sent
to customer 1
st Commercial
Order (5MT)
3rd
Commercial Order (200MT)
(Supply up to Mar-12)
2nd
Commercial Order (57 MT) (Supply up to
Mar-11)
Signed Agreement of
1500 mt. ($36m) for 3 yrs)
Source: Company, Elara Securities Research
PI Industries
Cro
p P
rote
cti
on
47 Elara Securities (India) Private Limited
Strong process research capabilities: PIIL is well
supported by strong research capabilities in process
research scale up and contract manufacturing and
world class research and manufacturing set up. It
has 5 multi-product plants at its Panoli facility
supported by captive gas based power plant. It also
has a dedicated R&D facility at Udaipur and strong
scientific capabilities including 100 scientists.
Involvement from early stage in life cycle: PIIL
essentially works with innovators in the area of
process research for newly discovered molecules for
scale up and commercialisation. This positions PIIL at
the early stage in the life cycle of a molecule
enabling it to capitalise on complete product life
cycle. PIIL is the only CSM business in the country
where up to 95% of the molecules are patented or
are at an early stage of commercialisation.
Generally, 1st/2nd supplier: As a prudent strategy
innovator companies keep 2-3 sources across
geographies mainly for IP protection and
compliance. PIIL enjoys the status of 1st/2nd source
supplier for most of its molecules under contract.
Strong order book of ~USD325mn
PIIL has a strong order book of ~USD325mn, as on
Q2FY12, in its CSM division executable over next 2-4
years. This is close to ~6x FY11 CSM revenues of
INR2.3bn. Order breakup in terms of geography stood at
– 65%-70% from Europe, 20% from Japan and rest from
other continents.
Exhibit 10: Majority clients in CSM are either
European or Japanese players
Source: Company, Elara Securities Research
Currently, majority clients are agro-chem (60%-70%).
However, revenues from imaging, electronics and
pharma are on the rise. On an average, at any given
point in time, PIIL has around 10-12 products at
commercial stage and 24-25 products under R&D phase.
Average revenue potential for PIIL in CSM for a product,
on average, is USD5-20m. Generally, more than 60% of
products under development and process research move
to commercial phase (manufacturing).
Upcoming facility at Jambusar to back order book
PIIL is setting up a new facility at Jambusar, Gujarat. It
has already taken 22.3 acre land in Sterling SEZ and
expected capex for the facility is ~INR1.25bn. The plant is
expected to commence operations by Q1FY13 and will
enjoy full income tax and excise benefits. PIIL has already
tied up with customers/contracts for this plant as
indicated by the scale up in order book.
Management has highlighted that the upcoming facility
at peak utilisation can generate around ~INR2.5-3bn in
revenues (2-2.5x asset turnover). Hence, with existing
investment of INR1.5-2bn in CSM division coupled with
Jambusar facility, PIIL is well placed to generate
~INR6-7bn at peak utilisation levels – 2.5x-3x FY11
revenues.
Strong 33% CAGR in CSM revenues over FY12E-14E
Over FY12E-14E, we are modelling CSM division
revenues to grow at a CAGR of ~33% driven by –
1) unique no-conflict business model backed by utmost
respect for IPs, 2) strong relations with MNCs, 3) healthy
and growing order book of USD325mn (6x FY11
revenues) and 4) upcoming facility to start in Q1FY13
(can support INR2.5-3bn revenues at peak levels).
Further, we highlight volume commitment and
take-or-pay clause in supply agreement ensures risk of
failure of a molecule lies with the innovator and PI
receives fixed return on investment.
Exhibit 11: Modeling CSM division revenues to grow
at a CAGR of ~33% over FY12E-14E
Source: Company, Elara Securities Estimate
Europe 65%
Japan 20%
Others 15%
1.9 2.3
3.3
4.5
5.8
0
5
10
15
20
25
30
35
40
45
0
1
2
3
4
5
6
7
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R b
n)
Revenue (LHS) YoY (RHS)
PI Industries
48 Elara Securities (India) Private Limited
Weak H2FY12 but expect recovery in earnings in FY13-14E
During H1FY12 PIIL posted a strong growth of ~ 43%
YoY in revenues (~60% like-to-like excluding polymer
revenues) aided by a robust ~36% YoY growth in
agri-inputs (grew only ~10%-12% in Q2FY12 due to poor
mix owing to erratic monsoons) and ~135% YoY growth
in CSM division (partially aided by low base) on account
of robust commercial production of existing pipeline.
Recurring earnings (excluding exceptional gain of
INR300mn from sale of polymer division) grew a robust
~38% YoY aided by ~120bps expansion in margins
(despite weaker margins in agri-inputs in Q2FY12 due to
weaker product mix) due to higher contribution of CSM
business (enjoys higher margins vs. agri-inputs).
However, owing to significant deficiency (~50% below
LPA) of post season monsoons (Oct-Dec) in key crop
protection consuming state of Andhra Pradesh leading
to lower paddy acreage and squeeze in farmer
profitability due to crash in prices of vegetables like
onions and potatoes, we expect PIIL to post weaker
H2FY12E with ~3% revenue growth (14% like-to-like)
and ~4% earnings growth as – 1) base effect catches up
in CSM division (modeling in just ~5% YoY growth in
H2FY12E), 2) OPM contracts ~100bps due to weaker
revenue growth and poor product mix (lower usage of
herbicides/fungicides).
Exhibit 12: H2FY12 to witness pressure on revenue
and earnings
Source: Company, Elara Securities Estimate
Notwithstanding quarterly volatility, during the period
FY12E-14E, we expect PIIL to post a robust ~28% CAGR
in revenues driven by – 1) 25% CAGR in agri-inputs
business aided by volume expansion in existing products
and robust pipeline of new products and 2) ~33% CAGR
in CSM division aided by unique no-conflict business
model, strong order book of USD325mn and upcoming
facility at Jambusar in Q1FY13.
Exhibit 13: Revenue CAGR of ~28% over FY12-14E
aided by CAGR of 25% in agri-inputs and 33% in CSM
Source: Company, Elara Securities Estimate
Exhibit 14: Key revenue growth assumptions
FY11 FY12E FY13E FY14E
Revenue (INR mn)
Agri-Inputs 4,120 5,333 6,811 8,275
CSM 2,320 3,307 4,464 5,803
Polymer 746 12 - -
Total Revenue 7,186 8,652 11,275 14,078
YoY Growth (%)
Agri-Inputs 37.5 29.5 27.7 21.5
CSM 21.5 42.5 35.0 30.0
Polymer 45.9 - - -
Total Revenue 32.6 20.4 30.3 24.9
% of Total
Agri-Inputs 57 62 60 59
CSM 32 38 40 41
Polymer 10 0 - -
Source: Company, Elara Securities Estimate
Margins to expand ~90bps over FY12-14E aided by rising mix of CSM revenues and in-licensed products
Over the period FY12E-14E, we expect margins to
expand by 90bps (management guidance of ~100-
200bps) from 17.1% in FY12E to 18% in FY14E driving a
robust ~31% growth in EBITDA aided by:
Higher contribution from in-licensed products in
agri inputs – Margins from in-licensed products are
at ~25%-30% double of those in generics at ~15%.
Driven by launches and growth in existing in-
licensed products, we expect contribution of in-
43
3
38
4
0
5
10
15
20
25
30
35
40
45
H1FY12 H2FY12
(%)
Sales Growth PAT Growth
5,4
17
7,1
86
8,6
52
11
,27
5
14
,07
9
0
5
10
15
20
25
30
35
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Revenue (LHS) YoY (RHS)
Valuation & Recommendation
Earnings to pick up post weak H2FY12, model in ~46% CAGR over FY12E-14E
Unique model and strong order book to sustain valuations
Initiate with Buy with a Sept-13 TP of INR669
PI Industries
Cro
p P
rote
cti
on
49 Elara Securities (India) Private Limited
licensed products in overall agri-inputs to rise to
~50% by FY14E boosting divisional margins.
Rising contribution of CSM – CSM business enjoys
~20% margins, around ~300-400bps higher than
margins in agri-inputs which stand at ~16.5%-17%.
Over FY12E-14E, we expect contribution of CSM to
overall revenues to rise from ~38% to ~41% firming
up margins.
Exhibit 15: Modelling in recovery in agri-inputs
margins and stable margins in CSM over FY12-14
Source: Company, Elara Securities Estimate
Exhibit 16: Overall OPM to expand 90bps YoY driving
robust ~31% CAGR in EBITDA
Source: Company, Elara Securities Estimate
Earnings growth strong at ~46% CAGR driven by lower tax and interest costs
During the period FY12E-14E, we expect PIIL to post a
strong ~46% CAGR in earnings aided by – 1) ~25%
CAGR in revenues, 2) 90bps expansion in margins,
3) ~200-250bps savings in tax rate due to scale up at
upcoming facility in Jambusar which will benefit from
income tax and excise benefits, 4) halving of interest
costs driven by reduction in debt due to repayment (on
account of cash flow received from sale of polymer
division) and high free cash flow generation over
FY12E-14E.
Exhibit 17: Model in strong earnings CAGR of ~46%
over FY12E-14E post 18% YoY growth in FY12
Source: Company, Elara Securities Estimate
Exhibit 18: FY14E EPS (INR) sensitivity to sales CAGR
and net margin expansion over FY12E-14E F
Y1
2-1
4 n
et
ma
rgin
exp
an
sio
n
FY14 EPS FY12-14 sales CAGR
21.5% 24.5% 27.5% 30.5% 33.5%
205bps 55.1 57.8 60.6 63.5 66.5
235bps 56.6 59.4 62.3 65.3 68.3
265bps 58.1 61.0 64.0 67.1 70.2
295bps 59.7 62.6 65.7 68.8 72.0
325bps 61.2 64.2 67.4 70.6 73.9
Source: Elara Securities Estimate
Initiate with a Buy with a Sept-2013 TP of INR669
Over the last 3 months, PIIL has witnessed a correction of
~15% significantly underperforming Sensex (down
~6%). We attribute this correction to concern over a
weaker H2FY12. We highlight that we have already
factored in a weaker H2 but do not expected it to persist
in FY13 unless disrupted by a weak monsoon and
sustained steep fall in crop prices (especially fruits and
vegetables).
Exhibit 19: PIIL has witnessed steep correction over
the last 3 months retracing back to P/E of 10-12x
Source: Bloomberg, Company, Elara Securities Research
15.6
16.6
15.5
16.4 16.7
18.5
20.0 19.9 19.8 20.0
15
16
17
18
19
20
21
FY10 FY11 FY12E FY13E FY14E
(%)
Agri-Inputs CSM
86
0
1,2
25
1,4
82
1,9
85
2,5
28
15.9
17.0 17.1
17.6 18.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
15
515
1,015
1,515
2,015
2,515
3,015
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
EBITDA (LHS) OPM (RHS)
40
9
64
1
75
6
1,1
88
1,6
04
0
10
20
30
40
50
60
70
80
90
15
215
415
615
815
1,015
1,215
1,415
1,615
1,815
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
PAT (LHS) YoY (RHS)
0
2
4
6
8
10
12
14
16
18
Ap
r-0
9
Jun
-09
Au
g-0
9
Oct-
09
De
c-0
9
Fe
b-1
0
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct-
10
De
c-1
0
Fe
b-1
1
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct-
11
De
c-1
1
(x)
PI Industries
50 Elara Securities (India) Private Limited
Over the last 2 years, PIIL has witnessed significant
re-rating driven by success of a unique no-conflict model,
strong pipeline of in-licensed products and blockbuster
success of Nominee Gold, sustained order book scale up
in CSM business and exponential growth in earnings.
