Rallis India - CU0smartinvestor.business-standard.com/BSCMS/PDF...Rallis India Agrichemicals Company Overview Second largest Pesticide player RAIL is one of the oldest and second largest

1January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539July 20, 2009 For Private Circulation Only - Sebi Registration No : INB 010996539 1

Rallis IndiaInitiating Coverage

Sageraj Bariya

Tel: 022 - 4040 3800 Ext: 346

E-mail: [email protected]: Company, Angel Research; Note: * Adjusted for exceptional item.

Key Financials (Consolidated)Y/E March (Rs cr) FY2008 FY2009 FY2010E FY2011E

Net Sales 674.6 836.7 946.9 1,087.3

% chg 9.4 24.0 13.2 14.8

Adj. Net Profit 43.6 64.3 74.2 99.4

% chg 1,752.2 47.4 15.4 33.9

Adj. FDEPS (Rs) 36.4 53.6 61.9 82.9

EBITDA Margin (%) 8.8 13.3 14.0 15.1

P/E (x) 20.2 13.7 11.9 8.9

RoE (%)* 16.6 19.6 21.9 26.7

RoCE (%) 13.0 22.4 22.5 25.8

P/BV (x) 4.0 3.4 2.7 2.1

EV/Sales (x) 1.3 1.0 1.0 0.8

EV/EBITDA (x) 14.6 7.4 7.3 5.4

Stock Info

ACCUMULATEPrice Rs735

Target Price Rs796

Investment Period 12 months

‘Rallis’ onRallis India (RAIL), a Tata Group company, is the second largest player in the domesticPesticide market. RAIL had undertaken a restructuring exercise post FY2004, which resultedin RAIL clocking all-time high EBITDA Margins in FY2009. Going ahead, we expect ContractManufacturing (CM) to drive the company's next level of growth particularly with its new plantcoming on stream by June 2010. We estimate RAIL to register a CAGR of 14% and 24.3%in Net Sales and Profit over FY2009-11E, respectively. At Rs735, the stock is trading at8.9x FY2011E Earnings and 5.4x FY2011E EV/EBITDA. Historically, RAIL has traded in the3-11x one-year forward PE band, and at an average 8x over the last couple of years. Goingahead, on account of improving Return Ratios and higher Net Profit growth, we expect thestock to trade at higher valuations than its historical average. We Initiate Coverage on thestock with an Accumulate rating and Target Price of Rs796.

Set to seize rising opportunities in the Domestic Pesticides market: India's overallpesticides consumption is one of the lowest in the world, and we believe that RAIL iswell-placed to seize this opportunity on the back of its wide distribution network, strongbrands and robust new product pipeline. According to industry estimates, the unorganisedmarket accounts for another 50% of the industry. Nonetheless, we believe that RAIL is in aposition to wrest marketshare as well as charge a premium for its products.

Exports to register steady growth: Closing down of capacity in China before theOlympics 2008 and MNCs diversifying their base to India had resulted in the company’sExports spiking 80% in FY2009 to Rs295cr. The scenario has however changed post theOlympics and many closed capacities have come on stream. Slowdown in the global economyhas also resulted in sluggish demand the worldover. Against this backdrop, we estimateRAIL to post a decent CAGR of 17.7% in Exports over FY2009-11E.

Contract manufacturing to be next growth driver: RAIL plans to focus on CM forExports and selectively target and supply to the top players. To facilitate the same, thecompany is setting up a new plant at Dahej. Overall, RAIL targets to achieve cumulativeRevenues of Rs1,000cr over the next five years from this Segment alone.

Sector Agrichemicals

Market Cap (Rs cr) 880

Beta 0.4

52 Week High / Low 809/280

Avg Daily Volume 8547

Face Value (Rs) 10

BSE Sensex 15,191

Nifty 4,502

Shareholding Pattern (%)

Promoters 45.2

MF / Banks / Indian FIs 31.8

FII / NRIs / OCBs 5.2

Indian Public / Others 17.8

Abs. 3 m 1yr 3yr

Sensex (%) 38.4 11.4 46.7

Rallis India (%) 38.1 77.0 195.6

BSE Code 500355

NSE Code RALLIS

Reuters Code RALL.BO

Bloomberg Code RALI@IN


Rallis India

Agrichemicals

Company Overview

Second largest Pesticide player

RAIL is one of the oldest and second largest pesticide agrichemical companies in the countrywith a marketshare of around 13% and belongs to the Tata Group. The company also has acredible presence in the international market. Pesticide accounts for 97% of the company'sTotal Revenues, while plant nutrients, seeds and leather chemicals constitute the balance.Historically contribution from the Domestic business has stood at 77% levels while Exportsaccounted for the balance.

Source: Company, Angel Research; Note - AI - Active Ingredients, CM - Contract Manufacturing

Exhibit 1: Sales Mix and Break-up

90

92

94

96

98

100

FY2007 FY2008 FY2009

Sales Mix (%)

Pesticides Nutrients Seeds Chemicals

Domestic -

Branded

55%

Export-CM

13%

Export-bulk

12%

Export-

Branded

10%

Domestic -

AI 10%

Sales Break up (%) for FY2009

Product break up

Paddy and Cotton are the two largest contributors to RAIL's Revenues, which is in line with theagrichemical consumption of the country wherein the two crops dominate the consumption. Interms of types of pesticides, Insecticides dominate the company's Revenue share with acontribution of almost 70%, followed by Fungicides and Herbicides, which contribute 20% and10% of the company's Total Revenues, respectively.

