october 1, 2014 rating matrix rallis india (ralind)

October 1, 2014

ICICIdirect.com | Equity Research

Initiating Coverage

Good play on ‘Agri’ theme.... Rallis India Ltd (Rallis), a Tata enterprise, is a major crop protection (agro chemicals) player domestically with presence in the hybrid seed segment through its subsidiary Metahelix. The company has transformed itself from being an insecticide player in the past decade to a total agriculture services solution provider. Rallis’ presence across the value chain along with good brand recall bodes well for the company. In FY10-14, Rallis’ Sales and PAT have grown at a CAGR of 18.4% and 10.6%, to | 1727 crore and | 152 crore respectively. Going forward, on the back of robust outlook in contract manufacturing business, strong retail presence through 2000 dealers & 30000 retailers & increasing share of Non pesticide portfolio (NPP share to rise from 33.9% of net sales in FY14 to 34.6% of net sales in FY17E) we expect the company’s Sales and PAT to grow at a CAGR of 16.8% & 21.6% respectively in FY14-17E. We initiate coverage on Rallis valuing it at 22x P/E on an average FY16E & FY17E EPS of | 12.6 with a corresponding target price of | 278 & assign a BUY rating. Presence across the value chain!! Rallis is present across the agricultural value chain ranging from hybrid seeds (through its subsidiary Metahelix) to plant growth nutrients to organic manure & soil conditioners (through its subsidiary Zero Waste Agro Organics) to crop protection (agro chemicals). Metahelix manufactures and markets hybrid seeds with ~60-65% exposure to the Kharif season. Metahelix’s revenue has grown at a CAGR of 59 % in FY12-14. With good product profile coupled with strong R&D set up, we expect the Metahelix’s revenue to grow at a CAGR of 25% in FY14-17E to | 439 crore in FY17E (| 225 crore in FY14). Hence with Metahelix traction and strong base business we expect consolidated revenues to grow at a CAGR of 16.8% over FY14-17E to | 2755.3 crore in FY17E. Contract manufacturing; new area of thrust; robust growth outlook Rallis also has a notable presence in the contract manufacturing segment wherein it manufactures chemicals and formulations for other reputed industry players. It is developing its new Dahej SEZ unit for the purpose of contract manufacturing. In FY14, Rallis clocked a top line of ~| 250 crore from this segment. With the commissioning of Dahej facility (partially) we expect this segment to grow at a CAGR of 20% in FY14-17E. Sound financials, lean balance sheet; well poised for growth Rallis has a lean balance sheet with minimal leverage and strong return ratios with FY14 ROCE & ROE at 21% & 28% respectively. The company also possesses relatively better working capital cycle with Net working capital days at 23 days in FY14 vis-à-vis industry average of ~ 44 days. We initiative coverage on Rallis India with a target price of | 278, valuing the company at 22x P/E (implying PEG of 1x over FY14-17E period) on an average FY16E & FY17E EPS of |12.6. We assign a BUY rating on the stock Exhibit 1: Financial Performance (Consolidated)

(Year-end March) FY13 FY14 FY15E FY16E FY17ENet Sales (| crore) 1,440.9 1,727.2 2,026.6 2,360.8 2,755.3 EBITDA (| crore) 210.6 261.3 316.9 388.7 476.9 Net Profit (| crore) 119.0 151.9 183.7 217.4 273.2 EPS (|) 6.1 7.8 9.4 11.2 14.0 P/E (x) 36.9 28.9 23.3 19.7 15.7 Price / Book (x) 7.1 6.1 5.1 4.4 3.7 EV/EBITDA (x) 21.0 17.0 13.6 10.9 8.7 RoCE (%) 26.4 27.5 29.9 33.9 35.4 RoE (%) 19.2 21.2 22.0 22.2 23.7

Source: Company, ICICIdirect.com Research

Rallis India (RALIND)| 226

Rating Matrix Rating : BuyTarget : 278Target Period : 18-24 monthsPotential Upside : 23%

YoY growth (%)

(YoY Growth) FY14 FY15E FY16E FY17ENet Sales 19.9 17.3 16.5 16.7 EBITDA 24.1 21.3 22.6 22.7 Net Profit 27.6 20.9 18.4 25.7 EPS (Rs) 27.6 20.9 18.4 25.7

Valuation summary (Consolidated)

FY14 FY15E FY16E FY17EP/E 28.9 23.3 19.7 15.7 Target P/E 35.5 29.4 24.8 19.8 EV / EBITDA 17.0 13.6 10.9 8.7 P/BV 6.1 5.1 4.4 3.7 RoNW 21.2 22.0 22.2 23.7 RoCE 27.5 29.9 33.9 35.4

Stock Data

Stock DataMarket Capitalization | 4395.7 CroreTotal Debt (FY14) | 74.5 CroreCash and Investments (FY14) | 15.5 CroreEV | 4454.7 Crore52 week H/L 251 / 145Equity capital | 19.5 CroreFace value | 1MF Holding (%) 6.7FII Holding (%) 15.0

Comparative return matrix (%)

Return % 1M 3M 6M 12MRallis India -5.0 -2.0 37.0 46.0PI Industries -5.0 36.0 75.0 210.0Dhanuka Agritech 11.0 26.0 90.0 260.0UPL Ltd 3.0 6.0 85.0 138.0

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Analyst’s name

Chirag J Shah [email protected]

Shashank Kanodia [email protected]


Company background Rallis India, promoted by Tata Chemicals (US$ 1.5 billion market cap company), is a market leader in the crop protection (agro-chemical i.e. pesticides) segment domestically with a rich historical background. Under crop protection segment it manufactures and markets insecticides, herbicides and fungicides. With manufacturing facilities spread across 4 geographic locations domestically, the company has a capacity of 10,000 tonne of technical grade pesticides and ~30,000 tonne/litres of formulations per annum. The company has a strong distribution network with ~2000 dealers & 30,000 retailers thereby covering ~80% of the Indian districts. The company has over 25 depots with ~200 plus field staff and more than 1200-1300 crop advisers. Rallis has presence in almost all key Agri states including Andhra Pradesh, Gujarat, Maharashtra, Punjab and Haryana among others.

The company has transformed itself from being only an insecticide player to a total agro service solution provider. The transformation began in FY11 when it acquired a majority stake in a seed manufacturing company i.e. Metahelix Life Sciences Pvt. Ltd. at an enterprise value of ~| 186 crore. Rallis’ present stake in Metahelix stands at ~80% with a total equity investment of | 171 crore. In FY13 it had also acquired a majority stake in organic manure and soil conditioners manufacturing company based in Maharashtra i.e. Zero Waste Agro Organics Pvt. Ltd. As of FY14, Rallis holds 51% in this company with a total equity investment of | 29 crore. Rallis also has an institutional and contract manufacturing arm that manufacturers chemicals for its institutional clients namely Bayer Corpscience, PI Industries among others. The company is a registered source of supplier in international markets and has no plans to enter into the subsidy driven fertilizer segment domestically.

Exhibit 2: Rallis India Ltd. Overview

s

Source: Company, ICICIdirect.com Research,

Rallis India

Consolidated revenue of ~ |1750 crore in FY14

Domestic Agro-chemicals

(crop protection)

Revenues of ~|900 crore (51%)

Seeds Business

Metahelix

Revenues of ~| 225 crore (13%)

Contract Manufacturing


Institutional Business

Revenues of ~ | 250 crore (14%)

Plant Growth Nutrients, Household Chemicals


Shareholding pattern (%) – Q1FY15

Shareholder's Category Holding (%)Promoters 50.1Institutional Investors 21.6General Public 28.3

FII & DII holding trend (%)

10.8 10.6 10.211.3

12.513.8

15.011.9

8.9

6.76.36.16.87.27.1

11.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Q2FY

13

Q3FY

13

Q4FY

13

Q1FY

14

Q2FY

14

Q3FY

14

Q4FY

14

Q1FY

15

%

FII DII


Brief Overview of Indian Agriculture Industry/Sector The Indian economy has transformed itself from being an agrarian economy way back in 1950’s to being a services driven economy in recent times. The share of agriculture in our total GDP has reduced from 51.9% in 1950-51 to 13.9% in FY14. Though the share of agriculture in the total GDP has decreased over a period of time, a majority ~60-65% of our population is still directly or indirectly dependent on it for livelihood. Domestically our agriculture season is bifurcated into Kharif and Rabi season. Kharif (June-October) being the season wherein the crops are mainly rain-fed (South-West monsoons) with major crops sown during the season include rice, cotton, soyabean etc. The Rabi (November-April) season is mostly governed by irrigation wherein main crops sown during this season include wheat, barley, mustard etc. India on an average receives ~1186 mm of rainfall annually with ~887 mm (~75%) distributed during the Kharif season. The total land under cultivation as of FY11 stood at 141.6 million hectare while the total food grain production in FY14 stood at 264.4 million tonne (estimated by the ministry of agriculture)

Exhibit 3: Domestic Food grain production (% Share, Kharif vs. Rabi)

63.6 60.0 56.3 51.9 49.4 48.9

36.4 40.0 43.7 48.1 50.6 51.1

0

20

40

60

80

100

1970-71 1980-81 1990-91 2000-01 2010-11 2013-14

% s

hare

Kharif Rabi

Source: Ministry of Agriculture, ICICIdirect.com Research

Exhibit 4: Indian GDP Contribution (Agri, Industry, Services)

14.6 14.6 14.4 14.0 13.9

28.3 27.9 28.2 27.3 26.1

57.1 57.5 57.4 58.8 60.0

0

20

40

60

80

100

2009-10 2010-11 2011-12 2012-13 2013-14

%

Agriculture & Allied Sectors Industry Services

Source: Government of India, ICICIdirect.com Research

The proportion of food grain production between Kharif and Rabi in the past has been skewed towards the Kharif season (In 1970’s & 80’s the share of Kharif stood at ~60%). With increasing thrust on irrigation & farmer awareness, the scenario is now balanced with current proportion of food grain production being equally distributed among Kharif & Rabi season. As of FY14, the share of Kharif & Rabi in total food grain production stood at 49% & 51% respectively.

The pure play agricultural share in the total GDP at constant prices stood at ~12% in FY14 while its share at the current prices was at ~16% in FY14. In FY14, the real agricultural GDP growth rate stood at 4.7%.

Exhibit 5: India Domestic GDP vs. India Domestic Agriculture GDP

Fiscal YearDomestic GDP at Constant Prices (2004-05) (| crore)

YoY Growth (%)

Domestic GDP at Current Prices (| crore)

YoY Growth (%)

Agricultural GDP at Constant Prices (2004-05)

(| crore)YoY Growth

(%)

Agricultural GDP at Current Prices

(| crore)YoY Growth

(%)FY06 3253073 9.5 3390503 14.1 502996 5.5 536822 12.6FY07 3564364 9.6 3953276 16.6 523745 4.1 604672 12.6FY08 3896636 9.3 4582086 15.9 556956 6.3 716276 18.5FY09 4158676 6.7 5303567 15.7 555442 -0.3 806646 12.6FY10 4516071 8.6 6108903 15.2 557715 0.4 928586 15.1FY11 4918533 8.9 7248860 18.7 610905 9.5 1143517 23.1FY12 5247530 6.7 8391691 15.8 643543 5.3 1300569 13.7FY13 5482111 4.5 9388876 11.9 649424 0.9 1417468 9.0FY14 5741791 4.7 10472807 11.5 681412 4.7 1653802 16.7

Source: Ministry of Agriculture, ICICIdirect.com Research ,

India Topological Data (2011) Particulars Units AmountTotal Geographical Area million hectare 329Gross Cropped Area (GCA) million hectare 199Net Sown Area (NSA) million hectare 142Cropping Intensity GCA/NSA 141%Net Irrigated Area million hectare 64Irrigation % % 45



India Vs Global Crop Protection Industry According to the industry estimates, the global agro chemical (crop protection) industry is pegged at ~US$ 48 billion as of CY12. It has grown at a CAGR of 10.9% in CY06-12 and is expected to grow at a CAGR of 6.8% in CY12-18E to US$ 71 billion by CY18E. The Indian agro chemical industry size is pegged at ~US$ 3.8 billion (~| 20,000 crore) as of FY12, which is equally divided between the domestic consumption & exports; each at US$ 1.9 billion (~| 10,000 crore). The domestic industry is expected to grow at a CAGR of ~12% to US$ 6.8 billion by FY17E with domestic consumption witnessing a growth of ~8% CAGR & exports expected to grow at a CAGR of ~15% in the aforesaid period.

