Elara Capital - Agri Inputs

A long harvest
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Limited land Food Crop Production Protection Yield Population Land Food Crop Production Protection Yield Population Land
Anand Shah anand.shah@elaracapital.com +91 22 4062 6821
India Crop Protection

9 January 2012 Elara Securities (India) Private Limited
Notes
Elara Securities (India) Private Limited
India | Crop Protection
9 January 2012
Initiating Coverage

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 worlds 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. Valued at INR137bn, crop protection industry has grown ~11% CAGR
150 (INR bn) 100 50 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 40 30 10 0 (10) (%) 20
Global Markets Research
Domestic Consumption (LHS) YoY (RHS) Source: CMIE, Elara Securities Research
Per hectare consumption of pesticides in India lags its peers

18 16 14 12 10 8 6 4 2 0 17.0 14.0 12.0 7.0 7.0 5.0 5.0 1.0 0.5
China Korea Taiwan Pakistan Japan France India USA UK
Source: Industry estimates, Elara Securities Research
Usage of herbicides has risen to ~20% driven by labour shortages

India 2009
Others 5% Fungicides 20%
(kg/ ha)
Herbicides 20%
Insecticides 55%
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. Key Financials
Company Rallis India # PI Industries Dhanuka Agri Insecticides India Rating Buy Buy Buy Accumulate Mcap INR mn USD mn 23,531 12,349 4,552 5,035 444 233 86 95 CMP Target Upside (INR) (INR) (%) 121 493 91 397 170 669 128 457 40 36 41 15 FY12E 17.1 16.3 8.4 12.8 P/E (x) FY13E 13.0 10.4 6.3 9.4
Price performance
(Rebased to 100) 300 250 200 150 100 50 0 Jan-11 Jun-11 Aug-11 Apr-11 Feb-11 Mar-11 Sep-11 Oct-11 May-11 Nov-11 29.1 30.5 30.4 25.3 Dec-11 Jan-12 31.6 31.3 29.7 28.2 Jul-11
Sensex Rallis Source: Bloomberg
PIIL IIL
Dhanuka
FY14E 10.2 7.7 5.2 6.7
EV/EBITDA (x) FY12E FY13E FY14E 11.4 9.6 6.6 9.3 8.7 7.0 4.8 6.8 6.8 5.1 3.6 4.8
FY12E 25.9 27.6 28.6 22.8
RoE (%) FY13E
FY14E
Source: Company, Elara Securities Estimate; Note: # Consolidated financials

Table of Content
Executive Summary 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. Valuation & Recommendation Initiate with Rallis & PI Industries as top picks Annexure I: Distributor/Farmer meetings takeaways.. Annexure II: Insights into global crop protection industry. Annexure III: Primer on Pesticides.. 3 4 4 7 9 15 18 22 24
Company Section
Rallis India (Rallis) Poised to grow.. Investment rationale. Valuation & Recommendation PI Industries (PIIL) Going one up with a niche model.. Investment rationale. Valuation & Recommendation Dhanuka Agritech (Dhanuka) Partnering its way to success.. Investment rationale. Valuation & Recommendation Insecticides India (IIL) Expanding into new horizons. Investment rationale. Valuation & Recommendation 63 66 70 53 56 59 41 44 48 27 30 35
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 worlds 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 agriinputs like crop protection (pesticides) products.
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.
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.
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 dont 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 debtequity), 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%.
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--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.
Crop Protection
3
India Crop Protection 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
Vegetables
Growing populationgrowing needs

Indias current population estimates for 2011 stands at 1.2bn. According to population projections based on different average annual rate of growth, Indias 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, Indias population will reach 1.5bn by 2040. Exhibit 1: Indian population to reach 1.4bn by 2026
1.45 1.40 1.35 (bn) (million tonnes) 1.30 1.25 1.20 1.20 1.34 1.40 1.15 1.10 2011 2021 2026 2000
Foodgrains
Compared to other countries, India faces a bigger challenge, since with only 2.3% share in worlds 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 agriinputs like crop protection (pesticides) products.
400 300 (million tonnes) 102 200 14 30 100 0 Wheat Cereals 156
192
355
Landscape conducive for growth in agri-inputs
Exhibit 2: Domestic demand for food grains to reach 355 mn tonnes by 2030
64 95
110
81
93
180 Fruits 43 2030 Edible Oil 2026
33
Rice
Source: ICAR Vision 2030 document, Elara Securities Research
Further, according to a working paper by ICRIER (Mittal, 2008 - DemandSupply 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
40 20 0 (20) (40) (60) (80) Rice Wheat Total Cereals 2021 Pulses (3) (4) (7) (8) (17) (18) (25) (27) (39) (40) (74) Sugar 1 99 21 27 32 21
Source: Indian Council for Research on International Economic Relations (ICRIER) working paper Mittal, 2008, Elara Securities Research
Pulses
2011
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.
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
Milk
76
182

believe the same can be achieved through focus on irrigation facilities and credit availability, better farming techniques, mechanisation and judicious use of agriinputs (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 worlds 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
139 138 139 141 142 143 141 141 141 144 142 140 138 136 134 132 130 128 126 141 141 141 140 141
Exhibit 5: Average land holding sizes have declined to 1.06ha with operational holdings doubling
120 100 (million) 80 60 50.77 57.07 71.04 40 20 0 1960-61 1970-71 1981-82 1991-92 2003 2.63 2.20 1.67 1.34 93.45 1.06 101.27 3.0 2.5 2.0 1.5 1.0 0.5 0.0 (ha)
Number of operational holdings (LHS) Average size of holding (RHS)

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
3 2 1 0 (1) (2) (3) (4) 2.21 0.85 0.57 0.24 0.54 0.95
(million hectares)
133
138
1961 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008
133
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.
(CAGR %)
(0.04)
(3.16)
Cereals
(0.13)
Foodgrains
Jowar
Bajra
(0.02)
Oilseeds
Wheat
Maize
Rice
Pulses
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.
5
Non-Foodgrains
Crop Protection

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
250 (million tonnes) 230.8 212.9 213.2 198.4 208.6 217.3 218.1 200 196.8 176.4 150 129.6 108.4 100 50.8 50 0 1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 82.2 234.5
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
2,000 (Kg per hectare) 1,500 1,000 500 0 1950-51 1958-59 1964-65 1975-76 1980-81 1994-95 1999-00 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
174.8
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
5 4 3 2 1 0 (1) (2) (3) 3.8 1.2 0.4
Further, in terms of comparative yields, India not only lags countries like USA and China, a look at the statewise average yield shows prominent crop productivity differences especially in paddy, wheat and pulses. Exhibit 11: Yields in India lag behind other countries
(CAGR %)
0.4 (million tonnes)
10,000 8,000 6,000 4,000 2,000 0
6,556 7,672 4,309 3,370
0.6 (0.1) (2.6) Wheat
0.9
5,556 3,018 3,086 2,802
9,658 4,762 5,109 Maize India Cotton 403 737 233 2,324 659 980 307 Wheat USA World Avg 2,414 4,878 Maize Soybean Pulses Highest Lowest 1,041 1,366 679 1,361
12,000
Bajra
Rice
Jowar
Maize
Cereals
Pulses
Foodgrains
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
200 190 180 170 160 150 140 130 120 110 100
Exhibit 12: Significant yield-gaps exist within states

5,000 (million tonnes) 4,000 3,000 2,000 1,000 0 Paddy Wheat All India 4,022 4,462 2,907 918 6,000
( Kgs per year)
186.2 171.1 169.4 172.0 180.8 173.5 183.6 163.2 170.0 165.9 151.9 180.4 159.7 168.9 154.2 162.5 161.6 159.2 162.1
2,178
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
927
522 672 757 944 1,023 Paddy China
1,546 1,704 1,734 1,535 1,727 1,652 1,715 1,756 1,860 1,909 1,798

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.
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 ~60100% over FY2005-11
220 200 180 160 140 120 100 80 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 Base FY2005 = 100
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
18 16 14 12 10 8 6 4 2 0 13.8 14.9 16.0 13.0 13.0 15.6 12.9 10.5
Cereals Fruits
Source: CMIE, Elara Securities Research
Pulses Raw cotton
Vegetables
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
172.5 200 95.3 160 (INR bn) 48.6 70.5 120 17.9 16.8 20.5 26.6 80 40 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11RE 2011-12BE 38.0 108.7 171.2
(CAGR %)
8.4
4.3
4.0
4.3
2.7
2.7
3.9
2.5
4.7
Soyabean
FY03-08
Groundnut
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
40 26 (%) 30 20 10
Rapeseed Safflower Lentil (Masur) Wheat Barley Gram
33
15
24
35
39
50
Sugarcane
Cotton
Paddy
Jowar
Bajra
Wheat
Barley
1.6
Source: www.dacnet.nic.in, Elara Securities Research; Note: RE = Revised Estimates, BE = Budgeted Estimates
Source: www.dacnet.nic.in, Elara Securities Research
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
7
Crop Protection
Higher MSPs a windfall for farmers