70%

20%

10%

Insecticides Fungicides Herbicides

Source: Company, Angel Research

Exhibit 2: Pesticides Sales break up (%)

Pesticide accounts for 97% ofthe company's Total Revenues

Insecticides dominate thecompany's Revenue sharewith a contribution of almost70%


Rallis India

Agrichemicals

Preferred distribution partner with MNCs

RAIL has one of the best distribution networks in the country with approximately 40,000retailers covering around 80% of India's districts. RAIL derives around 65% of its Revenues fromits domestic business through sale of own branded formulations (55%) and supply of bulk (10%)to other branded sellers.We believe that RAIL's distribution network is its key strength and thedifferentiating feature vis-a-vis competition. Hence, many MNC global players have inkedstrategic alliances with RAIL for distribution of their products (pesticides and seeds) in thedomestic market. strategic alliance contributes 1/3rd of domestic formulation.


Exhibit 3: Strategic AlliancesCompany Product CropE I Dupont Indoxacarb Cotton & GramSyngenta India Pretilachlor Rice

Thiomethozam Cotton & RiceEmmamaectine Benzoate Cotton

Makhteshim Chemical Works Atrazine SugarcaneCaptan General Fungicide

Bayer India Thirodicarb Cotton & VegetableNihon Nohayaku Fuji one RiceFMC India Carbofuran Rice

Carbosulfan Fruits & BrinjalBifenthrin Cotton & others

Gharda Chemicals Sulfosulfuron WheatChloro + Cyper Cotton & Rice

Yara International Calcium nitrate solution Water soluable fertilizersfor various crop

Borax International Boron 20% Cotton, Chillies & Tomato

Business restructuring aids turnaround

During FY2001-04, the company was involved in too many businesses which dilutedmanagement's focus and was in the red. Since then, it has come a long way. RAIL initiatedseveral measures to restructure its business following which it managed to turn the corner.Some of the measures initiated by the company included the following:

Selling of non-core business like Pharma and Gelatin;

Merger of subsidiaries to reduce operating expenses;

Disposing land to generate cash; and

Issuance of Preference share worth Rs88cr to Tata group companies.

We believe that RAIL'sdistribution network is its keystrength and thedifferentiating feature vis-a-viscompetition


Rallis India

Agrichemicals


Exhibit 4: Changing business mix...

Pesticides Nutrients Seeds Chemicals

97%

1%1%

1%

FY2009

85%

3%

1%

7%3%

1%

FY2004

Pesticides Fertilizer Seeds

Gelatine Chemical Other

Such restructuring resulted in the company's Profitability improving. EBITDA Margins also movedfrom being negative (-6%) in FY2003 to reach an all-time high of 13% in FY2009.


Exhibit 5: ...Improving Financials

(10.0)

(5.0)

0.0

5.0

10.0

15.0

(400)

(200)

0

200

400

600

800

1,000

1,200

FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

Sales EBITDA %

RestructuringSale of pharma, fertiliserbusiness leading to dropin sales.Sale of asset andissuance of preferenceshare for rationalisationof debt.

Focus on corefocus on internal costcutting,introduction ofnew products andbrand building

Resultcontinuing benefit ofinternal cost cutting andfocuson export

DownfallDraught andovercapacity inindustry lead to losses

Rs

cr

%

EBITDA Margins touched anall-time high in FY2009


Rallis India

Agrichemicals

Investment Argument

Set to seize rising opportunities in the Domestic Pesticides market

India's pesticide consumption stands at an abysmal 0.48kg per hectare (ha) compared to11kg/ha for Japan and 4.5kg/ha for USA. We believe RAIL is well placed to seize the opportunityon account of having a well-spread distribution network, strong brands and robust new productpipeline. Moreover, according to industry estimates, counterfeit, fake and unorganised marketaccounts for another 50% of the industry. Nonetheless, we believe that RAIL has immenseopportunity to wrest marketshare as well as charge a premium for its products on account of itsstrong reach and goodwill among the farmers and the Tata brand.

Strong New Product Pipeline

New product launches has been a key strategy behind RAIL's turnaround performance. On anaverage, the company has been registering 5-6 products and launching 3-4 products every year.Pertinently, new product launches were possible due to RAIL's strong reach and goodwill amongthe farmers and the Tata brand associated with it which has enabled it to conduct the field trials.The Indian registration process is regarded as one of the most stringent ones in Asia (excludingJapan). Each new formulation typically takes 2-3 years for approval from the time of registration,as it has to undergo extensive field trials with respect to chemistry, toxicology, metabolism,efficacy, soil residue and packaging/labelling.

The company’s New product sales contribution has been in the range of 24-31% of its TotalSales over FY2001 to FY2009. Currently, the company's Top-5 products contribute almost25-30% of Sales. Of this, two brands are less than four years old while the balance three havebeen in the market for over four years. This indicates RAIL's strong capability to innovate andmarket new products. We believe RAIL's constant focus on new products would continue toyield results going ahead on the back of its strong R&D and registration pipeline. We believeRAIL's constant focus on new products would continue to yield results going ahead on the backof its strong R&D and Registration pipeline.

