agri -edel

Edelweiss

Friday, June 20, 2014 • Trident, BKC, Mumbai

P o s t C o n f e r e n c e N o t e sP o s t C o n f e r e n c e N o t e s

June 24, 2014June 24, 2014

Manish Mahawar

+91 22 6623 3481

[email protected]

Manoj Bahety, CFA

+91 22 6623 3362

[email protected]

1 Edelweiss Securities Limited

Post Conference Notes

Preface We present key takeaways of Edelweiss Agri Day 2014, held in Mumbai on June 20, 2014. The event, that brought together over 16 corporates/industry bodies and 107 investors, was a resounding success. Post a good monsoon and healthy crop season during FY14, onset of monsoon has been delayed in most parts of India during the ongoing season. However, the Indian Meteorological Department (IMD) expects rainfall to pick up in the coming days. Though El Nino is a risk, its impact is likely to play out only in September; and, if it raises its head post July, it will not have any material impact on the economy. Declining arable land and rising population needs to be addressed by improving the yields, which we believe bolster the agri sector’s long-term story. Agro chemicals, seed, micro irrigation and fertiliser segments offer tremendous potential considering the current low penetration and the need to improve yield. Our interactions with major agro players indicate robust demand at the ground level and most companies are cautiously optimistic about the ongoing season. Post excessive non-urea fertiliser channel inventory during FY13/14, the fertiliser sector has commenced the ongoing season with normal inventory in most markets. However, the issue persists in parts of Uttar Pradesh. Also, subsidy receivables continue to be a challenging problem. Agro chemical players have effected 5-10% price hikes during Q1FY15 and are optimistic on demand. The micro irrigation industry is also expected to fare well on lower base, considering players’ cash flow focus. Seed players are bullish on the industry anchored by lower hybridisation primarily in maize and rice. Agri financing players are focusing on diversification of portfolios, recovery and new product launches. However, the concerns of operating in a regulatory environment still persist. Based on our interactions with industry participants, price regulations along with delay in disbursal of subsidy payments, passage of the new seed bill and new urea policy are still impeding the sector’s growth. With change in government, most of the players are optimistic on series of agri reforms. Post strong stock performance in FY14, we believe stocks are offering good long-term investment opportunities. At current valuations, we like Bayer Cropscience, Dhanuka Agritech, Rallis India, PI Industries, Coromandel International and Jain Irrigation.



Agri Day Snapshot

Company Market cap Rating Closing price Target Key takeaways

(INR bn)(June 20, 2014)

(INR)Price (INR)

Central Warehousing Corp (CWC)

NA NA NA NA Regional imbalance in terms of availability of storage facilities.

Deepak Fertilisers 13 Buy 149 210 Softening raw material prices positive for margins. Gas availability and prices key challenges.

Dhanuka Agritech 20 Buy 392 450 Additions to dealer network and launch of six exclusive products to drive growth over next three years.

EPC Industrie 6 NR 204 NR Capturing untapped micro irrigation markets by expanding distribution network and product portfolio.

Indian Meteorological Dept (IMD)

NA NA NA NA Onset of monsoon delayed in most parts of India. El Nino impact likely to be felt towards September.

Insecticide India 5 NR 395 NR Focusing on brands and exports for long-term growth.

Jain Irrigation 53 Buy 115 143 Sustainable MIS growth with improvement in balance sheet and gradual reduction in debt.

Kaveri Seeds 45 NR 662 NR Riding rising hybridisation in cotton, maize and rice. Expanding market share on differentiated and high-yielding seeds portfolio.

Mahindra & Mahindra Financial

155 Buy 272 315 Diversified profile shields from below-normal monsoons.

Monsanto India 36 NR 2075 NR Riding rising hybridisation in maize, which will be the growth story over the next four-five years.

Rallis India 40 Buy 206 228 New product launches in domestic market, Dahej capacity ramp up and sales/margin expansion in Metahelix to drive overall performance.

Sharda Cropchem NA NA NA NA Expansion in existing market and addition of newer geographies will be key growth drivers.

Star Agriwarehousing NA NA NA NA Provides post-harvest management solutions to farmers and helps them improve income levels.

State Bank of India - Agri division

1928 Buy 2583 3237 Focused on NPA recovery and new product launches.

Tata Chemicals 83 NR 327 NR Stable soda ash demand both globally and domestically. Fertiliser subsidy environment however, remains challenging.

UPL 134 Buy 313 415 Looking to strengthen balance sheet and RoE/RoCE.

NA - Not applicableNR - Not rated



Contents Central Warehousing Corporation ........................................................................................ 4 Deepak Fertilisers ................................................................................................................... 5 Dhanuka Agritech ................................................................................................................... 8 EPC Industrie ........................................................................................................................ 11 IMD ...................................................................................................................................... 14 Insecticide India ................................................................................................................... 15 Jain Irrigation ....................................................................................................................... 18 Kaveri Seeds ....................................................................................................................... 21 MMFS ................................................................................................................................... 24 Monsanto India .................................................................................................................... 27 Rallis India ............................................................................................................................ 30 Sharda Cropchem ................................................................................................................. 33 Star Agriwarehousing ........................................................................................................... 36 State Bank of India ............................................................................................................... 37 Tata Chemicals ..................................................................................................................... 40 UPL ....................................................................................................................................... 43

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Key takeaways

• Over the years, continuous increase in mininmum support prices(MSP) in wheat and rice (and some states announcing high bonuses on top of the MSPs declared by the Centre) has driven away the private sector from cereal trade.

• Total storage capacity with the official agencies including Food Corporation of India (FCI), Centre and State Warehousing Corporations and state civil supplies, among others, is ~70-75MT. However, not all of this capacity is used for storage of food grains. It is used for storage of other items as well such as cotton, oilseeds and even industrial goods.

• In addition, there is the issue of regional imbalance in terms of availability of storage facilities. For instance, storage capacity has not expanded much in states such as West Bengal, Bihar and Odisha.

• To meet the increased storage demand in order to ensure full implementation of the Food Security Act, the government is incentivising the private sector to build storage capacity.

CENTRAL WAREHOUSING CORPManages food grain stocks

Kapil Gupta +91-22-4063 5406 [email protected] Prateek Parekh +91 22 6623 3469 [email protected]

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India Equity Research| Agriculture

June 20, 2014


Key takeaways Deepak Fertilisers (DFPCL) believes lower ammonia prices will boost chemical business margin in the coming quarters (positive impact visible in H2FY14). Methanol prices shot up sharply due to shut down of one of the global plants, which led to the company clocking exceptional EBITDA during H2FY14. However, prices have corrected recently, which will result in profitability of methanol normalising during FY15. Management guided for 90-95% capacity utilisation at its technical ammonium nitrate (TAN) plant.

Management stated that gas price hike will impact fertiliser segment’s margin by INR3,000-3,500/MT, which will be passed on to farmers in stages during FY15. The company anticipates fertiliser plant utilisation to jump 10-15% in FY15E. Subsidy receivable, as on March 31, 2014, was INR2bn. Maintenance capex is expected to be INR0.5-0.6bn/p.a. in FY15/16E. DFPCL is setting up a brownfield non-urea fertiliser plant as well as a bentonite sulphur plant at a capex of INR4.3bn. The company will incur this capex during FY15/16. It is expected to incur capex of INR0.7bn/INR0.8-1bn on this project during FY15/16. The plant is expected to be commissioned in Q4FY16.

Investment conclusion DFPCL is the leader in the Indian TAN market with two third share. The company has increased its TAN capacity by 300K MT from 132K MT at a capex of INR6bn. TAN volume is expected to rise over FY14-16. Based on management’s estimate, gas price hike will impact fertiliser segment’s margin by INR3,000-3,500/MT, which will be passed on to farmers in stages during FY15. We believe, the company will not be able to pass on the hike (17-20% of current MRP) in a single year.

Key risks Poor monsoon, seasonality and cyclical nature of agriculture could impact the company’s earnings. Higher raw material cost, INR depreciation and delay in payment of government subsidy could affect profitability. We believe gas price hike will be near-term risk to earnings.

COMPANY PROFILE

DEEPAK FERTILIZERGas availability, prices key

EDELWEISS RATINGS

Absolute Rating BUY

Investment Characteristics Value

MARKET DATA (R: DPFE.BO, B: DFPC IN)

CMP : INR 149

Target Price : INR 210

52-week range (INR) : 160 / 81

Share in issue (mn) : 88.2

M cap (INR bn/USD mn) : 13 / 215

Avg. Daily Vol. BSE/NSE (‘000) : 125.6

SHARE HOLDING PATTERN (%)

Current Q3FY14 Q2FY14

Promoters * 45.5 45.5 44.5

MF's, FI's & BKs 4.5 4.8 5.5

FII's 12.9 12.9 12.9

Others 37.2 36.9 37.1 * Promoters pledged shares (% of share in issue)

: NIL

PRICE PERFORMANCE (%)

BSE Midcap Index

Stock Stock over

Index

1 month 21.3 9.4 (11.9)

3 months 34.5 28.1 (6.4)

12 months 38.9 59.6 20.7

Manish Mahawar +91 22 6623 3481 [email protected] Manoj Bahety, CFA +91 22 6623 3362 [email protected]

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India Equity Research| Fertilisers

June 20, 2014

Financials (Consolidated)Year to March FY13 FY14 FY15E FY16ENet revenues (INR mn) 26,716 39,204 42,225 44,280EBITDA (INR mn) 3,195 5,146 5,212 6,081Adj. profit (INR mn) 1,343 2,519 2,467 3,096Share outstanding (mn) 88 88 88 88 EPS (INR) 15.2 28.6 28.0 35.1P/E (x) 9.8 5.2 5.3 4.2EV/EBITDA (x) 6.5 3.8 3.6 3.1ROAE (%) 10.8 18.4 16.0 17.8



Financial Statements

Income statement (INR mn)

Year to March FY13 FY14 FY15E FY16E

Net revenue 26,716 39,204 42,225 44,280

Materials costs 18,937 28,180 30,267 31,085

Gross profit 7,779 11,024 11,958 13,195

Employee costs 1,508 1,689 1,866 2,000

Other Expenses 3,076 4,190 4,880 5,114

EBITDA 3,195 5,146 5,212 6,081

Depreciation and amortisation 1,082 1,143 1,178 1,210

EBIT 2,113 4,003 4,034 4,871

Other income 590 490 525 525

Interest expenses 823 1,010 983 934

Profit before tax 1,880 3,483 3,576 4,462

Provision for tax 537 964 1,109 1,366

Net profit 1,343 2,519 2,467 3,096

Extraordinary income/ (loss) (50) (114) - -

Profit After Tax 1,293 2,405 2,467 3,096

Shares outstanding (mn) 88 88 88 88

Diluted EPS (INR) 15.2 28.6 28.0 35.1

CEPS (INR) 27.5 41.5 41.3 48.8

Dividend per share (INR) 5.5 6.5 7.0 7.5

Dividend payout (%) 36.1 22.8 25.0 21.4

Common size metrics


Gross margin 29.1 28.1 28.3 29.8

EBITDA margins 12.0 13.1 12.3 13.7

EBIT margins 4.0 2.9 2.8 2.7

Net profit margins 5.0 6.4 5.8 7.0

Growth ratios (%)


Revenues 10.8 46.7 7.7 4.9

EBITDA (22.4) 61.0 1.3 16.7

Net profit (36.6) 87.5 (2.1) 25.5

EPS (36.6) 87.5 (2.1) 25.5

Key Assumptions


Macro

GDP(Y-o-Y %) 5.0 4.8 5.4 6.3

Inflation (Avg) 7.4 6.2 5.5 6.0

Repo rate (exit rate) 7.5 8.0 7.8 7.3

USD/INR (Avg) 54.5 62.0 60.0 58.0

Company

Ammonium nitrate sales volume (MT) 233,337 310,017 365,400 395,400

Methanol sales volume (MT) 18,521 32,830 30,000 50,000

IPA sales volume (MT) 81,977 76,644 84,000 84,000

Nitric acid sales volume (MT) 118,675 142,694 158,534 158,534

ANP sales volume (MT) 177,198 261,884 275,400 275,400

Chemicals EBITDA margin (%) 16.8 12.7 14.3 15.2

Fertiliser EBITDA margin (%) 11.0 10.9 10.6 12.7

Cost assumptions

Raw Material Cost as % Net Revenue 70.9 71.9 71.7 70.2

Employee cost as % of sales 5.6 4.3 4.4 4.5

Other expenses as % of net revenues 11.5 10.7 11.6 11.5

Financial assumptions

Net borrowings (INR mn) 10,191 8,680 7,883 7,741

Tax rate as % of PBT 28.6 27.7 31.0 30.6

Capex (INR mn) 1,336 1,713 1,511 2,644

Debtor days 83 67 69 69

Inventory days 44 38 45 50

Payable days 77 65 74 74

Cash conversion cycle (days) 50 40 41 46

Interest Cost (% of Debt) 8.1 9.7 10.5 10.6

Depreciation as % of gross block 5.0 5.0 5.0 5.0



Peer comparison valuation

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

Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E

Deepak Fertilizer Ltd 215 5.3 4.2 3.6 3.0 16.0 17.8

Chambal Fertilisers and Chemicals 388 9.6 9.1 7.3 6.9 11.7 11.5

Coromandel International 1,216 12.8 10.5 7.6 6.3 23.5 24.1

Median - 9.6 9.1 7.3 6.3 16.0 17.8

AVERAGE - 9.2 7.9 6.2 5.4 17.0 17.8

Source: Edelweiss research

Cash flow metrics


Operating cash flow 2,248 3,841 3,489 3,970

Investing cash flow (3,149) (1,272) (1,511) (2,644)

Financing cash flow 391 (2,660) (1,799) (1,684)

Net cash flow (511) (91) 180 (358)

Capex (1,336) (1,713) (1,511) (2,644)

Dividends paid (562) (671) (722) (774)

