Agrochemicals - May16

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SECTOR REPORT 13 MAY 2016

Agrochemicals

Good monsoon + rich strategy India’s total food demand continues to rise in

tandem with its population, disposable income and ashift in preferences. With more pressure on limited

land (17% of global population on 2% of land),

improving crop yields and minimising farm losses are

key to raising food supply.

Agrochemicals play a vital role in raising crop yields,

but are under-penetrated in India. According to

studies, there is 15-25% crop loss owing to non-usage

of pesticides in the country. The structural drivers for

the domestic agrochemical market are (1) Lowerpenetration, (2) Efficient products, (3) Shift towards

cash crops, and (4) Increasing farmer awareness. The

government’s initiatives to double farm incomes by

2022 will further support demand. A few players are

also focusing on the export market owing to India’s

competitiveness in manufacturing at a lower cost.

A normal monsoon will be crucial for Indian agri-

inputs, as only ~46% of the net cultivated area is

irrigated. There are challenges galore for the sector,which is at the end of the value chain (after seeds

and fertilisers). However, things seem to be looking

up with the IMD and Skymet forecasting rainfall to

be 106% and 105% of long period average in 2016.

We have focused on domestic players like Dhanuka

Agritech, Insecticides India and Rallis India. These area proxy play for an uptick in the domestic market.

Investment arguments

Dhanuka Agritech Ltd (DAL): (1) Present only inasset-light formulation business, (2) Focus on in-licensing specialty molecules (~75% of portfolio)via tie-ups with MNCs, (3) Regular productlaunches, (4) Revenues and PAT to grow at a CAGRof 23% and 34% over FY16-18E, and (5) Zero netdebt and end of capex phase. Initiate coverage

with a BUY. Our TP is Rs 700 (20x FY18E EPS). Insecticides India (IIL): (1) Present across branded

and technical business, (2) Strong productportfolio led by R&D, brand acquisitions and tie-ups with MNCs, (3) Top-20 products (~50% of rev)are growing at ~30%, (4) Focus on R&D formolecules going off-patent, (5) Capex is over, netD/E of 0.9x FY16E, and (5) Sales and PAT to growat a CAGR of 16% and 31% over FY16-18E. Initiatecoverage with a BUY. Our TP is Rs 535 (16x FY18E)

Rallis India: (1) New product launches, (2) CSMrevenues are likely to begin, (3) Robust uptick inseed business, (4) Strong distribution network, and(5) Sales and PAT growth at 16% and 31% CAGRover FY16-18E. Maintain BUY with a TP of Rs 250(20x FY18E EPS).

Sector PerspectiveMCap

(Rs bn)

CMPRating

TP Revenues (Rs mn) PAT (Rs mn) ROE (%)

(Rs/sh) (Rs/sh) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

DAL 31.5 630 BUY 700 8,308 10,219 12,524 978 1,318 1,750 21.8 24.6 26.9

IIL 9.1 441 BUY 535 9,785 11,315 13,139 402 535 691 12.9 15.0 16.7

Rallis 40.6 209 BUY 250 16,279 18,680 21,927 1,430 1,904 2,435 16.7 19.9 22.3Source: Company, HDFC sec Inst Research

Absolute Stock Returns (%)

3M 6M 1Y

DAL 20.5 45.9 6.1

IIL 47.9 24.4 (9.9)

Rallis India 40.4 6.2 (1.0)

BSE 500 13.8 1.2 (1.0)

Valuation (on FY18E)

P/E (x)P/BV

(x)

EV/EBITDA

(x)

DAL 18.0 4.4 12.1

IIL 13.2 2.0 8.8

Rallis India 16.7 3.5 10.9

Satish Mishra

[email protected]

+91-22-6171-7334

Deepak Kolhe

[email protected]+91-22-6171-7316

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters



AGROCHEMICALS : SECTOR REPORT

Contents

Indian agriculture under a cloud ...................................................................................................................... 3

Reasons for poor condition of India farmers .................................................................................................... 4

Lower crop yields ................................................................................................................................................. 4

Impact of irrigation .............................................................................................................................................. 4Non-remunerative price for crops ....................................................................................................................... 8

Lack of marketing infrastructure ......................................................................................................................... 9

Focus on the quality of agri-inputs ................................................................................................................ 10

Agrochemicals .............................................................................................................................................. 11

India players’ strategies ................................................................................................................................ 13

Companies

Dhanuka Agritech ................................................................... ........................................................................ .......... 14

Insecticides India ...................................................................................................................................................... 25

Rallis India ................................................................................................................................................................ 35

Page | 2




Indian agriculture under a cloud

The agriculture sector’s contribution to the Indian

GDP has fallen from ~28% in FY94 to ~14% in FY14.

The employment share has declined from ~65% to

~49%. A higher share of employment vs. lowercontribution has resulted in lower per capita

income for the sector (source: Government of

India reports).

India has the second-largest arable land in the

world after the US. However, the share of arable

to the total land is highest in India at ~49%. This

gives limited/no room for further increase.

Arable Land Vs. Total Lands (As per FY12)

Country Population(mn)

Arable land(mn ha)

Arable % of totalland

China 1,361 139 15

India 1,243 145 49

USA 316 165 18

Brazil 198 59 7

Japan 127 4 12

Germany 81 12 33

France 64 21 39

Italy 60 8 26

Spain 46 14 27Argentina 42 27 10

Canada 35 42 5

Australia 23 47 6

Source: World Bank, HDFC sec Inst Research

Owing to the high arable land, India in one of the

top producers of many crops.

India In Food Production (FY15)

Crop Output (mT) RankRice 103 2

Wheat 96 2

Sugarcane 355 2

Fruit + Veg 205 2

Cotton 35 2

Maize 23 6

Source: Ministry of agriculture, Company, HDFC sec Inst Research

India is the largest producer of spices, pulses, milk,

tea, cashew and jute; second-largest of wheat,rice, fruits and vegetables, sugarcane, cotton and

oilseeds

The story of the Indian farmer, however, is not as

glorious. About 36% of the agricultural households

have been issued BPL (below poverty line) cards.

About ~5% are Antyodaya cardholders, which are

for ultra-poor households (source: MOSPI, GOI).

At an all-India level, the average monthly income

of agricultural households between Jul-12 and

Jun-13 was estimated at Rs 6,426. This included

net receipts from cultivation, farming of animals,

non-farm business and income from

wages/salaries. (source: MOSPI, GOI)

India has the second-largest

arable land and is among the

top producers of key crops

Around half of India’s

population is dependent on

agriculture, which contributes

~14% to GDP

~85% of farmers own marginal

(<1Ha) or small (<2 Ha) lands

40% of agriculture households

are below poverty line

Page | 3




Reasons for poor condition of India farmers

1.

Lower crop yields

2. Non-remunerative price for crops

3.

Reducing farm size per farmer

4.

High risk associated with natural calamities

Lower crop yields

In the charts below, we have compared yields of

the top-5 crop producing countries. In most cases

(except banana), our yield is below or equal to the

global average.

The sequence of the countries is based on their

global ranking in production.

Yield (000’ kg/ha)

Rice Wheat

Potato Banana

Source: MOPSI, GOI reports, HDFC sec Inst Research

There are multiple reasons for lower crop yields:

(1) Poor irrigation facility, (2) Poor quality and

quantity of agri-inputs (seeds, agrochemicals and

fertilisers), (3) Conventional style of farming, i.e,less technological advancement, and (4) Wastage

during farming.

Impact of irrigation

Crop yields vary significantly within states. These

can be attributed to an array of reasons such as

technology adoption, quality of agri-inputs and

infrastructure availability. However, it has been

observed that there is a direct relation between %

irrigated area with crop yield.Crop Yields For Food Grains Vs. Irrigated Area

Source: MOPSI, GOI reports, HDFC sec Inst Research

There are exceptions to the rule. For instance, in

Bihar and Assam the relation between irrigation

and yields are not direct. This may be owing to

frequent floods in Bihar and good rains in Assam.

Crop yields in India are lower

compared to other key

producers

Key reasons for lower yields:

(1) Poor quality of agri-inputs

(2) Inadequate irrigation facility

(3) Less usage of technology

Crop yields in different states are

directly proportional to the

irrigation facility

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C h i n a

I n d i a

I n d o n e s i a

B a n g l a d e s h

V i e t N a m

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C h i n a

I n d i a

U S A

F r a n c e

R u s s i a n F e d .

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C h i n a

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B r a z i l

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M a h a r a s h t r a

R a j a s t h a n

C h h a t t i s g a r h

O d i s h a

K a r n a t a k a M P

J h a r k h a n d

G u j a r a t

A s s a m

B i h a r

U t t a r a k h a n d

A l l I n d i a

T a m i l N a d u U P A P

W e s t B e n g a l

H a r y a n a

P u n j a b

% Irrigated Yield - LHS

Yield '000 kg/ha % Irrigated

Page | 4




India accounts for about ~17% of the world’s

population, but only ~4% of the world’s fresh

water resources. The distribution of these

resources is uneven across states.

And since only ~46% of the net cultivated area is

irrigated, there is high dependency on monsoon.

Low Irrigation Penetration

Source: Ministry of Agriculture, HDFC sec Inst Research

Uncontrolled and non-scientific water usage has

led to water scarcity in the country. As per

international norms, a water-stressed and water-

scarce country is one where the per capita water

availability goes below 1,700 m3 and 1,000 m3,

respectively. India is already a water-stressed

nation with 1,544 m3 per capita availability, and is

sprinting towards water scarcity.

Of the total available water, irrigation consumes

~84%, industrial ~12% and domestic usage ~4%.

Over the years, there has also been a significant

shift in the sources of irrigation in the country. The

share of canal in net irrigated area has declined

from ~40% in 1950-51 to ~24% in 2012-13.

Consequently, the share of groundwater sources

has increased from 29% to a whopping 62% duringthe same period (source: GOI reports).

Source Of Irrigation In India


However, the scarcity is not yet reflected in the

usage of water. As per GOI reports, India uses 2-4

times more water for crop production compared

to other major agricultural countries like China,

Brazil, and the US.

Hence, India can save ~50% water by adopting

scientific and efficient irrigation methods. This will

expand the area under irrigation and also result in

water conservation.

Only ~46% of India’s cultivated

area is irrigated and the rest is

dependent on the rains

The situation is worrisome as

India has 4% of global fresh

water resources

A higher usage of underground

water (62% vs. 29% over the

past 65 years) has made India a

water-stressed nation

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140

FY51 FY61 FY71 FY81 FY91 FY01 FY11

Area (mn H) (LHS) Area under i rrigation (%) (RHS)

Page | 5




Monsoon is make or break for Indian agriculture

Poor irrigation infrastructure has led to a strong

relation between Indian agriculture and monsoon.

Relation Between Agriculture Growth And Monsoon


Strongest El Nino in 2015 since 1997

The rainfall recorded in India was 88% and 86% of

LPA (long period average) in 2014 and 2015.

Since 1950, there have been 22 El Nino (bad

monsoon scenario) events of varying durations

and intensities. Of the 21 El Nino before 2015,

nine have been followed by La Nina (good

monsoon scenario).

The 2015 El Nino has been the strongest since

1997. However, forecasts of a La Nina in 2016

have revived hopes of a normal monsoon (source:

Economic survey 2015-16).