Exhibit 6: Global Agro chemical geographic distribution (CY12)

ROW4%

Latin America19%

North America23%

Asia25%

Europe29%

Source: FICCI, Tata Strategic Group Study, ICICIdirect.com Research

In Europe the consumption is highest on account of high commodity prices, need for better quality, higher yield & limited land. In Asia however, the consumption is higher on account of increasing demand for palm oil in Japan, Malaysia & Indonesia.

There is a key difference observed in terms of application of agro chemicals. Globally, fruits & vegetables and cereals form majority (44%) of the agro chemical consumption while in India it is mainly skewed towards the Kharif crops i.e. Cotton (50%) & Rice/Paddy (18%), which forms the major portion of the agro chemical consumption.

Exhibit 7: Global consumption bifurcation – Crop Wise (CY12)

Fruits & Vegetables

26%

Cereals18%

Maize13%

Soyabean10%

Cotton6%

Rice9%

others18%


Exhibit 8: Domestic consumption bifurcation- Crop Wise (CY12)

Cotton50%

Paddy18%

Fruits & Vegetables

14%

Plantation Crops8%

Sugarcane2%

Cereals, Millets, Oil Seeds

7%others

1%


A stark difference is also observed in the agro chemical usage bifurcation globally vis-à-vis India wherein globally herbicide forms major portion of pesticide consumption (44% share) while in India, insecticides forms the major share (65%).

Global Agro chemical Industry

26

48

71

0

20

40

60

80

CY06 CY12 CY18E

US$

billio

n


CAGR 10.9% CAGR 6.8%

Globally, Europe constitutes the highest ~29% of the total agro chemical consumption while Asia ranks 2nd with ~25% share of the total pie as of CY12.


Investment Rationale Challenges faced by Indian Agri industry: An opportunity for agro-chemicals India commands ~ 2.4% of the global geographic area & has access to ~4% of the total water reserves for supporting a mammoth ~18% of the total global population & ~15% of the total global livestock. Given the size of population and geographical limitations there exists a strong case for augmenting the productivity of sowable land.

1) Constant Arable Land: Growing Population In India, the land under cultivation or the net sown area has increased marginally in the last several decades. In 1950-51, the net sown area stood at 118.8 million hectare while in 2010-11 it stood at 141.6 million hectare. However the same is not the case in the last decade specifically, wherein the net sown area has remained almost constant (net sown area in 2000-01 stood at 141.3 million hectare while the same in 2010-11 stood at 141.6 million hectare).

Exhibit 9: India Net Sown Area & Gross Sown Area (1950-2011)

118.

8

133.

2

140.

9

140.

3

143.

0

141.

3

141.

6

131.

9

152.

8

165.

8

172.

6

185.

7

185.

3

199.

0

111 115 118 123130 131

141

0

50

100

150

200

250

1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2010-11

milli

on h

ecta

re

0

20

40

60

80

100

120

140

160

%

Net Area Sown Total Cropped Area Cropping Intensity

Source: Agriculture Statistics 2013, Ministry of Agriculture, ICICIdirect.com Research

Exhibit 10: India Net Sown Area & Gross Sown Area (2000-2011)

131

134132

135136 137

138138

138136

141

0

50

100

150

200

250

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

milli

on h

ecta

re

126

128

130

132

134

136

138

140

142

%

Net Area Sown Total Cropped Area Cropping Intensity

Source: Agriculture Statistics 2013, Ministry of Agriculture, ICICIdirect.com Research

Cropping Intensity i.e. the no of times the same land can used for cropping (calculated as gross sown area to net sown area) however in the aforesaid period has increased from 111% in 1950-51 to 141% in 2010-11, thereby implying efficiencies over the period of time.

As per the Vision 2030 document released by the Indian council of agricultural research, the domestic demand for food grains is expected to increase at a CAGR of ~2% in CY2000-30. The food grains demand is expected to reach 355 million tonne in CY 2030 vis-à-vis 192 million tonne in CY2010. Fruits & vegetables demand is expected to reach 290 million tonne in CY2030 vis-à-vis 136 million tonne in CY2010.

Exhibit 11: Food grains demand expected to increase at a CAGR of ~2% in CY2000-30

14 3364 81

192

4393 76

30

102 95156

355

110

180 182

050

100150200250300350400

Puls

es

Cere

als

Whe

at

Rice

Food

Grai

ns

Frui

ts

Vege

tabl

es

Milk

milli

on to

nne

CY2000 CY2030

Source: Indian Council of Agricultural Research – Vision 2030, ICICIdirect.com Research

Indian Vs. Global (2011) Particulars Units India World % Share

Total Areamillion hectare 329 13442 2.4

Land Areamillion hectare 297 13009 2.3

Arable landmillion hectare 159 1411 11.3

Total Population million no 1241 6909 18.0

Source: Agriculture Statistics 2013, ICICIdirect.com Research

India’s domestic population has grown from 361 million in 1950-51 to 1210 million in 2010-11 (at a CAGR of 2%). Going forward, as per the estimates of United Nations (UN) India’s population is expected to grow at a CAGR of 1% to 1450 million by 2028, putting forth a tremendous demand for food grains.

However, given the limitation of land use and increasing the cropping intensity over a certain limit there exists an urgency to increase the yield out of the same land for meeting the needs of growing domestic population. This in turn will be a key growth driver for the growth of agro chemical industry going forward.


2) Fragmented Land Holdings: Reducing the economies of scale The acreage of land holdings per Indian farmers have reduced over a period of time thereby leading to challenges over economics of scale and greater farm mechanization. As per the agriculture census released by the government of India, average size of operational holding has reduced from 1.33 hectare per holding in FY01 to 1.23 hectare per holding in FY06 and further to 1.15 hectare per holding in FY11. The proportion of marginal & small holding as a % of total holdings is also on the rise in India. It has increased from 81.8% in 2000-01 to 85% in 2010-11.

Exhibit 12: India Farm Holdings Bifurcation

2000-01 2005-06 2010-11 2000-01 2005-06 2010-1175.4 83.7 92.4 29.8 32 35.422.7 23.9 24.7 32.1 33.1 35.1

14 14.1 13.8 38.2 37.9 37.56.6 6.4 5.9 38.2 36.6 33.71.2 1.1 1 21.1 18.7 17.4

119.9 129.2 137.8 159.4 158.3 159.1

1.33 1.23 1.15

81.8 83.3 85.0

Large (>10 hectare)All Holdings

Average Size of Holding (hectare/holding)

Proportion of Marginal & Small holdings (%)

Marginal (<1 hectare)Small (1-2 hectare)

Semi-Medium (2-4 hectare)Medium (4-10 hectare)

No of Holding (million number) Area (million hectare)Category of Holdings


Thus, with increasing fragmented land holdings and limitations over mechanization of the same, there exits an impelling case for increase the yields per holding. One of the ways through which it can be achieved is the optimum use of agro chemicals in farm lands.

3) Domestic Pesticide Industry, under penetrated market; nascent stage According to the industry estimates, the domestic agrochemical (crop protection) industry size is pegged at ~US$ 3.8 billion (FY12) with US$ 1.9 billion of sales domestically (~| 10,000 crore) & ~US$ 1.9 billion worth of exports. India’s per capita pesticide consumption however is one of the lowest in the world with 0.6 kg/hectare of pesticides used vis-à-vis its global peers like China & Japan, which use 13 kg/hectare & 12 kg/hectare respectively.

Exhibit 13: Per Capita Consumption of pesticides (FY12)

7 75 5

0.6

17

1312

02468

1012141618

USA Korea France UK India Taiwan China Japan

Kg/h

ecta

re


The per capita consumption of pesticides is low in India on account of low farmer awareness, limited reach and relatively limited purchasing power of Indian farmer vis-à-vis their global counterparts.

Pesticide usage in developed countries like USA & UK in FY12 stood at 7 Kg/hectare and 5 Kg/hectare respectively.

Average size of operational holding in 1960-61 stood at 2.63 hectare/holding

As of 2010-11, the total number of marginal holding (<1 hectare) stood at 92.4 million while small holding (1-2 hectare) stood at 24.7 million out of the total holdings which stood at 137.8 million


As of FY12, Insecticides form the largest share (65%) of pesticides consumed in India, followed by Herbicides (16%), Fungicides (15%) and others (4%). Among the crops, the major crops for which pesticides are used are mainly Kharif crops namely Cotton (50%) & Rice/Paddy (18%).

Exhibit 14: Domestic consumption bifurcation – Pesticide type (FY12)

Others4%Herbicides

16%

Fungicides15%

Insecticides65%


Exhibit 15: Domestic consumption bifurcation- Crop Wise (FY12)

Cotton50%

Paddy18%

Fruits & Vegetables

14%

Plantation Crops8%

Sugarcane2%

Cereals, Millets, Oil Seeds

7%others

1%


Among the states, Andhra Pradesh commands the highest share of 24% in terms of pesticides usage, followed by Maharashtra which accounts for 13% and Punjab at 11%.

Exhibit 16: State Wise Domestic pesticide consumption (FY12)

Others15%

West Bengal5%

Haryana5%

Tamil Nadu5%

MP & Chhattisgarh8%

Gujarat7%

Karnataka7%

Punjab11%

Maharashtra13%

Andhra Pradesh24%


Going ahead, the Indian agrochemcial industry is expected to grow at a CAGR of ~12% to US$ 6.8 billion by FY17E with domestic industry witnessing a growth of ~8% CAGR over FY12-17E while exports are expected to grow at a CAGR of ~15% in the aforesaid period.

Rallis, with it’s presence across the agro-chemical value chain i.e. technical grade manufacturer, formulator and distributor is well poised for exciting growth period ahead. Rallis is also adequately present across the insecticides, herbicides & fungicides segment and commands ~8% domestic market share. It generates ~ | 900 crore of top line from this segment out of the total market size of ~ | 12,000 crore. Going forward we expect the company’s sales in this segment to grow at a CAGR of 15% to | 1362 crore in FY17E.

Under penetration of pesticides segment domestically and government’s thrust to augment the crop yields, reiterate our positive stance on the agro-chemicals industry. Rallis with its strong presence amongst the Agri community is well poised for the robust growth journey ahead.

Agro-chemical value chain

In-licensing

Technical Grade Manufacturers Formulator Distributor

End User



4) Huge losses on account of non usage of pesticides As per industry estimates, crop losses on account of non usage of pesticides is pegged at | 90,000 crore annually. Majority of the losses can be attributed to weeds (accounting for ~33%), insects (accounting for ~26%) & diseases (accounting for ~26%). Hence in order to avoid crop losses, application of agro chemicals becomes essential. Exhibit 17: Crop losses due to different pests (FY12)

Rodents & others15%

Diseases26%

Insects26%

Weeds33%


5) Shortage of farm labour, impelling case of herbicide growth Globally, herbicides (used for removing unwanted plants that grow alongside the main plant) form the major portion of agro chemical consumption with a share of 44%. In India, however due to abundance of man power herbicides portion is subdued at only 16% of the total agro- chemical consumption pie.

