PC - Agricultural Sector and Initiation - Nov...

12 November 2012

Agricultural Inputs Plough, plant & grow!

• Rising population, dietary shifts, increasing income ‐ food production under immense stress

• India has to produce to eat and also to feed, addressing structural issues to be gradual

• Farm profitability to sustain, regulatory environment to continue its support • Initiate coverage with a positive stance ‐ Agri input suppliers’, key aggregators of

farm produce for modern retail • High conviction ideas: Chambal Fertilisers, PI, Kaveri Seeds, Tata Chemicals and

Coromandel International Gauri Anand

Agricultural Inputs 12 November 2012

PhillipCapital (India) Pvt. Ltd.

Agri‐inputs’ demand is certain to improve: Late showers in Kharif should likely support a better Rabi crop thus improving the outlook for the agri‐input sector in H2FY13. Monsoons are uncertain, but Indian agriculture has shown marked resilience to uncertainties in monsoon. Despite monsoons being erratic in the last two decades, India has witnessed record production (food grain CAGR FY01‐12 – 2.3%), improved yields (0.71%) and has robust buffer stocks (82 mmt). Among other things, these wouldn’t have been achieved without the usage of high quality hybrid seeds, balanced fertilizer usage and judicious mix of pesticides.

Rising income (3‐fold jump during FY02‐11), dietary shifts with this declining per capita land availability (halved to 2.2 ha land per person) has put the onus of increasing food production on existing farm land. Indian yields are still the lowest and agri‐input consumption in most cases below world average. With increase in dissemination of information/training (most coverage companies have training/service centers); the farmers have become more scientific in their approach towards cultivation, which in our view is a strong demand driver for the agri‐input sector.

The agri‐input sector has steered well the headwinds on rising input costs, labour, increased irrigation cost (diesel price hike) and absence of free and fair markets that has stagnated farm profits and plagued overall growth (during FY10‐12) by product profile changes, innovation and better material/receivable management. The issue of poor investments in infrastructure (key bottleneck that leads to high farm produce wastage and lowers farm profits too) which has impeded the sectors growth could likely be addressed with opening up of FDI in retail. We see agri‐input suppliers as key aggregators of farm produce for modern retail. But as these structural changes would be likely long drawn; we expect near term increases to farm productivity to be likely through increased usage of agri‐inputs. We initiate coverage on the sector with a positive stance driven by strong long‐term demand outlook for food grain and thus the need to improve yields vs. global average. Structural changes that address India’s low yield, inefficiencies in procurement and distribution and improve farm economics is essential and would likely fall in place (although gradually). Until then we expect government support by way of policy support (higher MSP’s/subsidies) to continue driving the prospects of the sector. High conviction ideas Chambal Fertilisers, PI, Kaveri Seeds, Tata Chemicals and Coromandel International.

Structural imperatives that would drive agri‐inputs’ demand • India has to produce more to eat and also to feed • Addressing structural challenges to be only gradual ‐ Agri input suppliers, key

aggregators of farm produce for modern retail • Farm profitability to sustain, Policy environment to continue its support • Farm input exporters to benefit from firm crop prices

Key FY13‐14E Industry theme Seeds: Industry to sustain 12‐13% growth rate; fall in cotton acreage and already huge cotton seed (1/4th of industry size of US$ 2bn) inventory lowers cotton seed demand outlook somewhat. Although increased usage of hybrid rice/vegetables could set this off

Fertilisers: Late monsoons coupled with this huge high priced inventories impacted fertilizer demand in H1FY13E; pressurizing the working capital. Industry to return to normalcy in H2. Key regulatory positive pronouncements to support urea stocks. Complex fertilizers manufacturers to gain on fall in input costs, strengthening INR and likely unchanged retail prices

Pesticidies: While it is likely that Indian pesticide industry growth may be hurt due to less pest incidence and thus less demand, the industry could benefit on change in product mix, rising farm incomes globally and relatively weak INR.

Companies Covered Chambal Fertiliser CMP Rs 67Reco BuyTarget Price Rs 90 Coromandel International CMP Rs 278Reco BuyTarget Price Rs 318 Deepak Fertiliser CMP Rs 130Reco NeutralTarget Price Rs 150 Kaveri Seeds CMP Rs 1179Reco BuyTarget Price Rs 1500 PI Industries CMP Rs 506Reco BuyTarget Price Rs 650 Rallis India CMP Rs 149Reco NeutralTarget Price Rs 150 Tata Chemicals CMP Rs 318Reco BuyTarget Price Rs 400 United Phosphorus CMP Rs 115Reco NeutralTarget Price Rs 135 Gauri Anand (+ 9122 6667 9943) [email protected] Saurabh Rathi (+ 9122 6667 9951) [email protected]

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12 November 2012 / INDIA EQUITY RESEARCH / AGRICULTURE INPUTS SECTOR REPORT

Table of Contents

Investment Rationale ......................................................................... 3

Seeds Industry Overview .................................................................... 16

Fertiliser Industry Overview ............................................................... 22

Pesticides Industry Overview ............................................................ 31

Companies Covered

Chambal Fertiliser ............................................................................... 40

Coromandel International .................................................................. 51

Deepak Fertiliser ................................................................................. 67

Kaveri Seeds ........................................................................................ 81

PI Industries ........................................................................................ 91

Rallis India ........................................................................................... 102

Tata Chemicals .................................................................................... 114

United Phosphorus ............................................................................. 128

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Investment Rationale India has to produce more to eat and also to feed India’s population as per estimates from UN is likely to grow to 1.7bn by 2050 (0.81% CAGR). With population growth, rapid urbanization and dietary shifts, the food production is under immense stress. Rising per‐capita income has led to more consumption of livestock products outstripping growth in the food grain consumption and this trend is likely to sustain over the next decade too. Thus India has to produce more not only to eat but also to feed cattle/poultry. The need to produce more would drive demand for agri‐inputs. Addressing structural challenges to be only gradual Inefficiencies in procurement and distribution, by some estimates results in huge wastage of farm produce (almost 40%) and causes inflation. While policy initiatives (for eg FDI in multi‐brand retail) that address these challenges are progressive, the benefits are unlikely to be instant but long drawn. Thus higher use of agri‐inputs holds the key to increasing productivity in the near term. The opening up of FDI in mutli‐brand retail would increase private expenditure in infrastructure segment and benefit farmers, a stronger tailwind for farm input sector. We also see agri‐input suppliers as key aggregators of farm produce for modern retail (explained ahead). Farm profitability to sustain, Policy environment to continue its support Between FY01‐09; the industry had splendid profits; which is stagnating at present. We expect the government to be cognizant of the rising cost pressures and that is likely to be compensated by way of increases to MSPs (point in case a sharper hike in MSP by 15‐40% in this kharif season; and given the ensuing drop in Tur/Moongh cultivation it has been raised further). The MSP’s for key Rabi crops (Gram, masur, mustard, safflower and barley) too were raised by 12‐20%, which would be marketed in FY13‐14E. Ahead of ensuing state elections possibility of unfavorable policy actions are remote; which means deep P&K subsidy cuts are unlikely and point to increasing MSP’s going forward. Farm input exporters to benefit from firm crop prices Severe drought in US (this season) has impacted key crop production like corn and soybean and the tightness is estimated to continue. Thus global farm income would likely sustain meaningful gains, helped by surging crop prices. This should compel growers to maximize yields and profitability. Higher demand and relatively weak INR to benefit Indian Pesticides exporters’ the most.