Exhibit 20: Over the last 2 years, PIIL has witnessed
significant re-rating to a P/E band of 12-15x
Source: Bloomberg, Company, Elara Securities Research
Going ahead, we expect the re-rating in PIIL to sustain
driven by ~1) robust ~46% CAGR in earnings over
FY12E-14E, 2) strong return ratios in excess of ~30% and
3) modest FCF generation over FY12E-14E as major
capex (in upcoming CSM facility) will be incurred in FY12.
We initiate coverage on PIIL with a Buy rating and a
Target Price of INR669 based on P/E of 12x (25%
discount to Rallis) to Sept-13 EPS of INR55.7 indicating an
upside of ~36%.
Exhibit 21: Major capex to get complete in FY12,
expect modest FCF generation over FY12E-14E
Source: Company, Elara Securities Estimate
Exhibit 22: Strong return ratios to support re-rating in
valuations
Source: Company, Elara Securities Estimate
Upsides from tie-up with Sony not factored in our numbers but holds long-term potential
In January 2011 PIIL set up a joint research laboratory at
Udaipur (first of its kind) with one of the largest
electronics companies in the world - Sony Corporation of
Japan for carrying out research in the area of synthetic
organic chemicals for applications in the electronics
industry.
We believe this is a unique initiative further
strengthening the credibility of PIIL in CSM business.
However, we have not factored in any numbers from the
venture and the same holds an upside element to our
estimates.
0
100
200
300
400
500
600
700
Ap
r-0
9
Jun
-09
Au
g-0
9
Oct-
09
De
c-0
9
Fe
b-1
0
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct-
10
De
c-1
0
Fe
b-1
1
Ap
r-1
1
Jun
-11
Au
g-1
1
Oct-
11
De
c-1
1
Sh
are
Pri
ce
(IN
R)
15x
12x
9x
6x
91
3
78
8
43
7
14
6
15
9
1,2
12
99
8 1
,40
3
(7
54
)
42
4
56
2
1,2
57
(1,000)
(500)
0
500
1,000
1,500
2,000
FY11 FY12E FY13E FY14E
(IN
R m
n)
Capex Op Cash Flow Free Cash Flow
35.3
27.6
30.5
31.3
26.1 24.6
28.3
32.2
20
22
24
26
28
30
32
34
36
38
FY11 FY12E FY13E FY14E
ROE (%) ROCE (%)
PI Industries
Cro
p P
rote
cti
on
51 Elara Securities (India) Private Limited
Board of Directors & Management
Salil Singhal, Chairman
Singhal has lead PIIL since 1979. A reputed agro
chemical leader, he has served as the chairman of
Pesticides Association of India (now Crop Care
Federation of India) for 20 years, a member of the
Executive Committee of FICCI as also chairman of its
Environment Committee for 5 years. Currently, he is Co-
Chairman of CII National Council on Agriculture, and has
been a member of the National Council of CII for the past
5 years. Singhal also serves on the Boards of Wolkem
India Ltd, Historic Resorts Hotels Pvt Ltd, The Lake Palace
Hotels and Motels Pvt Ltd, Secure Meters Ltd, Somany
Ceramics Ltd, PILL Finance & Investment Ltd, Usha Martin
and Secure International Holdings Pte Ltd.
Mayank Singhal, MD & CEO
An Engineering Management Graduate from the UK, he
joined PIIL in 1996. He was appointed as Jt. MD in 2004
and MD & CEO effect from December, 2009. Singhal has
worked at plant level for 2 years and has been
responsible for the rapid growth and expansion of the
Company’s manufacturing and marketing. He is also a
Director on the Boards of PI Life Science Research Ltd,
PILL Finance and Investment Ltd and Samaya Investment
and Trading Pvt Ltd.
Anurag Surana, Whole-time Director
Surana joined PIIL in 1995. He has handled the polymer
compounding business and later managed the entire
manufacturing operations of the Company at Panoli. His
current responsibilities include managing the company’s
custom synthesis business and overseeing
manufacturing operations and projects. He is also a
Director on the Boards of PI Life Science Research Ltd,
PILL Finance and Investments Ltd and WILL Investments
Ltd.
P N Shah, Director
Past President of the Institute of Chartered Accountants
of India (ICAI), Shah is a partner of Shah & Co, a CA Firm
and has an in-depth understanding of various Corporate
and Taxation Laws. Currently, he is also on the Board of
Indo Count Industries Ltd, Secure Meters Ltd, Taparia
Tools Ltd, Wolkem India Ltd and Pranavaditya Spinning
Mills Ltd.
Narayan K Seshadri, Director
A Chartered Accountant, Seshadri started his career with
Arthur Anderson in the business consultancy area.
Subsequently, he joined KPMG and became the
Managing Partner of the business advisory practice of
the firm in India. His expertise is in the areas of strategy
planning good management practices and financial
engineering. He is also on the Board of Halcyon
Resources and Management Pvt Ltd, Development Credit
Bank, DHFL Venture Capital India Pvt Ltd, HGB Holdings
Pvt Ltd, Magma Fincrop Ltd, Kalpataru Power
Transmission Ltd, WABCO TVS India Ltd, SBI Capital
Markets Ltd, Radiant Life Care Pvt Ltd., Halcyon
Enterprises Pvt Ltd, IRIS Business Services Ltd and TVS
Investments Ltd.
Raj Kaul, Director
While Kaul began his career with NELCO a TATA
Company, he joined the agro chemical business world at
Ciba India Ltd, and later moved to Bayer India now
known as Bayer Crop Sciences where he was its
Executive Director & CEO for their crop protection
business. He was later transferred to Bayer AG
(Leverkusen, Germany) and headed M&A division of M/s.
Bayer Crop Sciences. Under his tenure, he concluded
over 200 M&A transactions for Bayer Crop Sciences in
the area of agro chemicals and Bio-technology, and
brings his global knowledge and understanding of the
agro chemical business to the Board. Currently, he is also
on the Board of Gowan Company, Yuma in Arizona
(USA).
Company description
Incorporated in 1947, PI Industries Limited (PIIL), erstwhile Pesticides India, was set up by late Mr P.P Singhal as
edible oil refinery unit and later ventured into agro chemicals formulations business. PIIL is one of the leading
players in crop protection industry and largely operates in two core segments – agri-inputs (primarily dealing in
agro chemicals, specialty fertilisers and plant nutrients) and custom synthesis (CSM), which involves process research
and contract manufacturing activities.
With more than 50 years of brand history, strong distribution network of 25,000 retailers and 4,500 distributors,
niche portfolio of 24 products and exclusive tie-ups with several MNCs for distribution in India, PIIL has established
itself as one of the top five domestic crop protection companies. During FY12, we expect PIIL to derive ~62%
revenue from Agri-inputs and ~38% from CSM. We highlight, PIIL divested its polymer compounding division in
April 2011 to French specialty chemical MNC Rhodia SA for a consideration of INR0.73bn.
PI Industries
52 Elara Securities (India) Private Limited
Coverage History
Date Rating Target Price Closing Price
1
4-Jan-2012 Buy INR669 INR493
Guide to Research Rating
BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
0
100
200
300
400
500
600
700
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12
Not Covered Covered
1
Anand Shah • [email protected] • +91 22 4062 6821
Glo
ba
l M
ark
ets
Re
sea
rch
Elara Securities (India) Private Limited
Partnering its way to success
Strong portfolio and distribution to act as a base for growth
Dhanuka Agritech (Dhanuka) is solely into selling formulations in the
domestic markets. It enjoys a strong pan India distribution network
with 6,500 direct accounts and a reach of 10mn farmers. Over the
years, Dhanuka has developed strong relations with farmers via
various connect initiatives imparting technical and product knowledge
to boost pesticide consumption across segments and crops. With a
strong portfolio of 80+ brands and presence across all major crops,
Dhanuka features amongst the top five agro chemical players in the
branded domestic market.
Contribution of herbicides to rise to ~39% by FY14E
While insecticides constitute the largest chunk (48%) of revenues for
Dhanuka, herbicides has emerged as a faster growing segment
(owing to success of Targa Super, accounts for ~18-20% of revenues)
for Dhanuka and we expect the same trend to continue aided by
rising use of herbicides due to labour shortages, volume expansion in
existing products and new launches in this segment. Hence, we expect
herbicides to register a robust ~30% CAGR over FY12E-14E and its
contribution in overall products to rise to ~39% from current ~33%.
MNC tie-ups to provide additional lever
Over the years, Dhanuka has entered into various tie-ups and strategic
alliances with global agro-chem players to market/distribute their
products in India. Dhanuka’s top 3 selling products - Targa Super (18-
20% of revenues), Caldan (10%) and Omite (5%) are all tie-ups with
MNCs and overall such tie-up products account for ~55% of revenues.
Such products enjoy better margins (~15-30%) vis-à-vis pure generics
(10-15%) and enjoy a higher acceptability amongst farmers. In FY12,
Dhanuka has already launched 4 new products under tie-ups and
Dhanuka has a high-potential product pipeline with 5-6 specialty
products to be launched over the next 2-3 years.
Valuation We initiate coverage on Dhanuka with a Buy rating and a Target
Price of INR128 based on P/E of 8x (50% discount to Rallis, ~15%
premium to its historical average of 7x P/E) to Sept-13 EPS of INR16
indicating an upside of ~41%. Going ahead, we expect Dhanuka to
sustain valuations in the range of ~7x-8x aided by – 1) strong tie-
ups with MNCs, 2) promising new product pipeline in specialty
products, 3) robust ~27% CAGR in earnings over FY12E-14E,
4) strong return ratios in excess of ~30% and 5) modest FCF
generation due to benign capex over FY12E-14E.
Dhanuka 1 yr fwd P/E bands
Source: Bloomberg, Company, Elara Securities Research
Key Financials (Standalone) Y/E Mar (INR mn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)
FY10 4,075 21.1 577 14.2 363 56.6 7.3 43.9 39.4 12.5 8.9
FY11 4,862 19.3 711 14.6 511 40.7 10.2 38.2 34.0 8.9 7.2
FY12E 5,329 9.6 755 14.2 544 6.4 10.9 28.6 28.3 8.4 6.6
FY13E 6,491 21.8 973 15.0 720 32.4 14.4 30.4 31.8 6.3 4.8
FY14E 7,809 20.3 1,197 15.3 882 22.5 17.6 29.7 33.3 5.2 3.6
Source: Company, Elara Securities Estimate
India | Crop Protection 9 January 2012
Initiating Coverage
Dhanuka Agritech
Rating : Buy Target Price : INR128
Upside : 41%
CMP : INR91 (as on 4 January 2012)
Key data*
Bloomberg /Reuters Code DAGRI IN/DHNP.BO
Current /Dil. Shares O/S (mn) 50/50
Mkt Cap (INRbn/US$mn) 5/85
Daily Vol. (3M NSE Avg.) 21,971
Face Value (INR) 2
1 US$= INR53
Source: Bloomberg ; * As on 04 January 2012
Price & Volume
Source: Bloomberg
Share holding (%) Q3FY11 Q4FY11 Q1FY12 Q2FY12
Promoter 75.0 75.0 75.0 75.0
Institutional Investors 8.3 8.3 8.6 8.6
Other Investors 7.9 8.2 7.0 6.7
General Public 8.9 8.6 9.5 9.8
Source: BSE
Price performance (%) 3M 6M 12M
Sensex 0.6 (15.3) (21.8)
Dhanuka Agritech (8.8) 1.7 13.3
Rallis India (30.5) (21.7) (13.8)
PI Industries (13.6) 31.1 88.7
Insecticides India 5.6 19.1 78.6
Source: Bloomberg
0
50
100
150
200
Ap
r-0
5
Se
p-0
5
Fe
b-0
6
Jul-0
6
De
c-0
6
Ma
y-0
7
Oct-
07
Ma
r-0
8
Au
g-0
8
Jan
-09
Jun
-09
No
v-0
9
Ap
r-1
0
Se
p-1
0
Fe
b-1
1
Jul-1
1
De
c-1
1
(IN
R)
13x
10x
7x
4x
0
200
400
600
800
60
70
80
90
100
110
120
Jan-11 May-11 Sep-11 Jan-12
Vol. in 000s (RHS) Dhanuka Agritech (LHS)
Dhanuka Agritech
54 Elara Securities (India) Private Limited
Valuation trigger
Source: Bloomberg, Elara Securities Estimate
Valuation overview
Methodology INR/Share
Standalone PAT Sept -2013 (INR mn) 801
No of shares (mn) 50.0
EPS Sept-2013E 16.0
Assigned P/E multiple (x) 8.0
Fair value 128
CMP 91
Potential Upside (%) 40.8
Source: Elara Securities Estimate
Valuation driver – Dhanuka’s one year forward P/E chart
Source: Elara Securities Research
Investment summary
One of the largest distribution
network in crop protection – 6,500
direct accounts and farmer reach of
10mn.