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)
120 100 (INR bn) 80 60 40 20 0 2010-11RE 2007-08 2008-09 2009-10 2011-12BE 12.5 28.9 37.6 67.2 103.5
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, hasslefree 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
84.6 93.7 2009-10 120 67.6 76.1 100 41.4 51.1 80 (mn) 23.9 32.1 60 5.9 14.6 40 0.8 20 0 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2010-11 (%) 59.1 100.9
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), nonbanking 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
5,000 4,468 4,000 (INR bn) 3,000 1,253 1,805 463 528 620 696 870 2,294 2,547 2,000 1,000 0 2011-12T 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 3,019 3,845 4,750
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
1,600 1,400 1,200 1,000 800 600 400 200 0 19.7 16.0 13.5 761 14.6 866 14.6 1,050 1,287 907 1,334 FY2010 20.3 22 20 18 16 14 12 10 FY2005 FY2006 FY2007 FY2008 FY2009
(INR bn)
GCF (LHS)
GCF/GDP (RHS)
Source: DAC Annual Report 2011, Elara Securities Research
Source: NABARD Annual Reports, Elara Securities Research
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
Others 14% Storage 10% Weeds 28%
Low consumption indicates tremendous scope One of the key reasons for high crop losses in India vis--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-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
18 16 14 12 10 8 6 4 2 0 17.0 14.0 12.0 7.0 7.0 5.0 5.0 1.0 Pakistan Taiwan China Japan USA France Korea UK 0.5 India
Insects 23%
Diseases 25%
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 Cotton Rice Groundnut Maize Sugarcane Pulses Vegetables Fruits Avoidable Losses (%) 49-90 21-51 29-42 20-25 8-23 40-88 30-60 20-35 Cost: Benefit ratio 1:7 1:7 1:28 1:3 1:13 1:4 1:7 1:4
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
450 400 350 300 250 200 150 100 50 0 391 335 401 358 300 299 400
(INR bn)
(kg/ ha)
2006-07
113 86
2007-08
120 126
2008-09
2009-10
2010-11
Budget Outlay
Central Release
Source: Division of Agrochemicals, IARI (2008), Elara Securities Research
Source: www.nrega.nic.in, Elara Securities Research
2011-12
Crop Protection
9

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
160 140 120 100 80 60 40 20 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 35 30 25 20 15 10 5 0 (5) (10)
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.
(INR bn)
(%)
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
Others 20%
Tamil Nadu & Kerala 6% Haryana 7% Andhra Pradesh 23%
Domestic Consumption (LHS)

YoY (RHS)
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 4thlargest 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.
Punjab 12%
West Bengal 6% Gujarat 7% Karnataka 7%
Maharashtra 12%
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

Exhibit 27: Cotton consumed the highest amount of pesticides in 2001-02
Others 9% Chillies 4% Pulses & Oilseeds 7% Fruits 6% Vegetables 8% Wheat 8% Paddy 23% Fungicides 20%
2001-02
Cotton 35%
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.
India 2009
Others 5%
Source: Industry, Care Research, Elara Securities Research
Exhibit 28: Post BT cotton, Paddy has emerged as the No1 crop in terms of pesticides consumption
Others 8% Chillies 4% Pulses & Oilseeds 9% Fruits 6% Vegetables 9% Wheat 8% Paddy 29%
2006-07
Cotton 27% Herbicides 20%
Insecticides 55%
Exhibit 31: Labour shortage/rising wages due to MNREGA is driving shift towards herbicides
(No of households in cr) 6 5 4 3 2 2.10 3.39 4.51 5.26 1 0 FY07 FY08 FY09 FY10 FY11 Employment Provided (LHS) 5.48 65 75 84 90 100 120 100 80 60 40 20 0 Avg daily wages (RHS) (INR)
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) countrys 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
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. Indias ~20%
India 1995
Fungicides 8% Herbicides 11% Others 1% Fungicides 26%
World 2009
Others 3% Insecticides 26%
Insecticides 80%
Source: Singh, O. P., 2005, GoI, Elara Securities Research
Herbicides 45%
Source: Phillips McDougall, Elara Securities Research
Crop Protection
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Exhibit 30: Usage of herbicides has risen to ~20%

Exhibit 33: Porters five forces analysis of crop protection industry in India
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.
Source: Elara Securities Research
12

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
60 50 (INR bn) 40 30 20 10 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 12 14 15 17 28 21 29 31 50 53 70 60 50 30 20 10 0 (%) 40
Exhibit 35: Size of global crop protection generics market has risen to USD18bn in 2008
20 15 (USD bn) 10 20 10.3 10.4 11.6 12.0 14.0 18.4 8.4 5 0 1998 2000 2002 2005 2006 2007 2008 10 35.6 30.2 41.2 37.2 39.6 42.2 45.4 50 40 (%) 30
Mkt Value (LHS)
Mkt Share (RHS)
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
10 8 (USD bn) 6 4 2 0.3 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total 0.8 1.3 1.5 0.4 0.9 1.6 1.2 0.4 0.7 0.2 9.3
Exports (LHS)
YoY (RHS)
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.
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 AgritechDuPont, FMC, Dow Agro, Chemtura, Nissan Chemical, Sumitomo, Mitsui Japan & Hokko Japan PI IndustriesBayer, BASF and Kumiai Chemicals
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.
Crop Protection
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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. 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 Governments 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.
Exhibit 37: Good rainfall is important for Kharif output from rainfed areas
120 100 80 60 40 20 0 85 93 99 78 52 59 24 56 41 16 50 48 27 35 68 120 100 80 60 40 20 0
(%)
(%)
Pearlmillet
Area under Irrigation (LHS) Share in Kharif Output (RHS)

Source: Rallis India, Elara Securities Research
Area under Rainfed (LHS)
Foodgrains
Oilseeds
Cereals
Cotton
Paddy
Corn
Pulses
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.
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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
Recent underperformance attractive entry point
offers
Exhibit 39: Over the last 3 months, crop protection stocks have witnessed steep correction
Exhibit 38: Mid cap crop protection stocks have delivered multiple returns over the last two years
500 400 300 (%) 200 432 324 (24) 91 0 (100) Rallis PIIL IIL United Phos BSE Sensex Bayer Crop Dhanuka BSE 500 94 100 (14) (10) 40
Source: Bloomberg, Elara Securities Research
Exhibit 40: Out of 36 regions, 23 have received scanty rainfall over the last 3 months
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.
Source: imd.gov.in, Elara Securities Research
United Phos
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.
Crop Protection
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10 5 0 (5) (10) (15) (20) (25) (30) (35)
(9)
(32)
(12)
(11)
(%)
Rallis
PIIL
IIL
(15)
(4) BSE Sensex BSE 500
Bayer Crop
Dhanuka

Exhibit 41: Annual inflation particularly in vegetables indicate a crash in prices hurting farmer sentiments
20 10 0 (10) (20) (30) (40) (50) (60) 14.2 1.5 (4.2) (21.7) (34.4) (49.4) Potatoes Oilseeds Onions Wheat Pulses Tomato Fruits Rice Milk 8.9 11.2 9.6
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 FY13EFY14E 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)
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 dont 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
43 50 40 29 26 22 30 20 3 10 0 Rallis PIIL H1FY12 Dhanuka H2FY12 IIL
Exhibit 44: Strong FCF generation over FY12-14E as capex to remain moderate
3,500 3,000 3,027
19
(INR mn)
16
2,500 2,000 782 1,500 1,000 500 0 Rallis 583
1,819
1,022
Source: Company, Elara Securities Estimate
Exhibit 43: H2FY12 earnings likely to remain muted due to margin pressures and weaker revenue
38 50 40 30 11 20 10 0 (8) (10) (20) Rallis PIIL H1FY12 4 4 33
PIIL Capex
Dhanuka FCF
118
Exhibit 45: Valuations attractive given earnings CAGR and return ratios of ~25%+
12 10 8 (x) 6 4 10.2 7.7 5.2 5
125 IIL
strong
Dhanuka H2FY12
24
IIL
0 Rallis PIIL Dhanuka IIL
Source: Company, Elara Securities Estimate; Note: P/E based on FY14E EPS
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6.7
609

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 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 FY12E14E, 4) strong return ratios in excess of ~30% and 5) modest FCF generation over FY12E-14E.
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 inlicensed 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. Exhibit 46: Peer valuation
Company Mcap CAGR % (FY12-14E) USD mn Bayer AG Syngenta AG BASF SE Monsanto Dow Chemical DuPont Chemtura Corp Global Average United Phosphorous Bayer Cropscience Rallis India PI Industries Dhanuka Agri Insecticides Inida Domestic Average
Source: Bloomberg, Elara Securities Estimates
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.
OPM (%) FY13E 13.0 16.9 11.7 20.6 8.6 13.5 6.7 13.0 16.3 10.9 17.0 17.6 15.0 10.8 15.1 FY14E 14.7 18.5 11.6 20.6 9.3 14.5 6.2 13.6 15.7 NA 17.7 18.0 15.3 11.2 15.5
RoE (%) FY13E 17.6 25.5 19.7 15.0 13.6 30.8 6.8 18.4 18.6 22.0 29.1 30.5 30.4 25.3 28.8 FY14E 17.8 25.5 18.9 16.9 15.2 27.6 8.0 18.6 18.0 NA 31.6 31.3 29.7 28.2 30.2
P/E (x) FY13E 10.5 13.5 10.2 21.1 10.7 11.1 11.8 12.7 6.9 15.2 13.0 10.4 6.3 9.4 9.8 FY14E 9.4 12.7 9.4 18.1 8.7 9.6 9.4 11.1 6.3 NA 10.2 7.7 5.2 6.7 7.4
EV/EBITDA (x) FY13E 6.5 NA 5.9 11.1 7.0 7.8 5.0 7.2 4.2 9.1 8.7 7.0 4.8 6.8 6.8 FY14E 5.9 NA 5.5 10.0 6.2 7.1 4.7 6.6 3.9 NA 6.8 5.1 3.6 4.8 4.9
Revenue 3.0 5.6 (0.1) 9.4 3.7 7.9 2.6 4.6
PAT 8.8 7.5 (5.0) 17.7 14.4 9.9 14.5 9.7 16.2 NA 29.6 45.6 27.3 38.6 35.3
55,050 28,330 66,893 38,908 35,395 43,443 1,154
1,151 556 444 233 86 95
11.7 NA 19.5 27.6 21.1 29.4 24.4
Crop Protection
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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
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 regionwise) 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.
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:
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 MNREGAs rate of ~INR120 for current year).
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
18

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 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 of urea +
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.
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.
Crop Protection
19
What kind of pesticides do you use the most?