Comparative Valuation Matrix CMP ___Adj. EPS (Rs)___ CAGR _____PER (x)_____ _____PBR (x)_____ __EV/EBITDA (x)__ TP Rating

Rs FY13E FY14E FY12‐14E FY13E FY14E FY13E FY14E FY13E FY14E Rs

Chambal Fertiliser 67 8.5 8.3 8.3 7.9 8.1 1.4 1.3 5.3 4.9 90 BuyCoromandel Intl. 278 21.1 26.7 13.3 13.2 10.4 2.9 2.5 9.7 7.7 318 BuyDeepak Fertiliser 130 20.3 26.8 ‐4.1 6.4 4.9 0.9 0.8 4.6 3.4 150 NeutralKaveri Seeds 1179 83.0 99.2 52.9 14.2 11.9 4.6 3.4 12.1 9.6 1500 BuyPI Industries 506 40.6 60.2 37.0 12.5 8.4 3.0 2.3 8.2 9.6 650 BuyRallis India 149 6.8 8.2 24.0 22.0 18.1 4.5 3.8 14.3 11.4 150 NeutralTata Chemicals 318 38.0 42.8 14.1 8.4 7.4 1.1 1.0 5.6 5.6 400 BuyUnited Phosphorus 115 15.2 16.6 7.3 7.5 6.9 1.1 0.9 5.0 4.6 135 Neutral

Source: Company, PhillipCapital India Research

Agri‐input suppliers could play a pivotal role in aggregating farm produce for the modern retail

Further MSP hikes likely. FY14E deep subsidy cuts in P&K subsidy remote

UPL, Rallis and PI to gain the most

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Poor Monsoons, is it still an area of concern? Post monsoon showers this year have lowered the cumulative rainfall deficit to less than 4% of the LPA; which in June was about 44%. India’s 84 important reservoirs are filled to 74% capacity, which is nearly 89% of last year’s storage and 105% of the average of last ten years. Water table levels at 115 BCM is higher than the 10‐yr average of 109 BCM; strong water table alleviates concerns on agri‐input incase of failed monsoon in FY14E. However, contrary to our popular belief that poor monsoons impact agro production or agri‐inputs demand, our findings suggest, that Indian agriculture has gradually become more resilient to the uncertainties in monsoon. Despite monsoons being erratic in the last two decades, India has witnessed record production (food grain CAGR FY01‐12 – 2.3%), improved yields (0.71%) and has robust buffer stocks (82 mmt). Despite the severe monsoon shock (during FY10, FY02, FY00, FY09 and partly in FY07‐08), the fertilizer consumption and food production have been unhurt but increased. The erratic (excess or deficient) rains however have impacted the pesticide consumption the most. Poor monsoons, while are an area of concern, we expect the higher resilience to limit any unprecedented shock either on food production or demand for fertilizers.

Despite deviation in monsoons (compared to lpa), most factors have growing, underpinning the resilience

0

50

100

150

200

250

FY96

FY98

FY00

FY02

FY04

FY06

FY08

FY10

FY12

‐20.0

‐15.0

‐10.0

‐5.0

0.0

5.0

10.0

Food production (lhs) Fertilisers (lhs)Pestisides (lhs) Rainfal (rhs)l

0

20

40

60

80

100

120

140

160

180

FY96

FY98

FY00

FY02

FY04

FY06

FY08

FY10

FY12

‐20.0

‐15.0

‐10.0

‐5.0

0.0

5.0

10.0AgriGDP (lhs) Rainfall (rhs)

Source: Ministry of Agriculture, Dept. of Fertiliser, IMD, PhillipCapital India Research

Crop sowings have improved

0

5

10

15

20

25

30

35

40

Rice Pulses Sugarcane Oil seeds CoarseCereals

Cotton

13th July 2012 20th July 2012 30th Sept 2012

Source: Ministry of Agriculture ,PhillipCapital India Research

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…Increased Irrigation and higher MSPs until have perhaps favored farm sector growth With increase in MSPs, stagnant input costs (seeds, fert, pests) and higher production farm profits have soared between during FY01‐09. The returns from agriculture (which is generally higher than of cost of investments, if crops don’t fail) led to higher demand for farm‐inputs. Rising land prices due to increase in urbanization has led to the extra income (incase of sale) which further led to higher crop input demand.

Net irrigated area has been on the rise Remarkable increase in MSPs of key crops

25

30

35

40

45

50

1988

‐89

1990

‐91

1992

‐93

1994

‐95

1996

‐97

1998

‐99

2000

‐01

2002

‐03

2004

‐05(p)

2006

‐07(p)

2008

‐09(p)

(%)

MSP of Key Kharif & Rabi Crops

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Rs/Qtl

PaddyMaizeMoongCottonSoyabeanWheat

Source: Ministry of Agriculture, FAI, PhillipCapital India Research

Food grain production growth (mmt) Year 2000 10 yr CAGR 1990‐2000 Year 2012** 11 yr CAGR 2000‐2012

Cotton 11.5 1.8 35.2 11.9Rice 89.7 2.1 104.3 1.1Wheat 76.4 3.7 93.9 2.0Maize 11.5 2.8 21.6 5.5Sunflower 0.7 ‐2.5 0.5 0.01 Cereals 192.0 2.3 240.2 2.0Pulses 13.4 ‐0.7 17.2 4.6Oilseeds 20.7 1.2 30.0 5.3Total Food grain 205.4 2.0 257.4 2.2

Source: Ministry of Agriculture, FAI, PhillipCapital India Research

** As per fourth advance estimates

…however farm input costs are rising Despite a bumper crop, farmers in several parts of the country are disappointed as their realizations had fallen below remunerative levels (particularly in H2FY12), in certain cases not even recovering the costs. Reports indicate that prices of paddy fell below MSP all along the eastern belt causing severe distress to farmers. There has been an acute discontent on declining prices of cotton among farmers in Maharashtra. The back and forth policy on export controls on cotton in early March 2012 led to a dramatic decline of raw cotton prices from Rs 4000/quintal to Rs 3000/quintal within a week in several markets of Maharashtra, creating confusion and cries from farmers. The issues of insufficient market access for agricultural produce and an inefficient supply chain leading to low margins for farmers are severely plaguing Indian agriculture today.

In the last decade, maize, oilseeds, pulses production has increased the most over staples

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The labour costs at all India level have risen a sharp 74% in FY12 over FY08. In certain states like Odisha, Maharashtra, Tamil Nadu, AP and Karnataka, the rise has been even sharper between 80‐100% over the same period. Further rise in fertilizer costs (up almost 40%), Diesel and fodder/cattle feed prices have risen a sharp 45‐60% during the same period. As a result of sharp increase in input costs and also land rentals and capitals the farm profits have reduced. However with rise in input costs, labour wages, excess production (reducing bargaining power or opportunity to earn over MSPs), farm profits have been under pressure, so much so it now seems to be a non‐profitable business proposition. However, we expect levers exists that could drive farm profitability over the medium term

Farm inputs: index numbers of wholesale prices All India avg daily wage rate for agricultural labor (base 2004‐05=100)

80

130

180

230

280

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

FertiliserElectricity (Irrigation)PesticidesNon electrical MachineryTractorsLubricantsFodderCattle Feed

All India avg daily wage rate for Agricultural Labour (Rs/day)

98

114

135

163

189

0

50

100

150

200

FY08 FY09 FY10 FY11 FY12

Source: Commission for Agricultural costs and prices, PhillipCapital India Research

Cost components, agriculture is labor centric

Others 7%Insecticide

6%

Fertilisers9%

Seeds8%

Machine labour15%

Human labour55%

Source: Ministry of Agriculture, PhillipCapital India Research

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……rise in farm input costs is threatening farm profitability Between FY01‐FY09 farm profits have improved sharply, helped by increase in MSPs; however since FY10 the profits have been almost stagnating. While we have computed profit estimates for AP region for crops like Rice/Cotton, our readings suggest the profit trend is almost similar all across except for Tobacco. We expect the government to be cognizant of the cost pressures and adequately compensate farmers by way of increases to MSP’s to the extent of 15‐40% as was witnessed in case of Kharif crops this season. Also key Rabi crops to be marketed in FY13‐14E, MSP’s were raised by about 12‐20%.