Strong portfolio of products across
segments, crops and geographies.
Strong FCF generation over
FY12E-14E as capex expected to
remain benign
Valuation trigger
1. FY13E-14E to witness launch of 3-4
new specialty molecules (2 with Nissan
and 1 with DuPont).
2. Margins to expand over FY12E-14E by
110bps driven by launch of new
specialty molecules and operating
leverage.
3. Earnings to recover post weak
H2FY12, model in ~27% CAGR over
FY12E-14E
Key risks
Poor monsoons, low pest infestation
and slowdown in off-take due to
impact on farmer profitability
Delay in launching new specialty
molecules
Our assumptions
We have modeled in 21% CAGR in
revenues over FY12E-14E
We expect herbicides to grow the
fastest at ~30% CAGR and its
contribution to rise to ~39% in FY14E
Model in a benign capex of
INR100-150mn (in-line with
management guidance)
40
50
60
70
80
90
100
110
120
130
140
Jan
-10
Ma
r-1
0
Ma
y-1
0
Jul-1
0
Se
p-1
0
No
v-1
0
Jan
-11
Ma
r-1
1
Ma
y-1
1
Jul-1
1
Se
p-1
1
No
v-1
1
Jan
-12
Ma
r-1
2
Ma
y-1
2
Jul-1
2
Sep
-12
No
v-1
2
Jan
-13
Margins to expand over FY12E-14E by 110bps
driven by launch of new specialty molecules and
operating leverage
Earnings to recover post weak H2FY12, model in
~27% CAGR over FY12E-14E
1
2
3
FY13E-14E to witness launch of 3-4 new
specialty molecules (2 with Nissan and 1
with DuPont)
0
5
10
15
20
25
Ap
r-0
4
Au
g-0
4
De
c-0
4
Ap
r-0
5
Au
g-0
5
De
c-0
5
Ap
r-0
6
Au
g-0
6
De
c-0
6
Ap
r-0
7
Au
g-0
7
De
c-0
7
Ap
r-0
8
Au
g-0
8
De
c-0
8
Ap
r-0
9
Au
g-0
9
De
c-0
9
Ap
r-1
0
Au
g-1
0
De
c-1
0
Ap
r-1
1
Au
g-1
1
De
c-1
1
Dhanuka Agritech
Cro
p P
rote
cti
on
Elara Securities (India) Private Limited 55
Standalone Financials (Y/E Mar) Income Statement (INR mn) FY11 FY12E FY13E FY14E
Net Revenues 4,862 5,329 6,491 7,809
EBITDA 711 755 973 1,197
Add:- Non operating Income 75 60 72 58
OPBIDTA 786 815 1,045 1,254
Less :- Depreciation & Amortization 49 49 57 62
EBIT 737 766 989 1,192
Less:- Interest Expenses 65 55 47 40
PBT 673 711 941 1,153
Less :- Taxes 161 167 221 271
Adjusted PAT 511 544 720 882
Add/Less: - Extra-ordinaries - - - -
Reported PAT 511 544 720 882
Balance Sheet (INR mn) FY11 FY12E FY13E FY14E
Share Capital 100 100 100 100
Reserves 1,605 2,002 2,535 3,195
Borrowings 602 527 452 377
Deferred Tax (Net) 28 28 28 28
Total Liabilities 2,334 2,657 3,115 3,699
Gross Block 630 666 729 801
Less:- Accumulated Depreciation 247 295 352 414
Net Block 383 371 378 387
Add:- Capital work in progress 8 33 22 16
Investments 0 0 0 0
Net Working Capital 1,936 2,246 2,708 3,289
Other Assets 7 7 7 7
Total Assets 2,334 2,657 3,115 3,699
Cash Flow Statement (INR mn) FY11 FY12E FY13E FY14E
Cash profit adjusted for non cash items 614 649 818 967
Add/Less : Working Capital Changes (774) (327) (269) (377)
Operating Cash Flow (159) 322 549 591
Less:- Capex (43) (62) (52) (66)
Free Cash Flow (203) 260 497 525
Financing Cash Flow 225 (247) (269) (302)
Investing Cash Flow 7 8 15 25
Net change in Cash 29 20 243 248
Ratio Analysis FY11 FY12E FY13E FY14E
Income Statement Ratios (%)
Revenue Growth 19.3 9.6 21.8 20.3
EBITDA Growth 23.3 6.2 28.9 23.0
PAT Growth 40.7 6.4 32.4 22.5
EBITDA Margin 14.6 14.2 15.0 15.3
Net Margin 10.5 10.2 11.1 11.3
Return & Liquidity Ratios
Net Debt/Equity (x) 0.3 0.2 0.1 (0.1)
ROE (%) 38.2 28.6 30.4 29.7
ROCE (%) 34.0 28.3 31.8 33.3
Per Share data & Valuation Ratios
Diluted EPS (INR/Share) 10.2 10.9 14.4 17.6
EPS Growth (%) 40.7 6.4 32.4 22.5
DPS (INR/Share) 2.0 2.5 3.2 3.8
P/E Ratio (x) 8.9 8.4 6.3 5.2
EV/EBITDA (x) 7.2 6.6 4.8 3.6
EV/Sales (x) 1.0 0.9 0.7 0.6
Price/Book (x) 2.7 2.2 1.7 1.4
Dividend Yield (%) 2.2 2.7 3.5 4.2
Source: Company, Elara Securities Estimate
Revenue & margins growth trend
Source: Company, Elara Securities Estimate
Adjusted profits growth trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
14.6
14.2
15.0
15.3
14
14
15
15
16
0
2,000
4,000
6,000
8,000
10,000
FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Revenues (LHS) EBITDA Margin (RHS)
40.7
6.4
32.4
22.5
0
10
20
30
40
50
0
200
400
600
800
1,000
FY11 FY12E FY13E FY14E
(IN
R m
n)
Adj PAT (LHS) PAT Growth (RHS)
38.2
28.6
30.4 29.7
34.0
28.3
31.8 33.3
20
25
30
35
40
FY11 FY12E FY13E FY14E
ROE (%) ROCE (%)
Dhanuka Agritech
56 Elara Securities (India) Private Limited
Strong portfolio and distribution network to act as a base for growth
Dhanuka Agritech, a 25 years old agro chemical
company, is solely into selling formulations (no presence
in technicals) in the domestic markets (no exports). It
enjoys a strong pan India distribution network with
6,500 direct accounts (10-15% are distributors, rest
dealers) and a reach of 10mn farmers. The company has
three state of the art facilities located at Sanand
(Gujarat), Udhampur (J&K) and Gurgaon (Haryana)
catering to the demand for Dhanuka brand of products.
Exhibit 1: Dhanuka enjoys a pan India distribution
with 6,500 direct accounts
Source: Company, Elara Securities Research
Wide presence across segments and crops
With a strong portfolio of 80+ brands and presence
across all major crops including cotton, rice, wheat,
sugarcane, fruits, vegetables and plantation crops,
Dhanuka features amongst the top five agro chemical
players in the branded domestic market.
Dhanuka’s product portfolio includes 18 herbicides, 39
insecticides, 21 fungicides and 18 other products (Plant
growth regulators, bio-fertilisers etc.).
Exhibit 2: Dhanuka’s premium products portfolio
Source: Company, Elara Securities Research
Exhibit 3: Paddy, pulses and vegetables account for
~65% of revenues for Dhanuka in terms of crops
Source: Company, Elara Securities Research
In terms of geographies, West accounts for the
maximum revenues followed by South especially Andhra
Pradesh (No1 market for pesticides overall).
Exhibit 4: West is the biggest market for Dhanuka
followed by South
Source: Company, Elara Securities Research
Paddy 27%
Pulses 20%
Vegetables 18%
Cotton 15%
Others 20%
North 22%
South 27%
East 14%
West 37%
30 Branch offices/Warehouses
6,500 Direct customers
65,000 Retail outlets
1,000 Manpower
500 Techno commercial personnel
More than 80 products
More than 400 SKUs
Jammu
Gurgaon
Sanand
Production facilities
Investment rationale
Strong portfolio and distribution network to act as a base for growth
Contribution of herbicides to rise to ~39% by FY14E
MNC tie-ups to provide additional lever
Dhanuka Agritech
Dhanuka Agritech
Cro
p P
rote
cti
on
Elara Securities (India) Private Limited 57
Strong relations with farmers through various initiatives to support growth
Over the years, Dhanuka has developed strong relations
with farmers via various connect initiatives imparting
technical and product knowledge to boost pesticide
consumption across segments and crops.
Exhibit 5: Dhanuka’s farmer connect initiatives
Source: Company, Elara Securities Research
Dhanuka Suvidha Kendras: In 2010, Dhanuka
entered into Agri retail business based on the
concept of franchsier-franchisee under the name of
Dhanuka Suvidha. The outlets provide quality inputs
and agri-services to farmers under a single-window
system. Dhanuka has set up 11 franchises in UP,
Uttarakhand and Gujarat and aims to extend this
concept to other states as well.
Dhanuka Chaupal: Dhanuka has established
Dhanuka Chaupal for providing soil and water
testing facilities, and training-cum-education to
farmers. With the encouraging results obtained in
Haryana, Dhanuka is looking to extend the concept
to other states in India.
Dhanuka Doctors: Dhanuka, besides engaging
prominent professionals, also engages over 2,000
Dhanuka Doctors as per need, temporarily every
year, for working closely with farmers at large. The
field activities include – on field demonstrations and
field days, educational campaigns and group
meetings, circulation of product literature and
workshop and seminars.
Dhanuka Kheti Ki Nai Takneek: Under its farming
technique campaign and integrated crop solution
for farmers, Dhanuka runs numerous initiatives
educating farmers regarding judicious use of
pesticides, rain water harvesting and adopting better
agricultural practices to increase per hectare yield.
Contribution of herbicides to rise to ~39% by FY14E
Labour shortage, due to factors such as better and more
employment opportunities in manufacturing and service
sectors and higher allocation to government schemes
like NREGA, which provide assured employment, are
likely to drive a shift from manual weeding to higher use
of crop protection products like herbicides.
