rallis india - initiating coverage-feb-13-edelbreport.myiris.com/es1/ralindia_20130227.pdf ·...

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Edelweiss Securities Limited

Rallis India (Rallis), a Tata Group company, is an established agrochemical

player in India. The company, with market share of ~10% is well placed to

capture emerging opportunities in the domestic agrochemical market on

back of healthy distribution network, branded farm solutions and launch

of new products. Acquisition of Metahelix has further equipped it to cash

in on the spurt in the hybrid seed market riding the former’s formidable

R&D capabilities and strong product pipeline. Additionally, its Dahej SEZ

facility is expected to spur export sales and reduce dependence on the

domestic market. We initiate coverage with ‘BUY’.

Poised well to exploit emerging opportunities in agrochemical market

Increasing consumption, rising minimum support price, sharpened government focus

and mounting cost of labour will propel domestic agrochemical market to post 10-12%

CAGR in the near term. The company has launched 10 products in FY12 (versus

average three-four p.a) and this will help to gain market share in the near term.

Further, the newly commissioned Dahej SEZ facility is anticipated to boost export sales,

consequently reducing its domestic market dependence.

Metahelix to spur hybrid growth

The organised hybrid seed market is expected to post 12-15% CAGR in the coming

years. India has a dismal ~2mha of the total 40mha under hybrid seed in rice crop, thus

leaving enough room for penetrating untapped markets. Post acquisitions of

Metahelix, Rallis is well equipped to ride this surge armed with the former’s

formidable R&D capabilities and robust product pipeline.

Outlook and valuations: Poised for growth; initiating with ‘BUY’

Rallis is expected to post sales and PAT CAGR of 14.2% and 19.2% (FY05-12 CAGR of

11.6% and 23.9%), respectively, over FY12-15E. The company has a strong operating

cash flow with a healthy RoE (20%-25%) and dividend payout ratio of ~35%. We value

it at P/E of 15x FY15E (without considering positives i.e., land bank, strategic stake in

Advinus, income from pulses initiatives). We initiate a `BUY’.

INITIATING COVERAGE

RALLIS INDIA Encashing emerging trends

EDELWEISS RATINGS

Absolute Rating BUY

Investment Characteristics Growth

MARKET DATA (R: RALL.BO, B: RALI IN)

CMP : INR 120

Target Price : INR 158

52-week range (INR) : 168 / 111

Share in issue (mn) : 194.5

M cap (INR bn/USD mn) : 23 / 430

Avg. Daily Vol. BSE/NSE (‘000) : 183.7

SHARE HOLDING PATTERN (%)

Current Q2FY13 Q1FY13

Promoters *

50.1 50.1 50.1

MF's, FI's & BKs 8.9 11.5 11.8

FII's 10.8 11.9 11.6

others 30.2 26.6 26.4

* Promoters pledged shares

(% of share in issue)

: Nil

RELATIVE PERFORMANCE (%)

Sensex Stock Stock over

Sensex

1 month (3.8) (9.6) (5.8)

3 months 4.3 (21.0) (25.3)

12 months 10.8 0.5 (10.4)

Manish Mahawar

+91 22 6623 3481

[email protected]

Click on image to view video

Manoj Bahety, CFA

+91 22 6623 3362

[email protected]

Ind

ia M

idca

ps

India Equity Research| Agriculture

February 27, 2013

Financials

Year to March FY11 FY12 FY13E FY14E

Net revenues (INR mn) 10,862 12,749 14,251 16,492

Revenue growth (%) 21.1 17.4 11.8 15.7

EBITDA (INR mn) 1,915 2,126 2,154 2,615

Core profit (INR mn) 1,258 1,224 1,239 1,660

Diluted shares (mn) 194 194 194 194

EPS (INR) 6.4 6.2 6.2 8.3

EPS growth (%) (22.9) (3.6) 0.3 33.0

P/E (x) 18.6 19.2 19.2 14.4

EV/EBITDA (x) 12.0 11.0 10.8 8.6

ROAE (%) 27.0 22.9 20.6 23.9

http://www.edelresearch.com/webcast/webcast_new.aspx?Id=22552&Type=ynaj9XvqmJoptbYzJzovtA==

Agriculture

2 Edelweiss Securities Limited

Investment Rationale

Wide network to widen consumer base further

According to the industry, the domestic agrochemical sector has shown a 10Yr CAGR (FY01-

10) of 7-8% and is worth INR80bn at present. Domestic agrochemical market is expected to

grow at 10%-12% CAGR in the near term on the back of increasing consumption levels, rising

MSP, better government focus and mounting cost of labour. In India, consumption of

agrochemical is well below the global standards.