India's pesticide consumptionstands at an abysmal 0.48kgper hectare (ha) compared toglobal average

New product launches werepossible due to RAIL's strongreach and goodwill among thefarmers and the Tata brandassociated with it


Strong Brand & network

Advantage in field trialfor new product

Better product

Better sales

0

1

2

3

4

5

6

7

8

FY

2003

FY

2004

FY

2005

FY

2006

FY

2007

FY

2008

FY

2009

Product Registration Product Launch

Exhibit 6: New Product Registrations and Launches


Rallis India

Agrichemicals


Exhibit 7: New Products - Sales contribution

R&D - Eight new molecules in pipeline

RAIL has a robust pipeline of eight new molecules under the Fungicide category. Rallis and theCouncil of Scientific and Industrial Research (CSIR), New Delhi jointly hold commercial rights ofthese molecules, as this project is initiated under the Public-Private-Partnership (PPP) schemeof New Millennium India Technology Leadership Initiative. The government through soft loans(3% interest rate) funds this research. These molecules are at various stages of field trials.Agrichemical R&D is very similar to that of pharmaceutical, any molecule can turnout to be amulti-billion dollar opportunity or prove to be a complete failure. Given RAIL's strong R&D trackrecord, management expects to launch at least one successful molecule from its pipeline overthe next 2-3 years. Success of a single molecule, we believe, will put the company into analtogether new growth trajectory. However, we have not factored in the same, which poses anupside risk to our estimates.

Exports to register steady growth

The company undertakes Exports in the segments of Contract Manufacturing (13%),Formulation Sales (10%) and Bulk (12%).

Given RAIL's strong R&D trackrecord, we expect it to launchat least one successfulmolecule from its pipelineover the next 2-3 years

Source: Company, Angel Research; Note - AI - Active Ingredients, Contract Manufacturing

Exhibit 8: Revenue mix

0

25

50

75

100

FY2004

FY2005

FY

2006

FY2007

FY2008

FY2009

Revenue mix (%)

Domestic Export

Domestic -

Branded

55%

Export-CM

13%

Export-

bulk 12%

Export-

Branded

10%

Domestic -

AI 10%

Sales Break up


Rallis India

Agrichemicals

Over FY2004-09, RAIL's Exports registered a decent CAGR of 27.7%. However, FY2009 was anexceptional year where the company's exports spiked a significant 80% to Rs295cr andcontribution to Total Revenue stood at around 35% compared to 21% and 22% in FY2007 andFY2008, respectively. Thus, excluding the phenomenal growth registered in FY2009, thecompany's Exports CAGR during FY2004-08 stood at 10.3%.

The company's exceptional FY2009 performance was driven by a combination of factorsincluding:

Closing down of capacity in China before the Olympics 2008Closing of many manufacturing units on ecological ground created overall shortage.

Diversification of manufacturing base globallyMany global MNCs were dependent on Chinese manufacturing base for supply of their

product. To mitigate risks arising from such dependence, they started sourcing from the Indianmanufacturers.

Post the Olympics, the scenario has changed with many closed capacities coming on stream.Besides, overall slowdown in the global economy has also resulted in sluggish demand theworldover. It is against this backdrop that we estimate RAIL to post a decent CAGR of 17.7% inExports over FY2009-11E.

Contract Manufacturing - Cumulative Revenue target of Rs1,000cr over nextfive years

Currently, RAIL is an exclusive contract manufacturer and supplier of two agrichemicals andone speciality polymer to a global player. RAIL has entered into long-term (5-7 years) supplyagreement with global MNCs. Revenue and Profit visibility is usually high in such dedicatedmanufacturing supply agreements. Hence, going ahead, we expect this Segment to be the keygrowth driver for the company.

Global supplier for AI

Global agrichemical companies have been reducing manufacturing capacity of low valueproducts to concentrate on higher-value products. Conversely, they are maintaining their stronghold on off-patent AI through outsourcing the same. For example, Germany's BASF has cut itsrange of AI from 300 in 2001 to 130 in 2006. Syngenta has also reduced its portfolio from 120 to80. Bayer CropScience reduced its portfolio by 29 actives between 2000 and 2006. Total globalsales of agrichemicals were estimated to be worth US $41bn in CY2008. Sales of patentedproduct constituted approximately 1/3rd of the total and another 1/3rd is proprietary off patent(Patent of molecule has expired but no credible generic brand has been able to garner significantmarketshare from patented brand). Opportunity of even 10% of the total market size wouldtranslate into US $4bn. Hence, RAIL plans to selectively target this opportunity by supplying AIto the industry top players. Overall, RAIL is targeting cumulative Revenues of Rs1,000cr overthe next five years from this Segment alone.

FY2009 was an exceptionalyear with the company'sexports spiking a significant80% to Rs295cr

Revenue and Profit visibility ishigh in the manufacturingsupply agreements with theMNCs

Rising trend of outsourcingby global MNCs


Rallis India

Agrichemicals

Targeting niche high-Margin Agrichemicals

Agrichemicals being crop specific have varying demand based on the specific type of pest thathampers growth of the crop. Hence, one crop might need different type of insecticides or fungicideor herbicide in different regions. In addition, there are many crops that are grown in very specificregions and may require less amount of agrichemicals which may not be economical to produceand profitable to sell to the big global players. Therefore, the smaller regional players very oftendominate these niche segments. RAIL plans to meet the requirements of such niche demand,as it commands higher Margin.