Exhibit 6: Labour shortage/rising wages due to
NREGA is driving shift towards herbicides
Source: www.nrega.nic.in, Elara Securities Research
In FY11, Dhanuka derived 48% from insecticides, 33%
from herbicides, 13% from fungicides and 6% from other
products. While insecticides constitute the largest chunk
of revenues for Dhanuka, herbicides has emerged as a
faster growing segment (owing to success of Targa
Super, accounts for ~18-20% of revenues) for Dhanuka
and we expect the same trend to continue aided by
rising use of herbicides due to labour shortages, volume
expansion in existing products and new launches in this
segment. Dhanuka’s herbicide portfolio includes
products like Targa Super (tie-up with Nissan), Weedmar,
Craze, Qurin (tie with DuPont) and Wrap-up & Zargon
(tie-up with Dow).
Exhibit 7: In FY11, insecticides accounted for highest
chunk of revenues followed by herbicides
Source: Company, Elara Securities Research
Farmer connect
initiatives
Dhanuka Doctors
Dhanuka Suvidha Kendras
Dhanuka Chaupals
Dhanuki Kheti ki
Nai Takneek
2.1
0
3.3
9
4.5
1
5.2
6
5.4
8
65 75
84 90
100
0
20
40
60
80
100
120
0
1
2
3
4
5
6
FY07 FY08 FY09 FY10 FY11
(INR
)
(No
of
ho
use
ho
lds
in c
r)
Employment Provided (LHS) Avg daily wages (RHS)
Insecticides 48%
Herbicides 33%
Fungicides 13%
Others 6%
Dhanuka Agritech
58 Elara Securities (India) Private Limited
Hence, we expect herbicides to register a robust ~30%
CAGR over FY12E-14E and its contribution in overall
products to rise to ~39%.
Exhibit 8: Contribution of herbicides to rise driven by
success of Targa Super and new launches
Source: Company, Elara Securities Research
MNC tie-ups to provide additional lever
Over the years, Dhanuka has entered into various tie-ups
and strategic alliances with global agro-chem players like
DuPont, FMC, Dow Agro, Chemtura, Nissan Chemical,
Sumitomo, Mitsui Japan & Hokko Japan to
market/distribute their products in India. Most of these
tie-ups are based on annual purchase contracts
(technical) from the MNC whereby Dhanuka receives the
right to market and distribute the product in India under
its own brand name.
While MNC is able to leverage Dhanuka’s pan India
distribution reach to garner higher volume off-take,
Dhanuka benefits from a wider bouquet of specialty
products addressing varied farmer needs across crops.
Exhibit 9: Leveraging on its distribution, Dhanuka
has built strong co-marketing tie-ups with MNCs
Tie-Up Product
DuPont (USA) Dunet, Qurin, Dhawa Gold, Cursor, Hi Dice, Hook
FMC Corp (USA) Aatank, Markar, Nabood, Brigade
Dow Agro (USA) Wrapup, Zargon, One-up
Chemtura (USA) Dimilin, Omite, Vitavax, Banmite
Nissan Chemical (Japan) Targa Super
Sumitomo (Japan) Caldan, Sheathmar
Mitsui (Japan) Nukil, Bombard
Hokko (Japan) Kasu-B
Source: Company, Elara Securities Research
Dhanuka’s top 3 selling products - Targa Super (18-20%
of revenues), Caldan (10%) and Omite (5%) are all tie-ups
with MNCs and overall such tie-up products account for
~55% of revenues. Such products enjoy better margins
(~15-30%) vis-à-vis pure generics (10-15%) and enjoy a
higher acceptability amongst farmers.
Exhibit 10: More than ~55% of revenues are
accounted for by specialty/tie-up products
Source: Company, Elara Securities Research
Promising pipeline of specialty products
In FY12, Dhanuka has already launched 4 new products
under tie-ups and Dhanuka has a high-potential product
pipeline with 5-6 specialty products to be launched over
the next 2-3 years.
Management highlighted that it is working on 2 new
herbicides with Nissan (one is patented product) which
would be catering to untouched market segment and
would add tremendous value to Dhanuka’s portfolio –
one would be for sugarcane, other will be for broadleaf
crops like soybean, cotton and groundnut. It is also
working on a fungicide with DuPont in paddy segment.
Most of these products would be exclusively with
Dhanuka and after introduction would have 8-10 years
of dominating lifecycle. However, we highlight, most
new products take around 2-3 years to establish before
volume off-take starts equating into substantial revenues.
Exhibit 11: Dhanuka has launched 3-4 specialty
products in FY12 and more to come soon
Year Product Segment Tie-Up Crop
FY12
Banmite (I) Chemtura Tea segment, floriculture product
Bombard (I) Mitsui Paddy and Cotton
Brigade
FMC Tea
FY13-14
NA (H) Nissan Sugarcane
NA (H) Nissan Soybean, Cotton and Groundnut
NA (F) DuPont Paddy
Source: Company, Elara Securities Research; Note: I = Insecticides, H =
Herbicides and F = Fungicides
27 33 34 37 39
52 48 47 45 43
14 13 13 13 14
8 6 6 5 5
0
20
40
60
80
100
FY10 FY11 FY12E FY13E FY14E
(%)
Herbicides Insecticides Fungicides Others
Specialty Products
52%
Generics 48%
Lower margin products (10-15%)
Higher margin (15-30%) - tie ups with MNCs
Dhanuka Agritech
Cro
p P
rote
cti
on
Elara Securities (India) Private Limited 59
Modeling ~27% CAGR in earnings over FY12E-14E post weak H2FY12
During H1FY12, Dhanuka posted a modest growth of
16% YoY growth in revenues and 24% YoY growth in
earnings aided by volume expansion in its key products,
~60bps expansion in operating margins due to better
product mix and ~450bps decline in tax rate aided by
higher production from Udhampur facility (enjoys tax
benefits).
However, owing to significant deficiency (~60% below
LPA) of post season monsoons (Oct-Dec) in key crop
protection consuming state of Andhra Pradesh leading
to lower paddy acreage and squeeze in farmer
profitability due to crash in prices of vegetables like
onions and potatoes, we expect Dhanuka to post weaker
H2FY12 with ~3% YoY revenue growth (decline in Q3
revenues) and a dip in earnings growth by ~8%. We
highlight Dhanuka will be slightly more impacted vs. its
peers due to its high exposure to Andhra Pradesh (~20%
of revenues) and margins will taper down due to weaker
revenue growth.
Exhibit 12: H2FY12 to witness pressure on revenue
and earnings
Source: Company, Elara Securities Estimate
Notwithstanding quarterly volatility, during the period
FY12E-14E, we expect Dhanuka to post a modest ~21%
CAGR in revenues driven by – 1) its strong distribution
reach, 2) volume expansion in its key products like Targa
Super, Caldan and Omite and 3) robust pipeline of new
products (3 launched in FY12, 2 with Nissan and 1 with
DuPont to be launched in FY13-14E).
We highlight our estimates are conservative (INR8.7bn
gross revenue in FY14E) vs. management plant to reach
INR10bn gross revenues by FY14E.
Exhibit 13: Revenue CAGR of ~21% over FY12E-14E
Source: Company, Elara Securities Estimate
We expect margins to expand by 110bps (in-line with
management guidance) from 14.2% in FY12E to 15.3%
in FY14E driving a robust ~27% CAGR in earnings aided
by superior product mix (higher contribution from
specialty products and herbicides) and operating
leverage.
Exhibit 14: Overall OPM to expand 110bps YoY
driving robust ~27% CAGR in PAT
Source: Company, Elara Securities Estimate
Exhibit 15: FY14E EPS (INR) sensitivity to sales CAGR
and net margin expansion over FY12E-14E
FY
12
-14
ne
t m
arg
in
exp
an
sio
n
FY14 EPS FY12-14 sales CAGR
15% 18% 21% 24% 27%
70bps 15.4 16.2 17.0 17.9 18.8
90bps 15.7 16.5 17.3 18.2 19.1
110bps 15.9 16.8 17.6 18.5 19.4
130bps 16.2 17.1 18.0 18.9 19.8
150bps 16.5 17.4 18.3 19.2 20.1
Source: Elara Securities Estimate
16
3
24
(8) (15)
(10)
(5)
0
5
10
15
20
25
30
H1FY12 H2FY12
(%)
Sales Growth PAT Growth
4,0
75
4,8
62
5,3
29
6,4
91
7,8
09
0
5
10
15
20
25
0
2,000
4,000
6,000
8,000
10,000
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Revenue (LHS) YoY (RHS) 3
63
51
1
54
4
72
0
88
2
13.5
14.0
14.5
15.0
15.5
0
200
400
600
800
1,000
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
PAT (LHS OPM (RHS)
Valuation & Recommendation
Modeling ~27% CAGR in earnings over FY12E-14E post weak H2FY12
Strong tie-ups and new launches to support valuations
Initiate with Buy with a Sept-13 TP of INR128
Dhanuka Agritech
60 Elara Securities (India) Private Limited
Initiate with a Buy with a Sept-2013 TP of INR128
Over the last 3 months, Dhanuka has witnessed a
correction of ~10% underperforming Sensex (down
~6%). We attribute this correction to concern over a
weaker H2 in FY12. We highlight, we have already
modeled a weaker H2 but do not foresee the same
weakness to persist in FY13E unless disrupted by a weak
monsoon and sustained steep fall in crop prices
(especially fruits and vegetables).
Hence, we initiate coverage on Dhanuka with a Buy
rating and a Target Price of INR128 based on P/E of 8x
(50% discount to Rallis, ~15% premium to its historical
average of 7x P/E) to Sept-13 EPS of INR16 indicating an
upside of ~39%.
Exhibit 16: Dhanuka trades at an average P/E band
of ~7x-10x
Source: Bloomberg, Company, Elara Securities Research
Going ahead, we expect Dhanuka to sustain valuations
in the range of ~7x-8x aided by – 1) strong tie-ups with
MNCs, 2) promising new product pipeline in specialty
products, 3) robust ~27% CAGR in earnings over FY12E-
14E, 4) strong return ratios in excess of ~30% and
5) modest FCF generation due to benign capex over
FY12E-14E (INR100-150mn for installing product lines
and inventory warehouse and packaging automation).
Exhibit 17: Benign capex program do aid strong FCF
generation over FY12E-14E
Source: Company, Elara Securities Estimate
Exhibit 18: Strong return ratios in excess of ~30% to
help sustain valuations in range of ~7x-8x
Source: Company, Elara Securities Estimate
Potential upsides from capacity expansion, inorganic venture in seeds or land sale not yet discounted
Capacity expansion at Sanand: Dhanuka had
planned INR300mn capex at Sanand to double its
formulations capacity. However, the same has been
shelved pending approvals from Gujarat
government and we haven’t factored the same in
our numbers. We highlight the firm has bought
around 16.5 acres of land in Sanand for the
proposed expansion.
New unit planned at Dahej: Dhanuka plans to
backward integrate into technicals manufacturing
through a new plant at Dahej for which it has
applied for a 37 acre land with Gujarat government.
However, pending approvals, the plant is on hold
and we haven’t factored the same in our numbers.
Management also indicated that once approved, it
may look to dilute 10-15% stake through FPO to
fund the expansion.
Acquisition of seeds Company: Dhanuka is looking
to acquire ~25% stake in a seeds company and has
already given the mandate to a Mumbai based
consultant. Deal is likely to be materialized in the
next six months and the seeds company will mostly
be either from Maharashtra or Hyderabad.