Profitability & efficiency ratios


ROAE (%) 10.8 18.4 16.0 17.8

ROACE (%) 9.5 17.4 16.9 19.2

ROA 5.7 9.9 9.5 11.3

Inventory day 44 38 45 50

Debtors days 83 67 69 69



Current ratio 3.6 2.4 2.5 2.5

Debt/EBITDA 3.5 1.9 1.7 1.4

Debt/Equity 0.9 0.7 0.6 0.5

Operating ratios


Total asset turnover 1.1 1.5 1.6 1.6

Fixed asset turnover 1.9 2.8 3.2 3.5

Equity turnover 2.1 2.9 2.7 2.5

Valuation parameters


Diluted EPS (INR) 15.2 28.6 28.0 35.1

Y-o-Y growth (%) (36.6) 87.5 (2.1) 25.5

CEPS (INR) 27.5 41.5 41.3 48.8

Diluted PE (x) 9.8 5.2 5.3 4.2

Price/BV (x) 1.0 0.9 0.8 0.7

EV/Sales (x) 0.8 0.5 0.4 0.4

EV/EBITDA (x) 5.7 3.8 3.6 3.0

Dividend yield (%) 3.7 4.4 4.7 5.0

Market Capitalisation 13,133 13,133 13,133 13,133

Balance sheet (INR mn)

As on 31st March FY13 FY14 FY15E FY16E

Equity capital 882 882 882 882

Reserves & surplus 11,928 13,650 15,394 17,716

Shareholders funds 12,810 14,532 16,276 18,598

Short term debt 3,044 3,716 3,020 2,520

Long term debt 8,195 5,921 6,000 6,000

Borrowings 11,239 9,637 9,020 8,520

Deferred tax liability 1,250 1,199 1,199 1,199

Sources of funds 25,299 25,369 26,495 28,317

Gross block 22,778 23,313 23,995 24,697

Accumulated depreciation 8,505 9,842 11,020 12,230

Tangible assets 14,273 13,471 12,975 12,467

Intangible assets 310 310 310 310

CWIP (incl. intangible) 267 1,446 2,275 4,217

Total net fixed assets 14,850 15,227 15,560 16,993

Investments 2,545 2,104 2,104 2,104

Non current investments 17 1,808 1,808 1,808

Current Investments 2,528 295 295 295

Cash and equivalents 1,048 957 1,136 779

Inventories 2,468 3,426 4,051 4,466

Sundry debtors 6,517 7,891 8,179 8,679

Loans and advances 1,749 1,602 1,602 1,602

Other current assets 198 151 79 78

Total current assets (ex cash) 10,933 13,070 13,911 14,824

Trade payable 2,124 3,564 3,791 3,960

Others current liabilities 1,953 2,424 2,424 2,424

Total current liabilities & 4,077 5,988 6,216 6,384

Net current assets (ex cash) 6,856 7,082 7,696 8,441

Uses of funds 25,299 25,369 26,495 28,317

Book value per share (INR) 145.2 164.8 184.5 210.9

Free cash flow (INR mn)


Net profit 1,293 2,405 2,467 3,096

Depreciation 1,082 1,143 1,178 1,210

Others 1,091 519 537 410

Gross cash flow 3,466 4,068 4,182 4,716

Less: Changes in WC 1,218 226 692 746


Less: Capex 1,336 1,792 1,433 2,644

Free cash flow 911 2,049 2,057 1,326


Key takeaways Dhanuka Agritech (DAL) has over 8,000 direct dealers servicing over 75,000 retailers, covering more than 85% of India’s districts. It is planning to expand the dealer network to 10,000 over the next three years. The company is expected to clock sales growth of 25% YoY during FY15E. It believes sustainable EBITDA margin will be 15-17% going forward. DAL’s top 5 and 10 products contributed ~30% and ~40%, respectively, to its overall FY14 sales. DAL has six products in the pipeline, of which two will be launched annually over the next three years, subject to regulatory approvals. Of these, it will launch five products in-licensing with Japanese players; one product has been developed by DAL in-house. Of these, three products will be in herbicides, the fastest growing category in domestic agrochemicals industry. Out of the above six, DAL is expected to launch two herbicides in FY15—one is for paddy and one for soyabean crop. The company is setting up a formulations plant in Rajasthan, expected to go on-stream by Q4FY15, at a capex of INR0.50bn. The capex will be funded through internal accruals.

Investment conclusion DAL, an established agrochemical player in India, boasts of a unique asset-light business model underpinned by core focus on marketing and distribution network, giving it an edge over competitors. A promising launch pipeline of six exclusive products over the next three years is bound to propel the company’s growth into higher gear. We estimate DAL to post sales and PAT CAGR of 24.0% and 26.9% (FY08-14 CAGR of 19.9% and 32.9%), respectively, over FY14-16E. The company has robust operating cash flow, minimal debt and healthy RoE/RoCE with good dividend payout.

Key risks The agrochemicals industry faces risk of seasonal weather. Acceptance of GM crops may adversely affect DAL’s business.

COMPANY PROFILE

DHANUKA AGRITECHExclusive products’ launch to drive growth

EDELWEISS RATINGS

Absolute Rating BUY

Investment Characteristics Growth

MARKET DATA (R: DHNP.BO, B: DAGRI IN)

CMP : INR 392


52-week range (INR) : 408 / 125






Promoters * 75.0 75.0 75.0

MF's, FI's & BKs 0.2 0.0 0.8

FII's 8.4 8.4 8.2


: Nil


BSE Midcap Index

Stock Stock over

Index

1 month 3.3 36.0 32.7

3 months 15.4 146.8 131.4

12 months 33.7 189.5 155.8


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June 20, 2014

FinancialsYear to March FY13 FY14 FY15E FY16ENet revenues (INR mn) 5,823 7,395 9,022 11,368 Revenue growth (%) 10.0 27.0 22.0 26.0EBITDA (INR mn) 819 1,216 1,543 2,058 Core profit (INR mn) 644 931 1,175 1,500 EPS (INR) 12.9 18.6 23.5 30.0 EPS growth (%) 12.8 44.5 26.2 27.7P/E (x) 31.4 21.8 17.2 13.5 ROAE (%) 27.0 31.3 31.2 31.5




Key assumptionsYear to March FY13 FY14 FY15E FY16EMacroGDP(Y-o-Y %) 5.0 4.8 5.4 6.3Inflation (Avg) 7.4 6.2 5.5 6.0Repo rate (exit rate) 7.5 8.0 7.8 7.3USD/INR (Avg) 54.5 62.0 58.0 56.0

CompanyNet sales growth 12.2 28.3 22.0 26.0Excise duty as % of gross sales 9.9 10.8 10.8 10.8

Cost AssumptionsRaw mat. cost as % net rev. 65.4 63.2 63.2 63.2Employee exp. as % net rev. 8.2 7.9 7.7 7.2Admin. cost as % net revenue 12.3 12.5 12.0 11.5

Financial AssumptionsDep. as % of gross block 4.9 4.6 5.0 5.0Int. rate as % of gross debt 10.7 10.7 11.9 #DIV/0!Tax rate as % of PBT 20.2 19.9 21.0 26.0Capex (INR mn) 279 302 407 110 Net borrowings (INR mn) 276 371 206 (254) Receivable (days) 94 84 85 83 Inventory (days) 153 168 155 150 Payable (days) 117 110 109 106 Cash conversion cycle (days) 131 142 131 127

Income statement (INR mn)Year to March FY13 FY14 FY15E FY16ENet revenues 5,823 7,395 9,022 11,368 Raw material costs 3,811 4,670 5,702 7,184 Gross profit 2,012 2,725 3,320 4,183 Employee expenses 476 582 695 818 Other expenses 717 927 1,083 1,307 Operating expenses 1,193 1,509 1,777 2,126 Total expenditure 5,004 6,179 7,479 9,310 EBITDA 819 1,216 1,543 2,058 Depreciation & amortisation 45 48 57 87 EBIT 774 1,168 1,486 1,970 Interest expense 35 42 35 17 Other income 69 37 37 74 Profit before tax 808 1,163 1,488 2,027 Provision for tax 163 232 312 527 Core profit 644 931 1,175 1,500 Extraordinary/ Prior period items - - - - Profit after tax 644 931 1,175 1,500 Profit after minority interest 644 931 1,175 1,500 Equity shares outstanding (mn) 50.0 50.0 50.0 50.0 EPS (INR) basic 12.9 18.6 23.5 30.0 Diluted shares (mn) 50.0 50.0 50.0 50.0 EPS (INR) diluted 12.9 18.6 23.5 30.0 CEPS 13.8 19.6 24.6 31.7 DPS 2.8 4.0 5.0 6.5 Dividend payout (%) 21.7 21.5 21.3 21.7

Common size metrics (% net revenues)Year to March FY13 FY14 FY15E FY16EGross margin 34.6 36.8 36.8 36.8 Operating expenses 20.5 20.4 19.7 18.7 EBITDA margins 14.1 16.4 17.1 18.1 EBIT margin 13.3 15.8 16.5 17.3 Interest 0.6 0.6 0.4 0.1 Net profit margin 11.1 12.6 13.0 13.2

Growth metrics (%)Year to March FY13 FY14 FY15E FY16ERevenues 10.0 27.0 22.0 26.0 EBITDA 3.1 48.5 26.9 33.4 PBT 15.3 44.0 27.9 36.3 Net profit 12.8 44.5 26.2 27.7 EPS 12.8 44.5 26.2 27.7



Balance sheet (INR mn)As on 31st March FY13 FY14 FY15E FY16EShare capital 100 100 100 100 Reserves & surplus 2,528 3,225 4,108 5,227 Shareholder equity 2,628 3,325 4,208 5,328 Long term borrowings - - - - Short term borrowings 330 394 294 - Loan funds 330 394 294 - Deferred tax liability/asset 28 36 36 36 Sources of funds 2,986 3,755 4,538 5,364 Gross fixed assets 919 1,041 1,141 1,741 Accumulated depreciation 300 348 405 492 Tangible assets 619 694 737 1,250 Intangible assets 6 6 6 6 CWIP (incl. intangible) 13 193 500 10 Total net fixed assets 639 893 1,243 1,266 Investments 82 10 10 10 Cash and cash equivalents 54 23 88 254 Inventories 1,599 2,148 2,421 2,952 Sundry debtors 1,507 1,709 2,101 2,585 Loans and advances 321 382 382 382 Other assets 3 3 3 3


Trade payable 450 482 594 748

Other current liabilities & prov. 769 931 1,117 1,340

Total current liabilities & prov. 1,219 1,413 1,710 2,088


Application of funds 2,986 3,755 4,538 5,364

Book value per share (INR) 53 66 84 107

Free cash flow


Net profit 644 931 1,175 1,500

Add: Depreciation 45 48 57 87

Add: Int & other non-cash items 3 - - -

Gross cash flow 693 979 1,232 1,587

Less: Changes in working cap. 227 618 368 637

Operating cash flow 466 361 865 950

Less: Capex 279 302 407 110

Free cash flow 187 58 458 840




Rallis India 656 19.5 16.2 11.9 9.9 25.9 25.8

Bayer Cropscience 1,095 20.3 16.3 12.0 9.5 17.6 18.6

PI Industries 736 19.5 15.1 12.7 9.9 29.0 29.0

UPL 2,187 10.7 9.0 6.3 5.3 21.7 21.7

Median - 19.5 15.7 11.9 9.7 23.8 23.8

AVERAGE - 17.5 14.2 10.7 8.7 23.6 23.8


Cash flow metrics



Financing cash flow (314) (162) (393) (675)

Investing cash flow (185) (230) (407) (110)

Net cash flow (34) (31) 65 165

Capex (279) (302) (407) (110)

Dividends paid (215) (234) (293) (380)

Profitability ratios


EBITDA margin 14.1 16.4 17.1 18.1 ROACE (%) 29.1 35.1 35.9 39.9 ROAE (%) 27.0 31.3 31.2 31.5 ROA (%) 23.2 27.6 28.3 30.3 Current ratio 2.9 3.0 2.9 3.0 Quick ratio 1.5 1.5 1.5 1.4 Receivables (days) 94 84 85 83 Inventory (days) 153 168 155 150 Payables (days) 117 110 109 106 Cash conversion cycle (days) 131 142 131 127

Operating ratios (x)Year to March FY13 FY14 FY15E FY16ETotal asset turnover 2.1 2.2 2.2 2.3 Fixed asset turnover 11.6 11.3 12.6 11.4 Equity turnover 2.4 2.5 2.4 2.4

Valuation parametersYear to March FY13 FY14 FY15E FY16EDiluted EPS (INR) 12.9 18.6 23.5 30.0 Y-o-Y growth (%) 12.8 44.5 26.2 27.7 CEPS (INR) 13.8 19.6 24.6 31.7 Diluted P/E (x) 30.4 21.1 16.7 13.1 P/BV (x) 7.5 5.9 4.7 3.7 EV/Sales (x) 3.3 2.6 2.2 1.7 EV/EBITDA (x) 23.8 16.1 12.6 9.2 Dividend yield(%) 0.7 1.0 1.3 1.7


Key takeaways In India, only 6m ha is under micro irrigation systems (MIS) of the 70m ha irrigated land. However, ~60% of cultivable land is still rain-fed. Maharashtra was the pioneer in MIS adoption. According to EPC Industries (EPC), Madhya Pradesh and Rajasthan are the next emerging markets. EPC indicated that MIS industry is become more structured and streamlined over past couple of years. Further, bank financing to the MIS segment has been rising aggresively. EPC was established in 1981 and pioneered MIS in India since 1986. Mahindra & Mahindra acquired 54.81% stake in EPC in FY11. The company is registered in 15 states under the MIS subsidy programme and has more than 600 channel partners. It is present in UP, Bihar, Jharkhand, Chhattisgarh, Madhya Pradesh, Maharashtra, Karnataka, Tamil Nadu, Kerala, Rajasthan, Himachal Pradesh and Haryana. The company has strong presence in drip and sprinkler products. It commands good brand equity in the Indian MIS market. The company is expanding its distribution network. To expand its product portfolio, EPC started the pumps and greenhouse businesses, which is primarily used for flowers, capsicum, cucumbers, etc. The company also started agronomy services like agri doctors, farmer trainings and agri helpline, among others. To reduce dependence on subsidy programme, EPC is now focussing on large project business and exports.

Key risks Poor monsoon, seasonality and cyclical nature of agriculture could impact the company’s earning. MIS is working capital intensive, which may constrain EPC from achieving its targeted growth.