Setting up new plant for CM

RAIL is setting up a new plant at Dahej for manufacturing AI for the export market as well as tomeet its own formulation consumption. Total capex of the Dahej plant is estimated at Rs150cr.The company has already incurred Rs40cr in FY2009. The plant is likely to be up and ready byJune 2010. The plant will enjoy SEZ status and avail tax exemptions. We expect this plant tocontribute Rs450cr to the company's Total Sales at peak capacity utilisation.

Formulation Exports - Still at investment stage

The company sells formulations under its own brand name post registration in the respectivecountries. Currently, the company sells its formulations in almost 25 different countries acrossthe world in regions like Latin American, USA, Japan, South East Asia, Australia and Africa.Registration and distribution network are the key requirements for this business. In line withthis, the company has tied up with local distributors for the supply of its product. However, webelieve that this business is still at the investment stage as the company is building its productportfolio through registrations, branding and network tie-ups. Nonetheless, we believe that exportformulation will be the next growth driver for the company post CM. We expect sustainablecontribution from this business to start trickling over the next 2-3 years. We believe that RAILmight acquire a company with a strong distribution network to meet its targets in the Segment.However, this seems sometime away as it is still in the process of building its product portfolio.

Hidden Gems

Advinus Therapeutics

During 2005, the company transferred its Knowledge Services Business, a Research &Development Centre at Bangalore to Advinus Therapeutics Pvt Ltd for a consideration of Rs26cr.Advinus is India's finest Clinical Research Organisation (CRO) involved in business of New DrugDiscovery (Pharma & Agriculture) and clinical trials. The company is the first of its kind in Indiato offer end-to-end development services to the global Pharma, Agro and Biotech industries.Advinus was named as India's best emerging CRO in drug discovery services, according to asurvey conducted by Proximare, a management consulting firm based in New Jersey thatexclusively serves pharmaceutical and biotechnology companies with strategic issues. Webelieve Advinus has one of the best management teams in place to capitalise on the R&Doutsourcing opportunity.

The Dahej plant is expected tobe operational by June 2010

The company is building itsproduct portfolio forinternational markets

Advinus is India's finest CROin the business of New DrugDiscovery (Pharma &Agriculture) and clinical trials


Rallis India

Agrichemicals

Source: Company

Exhibit 9: Advinus - Illustrious ManagementExecutive CommitteeDr. Rashmi Barbhaiya - CEO and Managing Ex-President of R&D - Ranbaxy ResearchDirector Laboratories

Ex-Vice President in the PharmaceuticalResearch Institute, Bristol-Meyers Squibb (BMS).

Dr. Kasim Mookhtiar - CSO and Senior Vice Ex-Bristol-Meyers Squibb & Ranbaxy Lab.President, Drug DiscoveryDr. Nimish Vachharajani - Vice President and Ex-Bristol-Meyers SquibbHead - Pharmaceuticals and AgrochemicalDevelopmentScientific Advisory BoardChristopher M. Cimarusti, Ph.D Ex-Bristol-Meyers Squibb (BMS) - worked in drug

discovery and development.Perry B. Molinoff, MD Professor of Pharmacology at the University of

Pennsylvania. More than 30 years of experiencein academic and industrial sectors

David C. U'Prichard, Ph.D President of Druid Consulting LLC, consultantto the pharmaceutical and biotechnologyindustries

The Tata group is a major shareholder in Advinus while RAIL holds 15% stake in it while thecompany management holds minority stake. As per media reports, Advinus Revenues are in theregion of Rs80-100cr, while total investment are estimated at around Rs200cr. Advinus iscurrently loss making and under investment mode. RAIL does not plan to sell its stake as itconsiders it as a strategic investment. We have not taken any value of Advinus in our valuationof Rallis however any developments on this front would have ripple effects on Rallis.

Real Estate

RAIL has considerable amount of surplus real estate that it can divest if the need arises. Thecompany in the past had sold real estate to raise funds for its core business. As per mediareports, the company currently has excess land of 85 acres in Hyderabad and 22 acres inThane, Maharashtra. We have conservatively estimated value of the same in the region ofRs300-400cr translating into Rs250-334 per share. Our valuations are in line with the historicdeal done by RAIL wherein it had sold 31 acre property at Hyderabad for Rs90cr to Peninsula inFY2008. We have not factored any value of Real Estate in our valuation.

Miscellaneous

RAIL derives a small amount (3% of Total Revenues) of revenue through sale of seeds, plantnutrients and leather chemical. In case of its Seeds business, the company markets hybrid,high yielding and genetic modified seeds of different crops (Bt Cotton, Wheat, Paddy, etc). RAILalso has a small presence in the Leather Chemical business through its brand Vegtan for theTannery Industry. Vegtan holds 45% marketshare in the domestic market.

We have not taken any valueof Advinus in our valuation ofRallis; however, anydevelopments on this frontwould have ripple effects onRallis

We estimate value of thecompany’s surplus realestate at Rs300-400crtranslating into Rs250-334 pershare


Rallis India

Agrichemicals

Financial Performance

Revenues to post moderate yoy growth

Notably, in FY2009, RAIL logged one of its best performances in the current decade driven bystrong Exports that led to Total Sales growth of 24% to Rs837cr. Overall, RAIL logged 16.5%CAGR in Total Sales over FY2007-09, wherein Exports posted a CAGR of 36.8% over thementioned period. Going ahead, we expect the company's Total Revenues to post moderateCAGR of 14% over FY2009-11E on the back of 17.7% growth in Exports. We estimate RAIL’sExport to receive a major leg up once its new plant at Dahej comes on stream in June 2010.