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.
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 Bayers Confidor was considered to be the top most selling brand in this region. Syngentas 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. Confidors 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.
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).
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.
20

Pictorial takeaways from our trip
Exhibit 48: Bayers Confidor was the top selling product across dealers Exhibit 51: Distributor shop in Amravati
Exhibit 49: Monsantos Roundup a very popular non-selective herbicide in the region
Exhibit 52: Dealer explaining farmer group in selection of pesticides
Exhibit 50: Popular MNC products include Bayers Fame, Syngentas Polo/Pegasus and Proclaim and DuPonts Coragen
Exhibit 53: Insecticides Indias Monocil brand has done extremely well in this region
Crop Protection
21
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
40.5 45 40 35 30 25 20 15 10 5 0 37.9 30.7 31.2 30.4 33.4 25 20 15 (%) 10 5 0 (5) (10) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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%
North America 23% RoW 4% Europe 29%
27.8
25.8
(USD bn)
25.2
26.7
Latin America 19%

Asia 25%
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)
10 8 (US$ bn) 6 4 2 0 Bayer Dow MAI Arysta Lifescience BASF Monsanto Sumitomo DuPont Syngenta Nufarm 5.1 3.9 3.5 8.5 8.3
Size (LHS)
YoY (RHS)
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 offpatent products including generics which accounted for roughly ~45%. Exhibit 55: Category-wise, patented products constituted only ~25% of the global market
Off-Patent Products 30% Generic 45%
2.4
2.1
1.8
1.4
1.1
Exhibit 58: Syngenta, Bayer and BASF together control ~50% of the global market
Arysta Lifescience 3% Sumitomo 3% Nufarm 4% MAI 5% DuPont 5% Monsanto 8% Others 13% Syngenta 19%
Patented Products 25%

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.
Bayer 19% Dow 9% BASF 12%
22

Global crop protection market is characterised by large number of mergers and acquisitions. The period19952002 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
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
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.
Syngenta
Bayer Aventis
Monsanto DuPont AHP BASF Dow
DuPont Shell Cyanamid BASF Dow Rohm & Hass
Source: Syngenta Presentation, Elara Securities Research
Exhibit 61: Herbicides dominate the crop protection market with ~45% market share
Others 3% Fungicides 26% Insecticides 26%
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 companys presence in all major markets to ensure rapid market penetration with new products and quicker recovery of R&D investments.
Herbicides 45%
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
Others 18% Fruits & Vegetables 26%
Exhibit 60: Drivers of consolidation

Barriers to entry Patents & registration Capital investment Scale economies Branding Entrenched distribution
Cotton 6% Rice 9%
R&D Innovation Differentiation Life-cycle management
Marketing Integrated approach Local battles, tailored strategies
Attractive returns to leading competitors

Portfolio leverage Breadth & depth Global reach
Soybean 10%
Cereals 18% Maize 13%
Source: Syngenta Presentation, Elara Securities Research
Crop Protection
23
Ciba Sandoz Merck Zeneca ISK Biosciences Bayer Rhone-Poulenc Hoechst Schering Monsanto
Novartis
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.
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 highpowered 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.
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.
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.
24
Company Section
Crop Protection
25

Notes
26
9 January 2012
Initiating Coverage
Rallis India
Poised to grow
Domestic business steady, new launches hold the key Over FY12E-14E, we expect the companys 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 Monsantos 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.
Rating : Buy
Target Price : INR170 Upside : 40% CMP : INR121 (as on 4 January 2012) Key data*
Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/US$mn) Daily Vol. (3M NSE Avg.) Face Value (INR) 1 US$= INR53.0
Source: Bloomberg ; * As on 04 January 2012
RALI IN/RALL.BO 194.4/194.4 24/444 266,168 1
Price & Volume

200 175 150 125 100 Jan-11 6,000 5,000 4,000 3,000 2,000 1,000 May-11 Vol. in 000s (RHS) Source: Bloomberg Sep-11 0 Jan-12 Rallis India (LHS)
Share holding (%)

Promoter Institutional Investors Other Investors General Public Source: BSE
Q3FY11 Q4FY11 Q1FY12 Q2FY12 50.7 24.7 4.1 20.5 50.7 25.6 3.8 20.0 50.7 25.8 4.6 18.9 50.8 25.4 4.3 19.5
Price performance (%)

Sensex Rallis India PI Industries Dhanuka Agritech Insecticides India Source: Bloomberg
3M 0.6 (30.5) (13.6) (8.8) 5.6
6M (15.3) (21.7) 31.1 1.7 19.1
12M (21.8) (13.8) 88.7 13.3 78.6
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. Key Financials (Consolidated)
Y/E Mar (INR mn) FY10 FY11 FY12E FY13E FY14E Rev 8,787 10,657 13,143 15,907 18,768 YoY (%) 5.0 21.3 23.3 21.0 18.0 EBITDA 1,449 1,713 2,136 2,707 3,317 EBITDA (%) 16.5 16.1 16.3 17.0 17.7 Adj PAT 1,015 1,260 1,378 1,812 2,315 YoY (%) 40.9 24.6 11.5 31.4 28.1
Rallis 1 yr fwd P/E bands

250 200 (INR) 150 100 50 0 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 Source: Bloomberg, Company, Elara Securities Research Fully DEPS 5.2 6.5 7.1 9.3 11.9 RoE (%) 26.2 27.2 25.9 29.1 31.6 RoCE (%) 29.8 29.2 27.7 31.9 35.7 P/E (x) EV/EBITDA (x) 23.2 18.7 17.1 13.0 10.2 15.2 14.2 11.4 8.7 6.8 23x 19x 15x 11x

Rallis India
Investment summary
Margins to recover in FY13E-14E driven by launches, higher export revenues and improvement in Metahelix margins
Valuation trigger
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%
200 180
Earnings to recover post weak H2FY12, model in ~30% CAGR over FY12E-14E
160
140 120 100 80 60 40
1
Significant capex behind, expect strong FCF generation over FY12E-14E
Jul-10
Jul-11
Nov-10
Nov-11
Jul-12
Nov-12
Jan-10
Jan-11
Jan-12
May-10
May-11
May-12
Mar-10
Mar-11
Mar-12
Sep-12
Sep-10
Sep-11
Jan-13
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
Source: Bloomberg, Elara Securities Estimate
Valuation overview
Methodology Consolidated PAT Sept -2013 (INR mn) No of shares (mn) EPS Sept-2013E Assigned P/E multiple (x) Fair value CMP Potential Upside (%)
Source: Elara Securities Estimate
INR/Share 2,063 194.5 10.6 16.0 170 121 40.3
Valuation driver Rallis one year forward P/E chart

25 20 15
Our assumptions
10 5
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
0 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11
28
Rallis India
Consolidated Financials (Y/E Mar)

Income Statement (INR mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Less: Minority Interest Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Minority Interest Borrowings Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital Other Assets Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) Price/Book (x) Dividend Yield (%)
FY11 10,657 1,713 346 2,059 175 1,885 40 1,845 580 4 1,260 1,260 FY11 194 4,855 21 1,172 32 6,275 5,293 1,743 3,551 1,695 256 774 6,275 FY11 1,189 (226) 963 (2,641) (1,678) 452 (1,432) (17) FY11 21.3 18.3 24.6 16.1 11.8 0.2 27.2 29.2 6.5 24.2 2.0 18.7 14.2 2.3 4.7 1.7
FY12E 13,143 2,136 300 2,436 287 2,149 120 2,029 619 33 1,378 1,378 FY12E 194 5,664 21 1,172 32 7,084 7,455 2,029 5,426 239 256 1,163 7,084 FY12E 1,761 (525) 1,236 (707) 529 (573) (667) (3) FY12E 23.3 24.7 11.5 16.3 10.5 0.1 25.9 27.7 7.1 9.3 2.5 17.1 11.4 1.8 4.0 2.1
FY13E 15,907 2,707 343 3,050 331 2,719 89 2,629 776 42 1,812 1,812 FY13E 194 6,679 21 872 32 7,799 7,974 2,360 5,613 162 256 1,768 7,799 FY13E 2,235 (565) 1,670 (442) 1,228 (958) (394) 318 FY13E 21.0 26.7 31.4 17.0 11.4 0.0 29.1 31.9 9.3 31.5 3.5 13.0 8.7 1.5 3.4 2.9
FY14E 18,768 3,317 396 3,712 355 3,357 59 3,299 924 60 2,315 2,315 FY14E 194 7,970 21 572 32 8,791 8,306 2,715 5,591 171 256 2,773 8,791 FY14E 2,719 (580) 2,139 (341) 1,799 (1,155) (284) 701 FY14E 18.0 22.5 28.1 17.7 12.3 (0.1) 31.6 35.7 11.9 27.8 4.5 10.2 6.8 1.2 2.9 3.7
Revenue & margins growth trend

20,000 15,000 (INR mn) 10,000 5,000 0 FY11 FY12E FY13E FY14E
Revenues (LHS)
17.7 17.0 16.1 16.3
18 18 17 17 16 16 15 (%)
Adjusted profits growth trend

2,500 2,000 (INR mn) 1,500 1,000 500 0 FY11 FY12E FY13E FY14E
Adj PAT (LHS)
31.4 24.6
28.1
11.5
35 30 25 20 15 10 5 0
PAT Growth (RHS)
Return ratios
40 35 30 25 20 FY11 FY12E
ROE (%)
35.7 31.9 29.2 27.7 29.1 25.9 FY13E

ROCE (%)
31.6
27.2
FY14E
Crop Protection
29
EBITDA Margin (RHS)
(%)
Rallis India Rallis India
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
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
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
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 30 25 20 15 10 1,109 1,449 1,713 134 591 5 0 FY07 FY08 FY09 FY10 FY11 EBITDA (LHS) Sales Growth (RHS) (%)
Internation al Business - Pesticides 23%
Domestic Pesticides 73%

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.
30
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.
(INR mn)
Plant Growth Nutrients 2%
Seeds 2%
Rallis India
Exhibit 4: Rallis is looking to broad-base its revenue mix into complete agri-inputs solution provider Exhibit 6: Domestic pesticides business to register ~13.4% CAGR in revenues over FY12E-14E
14,000
Agri Services
25 20 15 10 10,554 7,232 8,421 9,316 11,973 5 0 FY10 FY11 FY12E FY13E FY14E Revenue (LHS) (Growth YoY (RHS) (%)
12,000 10,000 (INR mn)