Exhibit 18: Global consumption bifurcation – Pesticide type (FY12)

others7%

Fungicides27%

Insecticides22%

Herbicides44%


Exhibit 19: Domestic consumption bifurcation – Pesticide type (FY12)

Others4%Herbicides

16%

Fungicides15%

Insecticides65%


However, going forward with increasing urbanization and enrolment under MGNREGA scheme, there is an existing trend of shortage of farm labour which is driving the growth of herbicides domestically. As the Manual labour is waning away, thereby making economics favourable towards increased use of herbicides going ahead. To reiterate our point, 50% of the new products launched by Rallis in the period FY11-14 were in the herbicides segment, thereby showing strong inclination to penetrate the most promising agro chemical segment.

MG NREGA Statistics

Particulars Units FY11 FY12 FY13FY14 (till Dec'13)

Total Job Card Issued crore 12.0 12.5 12.8 12.7Employment provided, Households crore 5.5 5.1 5.0 3.8Person days crore 257.2 218.8 229.9 134.8Budget Outlay | crore 40100 40000 33000 33000Central Release | crore 35769 29190 30010 29886

Source: NREGA.nic.in, ICICIdirect.com Research


Increase in MSP’s, rise in purchasing power of farmers to further increase agro-chemical penetration domestically The government with the view of protecting the farmer’s interest has been declaring the minimum support price (MSP) for various agricultural produce. MSP is the minimum price that the farmer will realize while selling its produce either to the government agencies for public distribution system or to the “aanaj mandi’s” at various locations across the country. In case the market price falls below this MSP then it is the onus of the government to procure the farm produce from the farmers at its declared MSP price. Over the 5 year period i.e. FY11-15 the MSP of key crops like rice (common), maize & cotton (medium staple) have increased at a CAGR of 8%, 10% & 11% respectively. Exhibit 20: Minimum Support Price (MSP) Trend

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Common 9.0 10.0 10.0 10.8 12.5 13.1 13.6Grade A 9.3 10.3 10.3 11.1 12.8 13.5 14.0

Maize 8.4 8.4 8.8 9.8 11.8 13.1 13.1Arhar 20 23 30 32 38.5 43.0 43.5Moong 25.2 27.6 31.7 35 44 45.0 46.0Urad 25.2 25.2 29 33 43 43.0 43.5

Medium Staple 25 25 25 28 36 37.0 37.5Long Staple 30 30 30 33 39 40.0 40.5

Wheat 10.8 11 11.7 12.85 13.5 14 NA

Kharif Crops

Paddy

CottonRabi Crops

(|/kg)


Increase in MSP’s bodes well for the farmers as it makes them financially empowered thereby increasing their purchasing power for procuring optimum raw materials for their farm lands. Increase in MSP’s will also aid in increasing the use of agro-chemicals going forward thereby helping the agro-chemical industry for a robust growth period ahead.

Time and again the government has been increasing the MSP and generally it’s been ~| 50/qunital or | 0.5/kg annually. Government has already declared the MSP’s for the current Kharif season with Paddy’s (Rice) MSP being fixed as | 13.6/kg for common variety & | 14.0/kg for Grade A variety


Domestic Yields off from their lows; albeit laggard vis-à-vis its global peers In India, the yield of crops has improved over a period of time. The yield of farmland producing food grains has improved from 522 kg/hectare in 1950-51 to 1930 kg/hectare in 2010-11, representing a CAGR of ~2.2% in the aforesaid period. However the progress of the same has been rather slow in the last decade wherein the yield of food grains has increased from 1626 kg/hectare in 2000-01 to 2095 kg/hectare in 2013-14, representing a CAGR of ~2% in the aforesaid period.

Exhibit 21: Food grains: Yield per hectare (1950-2011)

522710

8721023

13801626

1930

0

500

1000

1500

2000

2500

1950

-51

1960

-61

1970

-71

1980

-81

1990

-91

2000

-01

2010

-11

kg/h

ecta

re


Exhibit 22: Food grains: Yield per hectare (2000-2014)

1626 15351652 1757

1909 19302071 2095

0

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-03

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kg/h

ecta

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India’s yield of food grains lags considerably vis-à-vis that of global peers.

Exhibit 23: Paddy/Rice, Yield per hectare (2012)

164

31 43 13 8

718

206153

69 44

4394

6735

3591

51535639

0100200300400500600700800

World China India Indonesia Vietnam

milli

on

010002000300040005000600070008000

kg/h

ecta

re

Area (million hectare) Production (million tonne)

Yield (kg/hectare)


Exhibit 24: Maize, Yield per hectare (2012)

177

35 35 14 8

875

274208

71 21

4944

7734

59495021

2512

0

200

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1000

World USA China Brazil India

milli

on

0100020003000400050006000700080009000

kg/h

ecta

reArea (million hectare) Production (million tonne)

Yield (kg/hectare)


As evident from the above charts, in the case of rice, domestic yield as of 2012 stood at 3591kg/hectare vs. the global average of 4394 kg/hectare and significantly lagging behind China’s yield of 6735 kg/hectare. Similarly, in case of maize, which is the crop most widely produced across the world, India’s yield stands at 2512 kg/hectare vs. global average of 4944 kg/hectare. However in case of Wheat & Sugarcane India is at par with the global average. In case of wheat, as of 2012 this stands at 3174 kg/hectare while the global average is 3116 kg/hectare. Similarly, in case of sugarcane, as of 2012 domestic yield is 68216 kg/hectare vs. global average of 68752 kg/hectare


Rallis India: Presence across the value chain; Meta-helix feather in cap Rallis is present across the agricultural value chain ranging from hybrid seeds (through its subsidiary Metahelix) to plant growth nutrients to organic manure & soil conditioners (through its subsidiary Zero Waste Agro Organics) to crop protection (agro chemicals). The company has on a consolidated basis clocked revenues of | 1747 crore in FY14, exhibiting a CAGR of 18.4% in FY10-14. The core business of Rallis constitutes the crop protection (agro chemical; pesticides) business. Its non pesticide portfolio (NPP) consists of plant growth nutrients, hybrid seeds, organic manure & specialty chemicals which constituted ~31% (~| 570 crore) of its gross turnover in FY14.

Exhibit 25: Agriculture Value Chain & Rallis presence

Agriculture Value Chain

Rallis Presence Metahelix Standalone Entity Core BusinessZero Waste Agro

Seeds Plant Growth Nutrients Organic Manure Crop Protection

Source: ICICIdirect.com Research

Domestic Crop Protection Business to dominate (CY17 share at 49.4%) The company has a strong uphold in the domestic crop protection industry and clocked revenues of ~| 900 crore from this segment in FY14. It corresponds to a domestic market share of close to ~8% as of FY14. Indian agro chemical industry is expected to grow at a CAGR of 11-12% going forward whereas the company is expected to outperform the industry growth and is expected to grow at a CAGR of 15% on the back of prominent presence across the farmer community (through various farmer benefiting programme), strong brand recall and successful penetration of products launched over FY12-14. We expect the company’s revenues to grow at a CAGR of 14.8% to | 1362 crore in FY17E and estimate the average share in revenues of this segment to range between 49-51% over the aforesaid period

Exhibit 26: Domestic Crop Protection business to at CAGR @ 14.8%

9001033

11861362

0

500

1000

1500

2000

FY14 FY15E FY16E FY17E

| cr

ore


Exhibit 27: Rallis’ Domestic Crop Protection Bifurcation (FY14)

Fungicides30%

Herbicides25%

Insecticides45%



Within the domestic crop protection segment, insecticides constitute 45% share (~| 400 crore) while fungicides constitute 30% (~| 270 crore) & herbicides constitute 25% (~| 225 crore) of the segment sales.

In the pesticides segment, apart from manufacturing its own products, the company also acts like an associate thereby marketing & distributing various world class products of other companies. The trading activity accounted for 15%(| 240 crore in FY14) of the standalone topline in FY14.

Some of the renowned names & products for which it acts as associate are as follows:

Nihon Nohyaku Co. Ltd., Japan

Rallis is in long term collaboration with M/s. Nihon Nohyaku for marketing their product under the brand name of “FUJIONE” which is an insecticide for the control of blast in rice.

Syngenta

Rallis is in agreement with Syngenta for co-marketing some of their products with exposure to crops like rice, cotton & wheat. These products are sold under the Rallis brand name. The brands include Preet, Paralac & Sartaj

Bayer

Rallis has sourced the popular brand “Tata Mida” from Bayer and is also co-marketing “Spiro” brand

Gharda Chemicals Ltd

Rallis has sourced some products from Gharda Chemicals Ltd and markets them under his own brand name. One of the popular products is “Fateh”, which is a leading herbicide in the wheat segment.

Makhteshim Chemical Works

Rallis has a long term association with Makhteshim Chemical works and has imported the popular brands “Captan” and “Atrazine” from them. Rallis will also be launching the product “Nova” this fiscal year for its target crop- Cotton


Focus on R &D and product launches to drive growth

R&D Expenditure: Best in the agro-chemical space Rallis has its own captive research team and its annual expenditure on R&D on consolidated basis is ~2% of its net sales with FY13 & FY14 expenditure at 1.8% & 1.7% of its consolidated net sales.

Exhibit 28: R & D expenditure as a % of sales

7.2

5.3

2.5 6.0 9.

2

9.0

23.6 25.5

1.2

0.8

0.3

0.70.9

0.8

1.81.7

0

5

10

15

20

25

30

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

| cr

ore

0.00.20.40.60.81.01.21.41.61.82.0

%

R&D Expenditure % of Net Sales


Product Launches: Key growth driver The company has been quiet responsive to market conditions and has in the past introduced new products at regular intervals. The company on an average introduces ~3 products each year. Exhibit 29: Product Launches by Rallis India

Nova, Applaud InsecticideTaqat FungicideTakumi, Sedna, Royal InsecticideIshaan, Tebuconazole FungicideMantis BlasticideCartox G, Cartox SP InsecticideErgon FungicideBalwan InsecticideRallizyme Plant Growth NutrientRalligold Plant Growth NutrientTaarak HerbicideToran InsecticideNeon, Sonic, Taffin InsecticideVaar, Honcho, Cylo, Fycol HerbicideSaras, Ditaf FungicideBahar Plant Growth Nutrient

FY13 16 2 Upahar, Gluco Beta Plant Growth NutrientFY14 17 1 Plato Herbicide

Total No of Registrations

6

5

7

2

12

3

FY12 10

FY09 3

FY08

3

5

16

FY07

YearNo of Products Commercialized Product Name Product Type

FY10

FY11

3


In the current financial year (YTD FY15) the company has launched 2 major products namely Origin (Insecticide + Fungicide) & Duton (Herbicide). The company expects to break even in 2-3 years from these new products.

Origin: It is a combination of insecticide & fungicide and is meant for paddy/rice. It’s a first of its kind in India and has been developed in house by the company.

Duton: It is an herbicide which is meant for paddy. It is in-licensed from Dow Chemicals.

In the context of crop protection chemicals, a registration essentially means the license issued by the competent authority for selling that particular molecule/formulation in that very country. All agro chemical manufacturers have to obtain these registrations before being able to sell their products in international markets. Post FY10, Rallis has been quiet active in its overseas business with registrations (both international & domestic for exports) increasing at a steady pace. In the past three years the company has made around 50 registrations which should provide fillip to its international business going forward

R & D expenditure (Industry Players)

R&D Exp Net Sales R&D -% of SalesPI Industries 8.1 1761 0.4UPL Ltd 71.8 10771 0.7Dhanuka Agritech 1.6 738.4 0.2Rallis India 25.5 1747 1.7Bayer Corpscience 20.2 3245 0.6Monsanto India 28.8 582 4.9

FY14Company



Innovation Turnover Index Rallis benchmarks its internal performance through an internally defined parameter called Innovation Turnover Index. The parameter basically measures the contribution of new products to the total product mix. It is calculated as the ratio of revenues from products introduced in the last four years to total revenue in the present year. Exhibit 30: Innovation turnover index

30 30 31

20

1115 15

0

5

10

15

20

25

30

35


%


It is a strong measure depicting R&D focus of the company. Greater the product launches in any particular year & their consequent better acceptances in market, greater the innovation index.