Profitability to improve marginally

RAIL improved its Profitability substantially during FY2007-09. EBITDA posted a CAGR of 187.5%over FY2007-09 as EBITDA Margins improved from 2.2% in FY2007 to touch an all-time high of13.3% in FY2009 on the back of strong pricing power. We expect RAIL to further improve itsEBITDA Margins to 14% and 15.1% in FY2010E and FY2011E respectively, due to continuingbenefits of its restructuring exercise. We believe our EBITDA Margins are achievableconsidering that peer, Nagarjuna Agrichem, posted 19.2% EBITDA Margins in FY2009. Weestimate EBITDA to register a CAGR of 21.7% over FY2009-11E compared to Sales CAGR of14% over same period.

We expect the company'sTotal Revenues to postmoderate CAGR of 14% overFY2009-11E

We estimate the company'sNet Profit to post a CAGR of24.3% over FY2009-11E


Exhibit 11: EBITDA Margin Trend

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY2007 FY2008 FY2009 FY2010E FY2011E

(%)

EBITDA Margins to expanddue to continuing benefits ofrestructuring on strongpricing power


Exhibit 10: Financial Performance

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15

20

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30

0

200

400

600

800

1,000

1,200

FY2008 FY2009 FY2010E FY2011E

Net Sales % chg

(Rs

cr)

(%)

(60)

(40)

(20)

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

FY2008 FY2009 FY2010E FY2011E

PAT % chg

(Rs

cr)

(%)


Rallis India

Agrichemicals

RAIL's Net Profit registered sluggish CAGR of 12.4% over FY2007-09 primarily due to the risingTax outflow owing to reducing carry forward Losses. However, going ahead, we estimate thecompany's Net Profit to almost mirror EBITDA growth and post a CAGR of 24.3% overFY2009-11E.

Stabilising Debt:Equity ratio

Post restructuring, RAIL was able to trim down its Debt-to-Equity ratio from 6.1x in FY2003 to2x in FY2004. Thus, FY2004 onwards the company's debt levels have been on a declining trendtouching an all-time low of 0.2x in FY2008. Nonetheless, we estimate the Debt-to-Equity ratioto see a spike to 0.6x in FY2010. Key reasons for increase in the Debt-to-Equity include:

1) Redemption of Preference shares to the tune of Rs88cr; and

2) Capex of Rs150cr being incurred for the new manufacturing unit at Dahej


Exhibit 12: Debt:Equity Ratio

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY

20

03

FY

20

04

FY

20

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FY

20

06

FY

20

07

FY

20

08

FY

20

09

FY

20

10

E

FY

20

11E

(x)

We expect the Dahej plant to be part-funded by Debt and sale of investments. In the absence ofsale of investments and the company resorting to debt for funding, its Debt-to-Equity ratio wouldstand at 0.8x in FY2010E. However, we expect Debt-to-Equity to stabilise post investment inDahej.

We estimate the company'sNet Profit to almost mirrorEBITDA growth and post aCAGR of 24.3% overFY2009-11E


Rallis India

Agrichemicals

Return Ratios set to improve

The company’s RoE soared to 45.2% in FY2008 on the back of exceptionally high OtherIncome arising from sale of assets. In FY2009, the company recorded RoE of 19.6% on theback of expansion in EBITDA Margins. Going ahead, we estimate the company to furtherimprove its RoE to 21.9% and 26.7% in FY2010 and FY2011E respectively, following animprovement in EBITDA Margins due to continuing benefits of restructuring.

Downside risks to our call

Growth challenge in Exports: If the company is unable to meet our export target due to anyunforeseen external factors, the company may post dismal performance and pose a downsiderisk to our estimates.

Vagaries of Monsoon: Agrichemicals are the last input in any agricultural operation andprotect the final output ie. crop. In case of India, most of the agricultural production is rain fedand hence highly dependent on monsoon. Hence, vagaries in season could affect the demandfor agrichemicals and in turn impact our estimates.

Source: Company, Angel Research; Note: Adjusted for exceptional item.

Exhibit 14: DuPont AnalysisFY2008 FY2009 FY2010E FY2011E

EBITDA/Sales (%) 8.8 13.3 14.0 15.1

Sales/Total Assets (x) 1.9 1.9 1.8 2.0

PBT/EBITDA(x) 2.3 0.9 0.9 0.9

PAT/PBT (x) 0.8 0.6 0.7 0.7

Total Assets/Net Worth (x) 1.6 1.7 1.6 1.3

RoE (%) 16.6 19.6 21.9 26.7

0

5

10

15

20

25

30

FY2008 FY2009 FY2010E FY2011E

(%)

RoE (%) RoCE (%)

Exhibit 13: Improving Return Ratios

Source: Company, Angel Research; Note: Adjusted for exceptional item.


Rallis India

Agrichemicals


Exhibit 15: One-year Forward P/E Chart

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(Rs)

Outlook and Valuation

The Agriculture Sector has seen rejuvenation of government interest since the past couple ofyears. Food security is also top priority for the government while reduction in food loss is one ofthe easiest ways to boost food production. Usage of Pesticides or agrichemicals can reducethe loss of food production. However, consumption of agrichemicals has been restricted to therich farmers. Hence, to increase and eliminate the disparity in agrichem consumption, thegovernment has been making concerted efforts to make the farmers aware of the benefits (higherincome) of using agrichemicals apart from enhancing allocation to schemes like RashtriyaKrishi Vikas Yojana.