Chart 1: Consumption pattern of Agrochemicals

Source: Company, Edelweiss research

Rallis has domestic market share of ~10% and is well placed to capture emerging

opportunities on the back of healthy distribution network, branded farm solutions and

launch of new products. Rallis is competing with Bayer Crop science and Syngenta, who are

the largest players in India. Other competitors are United Phosphorus, PI Industries,

Dhanuka Agritech etc. Rallis has 2500 dealers and 37000 retailers, covering 80%of India’s

districts. Further, it uses 700 exclusive outlets of Tata Chemicals for marketing purpose and

has extended its reach to 0.5mn farmers. Rallis plans to double the farmer reach over the

next two years. The company has established a strong rapport with farmers through Rallis

Kisan Kutumbha (RKK) that has extended support in crop protection, led to better yields and

quality produce.

New product launches to drive growth

Rallis is registering and launching new products on a continuous basis. The company has

registered 63 products and launched 38 products during FY05-12 (usually, it launches 3-4

products/pa). Rallis discontinued a few products that had alternative products and less

profitable. It has discontinued all red triangle (toxic) products in FY12 as a conscious

measure. Rallis launched ten products in FY12 (v/s average 3-4 products/pa) which we

believe, will drive the growth in the near term and help to gain market share.

0

4

8

13

17

21

Taiwan China Japan USA Korea France UK Pakistan India

(Pe

r k

g/H

ec

tare

)

Rallis exited completely from toxic

products as a conscious decision

in FY12.

In India, consumption of

agrochemicals is well below global

standards.

The INR80bn domestic

agrochemical industry is expected

to grow at 10%-12% CAGR in near

term.

Rallis with a ~10% domestic

market share is well-poised to

capture emerging opportunities. It

plans to double its farmer reach

to 1.0mn in the next two years.

Rallis India


Chart 2: New product registrations and launches


Chart 3: Providing Greener products


Rallis defined its turnover from newly introduced products in the last four years to total

turnover as ‘Innovation Turnover Index (ITI)’. ITI was normally 25%-30% during FY05-10. It

has fallen down to 20% and 11% in FY11 and FY12, respectively. Key revenue generating

products ‘Applaud’ and ‘Takumi’ have come out of the ITI in FY11 and FY12. Hence, index

has fallen down substantially (including revenue from both the products turnover

innovation index stood at 20% in FY12). We expect that ITI will be back to normal bracket

of 25%-30% because products launched during FY12 will drive the growth in near term.

1

6

10

15

19

24

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

(No

. of

pro

du

cts

)

Registrations Launches

Yellow

47%

Blue

36%

Green

7%

Red

10%

2001-02

Yellow

18%

Blue

52%

Green

30%

Red

0%

2011-12

Rallis launched ten products in

FY12 as against the annual

average of 3-4 products. This will

drive growth in the near term and

help to gain market share.

Innovation Turnover Index is

expected to be back to normal

range of 25%-30% as products

launched during FY12 will drive

up growth in near term.

Agriculture


Chart 4: Innovation turnover index


Table 1: Some of the Key Products Launched during FY10-12


Dahej to boost exports further

In FY12, Rallis has set up a new pesticide plant of 5000MT/PA in Dahej, Gujarat (SEZ) with

the capex of INR1.8bn. This plant will enjoy tax exemption for the initial five years and has

a potential to generate cumulative turnover of INR5bn over three years. The new plant

would primarily cater to export market as the company is targeting higher export sales

growth v/s domestic sales growth on the back of increased contribution from existing

geographies and entry to newer market. The Dahej facility will drive the export sales and

reduce dependence on the domestic market.

8.0

14.0

20.0

26.0

32.0

38.0

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

(%)

Key products ‘Applaud’ and ‘Takumi’

have come out of the ITI in FY11 and

FY12. Hence, index has fallen down

substantially

Products Description

Taarak Rice Herbicide

Ergon A unique fungicide product which enhance the yield

Rall igold Plant Growth Nutrients

Toran Pesticide for Cotton crop

Saaras Fungicide with collaboration of Syngenta

Neon An effective insecticide for the management of cotton

jassids and tea mites

Sonic A granular insecticide for paddy and sugarcane

Vaar Soyabean post emergence herbicide for the management of

all major weeds

Honcho Pre-post emergent herbicide for the management of all

major weeds in Onion

Cylo Post emergent herbicide for grassy weeds in rice

Tata Bahaar Plant Growth Promoter (PGP) for vegetables and fruit crops

to improve the growth and yield

Dahej facility has potential to

generate cumulative turnover of

INR5bn over the next three

years. It will boost export sales

and reduce dependence on the

domestic market.

Rallis India


Chart 5: Export sales and contribution to total sales


Metahelix – a growth ladder

In December 2010, Rallis entered into a definitive agreement to acquire a majority stake of

53.5% in the Bengaluru-based seeds research company ‘Metahelix Life Sciences’ (Metahelix)

in an ~INR1bn all-cash deal funded largely through internal accruals. Further, the company

increased its stake to 75.64% at the end of FY12 and total investment increased ~INR1.6bn.

Rallis further increased its stake to 77.02% during Q3FY13. As per the agreement, Rallis will

enhance its shareholding to 100% in Metahelix over a period of five years.