Cumulative Rainfall (Jun-Sep) (LPA) (%)

Source: IMD, Economy survey, HDFC sec Inst Research

A study over FY81-16 has shown that agriculturegrowth during La Nina is as high as 8.4% vs. an

average of 3%. El Nino results in negative growth.

Source: Economic survey 2015-16, HDFC sec Inst Research

A normal monsoon in 2016 is essential for the

agricultural sector, which has been in distress for

the past two years.

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EL Nino La Nina

Lack of irrigation facility has

resulted in direct relation

between monsoon and

agriculture growth

Agriculture growth has been

robust in La Nina years, which is

expected in 2016

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Agriculture GDP Growth (RS) Monsoon Surplus/(Deficit)

% %

8.4

3.73

-2.1-4

-2

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6

8

10

La Nina years Years other

than EL Nino

and LA Nina

Period average El nino years

Page | 6




Robust outlook for monsoon in 2016

Things seem to be looking up after two

consecutive years of monsoon deficit. Two key

metrological agencies, IMD and Skymet, have

predicted rainfall to be 106% and 105% of LPA

(long period average) in 2016.

These forecasts have improved the sentiments of

all stakeholders in the sector.

Key points from the IMD forecast

The El Nino conditions have started weakening.

This year’s rainfall is likely to be 106% of the LPA,

with a model error of +5%.

Probability For Monsoon-2016 By IMD

CategoryRainfall Range

(% of LPA)

Forecast Probability

(%)

Deficient < 90 1

Below Normal 90 - 96 5

Normal 96 -104 30

Above Normal 104 -110 34

Excess > 110 30

Source: IMD, HDFC sec Inst Research

Key points from the Skymet forecast

The monsoon in 2016 is likely to be 105% of LPA.

Central India and west coast are likely to receive

good rainfall.

Tamil Nadu, North East India and some regions in

Karnataka may receive less rainfall.

Probability For Monsoon-2016 By Skymet

Probability %

Drought 5

Below normal 10

Normal 30

Above Normal 35Excess 20

Source: Skymet, HDFC sec Inst Research

Initiatives taken by Government of India

Irrigation projects worth Rs 58.4bn (vs. Rs 53bn

FY16BE) haves been budgeted under the Pradhan

Mantri Krishi Sinchai Yojana (PMKSY). Under this

scheme, 28.5 lakh hectares of land will be

irrigated.

The implementation of 89 stalled irrigationprojects under AIBP (Accelerated Irrigation

Benefits Programme) will be fast tracked.

This will help irrigate 80.6 lakh hectares. These

projects require an expenditure of Rs 170bn next

year and Rs 865bn in the next five years.

The government is focusing on water conservation

and judicious usage of water. Currently, flood

irrigation method is followed in India, which leads

to huge water loss. Focus on sprinkler and dripirrigation systems will lead to lower consumption.

The outlook for 2016 is robustwith both IMD and Skymet

predicting above-normal

monsoon

The Indian government is

implementing several projects to

improve irrigation infrastructure

Page | 7




Non-remunerative price for crops

Aim to double farmers’ income: Lower farm

income is a key reason for the poor state a

majority of the small farmers are in. The government has targeted to double farmers’

income by 2022. It is planning different initiativesat farm and non-farm levels to achieve its goal.

Factors such as (1) MSP for crops, (2) Type of

crops, and (3) Marketing infrastructure impact

remuneration for farmers.

Is the increase in MSP sufficient?

There has been a significant increase in MSP of key

crops over the past few years.

MSP (Prices in Rs/quintal)

Commodity FY10 FY15 FY16% Change

FY10 to FY16

Paddy 950 1,360 1,410 48%

Red Gram 2,300 4,350 4,625 101%

Green Gram 2,760 4,600 4,850 76%

Black Gram 2,520 4,350 4,625 84%

Groundnut 2,100 4,000 4,030 92%

Soyabean 1,390 2,560 2,600 87%

Cotton 2,500 3,750 3,800 52%

Wheat 1,080 1,450 1,450 34%

Source: Ministry of agriculture, HDFC sec Inst Research

However, MSP is not applicable for all crops and

not implemented fully across all states. Sometime

owing to excess production and absence of MSP,

farmers end up with huge losses.

The sale of food grains under the public

distribution system (PDS) further reduces the

demand and, hence, the price of grains.

Change in crop pattern

Low-value cereals dominate Indian farming. There

has been some shift towards high-value crops over

the past decade, but they still remain significantly

small.

The value of output per hectare from fruits and

vegetable was ~Rs 3.3 lakh vs. ~Rs 0.4 lakh for

cereals, Rs 0.3 lakh for pulses and Rs 0.5 lakh for

oil seeds (source: GOI reports for FY14).

Distribution Of Cropped Area Across Major Crops

Year 2001-02 2013-14

Rice 24% 22%

Wheat 14% 16%

Coarse Cereals 16% 13%

Total Cereals 54% 51%

Pulses 11% 13%

Total Food Grains 65% 64%

Sugarcane 2% 3%

Condiment and Spices 1% 2%

Fruits 2% 4%

Vegetables 3% 5%

Oilseeds 12% 14%

Fibres 5% 7%

Tobacco 0% 0%Other Crops 8% 4%

Total 100% 100%


The share of fruits and vegetables has doubled

over the past two decades. However, it is still

below 10%.

The easiest way to increase farm

income is by increasing MSP and

switching to cash crops

Bringing more crops under MSP

and improving cold

storages/supply chain are key

factors

Page | 8




Lack of marketing infrastructure

Lack of supporting infrastructure is one of the key

reasons for the lower share of high-value crops.

These crops require more capital and technology,

quality inputs, support services and timely

information.

Fruits and vegetables are not part of the MSP

scheme and, hence, are completely exposed to

market dynamics.

A shortage of cold storage facilities and perishable

nature of the fruits and vegetables have resulted

in a majority being sold in local markets.

Inadequate supply chain infrastructure, too many

intermediaries, and gaps in the APMC Act haveresulted in low realisation for even high-value

crops.

In many states, farmers are forced to sell their

produce through APMC. Unless farmers are given

full freedom, there will always be middlemen in

the system and the farmers will receive only a

small pie of the final realisation.

There should be impetus on agro-processing

industries, cold storages, refrigeratedtransportation facilities, and retail chains. The

development of contract farming, cooperatives,

and government support will provide market

access to farmers and will reduce price risk.

Unless these gaps are addressed, farmers will stick

to low, but assured, value crops like food grains.

Reducing farm size per farmer

India’s rising population and stagnant farm area

have resulted in a highly fragmented land holding.

The average land holding has reduced from 1.84

hectares in 1980-81 to 1.15 hectares in 2010-11.

Land Holding in India

1980-81 2010-11

Holding

(%)

Area

(%)

Holding

(%)

Area

(%)

Marginal (< 1 ha) 56% 12% 67% 22%

Small (1 to 2 ha) 18% 14% 18% 22%

Semi-Medium

(2 - 4 ha)14% 21% 10% 24%

Medium (4 - 10 ha) 9% 30% 4% 21%

Large (> 10 ha) 2% 23% 1% 11%


A fragmented land area makes usage of

technology unviable. Only ~15% of farmers (~55%

of area) have land parcels more than two hectares

that can benefit from mechanisation.

The absence of a transparent land leasing law is a

major problem. In many cases, landowners are not

farming and lands are given to sharecroppers.

Tenants are not able to benefit from differentgovernment schemes without documents.

Landowners are also apprehensive about

providing tenant details, as they fear losing their

land.

The usage of mechanisation and implementation

of government schemes are viable only post the

consolidation of land holdings. With rising

population and further fragmentation of lands, the

only solution is a transparent land leasing law that

protects the interest of all stakeholders.

Inadequate marketing

infrastructure and gaps in APMC

Act are key reasons for farmers’

poor condition

Small land holdings make

adoption of mechanisation

unviable in India

A transparent land lease law

may be a game changer and

lead to consolidation of lands at

the operational level

Page | 9




Risks associated with natural calamities

Indian farmers are exposed to natural disasters

such as droughts, floods, cyclones, storms,

landslides, earthquakes, etc. These can lead to

extreme distress in the absence of government

support.

So far, most relief measures were available to

farmers with outstanding loans from banks.

However, there is nothing for marginal farmers,

landless workers and sharecroppers.

There is a need for a policy that provides a

minimal amount of relief to the farmers

immediately after the calamity. Damages should

be compensated in a given timeframe.

Direct transfer of money to the farmers’ bank

accounts can improve transparency and efficiency

of relief measures.

Government initiatives

Crop insurance scheme: The government has

provided Rs 55bn (vs. Rs 26bn in FY16BE) for this

scheme, which aims to insulate farmers from

natural calamities and reduce their losses.

Agri credit: The government allocated an all-timehigh of Rs 9.0tn for agricultural credit in FY17

compared to Rs 8.5tn YoY. Provision of Rs 150bn

has been made in FY17BE towards interest

subvention. These steps will reduce the burden of

loan repayment on farmers, which has increased

significantly post the two years of rain deficit.

Focus on the quality of agri-inputs

Apart from the supporting infrastructure discussed

earlier, seeds, fertilisers and agrochemicals are key

inputs in agriculture. Their quality and quantity

directly impact crop yields. During the previous green revolution, the focus

was on usage of high-yielding seeds and effective

usage of fertilisers.

Seeds

Seeds are a key product in agri-inputs. Due to lack

of awareness and financial support, the share of

quality seeds is still low vs. the farm saved seeds.

Quality seeds usage is <20% in pulses and <30% in

paddy and wheat.

Currently, there are institutions (public, private

and universities) that are involved in the

development of high-yielding crops.

So far, technology has been successful adopted in

cotton (BT). Hybrids in maize, vegetables, fruits,

and rice are also gaining traction.

The government is implementing initiatives to

increase the usage of quality seeds. Policy is made

for 100% FDI under the automatic route. There is athrust on creating a seed bank.

There is need for a mechanism that offers financial

support to marginal farmers. Since hybrid seeds

are costlier, they aren’t very frequently.

A strict regulatory framework should be in place to

restrict the sale of spurious seeds. Companies

should be held accountable for poor performance

of seeds.

Transparent and quick relief

against natural disasters will

prevent distress among farmers

Jan Dhan Yojana and the crop

insurance scheme can be game

changers for Indian agriculture

Seeds are the best and easiest

way to incorporate technology

in agriculture

Awareness, financial support

and strict regulation againstspurious seeds are key factors

Page | 10




Fertilisers

The usage of fertilisers was given significant

importance during the Green Revolution. The

average consumption of fertilisers in India rose

from ~106 kg/ha in 2005-06 to ~128 kg/ha in

2012-13.

However, the usage in India is still below its

neighbouring countries. Pakistan consumes 205

kg/ha whereas China uses 396 kg/ha.

A balanced usage of nutrients is important, along

with higher usage of fertilisers. The optimal level

of fertiliser use depends on the soil, crop and

water availability.

Lower price of urea vs. complex fertilisers resulted

in higher usage of nitrogen nutrient compared to

phosphorous and potash. An unbalanced usage of

fertilisers is leading to lower yields.

Government initiative: A soil health card scheme has been initiated to give farmers information

about the nutrient level of the soil. This will help

them make judicious use of fertilisers. The target

is to cover all 14cr farm holdings by March 2017.