Pesticide Toxicity: Strong focus on Green Label Products The toxicity of the pesticides is determined by the quantum of dosage in milligram (mg) per kilo gram (kg) of animal weight that is lethal in nature. Accordingly, as per the Insecticides Act of 1968 and the Insecticides Rules of 1971, in the Indian context there are 4 labels of toxicity i.e. Red, Yellow, Blue & Green with Red being the most toxic and green being the least. Currently, it is mandatory for the companies to disclose their toxicity label onto their product.

Exhibit 31: Pesticide Toxicity Labels

Label Name Level of toxicity

Oral Lethal dose (mg per kg body weight of test animals)

Dermal Lethal dose (mg per kg body weight of test animals)

Red Label Extremely toxic 1--50 1--200

Yellow Label Highly Toxic 51--500 201--2000

Blue Label Moderately Toxic 501--5000 2001-20000

Green Label Slightly Toxic >5000 >20000

Source: Insecticides Rules 1971, Government of India, ICICIdirect.com Research

Rallis India on its conscious effort and strong ethical parentage has stopped manufacturing & marketing Red label products (since 2011) and is currently manufacturing & marketing only green label pesticides. It resulted in the marginal decline in sales amounting to ~| 100 crore in FY11-12

As of FY14, Rallis’ innovation index stood at 15%, flat YoY


Rallis focus on inorganic growth: moving in right direction

Metahelix: Hybrid Seed Researcher & Manufacturer In FY11, Rallis acquired 60.2% stake in Metahelix Life Sciences Pvt. Ltd. for ~| 126.3 crore with an option of increasing its stake in future. Thereafter, the company has been increasing its stake in Metahelix at regular intervals with current (as of FY14) stake at 80% with a total equity investment of ~| 171 crore. Metahelix manufactures hybrid seeds for paddy, bajra and maize among others with main exposure (~60-65%) to the Kharif season. According to industry estimates, the domestic seed industry size is pegged at ~| 10000-12000 crore, of which Metahelix commands market share of ~2%. Rallis had set a revenue guidance of cumulative sales amounting to ~| 1000 crore over FY12-16 and has achieved a sales of | 441 crore till FY14 and is well placed to achieve the balance | 560 crore during FY15E-16E. Going forward we expect the sales in this segment to grow at a CAGR of 25% to | 439 crore in FY17E.

Exhibit 32: Metahelix Financials

125 22

5 281 35

1 439

3 16.7 21.8 35.6 54.12.4

7.4 7.8

10.1

12.3

0

100

200

300

400

500

FY13 FY14 FY15E FY16E FY17E

| cr

ore

0

2

4

6

8

10

12

14

%

Net Sales EBITDA EBITDA Margins (RHS)


Metahelix is currently going through a gestation period wherein it is invested heavily into business promotion activities to establish itself in the domestic markets. This is reiterated from the fact that 12% of its net sales (~| 26 crore) is spent on business promotion activities while another 18% of its net sales (~| 41 crore) is expensed in form of cash discounts in FY14. Going forward, with increasing market share & higher traction in revenues we expect operating leverage benefits to kick in, which would improve EBITDA margins from 7.4% in FY14 to 12.3% in FY17E. With robust growth in revenues, we expect metahelix share in total revenue mix to increase from 12.9% in FY14 to 15.9% in FY17E

Exhibit 33: Rallis consolidated revenue mix

4.3 4.2 4.2 4.12.0 2.0 2.0 1.9

51.6 51.0 50.2 49.4

14.3 14.8 15.2 15.6

14.3 13.5 12.8 12.0

12.9 13.9 14.9 15.90.5 0.6 0.8 1.0

0

20

40

60

80

100


%

Plant Growth Nutirents Household Chemicals Domestic Pesticide Contract Manufacturing

Speciality Chemicals Metahelix Zero Waste Agro


Metahelix Acquisition Details Particular Units FY11 FY12 FY13 FY14Stake % 60.21 75.64 77.02 80.5Incremental Stake % 15.43 1.38 3.48Investment Amount | crore 126.3 158.2 163.7 171Incremental Investment | crore 31.9 5.5 7.3Metahelix Valuation | crore 209.8 209.1 212.5 212.4


In FY14, Metahelix clocked sales of | 225 crore with EBITDA of | 16.7 crore & corresponding EBITDA margins of 7.4%.


Zero Waste Agro Organics: Organic manure & soil conditioners Rallis owns 51% in Zero Waste Agro Organics with an investment of | 29 crore as of FY14. The company manufactures organic manure which enriches soil and improves yield by at least 25-30% thereby helping the farmer realize more produce from its field. Rallis had set a revenue guidance of cumulative sales amounting to ~| 100 crore over FY14-18E and has achieved a sales of | 8 crore till FY14 and is well placed to achieve the balance | 92 crore during FY15E-18E. Going forward we expect the sales in this segment to grow at a CAGR of 50% to | 27 crore in FY17E, albeit on a low base. On the margins front the company reported negative EBITDA amounting | 2.8 crore in FY14 & we expect this division to just breakeven at the EBITDA level going forward in FY14-17E.

Exhibit 34: Zero waste agro organics revenue trend

812

18

27

0

10

20

30

40

50


| cr

ore


Non-Pesticide Portfolio (NPP): Share on rise; will further de-risk Rallis The company is making a constant effort to de-risk its business model wherein it is working towards increasing the share of non-pesticide portfolio in its overall sales mix. NPP includes business of plant growth nutrients (top line of ~| 75 crore as of FY14), household chemicals (top line of ~| 35 crore as of FY14), specialty chemicals (top line of ~ | 250 crore as of FY14) and its subsidiaries i.e. metahelix (top line of ~| 225 crore as of FY14) and Zero Waste Agro (top line of | ~8 crore as of FY14). Cumulatively revenues generated by the NPP portfolio was ~| 590 crore in FY14 and its share of the consolidated revenues in FY14 stood at 31%. Going forward, we expect the share of NPP portfolio to increase from 31% of gross turnover/33.9% of net sales in FY14 to 34.6% of net sales in FY17 primarily on the back of growth in the seeds (Metahelix) & organic compounds (Zero Waste Agro) business. The company has an internal target of increasing the NPP share to 40% of the total sales going forward. With increasing share of NPP portfolio (led by increase share of Metahelix in the total revenue mix; share increasing from 13% in FY14 to 16% in FY17E) and improvement in margin profile at Metahelix, the consolidated margins of Rallis is expected to improve from 15.1% in FY14 to 17.3% in FY17E.

NPP as a % of Net Sales (Consolidated)

33.933.8

34.2

34.6

33

34

34

34

34

34

35

35


%


Zero waste agro sales are expected to grow at a CAGR of 50% to | 27 crore in FY17E (| 14 crore in FY14)


Rallis’ increasing thrust on contract manufacturing; margins accretive Currently exports account for ~50% of total crop protection industry domestically (Domestic industry size ~US$ 3.8 billion; Exports ~US$ 1.9 billion). A major chunk of it is attributed by contract manufacturing. Currently both Rallis India & PI Industries are major players in this segment and realize healthy revenues out of it. As per industry estimates the total contract manufacturing opportunity is estimated at ~US$ 25 billion. The foreign players prefer India as an outsourcing partner on account of de-risking of their manufacturing base from China, strong domestic technical know-how and employee cost arbitrage.

The company, in FY14, clocked export turnover of ~| 500 crore, 50% of which or ~| 250 crore was from contract manufacturing segment. The company exports to Europe, Asia, Middle East, Americas, Africa & Oceania. It is developing its facility at Dahej SEZ dedicated for this purpose wherein in the initial phase, the company plans to develop four lines at its Dahej unit with the first two lines already operating on a pilot basis. The company has targeted cumulative revenues of | 500 crore in 5 years from this facility (period FY13-17E). Going forward we expect the sales in this segment to grow at a CAGR of 20% and built in revenue to reach | 430 crore by FY17E. Exhibit 35: Contract Manufacturing Business to grow at a CAGR of 20% in FY14-17E

250

300

359

430

200

300

400

500


| cr

ore


Product Profile-Across Segments The company defines its Mega brands as the brand which has the potential to reach | 100 crore of top line. Some of its mega brands include Tata Uphaar, Tata bahaar & Ralligold among others. Exhibit 36: Rallis’ product profile Particular Type/Specific Brands/Crops

Insecticides Tata Mida, Reeva, Asataf, Manik Herbicides Fateh, Tata Metri, Tata Panida Fungicides Contaf, Contaf Plus, Master and Fujione

Foliar GradesFertigation Grades

Household products Insecticides Termex, SentrySeed Treatment Chemicals

Tata Mida 70 WS, Glazer 35 WS, Tata Mida 600 FS, Captaf 50 WP

Plant Growth Nutrients

Pesticides

Hybrid Maize, Hybrid Paddy, Bt Cotton, Bajra, Black Gram, Green Gram, Red Gram, Bengal Gram, Soybean, Wheat, MustardSeeds Crops Covered

Gluco Beta, Ralligold, Solubar, Tata Bahaar, Tracel, Tata Uphaar

Source: Company, ICICIdirect.com, Research

Contract manufacturing is nothing but manufacturing chemicals and formulations for other reputed industry players

In the case of plant growth nutrients, foliar grade essentially means the nutrients which are applied on the plant leaves or sprayed in the air and are to be absorbed by the plant leaves. Fertigation grade on the other hand means the nutrients which are released along the irrigation channel which are normally applied to the roots directly


Working Capital Discipline: A strong positive The working capital management of Rallis is one of the best in Industry wherein its net working capital days are well below 30 days. In FY13 & FY14, Rallis net working capital days stood at 6 days & 23 days respectively

Exhibit 37: Net Working Capital Days FY13 (Industry Players)

58

33

59

88

134

6

0

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Baye

rCo

rpsc

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oIn

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PI In

dust

ries

UPL

Ltd

Dhan

uka

Agrit

ech

Rallis

Indi

a

days


Exhibit 38: Net Working Capital Days FY14 (Industry Players)

47

1334

83

173

23

020406080

100120140160180200

Baye

rCo

rpsc

ienc

e

Mon

sant

oIn

dia

PI In

dust

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UPL

Ltd

Dhan

uka

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Rallis

Indi

a

days


Going forward, on the back of increase share of working capital intensive seed business i.e. Metahelix (share in consolidated revenues expected to increase from 13% in FY14 to 16% in FY17E), we expect the net working capital days to increase from 23 days in FY14 to 30 days in FY15E and further to 40 days by FY17E, which will still be better than the Industry standards. Exhibit 39: Net working capital days (Rallis India)

58

30

-15

110

6

2330

3540

-20

-10

0

10

20

30

40

50

60

70

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

days



Seasonal Business: First half overpowers the 2nd half Rallis’ business depicts high degree of seasonality as company has significant exposure (~60%-65%) to the Kharif season. The first quarter results are usually dominated by the performance of the seed business (Metahelix) wherein the seed placement for the Kharif season takes place i.e. April to June. The second quarter is dominated by performance of agro-chemical business wherein the major sprays post crop germination takes place. The third & forth quarter are usually lean. However, the company’s contract manufacturing business as well as exports are not seasonal in nature and are equally spread across the fiscal year.