Organised hybrid seeds market is worth INR100bn (including vegetable seeds market size

INR20bn) in India and is expected to post 12-15% CAGR in coming years. India has ~2m ha

(of total 40m ha) under hybrid seed in rice crop, which is the next big opportunity for the

industry as well as Rallis. Area under rice hybrid seed is likely to reach 4-5m ha over the

three-four years.

Metahelix boasts of a good product portfolio in paddy, maize, millets & vegetable seeds,

and has a nationwide presence through its brand 'Dhaanya Seeds'. It has strong R&D

capabilities with ~70 scientists. We believe that Metahelix is well positioned to capture the

market due to strong R&D capabilities and product pipeline. Metahelix has launched ten

new seed hybrids and conducted extensive field activities in FY12 which is expected to

support the strong growth trajectory in the near term. Further, strong distribution network

of Rallis and Tata Chemicals will accelerate the growth of Metahelix, going forward.

Rallis guided to achieve cumulative net sales of INR10bn in initial five years. Metahelix had

sales of INR0.4bn during FY11 i.e. at the time of acquisition. It has already achieved sales of

INR0.8bn in FY12/H1FY13. At present, Metahelix’s EBITDA margin is 5%-10%. However, it is

expected to be in the range of 15-20% on account of operating leverage, going forward.

0.0

8.0

16.0

24.0

32.0

40.0

0

1,400

2,800

4,200

5,600

7,000

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

E

FY

14

E

FY

15

E

(%)

(IN

R m

n)

India has only ~2mha (of total

40m ha) under hybrid seed in rice

crop, which is big opportunity for

the industry as well as for Rallis.

Metahelix is well positioned to

capture the market due to strong

R&D capabilities and product

pipeline.

Rallis guided to achieve

cumulative sales of INR10bn in

the initial five years from seed

business. Seed business EBITDA

margin is expected to improve on

account of operating leverage.

Agriculture


Chart 6: Metahelix – Seeding growth


Into organic manure business

Rallis entered into an agreement to acquire 51% stake in ‘Zero Waste Agro Organics’ for

INR0.3bn in April 2012. Company makes organic manure from waste of sugarcane mills and

has brand ‘Geogreen’. Acquisition would be funded through internal accruals. The company

guided cumulative sales of Rs1bn in the next five years from the acquisition.

0.0

3.2

6.4

9.6

12.8

16.0

0

500

1,000

1,500

2,000

2,500

FY11 FY12 FY13E FY14E FY15E

(%)

(IN

R m

n)

Sales EBITDA EBITDA margin

Rallis guided to achieve

cumulative sales of INR1bn in next

five years from organic manure

business.

Rallis India


Valuations

At current valuation, Rallis is trading at a premium to domestic peers and at par with global

peers on account of

• Better financials

• Brand recognition

• Higher return ratio (RoE of 20%-25% )

• Marketing synergy with Tata Chemicals (TCL).

We strongly believe that Rallis will trade at premium, going forward too. We are initiating

coverage on Rallis with ‘BUY’ rating, valuing the stock at P/E of 15xFY15E. Though, we have

not considered the positives listed below, either in estimate or valuation.

• Surplus land bank: Rallis has considerable surplus land which it can divest any time as

per its requirement. As per media sources, the company is holding 110acres of land

(85acres in Hyderabad and 25acres in Mumbai). We believe both the property together

could fetch ~INR3bn (~INR15/share or ~13% of CMP)

• Strategic stake in Advinus: Rallis has a ~14% stake in Advinus Therapeutics (Advinus),

with a total investment of INR0.18bn. Advinus is a research-based pharmaceutical

company founded by leading global pharmaceuticals executives and promoted by the

Tata Group. Company offers development services to pharma, agro and biotech

industries.

• Income from pulses initiatives (with TCL): TCL has forayed into branded pulses, retailing

under brand ‘I-Shakti’ with Rallis. TCL has introduced four variants – Tur, Moong,

Chana and Urad retailing under brand ‘I-Shakti’. Rallis would encourage farmers to

grow pulses, provide them necessary agri-inputs and pay them higher prices (v/s MSP)

for their produce. Tata Chemicals is targeting INR50bn of sales in the next five years

from this initiative. Hence, we believe that even 1% margin for Rallis could generate

INR0.50bn (~24% of FY12 EBITDA) of EBITDA in the next five years.