Profits stagnate: Rice cultivation in AP (Rs/ha) Cotton cultivation (high grade) in AP (Rs/ha)

46,427

24,31924,577

‐

10,000

20,000

30,000

40,000

50,000


Estimated Cost Estimated Profit

48,748

28,23827,742

‐

10,000

20,000

30,000

40,000

50,000

60,000


Estimated Cost Estimated Profit

Cotton cutlivation (high grade) in AP (Rs/ha)

Source: Ministry of Agriculture, PhillipCapital India Research

Assumed operating cost that excludes imputed value of land rent on owner operated holdings. Source: GOI Kharif Reports,Ministry of Agriculture, Agricoop, PhillipCapital India Research Estimates Problem of plenty? How much are we prepared? With stress on increasing agricultural productivity, the production has risen, but the agri‐marketing hasn’t kept pace with increase in production. FCI (a government undertaking and created with a purpose to provide price support to the farmers) has its godowns brimming, as stocks are far in excess of the prescribed buffer stock requirements. Thus storage and management of the accumulated surplus are posing problems for the agency. Its an irony that India has huge surpluses in godowns and simultaneously witnessing inflation. FCI procurements from open market has been increasing FCI effectively safeguards the farmers interest by procuring grains at MSPs (atleast sets the floor). During harvest or at times of bumper production, prices are often soft; FCI procurement thus safeguards and limits any distressed selling by farmers. Given the sustained rise in MSP’s it has made economic sense for farmers to sell their produce to the government. FCI’s procurement is open ended and so far it has been procuring about 26‐28% in 2004‐2008 of the total grain production; however since FY09 the procurement levels have increased to over 30%. In FY11 the procurements stood at 34% and in FY12 it has been > 34%; indicating surplus production than required.

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Production & Procurement on rise

150

155

160

165

170

175

180

185

190

195

200

205

FY07 FY08 FY09 FY10 FY11 FY12

0%

5%

10%

15%

20%

25%

30%

35%

40%Foodgrain Production (in mmt) LHS

Procurement by FCI (%) RHS

Source: Ministry of Agriculture, Agricoop, PhillipCapital India Research

Inventory levels, manageable though, on the rise FCI’s procurement of foodgrains is for maintaining buffer stocks and ensuring national food security and distribution under PDS (public distribution schemes targeted for poor strata of population) and other schemes like Mid‐Day‐Meal, Antyodaya Anna Yojna etc. Of the 198 mmt of grain production, almost about 50 mmt is earmarked for such schemes; the buffer norms and strategic reserve are a paltry 2.5 mmt (Rice and Wheat) and inventory comparison to the buffer norms are thus meaningless. Of late the procurements have been higher than prescribed buffer stock requirements + PDS grants. The storage and management of the accumulated surplus are posing problems for the agency. Procurements on the rise, much higher than required (in mmt) Figs in mmt Procurement

in June 2012 PDS Scheme

RequirementBuffer norms

Strategic Reserves

TotalInventory

cut off

Excess procurement

A B C A+B+C %

FY07 25 34.95 2.0 0.5 37.5 ‐33.0FY08 31 37.93 2.0 0.5 40.4 ‐24.1FY09 52 34.66 2.0 0.5 37.2 39.5FY10 60 38.91 2.0 0.5 41.4 45.8FY11 59 45.87 2.0 0.5 48.4 22.5FY12 82 51.62 2.0 0.5 54.1 31.6


FCI’s inventory level on the rise (figs in mmt)

0

15

30

45

60

75

90

Jan Feb March April May June July Aug Sep Oct Nov Dec

2008 2009 2010 2011 2012

Source: Ministry of Agriculture, FCI, PhillipCapital India Research

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Storage capacity addition lags increase in procurement – capacity additions to address storage issues Against the procurement of 71 mmt the storage capacity is about 64 mmt; the gap met through by hiring private warehouses. The procurement CAGR at 23% (FY07‐12) has much outpaced the addition to storage CAGR at 3%. However, we gather the FCI is adding capacities by 16 mmt over next three years. With capacity augmentation over next three years the storage is likely to be better balanced. Also considering the inadequacy of storage facilities currently available with Government agencies, the government is trying actively to associate private interests to enhance storage capacity, with adequate support of bank credit and assured return over the effective life time of the godown. FCI's storage capacity Capacity FY05 FY12

Covered Owned 12.91 13.01Hired 10.46 17.21Total 23.37 30.22

CAP ( Cover and Plinth) Owned 2.25 2.63Hired 0.41 0.75Total 2.66 3.38Grand Total 27.03 33.6

Total storage capacity 50.4 63.82


FCI's storage capacity in mmt

Storage capacity at present 63.82Capacity additions March'12 3 Dec'12 5 Over next two years 8 total 16

Total capacity in next 3 years 79.82


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Structural growth drivers for farm input sector A. India needs to produce more to eat According to the estimates, during the next 20 years, the world's population will rise from 6.3bn to more than 8bn leading to a 50% increase in demand for food and 50% increase in demand for energy. Demand growth will also be compounded by peoples' demand for higher standards of living. Furthermore, land under cultivation is facing pressure in the wake of rapid urbanization, erosion, etc. Shortage of area under cultivation, increasing population, higher demand from emerging economies like China and India, use of land to produce bio fuels and feeds for animals, etc., has led to food shortage and higher farm food prices. With rise in per‐capita income, food demand has gone up and has led to sustained higher food prices (refer chart indicates prices well above the historical standards despite bumper crop production). The food demand could further go up in light of the enactment of National Food Security Bill and the grains requirement therein, which could likely be introduced as a populist measure ahead of GE in 2014E. Declining per capita land availability

3

4.4

6

7.54.3

3

2.21.8

0

2

4

6

8

1960 1980 2000 2020

Popu

lation

Rs bn

0

1

2

3

4

5

Arable land

per person (ha)

Population, bn (lhs) Arable land per person, hectares (rhs)

Source: Industry, PhillipCapital India Research

Supply/Demand gap for food items rising projected demand of food in India India's population by 2050 (In Bn)

‐50

‐40

‐30

‐20

‐10

0

10

20

30

40

Rice

Whe

at

Total cereals

Pulses

Edible oil

Sugar

(mmt) FY10 FY21

0

20

40

60

80

100

120

Rice

Whe

at

Pulses

Edible oil

Sugar

(mmt) FY00 FY11 FY21

1.00

1.25

1.50

1.75

FY10 FY12 FY20 FY50

Source: Working paper on food projections in India, Ministry of Agriculture, PhillipCapital India Research