COMPANY PROFILE

EPC INDUSTRIE Capturing untapped market

EDELWEISS RATINGS

Absolute Rating NOT RATED

MARKET DATA (R: EPCI.BO, B: EPC IN)

CMP : INR 204

Target Price : NA




Avg. Daily Vol. BSE (‘000) : 352.0



Promoters * 54.8 54.8 54.8

MF's, FI's & BKs 0.0 0.0 0.0

FII's 0.0 0.0 1.8


: NIL

RELATIVE PERFORMANCE (%)

Sensex Stock

Stock over Sensex

1 month 3.3 41.7 38.4

3 months 15.4 202.7 187.3

12 months 33.7 67.7 34.0


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FinancialsYear to March FY11 FY12 FY13 FY14Net revenues (INR mn) 868 1,251 1,614 1,747EBITDA (INR mn) 80 99 76 103Core profi t (INR mn) 14 67 53 77Di luted shares (mn) 17 17 28 28EPS (INR) 0.8 3.9 1.9 2.8P/E (x) 245.2 52.9 105.6 73.2EV/EBITDA (x) 40.3 35.9 69.9 51.4ROAE (%) 4.3 11.6 6.5 7.1




Income statement (INR mn)Year to March FY11 FY12 FY13 FY14Net revenues 868 1,251 1,614 1,747Raw material costs 533 790 1,057 1,143Gross profit 335 461 557 605Employee expenses 96 116 151 181Other expenses 159 246 330 320Operating expenses 255 362 481 502Total expenditure 788 1,152 1,538 1,644EBITDA 80 99 76 103Depreciation & amortisation 18 19 25 28EBIT 63 79 50 75Interest expense 49 29 25 24Other income 9 21 28 26Profit before tax 23 72 53 77Provision for tax 9 5 0 0Core profit 14 67 53 77Profit after tax 14 67 53 77Profit after minority interest 14 67 53 77Equity shares outstanding (mn) 17.3 17.3 27.6 27.6EPS (INR) basic 0.8 3.9 1.9 2.8Diluted shares (mn) 17.3 17.3 27.6 27.6EPS (INR) diluted 0.8 3.9 1.9 2.8CEPS 1.9 5.0 2.9 3.8

Common size metrics (% net revenues)Year to March FY11 FY12 FY13 FY14Gross margin 38.6 36.8 34.5 34.6Operating expenses 29.4 28.9 29.8 28.7EBITDA margins 9.3 7.9 4.7 5.9EBIT margin 7.2 6.4 3.1 4.3Interest 5.6 2.3 1.5 1.3Net profit margin 1.7 5.3 3.3 4.4

Growth metrics (%)Year to March FY11 FY12 FY13 FY14Revenues 19.8 44.1 29.1 8.2EBITDA 30.2 23.0 (23.2) 35.6PBT 71.6 205.9 (25.4) 44.3Net profit 50.8 363.5 (19.8) 44.3EPS (6.5) 363.2 (49.9) 44.3

Balance sheet (INR mn)As on 31st March FY11 FY12 FY13 FY14Share capital 173 173 276 276Reserves & surplus 373 425 779 854Shareholder equity 546 599 1,056 1,130Long term borrowings 30 21 126 7Short term borrowings 147 208 4 1Loan funds 177 228 130 8Deferred tax liability/asset (5) 0 0 0Sources of funds 718 827 1,185 1,138Tangible assets 189 286 307Intangible assets 0 0 3CWIP (incl. intangible) 23 2 4Total net fixed assets 212 288 314 322Cash and cash equivalents 412 152 381 242Inventories 148 241 239 359Sundry debtors 277 379 425 586Loans and advances 49 58 81 115Other assets 9 13 4 2Total current assets (ex cash) 483 690 749 1,062Trade payable 135 153 165 201Other current liabilities & prov. 253 150 94 287Total current liabilities & prov. 388 303 259 488Net current assets (ex cash) 95 387 491 574Application of funds 718 827 1,185 1,138Book value per share (INR) 32 35 38 41

Free cash flow Year to March FY11 FY12 FY13 FY14Net profit 25 67 53 NAAdd: Depreciation 18 19 25 NAAdd: Int. & other non-cash items 44 12 2 NAGross cash flow 86 98 81 NALess: Changes in working capital 47 158 70 NAOperating cash flow 39 (60) 11 NALess: Capex - 101 52 NAFree cash flow 39 (161) (41) NA

Cash flow metricsYear to March FY11 FY12 FY13 FY14Operating cash flow 39 (60) 11 NAFinancing cash flow 380 (116) 246 NAInvesting cash flow (61) (126) 235 NANet cash flow 357 (302) 492 NACapex - - 52 NADividends paid - - NA



Profitability ratiosYear to March FY11 FY12 FY13 FY14ROACE (%) 10.7 10.3 5.0 6.5ROAE (%) 4.3 11.6 6.5 7.1Receivables (days) 105 96 91 106Inventory (days) 75 90 83 96Payables (days) 176 160 97 119Cash conversion cycle (days) 4 26 77 82Debt-equity (x) 0.3 0.4 0.1 0.0Debt/EBITDA 2.2 2.3 1.7 0.1Adjusted debt/Equity (x) 0.3 0.4 0.1 0.0

Operating ratios (x)Year to March FY11 FY12 FY13 FY14Total asset turnover 1.5 1.6 1.6 1.5Fixed asset turnover 4.6 5.3 5.4 NAEquity turnover 2.6 2.2 2.0 1.6

Valuation parametersYear to March FY11 FY12 FY13 FY14Diluted EPS (INR) 0.8 3.9 1.9 2.8Y-o-Y growth (%) (6.5) 363.2 (49.9) 44.3CEPS (INR) 1.9 5.0 2.9 3.8Diluted P/E (x) 245.2 52.9 105.6 73.2P/BV (x) 6.5 5.9 5.3 5.0EV/Sales (x) 3.7 2.8 3.3 3.0EV/EBITDA (x) 40.3 35.9 69.9 51.4Dividend yield(%) - 0.0 0.0 0.0


Key takeaways

• The onset of monsoon is delayed with most parts of India receiving deficient rainfall this far. In some areas, such as interior Maharashtra, monsoon is yet to arrive. However, rainfall activity is likely to pick up in coming days. The Indian Meteorological Departmentexpects an improvement in July.

• The El Nino risk exists, but its impact is likely to be felt in the second half of the monsoon season, especially September. Broadly speaking, if the EL Nino effect materialises post July, it will not be that damaging.

• As per historical data, out of the 14 El Nino years during 1951-2014, eight recorded below-normal rainfall. So, while the EL Nino effect has negative correlation with the rainfall activity, it does not necessarily mean failure of monsoon. In fact, the year 1997 saw strongest EL Nino, and yet the rainfall activity was slightly above normal.

IMD Delayed onset of monsoons


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Key takeaways Insecticide India (IIL), established in 2001, has a strong distribution network in the domestic agrochemical market. The company’s its pan-India network has over 3,200 distributors, 50,000 retail outlets and 25 depots with six manufacturing plants. IIL’s plants have 21,800MT and 89,950MT capcity for technical and formulations, respectively. IIL has more than 110 formulation and 10 technical products in its portfolio, across the crop and pesticide categories. The company has launched brands like Victor, Sharp, Arrow and Indian in new segments. The company’s growth strategy encompasses product and brand acquisitions and organic growth (through existing product line). Giving shape to its growth strategy, IIL acquired brands like Thimet from Amvac, California, Lethal from Montari Industries and Monocil from NOCIL. The company has also entered into marketing tie-ups with Nissan Chemicals Industries, and Japan for new-age products, Pulsor and Hakama. IIL plans to focus on select high-growth emerging markets for branded fomulations/technicals. Its new Dahej facility is best suited for exports as it is situated close to the port. The company expects to register sales/EBITDA/PAT of INR12bn/INR1.2bn/INR0.6bn in FY15 versus INR8.6bn/INR0.8bn/INR0.4bn in FY14.

Key risks The agrochemical industry faces the risks of seasonal weather. Acceptance of GM crops may also adversely affect IIL’s business.

COMPANY PROFILE

INSECTICIDE INDIAFocusing on brands

EDELWEISS RATINGS


MARKET DATA (R: ISIL.BO, B: INST IN)

CMP : INR 395

Target Price : NA

52-week range (INR) : 413 / 203



Avg. Daily Vol. BSE/NSE (‘000) : 3,548.5



Promoters * 74.7 74.7 74.7

MF's, FI's & BKs 5.3 5.3 5.3

FII's 1.2 1.0 6.0


: NIL


Sensex Stock

Stock over Sensex

1 month 3.3 38.0 34.7

3 months 15.4 174.6 159.2

12 months 33.7 2.5 (31.2)


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June 20, 2014

FinancialsYear to March FY11 FY12 FY13 FY14Net revenues (INR mn) 4,501 5,218 6,167 8,641EBITDA (INR mn) 436 564 693 818Core profi t (INR mn) 322 330 353 399Di luted shares (mn) 13 13 13 13EPS (INR) 25.4 26.0 27.9 31.5P/E (x) 15.5 15.2 14.2 12.5EV/EBITDA (x) 11.5 10.4 8.9 8.1ROAE (%) 23.2 19.6 17.9 17.4




Income statement (INR mn)Year to March FY11 FY12 FY13 FY14Net revenues 4,501 5,218 6,167 8,641Raw material costs 2,781 3,153 4,147 6,015Gross profit 1,720 2,065 2,020 2,626Employee expenses 131 173 268 293Other expenses 1,153 1,328 1,058 1,515Operating expenses 1,283 1,501 1,327 1,808Total expenditure 4,065 4,654 5,474 7,823EBITDA 436 564 693 818Depreciation & amortisation 15 24 58 67EBIT 421 540 636 751Interest expense 24 111 174 269Other income 16 1 2 5Profit before tax 413 429 464 487Provision for tax 90 99 111 87Core profit 322 330 353 399Extraordinary/Prior period items - - - - Profit after tax 322 330 353 399Minority interest - - - - Profit after minority interest 322 330 353 399Equity shares outstanding (mn) 12.7 12.7 12.7 12.7EPS (INR) basic 25.4 26.0 27.9 31.5 Diluted shares (mn) 12.7 12.7 12.7 12.7 EPS (INR) diluted 25.4 26.0 27.9 31.5CEPS 26.6 27.9 32.4 36.8 DPS 2.5 2.5 3.0 3.0Dividend payout (%) 9.8 9.6 10.8 9.5


Growth metrics (%)Year to March FY11 FY12 FY13 FY14Revenues 19.3 15.9 18.2 40.1EBITDA 29.9 29.2 23.0 18.0PBT 25.7 4.1 8.0 4.8Net profit 14.2 2.5 7.0 13.1EPS 14.2 2.5 7.0 13.1

Balance sheet (INR mn)As on 31st March FY11 FY12 FY13 FY14Share capital 127 127 127 127Reserves & surplus 1,421 1,695 1,995 2,339Shareholder equity 1,547 1,822 2,122 2,466Minority interest - - - Long term borrowings 9 383 301 302Short term borrowings 333 1,152 1,700 2,124Loan funds 343 1,534 2,001 2,426Deferred tax liability/asset 20 29 102 133Sources of funds 1,911 3,385 4,225 5,025Tangible assets 304 504 1,365Intangible assets 10 9 38CWIP (incl. intangible) 592 920 449Total net fixed assets 906 1,432 1,852 2,243Non current investments - - - 111Investments - - - 111 Cash and cash equivalents 37 178 47 90Inventories 1,258 2,024 2,254 3,117Sundry debtors 806 892 1,165 1,279Loans and advances 302 508 779 710Other assets 125 169 225 364Total current assets (ex cash) 2,491 3,593 4,422 5,470Trade payable 994 1,185 1,307 2,036Other current liabilities & prov. 530 634 790 853Total current liabilities & prov. 1,524 1,818 2,097 2,889Net current assets (ex cash) 967 1,775 2,325 2,581Application of funds 1,911 3,385 4,225 5,025Book value per share (INR) 122 144 167 194

Free cash flow Year to March FY11 FY12 FY13 FY14Net profit 308 346 464 NAAdd: Depreciation 15 24 58 NAAdd: Int. & other non-cash items 11 110 -441 NAGross cash flow 335 480 80 NALess: Changes in working capital (40) 839 94 NAOperating cash flow 374 (359) (13) NALess: Capex 599 556 467 NAFree cash flow (225) (916) (480) NA

Cash flow metricsYear to March FY11 FY12 FY13 FY14Operating cash flow 374 (359) (13) NAFinancing cash flow 122 1,049 347 NAInvesting cash flow (545) (550) (465) NANet cash flow (49) 140 (131) NACapex (599) (556) 467 NADividends paid (25) (32) (32) NA



Profitability ratiosYear to March FY11 FY12 FY13 FY14ROACE (%) 25.3 20.4 16.7 16.4ROAE (%) 23.2 19.6 17.9 17.4Receivables (days) 58 59 61 52Inventory (days) 160 190 188 163Payables (days) 177 193 172 151Cash conversion cycle (days) 41 56 77 63Debt-equity (x) 0.2 0.8 0.9 1.0Debt/EBITDA 0.8 2.7 2.9 3.0Adjusted debt/Equity (x) 0.2 0.8 0.9 1.0


Valuation parametersYear to March FY11 FY12 FY13 FY14Diluted EPS (INR) 25.4 26.0 27.9 31.5Y-o-Y growth (%) 14.2 2.5 7.0 13.1CEPS (INR) 26.6 27.9 32.4 36.8Diluted P/E (x) 15.5 15.2 14.2 12.5P/BV (x) 3.2 2.7 2.4 2.0EV/Sales (x) 1.1 1.1 1.0 0.8EV/EBITDA (x) 11.5 10.4 8.9 8.1Dividend yield(%) 0.6 0.6 0.8 0.8


Key takeaways Globally, only 14% of total irrigated area i.e., 276m ha, is under micro irrigation (MIS), whereas in India the number stands at only 5m ha (of total irrigated area of 62m ha). Further, government support for use of MIS in the form of subsidy is accelerating growth. Post declining 25% YoY in FY13, Jain Irrigation’s (JISL) MIS business clocked positive growth in FY14. The company guided for 20% plus YoY growth in MIS business during FY15 primarily on account of growth in Maharashtra, Gujarat, Karnataka and Rajasthan. Exports rose from INR1.3bn in FY13 to INR3.0bn in FY14, primarily due to execution of a large African order (INR1.25bn). Management believes that exports will remain flat YoY in FY15. The company expects overseas operations’ EBITDA margin to improve going ahead. MIS receivables improved by 8 days QoQ to 257days in FY14. Management believes it can be further improved by 45-60 days in FY15. JISL indicated that government subsidy is likely to drop from INR3.9bn in FY14 to INR2.5bn in FY15. NBFC business disbursement stood at INR1bn in FY14 and is expected to reach INR1.5-2.0bn in FY15. Management believes debt will reduce by INR3bn in FY15. JISL incurred capex of INR3.4bn in FY14 and expects to spend INR2.2-2.3bn in FY15 on consolidated basis.