Table 2: Peer Comparison

Source: Bloomberg, Edelweiss research

Companies Mcap DPS D-Yield

(USD bn) CY13/FY14E CY14/FY15E CY13/FY14E CY14/FY15E CY13/FY14E CY14/FY15E CY11/FY12 %

Domestic Players

Rall is India 0.4 33.0 26.8 14.4 11.4 23.9 25.5 2.2 1.8

PI Industries 0.3 37.3 26.1 10.9 8.6 26.1 25.9 5.0 0.8

United Phosphorus 1.0 25.9 19.1 5.9 5.0 18.6 18.9 2.5 2.0

Big Six Global Players

Monsanto 52.9 14.3 11.9 19.0 16.9 20.0 20.1 1.3 1.3

Syngenta 40.4 10.1 5.4 14.5 13.7 24.1 21.7 9.5 2.4

Bayer 80.7 9.1 9.6 12.3 11.2 21.8 20.5 1.7 2.3

BASF 90.9 11.2 9.3 12.4 11.4 19.4 19.1 2.5 3.4

Dupont 43.5 18.0 12.4 11.8 10.5 31.5 29.0 1.7 3.7

Dow Chemical 37.9 24.4 24.8 13.4 10.7 13.7 15.6 1.2 3.8

Global Generic Players

FMC Corp 8.0 14.5 15.8 14.6 12.6 27.4 26.4 0.4 0.7

Nufarm (Global) 1.5 12.3 9.5 11.7 10.7 8.7 9.0 0.1 1.1

EPS Growth (%) P/E (x) ROE (%)

Agriculture


Chart 7: One year forward P/E

Chart 8: One year forward EV/EBITDA

Chart 9: One year forward P/BV

Source: Bloomberg, Edelweiss research

5x

10x

15x

20x

0

40

80

120

160

200

Ap

r-0

5

Se

p-0

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Fe

b-0

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Jul-

06

De

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6

Ma

y-0

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Oc

t-0

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Ma

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Au

g-0

8

Jan

-09

Jun

-09

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9

Ap

r-1

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b-1

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Jul-

11

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y-1

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Oc

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(x)

5x

10x

15x

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50

100

150

200

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Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

(x)

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4x

6x

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50

100

150

200

250

Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

(x)

Rallis is trading at lowest

valuation of past three years

Rallis India


Key Risks

Weather: Crop protection industry faces the risks of seasonal weather factors. The weather

can affect the presence of pest infestations as well as affect the demand for crop-protection

products. In the domestic market, sales are highly seasonal, mainly during the monsoon.

Any adverse change in the weather will have a negative effect on the sales.

Chart 10: Correlation of monsoon v/s Rallis sales growth

Source: IMD, Company, Edelweiss research

Genetically modified (GM) crops: The usage of crop protection products is significantly less

for GM crops. Hence, growth and acceptance of GM crops by consumers may have an

adverse effect on Rallis’ business.

Overseas regulation: Rallis is registering its products in the overseas market. Any negative

measure by the respective countries can affect the company’s growth adversely.

(28.0)

(17.0)

(6.0)

5.0

16.0

27.0

FY06 FY07 FY08 FY09 FY10 FY11 FY12

(%)

Monsoon % Departure Rallis Sales growth (%)

Agriculture


Company Description

About Rallis India

Rallis is a Tata Group owned Agrochemical Company and a key player in India. Tata

Chemicals holds 50.09% in Rallis India. Company has employee strength of 857 as on March

31, 2012 and have plants located at Akola, Ankaleshwar, Ratnagiri and Bharuch.

Agrochemical and seed business constitute ~94% and ~6% in consolidated FY12 sales.

Company acquired Bangalore based seed players Metahelix during FY11 and entered into

an agreement to acquire 51% stake in ‘Zero Waste Agro Organics’ in April 2012. Rallis has

broad and diversified product portfolio in terms of crops as well as type of pesticide.

Chart 11: Standalone sales breakup (FY12) Chart 12: Consolidated Sales breakup (FY12)

Source: Company. Edelweiss research

According to customer engagement survey by Gallop, Company has 7 of the top 12 brands

when it comes to awareness of brands in Indian agrochemical market.

Table 3: Strong Brands in Portfolio

Source: Company. Edelweiss research

Insecticide

45%

Herbicide

30%

Fungicide

25%

Brands Players

Confidor Bayer

Contaf Rall is

Rogor Rall is

Asataf Rall is

Tata Mida Rallis

Contaf Plus Rall is

Fame Bayer

Antracol Bayer

Tata Mono Rallis

Applaud Rallis

Proclaim Syngenta

Hostathion Bayer

Domestic

64%

Export

30%

Seed

6%

Rallis India


Rallis has strong relationship with global majors and entered into several alliances such as

Dupont, Syngenta, Bayer, among others. These tie-ups enable it to offer a bouquet of

specialty products, addressing varied crop protection needs.

Table 4: Details of alliances


About Metahelix Lifescience

Metahelix is an agricultural biotechnology company focusing on developing traits and

technologies for crop production and improved productivity. Hybrid seeds and traits are

commercialized by its wholly owned subsidiary— Dhaanya Seeds—that serves as a

production and marketing organization for technologies developed by Metahelix.

At present, Dhaanya Seeds markets farmer driven hybrids in major food crops such as rice,

maize, pearl millet, sorghum, oil seeds (sunflower), fibre crop (cotton). In vegetables, the

focused crops are tomato, hot pepper (chilli), brinjal, gourds and water melon. A large

number of new hybrids in these crops are also under test in actual farming conditions for

evaluation that would be ready for commercial launch in the next 1-2years. Metahelix has

launched ten new seed hybrids and conducted extensive field activities in FY12 which is

expected to support the strong growth trajectory in the near term.