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B. India needs to produce more also to feed the livestock Faster growth in per capita incomes and urbanization have triggered shift towards high value commodities like fruits, vegetable, oil, dairy, poultry products and eggs. The growth in consumption of these products has outstripped the consumption growth in cereals. As per planning commission estimates the horticulture/live stock and fisheries consumption will continue to outstrip the consumption growth in cereals over the next decade too. To feed the cattle/livestock, its natural the feed crop demand will rise. In the absence of increase in land availability the feed crops are likely to compete with food crops thus pushing crop prices higher. By some estimates, livestock’s are best insurance against vagaries of monsoon and as such account for 18~25% of small and marginal farmers income. Bullock power continues to be the main source of draught power for agricultural operations and transport of agricultural products to nearby markets and is likely to remain so for a long time to come. Further, agricultural productions get valuable organic manure provided by the livestock. Given its Consumption (mmt) FY12 CAGR 2007‐12

Rice 104.32 2.2Wheat 93.9 4.4Cotton (mn bales) 35.2 9.2Meat* 4.10 15.8Egg* 0.65 6.5Fruits* 0.08 6.2Vegetables* 0.14 11.1

Source: *FY11; Ministry of Agriculture, PhillipCapital India Research

C. Cost inflation indicates food price inflation to sustain While food inflation has risen, a distinct feature has been sustained price pressure in protein rich items (pulses, milk, fish, meat and eggs). The inflation in protein rich items has generally exceeded both headline (WPI) inflation and inflation in primary food articles. (Source RBI)

Commodity prices well above the historical standards despite bumper production….. WPI for rice, wheat, pulses and food grains rising In FY13

RICE

140

150

160

170

180

190

200

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009 20102011 2012

WHEAT

140

150

160

170

180

190

200

210

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009 20102011 2012

PULSES

140

160

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200

220

240

260

280

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009 20102011 2012


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FRUITS & VEGETABLES

110

130

150

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190

210

230

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009 20102011 2012

Eggs, Meat & Fish

110

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190

210

230

250

270

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 2010 2011 2012


D. Yields have to improve, farm inputs to aid growth Despite a huge land mass dedicated to agriculture (almost 48%), India’s overall productivity is relatively low. Though India ranks top in acreage and production of key crops (like Rice, Wheat, Pulses, Cotton, Sugarcane), its yield (productivity per hectare) is below world average. Farm inputs have helped sustained crop production increases; with further penetration yield improvements are likely. Concerted efforts are being made to bridge the prevalent yield gaps through technology development and dissemination as well as adoption of yield‐enhancing agronomic practices and crop varieties, by following region and crop specific initiatives. Use of high yield varietal crops, seed replacements rates are on the rise that would drive yields and thus profits going forward. We believe the favourable trends in farm incomes, rising prices and rising awareness among farmers will likely drive multi‐year volume growth in these segments. We expect agrochems to grow volumes at 10‐12% CAGR in the next 3‐5 years, while seeds should grow higher at 15‐18% CAGR. Fertiliser growth will likely be lower in the near term due to the high base and steep price increases in phosphatic fertilisers. The spend on agri inputs is far below the world averages (particularly in seeds and pesticides) and thus implies high potential for growth in both volume and value terms.

Scope for yields to improve Rice Production Yield Wheat Production Yield Maize Production Yield

Rank Country mmt/Hectare Rank Country mmt/Hectare Rank Country mmt/Hectare

1 China 6.6 1 China 4.74 1 USA 10.342 India 3.2 2 India 2.91 2 China 5.263 Indonesia 4.99 3 Russian Federation 2.32 3 Brazil 3.7110 Japan 6.5 4 U.S.A. 2.98 6 India 2.0015 USA 7.9 13 U.K. 7.93 13 Italy 8.60

World Avg 4.32 World Avg 3.04 World Avg 5.16


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India's Position in World Agriculture Item India World % Share India's Rank Next to

Area (mn hectares) Total Area 329 13442 2.4 Seventh Russian Federation, Canada, U.S.A., Land Area 297 13009 2.3 Seventh Russian Federation, China, U.S.A., Arable Land 159 1411 11.3 Second U.S.A.

Population in mn Total Population 1181 6750 17.5 Second China Agriculture 583 2617 22.3 Second China

Crop Production (mmt) Total Cereals 267 2521 10.6 Third China, USA Total Pulses 15 61 24.6 First

Fruits & Vegetables (mmt) (A) : Vegetables & Melons 90 932 9.7 Second China (B) : Fruits excluding Melons 67 580 11.6 Second China

Commercial Crops (mmt) (A) : Sugarcane 348 1736 20.1 Second Brazil (B) : Tea 0.81 3.9 20.7 Third China, Turkey

(C) : Cotton(lint) 3.77 22.85 16.5 Second China


E. Contract manufacturing – Agri input industry could be large aggregators of farm produce for modern retail Inefficiencies in procurement and distribution, by some estimates results in huge wastage of farm produce (almost 40%) and causes inflation. While policy initiatives (for eg FDI in multi‐brand retail) that address these challenges are progressive, the benefits are unlikely to be instant but long drawn. Thus higher use of agri‐inputs holds the key to increasing productivity in the near term. The opening up of FDI in mutli‐brand retail would increase private expenditure in infrastructure segment and benefit farmers, a stronger tailwind for farm input sector. The flaws in the retail food marketing may be remedied through improved public distribution system and encouragement of active private retail chains, reforming the mandi system related to taxes, fees and commissions. We expect the government primary agenda is to address the structural issues in the farm sector and reduce consumer inflation. The Cabinet has already Okayed FDI in multi‐brand retail; which due to political compulsions is under hold and a favorable review is soon likely. Our Retail sector Analyst (Abhishek Ranganathan) has pointed that successful partnership (like McCain foods (procurers for McDonalds), the farmers and McDonalds and tomato growers in Punjab with Pepsi foods has led to huge economic gains for the farmer/grower community. With the changing demographic profile (rising incomes, rising nuclear family) the need for quality food is gaining importance. Thus to meet the demands of changing India, such partnerships are expected to grow immensely in the days ahead. Given companies in farm‐input space are actively engaged with the farming community, we view this as an opportunity for the farm input companies in India. Agri input industry could emerge as large aggregators of farm produce for modern retail point in case Tata Chemicals – Rallis JV that is procuring pulses to take forward to the market. Deepak fertilizers has invested in Desai fruits and vegetables that exports banana and is at present exploring opportunity to market in India. F. Small ownership, falling farm profits and rising land prices to result in consolidation Though latest estimates are unavailable, we note India’s land holding is fragmented. Marginal farmers (Avg size of holdings about 0.38 hectares) account for 65% of the total holdings of 129 mn people and no.of farmers have risen from 75 to 84 mn. Also 65% of the total area is owned by people whose average size of holdings is not more than 2.5 hectares thus making mechanization difficult and expensive proposition. However, we note with stressed farm profits (given lack of mechanization, less bargaining power) and rising land

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prices small farmers find it attractive to sell their holdings to prosperous farmers who are willing to consolidate their land holdings. The contiguous land availability unfolds opportunities towards high end mechanization, lessen dependence on monsoon that would drive profits and brightens prospects for contract manufacturing tie‐ups.