Investment conclusion We anticipate the domestic MIS business to post sustainable strong growth with better balance sheet, going forward. However, debt reduction remains key for the stock.

Key risks Poor monsoon, seasonality and cyclical nature of agriculture could impact the company’s agro-processing division by hitting availability as well as prices of agro commodities. Though poor monsoon is unlikely to impact MIS in the short term, in case of recurring monsoon failure, the segment’s growth may slow down. Most of JISL’s activities are working capital intensive, which may constrain the company from achieving targeted growth.

COMPANY PROFILE

JAIN IRRIGATION Optimistic outlook

EDELWEISS RATINGS

Absolute Rating BUY


MARKET DATA (R: JAIR.BO, B: JI IN)

CMP : INR 115








Promoters * 28.7 27.5 27.5

MF's, FI's & BKs 13.4 1.6 0.8

FII's 39.1 52.4 52.3


: 2.9


BSE Midcap Index

Stock Stock over

Index

1 month 21.3 42.3 21.0

3 months 34.5 100.0 65.5

12 months 38.9 80.3 41.3


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Financials (Consolidated)Year to March FY13 FY14 FY15E FY16ENet revenues (INR mn) 50,361 58,330 67,880 78,766EBITDA (INR mn) 7,400 7,859 9,903 11,624Adj. profit (INR mn) 1,276 1,736 3,531 4,630Share outstanding (mn) 478 485 485 485Diluted EPS (INR) 2.7 3.6 7.3 9.5P/E (x) 43.1 32.2 15.8 12.1EV/EBITDA (x) 11.9 11.7 9.2 7.6ROAE (%) 6.5 8.0 15.2 17.4






Net revenue 50,361 58,330 67,880 78,766

Materials costs 28,224 33,409 38,427 44,616

Gross profit 22,137 24,921 29,452 34,151

Employee costs 5,019 6,141 6,788 7,877

Other Expenses 9,718 10,921 12,761 14,651

Operating expenses 14,737 17,062 19,549 22,527

EBITDA 7,400 7,859 9,903 11,624


EBIT 5,704 5,814 7,808 9,408

Other income 521 137 440 484

Interest expenses 4,855 4,677 3,993 3,800


Provision for tax 80 (462) 723 1,462

Net profit 1,290 1,736 3,531 4,630

Extraordinary income/ (loss) (1,245) (2,147) - -

Profit After Tax 45 (411) 3,531 4,630

Minority interest + pre- 14 - - -

Profit after minority interest 31 (411) 3,531 4,630

Basic EPS (INR) 2.8 3.8 7.6 10.0


Diluted EPS (INR) 2.7 3.6 7.3 9.5

CEPS (INR) 6.3 8.2 12.2 14.8


Dividend payout (%) 17.8 13.3 13.1 14.0

Common size metrics


Operating expenses 29.3 29.3 28.8 28.6

Gross margin 44.0 42.7 43.4 43.4

Interest expenditure 9.6 8.0 5.9 4.8

EBITDA margins 14.7 13.5 14.6 14.8

EBIT margins 11.3 10.0 11.5 11.9


Growth ratios (%)


Revenues 2.3 15.8 16.4 16.0

EBITDA (19.6) 6.2 26.0 17.4

PBT (65.3) (7.0) 233.8 43.2

Net profit (63.3) 34.6 103.4 31.1

EPS (64.9) 33.9 103.4 31.1

Key Assumptions


Macro

GDP(Y-o-Y %) 5.0 4.8 5.4 6.3

Inflation (Avg) 7.4 6.2 5.5 6.0


USD/INR (Avg) 54.5 60.5 58.0 56.0

Company

Cost assumptions




MIS revenue growth (%) (14.2) 19.5 16.6 16.7

Piping products revenue growth (%) 9.8 31.8 14.2 14.2

Agro-processing revenue growth (%) 19.7 19.6 19.3 18.5


Capex (INR mn) 2,693 3,356 1,401 2,165

Debtor days 153 117 102 97


Payable days 217 187 173 165








Jain Irrigation 867 15.8 12.0 9.2 7.6 15.2 17.4

Sintex Industries Ltd 469 7.0 - 5.7 - 10.8 -

Supreme Industries 1,041 17.6 13.8 9.6 7.7 32.7 33.7

Median - 15.8 13.8 9.2 7.7 15.2 33.7

AVERAGE - 13.5 12.9 8.2 7.7 19.6 25.5


Cash flow metrics




Financing cash flow (993) (1,846) (6,400) (6,557)

Net cash flow (1,186) 33 (1,019) 426

Capex (2,693) (3,356) (1,401) (2,165)

Dividends paid (266) (271) (541) (757)



ROAE (%) 6.5 8.0 15.2 17.4

ROACE (%) 9.7 9.4 12.3 14.5

ROA 2.2 2.8 5.6 7.1



Payable days 217 187 173 165



Debt/EBITDA 5.2 5.2 3.9 3.2

Debt/Equity 1.8 1.9 1.6 1.3

Operating ratios







Diluted EPS (INR) 2.7 3.6 7.3 9.5

Y-o-Y growth (%) (64.9) 33.9 103.4 31.1

CEPS (INR) 6.3 8.2 12.2 14.8

Diluted PE (x) 43.0 32.1 15.8 12.0

Price/BV (x) 2.4 2.4 2.1 1.9

EV/Sales (x) 1.8 1.6 1.3 1.1

EV/EBITDA (x) 11.9 11.7 9.2 7.6

Dividend yield (%) 0.4 0.4 0.9 1.2







Minority interest (BS) - 205 205 205

Short term debt 23,922 25,889 24,000 22,000

Long term debt 14,329 14,977 15,000 15,000

Borrowings 38,251 40,866 39,000 37,000

Deferred tax liability 912 217 217 217

Sources of funds 60,843 63,044 64,168 66,041

Tangible assets 23,785 23,839 23,917 23,907

Intangible assets 2,314 2,746 2,746 2,746

CWIP (incl. intangible) 737 1,993 1,222 1,181


Investments 38 14 14 14

Non current investments 38 14 14 14

Cash and equivalents 2,359 1,968 949 1,375

Inventories 17,231 18,364 20,006 22,644

Sundry debtors 19,547 17,994 20,080 21,855


Other current assets 5,461 5,113 5,113 5,113


Trade payable 13,379 13,433 14,323 17,240




Uses of funds 60,843 63,044 64,168 66,041




Net profit 31 (397) 3,531 4,630

Depreciation 1,696 2,045 2,095 2,215

Others 4,855 4,663 3,993 3,800

Gross cash flow 6,582 6,311 9,619 10,645

Less: Changes in WC 3,828 872 2,838 1,497


Less: Capex 2,693 3,356 1,401 2,165

Free cash flow 61 2,083 5,380 6,983


Key takeaways Organised hybrid seeds market size is INR100bn (including INR20bn vegetable seeds) and is expected to post 10-12% CAGR in coming years. Of this, cotton, maize, rice and vegetables & fruits constitute 40%, 15%, 6% and 20%, respectively. Kaveri Seeds (Kaveri) believes that India’s per acre consumption of cotton seeds is likely to jump from 1.6 packets/acre to the global standard of 2.0 packets/acre. The company has increased its market share from 5% in FY12 to 16.5% currently riding a differentiated and high yielding seeds portfolio. India has ~2mn ha (of total 40mn ha) under hybrid seed in rice crop, which is the next big opportunity for the industry as well as Kaveri. The company expects area under rice hybrid seed to grow to 4-5mn ha over the following three-four years. Bayer Cropscience and Kaveri have 40% and 7% market shares, respectively, in hybrid rice. Currently, penetration of hybrid maize is 60% in India and expected to rise to 70% in the near term. Monsanto, Dupont, Kaveri and Syngenta have 19%, 17%, 13% and 12% market shares, respectively, in the domestic hybrid maize market. Industry as well as Kaveri is expected to clock 15-20% CAGR in hybrid maize, going forward. Management expects sales to grow at 20% YoY during FY15E. Further, it expects EBITDA to surge to 25% over the next two-three years. Kaveri has set up a 100% subisidiary Kexveg India (Kexveg) with an initial invetsment of INR64m in FY12. Kexveg is a new initiative for producing high-value exotic Indian vegetables and European herbs for domestic and export markets. It could post strong growth in the long term. Capex will be in the INR300-400mn/p.a. range.

Key risks The seed industry is extremely competitive. Hence, success of any competitor’s product could impact Kaveri’s growth. Climate change drastically affects patterns of crop growth as well as cropping systems. Delayed or adverse monsoon could adversely affect the collection of receivables.

COMPANY PROFILE

KAVERI SEEDS Seeding growth

EDELWEISS RATINGS


MARKET DATA (R: KVRI.BO, B: KSCL IN)

CMP : INR 662

Target Price : NA

52-week range (INR) : 680 / 280






Promoters * 63.7 63.7 63.7

MF's, FI's & BKs 10.4 10.5 10.0

FII's 10.5 9.3 8.5


: NIL


Sensex Stock

Stock over Sensex

1 month 3.3 12.3 9.0

3 months 15.4 111.6 96.2

12 months 33.7 113.3 79.6


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FinancialsYear to March FY11 FY12 FY13 FY14Net revenues (INR mn) 2,337 3,724 7,120 10,111EBITDA (INR mn) 538 770 1,393 2,212Core profi t (INR mn) 425 634 1,267 2,092Di luted shares (mn) 69 69 69 69EPS (INR) 6.2 9.3 18.5 30.4P/E (x) 106.7 71.5 35.8 21.8EV/EBITDA (x) 83.5 57.3 31.5 19.2ROAE (%) 25.0 29.4 43.2 48.6




Income statement (INR mn)Year to March FY11 FY12 FY13 FY14Net revenues 2,337 3,724 7,120 10,111Raw material costs 545 1,058 3,154 3,751Gross profit 1,792 2,666 3,966 6,360Employee expenses 110 157 203 282Other expenses 1,144 1,740 2,370 3,866Operating expenses 1,253 1,897 2,573 4,148Total expenditure 1,798 2,955 5,727 7,899EBITDA 538 770 1,393 2,212Depreciation & amortisation 102 100 122 164EBIT 436 670 1,271 2,048Interest expense 43 33 15 2Other income 10 26 49 97Profit before tax 403 662 1,305 2,143Provision for tax (22) 29 38 52Core profit 425 634 1,267 2,092Extraordinary/ Prior period items - (53) 13Profit after tax 425 581 1,281 2,092Minority interest - - - 2Profit after minority interest 425 581 1,281 2,090Equity shares outstanding (mn) 68.5 68.5 68.5 68.7EPS (INR) basic 6.2 9.3 18.5 30.4Diluted shares (mn) 68.5 68.5 68.5 68.7EPS (INR) diluted 6.2 9.3 18.5 30.4CEPS 7.7 10.7 20.3 32.8 DPS 0.5 0.8 3.2 4.8Dividend payout (%) 8.1 8.6 17.3 15.8


Growth metrics (%)Year to March FY11 FY12 FY13 FY14Revenues 44.1 59.4 91.2 42.0EBITDA 52.6 43.0 81.0 58.8PBT 29.2 64.4 97.0 64.2Net profit 46.1 49.3 99.9 65.0EPS 46.1 49.3 99.9 64.3

Balance sheet (INR mn)As on 31st March FY11 FY12 FY13 FY14Share capital 137 137 137 137Reserves & surplus 1,757 2,277 3,311 5,018Shareholder equity 1,894 2,414 3,448 5,155Minority interest - - - 4Long term borrowings 27 26 8 9Short term borrowings 250 190 - 0Loan funds 277 216 8 9Deferred tax liability/asset (1) (2) 0 (2)Sources of funds 2,170 2,628 3,457 5,166Tangible assets 1,038 935 1,363Intangible assets 6 7 11CWIP (incl. intangible) 72 131 81Total net fixed assets 1,116 1,074 1,455 1,553Non current investments 6 70 28 6Current investments 363 1,106 1,290 2,777Investments 368 1,175 1,318 2,783Cash and cash equivalents 45 96 143 67Inventories 1,649 3,033 4,912 4,972Sundry debtors 362 285 686 653Loans and advances 211 191 11 159Other assets 4 29 50 94Total current assets (ex cash) 2,225 3,539 5,658 5,878Trade payable 383 1,100 2,385 2,295Other current liabilities and prov. 1,202 2,156 2,733 2,819Total current liabilities & prov. 1,585 3,256 5,118 5,114Net current assets (ex cash) 640 283 540 763Application of funds 2,170 2,628 3,457 5,166Book value per share (INR) 28 35 50 75

Free cash flow Year to March FY11 FY12 FY13 FY14Net profit 423 580 1,319 NAAdd: Depreciation 102 100 122 NAAdd: Int. & other non-cash items 35 62 (80) NAGross cash flow 560 742 1,361 NALess: Changes in working capital (10) (357) 262 NAOperating cash flow 570 1,099 1,099 NALess: Capex 125 108 420 NAFree cash flow 445 991 679 NA

Cash flow metricsYear to March FY11 FY12 FY13 FY14Operating cash flow 570 1,099 1,099 NAFinancing cash flow (259) (157) (471) NAInvesting cash flow (465) (892) (582) NANet cash flow (154) 51 47 NACapex (125) (108) (420) NADividends paid (34) (55) (256) NA



Profitability ratiosYear to March FY11 FY12 FY13 FY14ROACE (%) 23.3 41.2 70.8 90.6ROAE (%) 25.0 29.4 43.2 48.6ROA (%) 20.5 26.4 41.7 48.5Inventory (days) 981 808 460 481Payables (days) 915 835 484 498Cash conversion cycle (days) 126 4 0 7Debt-equity (x) 0.1 0.1 0.0 0.0Debt/EBITDA 0.5 0.3 0.0 0.0Adjusted debt/Equity (x) 0.1 0.1 0.0 0.0


Valuation parametersYear to March FY11 FY12 FY13 FY14Diluted EPS (INR) 6.2 9.3 18.5 30.4Y-o-Y growth (%) 46.1 49.3 99.9 64.3CEPS (INR) 7.7 10.7 20.3 32.8Diluted P/E (x) 106.7 71.5 35.8 21.8P/BV (x) 23.9 18.8 13.1 8.8EV/Sales (x) 19.2 11.9 6.2 4.2EV/EBITDA (x) 83.5 57.3 31.5 19.2Dividend yield(%) 0.1 0.1 0.5 0.7


Key Takeaways Monsoon impact: Mahindra & Mahindra Financial Services (MMFS) believes that below normal monsoon could have a marginal impact if it is restricted to fewer areas. Efforts over the past few years to diversify business model from a pure agri play will restrict the impact of a below-normal rainfall. Growth: Growth to pick up in H2FY15 and expects to close the year with a disbursement growth of 8-10%, translating into AUM growth of 14-15%. Asset quality: Cyclical inch up in NPL in Q1FY15 is expected on past trends given the slow activity in North India impacting cash flows coupled with challenges in the South which have continued to exert pressure on recovery. Steps taken to enhance recovery: With focus on recovery, MMFS has opened around 200 branches in Q4FY14 to move closer to customers. Growth over the past few years had widened the distance between customers and branch touch points to about 75km from an average of 35-40km, which it is trying to bridge by opening new branches .