We believe that RAIL is well placed to capitalise on these emerging opportunities. Besides, thecompany had also undertaken a restructuring exercise post FY2004, which resulted in it clockingall-time high EBITDA Margins in FY2009. Going ahead, we expect Contract Manufacturing todrive the company's next level of growth particularly with its new plant coming on stream byJune 2010. We also expect the company to register steady CAGR of 17.7% in Exports overFY2009-11E. Overall, we estimate RAIL to register a CAGR of 14% and 24.3% in Net Sales andProfit over FY2009-11E, respectively.

On the valuation front, at Rs735, the stock is trading at 8.9x FY2011E Earnings and 5.4xFY2011E EV/EBITDA. Historically, RAIL has traded in the 3-11x one-year forward PE band, andat an average 8x over the last couple of years. Going ahead, on account of improving ReturnRatios and higher Net Profit growth, we expect the stock to trade at higher valuations than itshistorical average. We Initiate Coverage on the stock with an Accumulate rating andTarget Price of Rs796.


Rallis India

Agrichemicals

Annexure

Industry Overview

Agrichemicals also known as Pesticides are substance or mixture of substances that are usedto avert, destroy or control any kind of pests or unwanted type of plants or animals that causeharm to crops or hampers the normal growth process of a crop. As per a Government of Indiaestimate of 2002, value of crop losses caused due to non-usage of pesticides was aroundRs90,000cr. Thereon, assuming losses grew at an average 2%, total losses would have amountedto Rs101,355cr in FY2009, a staggering 2.2% of India's GDP. Pesticides are the last input inany agricultural operation, which protects all the other inputs as significant investment arealready committed by then.

Size

Global Agrichemical industry has grown at an average 7.1% over CY2001-08 to US $41.7bn.For CY2008, the industry registered outstanding growth of 25% yoy on the back of volumegrowth and increase in price. On the other hand, the Indian Agrichemical Industry wasestimated at around US $1bn (Rs5,000cr) at the end of FY2009. In FY2009, overall industrywitnessed marginal volume decline, but saw a price increase of 10-12%.

Land

Seed

Labour

Fertilisers

Agrichemicals

Exhibit 16: Investment chain of farmer

Source: Industry , Angel research

Pesticides are the last input inany agricultural operation,which protects all the otherinputs as significantinvestment are alreadycommitted by then

Year US $mn % yoy2001 25,7602002 25,150 (2.4)2003 26,710 6.22004 30,725 15.02005 31,190 1.52006 30,425 (2.5)2007 33,390 9.72008 41,735 25.0

Source: Company

Exhibit 17: Global Agrichemical market


Rallis India

Agrichemicals

India's consumption of agrichemical is one of the lowest in the world, standing at 0.48kg perhectare. This compares very poorly with other countries that have less arable land undercoverage. For instance, countries like Taiwan, Japan, Holland and Korea have higher consumptionthan India. We believe this again highlights the under usage of agrichemicals by Indian farmersand unexploited opportunity at bay for the agrichemical companies. India produces approximately16% of the world's total food grain production and uses only around 2% of pesticides. Lowconsumption can be attributed to: a) fragmented land holdings, b) low level of irrigation, c) highdependence on monsoons and d) low awareness among farmers about the benefits of usingpesticides.

In India, Andhra Pradesh (AP) is the single largest consumer of pesticides, with a total share ofaround 22%. Including AP, eight states consume 83% of total agrochemical sold in India. If onecompares the consumption pattern of CY2006 with CY2001, contribution from other states hasdeclined from 19% to 17%, meaning usages has increased in existing states while other statesremain unexploited.

India's consumption ofagrichemical is one of thelowest in the world at0.48kg/ha

Key Markets and Consumption

North America, with a share of 26% in total consumption, is the largest consumer of agrichemicalsglobally. The Asia-Pacific and EU regions consume almost the same amount of agrichemicals.

Source: Industry

Exhibit 18: Global Agrichem sales by region Global Pesticides consumption (Kg/ha)

N-America A-Pac EU Latin America Others

26%

24%

26%

17%

7%

0

2

4

6

8

10

12

14

16

18

Taiwan Japan Holland S.Korea France USA India

Source: Industry

Exhibit 19: State-wise Share of Pesticides Consumption

0%

5%

10%

15%

20%

25%

30%

AP

Pu

nja

b

Ma

ha

rast

ra

Ka

rna

taka

Ha

raya

na

Gu

jara

t

W.B

en

ga

l

Tam

ilN

ad

u

Oth

ers

2001 2006


Rallis India

Agrichemicals

Source: Industry

Exhibit 21: India’s Changing Pesticides Consumption Pattern

Fungicides Herbicides Insecticides

15%

18%

67%

FY2007

Pesticides Classification and Marketshare

Agrichemicals are classified as Insecticides, Herbicides and Fungicides. In case of India'sAgrichemical market, insecticides constitute the largest share at 67% compared to the globalconsumption of 33%. Globally, herbicides constitute the largest consuming agrichemical with ashare of 45%. We believe dichotomy in higher consumption of insecticides in India is due tolower labour cost that replaces use of herbicides and due to the tropical climate.

Source: Industry

Exhibit 20: India v/s Global Share of Pesticides Consumption - 2007

India's changing Pesticides consumption pattern

India has predominately been an insecticides market due to its tropical climate and availabilityof cheap labour (replacement for herbicides). However, over a period of time, there has been aminor, but certain shift in demand towards fungicides and herbicides.