Category of Holdings __Number of Holdings (PPL in mns)__ ______Area (mn hectares) _______ ___Avg Size of Holdings (hectares)___ 2000‐01 2005‐06 2000‐01 2005‐06 2000‐01 2005‐06

1 2 3 4 5 6 7 Marginal (< 1 hect) 75 84 30 32 0.4 0.38 (62.3) (64.8) (18.7) (20.2) Small (1 to 2 hect) 23 24 32 33 1.42 1.38 (19.0) (18.5) (20.2) (20.9) Semi‐Medi (2 to 4 hect) 14 14 38 38 2.72 2.68 (11.8) (10.9) (24.0.) (23.9) Medium (4 to 10 hect) 7 6 38 37 5.81 5.74 (5.5) (4.5) (24.0) (23.1) Large (>10.0 hect) 1 1 21 19 17.12 17.08 (1.0) (0.8) (13.2) (11.8)

All Holdings 120 129 159 158 1.33 1.23


G. Farm input exporters to benefit from firm crop prices Global agencies like OECD and FAO estimate food demand to grow by 38% by 2050 in developing world. FAO further forecasts, even assuming that if population doesn’t grow, the world cereal production has to increase by 50% from current levels to 3 bn mmt. Increases to Per capita income in Asia and Latin America would result in dietary shifts towards high protein foods. Thus pushing crop prices and farm incomes higher, driving demand for farm input industry. FY13E to be likely strong ‐ The severe U.S. drought has led to the sharpest declines in corn and soybean conditions since 1988 over the past two months, supporting strong price increases across most major crops. Expectations for the continuation of tight supply/demand balances for major crops have led to significant increases in 2013/14 crop futures, supporting prospective grower cash margins well above the historical average. It’s expected that growers will respond to compelling economic incentive to maximize yields and profitability in FY13/14E; a stronger tailwind for farm input suppliers.

Soya bean/corn prices on rise Rising crop growers cash margins

0

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800

900

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18

Corn Soybeans Wheat

FY03‐10 Avg

FY12‐13 Futures

FY13‐14 Futures

Source: Bloomberg, PhillipCapital India Research

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Comparative Agri Input Overview Seeds Fertilisers Pesticides

Application in crop life cycle

Directly planted on the field or sown inside first until they germinate and then planted on the field.

Fertilisers are sprayed at various intervals, at times when seed is sown, when roots have grown and also when its leaves grow.

Pesticides are sprayed before pre germination and also post germination. At times seeds prior to planting are also coated/sprayed with pesticides that makes seeds less vulnerable to pests.

Macro opportunity Seed is basic input for enhancing agricultural production and productivity. Efficacy of other agri‐inputs is largely determined by the quality of seed. Seed quality is estimated to account for 20‐25% of productivity. The Indian seed industry valued at US$ 2 bn has been growing at a CAGR of 12%. It has made considerable progress in hybrid varieties of many crops, such as cotton, corn (maize), pearl‐millet (bajra), sunflower and vegetables. Estimates point to a 8% CAGR and industry size rising to ~ US$ 3bn in next 5 yrs.

Fertiliser industry earns revenues of about US$ 30bn, volume growth hitherto has been about 5.5% and estimates point to consumption growth rate moderating to 3% going forward. Almost over a third of the fertiliser consumption is imported, where margins are wafer thin. A small shift in product mix (from trading to manufacturing) can explode margins/earnings for P&K fertilisers. As for Urea near term piecemeal reforms, retail price hike could enhance earnings. However the broad story remains urea price decontrol, which in our view is a compulsion than a choice.

Pesticides are essential tools that reduce wastage (crop wastage by some estimates is about US$ 17 bn) and improve yields (lower compared to world average. Domestic pest industry is valued at Rs 100 bn (comprises of 50% exports) and given its lower usage is likely to grow at about 12‐14% over next few years. This segment is intensely competitive with branding and product differentiation being key to success.

Monsoon & its impact Seeds are a necessity thus is least impacted

Rainfed land consumes only a third of the fertilisers and consumption is largely less impacted due to below normal monsoon.

Erratic monsoon impacts demand, however companies that have exposure to exports are impacted less.

Quarterly variation

Regulation Remote regulatory threat except for quality check. Biotechnology only approved in cotton, approval for Bt brinjal is impending.

P&K retail prices are decontrolled, however as about 40% of the revenues are earned by way of subsidies, the industry is vulnerable to policy actions. Urea is heavily controlled as of today.

The Insecticides Act, 1968 and Insecticides Rules, 1971 regulate the import, registration , manufacture, sale, transport, distribution and use of pesticides with a view to prevent risk to living beings. All ipesticides have to necessarily undergo the registration process. Thus, technically all pesticides are those substances that are listed on the "Schedule" of the Insecticides Act, 1968.

Key risks Seed production is dependent on weather conditions and unfavourable weather can affect the quality and quantity of production. Also, due to adverse weather conditions, there may be pest attacks, affecting the output and hampering growth. Besides this production has to be planned an year in advance, a lower offtake (due to competition/weather) raises inventory related risks.

High external dependence for feedstocks and finished products raises risks of 1/higher subsidy and 2/ production sustenance

Intense competition, erratic monsoon, product acceptance and movements in INR. Also longer term risks include global warming and pest resistant seed usage

Financials Margins Seed plays earn overall margins of

20~25%; margins in vegetables and fruits are higher relative to cotton

Absolute margins for Urea hovers around Rs 2000 ~ 2800/mt; while that for phosphatics varies from Rs 1500 ~ Rs 3000/mt

Pest makers margin vary between 15~17%; exporters earnings varies with changes to currency

Return ratios Its asset and working capital light and almost debt free businesses thus return ratios are upwards of 30%

Most urea plants are fully depreciation, out back of the envelope working suggests returns could be about 18~20%. Phosphatic co., typically have higher asset turns (less gross block intensive) and thus return ratios are hover 22~30%

Return ratios vary from 18~25%; among coverage companies Rallis/PI earn decent recents; however due to expensive low margin acquisitions and a relatively lengthy working capital cycle, UPL’s return ratio are at the lower end of the band.

Source: Dept. of Agriculture, Dept. of Fertiliser, Agricoop, PhillipCapital India Research

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Seeds Industry Overview Critical input to improve yields/farm productivity: Seed is a critical and basic input for enhancing agricultural production and productivity in different agro‐climatic regions. Efficacy of other agricultural inputs such as fertilizers, pesticides and irrigation is largely determined by the quality of seed. Seed quality is estimated to account for 20‐25% of productivity. Thus seeds hold the key for increased productivity. Coupled with biotechnology, quality hybrid seeds offer tremendous opportunity for improving the current low yields in Indian agriculture. The notable seed companies in India include Pioneer, Mahyco, Monsanto India, ProAgro, Syngenta, Nuziveedu, Kaveri, JK, Advanta, Bayer, Vibha etc. Industry could be over US$ 3bn over next 5 years (CAGR of 8%): The Indian seed industry over last five years has been growing at a CAGR of 12%. It has made considerable progress in the development of high‐performance hybrid varieties of many crops, such as cotton, corn (maize), pearl‐millet (bajra), sunflower and vegetables. According to International Seed Federation, World commercial seed market is worth about US$ 43 bn. India is the fifth largest and the domestic seed market is assessed to be about US$ 2 bn. The Indian seed industry by some rough estimates has potential to grow to US$ 3 bn over next five years. Global area of biotech crops and estimated value of seed industry in 2011 Rank Country Area