Investment conclusion MMFSL, one of India’s leading auto financiers with ~INR340bn AUM, is in a sweet spot to capitalise on the resilient rural economy. We like the company for its Mahindra & Mahindra parentage with its resultant captive business by executives stationed at M&M dealerships (~50% of AUM from M&M vehicles). Locally recruited staff, speedy disbursements and limited access to alternative credit channels for customers further enhance its competitive profile.

Key risks MMFSL’s business model is directly linked to demand for underlying auto segments; Hence, earnings will be subject to seasonality and cyclicality of the same. 49% of MMFSL’s loan book is accounted for by M&M vehicles. This dependency links its performance to that of M&M. Hence, weak performance by the latter’s models can affect disbursements. Along with the rising footprint of banks in rural areas, expansion of other NBFCs like Shriram City Union Finance, Tata Finance, Sundaram Finance, Bajaj Finance, Kotak Prime is a cause of concern for the company due to their aggressive growth strategies. Slowdown in rural economy is another vectors to watch for.

COMPANY PROFILE

MAHINDRA & MAHINDRA FINANCIAL SERVICES

Diversified profile to shield from below normal monsoons

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Outperformer

Risk Rating Relative to Sector Medium

Sector Relative to Market Overweight

MARKET DATA (R: MMFS.BO, B: MMFS IN)

CMP : INR 272


52-week range (INR) : 357 / 212


M cap (INR bn/USD mn) : 155/ 2,530

Avg. Daily Vol.BSE/NSE(‘000) : 1,825.5



Promoters * 52.1 52.2 52.2

MF's, FI's & BK’s 1.3 2.2 3.2

FII's 41.4 40.8 39.7


: NIL


Stock Nifty EW Banks and

Financial Services Index

1 month 25.7 10.2 18.1

3 months 24.2 16.6 37.5

12 months 27.2 24.6 23.9

Nilesh Parikh +91 22 4063 5470 [email protected] Kunal Shah +91 22 4040 7579 [email protected] Suruchi Chaudhary +91 22 6623 3316 [email protected] Prakhar Agarwal +91 22 6620 3076 [email protected]

India Equity Research| Banking and Financial Services

June 20, 2014

FinancialsYear to March FY13 FY14 FY15E FY16ENet revenues (INR mn) 22,759 27,641 32,448 38,266Net profit (INR mn) 8,326 8,872 11,408 13,993Diluted EPS (INR) 14.6 15.5 20.0 24.5EPS growth 22.7 6.0 28.6 22.7Diluted P/E (x) 18.6 17.6 13.6 11.1P/Adj. book (x) 3.6 3.3 2.8 2.4ROAE (%) 22.5 18.5 20.6 21.6






Interest income 38,325 48,949 57,250 67,090

Interest expended 16,188 21,889 25,293 29,316

Net interest income 22,137 27,060 31,957 37,775

- Fee & forex income 622 581 491 491

Net revenues 22,759 27,641 32,448 38,266

Operating expense 7,423 9,126 10,755 12,369

- Employee exp 2,234 2,973 3,597 4,353

- Depreciation /amortisation 226 249 274 298

- Other opex 4,963 5,904 6,883 7,718

Preprovision profit 15,336 18,515 21,693 25,897

Provisions 3,190 5,059 4,407 4,695


Provision for tax 3,820 4,585 5,877 7,209

Profit After Tax 8,326 8,872 11,408 13,993

Extraordinaries 502 - - -

Reported PAT 8,827 8,872 11,408 13,993

Basic EPS (INR) 14.6 15.5 20.0 24.5


Diluted EPS (INR) 14.6 15.5 20.0 24.5


Dividend payout (%) 27.3 25.7 25.7 25.7

Growth ratios (%)


Revenues 35.9 21.5 17.4 17.9

NII growth 34.4 22.2 18.1 18.2

Opex growth 25.4 22.9 17.8 15.0

PPP growth 41.7 20.7 17.2 19.4

Provisions growth 103.2 58.6 (12.9) 6.5

Net profit 34.3 6.6 28.6 22.7

Operating ratios


Yield on advances 16.4 16.4 16.0 15.9

Net interest margins 10.1 9.6 9.4 9.5

Cost of funds 8.8 9.2 8.8 8.7

Spread 8.3 7.8 7.8 7.8

Cost-income 32.6 33.0 33.1 32.3

Tax rate 31.5 34.1 34.0 34.0

Key Assumptions

Year to March FY13 FY14E FY15E FY16E

Macro

GDP(Y-o-Y %) 5.0 4.8 5.4 6.3

Inflation (Avg) 7.4 6.2 5.5 6.0


USD/INR (Avg) 54.5 62.0 60.0 58.0

Sector

Credit growth 14.7 15.0 16.0 18.0

Borrowings growth (%) 13.5 15.0 16.0 18.0

Bank's base rate (%) 9.7 9.5 9.3 9.2

Wholesale borrowing cost (%) 8.9 8.7 8.5 8.3

G-sec yield 7.8 7.6 7.5 7.4

Company

Operating metric assumptions (%)



Cost of funds 8.8 9.2 8.8 8.7

Employee cost growth 11.8 33.1 21.0 21.0

Other opex growth 33.2 19.0 16.6 12.1

Tax rate (%) 31.5 34.1 34.0 34.0

Balance sheet assumption (%)

Disbursement growth 22.2 6.5 11.1 17.5

Repayment/prepayment rate (3.8) 42.1 11.1 17.5

Gross NPLs 3.0 4.4 4.3 4.3

Prov Cov 68.0 59.0 65.0 67.0

Net NPLs 1.0 1.9 1.5 1.4




Market cap Diluted PE (X) Price/BV (X) ROAE (%)


Mahindra & Mahindra Financial Services 2,530 13.7 11.1 - - 20.6 21.6

HDFC 24,760 24.3 20.7 4.9 4.5 21.3 22.6

Infrastructure Development Finance Co 3,187 9.4 8.7 1.2 1.1 13.2 12.8

LIC Housing Finance 2,637 10.4 9.0 1.9 1.6 19.2 19.2

Manappuram General Finance 326 8.6 7.0 0.7 0.7 8.8 10.1

Multi Commodity Exchange of India 514 31.9 25.0 - - - -

Muthoot Finance 1,220 8.3 6.5 1.4 1.2 18.5 19.9

Power Finance Corp 6,466 6.1 5.5 1.2 1.0 21.3 20.0

Reliance Capital 2,478 17.8 15.9 1.1 1.1 - -

Rural Electrification Corporation 5,547 6.0 5.5 - - 24.5 22.6

Shriram City Union Finance 1,496 14.3 12.1 - - 18.8 18.9

Median - 10.4 9.0 1.1 1.0 18.8 19.2

AVERAGE - 13.7 11.6 1.1 1.0 15.1 15.2


RoE decomposition (%)


Net interest income/assets 10.1 9.6 9.4 9.5

Net revenues/assets 10.4 9.8 9.6 9.6

Operating expense/assets (3.4) (3.2) (3.2) (3.1)

Provisions/assets (1.5) (1.8) (1.3) (1.2)

Taxes/assets (1.7) (1.6) (1.7) (1.8)

Total costs/assets (6.6) (6.6) (6.2) (6.1)

ROA 3.8 3.1 3.4 3.5

Equity/assets 16.9 16.9 16.4 16.3

ROAE (%) 22.5 18.5 20.6 21.6



Diluted EPS (INR) 14.6 15.5 20.0 24.5

Y-o-Y growth (%) 22.7 6.0 28.6 22.7


Adjusted book value per share 75.5 82.7 97.7 115.0

Diluted PE (x) 18.6 17.6 13.7 11.1

Price/ Adj. BV (x) 3.6 3.3 2.8 2.4

Dividend yield (%) 1.3 1.3 1.6 2.0



Equity capital 1,124 1,127 1,127 1,127

Share premium account 20,224 20,224 20,224 20,224


Net worth 44,672 51,264 59,735 70,127

Sub bonds/pref cap 70 70 70 70

Secured loans 185,450 229,193 270,240 317,206

Unsecured loans 27,700 34,234 40,365 47,381

Assignments 26,200 25,881 33,768 38,827

Total liabilities 284,094 340,642 404,179 473,610

Investments 5,325 5,625 5,925 6,225

Total current assets 9,214 10,979 13,127 15,413


Net current assets 249,417 305,801 360,926 424,729

Fixed assets 945 896 822 723

Assignments 26,200 25,881 33,768 38,827

Total assets 284,094 340,642 404,179 473,610

Loan growth 37.0 22.5 18.1 17.8

Deposit growth 36.5 23.6 17.9 17.4

EA growth 39.5 22.3 17.8 17.5

Gross NPA ratio 3.0 4.4 4.3 4.3

Net NPA ratio 1.0 1.9 1.5 1.4

Provision coverage 68.0 59.0 65.0 67.0


Key takeaways Monsanto India (MIL) is a subsidiary and the only listed Monsanto entity outside the US. In India, the Monsanto Group operates through three entities:

(1) Listed entity Monsanto India (MIL) which is primarily involved in maize seeds and herbicides (primarily Glyphosate).

(2) 50:50 JV between Mahyco and Monsanto Holdings known as Mahyco Monsanto Biotech (MMB), which is sub-licensed to distribute BT cotton technology in India.

(3) Monsanto Holding which deals in cotton and vegetable seeds. Its parent Monsanto has presence in maize seeds, glyphosate, soyabean seed, cotton seed, vegetable seed and canola seed. MIL does not have presence in soyabean seeds in India. It owns brands Dekalb (India’s largest selling hybrid maize seed) and Roundup (world’s as well as India’s largest selling herbicide). Management indicated that hybrid cotton seed market has posted strong growth over the past five years and its penetration has reached 95-97% In India. The company believes that the Indian hybrid maize market is expected to post strong growth over the next four-five years primarily led by rising hybridisation, which is currently at ~60%. MIL is the largest player in hybrid maize in India.

Key risks The seed industry is extremely competitive. Hence, success of any competitor’s product could impact Monsnato’s growth. Climate change drastically affects patterns of crop growth as well as cropping systems. Delayed or adverse monsoon could affect the collection of receivables adversely.

COMPANY PROFILE

MONSANTO INDIAInnovating growth

EDELWEISS RATINGS


MARKET DATA (R: MNSN.BO, B: MCHM IN)

CMP : INR 2,075

Target Price : NA

52-week range (INR) : 2,266 / 560






Promoters * 72.1 72.1 72.1

MF's, FI's & BKs 2.5 2.0 2.1

FII's 0.3 0.3 0.0


: NIL


Sensex Stock

Stock over Sensex

1 month 3.3 14.8 11.5

3 months 15.4 146.8 131.4

12 months 33.7 227.7 194.0


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June 20, 2014

FinancialsYear to March FY11 FY12 FY13 FY14Net revenues (INR mn) 3,634 3,738 4,424 5,818EBITDA (INR mn) 652 550 697 1,451Core profi t (INR mn) 550 499 673 1,298Di luted shares (mn) 17 17 17 17EPS (INR) 31.9 28.9 39.0 75.2P/E (x) 65.1 71.7 53.2 27.6EV/EBITDA (x) 51.8 60.5 47.0 22.5ROAE (%) 15.2 13.2 17.0 34.5




Income statement (INR mn)Year to March FY11 FY12 FY13 FY14Net revenues 3,634 3,738 4,424 5,818Raw material costs 1,489 1,630 2,058 2,443Gross profit 2,145 2,108 2,366 3,375Employee expenses 433 456 479 552Other expenses 1,061 1,102 1,191 1,372Operating expenses 1,493 1,558 1,670 1,924Total expenditure 2,982 3,188 3,728 4,367EBITDA 652 550 697 1,451Depreciation & amortisation 108 90 109 119EBIT 544 460 588 1,332Interest expense 3 13 7 5Other income 84 152 169 129Profit before tax 625 599 750 1,456Provision for tax 75 100 76 159Core profit 550 499 673 1,298Extraordinary/Prior period items (122) 3 (69)Profit after tax 428 502 673 1,229Minority interest - - - 0Profit after minority interest 428 502 673 1,229Equity shares outstanding (mn) 17.3 17.3 17.3 17.3EPS (INR) basic 31.9 28.9 39.0 75.2 Diluted shares (mn) 17.3 17.3 17.3 17.3 EPS (INR) diluted 31.9 28.9 39.0 75.2CEPS 38.1 34.1 45.3 82.1 DPS 20.0 20.0 22.0 30.0Dividend payout (%) 62.8 69.1 56.4 39.9


Growth metrics (%)Year to March FY11 FY12 FY13 FY14Revenues (11.4) 2.9 18.4 31.5EBITDA 14.4 (15.6) 26.6 108.4PBT 8.1 (4.1) 25.2 94.3Net profit 2.2 (9.2) 34.9 92.7EPS 2.2 (9.2) 34.9 92.7

Balance sheet (INR mn)As on 31st March FY11 FY12 FY13 FY14Share capital 86 173 173 173Reserves & surplus 3,657 3,671 3,902 3,272Shareholder equity 3,743 3,844 4,074 3,445Deferred tax liability/asset (30) (27) (36) (37)Sources of funds 3,714 3,817 4,038 3,408Tangible assets 865 804 867Intangible assets 12 5 0CWIP 51 111 24Total net fixed assets 927 920 892 885Current investments 1,514 1,958 2,509 2,667Investments 1,514 1,958 2,509 2,667 Cash and cash equivalents 172 190 203 85Inventories 1,303 1,297 1,394 1,692Sundry debtors 409 504 412 330Loans and advances 375 367 376 366Other assets 109 118 118 49Total current assets (ex cash) 2,196 2,287 2,300 2,438Trade payable 535 721 1,037 1,380Other current liabilities & prov. 560 816 830 1,288Total current liabilities & prov. 1,095 1,537 1,866 2,668Net current assets (ex cash) 1,101 749 434 (230)Application of funds 3,714 3,817 4,038 3,408Book value per share (INR) 217 223 236 200