Standalone: Q2 the strongest In the standalone entity, Q2 is the strongest quarter on account of agro-chemical business. Over FY11-14, Q2’s average full year contribution to top line stands at 36.1%, EBITDA at 48.8% & PAT at 54.4%

Exhibit 40: Standalone Quarterly Share of Revenues (FY11-FY14)

19

35

2621 20

37

26

1720

35

2520 18

37

2520

12

44

26

18 17

54

14 15 15

48

2215

26

48

2519

12

47

27

15 16

61

11 12 13

55

21

114

55

2417

0

10

20

30

40

50

60

70

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14

%

Quarterly sales as a % of annual sales Quarterly EBITDA as a % of annual EBITDA Quarterly PAT as a % of annual PAT

Source: Capitaline Database, ICICIdirect.com Research

Consolidated: Q1 catches up (Metahelix helps); but Q2 still rules In the consolidated entity, Q1 captures the result of Metahelix and has a greater proportion to total top line as against the standalone entity. For the seed business remaining 3 quarters are lacklustre in nature. Rallis, being a crop protection company, still derives maximum revenue in the second quarter of the fiscal year

Exhibit 41: Consolidated Quarterly Share of Revenues (FY11-FY14)

18

34

2522 23

35

25

17

24

33

2419

24

35

2319

12

44

26

1823

52

13 12

22

44

20

1318

44

2216

12

47

27

15

23

59

8 10

20

52

18

9

18

49

20

13

0

10

20

30

40

50

60

70

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14

Quarterly sales as a % of annual sales Quarterly EBITDA as a % of annual EBITDA Quarterly PAT as a % of annual PAT

Source: Capitaline Database, ICICIdirect.com Research


Good connect with the farmers, strong brand royalty

Exhibit 42: Rallis’ farmer oriented initiatives

System of Rice Intensification (SRI) Description Benefits AccruedSRI is a method of transplanting seeds in paddy fields usingtransplanters and automatic seeding machine. Rallis has initiatedthe SRI project on paddy in Bargarh District, Odisha

Usage of SRI technique has resulted inup to 15% higher paddy yields andsavings of irrigation water. The monetarybenefits out of this activity are yet toaccrue to the company

MoPu's objective is to enhance the cultivation of pulses byproviding farmers quality seeds, critical technology interventionsto increase yield and creating a mechanism for buyback of theirproduce at fair prices which is then sold under the brand name “i-Shakti Dals” by Tata Chemicals Ltd

It has been a great success with over 3.5lakh farmers covered and around 15,000MT of pulses procured from farmers tilldate. Company is aiming for a cumulative1 million farmers to be its beneficiarygoing forward

Grow More Pulses (MoPu) Description Benefits Accrued

Samrudh Krishi Description Benefits AccruedSamrudh Krishi is a holistic agro-advisory program whereincustomized recommendations are provided by crop-advisors ofthe company who visit each farmer’s plot. The company has alsostrengthen farmer helpline call centre's which have now becomean important tool in servicing the farmers. Rallis currently offershelp lines in fifteen vernacular languages. Rallis has added anumber of value added services such as SMS alerts on cropprices, weather and possible disease outbreak

Enhanced farm productivity throughadvanced agricultural practices. Helpscompany in developing the strongconnect with farmers

Description Benefits AccruedRallis Kisan Kutumb

Rallis Kisan Kutumb is Rallis' initiative for delivering up-to-dateinformation to farmers in the form of improved agronomicpractices coupled with efficient use of agro-chemicals to improveproductivity and lower costs. It uses various communicationmeans such as regular contacts throughout the crop cycle,organizing crop seminars, product demonstrations throughcarefully designed Package of Practices (PoP), Farmer exchangeprogrammes (Prerna), Focused Group Discussions (FGDs) andAdvisory Services. It acts like a very effective extension systemthereby helping the company increase the farmer reach

The company has obtained a very strongresponse against this initiative andcurrently has over 1.5 million farmerbase. It helps in wider reach for thecompany's product


As a result of all these initiatives, the company has created a strong presence among the farmer community and consequently, realizes a healthy brand recall. According to the survey done by an independent agency i.e. Gallup in 2009, the survey concludes that Rallis has 7 of its products in the top 12 products by customer unaided recall. Rallis brands that featured in the survey are Contaf, Rogor, Asataf, Tatamida, Contaf Plus, Applaud & Tatamono.

Brand Recall 2009, Customer Survey by Gallup

54

30 29 2824

19 17 15 13 13 13 12

0

10

20

30

40

50

60

Conf

idor

(Bay

er)

Rogo

r(R

allis

)

Tata

mid

a(R

allis

)

Fam

e(B

ayer

)

Proc

laim

(Syn

gent

a)

Tata

mon

o(R

allis

)

%



Industry Scan: Rallis vis-à-vis other Industry players

Exhibit 43: Major Players Profile Rallis India PI Industries Dhanuka Agritech UPL Ltd

Product Profile

Rallis India, a Tata Enterprise, is a marketleader in the crop protection (agro-chemical i.e. pesticides) segmentdomestically. The company under thesegment of crop protection manufacturesand markets insecticides, herbicides andfungicides. With manufacturing facilitiesspread across 4 geographic locationsdomestically, the company has acapacity to produce in excess of 10,000tonne of technical grade pesticides and~30,000 tonne/liters of formulations perannum.

Domestic Agri-inputs businesscomprises of plant protection products(herbicides, insecticides, fungicides) aswell as specialty plant nutrient productsand solutions. Custom synthesis exportscomprises of custom synthesis andcontract manufacturing of agro-chemicals, pharma intermediates andother niche fine chemicals that addressthe growing needs of global innovators. Itis market leader and the largest producerof molecules like Profenofos, Ethion andPhorate.

Dhanuka Agritech Limited manufacturesa wide range of agro-chemicals likeherbicides, insecticides, fungicides,miticides, plant growth regulators invarious forms – liquid, dust, powder andgranules. The Company has high numberof international technical tie-ups. It aimsto be a marketing (more than amanufacturing) company. The coremanufacturing activity that it undertakesis formulations

Manufacturing presence across 28international locations (nine in India).Global marketing presence via more than50 subsidiaries in 124 countries. TheCompany’s products comprisefungicides, insecticides, herbicides,rodenticides, fumigants, postharvestchemicals, fertilizers and seeds, plantgrowth regulators and industrial andspecialty chemicals. The Company hasmore than 3,500 product registrations.The company generates 21% of itsrevenues in India & 65% of theCompany’s production was sourced fromwithin India

Key Brands

Tata Mida, Reeva, Asataf, Manik, Fateh,Tata Metri, Tata Panida, Contaf, ContafPlus, Master and Fujione, Gluco Beta,Ralligold, Solubar, Tata Bahaar, Tracel,Tata Uphaar

Nominee Gold, Osheen, Foratox, Fosmite,Biovita and Roket.

Fluid, Onestar, Lustre, Dhanzyme Gold Gr,Fuzi super, maxxlyd

Manzate Prostick, Super Wham,Starthene,Vandozeb, Tricor, Lancer Gold,Saaf, Devrinol, Phoskill

Newly launchedproducts

In FY15, the company has launched 2major products namely Origin & Duton.Origin is a combination of insecticide &fungicide and is meant for paddy/rice.Duton is an herbicide which is meant forpaddy.

The Company introduced two newproducts during FY14– MELSA, a wheatherbicide and PIMIX, a rice herbicide.Going ahead, the company plans tointroduce 7-8 new products over the next3-4 years

Introduced five new products – Danfuron,Defend, Maxyld, Media Super andProtocol during FY 2013-14. Thecompany intends to launch two novelmolecules in each of the next three years

Company expects to develop at least fivemega brands in the near future. It haslaunched 6 new products in India in FY14

Network2000 dealers & 30,000 retailers 40,000 retail points & 9000

distributors/dealers8,000 distributors/ dealers selling to over75,000 retailers

NA

Share of contractmanufacturing

14% of revenues 52% of revenues Nil NA

Exports Composition

29% of revenues 52% of revenues 0.3% of revenues NA

Brand promotioninitiatives

Various farmer initiatives like Rallis KisanKutumb, Samrudh Krishi

NA Farmer initiatives like Dhanuka- kheti kinayi takneek; Signed Amitabh Bachchanas brand ambassador

NA

Cash discount/brand promotionexpenses

18% of net sales in metahelix with 12%additional of net sales of metahelix spenton cash discounts & business promotionrespectively (| 67 core in FY14)

9.5% of net sales spent as discounts (|166 crore in FY14), advertisement &sales promotion expense of | 22 crore inFY14

Advertisement & publicity (| 13 crore inFY14)

Advertising & sales promotion (| 112crore in FY14)

Employees 881 in FY14 1432 in FY14 >1100 employees in FY14 3595 in FY14FY14 NumbersR&D as a % ofSales

1.7 0.40 0.20 0.7

Net WC days 23 34.0 173.0 83.0Gross Block 651 676 99 3588Asset Turnover 2.7 2.6 7.5 3.0

Sales (| cr) 1747 1761 738 10771EBITDA (| cr) 261.3 306.8 125 2050.1Margins (%) 15.0% 17.4% 17.0% 19.0%PAT(| cr) 152 188 93 935M Cap (| cr) 4650 6139 2187 16216Debt: Equity (x) 0.1x 0.2x 0.1x 0.6x

Source: Company, ICICIdirect.com Research,


Financials Consolidated Revenues to grow 16.8% CAGR in FY14-17E We expect Rallis to clock a modest revenue growth of 16.8% CAGR in FY14-17E primarily on the back of better sales on account of enhanced registrations both domestically as well as in international markets. We expect the company to clock consolidated revenues of | 2755 crore in FY17E vis-à-vis | 1727 crore in FY14. The company’s share of exports is expected to remain constant at ~28% going forward.

Exhibit 44: Consolidated Revenue trend

1,4411,727

2,027

2,361

2,755

-

500

1,000

1,500

2,000

2,500

3,000


| cr

ore


Exhibit 45: Revenue bifurcation (Domestic sales vs. exports)

1,02

4

1,23

8

1,45

3

1,70

1

1,99

4

417

489

574

660

761

28.9

28.3 28.328.0

27.6

-

500

1,000

1,500

2,000

2,500

FY13 FY14 FY15E FY16E FY17E|

cror

e

25

26

27

28

29

30

%

Domestic Sales Exports Exports as a % of Total Sales


We expect the company’s standalone revenues to grow at a CAGR of 14.9% in FY14-17E. The standalone operations are expected to clock revenues of | 2289 crore in FY17E vis-à-vis | 1510 crore in FY14. Within the standalone business the contract manufacturing business is expected to grow at a CAGR of 19.8% in FY14-17E to | 430 crore in FY17E (~| 250 crore in FY14). The specialty chemicals business however is expected to be a laggard and is expected to grow at a CAGR of 9.8% in FY14-17E to | 331 crore in FY17E. On the subsidiaries front, we expect Rallis’ both subsidiaries to report robust performance going forward. Revenues of the seed business i.e. Metahelix is expected to grow at a CAGR of 25% in FY14-17E to | 439 crore in FY17E (| 225 crore in FY14). While soil conditioner business i.e. Zero waste agro is expected to grow at a CAGR of 50% in FY14-17E, albeit on a smaller base.