(mn hectares)

Value (US$ bn)

Biotech Crops

1 USA 69.0 12 Maize, soybean, cotton, canola, sugarbeet, alfalfa, papaya, squash 2 Brazil 30.3 2 Soybean, maize, cotton 3 Argentina 23.7 0.6 Soybean, maize, cotton 4 India 10.6 2 Cotton 5 Canada 10.4 0.55 Canola, maize, soybean, sugarbeet 6 China 3.9 9.5 Cotton, papaya, poplaar, tomato, sweet pepper 7 Paraguay 2.8 NA Soybean 8 Pakistan 2.6 NA Cotton 9 South Afric 2.3 0.37 Maize, soybean, cotton 10 Uruguay 1.3 NA Soybean, maize 11 Bolivia 0.9 NA Soybean 12 Australia 0.7 0.4 Cotton, canola

Source: ISAAA, ISF, PhillipCapital India Research

Saved seeds dominate, albeit the increase, hybrids underpenetrated: In value terms, the growth has come from increased adoption of hybrid and genetically modified (GM) seeds. The major contributing factor to the growth has been the increased adoption of Bt cotton. Another significant factor is increased hybrid corn use, which has seen recent growth in both volume and value. Other hybrid crops such as hybrid rice, pearl millet, sunflower and vegetables have also seen moderate growth. The volume growth in the seed industry has mainly come through increased seed replacement rates (SRR). The penetration of commercial open‐pollinated, hybrid and GM seeds has increased from 25% of total seed requirements to about 30%. However, the remaining 70% is still under farmer‐saved seeds.

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Requirement & Availability of Seeds in India Year Requirement Availability Surplus (+)/Deficient (‐)

2004‐2005 110.83 132.27 21.442005‐2006 107.08 140.51 33.432006‐2007 128.76 148.18 19.422007‐2008 180.74 194.31 13.572008‐2009 207.28 250.35 43.072009‐2010 249.12 279.72 30.62010‐2011 290.76 321.36 30.62011‐2012 330.41 353.62 23.21

Source: DAC, Seeds Division, PhillipCapital India Research

Distribution of certified quality seeds has led to increase in food grain production in mmt 2005‐06 2006‐07 2007‐08 2008‐09 CAGR (2001‐2009)

Crop‐wise Production Cereals 190.8 199.8 212.1 215.7 2.16Pulses 13.4 14.2 14.8 14.6 3.48Oilseeds 28.0 24.3 29.8 27.7 5.23Cotton 18.5 22.6 25.9 22.3 11.21Potato 23.9 22.2 28.5 34.4 5.45Total foodgrain 204.2 214.0 226.9 230.3 2.24

Crop‐wise Distribution of Certified/ Quality Seeds in mn quintal Cereals 8.7 11.0 12.4 14.7 12.02Pulses 0.7 1.0 1.3 1.4 18.01Oilseeds 2.4 2.7 3.4 4.0 15.57Cotton 0.3 0.2 0.2 0.2 ‐1.73Potato 0.5 0.5 0.5 1.1 4.84Total 12.7 15.5 17.9 21.6 12.14


Hybrid seeds penetration rate – Rice penetration can drive seed industry value Crops Hybrid Penetration (%) Key markets

Cotton 88.0 Maharashtra, Gujarat, AP Corn 55.0 AP, Karnataka, Bihar Rice 5.7 UP, Bihar, WB Sunflower 75.0 Karnataka, AP, Maharashtra Sorghum 40.0 Maharashtra, Karnataka Pearl millet 60.0 Rajasthan, Maharashtra, Gujarat


Cereals dominate gross sown area: The gross crop area in India is about 140 mn hectares, of which the majority is cereal crops such as rice, wheat, corn, jowar, bajra, pulses and oil seeds. Other key crops are cotton, sugarcane and vegetables. In volume terms, the seed industry is dominated by open‐pollinated rice and wheat from PSU. Cotton, corn and vegetables are among the largest segments by value, as a high % of cultivated are under cultivated area under these crops is hybrids. The hybrids are dominated by the private sectors.

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Key Crops BT cotton has transformed cotton production in India: India is the second largest producer of cotton, thanks to introduction of BT; the production has almost tripled in the last decade to 33.43 mmt. In 2011, plantings of Bt cotton in India surpassed the historical milestone of 10 mn hectares (10.6) for the first time, and occupied 88% of the record 12.1 million hectare cotton crop. The principal beneficiaries were 7 million farmers growing, on average, 1.5 hectares of cotton. Historically, the increase from 50,000 hectares of Bt cotton in 2002, (when Bt cotton was first commercialized) to 10.6 million hectares in 2011 represents an unprecedented 212‐fold increase in 10 years. India enhanced farm income from Bt cotton by US$9.4 billion in the period 2002 to 2010 and US$2.5 billion in 2010 alone Brookes and Barfoot, 2012, Forthcoming) . Thus, Bt cotton has transformed cotton production in India by increasing yield substantially, decreasing insecticide applications by ~50%, and through welfare benefits, contributed to the alleviation of poverty of 7 million small resource‐poor farmers and their families in 2011 alone. Approval of Bt brinjal (eggplant) is pending in India whilst the Philippines is planning for an approval in 2012/13 with a view to benefiting from the substantial reductions in pesticide applied to this very pest‐prone but popular vegetable.

Rise in yield & production of cotton after application of BT cotton

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Use of hybrid seeds has doubled Corn production in the last decade Corn is the 3rd largest cereal crop grown after rice and wheat in India. Corn acreage is about 9 mn hectares, the third largest after rice, wheat in cereal crops. The demand for corn is continuously growing due to population growth and growing demand for poultry products – corn is the most important feed for poultry industry. Though the area under corn has grown by just about 2.5% in the last decade, the production has doubled to 22 mmt mainly due to use of higher yielding hybrid seeds. Hybrid rice penetration is just about 5% Rice is one of the few crops that’s grown round the year in India. It has the largest acreage under cultivation (45 mn hectares); and production could likely be ~ 104 mmt in FY13E. While we are the second largest producer of Rice the yields are half the global average. And that is because almost 95% of its ~ 45 mn hect of rice areas grows traditional high‐yielding varieties (i.e use of saved or varietal seeds), compared to only about 30% in China, the biggest rice grower, whose use of hybrid technology has boosted average yields to more than five tonnes a hectare. In India yield per/hectare has improved by 18% in the last decade; however it is stagnating over the last 5 years. Rice is a water intensive crop and only 55% of the acreage under cultivation is irrigated, partly explaining the lower yields and thus production.

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Rice yields though up 18% in the last decade, yields are stagnating over the last 5 years

1.2

1.4

1.6

1.8

2.0

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2.4

2000‐01

2001‐02

2002‐03

2003‐04

2004‐05

2005‐06

2006‐07

2007‐08

2008‐09

2009‐10

2010‐11*

2011‐12**


While Cotton seeds account for 40% of the seed industry (about US$ 2bn); it accounts for ~ 1% in volume terms. With more penetration of hybrid rice it could well become the largest (presently about Rs ~ 4 bn against cotton ie. about Rs 30 bn). Reports indicate that the union government is aiming to increase the area under hybrid rice cultivation to 25% of all rice cultivated area by 2015. Demand for hybrid vegetable seeds to rise India is the second largest producer of vegetables. This segment however is at present dominated by varietal – saved seeds. Hybrid seeds have increased acceptance in tomato, watermelon, okra etc. Vegetable seeds account for about 12% of seed industry in value terms; however given increased acceptance the share is expected to go up. India is the second largest producer of Brinjal or Eggplant and approval for BT technology, though likely, is pending.