Potential land sale: Dhanuka shut down its Sohna,
Gurgaon plant in FY11 and is eventually looking to
shift its production from Gurgaon to Dahej (once
land approvals flow in). Any potential land sale at
Gurgaon could unlock significant value for the
company.
0 20 40 60 80
100 120 140 160 180 200
Ap
r-0
5
Se
p-0
5
Fe
b-0
6
Jul-0
6
De
c-0
6
Ma
y-0
7
Oct-
07
Ma
r-0
8
Au
g-0
8
Jan
-09
Jun
-09
No
v-0
9
Ap
r-1
0
Se
p-1
0
Fe
b-1
1
Jul-1
1
De
c-1
1
Sh
are
Pri
ce
(IN
R)
13x
10x
7x
4x
43
62
52
66
(1
59
)
32
2
54
9
59
1
(2
03
)
26
0
49
7
52
5
(300)
(200)
(100)
0
100
200
300
400
500
600
700
FY11 FY12E FY13E FY14E
(IN
R m
n)
Capex Op Cash Flow Free Cash Flow
38.2
28.6
30.4 29.7
34.0
28.3
31.8 33.3
20
25
30
35
40
FY11 FY12E FY13E FY14E
ROE (%) ROCE (%)
Dhanuka Agritech
Cro
p P
rote
cti
on
Elara Securities (India) Private Limited 61
Board of Directors & Management
R G Agarwal, Chairman
Agarwal serves as Non-Independent Executive Chairman
of the Board of Dhanuka Agritech. He is a Commerce
Graduate. He promoted Dhanuka Group in the year
1980, by acquisition of a sick unit (then named as
Northern Minerals Ltd, now merged with Dhanuka
Agritech) situated in Gurgaon. That time, the unit was
suffering losses and was at the verge of closure. But
under his able leadership, the unit started to earn profits
from very first year of acquisition. In 1985, he promoted
Dhanuka Agritech formerly known as Dhanuka
Pesticides Limited. He is also Director on the Boards of
Hindon Mercantile, Megh Garm Fab Pvt Ltd, HD Realtors
Pvt Ltd and Dhanuka Infotech Pvt Ltd He has also been
re-elected as Chairman of Crop Care Federation of India.
M K Dhanuka, Managing Director (MD)
M K Dhanuka serves as MD and Non-Independent
Executive Director of Dhanuka Agritech. He is the
promoter of the Company and mainly looks after Finance
matters, purchases of Technicals and overall supervision
of the Company. He holds Bachelor's Degree in
Commerce from Delhi University and has experience of
33 years in the Pesticides Industry. He has also been the
President of Haryana Pesticides Manufacturers
Association since 2006. His other directorships include
Golden Overseas Limited., Dhanuka Laboratories.,
Madhuri Designs-n- Export Pvt Ltd and Dhanuka Infotech
Pvt Ltd.
Rahul Dhanuka, Executive Director
R Dhanuka, a graduate in Chemistry from Delhi
University and MBA from SP Jain Institute of
Management, has an overall industry experience of 13
years. He is working in Dhanuka Agritech as the
Marketing Director and is responsible for national sales
and marketing. Due to his expertise, the
company has been able to penetrate the very interiors of
rural India. He has been instrumental in bringing new
systems and policies in the company, implementation of
ERP and for strategic business relationships with all the
collaborators.
Indresh Narain, Non Executive Independent Director
Narain has rich experience in Banking and retired as
Head of Compliance and Legal, HSBC Group. He has
advised the board on uncountable occasions on
numerous matters including those related to banking,
legal and compliances. He is also a Director on the Board
of Cholamandalam DBS Finance, Intex Technologies
(India) and Mindteck India.
Mridual Dhanuka, Director
M Dhanuka, son of M K Dhanuka, is a B Tech in Chemical
Engineering and MBA from NITIE, Mumbai. He has a
valuable experience of 6 years in managerial cadre in
Dhanuka Agritech in field of production. He joined the
company in 2007 and has been instrumental in
streamlining technical processes, systems and
procedures and establishing quality control in the
company. He is a Director on Boards of Dhanuka
Laboratories, Dhanuka Infotech Pvt Ltd, Otsuka Chemical
India Pvt Ltd and MD Buildtech Pvt Ltd.
Sachin Bhartiya, Director
Bharitya, a qualified CA, has rich experience in the field
of corporate finance and brings with him a blend of
lending and advisory background. He was worked
professionally with IDBI, GE Capital (India) and IL&FS. In
a career spanning a decade, he has originated and
executed a number of transactions both as a lender and
advisor for debt and equity. He is also a Director on the
Boards of Shaily Engineering Plastics, Radiant Hospitality
Services Pvt Ltd, UNIBIC India Pvt Ltd and Light House
Advisors India Pvt Ltd.
Company description
Dhanuka Agritech Limited, co-founded by Mr. R G Agarwal and Mr. M K Dhanuka, is a 25 years old agro chemical
company solely into selling formulations (no presence in technicals) in the domestic markets (no exports). It enjoys a
strong pan India distribution network with 6,500 direct accounts (10-15% are distributors, rest dealers) and a reach
of 10mn farmers. The company has three state of the art facilities located at Sanand (Gujarat), Udhampur (J&K) and
Gurgaon (Haryana) catering to the demand for Dhanuka brand of products.
With a strong portfolio of 80+ brands and presence across all major crops including cotton, rice, wheat, sugarcane,
fruits, vegetables and plantation crops, Dhanuka features amongst the top five agro chemical players in the
branded domestic market. Over the years, Dhanuka has entered into various tie-ups and strategic alliances with
global agro-chem players like DuPont, FMC, Dow Agro, Chemtura, Nissan Chemical, Sumitomo, Mitsui Japan &
Hokko Japan to market/distribute their products in India.
Dhanuka Agritech
62 Elara Securities (India) Private Limited
Coverage History
Date Rating Target Price Closing Price
1
4-Jan-2012 Buy INR128 INR91
Guide to Research Rating
BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
40
50
60
70
80
90
100
110
120
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12
Not Covered Covered
1
Anand Shah • [email protected] • +91 22 4062 6821
Glo
ba
l M
ark
ets
Re
sea
rch
Elara Securities (India) Private Limited
Expanding into new horizons
New launches and acquisitions driving success in formulations
Insecticides India (IIL) is a strong player in the generics formulation
market in India, retailing around 106 products. Company’s ability to
consistently launch new products and acquire off-shelf brands and
turn them around through aggressive marketing strategies has been
the cornerstone of its high growth. Overall, the top 4 brands for IIL
(Monocil, Victor, Lethal and Thimet) are likely to account for ~33% of
total formulation sales for IIL in FY12E. Going ahead, over FY12E-14E,
we expect the contribution of top 4 brands to increase by ~200bps
and formulations to register revenue CAGR of ~21%.
Significant capacity expansion to help boost growth in technicals
During FY11-12, IIL has invested close to ~INR700mn in augmenting
capacities by putting up 3 new facilities at – 1) formulations and
technicals unit at Dahej (Gujarat) and 2) formulations unit at
Udhampur (J&K). IIL’s overall capacity in formulations has increased by
~50% and technicals capacity has more than tripled to 12,800MT.
Going ahead, IIL is planning to manufacture 7-8 different technicals
from the Dahej plant consuming around ~50% of production in-house
and rest for external sales. Hence, over FY12E-14E, we expect IIL to
sustain ~93% CAGR in revenue from technicals aided by a ~15%
improvement in realisations and tripling of capacities.
Model in strong earnings CAGR of ~39% over FY12E-14E
Driven by robust ~29% CAGR in revenues, modest 70 bps expansion
in OPM and ~100-150bps savings in tax rate, we expect IIL to post a
strong ~39% CAGR in earnings over FY12E-14E. Margins will get a
boost aided by -1) addition of profitable molecules like Monocil,
2) significant capacity expansion in technicals of which ~50% is likely
to be used in-housed helping driving huge savings in raw material
costs and 3) operating leverage as utilisation levels improve.
Valuation We initiate coverage on IIL with an Accumulate rating and a Target
Price of INR457 based on P/E of 9x (45% discount to Rallis) to
Sept-13 EPS of INR50.8 indicating an upside of ~15%. Going ahead,
we expect IIL to sustain its re-rating from 6x-7x P/E to 10x driven by
– 1) strong ~39% CAGR in earnings over FY12E-14E, 2) 50% jump
in formulations capacity and tripling of capacities in technicals
moving the company into a completely different size trajectory and
3) modest FCF generation over FY12E-14E as IIL has completed
majority capex for next 3-4 years.
IIL’s 1 yr fwd P/E bands
Source: Bloomberg, Company, Elara Securities Research
Key Financials (Standalone) Y/E Mar (INR mn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)
FY10 3,774 43.3 353 9.3 282 35.9 22.2 24.9 25.6 17.8 14.7
FY11 4,501 19.3 451 10.0 322 14.2 25.4 22.9 25.3 15.6 11.9
FY12E 5,540 23.1 580 10.5 392 21.8 30.9 22.8 24.9 12.8 9.3
FY13E 7,083 27.9 768 10.8 535 36.4 42.2 25.3 27.2 9.4 6.8
FY14E 9,280 31.0 1,041 11.2 753 40.8 59.4 28.2 31.7 6.8 4.8
Source: Company, Elara Securities Estimate
India | Crop Protection 9 January 2012
Initiating Coverage
Insecticides India
Rating : Accumulate Target Price : INR457
Upside : 15%
CMP : INR397 (as on 4 January 2012)
Key data*
Bloomberg /Reuters Code INST IN/ISIL.BO
Current /Dil. Shares O/S (mn) 12.6/12.6
Mkt Cap (INRbn/US$mn) 5/95
Daily Vol. (3M NSE Avg.) 72,508
Face Value (INR) 10
1 US$= INR53.0
Source: Bloomberg ; * As on 4 January 2012
Price & Volume
Source: Bloomberg
Share holding (%) Q3FY11 Q4FY11 Q1FY12 Q2FY12
Promoter 74.7 74.7 74.7 74.7
Institutional Investors 4.1 6.1 6.0 6.0
Other Investors 8.1 9.5 10.6 9.9
General Public 13.1 9.7 8.6 9.4
Source: BSE
Price performance (%) 3M 6M 12M
Sensex 0.6 (15.3) (21.8)
Dhanuka Agritech (8.8) 1.7 13.3
Rallis India (30.5) (21.7) (13.8)
PI Industries (13.6) 31.1 88.7
Insecticides India 5.6 19.1 78.6
Source: Bloomberg
0
100
200
300
400
500
600
Ma
y-0
7
No
v-0
7
Ma
y-0
8
No
v-0
8
Ma
y-0
9
No
v-0
9
Ma
y-1
0
No
v-1
0
Ma
y-1
1
No
v-1
1
(IN
R)
13x
10x
7x
4x
0
1,000
2,000
3,000
4,000
100
200
300
400
500
Jan-11 May-11 Sep-11 Jan-12
Vol. in 000s (RHS) Insecticides India (LHS)
Insecticides India
64 Elara Securities (India) Private Limited
Valuation trigger
Source: Bloomberg, Elara Securities Estimate
Valuation overview
Methodology INR/Share
Standalone PAT Sept -2013 (INR mn) 644
No of shares (mn) 12.7
EPS Sept-2013E 50.8
Assigned P/E multiple (x) 9.0
Fair value 457
CMP 397
Potential Upside (%) 15.1
Source: Elara Securities Estimate
Valuation driver – IIL’s one year forward P/E chart
Source: Elara Securities Research
Investment summary
Strong distribution network with 106
products in formulations.