Dhaanya Seeds is well supported by Metahelix’s world class infrastructure consisting of

20000sqft laboratory space and 24000sqft green house. Company has production

operations in Karnataka, Tamilnadu and Andhra Pradesh. Metahelix has management team

with rich agricultural experience. It has strong R&D capabilities with ~70 scientists.

Players Brand/Products

FMC, USA Furadan, Tatafuran, Electra, Impeder

Nihon Nohyaku Co. Ltd. , Japan Applaud, Fuji 1

Dupont, USA Daksh, Rekord

Syngenta Preet, Anant, Paralac, Prabhav, Sartaj

Bayer Tata Mida, Spiro

Gharda Chemicals Fateh, Koranda

Makhteshim Chemical Works Captan, Atrazine, Nova

Borax, USA Micronutrient Boron

Yara International Asa Range of specialty products

A large number of new hybrids

are also under test in actual

farming conditions for evaluation

that would be ready for

commercial launch in the next 1-

2years.

Agriculture


Table 5: Metahelix‘s key personnel in management team


Dr. K.K. Narayanan,

Managing Director

One of the founder member of Metahelix and is in overall

incharge of company. Earlier Narayanan was the program lead

for Crop Transformation and Functional Genomics at the

Monsanto Research Center, Bangalore.

Dr. Gautham Nadig,

Director

Dr. Nadig is one among the founder members of Metahelix. Dr.

Nadig leads the Research and Development, Business

Development and administrative function of the Company.

Before joining Metahelix, Dr. Nadig was a Senior Scientist in the

Bioinformatics division of the Monsanto Research Center,

Bangalore and later on served as a consultant to Monsanto's

Plant Genomics group at Saint Louis.

Ravikrishna S.,

Director

Prior to joining Metahelix, Ravi was with Business Development

group in E.I. DuPont India Private Limited, Gurgaon and earlier

led the seed business at PHI Seeds Limited, Hyderabad. He had

also worked with Advanta India (previously ITC Zeneca Ltd) in

different positions before leading the Marketing and Business

Development function. In his previous roles, Ravi has been

responsible for new business initiatives and brings in

considerable experience in marketing and business

development.

Rallis India


Industry highlights

Agrochemical Industry

Global agrochemical industry has shown a 10-year CAGR (FY01-10) of ~4% and is worth

USD45bn. Crop protection industry players are categorised into innovators and generics.

Innovators are research & development patented product based players like Bayer,

Syngenta, BASF, Monsanto, Dow and Dupont. While off-patented product based players are

called as generic players. Generic players have a key strength of low-cost manufacturing and

wide distribution network.

Chart 13: Global Agrochemical Industry


Agrochemicals are necessary to avoid large losses due to weeds, fungal diseases and insect

infestations to crops. According to Cheminova (global generic crop protection player), 30-

50% of crops are saved by usage of spray globally.

As per Philips McDougall report (2007), patented products contribute only ~25% to the

global crop protection market, while balance market is off-patented (generics). However,

45% of the generic market is still marketed by innovator companies. Hence, we believe that

it will be an attractive opportunity for generic players in the future.

20.0

26.8

33.6

40.4

47.2

54.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(US

D b

n)

Agriculture


Chart 14: Global patented and off-patented market Chart 15: Share of innovators in off-patented market

Source: Philips McDougall, Edelweiss research

Chart 16: Geography-wise global agrochemical market

Source: United Phosphorus, Edelweiss research

As per industry sources, domestic crop protection industry has shown a 10 year CAGR (FY01-

10) of 7%-8% and is worth INR80bn. Further, 18%-20% of crops are saved on the back of

crop protection usage in India. Major agrochemical consuming states in India are from

southern and western India belts. Further, paddy (rice) followed by cotton is major

agrochemical consuming crop.

Patented

25%

Off

Patented

75%

Europe

27%

Latin America

22%North America

21%

Asia

26%

Rest of World

4%

Generic

Players

55%

Innovators

45%

Rallis India


Chart 17: State-wise pesticide consumption in India

Source: Ministry of Agriculture, PI Industries, Edelweiss research

Chart 18: Crop-wise pesticide consumption in India

Source: Industry, Edelweiss research

Global as well domestic food demand has been driven by increasing population, declining

arable land and shift from food to fuels. In India, arable land has been declining since the

last four decades. However, food production witnessed 2.1% CAGR (during 1960-2010)

primarily on the back of yield improvement.