Crop Protection
Others Contract Manufacturing Seeds & PGN
8,000 6,000 4,000 2,000 0
Crop Protection
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
120 100 80 (%) 60 40 20 0 FY10 FY11 FY12E Exports FY13E Seeds FY14E Others Domestic 77 73 66 62 60 2 1 20 2 2 22 2 7 25 3 8 27 3 9 29
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.). Companys 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 Confidor Asataf Rogor Tatamida Contaf Antracol Thiodon Contaf Plus Tata Mono Tata Fen Fujione Bilzeb Hostathion Larvin Metacid Company Bayer Rallis Rallis Rallis Rallis Bayer Bayer Rallis Rallis Rallis Rallis Bayer Bayer Bayer Bayer
During FY12E-14E, we expect the companys 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.
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)
31
Crop Protection
Rallis India
advisory services. Rallis currently has farmer membership of 0.5mn under the RKK programme and is expected to go up to 1mn by FY12-end. Exhibit 8: RKK initiative has helped Rallis strengthen its farmer connect with ~1mn farmers by FY12
Strengthening Farmer Relationships Rallis Kisan Kutumba
1000K Regular Contacts throughout crop cycle
Exhibit 10: Rallis has tied up with Syngenta to distribute its worlds 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
11-12
AZ is the worlds best selling fungicide
Covered more than 300 k farmers

130K RKK 35K 06-07 07-08 08-09
500K 250K 09-10 10-11 Enroll other Progressive Farmers

Crop Seminars
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
RKK activities to cover all territories

Demos
Scale up the activities Adding 30 more territories For RKK activites
Identified 30 Pilot territories Initiated activities

Farmer Exchange Programmes
Embarked on the RRK concept Worked out and finalized the model
Alliances/tie-ups coupled with consistent launches to help sustain growth momentum
new
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 FY07 FY08 FY09 FY10 FY11 FY12 Product launched Nova, Applaud (I), Taqat (F) Takumi (I), Sedna (I), Ishaan (F), Royal (I), Tebuconazole (F) Mantis (Blasticide) Ergon (F) Taarak (H), Ralligold (PGN), Toran (I) Neon (I), Sonic (I), Vaar (H), Honcho (H), Cylo (H), Saras (F), Taffin, Fycol, Ditaf
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 Du Pont Syngenta India Bayer India Nihon Nohayaku FMC India Gharda Chemicals Yara International Borax International Rallis Product Daksh, Rekord Preet, Anant, Sartaj, Prabhav, Paralac Spiro, Tatamida Fuji1, Applaud, Fenpyroximate Furadan, Tatafuran, Electra, Impeder Fateh, Koranda Water Soluble NPK Fertilisers Solubar
Source: Company, Elara Securities Researc; Note: I = Insecticdes, F= Fungicides and H = Herbicides
Makhteshim Chemical Works Captan, Nova, Atrazine
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
35 30 (%) 25 20 15 10 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 24 28 25 25 20 31 28 30 30 30 31
In Q1FY11, Rallis strengthened its relations with the global leader Syngenta by signing an agreement for marketing companys 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.
32
Rallis India
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.
registrations across new and existing territories), 2) strategic alliances with global majors and 3) synergies with parent Tata Chemicals 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
2,000 1,500 (INR mn) 1,000 550 500 0 FY11 FY12E Ankleshwar
1,200
150
200
350
500
FY13E Dahej
FY14E
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
7,000 6,000 5,000 (INR mn) 4,000 3,000 2,550 3,488 4,661 1,000 0 FY11 FY12E FY13E FY14E Revenue (LHS)
40 35 30 25 20 15 5,732 10 5 0 (Growth YoY (RHS) (%)
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
2,000
Crop Protection
33
1,750
Rallis India
Foray into seeds has potential

In Dec 2010, Rallis acquired 53.5% stake in Metahelix Life Sciences for an all cash deal of INR995mn funded via internal accruals. Later Rallis increased its stake to 59.02% for an additional INR250mn and in FY12 has further increased its stake to 72.98%. Furthermore as per the agreement, Rallis will enhance its shareholding to 100% over a period of five years. Overall, the initial deal was completed at 2x sales of FY12E (we are modelling ~INR900mn revenue for FY12) and Rallis expects the entity will exceed INR10bn revenue cumulatively over a 5 year period. Metahelix acquisition part of growth agenda under Rallis poised, gives entry into INR65bn seeds market Rallis had identified seeds business as one of the key pillars under Rallis Poised and Metahelix acquisition would help it to offer a complete suite of agri-inputs for farmers. Further, competencies of Rallis in terms of farmer relations and channel partnerships through Rallis Kisan Kutumbha and Tata Kisan Sanchar would help leverage Metahelixs 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
Sorghum & Millets, 250 Sunflower, , 4% 150 , 2% Vegetables, 1,000 , 15% Wheat, 850 , 13% Others, 150 , 2% Paddy, 1,200 , 19%
Exhibit 16: We expect Metahelix to double revenues from FY12-14E aided by launch of proprietary Bt trait
1.8 1.6 1.4 (INR bn) 1.2 1.0 0.8 0.6 0.4 0.2 0.0 FY12E FY13E FY14E 0.9 1.3 1.7
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 Monsantos 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 Monsantos. 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, hotpepper and okra. The crop breeding programmes are located at Bangalore (rice, maize & vegetable crops), Hyderabad (rice and cotton) and Ahmedabad (millets).
Cotton, 2,000 , 31%
Maize, 900 , 14%
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.
34
Rallis India

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
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
35 30 25 (%) 20 15 10 5 0 H1FY12 Sales Growth
revenues from INR0.9bn to INR1.7bn aided by launch of proprietary Bt trait.
20,000 15,000 (INR mn) 10,000
25 20 15 10 10,657 13,143 15,907 8,787 (%)
5,000 0
5 0
FY10
FY11
FY12E
FY13E
FY14E
Revenue (LHS)
(Growth YoY (RHS)
Exhibit 19: Key revenue growth assumptions

(INR mn) Pesticides Biz (A + B) YoY % Domestic (A) YoY % Formulations YoY % Institutional YoY % International (B) YoY % Contract Manufacturing YoY % Alliance/Bulk Sales YoY % Registered Product Sales YoY % Plant Growth Nutrients YoY % Total Seeds Biz (Incl Metahelix) YoY % Other (Subsidiary Sales) YoY % Total Consolidated Revenues YoY % FY11 10,971 20.1 8,421 16.5 7,132 20.0 1,289 0.1 2,550 34.2 1,017 35.2 781 30.0 765 40.0 238 80.2 221 343.0 35 (1.2) 11,466 22.4 FY12E 12,804 16.7 9,316 10.6 7,988 12.0 1,328 3.0 3,488 36.8 1,471 44.6 887 13.5 1,130 47.7 298 25.0 977 341.1 39 10.0 14,117 23.1 FY13E 15,215 18.8 10,554 13.3 9,186 15.0 1,368 3.0 4,661 33.6 2,038 38.5 1,020 15.0 1,603 41.9 387 30.0 1,386 42.0 42 10.0 17,031 20.6 FY14E 17,705 16.4 11,973 13.4 10,564 15.0 1,409 3.0 5,732 23.0 2,547 25.0 1,152 13.0 2,033 26.9 504 30.0 1,796 29.5 47 10.0 20,052 17.7
29 22
11 4
H2FY12 PAT Growth
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
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
35
Crop Protection
Exhibit 18: Revenue growth of ~19.5% CAGR over FY12-14 aided by new launches, Dahej and Metahelix
18,768
Rallis India
aided by 1) continued cost savings from third phase of DISHA initiatives focussing on curtailing operating and fixed expenses, 2) higher contribution of higher margin new products under herbicides/weedicides category, 3) improvement in profitability of Metahelix (seed companies enjoy higher operating margins at ~18%-20% on average), 4) significant jump in export revenues aided by Dahej scale up and 5) operating leverage. Exhibit 20: DISHA initiatives under third phase to curtail operating and fixed expenses
DRIVING INNOVATIVE SOLUTIONS FOR HYPER ACHIEVERMENTS
Exhibit 22: Expect recovery in earnings post weak ~9% YoY growth in FY12
2,500 2,000 (INR mn) 1,500 1,000 1,015 1,260 500 0 FY10 FY11
PAT (LHS)
40.9 31.5 24.2 9.3 1,812 2,315 1,378
45 27.8 36 27 18 9 0 FY13E FY14E

YoY (RHS)
FY12E
Wave1
Wave 2
Wave 3 Operating Expenses Fixed Expenses
Manufacturing
Pricing
Exhibit 23: FY14E EPS (INR) sensitivity to sales CAGR and net margin expansion over FY12E-14E
FY14 EPS FY12-14 net margin expansion 13.5% 125bps 155bps 185bps 215bps 245bps 10.2 10.5 10.8 11.0 11.3 FY12-14 sales CAGR 16.5% 10.8 11.1 11.3 11.6 11.9 19.5% 11.3 11.6 11.9 12.2 12.5 22.5% 11.9 12.2 12.5 12.8 13.1 25.5% 12.5 12.8 13.1 13.5 13.8
Procurement
Logistics
Utility
Finance
Exhibit 21: Margins to witness uptick driving a robust ~25% CAGR in EBITDA over FY12E-14E
3,500 3,000 2,500 (INR mn) 2,000 1,500 1,449 1,000 500 0 FY10 FY11 FY12E FY13E FY14E EBITDA (LHS)
17.7 17.0 16.5 16.1 1,713 16.3
18.0 17.5 17.0 16.5 16.0 (%)
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
25 20 15 10 5 0 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11
Source: Bloomberg, Company, Elara Securities Research
2,136
2,707
3,317
15.5 15.0
OPM (RHS)
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.
36
(%)
Rallis India
2,641
(1,678)
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
250 Share Price (INR) 200 150 100 50 0 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 23x 19x 15x 11x
(2,000)
Capex
Op Cash Flow
Free Cash Flow
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.
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
113 107 120 100 80 (Days) 36 60 40 20 0 Rallis Debtor Bayer PI Ind Creditor Dhanuka Inventory IIL 90 80 72 107 102 103
78
75 74
86
42
65
Crop Protection
37
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).
963
2,000 (INR mn) 1,000 0
707 1,236 529
442
1,670 1,228
3,000
FY11 (1,000)
FY12E
FY13E
341 FY14E
2,139 1,799
Initiate with a Buy with a Sept2013 TP of INR170
Exhibit 27: Major capex behind, expect strong FCF generation over FY12E-14E
Rallis India
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).
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 NonExecutive 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.
38
Rallis India
Coverage History
200 180 160 140 120 100 80 60 40 Jan-10 1
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
Date 1 4-Jan-2012
Rating Buy
Target Price INR170
Closing Price INR121
Guide to Research Rating