Exhibit 46: Rallis segmental revenue break up

Plant Growth Nutrients | crore 75.0 86.1 98.8 113.5 14.8Household Chemicals | crore 35.0 40.2 46.1 53.0 14.8Domestic Pesticide | crore 900.0 1033.2 1186.1 1361.7 14.8

Contract Manufacturing | crore 250.0 299.5 358.8 429.8 19.8Specialty Chemicals | crore 250.0 274.5 301.4 330.9 9.8Total Standalone business | crore 1510.0 1733.5 1991.3 2288.9 14.9

Metahelix | crore 224.8 281.0 351.3 439.1 25.0Zero Waste Agro | crore 8.1 12.2 18.2 27.3 50.0

Total Consolidated business | crore 1742.9 2026.6 2360.8 2755.3 16.5

Business Segment Units FY14 FY15E FY16E FY17EFY14-17E CAGR

(%)


FY14-17E CAGR: 16.8%

Revenue share mix (%)

4.3 4.2 4.2 4.12.0 2.0 2.0 1.9

51.6 51.0 50.2 49.4

14.3 14.8 15.2 15.6

14.3 13.5 12.8 12.0

12.9 13.9 14.9 15.90.5 0.6 0.8 1.0

0102030405060708090

100


%

Plant Growth Nutrients Household Chemicals

Contract Manufacturing Specialty Chemicals

Zero Waste Agro



Arriving at Revenue estimates For the estimation of company’s revenue going forward, we have bifurcated the company’s business segments into two i.e. the established business & the nascent business. The established business would consist of the segments in which the company has a strong presence and commands a decent market share. This essentially consists of its entire standalone operations which include the domestic crop protection business, plant growth nutrients and export segment i.e. contract manufacturing & specialty chemicals. The nascent business would essentially include the seed & the organic composite business i.e. Metahelix and zero waste agro wherein the company is still in the process of establishing its presence & has a negligible market share.

It has been observed that the company’s standalone operations have mirrored the growth of nominal agriculture GDP in the last 7 years (FY08-14) with average revenue multiplier being 0.92x in the aforesaid period.

Exhibit 47: Rallis Standalone Revenue growth & nominal Agri GDP growth

18.5

12.615.1

23.1

13.7

9.0

16.7

7.6

23.1

5.2

19.8

9.912.1

15.7

0

5

10

15

20

25


%

Nominal Agri GDP growth (%) Standalone Revenue growth (%)


Exhibit 48: Standalone Revenue multiplier

0.41

1.83

0.35

0.850.72

1.34

0.940.92

0.0

0.5

1.0

1.5

2.0


x

Standalone revenue multiplier (x)

Average multiplier (x) FY07-FY14


Exhibit 49: Justification for top line growth Particulars Units FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14Standalone Revenues | crore 643 692 852 897 1074 1181 1324 1531% growth % 8 23 5 20 10 12 16Nominal Agri GDP | crore 604672 716276 806646 928586 1143517 1300569 1417468 1653802% growth % 18 13 15 23 14 9 17Standalone Revenues/Agri GDP x 0.41 1.83 0.35 0.85 0.72 1.34 0.94Average multiplier x 0.92 0.92 0.92 0.92 0.92 0.92 0.92

FY15E FY16E FY17EReal Agri GDP growth rate (assumption), A 4 4 4Average Agri GDP Inflation Rate (Studying past 7 year data), B 10.8 10.8 10.8Nominal Agri GDP growth rate, C = A+B 14.8 14.8 14.8Revenue Multiplier, D 1 1 1Standalone Revenues implied growth, C x D 14.8 14.8 14.8

Rallis Standalone Operations Revenue growth justification


Going forward, we have assumed the real Agri GDP growth rate of 4% and added to it the average Agri inflation rate (10.8%) over the last 7 years to derive the nominal Agri growth rate of 14.8%. Applying a revenue multiplier of 1x, we have obtained the revenue growth for company’s standalone operations (14.8% in FY14-17E).

For the company’s seed & organic composite business, given their low base, we have built in revenue CAGR of 25% & 50% respectively over FY14-17E.


Consolidated EBITDA to grow 22.2% CAGR in FY14-17E We expect Rallis’ consolidated EBITDA to grow at a CAGR of 22.2% in FY14-17E primarily on the back of improved margins on account of higher sales on the standalone basis and traction at Metahelix. We expect the company to record a margin improvement of 220 bps over next three years and expect Rallis to clock an EBITDA margin of 17.3% on the consolidated basis in FY17E vs. consolidated EBITDA margins of 15.1% in FY14. This is in line with company’s long term strategy to attain EBITDA margins of 20%.

Exhibit 50: Rallis Consolidated EBITDA & EBITDA Margins

211 261317

38947714.6

15.115.6

16.5

17.3

-

100

200

300

400

500

600


| cr

ore

1314141515161617171818

%

EBITDA EBITDA Margins


Exhibit 51: Rallis Standalone EBITDA & EBITDA Margins

203 247295

353423

15.4

16.2

16.8

17.5

18.3

-

100

200

300

400

500

FY13 FY14 FY15E FY16E FY17E|

cror

e1414151516161717181819

%

Standalone EBITDA Standalone Margins


The company’s standalone EBITDA margins are expected to improve from 16.2% in FY14 to 18.3% in FY17E. Its subsidiaries EBIDTA margins are expected to improve from 6.4% in FY14 to 11.6% in FY17E Consolidated PAT to grow 21.6% CAGR in FY14-17E We expect Rallis’ consolidated PAT to grow at a CAGR of 21.6% in FY14-17E on the back of improved EBITDA margins. The PAT margins are also expected to improve form 8.8% in FY14 to 9.9% in FY17E. Exhibit 52: Consolidated PAT trend

119152

184217

273

8.3 8.8 9.1 9.29.9

-

50

100

150

200

250

300


| cr

ore

-

2

4

6

8

10

12

%

PAT PAT Margins



ROCE & ROE set to improve, payout expected to be maintained at 30% With increasing profitability we expect the company’s return ratios to improve going forward. We expect Rallis’ ROCE to improve from 27.5% in FY14 to 35.4% in FY17E. The ROE too is expected to improve from 21.2% in FY14 to 23.7% in FY17E.

Exhibit 53: RoCE & RoE Trend

19.221.2 22.0 22.2 23.7

26.4 27.529.9

33.9 35.4

-

5

10

15

20

25

30

35

40


%

RoE RoCE


Exhibit 54: EPS, DPS & Dividend payout

6.17.8

9.411.2

14.0

2.3 2.4 2.8 3.4 4.2

38

31 30 30 30

-

2

4

6

8

10

12

14

16


|/sh

are

-

5

10

15

20

25

30

35

40

%

EPS DPS Payout Ratio


The company has maintained a healthy dividend payout at 38% in FY13 & 31% in FY14. We expect the company to maintain this healthy payout at ~30% going forward. We expect the company to record an EPS of | 9.4 in FY15E, | 11.2 in FY16E & | 14.0 in FY17E. The corresponding dividend is expected at | 2.8/share in FY15E, | 3.4/share in FY16E & | 4.2/share in FY17E. Cash Flows set to improve; CFO/EBITDA at 0.5x,FCF yield inching to 4.7% The cash flows of Rallis are expected to improve with cash flow from operations (CFO) increasing from | 104 crore in FY14 to | 255 crore in FY17E. The CFO/EBITDA, a measure of quality of earnings, is also expected to stabilize at ~0.5x by FY17E. On the free cash flow (FCF) front, the FCF is expected to improve from | 47 crore to | 200 crore in FY17E with corresponding FCF yield at 4.7%.

Exhibit 55: CFO, EBITDA, CFO:EBITDA

198

104 20

0

211 25

5

211 26

1 317 38

9 477

0.9

0.4

0.60.5 0.5

-

100

200

300

400

500

600


| cr

ore

-0.10.20.30.40.50.60.70.80.91.0

x

CFO EBITDA CFO/EBITDA


Exhibit 56: Free cash flow, free cash flow yield

168

47

90

156 20

0

3.8

1.1

2.1

3.7

4.7

-

50

100

150

200

250


| cr

ore

-

1

2

3

4

5%

Free Cash Flow Free Cash Flow Yield



Valuation Rallis India has always traded at a premium in relation to its peers like PI Industries, United Phosphorus and Dhanuka Agritech given the consistent product launches (average launch of 2-3 products each year in FY07-14 period), high diversification across the agricultural value chain, stringent working capital cycle and lean balance sheet with strong cash flow profile. We believe this premium is set to continue going forward. We expect Ralls’s revenues, EBITDA & PAT to grow at a CAGR of 16.8%, 22.2% & 21.6% respectively in FY14-17E. The company currently trades at a P/E of 19.7x FY16E EPS & 15.7x FY17E EPS.

The company has got re-rated multiple times in the last decade and with the current government’s thrust on increasing the farm productivity, we expect the robust outlook for Rallis to continue going forward with the company enjoying premium valuations. We have valued Rallis on the average FY16E (| 11.2/share) & FY17E (| 14.0/share) EPS of | 12.6 and assigned a P/E multiple of 22x (implying a PEG of 1x over FY14-17E; bottom line growth of 21.6% in FY14-17E) to arrive at a target price of | 278. We assign a BUY rating on the stock. With pick up in the monsoon activity towards the end of current season and progressive sowing domestically the risks over subdued agricultural activity have also relatively tapered down thereby rendering sentimental support to premium valuations.

Exhibit 57: Peer Comparison (Financials)

FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14PI Industries 6245 122 956.9 1246.3 1761.0 182.1 190.8 306.8 19.0 15.3 17.4 103.6 97.3 188.0UPL Ltd 14564 3350 7671.3 9185.7 10771.0 1435.7 1726.6 2050.1 18.7 18.8 19.0 600.7 740.7 934.8Dhanuka Agritech 2476 39 529.2 582.3 738.4 80.0 88.9 125.4 15.1 15.3 17.0 57.1 64.5 93.1Insecticide Ind 914 258 521.8 616.7 864.1 56.4 69.5 82.2 10.8 11.3 9.5 33.0 35.3 39.9Rallis India 4396 77 1274.8 1458.2 1746.6 202.9 210.6 261.3 15.9 14.4 15.0 99.1 119.0 151.9Monsanto (I) 5308 0 373.8 442.4 581.8 70.4 86.6 151.1 18.8 19.6 26.0 50.2 67.3 122.9Bayer Corp (I) 8561 0 2272.0 2725.0 3245.0 240.1 428.8 510.0 10.6 15.7 15.7 139.0 1162.0 289.5

PAT

Company

EBITDA Margin

DebtMarket

Cap

Sales EBITDA

Source: Bloomberg, ICICIdirect.com Research

Exhibit 58: Peer Comparison (Valuation)

FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16EPI Industries 6245 33.2 26.2 20.2 21.5 17.4 13.7 9.0 7.0 5.4 15.3 18.8 20.2 30.7 29.8 29.8UPL Ltd 14564 15.8 12.2 10.5 8.4 7.5 6.7 2.8 2.3 2.0 7.5 9.2 9.6 19.2 20.4 20.0Dhanuka Agritech 2476 26.6 22.3 18.7 20.8 17.1 13.6 7.5 6.0 4.8 19.9 23.8 25.1 31.3 28.7 28.0Monsanto (I) 5308 43.1 32.1 25.6 34.2 28.0 22.5 15.4 11.0 8.0 20.5 NA NA 32.7 36.8 35.8Bayer Corp (I) 8561 29.6 25.7 21.4 18.9 16.0 13.6 4.9 4.2 3.5 12.1 18.5 19.2 15.8 17.6 17.4Industry Average 29.7 23.7 19.3 20.8 17.2 14.0 7.9 6.1 4.7 15.1 17.6 18.5 25.9 26.6 26.2

Rallis India 4396 28.9 23.3 19.7 17.0 13.6 10.9 6.1 5.1 4.4 18.1 19.3 21.0 21.2 22.0 22.2

Company

P/E EV/EBITDA P/BMarket Cap

ROEROA


Sensitivity Analysis

Exhibit 59: EPS & Target price sensitivity to revenue growth

12 10 12 249

14 11 13 263

16 11 14 278

18 12 15 293

20 12 16 308

FY16E EPS (|)

Reve

nue

CAGR

ove

r FY

14 -

17E

FY17E EPS (|) Target Price (|)