Free cash flow Year to March FY11 FY12 FY13 FY14Net profit 503 601 750 NAAdd: Depreciation 108 90 109 NAAdd: Int. & other non-cash items 701 287 288 NAGross cash flow 1,312 979 1,147 NALess: Changes in working capital 316 258 253 NAOperating cash flow 996 721 894 NALess: Capex 111 120 86 NAFree cash flow 885 601 808 NA

Cash flow metricsYear to March FY11 FY12 FY13 FY14Operating cash flow 996 721 894 NAFinancing cash flow (182) (303) (405) NAInvesting cash flow (750) (399) (476) NANet cash flow 64 18 13 NACapex 111 120 86 NADividends paid 151 258 345 NA



Profitability ratiosYear to March FY11 FY12 FY13 FY14ROACE (%) 22.3 22.7 34.7 117.4ROAE (%) 15.2 13.2 17.0 34.5Receivables (days) 43 45 38 23Inventory (days) 383 291 239 231Payables (days) 293 295 302 339Cash conversion cycle (days) 133 41 (25) (85)

Operating ratios (x)Year to March FY11 FY12 FY13 FY14Total asset turnover 1.0 1.0 1.1 1.6Fixed asset turnover 4.2 4.5 5.3 6.7Equity turnover 1.0 1.0 1.1 1.5

Valuation parametersYear to March FY11 FY12 FY13 FY14Diluted EPS (INR) 31.9 28.9 39.0 75.2Y-o-Y growth (%) 2.2 (9.2) 34.9 92.7CEPS (INR) 38.1 34.1 45.3 82.1Diluted P/E (x) 65.1 71.7 53.2 27.6P/BV (x) 9.6 9.3 8.8 10.4EV/Sales (x) 9.3 8.9 7.4 5.6EV/EBITDA (x) 51.8 60.5 47.0 22.5Dividend yield(%) 1.0 1.0 1.1 1.4


Key takeaways Kharif season has commenced on a positive note and farmers’ sentiments are optimistic. Sowing is progressing well across India. However, sowing is yet to commence in Maharashtra. El nino, if it materialises, is expected to affect only July end or August rainfall. However, Rallis India (Rallis) is monitoring the sitution closely. The company indicated better farmer incomes augur well for near-term growth prospects. The company is expected to outperform the industry in the domestic agrochemicals market riding strong distribution network, branded product portfolio and launch of new products. It is expected to launch two new innovative agrochemical products during FY15. Its two plants in Dahej (of four) are running at 100% utilisation currently and utilisation is expected to improve during FY15 on overall basis. Metahelix (seed venture) has a strong products pipeline. It has launched a large number of products and conducted extensive field activities over the past two-three years. Rallis reiterated that it will achieve cumulative net sales of INR10bn in the initial five years from its seed business. Non-pesticide business’ contribution is expected to rise from 40% currently over the next few years. Agrochemical’s EBITDA margin is expected to be in the 15-18% range going forward. The company does not have major capex in the near future and expects to spend ~INR0.6bn in FY15E.

Investment conclusion Rallis, with market share of ~10%, is well placed to capture emerging opportunities in the domestic market due to its healthy distribution network, branded farm solutions and launch of new products. Its newly commissioned Dahej SEZ facility is anticipated to boost export sales. It is well equipped to ride the surge armed with Metahelix’s formidable R&D capabilities and robust product pipeline. Rallis is expected to post sales and PAT CAGR of 14.6% and 24.1% (FY05-14 CAGR of 12.8% and 22.0%), respectively, over FY14-16E. The company has a strong operating cash flow with healthy RoE (25-30%) and dividend payout ratio of ~30%.

Key risks The agrochemicals industry faces risk of seasonal weather. Acceptance of GM crops may adversely affect Rallis’ business.

COMPANY PROFILE

RALLIS INDIA Poised for growth

EDELWEISS RATINGS

Absolute Rating BUY


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

CMP : INR 206


52-week range (INR) : 218 / 125






Promoters * 50.1 50.1 50.1

MF's, FI's & BKs 6.4 6.1 6.8

FII's 13.8 12.5 11.3


: NIL


BSE Midcap Index

Stock Stock over

Index

1 month 21.3 (5.7) (27.0)

3 months 34.5 9.2 (25.3)

12 months 38.9 46.4 7.5


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June 20, 2014

FinancialsYear to March FY13 FY14 FY15E FY16ENet revenues (INR mn) 14,582 17,466 20,105 22,935EBITDA (INR mn) 2,149 2,742 3,333 3,855Core profit (INR mn) 1,238 1,617 2,118 2,564Diluted shares (mn) 194 194 194 194EPS (INR) 6.4 8.3 10.6 12.7P/E (x) 32.3 24.9 19.5 16.2EV/EBITDA (x) 18.6 14.4 11.5 9.6ROAE (%) 21.1 24.0 25.9 25.8






Net revenue 14,582 17,466 20,105 22,935

Materials costs 8,779 10,084 11,563 13,285

Gross profit 5,803 7,381 8,542 9,649

Employee costs 944 1,105 1,216 1,361

Other Expenses 2,710 3,534 3,994 4,433

Operating expenses 3,654 4,639 5,209 5,794

Total operating expenses 12,433 14,723 16,772 19,080

EBITDA 2,149 2,742 3,333 3,855

Depreciation and amortisation 315 407 450 490

EBIT 1,833 2,336 2,883 3,365

Other income 117 64 73 110

Interest expenses 178 126 45 -


Provision for tax 535 656 793 911

Net profit 1,238 1,617 2,118 2,564

Extraordinary income/ (loss) (50) (91) - -

Profit After Tax 1,188 1,526 2,118 2,564

Minority interest (2) 8 63 88

Profit after minority interest 1,190 1,518 2,056 2,477

Basic EPS (INR) 6.4 8.3 10.6 12.7


Diluted EPS (INR) 6.4 8.3 10.6 12.7

CEPS (INR) 8.0 10.4 12.9 15.3


Dividend payout (%) 36.1 29.0 23.6 22.0

Common size metrics



Gross margin 39.8 42.3 42.5 42.1

Interest expenditure 1.2 0.7 0.2 -

EBITDA margins 14.7 15.7 16.6 16.8

EBIT margins 12.6 13.4 14.3 14.7


Growth ratios (%)


Revenues 14.4 19.8 15.1 14.1

EBITDA 1.1 27.6 21.5 15.7

Net profit 1.1 30.7 31.0 21.1

EPS 2.5 29.8 27.7 20.5

Key Assumptions


Macro

GDP(Y-o-Y %) 5.0 4.8 5.4 6.3

Inflation (Avg) 7.4 6.2 5.5 6.0


USD/INR (Avg) 54.5 62.0 60.0 58.0

Company

Domestic rev. growth (%) 12.5 13.5 12.0 12.0

Export revenue growth (%) 8.9 20.4 15.0 15.0

Seeds revenue growth (%) 62.0 56.0 30.0 20.0

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




Net borrowings (INR mn) 1,047 657 (329) (1,756)

Capex (INR mn) (349) (577) (578) (600)

Debtor days 34 35 34 36


Payable days 168 157 154 151

Cash conversion cycle (days) (22) (14) (9) (3)


Interest rate as % of average gross debt 12.5 12.3 12.0 -






Rallis India 656 19.5 16.2 11.9 9.9 25.9 25.8

Bayer Cropscience 1,095 20.3 16.3 12.0 9.5 17.6 18.6

PI Industries 736 19.5 15.1 12.7 9.9 29.0 29.0

UPL 2,187 10.7 9.0 6.3 5.3 21.7 21.7

Median - 19.5 15.7 11.9 9.7 23.8 23.8

AVERAGE - 17.5 14.2 10.7 8.7 23.6 23.8


Cash flow metrics



Investing cash flow (399) (814) (578) (600)

Financing cash flow (897) (1,014) (1,356) (612)

Net cash flow 146 (170) 240 1,427

Capex (349) (577) (578) (600)

Dividends paid (495) (546) (569) (637)



ROAE (%) 21.1 24.0 25.9 25.8

ROACE (%) 25.1 29.7 34.1 34.6

ROA 16.4 20.0 24.4 25.7



Payable days 168 157 154 151

Cash conversion cycle (days) (22) (14) (9) (3)


Debt/EBITDA 0.6 0.3 - -

Interest coverage 10.3 18.5 64.5 -

Long term debt / Capital 16.6 8.9 - -

Total debt / Capital employed (%) 72.0 68.2 60.3 56.4

Operating ratios







Diluted EPS (INR) 6.4 8.3 10.6 12.7

Y-o-Y growth (%) 2.5 29.8 27.7 20.5

CEPS (INR) 8.0 10.4 12.9 15.3

Diluted PE (x) 32.4 25.0 19.5 16.2

Price/BV (x) 6.5 5.6 4.6 3.8

EV/Sales (x) 2.7 2.3 1.9 1.6

EV/EBITDA (x) 19.1 14.8 11.9 9.9

Dividend yield (%) 1.1 1.2 1.2 1.4






Minority interest (BS) 47 105 63 88

Borrowings 1,305 745 - -

Deferred tax liability 281 315 315 315

Sources of funds 7,841 8,345 9,045 10,909

Tangible assets 3,745 3,939 4,089 4,199

Intangible assets 132 132 132 132

CWIP (incl. intangible) 345 322 300 300


Goodwill on consolidation 1,676 1,860 1,860 1,860



Current Investments 10 64 64 64

Cash and equivalents 258 88 329 1,756

Inventories 2,672 3,295 3,707 4,425

Sundry debtors 1,648 1,679 2,110 2,417


Other current assets 27 26 26 26


Trade payable 2,503 3,051 3,410 3,914




Uses of funds 7,841 8,345 9,045 10,909




Net profit 1,190 1,518 2,056 2,477

Depreciation 315 407 450 490

Others 259 - - -

Gross cash flow 1,764 1,925 2,506 2,967

Less: Changes in WC 321 267 331 328


Less: Capex 349 577 578 600

Free cash flow 1,094 1,081 1,596 2,039


Key takeaways Sharda Cropchem (SCC) is a fast growing global agrochemicals company with leadership in the generic crop protection chemicals industry. It has made deep inroads into the highly developed European and US markets which are characterised as high entry barrier markets. The company also has significant presence in other regulated markets such as LATAM and Rest of the World. SCC has an asset-light business model whereby it focuses on identifying generic molecules, preparing dossiers, seeking registrations, marketing & distributing formulations through third party distributors or its own sales force. The company's core competence lies in developing product dossiers and seeking product registrations in different countries. It not only has an extensive distribution network, but has also set up its own sales force in various countries in Europe and in Mexico, Colombia, South Afirca and India. SCC’s strategy of sourcing through a global network of suppliers imparts it flexibility and nimbleness. The company provides a wide bouquet of products to customers. Its product portfolio in the agrochemicals business comprises formulations and generic active ingredients in fungicide, herbicide and insecticide segments for protecting various crops. The product portfolio in non-agrochemical business comprises belts, general chemicals, dyes and dye intermediates which enables SCC cater to varied demands. Expansion in exisitng market and addition of newer geographies will be key growth driver for SCC going forward.

Key risks The agrochemicals industry faces risks of seasonal weather. Growth and acceptance of GM crops may adversely affect SCC’s business.

COMPANY PROFILE

SHARDA CROPCHEMGlobal agrochemical play


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FinancialsYear to March FY10 FY11 FY12 FY13Net revenues (INR mn) 3,513 4,422 6,129 7,761EBITDA (INR mn) 614 810 1,219 1,393Core profit (INR mn) 286 417 680 839Diluted shares (mn) 18 18 90 90EPS (INR) 15.9 23.1 7.5 9.3P/E (x) NA NA NA NAEV/EBITDA (x) NA NA NA NAROAE (%) 10.6 13.9 19.0 19.5





Year to March FY10 FY11 FY12 FY13

Net revenues 3,513 4,422 6,129 7,761

Raw material costs 2,451 3,093 4,193 5,443

Gross profit 1,063 1,329 1,936 2,318

Employee expenses 52 84 109 136

Other expenses 396 435 608 789

Operating expenses 449 519 717 925

Total expenditure 2,899 3,612 4,910 6,368

EBITDA 614 810 1,219 1,393

Depreciation & amortisation 306 371 427 367

EBIT 308 439 792 1,026

Interest expense 2 2 1 4

Other income 41 76 66 149

Profit before tax 348 513 856 1,172

Provision for tax 62 96 176 332

Core profit 286 417 680 839

Profit after tax 286 417 680 839

Minority interest 3 0

Profit after minority interest 286 417 683 840

Equity shares outstanding (mn) 18.0 18.0 90.2 90.2

EPS (INR) basic 15.9 23.1 7.5 9.3

Diluted shares (mn) 18.0 18.0 90.2 90.2

EPS (INR) diluted 15.9 23.1 7.5 9.3

CEPS 32.8 43.7 12.3 13.4

DPS - 1.0

Dividend payout (%) - - - 10.8

Common size metrics (% net revenues)


Gross margin 30.2 30.1 31.6 29.9


EBITDA margins 17.5 18.3 19.9 18.0

EBIT margin 8.8 9.9 12.9 13.2

Interest 0.0 0.0 0.0 0.0

Net profit margin 8.1 9.4 11.1 10.8

Growth metrics (%)


Revenues (26.5) 25.9 38.6 26.6

EBITDA (7.7) 31.9 50.5 14.3

PBT (54.3) 47.5 67.0 NA

Net profit (52.8) 45.8 63.1 NA

EPS (52.8) 45.7 (67.5) NA


As on 31st March FY10 FY11 FY12 FY13

Share capital 180 180 902 902


Shareholder equity 2,792 3,195 3,925 4,660

Short term borrowings 22 24 34 459

Loan funds 22 24 34 459

Deferred tax liability/asset 58 42 49 86

Sources of funds 2,872 3,261 4,008 5,204



Current investments 173 255 324 923


Cash and cash equivalents 68 233 297 357

Inventories 376 579 1,020 929

Sundry debtors 2,144 2,483 3,259 3,765

Loans and advances 36 60 144 288

Other assets 99 32 37 105


Trade payable 907 1,171 1,745 1,961

Other current liabilities and prov. 408 462 578 776

Total current liabilities & prov. 1,315 1,633 2,323 2,737


Application of funds 2,872 3,261 4,008 5,204

Book value per share (INR) 155 177 43 52



Net profit 348 513 856 1,172

Add: Depreciation

Add: Int. & other non-cash items 309 224 151 3

Gross cash flow 656 736 1,007 1,175

Less: Changes in working capital 149 185 619 337


Less: Capex 507 300 417 530

Free cash flow 0 251 (29) 307

Cash flow metrics



Financing cash flow (117) (0) (4) 317

Investing cash flow (288) (370) (468) (1,125)

Net cash flow 102 181 (83) 29

Capex 507 300 417 530

Dividends paid - - - 90



Profitability ratios


ROACE (%) 12.3 15.6 24.0 26.1ROAE (%) 10.6 13.9 19.0 19.5Receivables (days) 221 191 171 165

Inventory (days) 44 56 70 65

Payables (days) 165 174 172 170


Debt-equity (x) 0.0 0.0 0.0 0.1

Debt/EBITDA 0.0 0.0 0.0 0.3

Adjusted debt/Equity (x) 0.0 0.0 0.0 0.1

Operating ratios (x)





Key takeaways

• Star Agriwarehousing and Collateral Management (Staragri) provides post-harvest management solutions to the farmers be it procurement, storage services, warehouse receipts, lab-testing of the produce and transportation, among others. It mainly deals in non-perishable agri-commodities such as wheat, soybean and oilseeds.