The government has budgeted Rs 3.7bn for this

project.

Agrochemicals

Agrochemicals have received the least attention

from the government.

It is estimated that crop losses in India owing to

pests are as high as 15% to 25%. If these losses are

avoided, India will be able to meet its needs for

2020 domestically (source: GOI reports).

The usage of agrochemicals is quite low in India

compared to other countries. This is also

considered as one of the key reasons for lower

crop yields.

Agrochemical Usage Vs. YieldsCountry Pesticide uses (kg/ha) Yield (Tons/ha)

UK 5.0 7.0

France 5.0 7.5

USA 7.0 7.0

China 13.0 6.5

India 0.6 3.0

World 3.0 3.0

Source: FICCI Agricultural Census, Analysis by Tata Strategic

While consumption is low in India, pesticide

residues have been found to be too high.

This is mainly because of a huge spurious market

and the use of more dangerous chemicals.Developed countries have shifted to safer

chemicals such as organophosphates and

pyrethroids, whereas India still uses hazardous

organochloride formulations.

Soil health card will lead to a

judicious use of fertilisers in

India

Lower pesticide usage is one of

the key reasons for lower yieldsin India

Page | 11




Inadequate access to latest technologies such as

low drift nozzle and spray shields is also leading to

lower efficiency. It is estimated that currently only

0.1% of the applied pesticide in Indian farms hits

the target with the remainder contaminating the

soil and water (source: GOI reports).

Indian farmers also lack information related to

agrochemicals. The Central Insecticide Board and

Registration Committee (CIBRC) regulate pesticide

use in India. However, farmers are often unaware

of the pesticides recommendations.

Use of bio-pesticides has not been popularised

and constitute only ~4% of the total pesticide

market in India.

Despite having the second-largest arable land,agrochemicals consumption is very less in the

country.

Agro-chemical Market Size In Major Countries

Country 2008 (US$ bn) 2013 (US$ bn) CAGR (%)

Brazil 5.9 10.0 11.0

USA 6.6 7.4 2.3

China 3.2 4.8 8.6

Japan 3.2 3.4 1.3

France 3.2 2.9 (2.5)Germany 2.0 2.1 1.0

Canada 1.3 2.0 8.2

Argentina 1.0 1.7 11.2

India 1.4 1.7 3.8

Italy 1.2 1.3 2.1

Australia 1.1 1.1 (0.6)

Source: Sumitomo annual report

Awareness among farmers, better availability of

products and rising farm incomes will lead to a

higher usage of agrochemicals.

The Indian crop protection industry is estimated at

~US$ 4.25bn, which is divided between domestic

and exports. It is expected to grow at 12% CAGR to

reach ~US$ 7.5bn by FY19 (source: Tata Strategic

Group, FICCI).

Indian Crop Protection Market (US$ bn)FY14 FY19E CAGR (%)

Export 2.0 4.2 16.0

Domestic 2.3 3.3 8.0

Total 4.3 7.5 12.0

Source: Tata strategic group, FICCI

Exports will grow at 16% CAGR. Indian players are

well placed, with the right skill set available at a

lower cost and growing outsourcing by MNCs.

Global innovators serious about India

Global majors want to expand their products in

India owing to an immense scope for increase in

penetration.

What they have to say

Chemtura: “In India, we intend to continue to

invest in order to expand our portfolio of

businesses in the region.”

Dupont: “Over the next 5 years, we anticipate thatover half our sales growth in the agriculture

segment will occur outside North America and

focused in key markets of Brazil, Russia, Ukraine,

India and China.”

FMC: “With the acquisition of Cheminova, we are

expanding our international sales, particularly in

Europe and key Asian countries such as India.”

Lack of awareness and lower

share of cash crops have

resulted in minimal usage of

agrochemicals in India

India and Latin America are two

growing markets. Global

innovators are keen to

participate in India

Page | 12




India players’ strategies

The Indian domestic agrochemical market is

growing fast, led by lower penetration, new

efficient products and farmers shifting towards

cash crops.

Generic products earlier dominated the market.

However, seeing the vast

opportunity, global innovators are entering India

through marketing tie-ups with local players.

Key Indian players have adopted different

strategies.

Differentiated Approach By India Players

Company Key Strategies

Bayer Crop science Best product portfolio owing to strong parent. Pioneer in launching new products

Rallis India One-stop solution for farmers. Products across both generic and licensed category

UPL Diversification across multiple countries. Shift from pure generic to branded company

PI Industries Focus on high-end CSM business. Specialty product approach in domestic market

Dhanuka Agritech Only into formulation. Specialty product portfolio with tie-ups with global innovators

Insecticide India Portfolio of fast-growing generic products. Focus on bio-pesticide and R&D

Source: Company, HDFC sec Inst Research

Impact of monsoon on Indian players

Like other agri-inputs, consumption of

agrochemicals is also dependent on monsoon.

Being at the end of value chain (after seeds and

fertilisers), farmers prefer to cut cost in usage of

agrochemicals during tough years.

Outlook for agrochemicals is robust if monsoon

remains normal.

Revenues Growth (%) Of Indian Agrochemical Players

Company FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 9MFY16Dhanuka Agritech 259.9 23.8 35.6 21.1 20.5 7.8 10.0 26.8 6.3 3.1

Insecticides India 37.4 17.4 33.4 43.3 19.3 15.9 18.2 40.1 11.6 0.8

PI Industries1 17.6 22.0 9.6 2.1 42.5 3.6 12.3 20.0 19.5 3.3

Rallis India2 14.0 13.4 (9.4) 26.5 15.6 5.1 19.0 20.9 5.3 (14.6)

UPL3 15.8 21.8 28.9 16.0 24.7 15.1 5.0 24.4 16.8 2.8

Cumulative Rainfall* 106 98 78 102 102 93 106 106 88 86

Source: IMD, Company, HDFC sec Inst Research *Cumulative Rainfall (Jun - Sep) (LPA) (%)

1 - PI Industries: Only domestic agri-inputs division revenues are considered. CSM revenues are not included.

2 - Rallis India: Only domestic revenues are considered. These are ~70% of total revenue.3 - UPL: Only Indian revenues are considered

Indian players have a huge

opportunity both in domestic as

well as export markets

All key players are focusing on

launching specialty products

with tie-ups with global

innovators

Agrochemicals market growth is

directly linked to monsoon

Page | 13



INITIATING COVERAGE 13 MAY 2016

Dhanuka Agritech

BUY

On the road less travelledDhanuka Agritech Ltd (DAL) has a unique business

model with (1) Focus on in-licensing speciality

molecules, (2) Tie-ups with global innovators, (3)Regular launches of new products, preferably in the

fast-growing herbicide/fungicide segments, (4)

Presence only in asset-light formulation business,and (5) Pan-India distribution network with added

initiatives such as ‘Dhanuka Doctors’ to spread

awareness among farmers.

DAL has developed a strategic partnership with eightglobal innovators across Japan and the US. The

sourcing of new exclusive products has resulted in

the share of high-margin high-growth specialtymolecules rising to ~75% by FY15. The company

aspires to launch 2-3 new products (in 9(3) category)

every year to maintain its growth momentum.

DAL adopted the asset-light only formulationapproach, as it requires less incremental capex to

launch new products. It has spent Rs 1.2bn in adding

capacities over the past five years. We see no majorcapex over the next 2-3 years even for revenue CAGR

of ~20%.

DAL has strengthened its marketing network to

achieve full benefits of tie-ups with MNCs and newlaunches. The number of distributors (~9k) and

Dhanuka Doctors (~1.5k) has doubled over the past

seven years.

A differentiated approach has worked in the

company’s favour. It has achieved revenues CAGR of31% and EBITDA CAGR of ~38% over FY05-15. The

balance sheet is debt-fee despite a distressed agri

situation (owing to two bad monsoons) and recent

capex of Rs 600mn (to be commissioned in FY17).

A strong product portfolio and new launches willlead to robust growth. A healthy balance sheet and

improving return ratios will command premium. At

CMP, the stock is trading at 18.0x FY18E EPS and 4.4xBV. We initiate coverage on Dhanuka Agritech with a

BUY rating and a TP of Rs 700/sh (20x FY18E EPS).

Robust financials: We expect revenues and PAT togrow at a CAGR of 23% and 34% over FY16-18E.

RoE and RoCE will grow to 26.9/26.1% in FY18E vs.

21.6/20.3% in FY16E.

Near-term outlook: FY16 was challenging for

agrochemical players owing to the second

consecutive year of bad monsoon. DAL’s share

price moved up ~20% in the past three months in

anticipation of good rains. Any disappointment

related to monsoon is a big risk for all agri-inputcompanies.

Financial Summary (Standalone)(Rs bn) FY14 FY15 FY16E FY17E FY18E

Net Sales 7,369 7,838 8,308 10,219 12,524

EBITDA 1,206 1,317 1,406 1,911 2,524

APAT 920 1,059 978 1,318 1,750

Diluted EPS (Rs) 18.4 21.2 19.5 26.4 35.0

P/E (x) 34.2 29.8 32.2 23.9 18.0

EV / EBITDA (x) 26.4 23.7 22.2 16.2 12.1

RoE (%) 30.9 28.4 21.8 24.6 26.9Source: Company, HDFC sec Inst Research

INDUSTRY AGROCHEMICAL

CMP (as on 13 May 2016) Rs 630

Target Price Rs 700

Nifty 7,815

Sensex 25,490

KEY STOCK DATA

Bloomberg DAGRI IN

No. of Shares (mn) 50

MCap (Rs bn) / ($ mn) 32/472

6m avg traded value (Rs mn) 8

STOCK PERFORMANCE (%)

52 Week high / low Rs 718/408

3M 6M 12M

Absolute (%) 20.5 45.9 6.1

Relative (%) 9.6 46.4 12.5

SHAREHOLDING PATTERN (%)

Promoters 74.99

FIs & Local MFs 6.52FIIs 0

Public & Others 18.49

Source : BSE

Satish Mishra

[email protected]

+91-22-6171-7334

Deepak Kolhe


HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters



DHANUKA AGRITECH : INITIATING COVERAGE

DAL’s performance over the past 15 years

Dhanuka Agritech Ltd (DAL) is engaged in the

formulation of a wide range of agrochemicals.

DAL’s revenues have grown ~30x over the past 15

years. In the chart below, we have summarised its

journey over three phases and the key triggers.

DAL enjoys pan-India presence through its

marketing and has a network of more than 8,600

distributors and over 80,000 retailers.

The strong performance was led by multiple

factors such as increasing focus on distribution

network, tie-ups with global innovators and focuson in-licensing product where margins are higher.

Stellar Performance Led By Multiple Factors

Source: Capitaline, Company, HDFC sec Inst Research (*Deficit more than 10%)

FY02 to FY06 FY07 to FY13 FY14 to FY18E Focus on in-licensing products and

increase in tie-ups with global

innovators.

Blockbuster product ‘Targa Super’

was sourced from Nissan Chemical,

Japan.

Hit by two years of rain deficit in

2002 and 2004.

Products launched during FY01-FY06

started contributing to topline.

Escalation in raw material prices pushed

up realisation of many products.

Focus on fast-growing herbicides. Built

strong product portfolio.