Crop share in volume terms Crop share in value terms

Corn, 7Cotton, 1

Rice, 45Wheat, 32

Vegetables, 0.7

Others, 14.3Corn, 11

Cotton, 26

Rice, 18Wheat, 9

Vegetables, 12

Others, 24


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Rising seed replacement rate, consolidation to drive industry growth: While replacement of seeds have picked up, it’s still very poor in dominant crops like Rice and Wheat. With proven results on use of hybrids, there is an inclination to move from open‐pollinated varietals to hybrids and this could drive demand for seeds going forward. Seed replacement rate though improved it is still very low in cereals

0

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100

Corn

Cotton

Pearl millet

Sunflow

er

Vegetables

Sorghum

Rice

Wheat

%

Source: Ministry of Agriculture, Seed Division, PhillipCapital India Research

Germplasm or the genetic wealth is most vital asset for any seed company. To have the germplasm base and protect IPRs seed companies have to own huge land bank, invest in good infrastructure and retain skilled manpower (both at the lab and the fields). With increasing competition from MNC’s, rising land prices and labour costs and with not adequate protection to IPR’s ‐ early stage seed companies with strong R&D have given up to acquisitions. To sight some examples – Dupont acquired two cotton seed producing companies (Nagarjuna and Nandi seeds), Advanta acquired Unicorn and Golden vegetable seed producers and Nuziveedu acquired cotton and corn producers Pravardhan and Yaaganti seeds. Fertiliser companies to offer a bouquet of products and services to farmers are looking to enter the high margin seeds segment. We expect consolidation to drive growth and thus value for this industry forward.

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Key seed players snapshot Kaveri Nuziveedu JK Seeds Advanta India Monsanto India

About the company Kaveri started off with seed production of public bred varieties of Corn, Pearl millet and Rice and subsequently also took up product distribution for a leading seed MNC. Its first ever proprietary private corn hybrid introduced in South India had an edge over other existing varieties in terms of yield. This mega success inspired it to venture into value added breeding and subsequently in 1986, evolved into a bigger entity under the name of kaveri seeds. It went public in Nov 2006. It then diversified into proprietary hybrid seeds of other crops such as Sunflower, Pearl Millet, Sorghum, Cotton and Rice.

Nuziveedu Seeds Limited operates as India's largest hybrid seed company. It is also the world’s third‐largest producer of cotton seed with revenues more than Rs. 6bn last year. It offers cotton, sorghum, maize, sunflower, pearlmillet, vegetables, and paddy products. Markets its products through a network distributors and dealers, as well as sub‐dealers. The company was founded in 1973 and is based in Hyderabad, India. The company has its presence in 17 states and markets approximately 350 varieties of seeds products to more than 5.5 million farmers across the country.

JK Agri Genetics, an erstwhile division of JK Tyre was established in 1989 with its headquarters at Hyderabad, AP. The division is concentration on R&D, production, processing and marketing of hybrid seeds.

Advanta India is Associate company of United Phosphorus Limited a large Indian Agrochemical Company. It is the holding company for the global business of Advanta. Advanta utilises with the Molecular Marker Technology in some crops, while building up value added biotech traits through seeds. The company has an outstanding base, both in terms of its market share in key crops and its proprietary products and expertise. Advanta is now embarking upon a very aggressive growth strategy. While organic growth will be a key factor in this, strategic acquitions will play a crucial role in achieving our objectives set for the next five years.

Monsanto India Limited (MIL) ‐ a subsidiary of the Monsanto Company, USA ‐ is the only publicly listed Monsanto entity outside USA. MIL endeavors to boost crop productivity through its advanced research in maize cultivation, access to a wide library of global maize germplasm, breeding technology and techniques, new high‐yielding hybrid seeds, best‐in‐class manufacturing facilities, extensive agronomic activities and on‐farm technology development.

Key Products Hybrid corn, sunflower, bajra, sorghum market share about 12‐15%. Also gaining market share in cotton, currently ~ 5%

BT Cotton (claims to hold 40% market share); maize, paddy tomato and other vegetables

Hybrid cotton, Bajra, Paddy, Maize and vegetables

Cotton, Maize, Millet, Mustard, Rice, Sunflower and vegetables

MIL focuses on maize (Dekalb®, India's largest selling hybrid maize seed brand) and agricultural productivity (Roundup®, the world, as well as India's largest selling glyphosate herbicide).

Key Brands Jadoo, Jackpot Mallika & Bunny (BT cotton & maize hybrid) JK Dekalb and Roundup herbicide Revenue 2.34 bn ~ Rs 10 bn Rs 1.2 bn Rs 1.39 bn Rs 3.62 bn PAT 0.425 bn ~ Rs 3 bn Rs 0.1 bn Rs 0.14 bn Rs 0.42 bn Market Cap Rs bn 16 Unlisted 1.6 13.6 10.9 Revenue break up Seeds ‐ 90%; Micro nutrients ‐ 10% BT Hybrid cotton seeds Rs 8 bn and other

crops worth Rs 2 bn Seeds 94 %, others 6% Hybrid Seeds 100% Seeds 69%, Agri Chem 29%, Others

1.5%

Share holding ‐ Promoters 65.05 unlisted 41.27 65.35 72.15 ‐ DII 10.81 0.05 ‐ 3.58 ‐ FII 3.43 ‐ 17.55 0.14 ‐ Others 20.71 58.68 17.1 24.13


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Fertiliser Industry Overview Chemical fertilizers have played an important role in making the country self reliant in food grain production. The role of Government of India has been significant as it has been consistently pursuing policies conducive to increased availability and consumption of fertilizers at affordable prices in the country. It is for this reason that the annual consumption of fertilizers, in nutrient terms (N, P & K ), has increased from 0.07 mmt in 1951‐52 to ~ 28 mmt in FY11 and per hectare consumption, has increased from less than 1 Kg in 1951‐52 to the level of 135 Kg now. Capacity stagnates; consumption and thus imports rise It is a well known fact that India lacks completely in Potassic (K) resources and meets 90% of phosphatic (P) requirements through imports of products or raw material. Urea (N) is the only fertilizer, the requirement of which is largely (around 80%) met through indigenous resources. Even in urea production, RLNG and crude oil which refines Naphtha & FO/LSHS are imported, the indigenous production can be considered to be partially import dependent. Over the years, the consumption of fertilizer in the country has risen steadily, while the indigenous production of fertilizers has not increased likewise to meet the growing requirement mainly due to raw materials / inputs limitations. There has been hardly any investment in urea sector in last decade except for few revamp and modernization been carried out by few urea units after the Government notified IPP linked New Investment Policy in 2008. Further, the indigenous capacities for phosphatic fertilizers, especially DAP remain underutilized due to raw material constraints and their international pricing levels. However overall consumption has improved by 6.8% during FY07‐12; given stagnant capacities, dependence on imports have increased. India’s imports accounts for 15 ‐40% of global trade across products. India's share of import in global trade