• The company is setting up private mandis (pioneer in this), which will help the

farmers improve their realisations in several ways:

o Provides lab-testing facilities to the farmers such that farmers with better quality produce will enjoy premium over others.

o In the private mandi channel, the number of middlemen are less. Typically, farmers go to the small-time traders who then sell the produce to bigger traders, and both earn commissions. Elongation of the supply chain means there is a large gap in the farm-gate prices and prices quoted to final consumers.

o The private mandis also provide storage facilities to the farmers wherein farmers who do not wish to sell their produce at distress prices can avail the warehousing services, store their produce and sell at a later date when better prices are available.

• While the company itself does not deal in perishables, it indicated that de-listing

of fruits and vegetables from the APMC will deliver benefits only in the long term. Today, farmers do not have much choice but go to the mandis to sell their perishable produce. Overtime, with the development of large retail chains and investments in cold storage, control of the traders can be minimised.

STAR AGRIWAREHOUSINGOffers post-harvest management solutions


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Key Takeaways State Bank of India’s (SBI) NPA profile, in light of the focused recovery efforts via camps, has improved. However, because of the possibility of a debt waiver customers are reluctant to repay, thereby spoiling the credit culture. Within the agri portfolio, Kisan Credit Card (KCC) accounts for half at INR600bn. It works as a credit/debit card and has the best features amongst banks. To ensure repeated borrower interaction Premium KCC is being introduced which works on staggered release of sanctioned loan amount, a part of which is linked to the repayment behaviour of the borrower. After KCC, the next big component of agri loans is the INR400bn worth of gold loans. To enhance the security, 400 carat verification machines are being installed in branches falling in Northern and Central belts. The quality of the portfolio is good with just 0.4% of NPA and that too because of borrower-wise classification regulation. To take on competition from NBFCs, tractor loan product “Shree Shakti” has been introduced which does not ask for land as a collateral and works only with tractor as the primary security. The rates will range from 12-13% and the LTV will be 50%.

Investment conclusion Given SBI’s conscious efforts towards quality growth and aggressive recoveries aided by improving macros, we expect NPLs to stabilise. Though sticky opex continues to mar profitability, the bank’s focused efforts are likely to yield benefits over the medium to long term. Further, stabilising NIMs, steady retail liability franchise and lower dependence on wholesale provides comfort. Key Risks • Macro economic risk is the biggest risk for SBI, given its size and exposures.

• Increasing geographical penetration by new private sector banks can lead to faster- than-expected decline in market share.

COMPANY PROFILE

STATE BANK OF INDIAFocused on recovery and on new product launches

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Performer

Risk Rating Relative to Sector Low

Sector Relative to Market Overweight

MARKET DATA (R: SBI.BO, B: SBIN IN)

CMP : INR 2583


52-week range (INR) : 2,835 / 1,453


M cap (INR bn/USD mn) : 1,928/ 31,498

Avg. Daily Vol.BSE/NSE(‘000) : 2,515.4



Promoters * 58.6 62.3 62.3

MF's, FI's & BK’s 20.8 17.9 17.7

FII's 9.7 8.8 8.9


: NIL


Stock Nifty EW Banks and

Financial Services Index

1 month 31.6 10.2 18.1

3 months 70.7 16.6 37.5

12 months 32.4 24.6 23.9

Nilesh Parikh +91 22 4063 5470 [email protected] Kunal Shah +91 22 4040 7579 [email protected] Suruchi Chaudhary +91 22 6623 3316 [email protected] Prakhar Agarwal +91 22 6620 3076 [email protected]

India Equity Research| Banking and Financial Services

June 20, 2014

FinancialsYear to March FY13 FY14 FY15E FY16ENet revenues (INR mn) 603,699 678,351 762,092 874,970Net profit (INR mn) 141,088 108,912 151,729 181,959Diluted EPS (INR) 206.3 145.9 203.2 243.7EPS growth (%) 18.2 (29.3) 39.3 19.9Diluted P/E (x) 12.5 17.7 12.7 10.6Price to book (x) 1.5 1.4 1.2 1.1ROAE (%) 15.4 10.0 12.2 13.2






Interest income 1,196,571 1,363,508 1,571,436 1,822,258

Interest expended 753,258 870,686 993,547 1,151,324

Net interest income 443,313 492,822 577,889 670,934

Non interest income 160,386 185,529 184,203 204,036

- Fee & forex income 131,753 148,443 156,819 169,368

- Misc. income 17,941 16,319 17,384 19,669

- Investment profits 10,692 20,767 10,000 15,000

Net revenue 603,699 678,351 762,092 874,970

Operating expense 292,844 357,259 384,334 430,999

- Employee exp 183,809 225,043 232,714 257,309

- Other opex 109,035 132,216 151,620 173,691

Preprovision profit 310,855 321,093 377,758 443,971

Provisions 111,308 159,354 151,297 172,390

Loan loss provisions 106,570 142,236 136,297 159,390

Investment depreciation (9,613) 5,628 3,000 3,000

Other provisions 14,352 11,490 12,000 10,000



Reported PAT 141,088 108,912 151,729 181,959

Diluted EPS (INR) 206.3 145.9 203.2 243.7


Dividend payout (%) 22.5 23.7 19.9 16.6

Growth ratios (%)


NII growth 2.4 11.2 17.3 16.1

Fees growth (2.6) 12.7 5.6 8.0

Opex growth 12.3 22.0 7.6 12.1

PPOP growth (7.7) 0.1 22.5 16.6

PPP growth (1.5) 3.3 17.6 17.5

Provisions growth (7.3) 33.5 (4.2) 16.9

Net profit 20.5 (22.8) 39.3 19.9

Operating ratios



Yield on investments 8.5 8.1 8.1 8.1

Yield on assets 8.6 8.4 8.3 8.3


Cost of funds 5.5 5.5 5.5 5.4

Cost of deposits 6.0 6.0 5.9 5.8

Cost of borrowings 5.3 5.1 5.0 5.0

Spread 3.0 2.8 2.9 2.8

Cost-income 48.5 52.7 50.4 49.3

Tax rate 29.3 32.7 33.0 33.0

Key Assumptions

Year to March FY13 FY14E FY15E FY16E

Macro

GDP(Y-o-Y %) 5.0 4.8 5.4 6.3

Inflation (Avg) 7.4 6.2 5.5 6.0


USD/INR (Avg) 54.5 60.5 58.0 56.0

Sector

Credit growth 14.7 14.0 16.0 18.0

Deposit growth 13.5 15.0 16.0 18.0

CRR 4.3 4.0 4.0 4.0

SLR 23.0 23.0 23.0 23.0

G-sec yield 7.8 8.5 7.8 7.0

Company

Operating metric assumptions (%)


Yield on investments 8.5 8.1 8.1 8.1

Yield on asset 8.6 8.4 8.3 8.3


Cost of funds 5.5 5.5 5.5 5.4

Cost of deposits 6.0 6.0 5.9 5.8

Cost of borrowings 5.3 5.1 5.0 5.0

Spread 3.0 2.8 2.9 2.8

Balance sheet assumption (%)

Credit growth 22.0 15.0 16.3 17.5

Deposit growth 15.2 15.9 18.1 18.1

SLR ratio 20.4 22.0 22.0 22.0

Low-cost deposits 44.8 41.6 42.7 44.1



Incremental slippage 3.6 3.9 3.4 3.1

Capital adequacy 13.2 12.4 10.0 9.0




Market cap Diluted PE (X) Price/ Adj. BV (X) ROAE (%)


State Bank of India 31,498 12.8 10.7 1.5 1.3 12.2 13.2

Allahabad Bank 1,127 4.5 4.0 0.9 0.8 13.8 14.1

Bank of Baroda 5,825 6.4 5.3 1.0 0.9 15.2 16.0

Oriental Bank Of Commerce 1,474 6.1 5.2 0.8 0.7 11.6 12.2

Punjab National Bank 5,628 - - - - 13.0 13.8

Union Bank Of India 2,265 - - - - 11.6 12.8

Median - 5.3 4.6 0.9 0.8 12.6 13.5

AVERAGE - 5.0 4.2 0.7 0.6 12.9 13.7


RoE decomposition (%)


Net interest income/assets 3.2 3.0 3.1 3.0

Fees/Assets 1.1 1.0 0.9 0.9

Investment profits/Assets 0.1 0.1 0.1 0.1

Net revenues/assets 4.3 4.2 4.0 4.0

Operating expense/assets (2.1) (2.2) (2.0) (2.0)

Provisions/assets (0.8) (1.0) (0.8) (0.8)

Taxes/assets (0.4) (0.3) (0.4) (0.4)

Total costs/assets (3.3) (3.5) (3.2) (3.1)

ROA 1.0 0.7 0.8 0.8

Equity/assets 6.6 6.7 6.6 6.3

ROAE (%) 15.4 10.0 12.2 13.2



Diluted EPS (INR) 206.3 145.9 203.2 243.7

Y-o-Y growth (%) 18.2 (29.3) 39.3 19.9

Book value per share (INR) 1,739.8 1,880.5 2,077.7 2,333.3

Adjusted book value per share 1,459.1 1,547.1 1,748.2 2,029.1

Diluted PE (x) 12.6 17.8 12.8 10.7

Price/ Adj. BV (x) 1.8 1.7 1.5 1.3

Dividend yield (%) 1.6 1.2 1.3 1.3

Price to income (x) 6.9 6.5 6.0 5.4



Equity capital 6,840 7,466 7,466 7,466

Reserves & surplus 981,997 1,175,357 1,296,919 1,448,711

Net worth 988,837 1,182,823 1,304,385 1,456,176

Sub bonds/pref cap 368,364 383,364 411,364 439,364

Deposits 12,027,396 13,944,085 16,463,939 19,437,601

Borrowings 1,323,463 1,447,945 1,677,945 1,907,945

Other liabilities 948,262 964,130 1,062,871 1,180,935

Total liabilities 15,656,321 17,922,346 20,920,503 24,422,020

Loans 10,456,166 12,098,287 14,154,996 16,701,480

Investments - - - -

Cash and equivalents 1,148,202 1,325,496 1,609,653 1,896,552

Gilts 2,721,206 3,224,056 3,911,390 4,602,100

Others 788,067 759,026 672,251 598,355

Fixed assets 70,050 80,022 92,195 102,869

Other Assets 472,631 435,459 480,018 520,665

Total assets 15,656,321 17,922,346 20,920,503 24,422,020

Credit growth 22.0 15.0 16.3 17.5

Deposit growth 15.2 15.9 18.1 18.1

EA growth 18.4 15.2 16.9 17.0

SLR ratio 20.4 22.0 22.0 22.0

C-D ratio 89.4 88.7 87.3 86.9

Low-cost deposits 44.8 41.6 42.7 44.1


Net NPA ratio 2.1 2.3 2.0 1.5


Incremental slippage 3.6 3.9 3.4 3.1

Net NPA / Equity 22.2 - - -

Capital adequacy 13.2 12.4 10.0 9.0

- Tier 1 9.4 9.7 7.1 6.5


Key takeaways Tata Chemicals (TCL) is witnessing early signs of improvement in global soda ash demand. The company expects global soda ash demand to grow at 1.5% p.a. Currently, global soda ash prices are hovering around USD250-280/MT and have improved USD30/MT recently. Management does not anticipate any new soda ash capacities globally as current prices are non-remunerative for new investments. TCL expects US soda ash prices to rise in the near term. The company is expected to sign new contracts in the US over the next couple of months. Domestic soda ash demand continued to be robust. Management indicated that India needs additional 1m MT of soda ash in every three years. The company has increased soda ash prices by INR600/MT recently in the India market. In agri business, TCL does not have any plan to expand in India as well as globally. Management believes that subsidy payment remains challenging in the country. TCL’s subsidy receivables stands at INR18bn currently. The company believes that the government has to first make PSUs profitable and convert all naphtha plants into gas based before decontroling the urea sector. TCL is expected to deleverage its balance sheet gradually over the next five years. Consumer products business continues with its product extension. TCL is planning to launch Tata Spices in a few states in July.

Key risks Poor monsoon, seasonality and cyclical nature of agriculture could impact the company’s earnings. Higher raw material cost, INR depreciation and delay in payment of government subsidy could affect profitability.