Andhrapradesh

23%

Punjab

12%

Maharashtra

12%Karnataka

7%

Gujarat

7%

West Bengal

6%

Haryana

7%

Tamilnadu and

Kerala

6%

Others

20%

Paddy

35%

Cotton

25%

Others

40%

Agriculture


Chart 19: Stagnant India’s Arable Land

Source: Department of Agriculture, Edelweiss research

Chart 20: India’s food production

Source: Department of Agriculture, Edelweiss research

India’s agricultural yield is rising with the same CAGR as the world, despite having an

absolute yield, which is much lower than the world. Demand for food is growing consistently

on account of rising population, diversion from food to fuels, rising income in developing

countries etc. Further, declining arable land and climatic problems are imposing supply-side

pressures. Hence, we believe that the only solution to increase food availability is to

improve agricultural yield that ensures strong trajectory for agricultural inputs like

fertilizers, crop protection products, seeds and irrigation facilities.

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FY

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FY

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FY

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FY

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FY

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(m m

t)

Rallis India


Chart 21: Agricultural yield

Source: USDA, Department of Agriculture (India), Edelweiss research

Seed Industry

Indian seed industry is the eighth largest in the world and market size is estimated to be

INR80-100bn (including vegetable seeds market size INR20bn). Domestic seed industry is

growing at the rate of 12% as compared to 6%-7% globally and is expected to post 12-15%

CAGR in coming years. Of this, domestic cotton seed market is worth INR40bn and is

expected to be same over the next two to three years on account of declining cotton

acreage in India. Nuziveedu Seeds is largest player in hybrid cotton seeds with 25% market

share followed by Rashi Seeds and Myhco.

Seed Industry has a long business cycle of 13-14years (R&D – ~7years, production – ~3years

and commercialization - ~3years) which plays big entry barrier.

India has ~2mha (of total 40mha) under hybrid seed in rice crop, which is the next big

opportunity for the industry. Area under rice hybrid seed is likely to reach 4-5mha over the

next three to four years. Bayer Crop Science is biggest player in hybrid rice seed with

domestic market share of 40%-50%.

0.0

0.8

1.6

2.4

3.2

4.0

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60

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FY

64

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08

FY

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(mt

/ h

ec

tare

)

World's Yield India's Yield

Agriculture


Chart 22: Indian seed industry crop-wise

Source: Kaveri Seeds, Edelweiss research

Cotton

40%

Vegetable and

fruits

20%

Others

40%

Rallis India


Financial Outlook

Healthy financials, dividend payouts

We expect Rallis’ net sales and PAT to grow FY12-15E at CAGR of 14.2% and 19.2%,

respectively (v/s FY05-12 CAGR of 11.6% and 23.9%) on the back of higher growth in export

sales, which would be supported by the new facility in Dahej, and the growth in Metahelix

seed business. We are considering 4%/12%/12% domestic agrochemical business growth

during FY13/14/15 (FY09-12 CAGR of 13.1%), primarily on account of volume growth that

we expect, to be driven by new products. During FY12, Rallis domestic business has shown

de-growth of 2.2% YoY primarily on account of discontinuation of red triangle (toxic)

products and adverse weather condition.

Chart 23: Strong revenue growth to continue


Chart 24: PAT Growth


0

4,500

9,000

13,500

18,000

22,500

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

(IN

R m

n)

Agrochemicals - Domestic Agrochemicals - Export Seeds Organic Manure

0

500

1,000

1,500

2,000

2,500


(IN

R m

n)

Agriculture


The company has improved its EBITDA margin from 11.3% in FY05 to 19.4% in FY10 on the

back of product optimization and internal initiatives, though it has come down to 17.6% in

FY11 and 16.7% during FY12 on account of higher input cost, sales of low margin products

led by erratic rain and contribution of lower margin seed business. We are considering flat

consolidated EBITDA margin over FY12-15 despite margin improvement in seed business

led by operating leverage.

Rallis has shut down its Turbhe, Mumbai plant and shifted its production to new Dahej

facility. On account of cessation, the company has given voluntary retirement scheme to its

employees and we believe that there will be cost saving pertaining to cessation of Turbhe

facility. We have not considered any benefit or margin improvement led by cessation of

Turbhe facility. Hence, it will be upside risk to our margin assumption.

Chart 25: EBITDA and EBITDA margin


Ralls’s gross debt increased from INR0.1bn in FY10 to INR1.5bn in FY12 (DER from Nil in FY10

to 0.3x in FY12) because company has made substantial investment by way of setting up

plant in Dahej (~INR1.8bn), acquisition of Metahelix (~INR1.6bn) and higher working capital

requirement (INR0.8bn in FY11 and FY12).

We believe there is no major capex likely in the near term as recent initiatives are seen

increasing cash-flows. This would lead to a lower debt in the near future and reduce interest

outgo. The company has healthy RoE (20%-25%) and strong dividend payout ratio of ~35%.