BUY ACCUMULATE REDUCE SELL Absolute Return >+20% Absolute Return +5% to +20% Absolute Return -5% to +5% Absolute Return < -5%
Crop Protection
39
Rallis India
Notes
40
9 January 2012
Initiating Coverage
PI Industries
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 companys 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).
Rating : Buy
Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/US$mn) Daily Vol. (3M NSE Avg.) Face Value (INR) 1 US$= INR53
PI IN/PIIL.BO 25/25 12/232 7,985 5
Price & Volume

700 600 500 400 300 200 Jan-11 May-11 Vol. in 000s (RHS) Source: Bloomberg Sep-11 800 600 400 200 0 Jan-12
PI Industries (LHS)
Share holding (%)

Q3FY11 Q4FY11 Q1FY12 Q2FY12 71.3 5.8 14.0 9.0 71.3 5.7 13.6 9.4 63.7 3.9 23.9 8.6 63.7 8.3 20.2 7.9

Sensex PI Industries Rallis India Dhanuka Agritech Insecticides India Source: Bloomberg
3M 0.6 (13.6) (30.5) (8.8) 5.6
6M (15.3) 31.1 (21.7) 1.7 19.1
12M (21.8) 88.7 (13.8) 13.3 78.6
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. Key Financials (Standalone)
Y/E Mar (INR mn) FY10 FY11 FY12E FY13E FY14E Rev 5,417 7,186 8,652 11,275 14,079 YoY (%) 17.3 32.6 20.4 30.3 24.9 EBITDA 860 1,225 1,482 1,985 2,528 EBITDA (%) 15.9 17.0 17.1 17.6 18.0 Adj PAT 409 641 756 1,188 1,604 YoY (%) 77.3 56.6 18.0 57.1 35.0
PIIL 1 yr fwd P/E bands

700 600 500 400 300 200 100 0 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Source: Bloomberg, Company, Elara Securities Research Fully DEPS 16.3 25.6 30.2 47.4 64.0 RoE (%) 33.4 35.3 27.6 30.5 31.3 RoCE (%) 22.5 26.1 24.6 28.3 32.2 P/E (x) EV/EBITDA (x) 30.2 19.3 16.3 10.4 7.7 16.1 12.0 9.6 7.0 5.1 15x 12x 9x 6x

(INR)
PI Industries
Valuation trigger
Upcoming facility in CSM to start in Q1FY13, to support INR2.5-3bn revenues at peak levels (2x FY11) Margins to expand over FY12E-14E by 90bps driven by higher contribution from in-licensed products and scale up in CSM business
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.
800 700
3 2 1
600
500 400 300 200 100 0
Jul-10
Jul-11
Nov-10
Nov-11
Jul-12
Nov-12
Jan-10
Jan-11
Jan-12
May-10
May-11
May-12
Mar-10
Mar-11
Mar-12
Sep-12
Sep-10
Sep-11
Jan-13
Valuation trigger 1. Upcoming facility in CSM to start in Q1FY13, to support INR2.5-3bn revenues at peak levels (2x FY11).
Valuation overview
Methodology Standalone PAT Sept -2013 (INR mn) No of shares (mn) EPS Sept-2013E Assigned P/E multiple (x) Fair value CMP Potential Upside (%)
INR/Share 1,396 25.05 55.7 12.0 669 493 35.6
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
Valuation driver PIIL one year forward P/E chart

18 16 14 12 10 8 6 4 2 0 Feb-10 Feb-11 Oct-09 Oct-10 Apr-09 Jun-09 Dec-09 Apr-10 Jun-10 Dec-10 Apr-11 Jun-11 Oct-11 Aug-09 Aug-10 Aug-11 Dec-11
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
42
PI Industries
Standalone Financials (Y/E Mar)

Income Statement (INR mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital Other Assets Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) Price/Book (x) Dividend Yield (%)
FY11 7,186 1,225 7 1,232 152 1,080 182 898 257 641 (0) 641 FY11 193 1,913 2,484 323 4,913 3,591 1,073 2,518 321 20 2,055 4,913 FY11 1,029 (870) 159 (913) (754) 781 6 32 FY11 32.6 42.5 56.6 17.0 8.9 1.1 35.3 26.1 25.6 56.6 2.2 19.3 12.0 2.1 5.2 0.5
FY12E 8,652 1,482 13 1,495 176 1,319 188 1,131 375 756 298 1,054 FY12E 125 3,241 2,030 323 5,719 4,272 1,249 3,024 427 20 2,249 5,719 FY12E 1,444 (232) 1,212 (788) 424 (406) 11 29 FY12E 20.4 21.0 18.0 17.1 8.7 0.6 27.6 24.6 30.2 18.0 3.0 16.3 9.6 1.6 3.7 0.6
FY13E 11,275 1,985 17 2,001 262 1,739 155 1,584 396 1,188 1,188 FY13E 125 4,290 1,720 323 6,458 5,011 1,511 3,500 125 20 2,814 6,458 FY13E 1,617 (619) 998 (437) 562 (553) 15 23 FY13E 30.3 33.9 57.1 17.6 10.5 0.4 30.5 28.3 47.4 57.1 4.8 10.4 7.0 1.2 2.8 1.0
FY14E 14,079 2,528 19 2,547 295 2,252 114 2,138 535 1,604 1,604 FY14E 125 5,711 1,270 323 7,429 5,166 1,806 3,360 116 20 3,933 7,429 FY14E 2,052 (649) 1,403 (146) 1,257 (704) 17 570 FY14E

15,000 18.0 (INR mn) 10,000 5,000 0 FY11 FY12E FY13E FY14E
Revenues (LHS)
19 17.6 17.0 17.1 18 18 17 17

EBITDA Margin (RHS)
(%)

2,000 1,500 (INR mn) 1,000 500 0 FY11 FY12E FY13E FY14E
Adj PAT (LHS)
56.6
57.1
60 50 35.0 40 30 20 10 0 (%)
18.0
PAT Growth (RHS)
Return ratios
40 35 30 25 20 27.6 28.3 26.1 FY11 24.6 FY12E
ROE (%)
35.3 30.5 32.2 31.3
24.9 27.4 35.0 18.0 11.4 0.1 31.3 32.2 64.0 35.0 6.3 7.7 5.1 0.9 2.1 1.3
FY13E
ROCE (%)
FY14E
Crop Protection
43
PI Industries PIIndustries
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
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 PIILs revenue in FY12
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
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 noconflict business model
CSM
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)
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
35 30 (YoY %) 25 20 15 10 5 45 FY07 63 FY08 PAT (RHS)
CSM 38%
641
700 600 400 (INR mn) 500 300 200 100 0
Agri Inputs 62%
409 231
0 FY09 FY10 FY11 Sales (LHS)
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
44
PI Industries
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
Others 20% In-licensed 40%
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 PIILs 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%)
Insecticides 50%
Generics 60%
Herbicides 30%
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.
45
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 Insecticides Herbicides Fungicides Key Brands Foratox, Jumbo, Lepido, Fosmite, Simba, Maxima Nominee Gold, Solaro, Jupiter, Alcor Kitazin, Sanit Key Crops Cotton, Rice, Fruits & Vegetables Rice, Wheat, Soybean & Sugarcane Rice, Potato, Grapes, Chillies, Fruits & Vegetables Multi-crop
Plant Nutrients
Biovita, Dispel
Crop Protection
PI Industries
Over FY12E-14E, we expect PIIL to register ~25% CAGR in revenues of agri-inputs division driven by volume expansion in key existing products like Nominee Gold and Biovita, expansion of distribution network in new markets and a strong pipeline of in-licensed products (expect 2 new launches each year over FY12E-14E). Exhibit 7: Agri inputs division to clock ~25% CAGR in revenues over FY12E-14E
9 8 7 6 5 4 3 2 1 0 8.3 6.8 5.3 4.1 3.0 40 35 30 25 20 15 (%) 10 5 0 FY10 FY11 FY12E FY13E FY14E Revenue (LHS)
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
90 80 70 60 50 40 30 20 10 0 2.3 1.9 1.4 2.5 2.0 1.5 1.0 0.5 0.7 0.5 0.0 FY07 FY08 FY09 FY10 FY11 Revenue (RHS)
(INR bn)
(%)
(INR bn)
YoY (RHS)
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.
YoY (LHS)
Unique model backed by strong competencies PIILs CSM business is unique and enjoys strong competencies vis--vis other CRAMs players (toll manufacturers) as PIILs product pipeline in CSM is largely focussed on patented, high value, complex chemistry and early stage molecules (longer life cycles).
Exhibit 8: How CSM business works...and PI lends value