15%

18%

67%

India


22%

45%

33%

Global

We believe dichotomy inhigher consumption ofinsecticides in India is due tolower labour cost thatreplaces use of herbicides anddue to the tropical climate

Over a period of time, therehas been a minor, but certainshift in demand towards fun-gicides and herbicides

12%

16%72%

FY2002



Rallis India

Agrichemicals

Key consuming crops

Rice is the largest consumer of total pesticides followed by Cotton. Cotton used to be thelargest consumer, but introduction of Bt Cotton in the Indian market had reduced dependenceon agrichemicals for crop protection. However, in recent times, a new pest has been plaguingthe Bt Cotton crop, which has in turn benefited the Agrichemical industry.

Competition and Players

Globally, six major innovators control 75% of the total market, while 4-5 generic players control10% and the balance 15% is controlled by hundreds of small regional players.

Company Sales (US$bn)MAI 2.3

Nufarm 2.2

Sumitomo 2.2

FMC 1.0UPL 1.0

Exhibit 23: Global Innovator and Generic playersCompany Sales (US$bn)Bayer 9.3Syngenta 9.1DuPont 7.9BASF 4.9Dow 4.5Monsanto 4.0

Source: Industry, Angel Research

Source: Industry

Exhibit 22: Consumption (%) of Pesticide on different Crops in India (2006)

0% 4% 8% 12% 16% 20% 24% 28%

Rice

Cotton

Wheat

Chillies

Soyabean

Grapes

Sugarcane

Potato

Red Gram

Tea

Bengal Gram

Mango

Other fruits

Other vegetables

Others

Key opportunities and challenges for industry

Low penetration of pesticides - Estimated size of the Indian economy is US $1trn of whichAgriculture accounts for 18%. The Agrichemical industry's size is estimated at US $1bn(Rs5,000cr) i.e. 0.1% of the country's total GDP and 0.6% of Agriculture GDP. Meanwhile, thesubsidy burden of urea for FY2009 is estimated at US $21.2bn or 2% of the total GDP and 12%of agriculture GDP. We believe this demonstrate the gross under penetration of agrichemicaland the opportunity that is available to the companies in the Sector.


Rallis India

Agrichemicals

Exhibit 24: Products coming off patent (2009-14E)

Source: Industry, Angel Research

Category Sales (2007 US $mn)Herbicides 800Insecticides 1,350Fungicides 1,448Other 50Total 3,648

Off patent proprietary: Global Agrichemical companies have been reducing manufacturingcapacity of low-value off patent proprietary products (ie. patent of molecule has expired, but nocredible generic brand has been able to garner significant marketshare from the patented brand).BASF has cut its range of AI from 300 in 2001 to 130 in 2006. Syngenta has reduced its portfoliofrom 120 to 80. Bayer CropScience reduced its portfolio by 29 actives between 2000 and 2006.Most of these off patent products are outsourced to third party manufacturer. Approximately,1/3rd of the total agrichemical sales are estimated to be that of proprietary off patent.

Diversification of manufacturing base: China has come to be known as factory of the worldand this fact remains the same for agrichemicals. However, to diversify risks arising out of singlelocation manufacturing base, many MNCs have been looking at other countries. Here, theIndian agrichemical manufacturers can position themselves as suitable alternatives to theirChinese counterparts.

Biotech seeds threat to agrichemicals: Scientific research has come up with seeds thathave self-immunity towards natural adversaries. This can be a potential threat to the business ofagrichemicals. Best example of such an introduction in the Indian market is "Bt Cotton", whichresulted in a decline in the consumption of agrichemicals by cotton crop. However, off late therehave been few reports of Bt Cotton unable to develop immunity towards new type of pests.

Patent expiry of molecules: Agrichemicals are protected by patents to encourage innovationakin to the Pharmaceutical industry. Going ahead, many molecules are likely to go off patentthrowing the market open for generic players. As per estimates, total likely available opportunitythrough patent expiry stands at US $3.6bn.


Rallis India

Agrichemicals

Profit & Loss Statement (Consolidated) Rs croreY/E March FY2008 FY2009 FY2010E FY2011E