0.0

5.0

10.0

15.0

20.0

25.0

300

900

1,500

2,100

2,700

3,300

FY

05

FY

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07

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FY

09

FY

10

FY

11

FY

12

FY

13

E

FY

14

E

FY

15

E

(%)

(IN

R m

n)

EBITDA EBITDA margin

Rallis India


Chart 26: RoE (%) and Pretax RoCE (%)


Chart 27: Consistent dividend history


0.0

12.0

24.0

36.0

48.0

60.0


(%)

RoE Pretax RoCE

4.0

21.8

39.6

57.4

75.2

93.0


(%)

Dividend Payout

Agriculture


Financial Statements

Key assumptions

FY12 FY13E FY14E FY15E

Macro GDP(Y-o-Y %) 6.5 5.5 6.5 7.0

Inflation (Avg) 8.8 7.8 6.0 6.0

Repo rate (exit rate) 8.5 7.5 6.8 6.0

USD/INR (Avg) 47.9 54.5 54.0 52.0

Company Domestic rev. growth (%) (2.2) 4.0 12.0 12.0

Export revenue growth (%) 49.5 20.0 15.0 15.0

Seeds revenue growth (%) 324.0 57.0 35.0 30.0

Organic manure rev. grw. (%) NA NA NA 35.0

Raw Material Cost as % Net Revenue 58.3 59.8 59.3 58.8

Employee expenses as % Net Revenue 7.1 6.5 6.2 5.9

Other Expenses as % Net Revenue 18.0 18.6 18.6 18.6

Deprec. rate as % of avg. gross block 6.3 5.4 5.2 5.2

Interest rate as % of avg. gross debt 10.5 13.3 9.0 9.0

Tax rate as % of PBT 30.8 27.7 26.2 25.2

Capex (INR mn) 1,522 600 600 600

Net borrowings (INR mn) 1,429 1,422 678 (390)

Receivable (days) 30 32 35 35

Inventory (days) 123 121 118 120

Payable (days) 195 175 166 166

Cash conversion cycle (dayes) (42) (22) (13) (11)

Income statement (INR mn)

Year to March FY12 FY13E FY14E FY15E

Net revenues 12,749 14,251 16,492 18,963

Raw material costs 7,428 8,522 9,786 11,153

Gross profit 5,321 5,729 6,706 7,810

Employee expenses 902 925 1,017 1,119

Other expenses 2,292 2,650 3,074 3,535

Operating expenses 3,195 3,575 4,091 4,654

Total expenditure 10,622 12,097 13,877 15,807

EBITDA 2,126 2,154 2,615 3,156

Depreciation & amortisation 287 303 327 357

EBIT 1,840 1,851 2,288 2,799

Interest expense 141 208 112 40

Other income 69 70 74 77

Profit before tax 1,768 1,713 2,250 2,836

Provision for tax 544 474 590 716

Core profit 1,224 1,239 1,660 2,121

Extraordinary/ Prior period items (217) 3 0 0

Profit after tax 1,007 1,242 1,660 2,121

Minority interest 15 26 48 75

Profit after minority interest 992 1,215 1,613 2,046

Equity shares outstanding (mn) 194.5 194.5 194.5 194.5

EPS (INR) basic 6.2 6.2 8.3 10.5

Diluted shares (mn) 194.5 194.5 194.5 194.5

EPS (INR) diluted 6.2 6.2 8.3 10.5

CEPS 7.7 7.8 10.0 12.4

DPS 2.2 2.3 2.4 2.5

Dividend payout (%) 35.4 36.9 28.9 23.8

Common size metrics (% net revenues)


Gross margin 41.7 40.2 40.7 41.2

Operating expenses 25.1 25.1 24.8 24.5

EBITDA margins 16.7 15.1 15.9 16.6

EBIT margin 14.4 13.0 13.9 14.8

Interest 1.1 1.5 0.7 0.2

Net profit margin 9.6 8.7 10.1 11.2

Growth metrics (%)


Revenues 17.4 11.8 15.7 15.0

EBITDA 11.0 1.3 21.4 20.7

PBT (3.8) (3.1) 31.4 26.0

Net profit (2.7) 1.2 34.0 27.7

EPS (3.6) 0.3 33.0 26.8

Rallis India


Balance sheet (INR mn)

As on 31st March FY12 FY13E FY14E FY15E

Share capital 194 194 194 194

Reserves & surplus 5,336 6,028 7,095 8,572

Shareholder equity 5,530 6,222 7,289 8,766

Minority interest 14 26 48 75

Long term borrowings 856 856 356 0

Short term borrowings 685 735 535 0

Loan funds 1,541 1,591 891 0

Deferred tax liability/asset 131 232 232 232

Sources of funds 7,217 8,071 8,459 9,072

Tangible assets 3,612 3,909 4,183 4,426

Intangible assets 25 25 25 25

CWIP (incl. intangible) 599 300 300 300

Total net fixed assets 4,236 4,234 4,508 4,751

Goodwill on consolidation 1,533 1,533 1,533 1,533

Non current investments 197 487 487 487

Current investments 30 30 30 30

Cash and cash equivalents 112 169 213 390

Inventories 2,717 2,950 3,386 3,930

Sundry debtors 1,035 1,479 1,685 1,991

Loans and advances 1,358 1,358 1,358 1,358

Other assets 8 8 8 8

Total current assets (ex cash) 5,118 5,795 6,436 7,287

Trade payable 2,680 2,840 3,260 3,729

Other current liabilities and provisions 1,330 1,337 1,488 1,677

Total current liabilities & provisions 4,010 4,178 4,748 5,406

Net current assets (ex cash) 1,108 1,617 1,688 1,881

Application of funds 7,217 8,071 8,459 9,072

Book value per share (INR) 28 32 37 45

Free cash flow (INR mn)