General work-flow in CSM
Customer enquiry Process & cost review
2nd Commercial Order (57 MT) (Supply up to Mar-11) Signed Agreement of 1500 mt. ($36m) for 3 yrs)
Typical order flow from inception to commercialisation
Pre-feasibility study
Sample validation
Enquiry received
Sample approved by customer
Sign secrecy agreement
SOP & validation
Process evaluation
Customer approval/agreement
Dec-09 Feb-10
Mar-10 Jun-10
Aug-10 Nov-10
Apr-11
Bench scale trials
Detailed plant engg.
Desktop costing
Plant erection & installing
1st sample sent to customer
1st Commercial Order (5MT)
3rd Commercial Order (200MT) (Supply up to Mar-12)
Customer approval
Raw material procurement
Pilot/Kilo lab scale up
Commercial production
46
PI Industries
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. 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.
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
7 6 5 (INR bn) 4 3 2 1 1.9 2.3 3.3 4.5 5.8 45 40 35 30 20 15 10 5 0 FY10 FY11 FY12E FY13E FY14E Revenue (LHS)
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
Others 15%
Japan 20% Europe 65%
0 YoY (RHS)
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).
Elara Securities (India) Private Limited 47
(%)
25
Crop Protection
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.
PI Industries

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
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
45 40 35 30 25 20 15 10 5 0 43 38
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
16,000 14,000 12,000 (INR mn) 10,000 8,000 6,000 11,275 5,417 7,186 8,652 4,000 2,000 0 FY10 FY11 FY12E FY13E FY14E Revenue (LHS)
35 30 25 15 14,079 10 5 0 YoY (RHS) (%) 14,078 21.5 30.0 24.9 59 41 20
Exhibit 14: Key revenue growth assumptions

FY11 Revenue (INR mn) Agri-Inputs CSM Polymer Total Revenue YoY Growth (%) Agri-Inputs CSM Polymer Total Revenue % of Total Agri-Inputs CSM Polymer 57 32 10 62 38 0 60 40 37.5 21.5 45.9 32.6 29.5 42.5 20.4 27.7 35.0 30.3 4,120 2,320 746 7,186 5,333 3,307 12 8,652 6,811 4,464 11,275 8,275 5,803 FY12E FY13E FY14E
(%)
3 H1FY12 Sales Growth
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 ~100200bps) 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 inlicensed products, we expect contribution of inElara Securities (India) Private Limited
H2FY12 PAT Growth
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
48
PI Industries
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 17: Model in strong earnings CAGR of ~46% over FY12E-14E post 18% YoY growth in FY12
1,815 1,615 1,415 1,215 1,015 815 615 415 215 15 90 80 70 60 50 40 30 20 10 0
(INR mn)
1,188
21 20 19 (%) 18 17 16 15 FY10 15.6 18.5
FY10 20.0 19.9 19.8 20.0
FY11
FY12E
FY13E
FY14E
PAT (LHS)
YoY (RHS)
16.6 15.5
16.4
16.7
FY14 EPS FY12-14 net margin expansion 21.5% 205bps 235bps 265bps 295bps 325bps 55.1 56.6 58.1 59.7 61.2 FY12-14 sales CAGR 24.5% 57.8 59.4 61.0 62.6 64.2 27.5% 60.6 62.3 64.0 65.7 67.4 30.5% 63.5 65.3 67.1 68.8 70.6 33.5% 66.5 68.3 70.2 72.0 73.9
FY11
FY12E
FY13E CSM
FY14E
Agri-Inputs
Exhibit 16: Overall OPM to expand 90bps YoY driving robust ~31% CAGR in EBITDA
3,015 2,515 (INR mn) 2,015 1,515 1,015 515 15 FY10 FY11 FY12E FY13E FY14E EBITDA (LHS)
17.6 17.0 15.9 1,225 1,482 1,985 17.1
18.0
18.5 18.0 17.5 17.0 16.5 16.0 15.5 15.0 14.5
Initiate with a Buy Sept-2013 TP of INR669
with
OPM (RHS)
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
18 16 14 12 10 8 6 4 2 0 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11
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.
2,528
860
(%)
(x)
Crop Protection
49
Exhibit 15: Modelling in recovery in agri-inputs margins and stable margins in CSM over FY12-14
409
641
756
1,604
(%)
PI Industries
Over the last 2 years, PIIL has witnessed significant re-rating driven by success of a unique no-conflict model, strong pipeline of in-licensed products and blockbuster success of Nominee Gold, sustained order book scale up in CSM business and exponential growth in earnings. Exhibit 20: Over the last 2 years, PIIL has witnessed significant re-rating to a P/E band of 12-15x
700 600 Share Price (INR) 500 400 300 200 100 0 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 15x 12x 9x 6x
Exhibit 22: Strong return ratios to support re-rating in valuations

38 36 34 32 30 28 26 24 22 20 35.3 30.5 27.6 28.3 26.1 24.6 FY12E ROE (%)
32.2 31.3
FY11
FY13E ROCE (%)
FY14E
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.
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
1,212 2,000 913 788 1,500 (INR mn) 1,000 159 500 0 (500) (1,000) FY11 (754) FY12E Op Cash Flow FY13E FY14E 1,403 1,257 562 Free Cash Flow 146
Capex
50
424
437
998
PI Industries
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.

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 CoChairman 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 Companys 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 companys 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).
Crop Protection
51
PI Industries
Coverage History
700 600 500 400 300 200 100 0 Jan-10 1
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
Date 1 4-Jan-2012
Rating Buy
Target Price INR669

52
9 January 2012
Initiating Coverage
Dhanuka Agritech
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. Dhanukas top 3 selling products - Targa Super (1820% 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--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.
Rating : Buy
Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/US$mn) Daily Vol. (3M NSE Avg.) Face Value (INR) 1 US$= INR53
DAGRI IN/DHNP.BO 50/50 5/85 21,971 2
Price & Volume

120 110 100 90 80 70 60 Jan-11 May-11 Sep-11 800 600 400 200 0 Jan-12
Vol. in 000s (RHS) Source: Bloomberg
Dhanuka Agritech (LHS)
Share holding (%)

Q3FY11 Q4FY11 Q1FY12 Q2FY12 75.0 8.3 7.9 8.9 75.0 8.3 8.2 8.6 75.0 8.6 7.0 9.5 75.0 8.6 6.7 9.8

Sensex Dhanuka Agritech Rallis India PI Industries Insecticides India Source: Bloomberg
3M 0.6 (8.8) (30.5) (13.6) 5.6
6M (15.3) 1.7 (21.7) 31.1 19.1
12M (21.8) 13.3 (13.8) 88.7 78.6
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 tieups 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

200 150 (INR) 100 50 0 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 Source: Bloomberg, Company, Elara Securities Research Fully DEPS 7.3 10.2 10.9 14.4 17.6 RoE (%) 43.9 38.2 28.6 30.4 29.7 RoCE (%) 39.4 34.0 28.3 31.8 33.3 P/E (x) EV/EBITDA (x) 12.5 8.9 8.4 6.3 5.2 8.9 7.2 6.6 4.8 3.6 13x 10x 7x 4x
Key Financials (Standalone)

Y/E Mar (INR mn) FY10 FY11 FY12E FY13E FY14E Rev 4,075 4,862 5,329 6,491 7,809 YoY (%) 21.1 19.3 9.6 21.8 20.3 EBITDA 577 711 755 973 1,197 EBITDA (%) 14.2 14.6 14.2 15.0 15.3 Adj PAT 363 511 544 720 882 YoY (%) 56.6 40.7 6.4 32.4 22.5

Dhanuka Agritech
Valuation trigger
Margins to expand over FY12E-14E by 110bps driven by launch of new specialty molecules and operating leverage 3 2 1 Earnings to recover post weak H2FY12, model in ~27% CAGR over FY12E-14E
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
140 130 120 110 100 90
FY13E-14E to witness launch of 3-4 new specialty molecules (2 with Nissan and 1 with DuPont)
80
70 60 50 40
Jul-10
Jul-11
Nov-10
Nov-11
Jul-12
Nov-12
Jan-10
Jan-11
Jan-12
May-10
May-11
May-12
Mar-10
Mar-11
Mar-12
Sep-12
Sep-10
Sep-11
Jan-13
Valuation trigger 1. FY13E-14E to witness launch of 3-4 new specialty molecules (2 with Nissan and 1 with DuPont).
Valuation overview
INR/Share 801 50.0 16.0 8.0 128 91 40.8
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
Valuation driver Dhanukas one year forward P/E chart

25
20 15 10 5 0 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11
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)
54
Dhanuka Agritech

FY11 4,862 711 75 786 49 737 65 673 161 511 511 FY11 100 1,605 602 28 2,334 630 247 383 8 0 1,936 7 2,334 FY11 614 (774) (159) (43) (203) 225 7 29 FY11 19.3 23.3 40.7 14.6 10.5 0.3 38.2 34.0 10.2 40.7 2.0 8.9 7.2 1.0 2.7 2.2
FY12E 5,329 755 60 815 49 766 55 711 167 544 544 FY12E 100 2,002 527 28 2,657 666 295 371 33 0 2,246 7 2,657 FY12E 649 (327) 322 (62) 260 (247) 8 20 FY12E 9.6 6.2 6.4 14.2 10.2 0.2 28.6 28.3 10.9 6.4 2.5 8.4 6.6 0.9 2.2 2.7
FY13E 6,491 973 72 1,045 57 989 47 941 221 720 720 FY13E 100 2,535 452 28 3,115 729 352 378 22 0 2,708 7 3,115 FY13E 818 (269) 549 (52) 497 (269) 15 243 FY13E 21.8 28.9 32.4 15.0 11.1 0.1 30.4 31.8 14.4 32.4 3.2 6.3 4.8 0.7 1.7 3.5
FY14E 7,809 1,197 58 1,254 62 1,192 40 1,153 271 882 882 FY14E 100 3,195 377 28 3,699 801 414 387 16 0 3,289 7 3,699 FY14E 967 (377) 591 (66) 525 (302) 25 248 FY14E