Govt support with reduction in excise

duty from 14% to 8%

EBITDA margins improved owing to

higher contribution from in-licensingproducts.

Two consecutive rain deficits (2014

and 2015) impacted the sector.

Introduction of new 9(3) products.

Rising share of revenues from newly

launched products and hence,

gradual increase in margins.

DAL enjoyed 6% of the domestic

agrochemicals market share.

New plant at Rajasthan to support

future growth.

DAL’s revenues have grown ~30x

over the past 15 years

The company has built a

network of more than 8.5k

distributors and over 75kretailers across India

Tie-up with global innovators

and launches of specialty

products were key strategies

0%

5%

10%

15%

20%

25%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 E

F Y 1 7 E

F Y 1 8 E

Revenues (Rs mn) (LHS) EBITDA (Rs mn) (LHS) EBITDA margins (%) (RHS)

2 years rain deficit1 years rain deficit

2 years deficit

Page | 15



DHANUKA AGRITECH: INITIATING COVERAGE

Asset-light business model

Dhanuka Agritech’s asset-light business model

differentiates it from peers. The company focuses

only on formulation and sources technical directly

from innovators or other manufacturers. Three

factors support this model: (1) A better productmix, (2) Strong marketing network, and (3) Good

relationship with innovators.

Fast-growing product mix

DAL’s product portfolio is concentrated towards

fast-growing herbicides, while that of the domestic

industry is towards insecticides. Herbicide is

growing at a rapid pace owing to the rising manual

labour cost in India. Globally, it is the biggest

category.

Crop Protection Industry As Per Category (%)

Source: UPL AR, Company, HDFC sec Inst Research

DAL’s revenue contribution from herbicide and

fungicide category has gone up from 23% and 13% in

FY08 to 30% and 16% in FY15.

DAL’s revenue mixRevenue (%) Insecticide Herbicide Fungicide Others

FY08 57 23 13 8FY15 43 30 16 11


DAL’s ‘Targa Super’ is the market leader in

herbicide for soybean. It was launched in 2001 in

collaboration with Nissan (Japan). The recent

launches have been mostly in the herbicide and

fungicide categories.

New Product Launched In Herbicide And Fungicide

Product Category Crop Year

Conika Fungicides Paddy FY16

Dozo Herbicides Cottons FY16

Sempra Herbicides Sugarcane, maize FY15

Sakura Herbicides Soyabean FY15

Oxykill Herbicide Rice, Onion, FY15

Protocol Fungicides Chilli, rice, grapes, tomato FY15


Strong marketing network

DAL has a pan-India marketing network with more

than 8,600 direct distributors and over 80,000retailers. A strong marketing network will lead to

(1) Increased brand awareness, (2) Strong product

reach, (3) Interest from global innovators, and (4)

Competitive advantage. The company doubled its

distributors between FY08 and FY14.

65%

22%

43%

15%

27%

16%

16%

44% 30%

4% 7% 11%

0%

20%

40%

60%

80%

100%

India Global Dhanuka

Insecticide Fungicide Herbicide Other

Unlike the technical business,

only the formulation model

requires less incremental capex

for launching new product

DAL is focusing on fast-growing

herbicides, whereas the industry

is concentrated towardsinsecticides

Page | 16




Strong Marketing Network In India

Marketing Network FY08 FY14 FY15

Revenues (Rs mn) 2,482 7,384 7,851

Total Distributors 4,000 8,000 8,600

Districts covered 450 600 600

Dhanuka Doctors 750 1,500 1,500Retail counters 75,000 80,000


Technical collaboration with global leaders

DAL has strong technical tie-ups with global

innovators. Currently, the company is sourcing

specialty molecules from four American and

Japanese companies each. As part of these

collaborations, DAL gets access to better products

and saves on R&D costs, while the innovators gainentry to India’s fast-growing agrochemical market

and access to DAL’s marketing network.

Strong Relationship With Global InnovatorsTie up

withCountry Products

Nissan Japan Targa Super, Sempra, Sakura,

Dupont USQurin, HOOK, Cursor, Hi-Dice, DUNET,

Cover, Lustre, Dhawa gold

Chemtura US Omite, Dimline, Vitavaxulta,

Sumitomo Japan CALDAN 4 G, SheathmarFMC US MARKAR, AAATANK, Brigade, Nabood

Dow US ONEUP, TARGA SUPER + ZARGON,

Mitsui Japan Bombard, Nukil,

Hokko Japan Kasu-B, Conika


Regular introduction of new molecules

DAL has introduced 16 new products in the past

three years. Of this, six are registered under 9(3)

and 10 under 9(4). The revenue share of the new

products improved to 20% in 9mFY16 compared to

15% in 9mFY15.

Two consecutive years of rain deficit impacted the

growth of these products. We believe Sempra,

Conika, Mortar and Sakura have huge growth

potential in the near future and a normal

monsoon will lead to better demand.

Products Launched In Past 2-3 Years

Product Type Categ. Crop Launch

Thiram 9(4) Fung FY16

Goldy 9(4) Fung Potato, grapes FY16

Conika 9(3) Fung Paddy FY16

Cover 9(3) Insec

Soyabean, Black

gram, sugarcane,

Paddy

FY16

Dozo 9(3) Herb Cottons FY16

Dhanvarsha PGR FY16

Sempra 9(3) Herb Sugarcane, maize FY15

Mortar 9(3) InsecPaddy and

vegetableFY15

Sakura 9(3) Herb Soyabean FY15

Pager 9(4) Insec FY15

Oxykill 9(4) Herb Rice, onion FY15

Jackal 9(4) Insec FY14

Defend, 9(4) InsecPaddy, grapes,

chilly, horticultureFY14

Danfuron 9(4) InsecBrinjal, chilli, okra,

tomatoFY14


DAL has a pan-India marketing

network with over 8,600 direct

distributors and over 80,000

retailers

Currently, the company is

sourcing specialty molecules

from four American and four

Japanese companies

DAL has introduced 16 new

products in the past three years

Page | 17




Rising share of specialty molecules

The introduction of new products has led to a

gradual increase in the share of the high-margin

specialty segment.

Specialty And Generic Revenues Contribution


Decreasing Product concentration

As of FY12, the top-5 products contributed ~41%

to revenues (Targa super 20%, Caldan 10%,

Markar 4%, Omite 4% and Dhanzyme 3%). Rising

contribution from new products has, however, led

to a decline in the top-5’s share to 25-28%. The

contribution from products launched in the past

three years increased to 20% in 9mFY16 as

compared to 15% in 9mFY15.

Top-5 Products’ Contribution

Products Category Revenues share

Targa super Herbicide

25-28%

Caldan Insecticide

Markar Insecticide

Dhanzyme Granules Organic manure

Omite Insecticide


Robust growth potential for new products

The penetration of crop protection chemicals in

India is below 30%. Therefore, new products have

a huge potential.

Addressable area for new products

A bigger opportunity in crops such as cotton,

maize, sugarcane and paddy, where sowing area is

huge.

Mortar, Sakura and Sempra will be major

contributors to revenues.

Product Type CropAddressable

area (k acre)

Area

tapped*

Conika Fung Pomegranate 244 73

Conika Fung Tomato 1,072 73

Conika Fung Cole Crops 1,199 97

Mortar Insec Paddy 108,600 1,700

Mortar Insec Tomato 2,100 400

Mortar Insec Cole Crops 2,000 140

Sempra Herbi Sugarcane 12,025 317

Sempra Herbi Maize 17,675 106

Sakura Herbi Cotton 28,882 693

Sakura Herbi Onion 2,970 583

Sakura Herbi Jute 2,540 83

Source: Company, HDFC sec Inst Research,*‘000 acres

We have analysed the huge revenue potential for a

few new products.

Contributions from products

launched in the past three years

increased to 20% in 9mFY16 vs.

15% in 9mFY15

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

FY11 FY12 FY13 FY14 FY15 FY16

Speciality (%) Generic (%)

Page | 18




Revenue potential from Sempra

Sempra was launched in FY15 for sugarcane and

maize to control cyprus weed. It is the only

product in the world with the ability to do so. This

product has the potential to achieve revenue of

more than Rs 3bn.

Sempra Potential In Sugarcane

Total Area Under Sugarcane (mn ha) 5.2

Addressable Area For Sempra (mn ha) 1.6

Assuming Addressable Area For Sempra (%) 30.0

Usage Area In Sugarcane For Sempra (mn ha) 0.39

Assum: Area Tapped Of The Addressable Area (%) 25.0

Usage amount (Rs/ ha) 5,000

Total Sales (Rs mn) 1,961


The area under maize is ~9.4mn hectares

compared to ~5.2mn hectares in sugarcane. Even

at a lower penetration, it offers a huge

opportunity.

Sempra potential in Maize

Total Area Under Maize (mn ha) 9.4

Addressable Area For Sempra (mn ha) 2.8Assuming Addressable Area For Sempra (%) 30

Usage Area In Maize For Sempra (mn ha) 0.28

Assum: Area Tapped Of The Addressable Area (%) 10

Usage Amount (Rs/ha) 5,000

Total Sales (Rs mn) 1,410


No major capex going forward

The company has spent more than ~Rs 1.2bn on

capacity expansion in the past five years. Earlier, it

had formulation units at Gurgaon, Udhampur and

Sanand. DAL will almost double its capacity with

the new manufacturing facility in Rajasthan, whichwill commence from FY17.

Strong free cash flow generation

The company has already incurred a major capex

for its growth. We believe it will require only Rs

50-100mn per year towards maintenance capex.

Net debt/equity remains zero even at the peak of

its capex despite poor rains. We expect net debt

to remain zero over FY15-FY18E.

We expect the company to generate CFO of ~Rs

700mn/year and free cash flow of ~Rs 500mn/year

over FY17E-18E.

Healthy Cash Generation And No Capex To Boost FCF


(400)

(200)

-

200400

600

800

1,000

(500)

-

500

1,000

1,500

F Y 1 1

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 E

F Y 1 7 E

F Y 1 8 E

Capex (LHS) FCO (LHS) FCF (RHS)

Rs mn

The penetration of crop

protection chemicals in India isbelow 30%. Therefore, new

products have a huge potential

DAL has spent more than ~Rs

1.2bn on capacity expansion inthe past five years. No major

capex likely in 2-3 years

Page | 19




How a differentiated model helped DAL

Higher assets turnover ratio: Dhanuka has asset

turnover ratio ~2x as of FY15.


PBT margins: Lower depreciation and interest cost

as compared to peer leads to better PBT margins


Strong return ratios: Healthy asset turnover and

higher margins has resulted in strong return

rations for Dhanuka Agritech.

ROE Comparison


ROCE Comparison


-

0.5

1.0

1.5

2.0

2.5

FY11 FY12 FY13 FY14 FY15

Dha nuka PI Indus try R al li s Indi a U PL Ins ecti ci de Indi a

x

-

5.0

10.0

15.0

20.0


Dha nuka PI Indus try R all is India U PL Ins ecti ci de Indi a

%

-

10.0

20.0

30.0

40.0


Dhanuka PI Indus try R al li s Indi a U PL Ins ecti ci de Indi a

%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0


Dha nuka PI Indus try R al li s Indi a U PL Ins ecti ci de India

%

DAL has the highest fixed asset

turnover ratio owing to its formulation model

Lower depreciation and interest

cost resulted in better PBT

margins for DAL

Page | 20




Concerns on high WC cycle is over stretched

Dhanuka’s cash conversion cycle is around 150-

170 days. This is the highest among agrochemical

players. However, looking deeper, the difference is

mainly on account of lower payable days.