Net Sales 674.6 836.7 946.9 1,087.3

% chg 9.4 24.0 13.2 14.8

Total Expenditure 615.5 725.8 814.4 923.1

EBIDTA 59.1 110.9 132.6 164.2

(% of Net Sales) 8.8 13.3 14.0 15.1

Other Income 111.7 22.7 24.4 26.3

Depreciation& Amortisation 20.1 22.9 24.4 26.8

Interest 12.1 11.2 19.0 13.0

PBT 138.7 99.5 113.6 150.7

(% of Net Sales) 20.6 11.9 12.0 13.9

Tax 21.1 35.2 39.4 51.4

(% of PBT) 15.2 35.4 34.7 34.1

PAT 117.6 64.3 74.2 99.4

% chg 131.2 (45.3) 15.4 33.9

Exceptional item (Adj. for Tax) 74.0 0.0 0.0 0.0

Adj PAT( After Excp. item ) 43.6 64.3 74.2 99.4

Y/E March FY2008 FY2009 FY2010E FY2011E

SOURCES OF FUNDSEquity Share Capital 12.0 12.0 12.0 12.0Preference capital 88.0 88.0 0.0 0.0Reserves & Surplus 207.8 249.8 316.9 402.3Shareholders fund 307.8 349.7 328.9 414.3Total Loans 46.6 82.5 199.7 124.2Defered Tax Liability 0.0 0.0 0.0 0.0Minority Interest 0.0 0.0 0.0 0.0Total Liabilities 354.4 432.2 528.6 538.5APPLICATIONGross Block 296.0 337.7 339.3 484.3Less: Acc.Depreciation 161.4 179.1 203.4 230.2Net Block 134.6 158.6 135.8 254.1Capital Work-in-Progress 13.2 29.1 137.5 17.5Investments 55.5 136.2 98.5 98.5Current Assets 338.1 351.9 411.0 472.0Current liabilities 201.1 260.8 267.6 305.7Net Current Assets 137.1 91.1 143.4 166.3Misc exp 14.0 17.3 13.4 2.1Total Assets 354.4 432.2 528.6 538.5

Balance Sheet (Consolidated) Rs crore

Cash Flow Statement (Consolidated) Rs croreY/E March FY2008 FY2009 FY2010E FY2011E

Profit before tax 146.4 107.2 113.6 150.7

Depreciation & others (61.8) 32.9 43.4 39.7

Change in Working Capital (103.6) 40.3 (35.0) (23.0)

Direct taxes paid (25.9) (31.0) (34.6) (45.2)

Cashflow from operation (44.9) 139.1 87.3 122.2

(Inc)./ Dec. in Fixed Assets 63.3 (64.4) (110.0) (25.0)

Free Cash Flow 18.3 74.7 (22.7) 97.2

Inc./ (Dec.) in Investments (20.9) (77.9) (37.6) 0.0

Issue of Equity 0.0 0.0 (88.0) 0.0

Inc./(Dec.) in loans 10.7 36.6 117.2 (75.5)

Dividend Paid (Incl. Tax) (18.9) (30.2) (22.4) (7.0)

Others (4.3) (3.4) (19.0) (13.0)

Cash Flow from Financing(33.5) (74.8) (49.8) (95.5)

Inc./(Dec.) in Cash (15.1) (0.2) 2.7 1.7

Opening Cash balances 22.2 7.0 8.2 10.9

Closing Cash balances 8.4 8.2 10.9 12.6

Key Ratios

Y/E March FY2008 FY2009 FY2010E FY2011E

Per Share Data (Rs)EPS 36.4 53.6 61.9 82.9

Cash EPS 114.9 72.8 82.2 105.2

DPS 16.0 16.0 5.0 10.0

Book Value 183.4 218.4 274.5 345.7

Operating Ratio (%)Inventory (days) 79.9 65.1 70.0 70.0

Debtors (days) 55.1 50.6 51.0 51.0

Debt / Equity (x) 0.2 0.3 0.6 0.3

Returns (%)RoE* 16.6 19.6 21.9 26.7

RoCE 13.0 22.4 22.5 25.8

Dividend Payout 19.1 34.9 9.4 14.1

Valuation Ratio (x)P/E 20.2 13.7 11.9 8.9

P/E (Cash EPS) 6.4 10.1 8.9 7.0

P/BV 4.0 3.4 2.7 2.1

EV / Sales 1.3 1.0 1.0 0.8

EV / EBITDA 14.6 7.4 7.3 5.4

Note: * Adjusted for exceptional item.


Rallis India

Agrichemicals

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Buy (Upside > 15%) Accumulate (Upside upto 15%) Neutral (5 to -5%)Reduce (Downside upto 15%) Sell (Downside > 15%)

Ratings (Returns) :

Fund Management & Investment Advisory ( 022 - 3952 4568)P. Phani Sekhar Fund Manager - (PMS) [email protected] Bhamre Head - Derivatives and Investment Advisory [email protected] Mehta AVP - Investment Advisory [email protected] Team ( 022 - 3952 4568)Hitesh Agrawal Head - Research [email protected] Kour Nangra VP-Research, Pharmaceutical [email protected] Agrawal VP-Research, Banking [email protected] Jajoo Automobile [email protected] Shah IT, Telecom [email protected] Pareek Oil & Gas [email protected] Burde Metals & Mining, Cement [email protected] Solanki Power, Mid-cap [email protected] Kanani Infrastructure, Real Estate [email protected] Shah FMCG , Media [email protected] Bambha Capital Goods, Engineering [email protected] Dalmia Pharmaceutical [email protected] Desai Logistics [email protected] Bariya Fertiliser, Mid-cap [email protected] Nadkarni Retail [email protected] Vora Research Associate (Oil & Gas) [email protected] Waghmare Research Associate (Metals & Mining, Cement) [email protected] Mate Research Associate (Infra, Real Estate) [email protected] Srinivasan Research Associate (Power, Mid-cap) [email protected] Agrawal Jr. Derivative Analyst [email protected]

Amit Bagaria PMS [email protected] Wagle Chief Technical Analyst [email protected] Joshi AVP Technical Advisory Services [email protected] Ail Manager - Technical Advisory Services [email protected] Jagtap Sr. Technical Analyst [email protected] Sanghvi Sr. Technical Analyst [email protected] Vasudeo Technical Analyst [email protected] Dayma Derivative Analyst - (TAS) [email protected]

Sanket Padhye AVP Mutual Fund [email protected] Rathod Research Associate (MF) [email protected] Jangid Research Associate (MF) [email protected]

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Agrichemicals

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