10,000 8,000 (INR mn) 6,000 4,000 2,000 0 FY11 FY12E FY13E FY14E
Revenues (LHS)
15.3 15.0 14.6 14.2
16 15 15 14 14 (%)
EBITDA Margin (RHS)

1,000 800 (INR mn) 600 400 200 0 FY11 FY12E FY13E FY14E
Adj PAT (LHS)
40.7 32.4 22.5 6.4
50 40 30 20 10 0
PAT Growth (RHS)
Return ratios
40 35 30 25 20 34.0 28.6 28.3 30.4 29.7 38.2 31.8 33.3
20.3 23.0 22.5 15.3 11.3 (0.1) 29.7 33.3 17.6 22.5 3.8 5.2 3.6 0.6 1.4 4.2
FY11
FY12E
ROE (%)
FY13E
ROCE (%)
FY14E
Crop Protection
55
Dhanuka Agritech Dhanuka Agritech
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
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
Exhibit 2: Dhanukas premium products portfolio
Jammu
Exhibit 3: Paddy, pulses and vegetables account for ~65% of revenues for Dhanuka in terms of crops
Others 20% Paddy 27%
Gurgaon
Sanand
Cotton 15%
Production facilities
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
Vegetables 18%
Pulses 20%
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
North 22% West 37%
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. Dhanukas product portfolio includes 18 herbicides, 39 insecticides, 21 fungicides and 18 other products (Plant growth regulators, bio-fertilisers etc.).
South 27% East 14%

56
Dhanuka Agritech
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: Dhanukas farmer connect initiatives
Dhanuka Doctors
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.
6 (No of households in cr) Dhanuki Kheti ki Nai Takneek
Farmer connect initiatives

Dhanuka Chaupals
5 4 3 2 2.10 3.39 65 75
Dhanuka Suvidha Kendras
84
90
100
120 100 80 (INR) 60 40
1 0
20 0
FY07
FY08
FY09
FY10
FY11
Employment Provided (LHS)

Avg daily wages (RHS)
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.
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. Dhanukas 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
Fungicides 13% Others 6%
Insecticides 48%
Herbicides 33%
Crop Protection
57
Exhibit 6: Labour shortage/rising wages due to NREGA is driving shift towards herbicides
4.51
5.26
5.48
Dhanuka Agritech
Hence, we expect herbicides to register a robust ~30% CAGR over FY12E-14E and its contribution in overall products to rise to ~39%. Exhibit 8: Contribution of herbicides to rise driven by success of Targa Super and new launches
100 80 (%) 60 40 20 0 FY10 Herbicides FY11 FY12E FY13E Fungicides FY14E Others Insecticides 27 33 34 37 39
Exhibit 10: More than ~55% of revenues are accounted for by specialty/tie-up products
8 14
6 13 48
6 13 47
5 13 45
5 14 43
Lower margin products (10-15%)
Specialty Products 52%
52
Generics 48%
Higher margin (1530%) - tie ups with MNCs
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 Dhanukas 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 Banmite FY12 Bombard Brigade NA FY13-14 NA NA (H) (H) (F) Segment Tie-Up (I) (I) Chemtura Mitsui FMC Nissan Nissan DuPont Crop Tea segment, floriculture product Paddy and Cotton Tea Sugarcane Soybean, Cotton and Groundnut Paddy
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 Dhanukas 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 DuPont (USA) FMC Corp (USA) Dow Agro (USA) Chemtura (USA) Nissan Chemical (Japan) Sumitomo (Japan) Mitsui (Japan) Hokko (Japan) Product Dunet, Qurin, Dhawa Gold, Cursor, Hi Dice, Hook Aatank, Markar, Nabood, Brigade Wrapup, Zargon, One-up Dimilin, Omite, Vitavax, Banmite Targa Super Caldan, Sheathmar Nukil, Bombard Kasu-B
Source: Company, Elara Securities Research; Note: I = Insecticides, H = Herbicides and F = Fungicides
Dhanukas 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--vis pure generics (10-15%) and enjoy a higher acceptability amongst farmers.
58
Dhanuka Agritech

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
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
30 25 20 15 10 5 0 (5) (10) (15) 24 16
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
10,000 8,000 (INR mn) 6,000 4,000 4,075 4,862 5,329 6,491 2,000 0 FY10 FY11 FY12E FY13E FY14E Revenue (LHS)
25 20 (%) 15 10 7,809 5 0 YoY (RHS)
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
1,000 800 (INR mn) 15.5 15.0 14.5 400 363 511 544 720 882 200 0 FY10 FY11 PAT (LHS FY12E FY13E FY14E OPM (RHS) 14.0 13.5 (%)
(%)
600
(8) H1FY12 Sales Growth H2FY12 PAT Growth
FY12-14 net margin expansion
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).
FY14 EPS 15% 70bps 90bps 110bps 130bps 150bps 15.4 15.7 15.9 16.2 16.5 FY12-14 sales CAGR 18% 16.2 16.5 16.8 17.1 17.4 21% 17.0 17.3 17.6 18.0 18.3 24% 17.9 18.2 18.5 18.9 19.2 27% 18.8 19.1 19.4 19.8 20.1
Crop Protection
59
Dhanuka Agritech
Initiate with a Buy Sept-2013 TP of INR128
with
Exhibit 18: Strong return ratios in excess of ~30% to help sustain valuations in range of ~7x-8x
40 35 34.0 30 25 20 FY11 FY12E ROE (%)
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
200 180 160 140 120 100 80 60 40 20 0 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 13x 10x 7x 4x
38.2 33.3
31.8 28.6 28.3 30.4
29.7
FY13E ROCE (%)
FY14E
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 havent 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 havent 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.
Share Price (INR)
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 FY12E14E, 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
549 497 700 600 500 400 300 200 100 0 (100) (200) (300) 591 525
(INR mn)
322 260
62
43
FY11 Capex
(159) (203)
FY12E Op Cash Flow
52
FY13E
Free Cash Flow
60
66 FY14E
Dhanuka Agritech
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.

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.
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Dhanuka Agritech
Coverage History
120 110 100 90 80 70 60 50 40 Jan-10 1
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
Date 1 4-Jan-2012
Rating Buy
Target Price INR128
Closing Price INR91

62
9 January 2012
Initiating Coverage
Insecticides India
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. Companys 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). IILs 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.
Rating : Accumulate
Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/US$mn) Daily Vol. (3M NSE Avg.) Face Value (INR) 1 US$= INR53.0
INST IN/ISIL.BO 12.6/12.6 5/95 72,508 10
Price & Volume

500 400 300 200 100 Jan-11 4,000 3,000 2,000 1,000 0 Jan-12
May-11
Sep-11
Vol. in 000s (RHS) Source: Bloomberg
Insecticides India (LHS)
Share holding (%)

Q3FY11 Q4FY11 Q1FY12 Q2FY12 74.7 4.1 8.1 13.1 74.7 6.1 9.5 9.7 74.7 6.0 10.6 8.6 74.7 6.0 9.9 9.4

Sensex Dhanuka Agritech Rallis India PI Industries Insecticides India Source: Bloomberg
3M 0.6 (8.8) (30.5) (13.6) 5.6
6M (15.3) 1.7 (21.7) 31.1 19.1
12M (21.8) 13.3 (13.8) 88.7 78.6
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.
IILs 1 yr fwd P/E bands

600 500 (INR) 400 300 200 100 0 Nov-07 Nov-08 Nov-09 Nov-10 May-07 May-08 May-09 May-10 May-11 Nov-11 14.7 11.9 9.3 6.8 4.8 13x 10x 7x 4x
Key Financials (Standalone)

Y/E Mar (INR mn) FY10 FY11 FY12E FY13E FY14E Rev 3,774 4,501 5,540 7,083 9,280 YoY (%) 43.3 19.3 23.1 27.9 31.0 EBITDA 353 451 580 768 1,041 EBITDA (%) 9.3 10.0 10.5 10.8 11.2 Adj PAT 282 322 392 535 753 YoY (%) 35.9 14.2 21.8 36.4 40.8 Fully DEPS 22.2 25.4 30.9 42.2 59.4 RoE (%) 24.9 22.9 22.8 25.3 28.2 RoCE (%) 25.6 25.3 24.9 27.2 31.7 P/E (x) EV/EBITDA (x) 17.8 15.6 12.8 9.4 6.8

Insecticides India
Investment summary
Margins to expand over FY12E-14E by 70bps aided by in-house production of technicals, launch of Monocil and operating leverage 3
Valuation trigger
Strong distribution network with 106 products in formulations. Backward integration in technicals manufacturing. Modest FCF generation over FY12E-14E as major capex complete.
500
450
400 350 300 250 200 150 100 50
Significant capacity addition in both formulations and technicals has come on-stream in FY12
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.
Jul-10
Jul-11
Nov-10
Nov-11
Jul-12
Nov-12
Jan-10
Jan-11
Jan-12
May-10
May-11
May-12
Mar-10
Mar-11
Mar-12
Valuation overview
Sep-12
Sep-10
Sep-11
INR/Share 644 12.7 50.8 9.0 457 397 15.1
Jan-13
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.
Valuation driver IILs one year forward P/E chart

12 10 8 6 4 2 0 May-07 May-08 May-09 May-10 May-11 Sep-07 Jan-08 Sep-08 Jan-09 Sep-09 Jan-10 Sep-10 Jan-11 Sep-11
Our assumptions We have modeled in 29% CAGR in revenues over FY12E-14E. We expect IILs formulations business to grow by ~21% CAGR over FY12E-14E aided by capacity expansions and new launches. We expect IILs technicals business to grow by ~93% CAGR over FY12E-14E aided by tripling of capacities and ~15% CAGR in price realisation.
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Insecticides India