Debtor and inventory days for DAL are comparableto the industry. Since the company enjoys debt-

free status, it buys most of the raw materials in

discount while paying in cash.

Working capital cycle as on FY15

Particulars (Days) UPL PI Ind. Rallis Dhanuka

Inventory 89 71 79 89

Debtor 111 72 50 90

Payables 97 67 58 29

Cash conversion cycle 103 77 71 150


Expansion in CRAM business on the cards

In 3QFY16, the management indicated some

interest in the CRAMs business. DAL’s relationship

with global innovator companies could help

expand the business. Although this may not

happen in the near future, we believe thisinitiative will strengthen the company’s position

from formulation to CRAMs manufacturer.

Risks

Monsoon: Indian agriculture is dependent on

monsoon, with only ~46% of arable land irrigated.

Dependency on global suppliers: DAL is engaged

in the business of formulation rather than

technical. Therefore, the company is dependent

on global innovators.

Changes in regulation: Product registration is a

time-consuming process. Any changes in

regulation could impact product launches.

Dhanuka’s cash conversion cycle

is the highest among peers.However, it is mainly on account

of lower payables. Being debt-

free, DAL prefers discount to

extended payable period

The management has indicated

interest in the CRAMs business

Page | 21




Assumptions

Assumption FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Specialty 4,136 4,643 6,041 6,495 7,340 9,175 11,469

% Change 9.4 12.2 30.1 7.5 13.0 25.0 25.0

% Of Revenues 72.0 72.0 73.0 75.0 80.0 81.3 82.9

Generic 1,609 1,805 2,234 2,165 1,840 2,116 2,370

% Change (0.7) 12.2 23.8 (3.1) (15.0) 15.0 12.0

% Of Revenues 28.0 28.0 27.0 25.0 20.0 18.7 17.1

Gross Margins Total (%) 35.3 34.6 37.7 37.3 37.8 38.1 38.3

Specialty Margins (%) 40.0 40.0 40.0

Generic Margins (%) 29.0 30.0 30.0


Peer Valuations

Mcap

(Rs bn)

CMP

(Rs/sh) Rating

TP

(Rs/sh)

EPS (Rs/sh) P/E (x) P/BV (x) ROE (%)

FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

Chambal Fert 27.6 66 BUY 76 9.9 8.9 9.5 6.7 7.5 7.0 1.2 1.0 0.9 17.8 14.7 14.1

Coromandel Int 63.7 225 BUY 260 11.8 15.9 21.7 19.0 14.2 10.4 2.7 2.4 2.1 14.9 18.0 21.7

Dhanuka Agritech 31.5 630 BUY 700 19.5 26.4 35.0 32.2 23.9 18.0 6.5 5.4 4.4 21.8 24.6 26.9

Insecticides India 9.1 441 BUY 535 19.5 25.9 33.4 22.7 17.0 13.2 2.7 2.4 2.0 12.9 15.0 16.7

PI Industries 85.5 626 BUY 680 20.1 25.0 31.1 31.1 25.1 20.1 7.6 6.1 4.9 27.3 27.1 27.0

Rallis India 40.5 209 BUY 250 7.4 9.8 12.5 28.3 21.3 16.6 4.5 4.0 3.5 16.7 19.9 22.3

UPL Ltd 250.2 584 BUY 625 31.8 35.3 43.5 18.4 16.5 13.4 3.7 3.1 2.6 21.6 20.5 21.3

Navin Fluorine 20.6 2,105 BUY 2,150 85.5 99.7 134.4 24.6 21.1 15.7 3.2 2.9 2.5 13.5 14.3 17.2

SRF Ltd 72.4 1,261 NEU 1,330 73.7 86.5 95.0 17.1 14.6 13.3 2.7 2.3 2.0 17.0 17.3 16.5

Source : Company, HDFC sec Inst Research

Page | 22




Income Statement (Standalone)

(Rs mn) FY14 FY15 FY16E FY17E FY18E

Net Revenues 7,369 7,838 8,308 10,219 12,524

Growth (%) 26.9 6.4 6.0 23.0 22.6

Material Expenses 4,270 4,485 4,344 5,308 6,483

Traded Goods 327 436 832 1,023 1,254Employee Expenses 580 648 725 834 959

Other Operating Expenses 1,001 965 1,014 1,155 1,317

Operating Profits 1,191 1,304 1,393 1,898 2,511

Operating Profit Margin (%) 16.2 16.6 16.8 18.6 20.0

Other Operating Income 15 13 13 13 13

EBITDA 1,206 1,317 1,406 1,911 2,524

EBITDA Margin (%) 16.3 16.8 16.9 18.7 20.1

EBIDTA Growth (%) 47.2 9.3 6.8 35.9 32.0

Depreciation 48 59 62 90 94

EBIT 1,157 1,259 1,344 1,822 2,429Other Income (Including EO Items) 48 61 47 48 52

Interest & Financial charges 42 26 14 - -

PBT 1,163 1,294 1,377 1,870 2,482

Tax 232 233 399 552 732

RPAT 931 1,061 978 1,318 1,750

EO (Loss) / Profit (Net Of Tax) 11.2 2.0 0.0 0.0 0.0

APAT 920 1,059 978 1,318 1,750

APAT Growth (%) 44.7 15.1 (7.7) 34.8 32.7

AEPS 18.4 21.2 19.5 26.4 35.0

EPS Growth (%) 44.7 15.1 (7.7) 34.8 32.7


Balance Sheet (Standalone)


SOURCES OF FUNDS

Share Capital 100 100 100 100 100

Reserves 3,225 4,023 4,755 5,741 7,051

Total Shareholders Funds 3,325 4,123 4,855 5,841 7,151Minority Interest - - - - -

Long-term Debt - - - - -

Short-term Debt 394 161 175 - -

Total Debt 394 161 175 - -

Long-term Provisions & Others 153 174 174 174 174

Net Deferred Taxes 36 34 34 34 34

TOTAL SOURCES OF FUNDS 3,909 4,492 5,238 6,049 7,359

APPLICATION OF FUNDS

Net Block 671 702 1,389 1,400 1,405

CWIP 223 385 35 35 35Investments 10 51 151 151 151

LT Loans & Advances 201 303 303 303 303

Other Non-current Assets 3 3 9 9 9

Total Non-current Assets 1,106 1,444 1,887 1,897 1,903

Inventories 2,113 1,917 2,052 2,523 3,091

Debtors 1,703 1,939 2,166 2,523 3,091

Other Current Assets 227 184 184 184 184

Cash & Equivalents 23 457 435 560 910

Total Current Assets 4,067 4,496 4,837 5,790 7,277

Creditors 482 622 661 813 996

Other Current Liabilities & Provns 783 825 825 825 825

Total Current Liabilities 1,264 1,448 1,486 1,638 1,821

Net Current Assets 2,802 3,048 3,351 4,152 5,456

TOTAL APPLICATION OF FUNDS 3,909 4,492 5,238 6,049 7,359


Page | 23




Cash Flow (Standalone)


Reported PBT 1,163 1,294 1,377 1,870 2,482

Non-operating & EO items (48) (61) (47) (48) (52)

Interest expenses 42 26 14 - -

Depreciation 48 59 62 90 94Working Capital Change (659) (38) (330) (676) (954)

Tax Paid (224) (234) (399) (552) (732)

OPERATING CASH FLOW ( a ) 322 1,045 677 683 838

Capex (288) (253) (400) (100) (100)

Free cash flow (FCF) 34 792 277 583 738

Investments (10) (41) (100) - -

Non-operating Income 59 63 47 48 52

INVESTING CASH FLOW ( b ) (239) (231) (453) (52) (48)

Debt Issuance/(Repaid) 64 (237) 14 (175) -

Interest Expenses (42) (26) (14) - -FCFE 57 529 277 408 738

Share Capital Issuance - - - - -

Dividend (193) (117) (246) (332) (440)

FINANCING CASH FLOW ( c ) (170) (380) (246) (507) (440)

NET CASH FLOW (a+b+c) (87) 434 (21) 125 350

EO Items, Others 11 2 - - -

Closing Cash & Equivalents 23 457 435 560 910


Key RatiosFY14 FY15 FY16E FY17E FY18E

PROFITABILITY (%)

GPM 37.7 37.3 37.8 38.1 38.3

EBITDA Margin 16.3 16.8 16.9 18.7 20.1

EBIT Margin 15.7 16.0 16.2 17.8 19.4

APAT Margin 12.5 13.5 11.7 12.9 14.0RoE 30.9 28.4 21.8 24.6 26.9

Core RoCE 26.6 26.0 21.6 25.0 28.7

RoCE 27.1 25.7 20.3 23.4 26.1

EFFICIENCY

Tax Rate (%) 19.9 18.0 29.0 29.5 29.5

Asset Turnover (x) 2.1 1.9 1.7 1.8 1.9

Inventory (days) 104 89 90 90 90

Debtors (days) 84 90 95 90 90

Other Current Assets (days) 2 1 1 1 1

Payables (days) 24 29 29 29 29Other Current Liab & Provns (days) 39 38 36 29 24

Cash Conversion Cycle (days) 128 113 121 122 128

Debt/EBITDA (x) 0.3 0.1 0.1 0.0 0.0

Net D/E (x) 0.1 (0.1) (0.1) (0.1) (0.1)

Interest Coverage (x) 27.8 48.4 96 NA NA

PER SHARE DATA (Rs)

EPS 18.4 21.2 19.5 26.4 35.0

CEPS 19.4 22.3 20.8 28.1 36.9

DPS 4.0 4.5 4.2 5.7 7.5

BV 66.5 82.4 97.1 116.8 143.0

VALUATION

P/E (x) 34.2 29.8 32.2 23.9 18.0

P/BV (x) 9.5 7.6 6.5 5.4 4.4

EV/EBITDA (x) 26.4 23.7 22.2 16.2 12.1

OCF/EV (%) 1.0 3.3 2.2 2.2 2.7

FCF/EV (%) 0.1 2.5 0.9 1.9 2.4

FCFE/MCAP (%) 0.2 1.7 0.9 1.3 2.3

Dividend Yield (%) 0.6 0.7 0.7 0.9 1.2


Page | 24



INITIATING COVERAGE 13 MAY 2016

Insecticides IndiaBUY

Ready to growInsecticides India Ltd (IIL) is a fast-growing Indianagrochemical player present across branded

formulation and the technical business. It has built a

strong product portfolio through reverseengineering, inorganic acquisitions and tie-ups with

global innovators.

IIL’s product portfolio comprises ~100 branded

products and ~20 technicals. To increase its focus on

high-growth and high-margin products, IIL hascategorised the top-20 branded products asNavratna and Super-11. The top-20 products

contribute ~70% to formulation revenues (~50% to

total revenues) and have grown at ~30% CAGR overFY12-15.

The company has product tie-ups with global players

such as AMVAC (US) and Nissan (Japan). Twoproducts from each partner are part of the top-20. IIL

has formed a 50-50 JV with OAT Agrio (Japan) to

capitalise on molecules going off-patent (worth US$6.3bn) during 2014-2020. The total investment by theJV, which aims to discover new molecules, will be

~Rs 400mn.