For every 200 bps alternation in the revenue CAGR over FY14-17E, the FY16E & FY17E EPS changes by ~4.5% & 6.4% respectively. For every 200 bps alternation in the revenue CAGR over FY14-17E, the target price changes by ~5.6% (~| 14.5/share)


Trading Multiples

Exhibit 60: 2 year forward P/E Graph (Rallis currently trading at 17.8x; Average at 15.9x)

0

50

100

150

200

250

300

350

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14

Apr-1

4

Jul-1

4

(|)

Price 28x 25x 22x 19x 16x 13x 10x

Source: Reuters, ICICIdirect.com Research

Exhibit 61: 1 year forward P/E Graph

Rallis 1 year forward P/E

21.9

0

5

10

15

20

25

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

x


Exhibit 62: 2 year forward P/E Graph

Rallis 2 year forward P/E

17.8

0

5

10

15

20

25Ja

n-10

Jun-

10

Nov

-10

Apr-1

1

Sep-

11

Feb-

12

Jul-1

2

Dec-

12

May

-13

Oct-1

3

Mar

-14

Aug-

14

x


Exhibit 63: Rallis P/E multiple; premium over PI Industries & Dhanuka Agritech

-50

0

50

100

150

200

250

Apr-1

2

Jun-

12

Aug-

12

Oct-1

2

Dec-

12

Feb-

13

Apr-1

3

Jun-

13

Aug-

13

Oct-1

3

Dec-

13

Feb-

14

Apr-1

4

Jun-

14

Aug-

14

Rallis premium over PI Industries Rallis premium over Dhanuka Agritech


Rallis has always traded at a premium over its domestic competitors namely PI Industries & Dhanuka Agritech with average P/E premiums being 43% (over PI Industries) & 95% (over Dhanuka Agritech) in the last 2 years. The premiums however have shrunk presently; with PI quoting at par with Rallis India while Dhanuka trading at a discount of 18.4% to Rallis India


Risks & Concerns Evolution of Genetically Modified crops (GM Crops) The global agro chemical industry is susceptible to introduction of genetically manufactured (GM) crops as they are highly pest resistant with better yields (as compared to the normal variety), thereby limiting the quantum of crop protection chemicals to be used for plants germinated through GM seeds. Rallis’ agrochemical business is also exposed to this risk factor and may adversely affect its profitability and financials on account of increased usage of GM crops globally. Exhibit 64: Sensitivity Analysis; Target price vs. revenue growth

12 14 16 18 20

15 252 265 278 292 305

20 256 269 282 295 309

25 260 272 285 299 313

30 264 276 289 303 317

35 268 281 294 307 321Met

ahel

ix R

even

ue

CAGR

ove

r FY1

4 -

17E

(%)

Standalone Revenue CAGR over FY14 - 17E (%)


We have assumed the standalone revenue to grow at a CAGR of 14.9% in FY14-17E. However, for every 200 bps increase/decrease of the same changes our target price by ~5% (~| 13.5/share) assuming the metahelix revenue growth materializes as expected (We expect metahelix’s revenues to grow at a CAGR of 25% in FY14-17E).

Farm Loan Waiver: Upside risk to Industry & Rallis’ revenues The central government in February 2008 had announced & executed a farm loan waiver scheme wherein the farm loans amounting to ~| 70,000 crore were waived off thereby benefiting the small & the marginal farmers. While, the benefits of the farm waiver & consequent benefits to the agriculture sector did not accrue in FY09 on account of higher growth base in FY08, the entire agro chemical industry however witnessed robust growth wherein their industry revenues grew 26.1% YoY. Rallis India followed the suit with its revenues growing by ~23% YoY in FY09 (highest pace in last 7 years).

Exhibit 65: Impact of Loan waiver on Industry revenues

Fiscal YearAgri GDP (Constant

Prices) | croreYoY Growth

(%)Agri GDP (Current

Prices) | croreYoY Growth

(%)

Domestic Agro-Chemical Industry Revenue, | crore

YoY Growth (%) Rainfall (mm)

Rallis India Standalone Top line

| crore YoY Growth (%)FY06 502996 5.5 536822 12.6 5241 99FY07 523745 4.1 604672 12.6 5973 14.0 100 643FY08 556956 6.3 716276 18.5 7204 20.6 106 692 7.6FY09 555442 -0.3 806646 12.6 9083 26.1 98 852 23.1FY10 557715 0.4 928586 15.1 10084 11.0 78 897 5.2FY11 610905 9.5 1143517 23.1 11923 18.2 102 1074 19.8FY12 643543 5.3 1300569 13.7 13160 10.4 101 1181 9.9FY13 649424 0.9 1417468 9.0 15901 20.8 92 1324 12.1FY14 681412 4.7 1653802 16.7 18942 19.1 106 1531 15.7

Source: Government of India, ICICIdirect.com Research

Going forward, with Telangana government declaring a farm loan waiver amounting ~| 17000 crore and erstwhile Andhra Pradesh’s state being the largest crop protection consumer (24% share in FY12) there exits a strong probability of Industry & Rallis’ revenue to increase in higher double digit in FY15E/FY16E

Farm Loan waiver scheme announced in Feb 2008; budget outlay | 60,000 crore. Actual disbursements started in Dec’08 with release of | 25000 crore & June’09 with release of | 5000 crore

Rallis followed the industry trend with its top line increasing by ~23% YoY


Failure to develop new products Though Rallis enjoys a good brand recall but failure to develop any new products according to the market needs can adversely affect the company’s financials. The company’s internal benchmarks i.e. Innovation Turnover Index has moved to a lower trajectory (Innovation index at 11, 15, and 15 in FY12-14 vis-à-vis 30, 30, 31 in FY08-10) depicting decreasing share of revenues from new products. Though there might we some blockbuster product by the company which had been launched more than 4 years ago and hence not accounted under this index, but still any reduction in launches of new products can hamper the growth in company’s revenues going forward.

MSP’s (global food prices seeing correction) One of the reasons for rise in purchasing power of domestic farmers and consequent buying of crop protection chemicals has been the increase in minimum support prices (MSP) by the central government at regular intervals for the farm produce. Currently, globally the food prices are seeing some correction (due to increase in production) and hence any reduction in MSP’s by the central government may limit the purchasing power of farmers thereby limiting the growth of agro chemicals industry and Rallis’s revenues going forward.

Competition Though the Indian crop protection market is under penetrated but still there exist a good number of efficient players in the organized segment which act as competitors for the company. The company faces stiff competition from both domestic as well as international players. International competitors include BASF, Bayer Corpscience & Syngenta among others while domestic competitors include United Phosphorus, PI Industries & Dhanuka Agritech among others

Weather conditions/ Inadequate Monsoons Rallis’ product profile is highly weather dependent, the control of which is beyond the company’s ambit. Any adverse weather conditions including inadequate or excess rainfall can likely result in loss of revenues for the company. The company’s core business i.e. agro chemical (crop protection) is also dependent on weather & soil conditions which result in growth of pests & weeds. Any anomaly in the above might alter the occurrence of pests & weeds which can result in loss of revenues for the company.

Soil degradation Excessive use of pesticides & fertilizers can cause degradation of the quality of soil which can adversely affect the yield of crops planted by farmers. And reduction in yields followed by reduction in purchasing power of farmers can adversely affect the business of the company


Financial Summary (Consolidated) Exhibit 66: Profit and Loss (| crore)

(Year-end March) FY13 FY14 FY15E FY16E FY17ENet Sales 1,440.9 1,727.2 2,026.6 2,360.8 2,755.3 Other Operating Income 17.3 19.4 24.3 25.9 27.5 Total Operating Income 1,458.2 1,746.6 2,051.0 2,386.6 2,782.7 Other Income 11.7 6.4 4.6 5.1 9.8 Total Revenue 1,469.9 1,753.0 2,055.5 2,391.7 2,792.5

Raw Material Expenses 877.9 1,008.4 1,163.7 1,359.7 1,576.2 Employee Expenses 94.4 110.5 126.6 143.4 163.2 other operating costs 275.3 366.3 443.7 494.9 566.4 Total Operating Expenditure 1,247.6 1,485.3 1,734.0 1,997.9 2,305.8

EBITDA 210.6 261.3 316.9 388.7 476.9 Interest 18.5 12.6 15.1 12.2 10.3 PBDT 203.8 255.1 306.4 381.5 476.4 Depreciation 31.5 40.7 44.0 50.4 57.5 PBT 172.3 214.4 262.4 331.2 418.9 Total Tax 53.5 61.7 76.6 109.3 138.2 PAT before MI 118.8 152.7 185.8 221.9 280.7 Minority Interest (0.2) 0.8 2.1 4.4 7.4 PAT 119.0 151.9 183.7 217.4 273.2


Exhibit 67: Balance Sheet (| crore)(Year-end March) FY13 FY14 FY15E FY16E FY17EEquity Capital 19.5 19.5 19.5 19.5 19.5 Reserve and Surplus 601.3 698.6 817.0 958.0 1,135.7 Total Shareholders funds 620.7 718.0 836.5 977.5 1,155.1 Total Debt 54.0 74.5 64.5 4.5 4.5 Deferred Tax Liability 28.6 33.0 33.0 33.0 33.0 Minority Interest 4.7 10.5 12.6 17.0 24.5 Other Non Current Liabilities 6.0 3.5 3.5 3.5 3.5 Liability side total 714.0 839.5 950.1 1,035.5 1,220.6

Total Gross Block 583.0 650.8 700.8 780.8 860.8 Less Total Accumulated Depreciation 195.3 232.7 276.7 327.1 384.6 Net Block 387.7 418.2 424.1 453.7 476.3 Total CWIP 34.5 21.1 81.1 56.1 31.1 Total Fixed Assets 422.2 439.3 505.2 509.8 507.4 Liquid Investments 1.0 6.4 6.4 16.4 116.4 Other Investments 18.7 18.7 18.7 18.7 18.7 Goodwill on Consolidation 167.6 185.9 185.9 185.9 185.9 Inventory 267.2 329.5 416.4 485.1 566.2 Debtors 164.8 167.9 194.3 258.7 339.7 Loans and Advances 119.5 138.0 141.9 165.3 192.9 Other Current Assets 2.7 2.6 2.0 2.4 2.8 Cash 26.0 9.1 10.8 12.7 14.0 Total Current Assets 580.2 647.0 765.5 924.2 1,115.5 Creditors 408.5 386.2 444.2 517.4 603.9 Provisions 67.7 73.0 88.8 103.5 120.8 Total Current Liabilities 476.2 459.2 533.0 620.9 724.7

Net Current Assets 104.0 187.8 232.4 303.2 390.8 Assets side total 714.0 839.6 950.1 1,035.6 1,220.7



Exhibit 68: Cash flow statement (| crore)

(Year-end March) FY13 FY14 FY15E FY16E FY17EProfit after Tax 119.0 151.9 183.7 217.4 273.2 Depreciation 31.5 40.7 44.0 50.4 57.5 Cash Flow before working capital changes 169.0 205.2 242.8 280.1 341.0

Net Increase in Current Assets (42.7) (83.7) (116.7) (156.8) (190.0) Net Increase in Current Liabilities 71.8 (17.0) 73.8 87.9 103.8 Net cash flow from operating activities 198.1 104.5 199.9 211.2 254.7

(Purchase)/Sale of Fixed Assets (30.2) (57.7) (110.0) (55.0) (55.0) Liquid Investments 1.9 (5.4) - (10.0) (100.0) Net Cash flow from Investing Activities (17.2) (74.6) (107.9) (60.6) (147.6)