Net profit 992 1,215 1,613 2,046

Add: Depreciation 287 303 327 357

Add: Interest and other non-cash items 175 - 0 0

Gross cash flow 1,453 1,518 1,940 2,403

Less: Changes in working capital 507 509 71 193

Operating cash flow 946 1,009 1,869 2,210

Less: Capex 466 301 600 600

Free cash flow 480 708 1,269 1,610

Peer comparison valuation

Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)

Name (USD bn) FY14E FY15E FY14E FY15E FY14E FY15E

Rallis India 0.4 14.4 11.4 8.6 6.8 23.9 25.5

PI Industries 0.3 10.9 8.6 6.7 5.2 26.1 25.9

United Phosphorus 1.0 5.9 5.0 4.0 3.4 18.6 18.9

Source: Edelweiss research

Cash flow metrics


Operating cash flow 946 1,009 1,869 2,210

Financing cash flow (239) (361) (1,225) (1,433)

Investing cash flow (740) (591) (600) (600)

Net cash flow (34) 57 44 177

Capex (466) (301) (600) (600)

Dividends paid (473) (523) (546) (569)

Profitability ratios


ROACE (%) 28.3 25.5 29.5 33.9

ROAE (%) 22.9 20.6 23.9 25.5

Receivables (days) 30 32 35 35

Inventory (days) 123 121 118 120

Payables (days) 195 175 166 166

Cash conversion cycle (days) (42) (22) (13) (11)

Debt-equity (x) 0.3 0.3 0.1 0.0

Debt/EBITDA 0.7 0.7 0.3 0.0

Adjusted debt/Equity (x) 0.3 0.3 0.1 0.0

Operating ratios (x)


Total asset turnover 1.9 1.9 2.0 2.2

Fixed asset turnover 4.4 3.8 4.0 4.4

Equity turnover 2.4 2.4 2.4 2.4

Valuation parameters


Diluted EPS (INR) 6.2 6.2 8.3 10.5

Y-o-Y growth (%) (3.6) 0.3 33.0 26.8

CEPS (INR) 7.7 7.8 10.0 12.4

Diluted P/E (x) 19.2 19.2 14.4 11.4

P/BV (x) 4.2 3.7 3.2 2.7

EV/Sales (x) 1.8 1.6 1.4 1.1

EV/EBITDA (x) 11.0 10.8 8.6 6.8

Dividend yield(%) 1.8 1.9 2.0 2.1

Agriculture


Holding Top -10

Perc. Holding Perc. Holding

Amansa Investments 3.87 Reliance Capital Asset Management 1.03

Fidelity Mutual Fund 3.01 Oriental Insurance Co 1.00

Sundaram Asset Management 1.74 Argonaut Ventures 1.00

L&T Investment Management 1.47 Amundi Luxembourg SA 0.77

UTI Asset Management 1.04 Blackrock Group 0.76

*as per last available data

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

05 Mar 2012 Tata AIG Life Insurance Company Ltd Buy 49732

05 Jun 2012 Rakesh Jhunjhunwala Buy 952000


Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No available data


Additional Data

Directors Data

Mr. R. Gopalakrishnan Chairman Mr. Homi R. Khusrokhan Director

Mr. B.D. Benerjee Director Mr. E.A. Kshirsagar Director

Mr. Prakash R. Rastogi Director Mr. Bharat Vasani Director

Mr. Venkatrao S. Sohoni Director Mr. K.P. Prabhakaran Nair Director

Mr. R. Mukundan Director Mr. Yoginder K. Alagh Director

Mr. Y.S.P. Thorat Director Mr. V. Shankar Managing Director & CEO

Auditors - Deloitte Haskins & Sells


Rallis India


Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Agriculture

EID Parry India, Jain Irrigation, PI Industries, Rallis India, Shree Renuka Sugars, United Phosphorus

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 118 46 17 181

* - stocks under review

Market Cap (INR) 117 57 7

> 50bn Between 10bn and 50 bn < 10bn

Date Company Title Price (INR) Recos

Buy Hold Reduce Total

Recent Research

26-Feb-13 Agrium Uncertainty clouds Indian non-

urea fertiliser outlook;

Global Pulse

Not

Rated

19-Feb-13 PI

Industries

Stellar performance;

Result Update

610 Buy

05-Feb-13 PotashCorp Domestic challenges to stay;

Global Pulse

Not

Rated

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

Agriculture


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