IIL has invested ~Rs 2.5bn over the past five years to

enhance its capacities as the current ones operates

at sub-50% utilisation level. We see no major capexover the next 2-3 years even for revenue CAGR of

~20%. The company has a pan-India distribution

network and has increased it distributors to 5,000 inFY15 vs. 3,200 in FY12.

IIL’s capex phase is over and it has partly reduced itsdebt by raising Rs 838mn through QIP (Aug-15 Rs

510/sh). Cash generation and no further capex will

improve the balance sheet. At CMP, the stock tradesat 13.2x FY18E EPS and 2.0x BV. We initiate coverage

on Insecticides India with a BUY rating and a TP of Rs

535/sh (16x FY18E EPS).

Highlights of the quarter

Robust financials: We expect revenues and PAT togrow at 16% and 31% CAGR over FY16-18E. RoE

and RoCE will grow to 16.7/13.2% in FY18E vs.

12.9/10.4% in FY16E.

Near-term outlook: FY16 was challenging for agri-

input players owing to a bad monsoon. IIL’s share

prices have moved up ~34% in the past three

months in anticipation of good rains. Any

disappointment is a big risk for all agri-input

companies.

Financial Summary (Standalone)

(Rs bn) FY14 FY15 FY16E FY17E FY18E

Net Sales 8,641 9,642 9,785 11,315 13,139

EBITDA 818 1,111 962 1,127 1,286

APAT 400 548 402 535 691

Diluted EPS (Rs) 19.3 26.5 19.5 25.9 33.4

P/E (x) 22.8 16.6 22.7 17.0 13.2

EV / EBITDA (x) 9.9 7.9 12.5 10.5 8.8

RoE (%) 17.4 20.4 12.9 15.0 16.7Source: Company, HDFC sec Inst Research



Target Price Rs 535

Nifty 7,815

Sensex 25,490

KEY STOCK DATA

Bloomberg INST IN


MCap (Rs bn) / ($ mn) 9/137




3M 6M 12M

Absolute (%) 47.9 24.4 (9.9)

Relative (%) 37.0 24.9 (3.4)


Promoters 68.75

FIs & Local MFs 7.76

FIIs 5.09


Source : BSE

Satish Mishra

[email protected]

+91-22-6171-7334

Deepak [email protected]

+91-22-6171-7316HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters



INSECTICIDES INDIA: INITIATING COVERAGE

IIL’s performance over the past 15 years

Insecticide India Ltd (IIL) is one of the fastest-

growing agrochemical companies in India. Its

current product portfolio comprises branded

products, technical and bulk formulations.

It has a portfolio of 99 formulations and 18 activeingredients. IIL enjoys a pan-India presence

through a network of 5,000 distributors.

Over the years, revenues have grown multi-fold,

led by inorganic acquisition of brands, expansion

of distribution network and tie-up with innovators.

The margins are strengthening with focus on high-

margin products. The revenue share from top-20products (Navratna and Super-11) has increased to

48% in FY15 from 40% in FY12.

Outstanding performance over the years

Source: Capitaline, Company, HDFC sec Inst Research (Defici t more than 10%)

FY02-FY06 FY07-FY13 FY14-FY18E

Started operations in Chopanki(Rajasthan)

Acquired 21 brands from MontariIndustries Ltd in 2003

Commissioned second formulationplant in Samba (Jammu)

Set up R&D Laboratory in Chopanki

Acquired the exclusive rights to sell

the Thimet brand in India from

AMVAC

Technical plant commenced operations inChopanki and Dahej

Acquired Monocil brand from NOCIL Ltd

Two new formulation plants at Dahej andUdhampur commenced operations

Launched Nuvan, Hakama and Pulsor incollaboration with AMVAC and Nissan

Entered into a JV with OAT Agrio, Japan,for research and invention of new

agricultural chemicals

Poor monsoon resulted in

slower growth in FY15 and FY16

Market share reached 7%

Contribution started from

newly launched products like

Hakama, Pulsor

Launched R&D centre with OAT

Agrio, Japan

Normal monsoon expectation in

2016 is key

Products expansion through

acquisition, tie-ups and reverseengineering

FY16 was difficult owing to

second year of poor monsoon

Contributions from new products

launched in the past two years

are yet to pick up

-

2

4

6

8

10

12

14

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY02 F Y03 FY04 FY05 F Y06 FY07 FY08 FY 09 FY10 FY11 F Y12 FY13 FY14 F Y15 FY16E FY17E FY18E

Revenues (Rs mn) (LHS) EBITDA (Rs mn) (LHS) EBITDA Margins (%) (RHS)

2 years rain deficit

1 year rain deficit

2 years deficit

Page | 26




Business segments

IIL has three major segments (1) Branded

formulation, (2) Technical, and (3) Bulk

formulation. Branded business is B2C whereas the

others are B2B.

Of the 99 products in its portfolio, IIL hascategorised the top-20 high-growth high-margin

ones as Navratna and Super-11.

The top-20 products contribute ~70% to the

branded segment’s revenues and ~48% to total

revenues.

Revenue share (FY15)


Exports: The contribution from exports was only

3% of revenues in FY15. However, the

management expects it to cross the Rs 1-bn mark

within five years.

IIL is pursuing registration of its products in the

Middle East and South-East Asia. A JV with OAT

Agrio, Japan, will be instrumental in discovering

new molecules.

Expansion via R&D, acquisitions and tie-ups

IIL manufactures off-patent technicals that provide

backward integration to its formulation portfolio.

It has expanded its product portfolio through

inorganic routes such as 21 products from Montari

Industries and one from NOCIL.

IIL is sourcing specialty molecules for four

products through international collaborations with

AMVAC (US) and Nissan Chemical (Japan). All the

products are successful and contributed ~19% to

total revenues in FY15.

Acquisition and tie-ups

Year Events

2003 Acquisition of 21 brands of Montari industries

2006Acquired the exclusive rights to sell Thimet and

Nuvan in India from AMVAC, Netherlands

2011 Acquired Monocil from NOCIL Ltd.

2012Launched Hakama and Pulsor in collaboration with

Nissan, Japan

2012Entered in to a JV with OAT Agrio, Japan for research

and invention of new agricultural chemicals


JV with OAT Agrio: IIL and OAT Agrio, Japan, haveformed a 50-50 JV and have set up an R&D centre

in Rajasthan. The total investment will be ~Rs

400mn. The JV will work towards the innovation of

new molecules.

~70% of revenues come from

branded sales

IIL has product tie-ups with

AMVAC (US) and Nissan (Japan)

JV with OAT Agrio (Japan) will

work towards the discovery of

new molecules

16%

11%

37%

11%

22%

70%Branded

Technical

Bulk-

Formulation

Navratna

Super 11

Other

Page | 27




Focus on fast-growing segments

Rising share from Navratna/Super-11 in formulation

The company has categorised the top-20 high-

margin high-growth products into Navratna and

Super-11 groups. The marketing focus is diverted

towards increasing their revenue share.

As a result, revenues from the top-20 products

have been ~31% CAGR over FY12-15 and their

share increased from 40% to 48%.

Newly launched products like Nuvan, Hakama,

Pulsor and Logo are doing well.

Navratnas Gross Revenues Break-up

Products (Rs mn) FY12 FY13 FY14 FY15

Thimet 416 501 716 774Nuvan - 268 512 602

Lethal 374 350 432 511

Monocil 333 370 517 481

Victor 316 392 292 376

Hijack 171 227 344 321

Hakama - 78 221 281

Pulsor - 50 136 276

Pluto/ Xpload 31 34 90 152

Flite 27 33 42 80

Total 1,669 2,304 3,302 3,855

% Of Total Revenue 30 35 36 37


IIL plans to launch new products and strengthen

its marketing network to maintain robust growth

momentum.

Super-11 Gross Revenues Break-up

Products (Rs mn) FY12 FY13 FY14 FY15

Logo/Gama - - 121 233

Indan 154 40 42 205

Sharp 89 114 129 131Arrow 51 64 84 98

Super star 19 50 86 94

Selector 84 107 81 91

Sargent 47 59 58 85

Avon Plus - 48 61 57

Phentom 70 77 104 55

Metro 31 26 35 33

Streptomil 11 15 26 28

Total 555 600 828 1,110

% Of Total Revenue 10 9 9 11Source: Company, HDFC sec Inst Research

We expect revenues from the top-20 products to

grow at a CAGR of 22% over FY16-18E.

Consequently, their share in total revenues will

increase to ~55%.

Technical revenues to pick up

Technical sales are the second-largest business for

IIL and have contributed ~16% to revenues in

FY15. The company has two technical synthesis

plants with multi-product facilities. The current

capacity stands at 13,800 tpa; utilisation rate was

56% in FY15.

IIL is pursuing registration of its products in the

Middle East and South-East Asia.

A JV with OAT Agrio, Japan, will be instrumental in

discovering new technicals.

Top-20 products recorded ~31%CAGR over FY12-15

IIL is pursuing registration of its

products in the Middle East and

South-East Asia

Page | 28




Robust Growth To Continue In Technicals


The technical segment has reported revenue

growth of ~38% CAGR over FY12-15.

As of FY15, IIL had a portfolio of 19 technicals.

Technicals launched in FY15 like diafenthiuron,

imazethapyr and myclobutanil are yet to

contribute to revenues. We believe revenues from

technical will grow at 15% CAGR over FY16-18E.

Ready infrastructure to support robust growth

Insecticide India has a strong portfolio of products.

To maintain its growth momentum, the company

has added production capacity and strengthenedits distribution network.

Building up capacity

The company has spent ~Rs 2.5bn in the past five

years towards capacity expansion. IIL has

formulation and technical manufacturing facilities

across Chopanki (Rajasthan), Udhampur (J&K),

Samba (J&K) and Dahej (Gujarat).

The current capacities operate at sub-50%

utilisation level. We don’t see any major capex

requirement over the next 2-3 years.

Capacity And Utilisation For FY15

PlantsStarted

inCapacity (tpa) Utilisation (%)

Chopanki

Unit 1 Formulation FY02 18,000 62

Unit 2 Technicals FY08 3,800 32

Unit 3 Formulation FY15 20,000 11

Samba

Formulation FY05 13,430 46

Udhampur

Formulation FY12 5,600 52

Dahej

Unit 1 Formulation FY12 53,000 28Unit 2 Technicals FY13 10,000 66


Strong distribution network

A strong marketing network is the key factor for

brand awareness and product reach. This helps in

partnering with global innovators.

The company has pan-India distribution network.

It increased its number of distributors ~55% overthe past three years to 5,000 in FY15.

Strengthening distribution network

Particulars FY12 FY15 CAGR (%)

Distributor 3,200 5,000 16

Dealers/Retailers 50,000 60,000 6

Revenues (Rs mn) 4,501 9,642 29


11%10% 10%

16%

18% 18% 18%

0%

5%

10%

15%

20%

-

500

1,000

1,500

2,000

2,500

3,000

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 E

F Y 1 7 E

F Y 1 8 E

Technica ls (Rs mn) (LHS) % of Revenues (RHS)

Technical sales are the second

largest business and contributed

~16% to revenues in FY15

The company has spent ~Rs

2.5bn in the past five years

towards capacity expansion

We don’t see any major capex

over the next 2-3 years

Page | 29




Well spread across geography

IIL’s footprint is well spread across India.