COMPANY PROFILE

TATA CHEMICALS Optimistic outlook

EDELWEISS RATINGS


MARKET DATA (R: TTCH.BO, B: TTCH IN)

CMP : INR 327

Target Price : NA

52-week range (INR) : 347 / 234


M cap (INR bn/USD mn) : 83 / 1,383




Promoters * 31.1 31.1 31.1

MF's, FI's & BKs 22.3 22.0 23.0

FII's 22.0 22.4 21.3


: 1.46%


Sensex Stock

Stock over Sensex

1 month 3.3 3.8 0.5

3 months 15.4 119.2 103.8

12 months 33.7 13.1 (20.6)


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FinancialsYear to March FY11 FY12 FY13 FY14Net revenues (INR mn) 110,606 138,150 148,588 158,954EBITDA (INR mn) 18,537 22,754 21,629 18,094Core profi t (INR mn) 8,829 11,919 12,804 6,125Di luted shares (mn) 255 255 255 255EPS (INR) 27.1 38.9 42.1 15.4P/E (x) 12.1 8.4 7.8 21.3EV/EBITDA (x) 6.4 5.4 6.0 8.0ROAE (%) 13.6 16.8 16.8 6.5




Income statement (INR mn)Year to March FY11 FY12 FY13 FY14Net revenues 110,606 138,150 148,588 158,954Raw material costs 44,523 56,775 57,986 62,629Gross profit 66,083 81,375 90,603 96,326Employee expenses 8,197 9,732 11,255 12,145Other expenses 39,349 48,888 57,718 66,086Operating expenses 47,546 58,621 68,973 78,231Total expenditure 92,069 115,396 126,959 140,860EBITDA 18,537 22,754 21,629 18,094Depreciation & amortisation 4,511 5,087 5,339 4,712EBIT 14,027 17,667 16,290 13,382Interest expense 3,508 4,270 4,639 5,793Other income 1,060 1,961 4,178 1,424Profit before tax 11,578 15,358 15,829 9,013Provision for tax 2,749 3,439 3,025 2,888Core profit 8,829 11,919 12,804 6,125Extraordinary/Prior period items (369) (1,524) (6,699) (14,202)Profit after tax 8,460 10,395 6,105 (8,077)Minority interest 1,926 1,995 2,070 2,210Share of net profit of associates 25 31 33 Profit after minority interest 6,535 8,376 4,004 (10,320)Equity shares outstanding (mn) 254.8 254.8 254.8 254.8EPS (INR) basic 27.1 38.9 42.1 15.4Diluted shares (mn) 254.8 254.8 254.8 254.8EPS (INR) diluted 27.1 38.9 42.1 15.4CEPS 44.8 58.9 63.1 33.9 DPS 10.0 10.0 10.0 10.0Dividend payout (%) 36.9 25.7 23.7 65.1


Growth metrics (%)Year to March FY11 FY12 FY13 FY14Revenues 15.9 24.9 7.6 7.0EBITDA 7.1 22.7 (4.9) (16.3)PBT 13.2 32.6 3.1 (43.1)Net profit 8.5 35.0 7.4 (52.2)EPS (3.4) 43.8 8.2 (63.5)

Balance sheet (INR mn)As on 31st March FY11 FY12 FY13 FY14Share capital 2,548 2,548 2,548 2,548Reserves & surplus 51,969 60,815 61,587 53,107Shareholder equity 54,517 63,363 64,136 55,655Minority interest 4,065 4,481 5,361 6,552Long term borrowings 49,163 54,845 54,609 69,098Short term borrowings 1,985 4,616 14,897 14,599Loan funds 51,148 59,461 69,506 83,696Deferred tax liability/asset 548 (325) (56) 1,910Sources of funds 110,277 126,980 138,947 147,813Tangible assets 37,561 43,747 40,482Intangible assets 253 197 306CWIP(incl Intangible) 6,510 5,492 5,916Total net fixed assets 44,324 49,436 46,703 47,520Goodwill on consolidation 56,324 63,587 66,270 67,226Non current investments 4,474 6,064 5,984 4,342Current investments 5 33 13 67Investments 4,479 6,097 5,997 4,409Cash and cash equivalents 13,450 16,780 18,414 17,530Inventories 11,456 18,632 16,018 16,490Sundry debtors 13,624 23,153 34,372 32,659Loans and advances 7,271 8,520 9,911 11,616Other assets 3,747 2,795 3,082 3,795Total current assets (ex cash) 36,097 53,101 63,382 64,560Trade payable 17,379 26,357 20,848 24,256Other current liabilities & prov. 27,019 35,665 40,971 29,176Total current liabilities & prov. 44,398 62,021 61,819 53,431Net current assets (ex cash) (8,301) (8,921) 1,563 11,129Application of funds 110,277 126,980 138,947 147,813Book value per share (INR) 214 249 252 218

0 0 0 0Free cash flow Year to March FY11 FY12 FY13 FY14Net profit 11,210 13,834 9,130 NAAdd: Depreciation 4,511 5087 5339 NAAdd: Int. & other non-cash items (2,182) 1,642 4,848 NAGross cash flow 13,538 20,563 19,317 NALess: Changes in working capital 3,968 8,410 17,084 NAOperating cash flow 9,570 12,153 2,233 NALess: Capex 5,932 7,610 5,842 NAFree cash flow 3,639 4,543 (3,609) NA

Cash flow metricsYear to March FY11 FY12 FY13 FY14Operating cash flow 9,570 12,153 2,233 NAFinancing cash flow 3,610 (1,950) 1303 NAInvesting cash flow (12,008) (7,665) (2,387) NANet cash flow 1,172 2,539 1,149 NACapex 5,932 7,610 5,842 NADividends paid 3,918 3,194 3,022 NA



Profitability ratiosYear to March FY11 FY12 FY13 FY14ROACE (%) 14.0 15.6 12.8 9.7ROAE (%) 13.6 16.8 16.8 6.5Receivables (days) 41 49 71 77Inventory (days) 86 97 109 95Payables (days) 322 342 390 336Cash conversion cycle (days) (195) (197) (210) (164)Debt-equity (x) 0.9 0.9 1.1 1.5Debt/EBITDA 2.8 2.6 3.2 4.6Adjusted debt/Equity (x) 0.9 0.9 1.1 1.5


Valuation parametersYear to March FY11 FY12 FY13 FY14Diluted EPS (INR) 27.1 38.9 42.1 15.4Y-o-Y growth (%) (3.4) 43.8 8.2 (63.5)CEPS (INR) 44.8 58.9 63.1 33.9Diluted P/E (x) 12.1 8.4 7.8 21.3P/BV (x) 1.5 1.3 1.3 1.5EV/Sales (x) 1.1 0.9 0.9 0.9EV/EBITDA (x) 6.4 5.4 6.0 8.0Dividend yield(%) 3.1 3.1 3.1 3.1


Key takeaways Management guided for 12‐15% YoY revenue growth with 60‐100bps margin improvement during FY15. India and Brazil will be major growth drivers for UPL. The company is targeting EBITDA margin of 22‐23%, going forward. Management reiterated that it is looking to further strengthen balance sheet and RoE/RoCE in the coming years. The company is currently focusing on organic growth and any major acquisition is not on the agenda. Net working capital days stood at 93 as of March 31, 2014, and should be 90‐95 days in FY15E. UPL is expected to incur capex of ~INR5bn in FY15E.

Gross debt and cash, as on March 31, 2014, stood at INR35.6bn and INR10.2bn (as on March 31, 2013: INR42bn and INR15.5bn), respectively. UPL is expected to reduce debt further during FY15.

UPL has entered into an agreement with Italian Sipcam S.P.A. to sell its entire 50% stake in the Brazilian agro‐chemical Sipcam UPL Brasil S.A for USD58.5mn (~INR3.5bn). This divestment will release funds to the company, which will be available for new opportunities and meet growing requirements.

Investment conclusion UPL is a direct proxy for increase in demand for food crops due to rising commodity prices, high population growth and surge in demand for bio fuel. The company has historically focused on acquisitions of smaller companies and brands to surpass market growth. We expect 12.7% revenue CAGR and earnings CAGR of 18.8% over FY14‐16E, reflecting strength in base business.

Key risks The agrochemicals industry faces risk of seasonal weather. Growth and acceptance of GM crops may adversely affect UPL’s business.

COMPANY PROFILE

UPL Focusing on balance sheet

EDELWEISS RATINGS

Absolute Rating BUY


MARKET DATA (R: UPLL.BO, B: UPLL IN)

CMP : INR 313


52‐week range (INR) : 329 / 121


M cap (INR bn/USD mn) : 134 / 2,187




Promoters * 29.8 28.9 28.9

MF's, FI's & BKs 6.8 9.1 12.3

FII's 46.8 44.9 39.8


: NIL


BSE Midcap Index

Stock Stock over

Index

1 month 21.3 13.3 (8.0)

3 months 34.5 68.7 34.2

12 months 38.9 90.8 51.9


Indi

a M

idca

ps


June 20, 2014

Financials (Consolidated)Year to March FY13 FY14 FY15E FY16ERevenues (INR mn) 91,861 107,731 122,117 136,770 Rev growth (%) 20.0 17.3 13.4 12.0 EBITDA (INR mn) 16,534 20,198 23,748 26,757 Adj. profit (INR mn) 8,094 10,507 12,490 14,836 Dil. shares (mn) 443 429 429 429 Adj. EPS (INR) 18.3 24.5 29.1 34.6 EPS growth (%) 41.6 34.1 18.9 18.8 P/E (x) 17.1 12.8 10.7 9.0 EV/EBITDA (x) 9.5 7.6 6.3 5.3 ROAE (%) 18.4 21.2 21.7 21.7






Income from operations 91,861 107,731 122,117 136,770

Materials costs 46,874 54,408 61,001 68,298

Employee costs 8,646 9,469 10,746 12,036

Selling and administration 19,807 23,656 26,622 29,679

Total operating expenses 75,327 87,533 98,369 110,013

EBITDA 16,534 20,198 23,748 26,757


EBIT 12,997 16,129 19,126 21,555

Other income 1,079 1,311 1,000 1,100

Interest expenses 4,290 4,866 3,672 3,072



Net profit 7,755 10,357 12,340 14,687

Extraordinary income/ (loss) 347 1,009 ‐ ‐

Profit After Tax 8,441 11,515 12,490 14,836

Minority interest (339) (149) (149) (149)

Profit after minority interest 8,094 10,507 12,490 14,836


Diluted EPS (INR) 18.3 24.5 29.1 34.6

CEPS (INR) 26.3 34.0 39.9 46.8


Dividend payout (%) 13.7 16.3 17.2 17.3

Common size metrics



Employee expenses 9.4 8.8 8.8 8.8

Cost of revenues 51.0 50.5 50.0 49.9

Selling and administration 21.6 22.0 21.8 21.7

Depreciation 3.9 3.8 3.8 3.8

Interest expenditure 4.7 4.5 3.0 2.2

EBITDA margins 18.0 18.7 19.4 19.6


Growth ratios (%)


Revenues 20.0 17.3 13.4 12.0

EBITDA 20.9 22.2 17.6 12.7

PBT 27.2 28.5 30.9 19.0

Net profit 20.9 33.6 19.1 19.0

EPS 41.6 34.1 18.9 18.8

Key Assumptions


Macro

GDP(Y‐o‐Y %) 5.0 4.8 5.4 6.3

Inflation (Avg) 7.4 6.2 5.5 6.0


USD/INR (Avg) 54.5 62.0 60.0 58.0

Company

India revenue growth (%) 5.0 25.9 12.0 12.0

North America revenue growth (%) 15.9 13.5 8.0 5.0

Europe revenue growth (%) 20.8 18.8 8.0 5.0

RoW revenue growth (%) 29.7 14.5 18.0 18.0

Cost assumptions



Financial assumptions



Tax rate as % of PBT 20.8 17.6 25.0 25.0

Capex (INR mn) 4,457 5,888 5,000 5,000

Debtor days 102 100 103 103





Interest rate as % of average gross debt 11.3 12.5 11.1 10.9






UPL 2,187 10.7 9.0 6.3 5.3 21.7 21.7

PI Industries 736 19.5 15.1 12.7 9.9 29.0 29.0

Rallis India 656 19.5 16.2 11.9 9.9 25.9 25.8

Median ‐ 19.5 15.1 11.9 9.9 25.9 25.8

AVERAGE ‐ 16.6 13.5 10.3 8.4 25.6 25.5


Cash flow metrics




Financing cash flow (817) (9,588) (7,507) (8,009)

Net cash flow 8,481 (5,255) 11 2,283

Capex (4,457) (5,888) (5,000) (5,000)



ROAE (%) 18.4 21.2 21.7 21.7

ROACE (%) 17.3 19.7 22.3 23.5


Debtors days 102 100 103 103




Debt/EBITDA 2.5 1.8 1.3 1.0

Debt/Equity 0.9 0.7 0.5 0.3

Operating ratios





Du pont analysis


NP margin (%) 8.8 9.8 10.2 10.8

Total assets turnover 1.1 1.2 1.3 1.4



Diluted EPS (INR) 18.3 24.5 29.1 34.6

Y-o-Y growth (%) 41.6 34.1 18.9 18.8

CEPS (INR) 26.3 34.0 39.9 46.8

Diluted PE (x) 17.1 12.7 10.7 9.0

Price/BV (x) 3.0 2.6 2.1 1.8

EV/Sales (x) 1.7 1.4 1.2 1.0

EV/EBITDA (x) 9.3 7.6 6.3 5.3

Dividend yield (%) 0.8 1.3 1.6 1.9







Minority interest (BS) 2,342 1,721 1,721 1,721

Short term debt 13,910 13,057 13,057 13,057

Long term debt 28,123 22,543 17,543 12,543

Borrowings 42,033 35,600 30,600 25,600

Deferred tax liability (131) 813 813 813

Sources of funds 90,697 90,608 95,590 102,417

Gross block 29,851 34,851 39,851 44,851

Accumulated depreciation 16,634 20,704 25,326 30,529

Tangible assets 13,217 14,148 14,525 14,322

Intangible assets 23,000 22,357 22,357 22,357

CWIP (incl. intangible) 2,451 3,982 3,982 3,982


Investments 10,252 7,373 7,373 7,373

Non current investments 7,415 7,373 7,373 7,373

Current Investments 2,837 ‐ ‐ ‐

Cash and equivalents 15,482 10,228 10,239 12,523

Inventories 20,687 24,801 27,806 31,132

Sundry debtors 26,931 32,204 36,504 40,884



Trade payable 21,176 26,940 30,204 33,817




Uses of funds 90,697 90,608 95,590 102,417




Net profit 8,094 10,507 12,490 14,836

Gross cash flow 15,949 13,567 17,112 20,039

Less: Changes in WC (1,043) 6,225 4,594 4,747


Less: Capex 4,457 5,888 5,000 5,000

Free cash flow 12,535 1,454 7,519 10,292



RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return



Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91‐22) 4009 4400, Email: [email protected]

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

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

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

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 149 40 12 202* 1 stocks under review

Market Cap (INR) 139 57 6

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

Buy Hold Reduce Total

Rating Interpretation

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

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

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

Rating Expected to



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