FY11 4,501 451 2 452 15 437 24 413 90 322 322 FY11 127 1,421 380 20 1,948 365 51 314 592 1 1,007 35 1,948 FY11 319 67 386 (594) (208) 108 50 (50) FY11 19.3 27.8 14.2 10.0 7.2 0.2 22.9 25.3 25.4 14.2 2.5 15.6 11.9 1.2 3.3 0.6
FY12E 5,540 580 1 582 27 555 58 497 104 392 392 FY12E 127 1,761 580 20 2,489 1,007 78 929 50 1 1,474 35 2,489 FY12E 483 (317) 167 (101) 66 105 1 172 FY12E 23.1 28.8 21.8 10.5 7.1 0.2 22.8 24.9 30.9 21.8 3.5 12.8 9.3 1.0 2.7 0.9
FY13E 7,083 768 2 770 43 728 50 677 142 535 535 FY13E 127 2,222 480 20 2,850 1,090 120 969 33 1 1,812 35 2,850 FY13E 633 (310) 323 (65) 259 (202) 1 57 FY13E 27.9 32.4 36.4 10.8 7.6 0.1 25.3 27.2 42.2 36.4 5.0 9.4 6.8 0.7 2.1 1.3
FY14E 9,280 1,041 2 1,043 50 993 40 953 200 753 753 FY14E 127 2,871 380 20 3,399 1,160 170 990 23 1 2,350 35 3,399 FY14E 837 (426) 411 (61) 350 (214) 1 137 FY14E 31.0 35.5 40.8 11.2 8.1 (0.0) 28.2 31.7 59.4 40.8 7.0 6.7 4.8 0.5 1.7 1.8

10,000 8,000 (INR mn) 6,000 4,000 2,000 0 FY11 FY12E FY13E FY14E Revenues (LHS) 10.0 10.8 10.5 11.2 12 11 (%) 11 10 10 9 EBITDA Margin (RHS)

800 36.4 600 (INR mn) 400 200 0 FY11 FY12E FY13E FY14E Adj PAT (LHS) 21.8 14.2 40.8 50 40 (%) 30 20 10 0 PAT Growth (RHS)
Return ratios
35 30 25.3 25 25.3 20 15 FY11 FY12E ROE (%) FY13E ROCE (%) FY14E 22.9 22.8 24.9 28.2 27.2 31.7
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Insecticides India Insecticides India
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
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 formulations in FY11
Traded Goods, 6% Technicals, 10%
Exhibit 2: IIL has consistently launched new products to spur growth in in-house brands
10 8 6 4 2 0 FY07 FY08 FY09 FY10 FY11 FY12 5 5 3 8 7 7
Exhibit 3: IIL has launched 7 new products in FY12
~84%
revenue
from
Source: Company, Elara Securities Research Formulations , 84%
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. Companys 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 IILs top 4
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).
66
Insecticides India
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
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
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 Nocils product mix. However, IILs justification to buy the brand was Monocils high brand recall which was evident from the success of Monocil in just months of getting launched IIL booked ~1mn litres (revenues of ~INR350mn).
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, IILs 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
30,000 25,000 20,000 15,000 11,450 18,450 13,600 27,600 12,800 6,600 9,700 3,800 10,000 5,000 0 EC (KL) WDP (MT) FY11
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
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 24.9 17.3 23.5 30 21.7 19.6 25 20 15 3,420 4,010 4,952 6,024 7,205 10 5 0 FY10 FY11 FY12E FY13E FY14E YoY (RHS) (%)
Granules (MT) FY12
Technicals (MT)
(INR mn)
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: IILs 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
Formulations revenue (LHS)

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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
Insecticides India
plant has just commenced operations in Q2FY12 and is likely to witness significant scale up in FY13. Udhampur formulations facility: IILs 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. Exhibit 7: Revenues from technicals to more than triple over FY12-14E, in-line with capacity expansion
2,500 2,000 (INR mn) 1,500 378 498 1,000 500 0 FY10 FY11 FY12E FY13E FY14E YoY (RHS) Technicals revenue (LHS)
2,187 1,056
200 150 100 50 0 (%)
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--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 inhouse) 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.
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
35 30 25 (%) 20 15 10 5 0 H1FY12 Sales Growth
33 26 19
589
H2FY12 PAT Growth
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Insecticides India
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
9,280 7,083 10,000 5,540 8,000 (INR mn) 6,000 4,000 2,000 0 FY10 FY11 FY12E FY13E FY14E 3,774 4,501 50 40 (%) 30 20 10 0
Exhibit 11: Margins to expand ~70 bps driving robust ~34% CAGR in EBITDA over FY12E-14E
1,200 1,000 (INR mn) 800 600 400 353 451 580 768 200 0 FY10 FY11 FY12E FY13E FY14E EBITDA (LHS)
11.2 10.8 10.5 10.0 9.3 1,041
11.5 11.0 10.5 (%) 10.0 9.5 9.0
8.0 OPM (RHS)
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
800 600 (INR mn) 282 322 500 400 300 200 100 0 FY10 FY11 PAT (LHS) FY12E FY13E FY14E 535 700 392 753 45 40 35 30 25 20 15 10 5 0
Net revenue (LHS)

YoY (RHS)
Exhibit 10: Contribution of technicals to total revenue to rise to ~22% by FY14E

100 80 60 40 20 0 FY11 FY12E FY13E Technicals FY14E 83.9 84.9 80.8 73.1 5.7 10.4 5.0 10.1 5.0 14.2 4.7 22.2
(%)
YoY (RHS)
FY14 EPS FY12-14 net margin expansion 23% 65bps 85bps 105bps 125bps 145bps 51.4 52.7 54.0 55.4 56.7 FY12-14 sales CAGR 26% 53.9 55.3 56.7 58.1 59.5 29% 56.5 58.0 59.4 60.9 62.3 32% 59.2 60.7 62.2 63.7 65.3 35% 61.9 63.5 65.1 66.7 68.3 Formulations Others
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--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.
(%)
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8.5
Insecticides India

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
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 IILs gross block has tripled over FY10-12 due to its aggressive capex. Exhibit 14: IIL has re-rated from an average P/E of 6x7x to ~10x
600 Share Price (INR) 500 400 300 200 100 0 May-07 May-08 May-09 May-10 May-11 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 13x 10x 7x 4x
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.
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
594 800 600 (INR mn) 101 167 66 400 200 0 (200) (400) Capex (208) 386
65
323 259
FY11
FY12E Op Cash Flow
FY13E
Free Cash Flow
70
61 FY14E
411 350
Insecticides India
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.

H C Aggarwal, Chairman H C Aggarwal joined IILs 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 1996 2001 2002 2003 2004 2005 2006 2007 Key Milestone Incorporated as private limited company Converted into public limited company Commissioned formulation plant at Chopanki (Rajasthan) Acquired all the brands of Montari Industries Ltd Commissioned second formulation plant at Samba (Jammu) Set up R&D Laboratory at Chopanki and was granted ISO 9001-2000 certification Acquired the exclusive right to sell the Thimet brand in India from American Vanguard Corporation, USA 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
Crop Protection
71
During FY11, IIL derived ~84% revenue for formulations, ~10% from technicals and rest from trading and non-crop sales (household pesticides). Post its major capacity expansion in FY11-12, IIL has 4 formulation units located at Chopanki (Rajasthan), Samba (J&K), Dahej (Gujarat) and Udhampur (J&) and 2 technical manufacturing units located at Chopanki and Dahej. Driven by strong growth in technicals, we expect the total contribution of technicals in total revenue to rise from ~10% in FY11 to almost ~22% in FY14E.
Insecticides India
Coverage History
450 400 350 300 250 200 150 100 50 Jan-10 1
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
Date 1 4-Jan-2012
Rating Accumulate
Target Price INR457

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Insecticides India
Notes
Crop Protection
73
Insecticides India
Notes
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Insecticides India
Notes
Crop Protection
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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.
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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.
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Elara Securities (India) Private Limited 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

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Elara Capital - Agri Inputs

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A long harvest

ion ulat pop eds wing ne Gro owing r g

Anand Shah anand.shah@elaracapital.com +91 22 4062 6821

India Crop Protection

Elara Securities (India) Private Limited

India | Crop Protection

India Crop Protection

Global Markets 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

Sensex Rallis Source: Bloomberg

FY14E 10.2 7.7 5.2 6.7

FY12E 25.9 27.6 28.6 22.8

RoE (%) FY13E

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

Anand Shah anand.shah@elaracapital.com +91 22 4062 6821

India Crop Protection

Elara Securities (India) Private Limited

India Crop Protection

Higher rural incomes and govt focus to act as key catalysts

Recent underperformance offers attractive entry point

Bullish on crop protection theme

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

India Crop Protection India Crop Protection

Growing populationgrowing needs

Landscape conducive for growth in agri-inputs

180 Fruits 43 2030 Edible Oil 2026

Source: ICAR Vision 2030 document, Elara Securities Research

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

Limited land & low productivity

India Crop Protection

Number of operational holdings (LHS) Average size of holding (RHS)

Source: Agricultural Statistics 2010, CMIE, Elara Securities Research

Source: Agricultural Statistics 2010, CMIE, Elara Securities Research

Elara Securities (India) Private Limited

India Crop Protection

Source: Agricultural Statistics 2010, CMIE, Elara Securities Research

0.4 (million tonnes)

10,000 8,000 6,000 4,000 2,000 0

6,556 7,672 4,309 3,370

0.6 (0.1) (2.6) Wheat

5,556 3,018 3,086 2,802

Source: Agricultural Statistics 2010, CMIE, Elara Securities Research

Source: Agricultural Statistics 2010, CMIE, Elara Securities Research

Exhibit 12: Significant yield-gaps exist within states

( Kgs per year)

Source: Agricultural Statistics 2010, CMIE, Elara Securities Research

Source: Agricultural Statistics 2010, CMIE, Elara Securities Research

522 672 757 944 1,023 Paddy China

Elara Securities (India) Private Limited

India Crop Protection

Crop prices remunerative too

Pulses Raw cotton

Rising govt. focus promising

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

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

Elara Securities (India) Private Limited

Higher MSPs a windfall for farmers

India Crop Protection

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

Strong push/initiatives have boosted credit flow to agriculture sector