Inc / (Dec) in Equity Capital - - - - - Inc / (Dec) in Loan Funds (74.9) 15.4 - (25.0) - Inc / (Dec) in Loan Funds (21.7) 5.1 (10.0) (35.0) - Total Outflow on account of dividend (52.2) (54.6) (64.2) (76.5) (95.6) Net Cash flow from Financing Activities (164.6) (46.8) (90.2) (148.7) (105.9)

- - - - - Net Cash flow 16.3 (16.9) 1.8 1.9 1.3 Cash and Cash Equivalent at the beginning 9.6 26.0 9.1 10.8 12.7 Closing Cash/ Cash Equivalent 26.0 9.1 10.8 12.7 14.0


Ratios

Exhibit 69: Ratio Analysis (Year-end March) FY13 FY14 FY15E FY16E FY17EPer Share DataEPS 6.1 7.8 9.4 11.2 14.0 Cash EPS 7.7 9.9 11.7 13.8 17.0 BV 31.9 36.9 43.0 50.3 59.4 Operating profit per share 10.8 13.4 16.3 20.0 24.5 Operating RatiosEBITDA / Total Operating Income 14.4 15.0 15.5 16.3 17.1 PAT / Total Operating Income 8.2 8.7 9.0 9.1 9.8 Return RatiosRoE 19.2 21.2 22.0 22.2 23.7 RoCE 26.4 27.5 29.9 33.9 35.4 RoIC 27.4 27.5 32.0 35.6 39.6 Valuation RatiosEV / EBITDA 20.4 16.6 13.6 10.9 8.7 P/E 35.9 28.2 23.3 19.7 15.7 EV / Net Sales 3.0 2.5 2.1 1.8 1.5 Sales / Equity 2.3 2.4 2.4 2.4 2.4 Market Cap / Sales 3.0 2.5 2.1 1.8 1.6 Price to Book Value 6.9 6.0 5.1 4.4 3.7 Turnover RatiosAsset turnover 2.0 2.2 2.3 2.4 2.4 Inventory Days 67.7 69.6 75.0 75.0 75.0 Debtor Days 41.7 35.5 35.0 40.0 45.0 Creditor Days 103.5 81.6 80.0 80.0 80.0 Working Capital Days 6.0 23.5 30.0 35.0 40.0 Solvency Ratios

Debt / Equity 0.1 0.1 0.1 0.0 0.0 Current Ratio 1.2 1.4 1.4 1.5 1.5 Quick Ratio 0.7 0.7 0.7 0.7 0.8



Appendix Food grain production In India, the area under cultivation for food grains has been steady at ~120-125 million hectares (out of the total area under cultivation of 171 million hectares) with total food grains production growing at CAGR of 4.9% in FY10-14 to 264 million tonne in FY14. Within the food grains segment, rice constituted 106 million tonne while wheat constituted 96 million tonne in FY14.

Exhibit 70: Area Under Cultivation & Food Grain production

FY10 FY11 FY12 FY13PFY14 Adv

Est FY10 FY11 FY12 FY13PFY14 Adv

EstLong Tern

Avg FY10 FY11 FY12 FY13PFY14 Adv

Est1 Rice 42 43 44 43 44 89 96 105 102 106 97 2126 2238 2393 2379 24212 Wheat 29 29 30 30 31 81 87 95 92 96 84 2835 2986 3174 3077 30613 Coarse Cereals 28 28 26 24 26 34 43 42 38 43 1211 1534 1592 1573 16754 Pulse 23 26 25 24 25 15 18 17 18 20 629 691 698 736 772

(1+2+3+4) Food grains 121 127 125 121 126 218 245 259 250 264 237 1797 1930 2078 2071 20955 Oilseeds 26 27 26 27 28 25 32 30 29 32 957 1194 1133 1112 11496 Sugarcane 4 5 5 5 5 292 342 361 335 348 326 69595 71333 72208 66908 696007 Cotton 10 11 12 12 12 24 33 35 34 37 404 501 490 495 530

Yield (kg/hectare)

S.NO Crops

Production (million tones)Area Under Cultivation (million hectares)

Source: Ministry of Agriculture, ICICIdirect.com Research Cotton production recorded as million bales; 170 kg each

Agriculture Exports/Imports

Exhibit 71: India Agricultural Exports (top 10 items)

Item Quantity Value Quantity Value Quantity Value(MT) (| crore) (MT) (| crore) (MT) (| crore)

1 Cotton Raw incl. waste 1.9 13160 2.0 21624 2.0 198122 Marine products 0.8 11917 1.0 16585 1.0 188333 Oil Meals 6.9 11070 7.4 11796 6.3 158224 Rice basmati 2.4 11355 3.1 15450 3.5 193915 Meat & Prep 8960 14111 179026 Tea & Coffee 0.5 6364 0.6 5600 0.5 93897 Wheat 0.0 0 0.7 1023 6.5 104888 Sugar 1.7 5419 2.7 8767 2.8 85769 Non-basmati Rice 0.1 231 4.0 8659 6.7 14417

10 Other Cereals 3.2 3649 4.1 5493 5.5 8217

FY13

S.No

FY11 FY12


Exhibit 72: India Agricultural Imports (top 10 items)

Quantity Value Quantity Value Quantity Value(MT) (| crore) (MT) (| crore) (MT) (| crore)

1 Vegetable Oils (fixed edible) 6.9 29860 8.4 46255 11.0 611062 Pulses 2.7 7150 3.4 8931 3.8 127383 Cashew Nuts 0.5 2650 0.8 5338 0.9 53314 Fruits & Nuts (excl cashew) 3637 4658 59725 Sugar 1.2 2790 0.1 314 1.1 30726 Spices 0.1 1556 0.1 2190 0.2 25907 Cotton raw & waste 0.1 624 0.1 1059 0.2 24658 Milk & Cream 0.0 492 0.1 1038 0.0 1079 Jute, raw 0.1 302 0.2 449 0.2 371

10 Cereal Preparations 0.0 229 0.0 317 0.1 332

FY13

S.No Item

FY11 FY12


India is a major exporter of raw cotton, marine products and basmati rice. In FY13, India exported 2 million tonne (MT) of cotton amounting to | 19,812 crore while the same quantum for basmati rice stood at 3.5 MT and | 19,391 crore respectively.

India is a major importer of edible oils, pulses and cashew nuts. In FY13, India imported 11.0 million tonne (MT) of edible oils amounting to | 61,106 crore while the same quantum for pulses stood at 3.8 MT and | 12,738 crore respectively.

The marginal increase in the area of cultivation with modest growth in food production implies that the crop yield has improved over a period of time. The average yield of food grain crops has increased from ~1800 kg/hectare in FY10 to ~ 2100 kg/hectare in FY14


Irrigation As of FY11, out of the total sown area of 142 million hectares around 45% (65 million hectares) was the area under irrigation. Among the agrarian states Punjab (98%) & Haryana (87%) are the most irrigated states while Maharashtra (19%) is the least one. Among the crops Wheat (92%) & Rice (59%) are the most irrigated crops domestically.

Micro-Irrigation: The new area of thrust As against the traditional flood irrigation methodology used by Indian farmers for irrigating their fields, off late the government is promoting the usage of micro-irrigation (MIS) technique. MIS essentially means released small quantum of water at necessary time periods to the most appropriate part of the plant. It is implemented through drip & sprinkler irrigation techniques. This regulated supply of water results increasing yield per crop and at the same time save precious natural resource i.e. water.

Credit Flow to agriculture sector The government through its various schemes supports the agriculture sector with credit being the fore most. The government has classified credit to agriculture as a priority sector lending wherein every bank has to set aside or disburse a big chunk of its advances to agriculture and allied services. The government at present is also running a credit subvention scheme wherein loan to farmers is offered at a concessional rate of 7% with 2% as subvention rate given by government directly to banks. Furthermore if the farmer makes timely payment he/she gets further subvention of 3% so that the effective rate of loan for judicious and responsible farmers come to about 4% only. Each year the government sets a target of agriculture credit which in totality is being met by the various lending institutions as a whole (banks, NBFCs, MFI’s, financial institutions etc.). For FY15, the government has set a target of | 8 lakh crore

Exhibit 73: Irrigated Area Trend Domestically

21 25 31 39 48 55 64 65

23 28

38

50

63

76

89 9217 1823

2934

4145 47

0

20

40

60

80

100

1950-51 1960-61 1970-71 1980-81 1990-91 2000-01 2010-11 2011-12

milli

on h

ecta

res

0

10

20

30

40

50

%

Gross Irrigated Area (million hectares)

Net Irrigated Area (million hectares)

% of Gross Irrigated Area over Gross Cropped Area


Exhibit 74: Agriculture Credit flow

YearAgricultural Credit, Target

(| cr)Agricultural Credit,

Achieved (| cr) % Achieved YoY Growth (%)FY09 280000 287149 103FY10 325000 384514 118 33.9%FY11 375000 468291 125 21.8%FY12 475000 511029 108 9.1%FY13 575000 607375 106 18.9%FY14 700000 730765 104 20.3%


Source of Irrigation (million hectares, % share) 2011-12

Other Sources, 7.1, 11%

Other Wells, 10.8, 17%

Tube Wells, 29.4, 44%

Tanks, 1.9, 3%

Canals, 16.0, 25%

Source: Ministry of Agriculture, ICICIdirect.com Research Rallis India

The government also subsidies the farmer in the initial cost of the irrigation set up (~35% of cost) and has been disbursing hefty sums for the same under various schemes (disbursed ~| 1300 crore in FY14). In terms of state exposure, Gujarat & Maharashtra have pioneered the use of this technique for the benefit of their farmers.


Monsoon Update

The monsoon in the current season had a lacklustre start with low rainfall in the month of June 2014. However it picked up momentum thereafter with country receiving good amount of rainfall in the month of July’14 & August’14. As of 24th September the total cumulative rainfall (1st June’14-24th Sept’14) is only 11% short of its long term average (858.8 mm) and hopes are intact for a healthy crop produce this season (FY14).

Exhibit 75: India Chart- South West Monsoon (1st June 2014- 24th September 2014)

Source: Indian metrological department (IMD), ICICIdirect.com Research,

Exhibit 76: Monsoon Summary

Regions Actual Rainfall (mm) Normal Rainfall (mm) % Departure form LPACountry as a whole 763.2 858.8 -11Northwest India 478.6 601.2 -20Central India 877.1 949.4 -8South Peninsula 637.4 679.8 -6East & northeast India 1226.5 1385.1 -11

Source: Indian metrological department (IMD), ICICIdirect.com Research

On the cumulative basis (1st June’14- 24th Sept’14), the total rainfall deficient in India stood at 11% with the rainfall deficient in northwest India being 20%, central India being 8%, south peninsula being 6% and east & northeast India being 11%.

Out of 36 meteorological subdivisions (defined by the Indian Metrological department), the rainfall has been excess over 1, normal over 25, deficient over 10 sub-divisions and no sub-division under scanty rainfall. In area-wise distribution, 7% area of the country received excess rainfall, 68% area of the country received normal rainfall and remaining 25% area received deficient/scanty rainfall.

As per latest release by the Ministry of agriculture, 96.3% of the normal area under Kharif crops has been sown up to 19th Sept’14. Area sown under all Kharif crops taken together has been reported to be 102 million hectares in FY15 (at all India level) vs. 104 million hectares in FY14

In the chart on the right, the areas/states marked as green received normal rainfall (+19% to -19%) while areas/states marked as red received deficient rainfall (-20% to -59%). Thus it can be observed that majority of the country (~68%) received normal rainfall with few areas namely Punjab, Haryana, West UP, East MP, HP, Delhi, East Up, Bihar, Marathwada, Telangana receiving deficient rainfall. It is also to be noted that, though the rainfall might be less in the agrarian states of Haryana & Punjab but they are one of the most irrigated states and hence the crop losses in these states are expected to be minimal


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Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]

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