Backward integration in technicals
manufacturing.
Modest FCF generation over
FY12E-14E as major capex complete.
Valuation trigger
1. Significant capacity addition in both
formulations and technicals has come
on-stream in FY12.
2. Margins to expand over FY12E-14E by
70bps aided by in-house production of
technicals, launch of Monocil and
operating leverage.
3. Earnings to recover post weak
H2FY12, model in ~29% CAGR over
FY12E-14E.
Key risks
Poor monsoons, low pest infestation
and slowdown in off-take due to
impact on farmer profitability.
Low utilisation levels and ramp up at
new facilities.
Price cuts in its formulations due to
intense competition.
Our assumptions
We have modeled in 29% CAGR in
revenues over FY12E-14E.
We expect IIL’s formulations business
to grow by ~21% CAGR over
FY12E-14E aided by capacity
expansions and new launches.
We expect IIL’s technicals business to
grow by ~93% CAGR over FY12E-14E
aided by tripling of capacities and
~15% CAGR in price realisation.
50
100
150
200
250
300
350
400
450
500
Jan
-10
Ma
r-1
0
Ma
y-1
0
Jul-1
0
Se
p-1
0
No
v-1
0
Jan
-11
Ma
r-1
1
Ma
y-1
1
Jul-1
1
Se
p-1
1
No
v-1
1
Jan
-12
Ma
r-1
2
Ma
y-1
2
Jul-1
2
Sep
-12
No
v-1
2
Jan
-13
Margins to expand over FY12E-14E by 70bps aided by
in-house production of technicals, launch of Monocil
and operating leverage
Earnings to recover post weak H2FY12,
model in ~29% CAGR over FY12E-14E
12
3
Significant capacity addition in both formulations and
technicals has come on-stream in FY12
0
2
4
6
8
10
12
Ma
y-0
7
Se
p-0
7
Jan
-08
Ma
y-0
8
Se
p-0
8
Jan
-09
Ma
y-0
9
Se
p-0
9
Jan
-10
Ma
y-1
0
Se
p-1
0
Jan
-11
Ma
y-1
1
Se
p-1
1
Insecticides India
Cro
p P
rote
cti
on
65 Elara Securities (India) Private Limited
Standalone Financials (Y/E Mar) Income Statement (INR mn) FY11 FY12E FY13E FY14E
Net Revenues 4,501 5,540 7,083 9,280
EBITDA 451 580 768 1,041
Add:- Non operating Income 2 1 2 2
OPBIDTA 452 582 770 1,043
Less :- Depreciation & Amortization 15 27 43 50
EBIT 437 555 728 993
Less:- Interest Expenses 24 58 50 40
PBT 413 497 677 953
Less :- Taxes 90 104 142 200
Adjusted PAT 322 392 535 753
Add/Less: - Extra-ordinaries - - - -
Reported PAT 322 392 535 753
Balance Sheet (INR mn) FY11 FY12E FY13E FY14E
Share Capital 127 127 127 127
Reserves 1,421 1,761 2,222 2,871
Borrowings 380 580 480 380
Deferred Tax (Net) 20 20 20 20
Total Liabilities 1,948 2,489 2,850 3,399
Gross Block 365 1,007 1,090 1,160
Less:- Accumulated Depreciation 51 78 120 170
Net Block 314 929 969 990
Add:- Capital work in progress 592 50 33 23
Investments 1 1 1 1
Net Working Capital 1,007 1,474 1,812 2,350
Other Assets 35 35 35 35
Total Assets 1,948 2,489 2,850 3,399
Cash Flow Statement (INR mn) FY11 FY12E FY13E FY14E
Cash profit adjusted for non cash items 319 483 633 837
Add/Less : Working Capital Changes 67 (317) (310) (426)
Operating Cash Flow 386 167 323 411
Less:- Capex (594) (101) (65) (61)
Free Cash Flow (208) 66 259 350
Financing Cash Flow 108 105 (202) (214)
Investing Cash Flow 50 1 1 1
Net change in Cash (50) 172 57 137
Ratio Analysis FY11 FY12E FY13E FY14E
Income Statement Ratios (%)
Revenue Growth 19.3 23.1 27.9 31.0
EBITDA Growth 27.8 28.8 32.4 35.5
PAT Growth 14.2 21.8 36.4 40.8
EBITDA Margin 10.0 10.5 10.8 11.2
Net Margin 7.2 7.1 7.6 8.1
Return & Liquidity Ratios
Net Debt/Equity (x) 0.2 0.2 0.1 (0.0)
ROE (%) 22.9 22.8 25.3 28.2
ROCE (%) 25.3 24.9 27.2 31.7
Per Share data & Valuation Ratios
Diluted EPS (INR/Share) 25.4 30.9 42.2 59.4
EPS Growth (%) 14.2 21.8 36.4 40.8
DPS (INR/Share) 2.5 3.5 5.0 7.0
P/E Ratio (x) 15.6 12.8 9.4 6.7
EV/EBITDA (x) 11.9 9.3 6.8 4.8
EV/Sales (x) 1.2 1.0 0.7 0.5
Price/Book (x) 3.3 2.7 2.1 1.7
Dividend Yield (%) 0.6 0.9 1.3 1.8
Source: Company, Elara Securities Estimate
Revenue & margins growth trend
Source: Company, Elara Securities Estimate
Adjusted profits growth trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
10.0
10.5
10.8
11.2
9
10
10
11
11
12
0
2,000
4,000
6,000
8,000
10,000
FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Revenues (LHS) EBITDA Margin (RHS)
14.2
21.8
36.4 40.8
0
10
20
30
40
50
0
200
400
600
800
FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Adj PAT (LHS) PAT Growth (RHS)
22.9 22.8
25.3
28.2
25.3 24.9
27.2
31.7
15
20
25
30
35
FY11 FY12E FY13E FY14E
ROE (%) ROCE (%)
Insecticides India
66 Elara Securities (India) Private Limited
New launches and acquisitions cornerstone of success in formulations
Insecticides India (IIL) is a strong player in the
formulation market in India, retailing around 106
products (key brands include Victor, Lethal, Thimet and
Monocil) spread across segments and crops. The
company has a strong distribution network of 8,000
distributors, 50,000 dealers and 29 depots across India.
Along with formulations, IIL is also backward integrated
into manufacturing technicals and engaged into selling
household pesticides. Post its major capacity expansion
in FY11-12, IIL has 4 formulation units located at
Chopanki (Rajasthan), Samba (J&K), Dahej (Gujarat) and
Udhampur (J&) and 2 technical manufacturing units
located at Chopanki and Dahej.
During FY11, IIL derived ~84% revenue for formulations,
~10% from technicals and rest from trading and
non-crop sales (household pesticides).
Exhibit 1: IIL derived ~84% revenue from
formulations in FY11
Source: Company, Elara Securities Research
Consistent new launches to build in-house portfolio
IIL has a built a strong set of in-house brands including
key brands like Victor, Indan 4G, Kaiser, Sharp, Bravo,
Arrow and Hijack. IIL has consistently launched new
brands positioning them as value for money brands,
especially in segments where MNC products are going
off-patent. On an average, IIL has launched 5-6 new
brands each year.
Even in FY12, IIL has launched 7 new brands (excluding
Monocil which it acquired) including 5 insecticides
(Shark, Metro, Rambo, Super Star and Victor Gold), 1
acaricide (Dynamite Plus) and 1 fungicide (Ultra).
Exhibit 2: IIL has consistently launched new products
to spur growth in in-house brands
Source: Company, Elara Securities Research
Exhibit 3: IIL has launched 7 new products in FY12
Source: Company, Elara Securities Research
Successful in developing brands through acquisitions and tie-ups
Over the years, IIL has successfully adopted the inorganic
route in order to augment its in-house portfolio.
Company’s ability to consistently launch new products to
cater to market demands and acquire off-shelf brands
and turn them around through aggressive marketing
strategies has been the cornerstone of its high growth
over the last several years.
Acquired Lethal & others from Montari
Industries: In 2003, IIL acquired the agro chemical
brands of Montari Industries including Lethal,
Tractor and Milchlor. Post acquisition it spent
significant amounts in branding and marketing
these products to revive the portfolio. Testament to
its success, Lethal has emerged as one of IIL’s top 4
Formulations, 84%
Technicals, 10%
Traded Goods, 6%
5 5
7
3
8
7
0
2
4
6
8
10
FY07 FY08 FY09 FY10 FY11 FY12
Investment rationale
New launches and acquisitions cornerstone of success in formulations
Significant capacity expansion to help boost growth in technicals
Post weak H2FY12, model strong earnings CAGR of ~39% over FY12E-14E
Insecticides India
Insecticides India
Cro
p P
rote
cti
on
67 Elara Securities (India) Private Limited
brands growing at a CAGR of ~20%+ over FY07-11
and registering sales of ~INR400mn in FY11.
Exhibit 4: Top 3 out of 4 brands for IIL are a function
of acquisition or tie-up
Source: Company, Elara Securities Research
Tied up with AMVAC for Thimet: In 2006, IIL
entered into Technical and marketing MoU with
AMVAC, USA (American Vanguard Corporation) to
manufacture and market Thimet (Insecticide –
Phorate) in India. Thimet is the largest selling brand
of IIL and has grown at a CAGR of ~14% over
FY07-11 registering sales of ~INR420mn in FY11.
Acquired Monocil from Nocil: In 2011, IIL acquired
another brand called Monocil from Nocil. Monocil is
a systemic insecticide (Monocrotophos) which
controls a broad spectrum of pests in a wide range
of crops. The brand was off-shelf during the past
five-six years as the product did not fit into the core
strategy of Nocil’s product mix. However, IIL’s
justification to buy the brand was Monocil’s high
brand recall which was evident from the success of
Monocil in just months of getting launched – IIL
booked ~1mn litres (revenues of ~INR350mn).
Hence, top 4 brands for IIL called MVLT (Monocil, Victor,
Lethal and Thimet) are likely to account for ~33% of total
formulation sales for IIL in FY12E. Going ahead, over
FY12E-14E, we expect the contribution of top 4 brands
to increase marginally by ~200bps and formulations to
register revenue CAGR of ~21%.
Exhibit 5: Formulation sales to witness ~21% CAGR
over FY12-14E aided by key brands & new launches
Source: Company, Elara Securities Estimate
Significant capacity expansion to help boost growth in technicals
During FY11, IIL had around three manufacturing plants
– 1) formulations unit at Chopanki (Rajasthan) and
Samba (J&K) and 2) technicals manufacturing unit at
Chopanki. Overall, IIL had a total formulation
manufacturing capacity of 11,450KL of EC (emulsifiable
concentrate), 6,600MT of WDP (wettable dispersible
powder) and 13,600MT of granules and technicals
manufacturing capacity of 3,800MT.
Invested ~INR700mn over FY11-12 to build new facilities at Dahej and Udhampur
During FY11-12, IIL has invested close to ~INR700mn
(funded via IPO proceeds and mix of debt and internal
accruals) in augmenting its capacities by putting up
three new manufacturing facilities at – 1) formulations
and technicals manufacturing unit at Dahej (Gujarat)
and 2) formulations unit at Udhampur (J&K).
With the capacity expansion, IIL’s overall capacity in
formulations has increased by more than ~50% to
18,450KL of EC, 9,700MT of WDP and 27,600MT of
granules and technicals manufacturing capacity has
more than tripled to 12,800MT.