It has a presence across major crop-producing

states like Punjab, Haryana, AP, Maharashtra,

Tamil Nadu, UP, MP and Gujarat.


Lower capex leads to positive FCF

A capex of Rs 2.5bn in the past five years has been

completed. We expect positive FCF and an

improvement in return ratios.


Improving return ratios

Even in the capex phase (FY11-15), return ratios

were healthy.

Although ratios have fallen in FY16, we expect ROE

and ROCE to pick up to 17% and 13% by FY18.


Debt to equity to be comfortable

The money raised from QIP (Rs 838mn) was used

for debt repayment. Further cash generation will

lead to reduction in D/E to 0.5x by FY18E.


-1,500

-1,000

-500

-

500

1,000

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 E

F Y 1 7 E

F Y 1 8 E

Capex ( LH S) F CF (R HS )

Rs mn

-

5

10

15

20

25

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 E

F Y 1 7 E

F Y 1 8 E

ROE (%) ROCE (%)

0.9

1.0 1.01.1

0.90.7

0.5

-

1

2

3

4

5

6

-

0.2

0.4

0.6

0.8

1.0

1.2

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

F Y 1 6 E

F Y 1 7 E

F Y 1 8 E

Debt/Equity (x) Interest Cover (x) - RHS

Lower capex will lead to positive

FCF and return ratios will

improve from FY17E

The money from QIP was used

for loan repayment

41 39 39 41

26 25 26 24

16 18 19 21

18 18 16 15

0%

20%

40%

60%

80%

100%

F Y 1 2

F Y 1 3

F Y 1 4

F Y 1 5

North South Central / West East

Page | 30




Risks and concerns High WC cycle: IIL’s cash conversion cycle is

around 120-130 days - higher than PI, Rallis and

UPL. Although, Dhanuka Agritech has a higher cash

conversion cycle, it is mainly on account of lower

payables.

Working Capital Cycle As On FY15

Particulars (Days) UPL PI Ind. Rallis Dhanuka IIL

Inventory 89 71 79 89 148

Debtor 111 72 50 90 63

Payables 97 67 58 29 79

Cash conversion cycle 103 77 71 150 132


Monsoon: Indian agriculture is dependent on

monsoon as only ~46% of the arable land is

irrigated.

Changes in regulation: Product registration is a

time-consuming process. Any changes inregulation could impact product launches.

Fluctuation in raw material: Most of the raw

materials are derived from crude oil. Any

fluctuation in crude prices could impact margins.

A normal monsoon is key for

Indian agrochemical players

Page | 31




Assumptions

Revenue Growth (%) FY13 FY14 FY15 FY16E FY17E FY18E

Navratna 38.0 43.3 16.7 5.0 22.0 22.0

Super 11 8.1 37.9 34.0 2.0 22.0 22.0

Other Branded Sale 4.5 22.3 -17.5 -5.0 10.0 10.0

Technical 1.5 54.0 68.4 17.0 15.0 15.0

Gross Profit Margins (%) 32.8 30.4 32.8 30.8 31.5 31.9

Branded Formulation (GPM %) 37.5 38.0 38.0

Institutional Sales (GPM %) 15.0 15.0 15.0


Peer Valuations

Mcap

(Rs bn)

CMP

(Rs/sh) Rating

TP

(Rs/sh)



Chambal Fert 27.6 66 BUY 76 9.9 8.9 9.5 6.7 7.5 7.0 1.2 1.0 0.9 17.8 14.7 14.1Coromandel Int 63.7 225 BUY 260 11.8 15.9 21.7 19.0 14.2 10.4 2.7 2.4 2.1 14.9 18.0 21.7




Rallis India 40.5 209 BUY 250 7.4 9.8 12.5 28.3 21.3 16.6 4.5 4.0 3.5 16.7 19.9 22.3

UPL Ltd 250.2 584 BUY 625 31.8 35.3 43.5 18.4 16.5 13.4 3.7 3.1 2.6 21.6 20.5 21.3


SRF Ltd 72.4 1,261 NEU 1,330 73.7 86.5 95.0 17.1 14.6 13.3 2.7 2.3 2.0 17.0 17.3 16.5


Page | 32




Income Statement (Standalone)


Net Revenues 8,641 9,642 9,785 11,315 13,139

Growth (%) 40.1 11.6 1.5 15.6 16.1


Traded Goods 1,018 496 571 656 755

Employee Expenses 293 344 396 456 524

Other Operating Expenses 1,515 1,704 1,653 1,983 2,380

EBITDA 818 1,111 962 1,127 1,286

EBITDA Margin (%) 9.5 11.5 9.8 10.0 9.8

EBIDTA Growth (%) 18.0 35.8 (13.4) 17.2 14.1

Depreciation 67 142 167 189 205

EBIT 751 969 795 938 1,081

Other Income (Including EO

Items)5 4 5 5 5

Interest 269 332 297 274 222PBT 487 642 503 669 864

Tax 87 93 101 134 173

RPAT 400 548 402 535 691

Mionority Interest - - - - -

EO (Loss) / Profit (Net Of Tax) - - - - -

APAT 400 548 402 535 691

APAT Growth (%) 13.3 37.2 (26.7) 33.0 29.2

AEPS 19.3 26.5 19.5 25.9 33.4

EPS Growth (%) 13.3 37.2 (26.7) 33.0 29.2


Balance Sheet (Standalone)


SOURCES OF FUNDS

Share Capital 127 127 207 207 207

Reserves 2,339 2,787 3,132 3,610 4,244

Total Shareholders Funds 2,466 2,914 3,339 3,817 4,451

Long-term Debt 302 537 498 464 432

Short-term Debt 2,278 2,680 2,470 2,300 1,852

Total Debt 2,580 3,216 2,968 2,764 2,284


Net Deferred Tax Liability 133 156 156 156 156



Net Block 1,701 2,047 2,257 2,368 2,362

CWIP 542 377 200 100 100

Investments 111 111 111 111 111LT Loans & Advances 48 59 59 59 59

Other Non-current Assets 63 22 22 22 22

Total Non-current Assets 2,464 2,616 2,649 2,660 2,654

Inventories 3,117 3,914 4,021 4,495 5,040

Debtors 1,279 1,668 1,743 1,860 1,980



Total Current Assets 5,450 6,592 6,783 7,381 8,049

Creditors 2,036 2,098 2,145 2,480 2,988

Other Current Liabilities & Provns 653 779 779 779 779

Total Current Liabilities 2,689 2,877 2,924 3,259 3,767




Page | 33




Cash Flow (Standalone)


Reported PBT 487 642 503 669 864

Non-operating & EO Items (3) (3) (3) (3) (3)

Interest Expenses 159 240 297 274 222

Depreciation 67 142 167 189 205

Working Capital Change (251) (999) (135) (256) (157)

Tax Paid (84) (80) (101) (134) (173)

OPERATING CASH FLOW ( a ) 374 (59) 728 739 958

Capex (462) (335) (200) (200) (200)

Free Cash Flow (FCF) (88) (394) 528 539 758

Investments (111) 0 0 0 0

Non-operating Income 3 3 3 3 3


Debt Issuance/(Repaid) 437 645 (248) (204) (480)

Interest Expenses (159) (240) (297) (274) (222)FCFE 191 11 (17) 61 57

Share Capital Issuance - - 80 - -

Dividend (45) (45) (57) (57) (57)

FINANCING CASH FLOW ( c ) 234 360 (522) (536) (758)

NET CASH FLOW (a+b+c) 38 (30) 9 7 3

EO Items, Others - - - - -



Key Ratios

FY14 FY15 FY16E FY17E FY18E

PROFITABILITY (%)

GPM 30.4 32.8 30.8 31.5 31.9

EBITDA Margin 9.5 11.5 9.8 10.0 9.8

EBIT Margin 8.7 10.0 8.1 8.3 8.2

APAT Margin 4.6 5.7 4.1 4.7 5.3

RoE 17.4 20.4 12.9 15.0 16.7

Core RoCE 13.4 15.1 10.5 11.9 13.3

RoCE 13.3 14.9 10.4 11.8 13.2

EFFICIENCY

Tax Rate (%) 17.9 14.5 20.0 20.0 20.0

Asset Turnover (x) 1.8 1.7 1.6 1.8 2.0

Inventory (days) 132 148 150 145 140

Debtors (days) 54 63 65 60 55

Other Current Assets (days) 13 14 14 12 10Payables (days) 86 79 80 80 83

Other Current Liab & Provns (days) 21 19 19 17 14


Debt/EBITDA (x) 3.2 2.9 3.1 2.5 1.8

Net D/E (x) 1.0 1.1 0.9 0.7 0.5

Interest Coverage 2.8 2.9 2.7 3.4 4.9

PER SHARE DATA (Rs/sh)

EPS 19.3 26.5 19.5 25.9 33.4

CEPS 36.8 54.4 27.5 35.0 43.4

DPS 3.0 2.5 2.5 2.5 2.5

BV 194.4 229.8 161.5 184.7 215.3

VALUATION

P/E (x) 22.8 16.6 22.7 17.0 13.2

P/BV (x) 2.3 1.9 2.7 2.4 2.0

EV/EBITDA (x) 9.9 7.9 12.5 10.5 8.8

OCF/EV (%) 4.6 (0.7) 6.1 6.3 8.5

FCF/EV (%) (1.1) (4.5) 4.4 4.6 6.7

FCFE/MCAP (%) 3.4 0.2 (0.2) 0.7 0.6

Dividend Yield (%) 0.7 0.6 0.6 0.6 0.6


Page | 34



COMPANY UPDATE 13 MAY 2016

Rallis India

BUY

Scripting a turnaroundFY16 has been challenging for Rallis India considering

(1) Two years of rain deficit in India, (2) Weaker Latin

America and European currencies, (3) Muted

international prices of agri-commodities, and (4)

Unfavourable weather in Latin America. Hence,

EBITDA declined 17% YoY to Rs 7.1bn and PAT fell

15% to Rs 3.4bn.

However, things seem to be looking up in FY17 with

the forecast of a normal monsoon, improvement in

agri-commodity prices and strengthening of LatAmcurrencies. Additionally, Rallis has specific triggers

such as (1) New product launches, (2) Custom

synthesis (CSM) revenues likely to begin, and (3)

Growth in the seed business.

The CSM business’ progress is encouraging. Two

products for global innovators have reached the pilot

stage and are headed for commercial production.

The revenue from seeds grew only 6% YoY to Rs

3.2bn in FY16. EBITDA margins were muted as well at

7.2%. Strong growth levers such as (1) Diversified

portfolio, (2) Strong brand, and (3) Pan-India

distribution network are in place for the seed

business. A normal monsoon may lead to revenue

growth of 25-30% CAGR over the next 2-3 years. We

expect a significant boost in profitability led by

operating leverage.

The stock has rallied ~13% in the past month, but we

believe there is more to come. Rallis is a direct

beneficiary of the Indian agriculture growth story.

Lower penetration of agrochemicals in the country

and its cost advantage underpin its long-term

growth. A strong brand, complete portfolio,

extensive distribution network and a strong balance

sheet will help gain market share. Maintain BUY with

a TP of Rs 250/sh (20x FY18EEPS).