Exhibit 6: IIL has increased its formulations capacity
by ~50%+ and tripled its technicals capacity in FY12
Source: Company, Elara Securities Research
Dahej formulations facility: Dahej formulations
facility, a multi-purpose plant, will have a total
capacity of 4,000KL in EC, 12,500MT in WDP and
2,500MT in granules. IIL invested ~INR100mn
(funded via IPO proceeds) in the plant and it has
commenced operations from Q1FY12. IIL will
produce Monocil from this plant.
Dahej technicals facility: IIL’s technical facility at
Dahej has a capacity of 9,000MT and the company
has invested ~INR550mn (funded via mix of debt
and internal accruals) in the plant. IIL will use ~50%
of technicals manufactured in-house leading to
significant cost savings in terms of raw materials. The
Acquired brands from Montari in 2003 - Lethal, Tractor and
Milchlor
Tie up with AMVAC USA in 2006 - Thimet
Acquired brand from NOCIL in 2011 - Monocil
3,4
20
4,0
10
4,9
52
6,0
24
7,2
05
24.9
17.3
23.5 21.7
19.6
0
5
10
15
20
25
30
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Formulations revenue (LHS) YoY (RHS)
11
,45
0
6,6
00
13
,60
0
3,8
00
18
,45
0
9,7
00
27
,60
0
12
,80
0
0
5,000
10,000
15,000
20,000
25,000
30,000
EC (KL) WDP (MT) Granules (MT)
Technicals (MT)
FY11 FY12
Insecticides India
68 Elara Securities (India) Private Limited
plant has just commenced operations in Q2FY12
and is likely to witness significant scale up in FY13.
Udhampur formulations facility: IIL’s Udhampur
facility has a total capacity of 3,000KL of EC, 2,000MT
of WDP and 600MT of granules. IIL has invested
~INR60mn in the plant and it has commenced
operations from Q2FY12. The plant will enjoy both
income tax and excise benefits and IIL plants to
produce its most profitable specialty molecules from
this unit.
Looking to tap into export markets
IIL at present has very little exports which caters to only
Nepal and Bangladesh but with production
commencing from its Dahej plant, IIL is looking to tap
international markets like the Middle East,
commonwealth of independent states (CIS) countries,
African and far east countries in the first phase. IIL has
already started applications for patents in Taiwan and
Thailand and is looking to sell a combination of
formulation brands and technicals. To start with, it will
go ahead with 15 products and is targeting revenues of
~INR500mn from exports in FY13.
Tripling of capacities in technicals to aid ~93% CAGR in revenues over FY12E-14E in technicals
IIL forayed into technicals manufacturing (backward
integration) during FY08 by setting up its first plant at
Chopanki. Foray into the technicals segment involves
complex chemical processes, technological superiority,
and higher initial investment vis-à-vis formulations
business.
Over FY09-11, IIL has posted a revenue CAGR of ~95% to
~INR500mn from manufacturing technicals from its
Chopanki unit (consumed almost ~60% of technicals in-
house) aided by higher capacities and ~40%
improvement in price realisations of the technicals sold.
Going ahead, IIL is planning to manufacture 7-8 different
technicals from the Dahej plant consuming around
~50% of production in-house and rest for external sales.
Hence, over FY12E-14E, we expect IIL to sustain ~93%
CAGR in revenue from technicals aided by a ~15%
improvement in realisations and tripling of capacities.
We are modeling in utilisation levels to drop to ~19% in
FY12E and gradually improve to ~50% in FY14E and
expect the company to utilize almost ~65% production
in-house.
Exhibit 7: Revenues from technicals to more than
triple over FY12-14E, in-line with capacity expansion
Source: Company, Elara Securities Estimate
Post weak H2FY12, model strong earnings CAGR of ~39% over FY12-14E
During H1FY12, IIL posted a strong growth of 26% YoY
growth in revenues and 33% YoY growth in earnings,
significantly ahead of its peers. While revenue growth
was aided by addition of Monocil in Q1FY12 (registered
revenues of ~INR300mn in H1FY12 – not in the base),
earnings growth was aided by ~40bps expansion in
OPM and ~300bps reduction in tax rate
(commencement of Udhampur plant which enjoys tax
benefits).
However, owing to significant deficiency (~50% below
LPA) of post season monsoons (Oct-Dec) in key crop
protection consuming state of Andhra Pradesh leading
to lower paddy acreage and squeeze in farmer
profitability due to crash in prices of vegetables like
onions and potatoes, we expect IIL to post weaker
H2FY12 with ~19% YoY revenue growth and a muted
earnings growth of ~5%. However, we highlight results
are likely to better than its peers aided by – 1) addition of
Monocil launched in Q1FY12 and commencement of
Dahej and Udhampur facilities in Q2FY12. Nonetheless,
higher depreciation charges and interest costs will keep
the earnings muted.
Exhibit 8: H2FY12 to witness pressure on revenue
and earnings
Source: Company, Elara Securities Estimate
37
8
49
8
58
9 1
,05
6
2,1
87
0
50
100
150
200
0
500
1,000
1,500
2,000
2,500
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Technicals revenue (LHS) YoY (RHS)
26
19
33
5
0
5
10
15
20
25
30
35
H1FY12 H2FY12
(%)
Sales Growth PAT Growth
Insecticides India
Cro
p P
rote
cti
on
69 Elara Securities (India) Private Limited
Notwithstanding quarterly volatility, during the period
FY12E-14E, we expect IIL to post a robust ~29% CAGR in
revenues driven by – 1) ~21% CAGR in formulations
aided by volume expansion in its top 4 brands, new
launches and capacity expansions at Dahej and
Udhampur facilities and 2) ~93% CAGR in technicals
revenue aided by tripling of capacities with
commencement of Dahej facility (~65% production to be
consumed in-house).
Driven by strong growth in technicals, we expect the
contribution of technicals in total revenue to rise from
~10% in FY11 to almost ~22% in FY14E.
Exhibit 9: Revenue CAGR of ~29% over FY12E-14E
aided largely by significant capacity expansion
Source: Company, Elara Securities Estimate
Exhibit 10: Contribution of technicals to total
revenue to rise to ~22% by FY14E
Source: Company, Elara Securities Estimate
We expect margins to expand by 70bps over FY12E-14E
from 10.5% in FY12 to 11.2% in FY14E driving a robust
~34% CAGR in EBITDA during the period. Margins will
get a boost aided by -1) addition of profitable molecules
like Monocil which enjoy higher margins vis-à-vis mass
generics, 2) significant capacity expansion in technicals
of which ~50% is likely to be used in-housed helping
curtail distributor margins on technicals sourced from
outside driving huge savings in raw material costs and
3) operating leverage as utilisation levels improve.
Exhibit 11: Margins to expand ~70 bps driving robust
~34% CAGR in EBITDA over FY12E-14E
Source: Company, Elara Securities Estimate
Hence, driven by robust ~29% CAGR in revenues,
modest 70 bps expansion in OPM and ~200-250bps
savings in tax rate (specialty molecules production to be
shifted to Udhampur which will enjoy both income tax
and excise benefits), we expect IIL to post a strong ~39%
CAGR in earnings over FY12E-14E.
Exhibit 12: Model in robust ~39% CAGR in earnings
over FY12E-14E
Source: Company, Elara Securities Estimate
Exhibit 13: FY14E EPS (INR) sensitivity to sales CAGR
and net margin expansion over FY12E-14E
FY
12
-14
ne
t m
arg
in
exp
an
sio
n
FY14 EPS FY12-14 sales CAGR
23% 26% 29% 32% 35%
65bps 51.4 53.9 56.5 59.2 61.9
85bps 52.7 55.3 58.0 60.7 63.5
105bps 54.0 56.7 59.4 62.2 65.1
125bps 55.4 58.1 60.9 63.7 66.7
145bps 56.7 59.5 62.3 65.3 68.3
Source: Elara Securities Estimate
3,7
74
4,5
01
5,5
40
7,0
83
9,2
80
0
10
20
30
40
50
0
2,000
4,000
6,000
8,000
10,000
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
Net revenue (LHS) YoY (RHS)
83.9 84.9 80.8 73.1
10.4 10.1 14.2 22.2
5.7 5.0 5.0 4.7
0
20
40
60
80
100
FY11 FY12E FY13E FY14E
(%)
Formulations Technicals Others
35
3
45
1
58
0
76
8
1,0
41
9.3
10.0
10.5
10.8
11.2
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
0
200
400
600
800
1,000
1,200
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
EBITDA (LHS) OPM (RHS)
28
2
32
2
39
2 5
35
75
3
0
5
10
15
20
25
30
35
40
45
0
100
200
300
400
500
600
700
800
FY10 FY11 FY12E FY13E FY14E
(%)
(IN
R m
n)
PAT (LHS) YoY (RHS)
Insecticides India
70 Elara Securities (India) Private Limited
Initiate with an Accumulate with a Sept-2013 TP of INR457
Over the last two years, IIL has witnessed significant
re-rating from average P/E multiple of 6x-7x to ~10x
driven by – 1) modest earnings CAGR of ~25% over
FY09-11 and 2) significant investments into capacity
expansions to the tune of ~INR700mn driving ~50%
increase in formulations and tripling of capacities in
technicals. We highlight IIL’s gross block has tripled over
FY10-12 due to its aggressive capex.
Exhibit 14: IIL has re-rated from an average P/E of 6x-
7x to ~10x
Source: Company, Elara Securities Estimate
Going ahead, we expect IIL to sustain its re-rating driven
by – 1) strong ~39% CAGR in earnings over FY12E-14E,
2) tripling of capacities in technicals moving the
company into a completely different size trajectory and
3) modest FCF generation over FY12E-14E as IIL has
completed majority capex for next 3-4 years.
Exhibit 15: Major capex completed in FY11-12, expect
modest FCF generation over FY12E-14E
Source: Company, Elara Securities Estimate
Hence, we initiate coverage on IIL with an Accumulate
rating and a Target Price of INR457 based on P/E of 9x
(45% discount to Rallis) to Sept-13 EPS of INR50.8
indicating an upside of ~15%.
Tie-up with Japanese firm for new molecule and QIP to fund further capex not factored in our numbers
Media reports suggest that IIL is looking to tie-up
with a Japanese firm to market a fungicide product
exclusively in India. The product will be applicable
on rice crop and is likely to be a patented product.
Any such launches, especially in specialty molecule
segment is likely to carry upside risks to our
estimates.
Media reports suggest that IIL is in talks with P/E
firms and other institutional investors to raise
INR700mn to fund further proposed expansion of
setting up a new plant in Rajasthan to further
increase formulations capacity by ~30-50% and
double technicals manufacturing capacity. We
highlight promoters hold ~75% stake in the
company. We have neither modeled the capacity
expansion plan nor dilution on account of fund
raising.
0
100
200
300
400
500
600
Ma
y-0
7
No
v-0
7
Ma
y-0
8
No
v-0
8
Ma
y-0
9
No
v-0
9
Ma
y-1
0
No
v-1
0
Ma
y-1
1
No
v-1
1
Sh
are
Pri
ce
(IN
R)
13x
10x
7x
4x
59
4
10
1
65
61
38
6
16
7 3
23
41
1
(2
08
)
66
25
9
35
0
(400)
(200)
0
200
400
600
800
FY11 FY12E FY13E FY14E
(IN
R m
n)
Capex Op Cash Flow Free Cash Flow
Valuation & Recommendation
IIL has witnessed significant re-rating over last two years
Strong earnings growth and increased capacities to sustain re-rating
Initiate with an Accumulate with a Sept-13 TP of INR457
Insecticides India
Cro
p P
rote
cti
on
71 Elara Securities (India) Private Limited
Board of Directors & Management
H C Aggarwal, Chairman
H C Aggarwal joined IIL’s board on October, 2001 and
was appointed the Chairman and MD on October, 2003.
However, he resigned as MD in November, 2006 and
serves as the Chairman of the company now. He belongs
to a business family of Delhi and has more than 3
decades of experience in pesticides business. Aggarwal
set up HIM Pulverizing Mills in 1972 and served as the
MD till 2004. He was awarded Udyog Bharti Award in
2004 by Indian Achievers Forum, New Delhi and has
served as President of NIPMA for 5 terms and director of
Crop Care Federation of India (CCFI).
Rajesh Aggarwal, Managing Director (MD)
R Aggarwal, a commerce graduate, is the promoter of IIL.
He incorporated the company in 1996 and was
appointed as the MD of IIL in 2006. Prior to IIL, he
worked in HIM Pulverizing Mills looking after production
and marketing and has very good knowledge in the
respective domains.
Sanjeev Bansal, Whole-time Director
Bansal is Whole-Time Director of IIL. After doing
graduation, he entered into the field of marketing. He
has been involved in the trading of Agro Commodities
and has experience of more than 18 years in the field of
marketing of Agro commodity. He was appointed as
whole time Director of the company in 2001 and looks
after day to day administration.
Year Key Milestone
1996 Incorporated as private limited company
2001 Converted into public limited company
2002 Commissioned formulation plant at Chopanki (Rajasthan)
2003 Acquired all the brands of Montari Industries Ltd
2004 Commissioned second formulation plant at Samba (Jammu)
2005 Set up R&D Laboratory at Chopanki and was granted ISO 9001-2000 certification
2006 Acquired the exclusive right to sell the Thimet brand in India from American Vanguard Corporation, USA
2007 Came out with an IPO to raise INR369.2mn
R&D facility and technical plant commenced in Chopanki
Expansion of formulations completed at Samba unit
2011 Acquired Monocil brand from Nocil Ltd.
Two new formulation plants- Dahej and Udhampur commence operations
Entered into an agreement with National Research Development Corporation, Government of India for providing technological support for research & development of a specific formulation
Company description
Incorporated by Mr Rajesh Aggarwal in 1996, Insecticides India Limited (IIL) commenced operations in 2002 after
setting up of Chopanki unit. In 2007, IIL came out with an IPO raising INR370mn. IIL is a strong player in the
formulation market in India, retailing around 106 products (key brands include Victor, Lethal, Thimet and Monocil)
spread across segments and crops. The company has a strong distribution network of 8,000 distributors, 50,000
dealers and 29 depots across India. Along with formulations, IIL is also backward integrated into manufacturing
technicals and engaged into selling household pesticides.
During FY11, IIL derived ~84% revenue for formulations, ~10% from technicals and rest from trading and
non-crop sales (household pesticides). Post its major capacity expansion in FY11-12, IIL has 4 formulation units
located at Chopanki (Rajasthan), Samba (J&K), Dahej (Gujarat) and Udhampur (J&) and 2 technical manufacturing
units located at Chopanki and Dahej. Driven by strong growth in technicals, we expect the total contribution of
technicals in total revenue to rise from ~10% in FY11 to almost ~22% in FY14E.
Insecticides India
72 Elara Securities (India) Private Limited
Coverage History
Date Rating Target Price Closing Price
1
4-Jan-2012 Accumulate INR457 INR397
Guide to Research Rating
BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
50
100
150
200
250
300
350
400
450
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12
Not Covered Covered
1
Insecticides India
Cro
p P
rote
cti
on
73 73 Elara Securities (India) Private Limited
Notes
Insecticides India
74 Elara Securities (India) Private Limited
Notes
Insecticides India
Cro
p P
rote
cti
on
75 75 Elara Securities (India) Private Limited
Notes
Elara Securities (India) Private Limited
76 Elara Securities (India) Private Limited
Disclosures & Confidentiality for non U.S. Investors
The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information
purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and
the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. Nothing in this
document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to
in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an
independent evaluation of an investment in the securities of companies referred to in this document (including the merits and
risks involved) and should consult its own advisors to determine the merits and risks of such an investment. Nevertheless, Elara
or any of its affiliates is committed to provide independent and transparent recommendation to its client and would be happy
to provide any information in response to specific client queries. Elara or any of its affiliates have not independently verified all
the information given in this Note and expressly disclaim all liability for any errors and/or omissions, representations or
warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this
information. Elara or any of its affiliates, their directors and the employees may from time to time, effect or have effected an
own account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may
perform or seek to perform investment banking or other services for or solicit investment banking or other business from any
company referred to in this Note. Each of these entities functions as a separate, distinct and independent of each other. This
Note is strictly confidential and is being furnished to you solely for your information. This Note should not be reproduced or
redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for
any purpose. This Note is not directed or intended for distribution to, or use by, any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use
would be contrary to law, regulation or which would subject Elara or any of its affiliates to any registration or licensing
requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and
persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon
request, the Recipient will promptly return all material received from the company and/or the Advisors without retaining any
copies thereof. The Information given in this document is as of the date of this report and there can be no assurance that
future results or events will be consistent with this information. This Information is subject to change without any prior notice.
Elara or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from
time to time. However, Elara is under no obligation to update or keep the information current. Neither Elara nor any of its
affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct,
indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the
information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an
indication that there has been no change in the business or state of affairs of the company since the date of publication of this
Note. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency
and should not be treated as endorsement of the views expressed in the report. Elara Securities (India) Private Limited
generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in
the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views
expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their
securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations
or views expressed in this report.
Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed
to Elara Securities (India) Private Limited / the company.
Disclaimer for non U.S. Investors
The information contained in this note is of a general nature and is not intended to address the circumstances of any
particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no
guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.
No one should act on such information without appropriate professional advice after a thorough examination of the
particular situation.
Elara Securities (India) Private Limited
Glo
ba
l M
ark
ets
Re
sea
rch
77 77
Disclosures for U.S. Investors
The research analyst did not receive compensation from Rallis India Limited, P I Industries Limited, Dhanuka Agritech Limited
and Insecticides India Limited.
Elara Capital Inc.’s affiliate did not manage an offering for Rallis India Limited, P I Industries Limited, Dhanuka Agritech Limited
and Insecticides India Limited.
Elara Capital Inc.’s affiliate did not receive compensation from Rallis India Limited, P I Industries Limited, Dhanuka Agritech
Limited and Insecticides India Limited in the last 12 months.
Elara Capital Inc.’s affiliate does not expect to receive compensation from Rallis India Limited, P I Industries Limited, Dhanuka
Agritech Limited and Insecticides India Limited in the next 3 months.
Disclaimer for U.S. Investors
This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its
completeness, accuracy or adequacy and it should not be relied upon as such.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument.
Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed
herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.
Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the
investor and the investor may get back less than the amount invested. Where an investment is described as being likely to
yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.
Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in
rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The
information contained in this report does not constitute advice on the tax consequences of making any particular
investment decision. This material does not take into account your particular investment objectives, financial situations or
needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before
acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances
and, if necessary, seek professional advice.
Certain statements in this report, including any financial projections, may constitute “forward-looking statements.” These
“forward-looking statements” are not guarantees of future performance and are based on numerous current assumptions
that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these
“forward-looking statements” and financial information.
Elara Securities (India) Private Limited
78 Elara Securities (India) Private Limited
India Elara Securities (India) Pvt. Ltd. Kalpataru Synergy,6th Level,East Wing, Opp Grand Hyatt, Santacruz East, Mumbai – 400 055, India
Tel : +91 22 4062 6868
Europe Elara Capital Plc. 29 Marylebone Road, London NW1 5JX, United Kingdom
Tel : +4420 7486 9733
USA Elara Securities Inc. 477 Madison Avenue, 220, New York, NY 10022, USA
Tel :212-430-5870
Asia / Pacific Elara Capital (Singapore) Pte.Ltd. 30 Raffles Place #20-03, Chevron House Singapore 048622
Tel : +65 6536 6267
Harendra Kumar MD - Institutional Equities & Global Research [email protected] +91 22 4062 6871
Sales
Joseph K. Mammen Global Head Sales & Trading
London +44 78 5057 7329 [email protected] +44 20 7467 5578
Anuja Sarda London +44 77 3819 6256 [email protected] +44 20 7299 2577
David Somekh New York +1 646 808 9217 [email protected] +1 212 430 5872
Nikhil Bhatnagar New York +1 718 501 2504 [email protected] +1 212 430 5876
Samridh Sethi New York +1 718 300 0767 [email protected] +1 212 430 5873
Amit Mamgain India +91 98676 96661 [email protected] +91 22 4062 6843
Koushik Vasudevan India +91 98676 96668 [email protected] +91 22 4062 6841
Prashin Lalvani India +91 9833477685 [email protected] +91 22 4062 6844
Saira Ansari India +91 98198 10166 [email protected] +91 22 4062 6812
Sales Trading & Dealing
Ananthanarayan Iyer India +91 98334 99217 [email protected] +91 22 4062 6856
Dharmesh Desai India +91 98211 93333 [email protected] +91 22 4062 6852
Manoj Murarka India +91 99675 31422 [email protected] +91 22 4062 6851
Vishal Thakkar India +91 98694 07973 [email protected] +91 22 4062 6857
Research
Abhinav Bhandari Analyst Construction, Infrastructure [email protected] +91 22 4062 6807
Aliasgar Shakir Analyst Mid caps [email protected] +91 22 4062 6816
Alok Deshpande Analyst Oil & Gas [email protected] +91 22 4062 6804
Anand Shah Analyst Mid caps – Consumption & Agri [email protected] +91 22 4062 6821
Ashish Kumar Economist
[email protected] +91 22 4062 6836
Henry Burrows Analyst Derivative Strategist [email protected] +91 22 4062 6854
Himani Singh Analyst FMCG, Hotels, Hospitals [email protected] +91 22 4062 6801
Mohan Lal Analyst Media , Automobiles [email protected] +91 22 4062 6802
Pankaj Balani Analyst Derivative Strategist [email protected] +91 22 4062 6811
Parees Purohit Analyst Banking & Financials [email protected] +91 22 4062 6859
Pralay Das Analyst Information Technology, Strategy [email protected] +91 22 4062 6808
Ravindra Deshpande Analyst Metals & Cement [email protected] +91 22 4062 6805
Ravi Sodah Analyst Cement [email protected] +91 22 4062 6817
Sumant Kumar Analyst FMCG [email protected] +91 22 4062 6803
Surajit Pal Analyst Pharmaceuticals, Real Estate [email protected] +91 22 4062 6810
Mona Khetan Associate Strategy [email protected] +91 22 4062 6814
Pooja Sharma Associate Automobiles [email protected] +91 22 4062 6819
Stuart Murray Associate Oil & Gas [email protected] +91 22 4062 6898
Access our reports on Bloomberg: Type ESEC <GO>
Also available on Thomson & Reuters
Member (NSE, BSE) Regn Nos: CAPITAL MARKET SEBI REGN. NO.: BSE: INB 011289833, NSE: INB231289837 DERIVATIVES SEBI REGN. NO.: NSE: INF 231289837
CLEARING CODE: M51449. Website: www.elaracapital.com Investor Grievance Email ID: [email protected]