Investment arguments

Robust financials: We expect revenues and PAT togrow at a CAGR of 16% and 30% over FY16-18E.

RoE and RoCE will grow to 22.3/20.7% in FY18E vs.

16.7/15.1% in FY16P.

Near-term outlook: Any disappointment related

to monsoon is a big risk for all agri-input

companies. Around 30% of Rallis’ revenues come

from exports. Sharp volatility in global agri

commodity prices and emerging market currencies

will have a direct impact on Rallis India.

Financial Summary (Consolidated) (Rs mn) FY14 FY15 FY16P FY17E FY18E

Net Sales 17,466 18,218 16,279 18,680 21,927

EBITDA 2,613 2,771 2,302 2,997 3,693

APAT 1,519 1,572 1,430 1,904 2,435

Diluted 7.8 8.1 7.4 9.8 12.5

P/E (x) 26.8 25.9 28.4 21.3 16.7

EV / 15.8 15.1 18.0 13.7 10.9

RoE (%) 22.7 20.5 16.7 19.9 22.3




Target Price Rs 250

Nifty 7,815

Sensex 25,490

KEY STOCK DATA

Bloomberg RALI IN


MCap (Rs bn) / ($ mn) 41/607




3M 6M 12M

Absolute (%) 40.4 6.2 (1.0)

Relative (%) 29.5 6.7 5.4


Promoters 50.09

FIs & Local MFs 10.67FIIs 7.56


Source : BSE

Satish Mishra

[email protected]

+91-22-6171-7334

Deepak Kolhe


HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

RALLIS INDIA COMPANY UPDATE



RALLIS INDIA : COMPANY UPDATE

Assumptions Change In Estimates FY13 FY14 FY15 FY16P FY17E FY18E

Sales Growth (%)

Domestic 19.0 20.9 5.3 (7.0) 15.0 15.0

Exports 8.3 17.3 2.0 (20.0) 15.0 25.0

Metahelix 42.2 46.3 40.0 6.4 25.0 25.0Total 14.4 19.8 4.3 (10.6) 14.8 17.4

Gross Margin (%) 39.8 42.3 45.4 48.5 49.0 48.5

Tax Rate (%) 31.0 28.8 27.9 21.0 24.2 24.0

Working capital (days) 4 18 49 43 43 42

Inventory 67 69 79 91 85 80

Debtors 41 35 50 44 45 45

Creditors 63 64 58 61 60 60

Capex (Rs mn) 349 587 431 800 800 800


FY17 Old FY17 New % Change

Net Sales 18,680 18,680 -

EBITDA 2,997 2,997 -

APAT 1,904 1,904 -

AEPS 9.8 9.8 -

FY18 Old FY18 New % Change

Net Sales 21,927 21,927 -

EBITDA 3,693 3,693 -

APAT 2,435 2,435 -

AEPS 12.5 12.5 -

Peer Valuation

Mcap

(Rs bn)

CMP

(Rs/sh) Rating

TP

(Rs/sh)



Chambal Fert 27.6 66 BUY 76 9.9 8.9 9.5 6.7 7.5 7.0 1.2 1.0 0.9 17.8 14.7 14.1

Coromandel Int 63.7 225 BUY 260 11.8 15.9 21.7 19.0 14.2 10.4 2.7 2.4 2.1 14.9 18.0 21.7




Rallis India 40.5 209 BUY 250 7.4 9.8 12.5 28.3 21.3 16.6 4.5 4.0 3.5 16.7 19.9 22.3

UPL Ltd 250.2 584 BUY 625 31.8 35.3 43.5 18.4 16.5 13.4 3.7 3.1 2.6 21.6 20.5 21.3


SRF Ltd 72.4 1,261 NEU 1,330 73.7 86.5 95.0 17.1 14.6 13.3 2.7 2.3 2.0 17.0 17.3 16.5


No change in estimates

Page | 36

RALLIS INDIA COMPANY UPDATE




Income Statement (Consolidated)

(Rs mn) FY14 FY15 FY16 FY17E FY18E

Net Sales 17,466 18,218 16,279 18,680 21,927

Growth (%) 19.8 4.3 (10.6) 14.8 17.4


Traded Goods 1,709 1,596 980 1,494 1,754Employee Expenses 1,105 1,294 1,324 1,483 1,661

Other Operating Expenses 3,663 4,208 4,268 4,673 5,281

EBITDA 2,613 2,771 2,302 2,997 3,693

EBITDA Margin (%) 15.0 15.2 14.1 16.0 16.8

EBIDTA Growth (%) 24.1 6.1 (16.9) 30.2 23.2

Depreciation 407 496 446 499 549

EBIT 2,206 2,276 1,856 2,498 3,144

Other Income 64 42 137 86 104

Interest & Financial Charges 126 101 136 72 42

EO Profit/(Loss) - - - - -

PBT 2,144 2,216 1,857 2,513 3,206

Tax 617 618 390 608 770

RPAT 1,527 1,598 1,467 1,904 2,435

Minority Interest 8 26 37 - -

APAT 1,519 1,572 1,430 1,904 2,435

APAT Growth (%) 27.6 3.5 (9.0) 33.1 27.9

AEPS 7.8 8.1 7.4 9.8 12.5

EPS Growth (%) 27.6 3.5 (9.0) 33.1 27.9


Balance Sheet (Consolidated)

(Rs mn) FY14 FY15 FY16P FY17E FY18E

SOURCES OF FUNDS

Share Capital 194 194 195 195 195

Reserves 6,986 7,951 8,796 9,965 11,460

Total Shareholders’ Funds 7,180 8,145 8,990 10,159 11,654Long-term Debt 261 268 262 112 112

Short-term Debt 507 985 633 483 283

Total Debt 768 1,253 895 595 395

Minority Interest 105 101 38 38 38


Net Deferred Tax liability 315 357 388 388 388



Net Block 4,182 3,996 3,976 4,504 4,759

CWIP 211 265 603 603 603

Goodwill 1,859 1,958 2,591 2,591 2,591

Investments 187 187 187 187 187

LT Loans & Advances 1,077 1,101 1,097 1,097 1,097

Other Non-current Assets - - - - -

Inventories 3,295 3,942 4,048 4,350 4,806

Trade Receivables 1,679 2,477 1,966 2,303 2,703


ST Loans & Advances 298 279 351 351 351


Current Assets 5,456 6,851 6,592 7,267 8,841

Trade Payables 3,051 2,882 2,737 3,071 3,604

Other Current Liabilities 1,372 1,396 1,781 1,781 1,781

Current Liabilities 4,423 4,278 4,518 4,852 5,386




Page | 37





Cash Flow (Consolidated)

(Rs mn) FY14 FY15 FY16P FY17E FY18E

Reported PAT 1,553 1,576 1,430 1,904 2,435

Non-operating income & EO

items46 (38) 92 58 69

PAT from Operations 1,507 1,613 1,339 1,847 2,366Interest 123 101 136 72 42

Depreciation 407 496 446 499 549

Working Capital Change (230) (1,487) (106) (531) (326)

OPERATING CASH FLOW ( a ) 1,807 724 1,815 1,886 2,630

Capex (587) (431) (800) (800) (800)

Free cash flow (FCF) 1,221 292 1,015 1,086 1,830

Investments (187) (119) - - -

Non-Operating Income 46 (38) 92 58 69


Share Capital Issuance - - - - -Debt Issuance (545) 485 (358) (300) (200)

Dividend (521) (550) (569) (735) (940)

Interest (124) (101) (136) (72) (42)

FINANCING CASH FLOW ( c ) (1,191) (166) (1,062) (1,107) (1,182)

NET CASH FLOW (a+b+c) (112) (31) 44 36 718

EO Items - - - - -



Key RatiosFY14 FY15 FY16P FY17E FY18E

PROFITABILITY (%)

GPM 42.3 45.4 48.5 49.0 48.5

EBITDA Margin 15.0 15.2 14.1 16.0 16.8

EBIT Margin 12.6 12.5 11.4 13.4 14.3

APAT Margin 8.7 8.6 8.8 10.2 11.1

RoE 22.7 20.5 16.7 19.9 22.3

Core RoCE 23.1 20.2 16.0 19.9 23.3

RoCE 20.1 17.8 15.1 18.1 20.7

EFFICIENCY

Tax Rate (%) 28.8 27.9 21.0 24.2 24.0

Asset Turnover (x) 2.2 2.0 1.6 1.7 1.8

Inventory (days) 69 79 91 85 80

Debtors (days) 35 50 44 45 45

Other Current Assets (days) 7 6 9 8 7

Payables (days) 64 58 61 60 60Other Current Liab & Prov (days) 29 28 40 35 30


Debt/EBITDA (x) 0.3 0.5 0.4 0.2 0.1

Net D/E 0.1 0.1 0.1 0.0 (0.0)

Interest Coverage 17.5 22.5 13.7 34.8 75.3

PER SHARE DATA (Rs/sh)

EPS 7.8 8.1 7.4 9.8 12.5

CEPS 9.9 10.6 9.6 12.4 15.3

DPS 2.4 2.5 2.5 3.2 4.1

BV 36.9 41.9 46.2 52.2 59.9

VALUATIONP/E 26.8 25.9 28.4 21.3 16.7

P/BV 5.7 5.0 4.5 4.0 3.5

EV/EBITDA 15.8 15.1 18.0 13.7 10.9

OCF/EV (%) 4.4 1.7 4.4 4.6 6.6

FCF/EV (%) 3.0 0.7 2.5 2.6 4.6

FCFE/MCAP (%) 2.7 0.5 2.2 2.5 4.4

Dividend Yield (%) 1.1 1.2 1.2 1.5 2.0


Page | 38





RECOMMENDATION HISTORY

Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target

24-Jul-15 235 BUY 265

8-Oct-15 215 BUY 26527-Oct-15 207 BUY 240

19-Jan-16 149 BUY 200

28-Apr-16 197 BUY 250

13-May-16 209 BUY 250

100

150

200

250

300

350

M a y - 1 5

J u n - 1 5

J u l - 1 5

A u g - 1 5

S e p - 1 5

O c t - 1 5

N o v - 1 5

D e c - 1 5

J a n - 1 6

F e b - 1 6

M a r - 1 6

A p r - 1 6

M a y - 1 6

Rallis TP

200

300

400

500

600

700

M a y - 1 5

J u n - 1 5

J u l - 1 5

A u g - 1 5

S e p - 1 5

O c t - 1 5

N o v - 1 5

D e c - 1 5

J a n - 1 6

F e b - 1 6

M a r - 1 6

A p r - 1 6

M a y - 1 6

Insecticides 1 yr price performance

350

400

450

500550

600

650

700

M a y - 1 5

J u n - 1 5

J u l - 1 5

A u g - 1 5

S e p - 1 5

O c t - 1 5

N o v - 1 5

D e c - 1 5

J a n - 1 6

F e b - 1 6

M a r - 1 6

A p r - 1 6

M a y - 1 6

Dhanuka 1 yr price performance

Page | 39





Disclosure:We, Satish Mishra, PGDM, & Deepak Kolhe, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect ourviews about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) inthis report.Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or itsAssociate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. FurtherResearch Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.Any holding in stock –No

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Agrochemicals - May16

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