Urea, 38%

Phos. Acid, 12%Rock, 8%

MoP, 27%

DAP, 15%

Source: Dept. of Fertilser, FAI, PhillipCapital India Research

Capacity stagnation inflates subsidy bill Given stagnant capacities, India is, becoming more and more import dependent in phosphatic and potassic sector and the gap between production and consumption of urea is on the rise too. The increasing international prices of inputs as well as finished fertilizers are making the growing fertilizer subsidies unsustainable. Fertiliser subsidies have increased to Rs 742 bn in FY12

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Subsidy trend with break up into indigenous and imported fertiliser Subsidy Rs Bn FY07 FY08 FY09 FY10 FY11 FY12

Indigenous P&K 66 103 330 160 207 198

Imported Urea 51 99 130 70 93 175

Imported P&K 36 66 326 235 209 166

Indigenous Urea 127 165 180 176 151 203

Total 280 433 995 640 658 742

Source: Dept. of Fertiliser, FAI

International fertiliser prices scaling up

220 215258

625

460

370

490

290 294

492

907

404

500

612

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900

1000

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MOP CFR DAP CFR

246 256

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495

278321

505

150 140 133 133 131 130 130

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UREA FOB OMIFCO JV FOB


Fertiliser demand to compound 3% during FY13‐17E The report of working group for XIIth plan, estimates overall fertiliser demand to compound by 3% during FY13‐17E. As SSP supplies two important nutrients (sulphur and phosphorus) and given its attractive pricing, on a low base is likely to see maximum growth of about 8.5%. SSP growth would be followed by growth in MOP and Urea. Other reports (FAI, CRISIL) also supports the estimates by the working group. All India Demand Projections of Fertilizer Products – FY13 to FY17 (figs in mmt) Urea DAP SSP NP/NPKs MOP* Others Total

2012‐13 30.35 11.56 4.29 10.29 4.20 0.95 61.632013‐14 31.19 11.78 4.68 10.58 4.34 0.98 63.552014‐15 32.03 12.00 5.09 10.86 4.49 0.98 65.452015‐16 32.86 12.21 5.51 11.14 4.64 1.00 67.372016‐17 33.68 12.41 5.95 11.42 4.79 1.00 69.25CAGR (%) (FY13 to fY17) 2.6 1.8 8.5 2.6 3.4 1.3 3.0


Projected overall fertilser consumption (figs in mmt) Urea DAP SSP NP/NPKs MOP* Others Total

2012‐13 30.35 11.56 4.29 10.29 4.2 0.95 61.632013‐14 31.19 11.78 4.68 10.58 4.34 0.98 63.552014‐15 32.03 12 5.09 10.86 4.49 0.98 65.452015‐16 32.86 12.21 5.51 11.14 4.64 1 67.372016‐17 33.68 12.41 5.95 11.42 4.79 1 69.25

2.6 1.8 8.5 2.6 3.4 1.3 3


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Policy actions imperative to curtail subsidies Archaic policy regime, regulated poor returns did little to attract investments in the sector, as a result imports and thus subsidies surged. To reduce subsidies and enhance capacity expansion, the Government notified favourable policies like NBS (Nutrient Based Subsidy) for P & K fertilizers and incentivized efficient urea producers for augmenting urea capacities. The urea investment policy for Greenfield/Brownfield did little to attract investments given higher capital costs and the absence of firm allocation of long term gas at a particular price level. A revisit to the old investment policy was inevitable and a GoM (Group of Ministers) have now approved a new investment policy for urea that suggests linking gas prices to urea floor realizations. New Investment Policy for Urea expansions could attract required investments • GoM approves new urea investment policy (ahead of our expectations); policy

momentum revives. Impact: Positive for all urea stocks • In a move intended to boost urea production and make India self‐sufficient in meeting

demand of ‘N’, a group of ministers (GoM) have approved the revised urea investment policy

• The revised policy offers better incentives (compared to Invt policy of 2008) to fertilizer companies to expand and set up urea plants

• The new policy will be taken up for consideration and approval by the Union cabinet in due course

• For Greenfield investments, the government has fixed a minimum floor‐ceiling price band for urea at $310‐340/mt at a landed gas price of $6.5/ mmBtu. For gas prices > $6.5/mmBtu, and going up to a maximum of $14/mmBtu, the ceiling will keep going up at the rate of $20/mt for every $1 increase in the price of gas

• The government offers subsidy only when the cost of production remains within the stipulated band. Since the band has now been narrowed by raising the floor and reducing the ceiling, the government hopes to save on its subsidy bill.

We have been for long maintaining that favourable policy pronouncements are imminent and are a compulsion than a choice! Albeit with the delays this has now been approved. We evaluate the new urea investment policy ahead… Key positive surprises • Gas costs over US$ 14/mmbtu to be considered • The debottleneck expansions made under the 2008 policy will continue to be

reimbursed under those rules only i.e 85% of IPP subject to floor/cap of US$ 250/425/ mt. We also gather companies that have expanded their capacities (thru debottlenecks) are allowed to revamp further under 2008 policy, which in our view is a huge positive

• While prima‐facie the returns on floor/cap offer 12‐18% post tax RoE, it must be noted the new investments are accorded infrastructure status in UB 2011‐12; implies such firms will enjoy advantages such as cheaper lending from banks on a priority basis, easier norms for external commercial borrowings, and tax concessions (exemption from IT for a block of any 10 years). On a pre‐tax basis the ROE on floor/cap works 18/27%; which in our view is more appropriate

• Gas pricing – clarity key to investments ‐ We don’t expect any capacity expansion until clarity emerges on subsiding gas cost beyond US$ 14/mmbtu. Though the government has assuaged “terming that it would consider” such cases. We expect the rationale on government’s part (to subsidise gas cost only till US$ 14/mmBtu) could be to discourage capacity expansions at higher spot LNG cost as also any price above USS$14/ mmBtu makes imports a much viable option than domestic production. If the government does signal linking ‐ increase in gas cost (beyond US$ 14/mmBtu) to increase in urea retail price or absorbing higher gas cost by way of subsidies, this could be a huge positive and capacity expansions are then likely.

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• Assumes all inclusive delivered gas cost – The max/min gas prices of US$ 6.5/14 mmBtu is an all inclusive cost i.e it includes gas transportation costs, service tax, State VAT, CST and Entry tax. However, we expect the gas marketing margins to have been excluded in this; implies it wouldn’t be subsidized.

• Gas availability – could fall in place ahead of capacity commissioning – We expect capacity expansions to replace urea imports of 6~7 mmt, indicates additional gas requirement of ~ 16 mcm/d over next 5 years. We expect increase in domestic gas production (ONGC (KG DWN 98/2); GSPC finds, RIL operated KG D6 blocks) and phased expansion of LNG terminals to meet the additional gas requirement. Given fertilizer sector is accorded the highest priority in gas allocation, we expect any gas to be first made available to this sector than the rest assuaging investor concern on gas availability front.

• Assured 12% ROI is a huge +ve: The post tax return on investment (all forms ‐brownfield, Greenfield etc) ranges between 12 ‐18%. The assured higher ROI (on floor) in our view is a huge positive. Longer term urea prices are expected to be subdued, given excess production of shale gas in the US that have lowered gas prices disturbing urea price fundamentals. Thus in this context a reduced ceiling/ ROI of 18% is a positive.

• Existing urea capacities – expect policy announcements shortly: We expect some form of pricing decontrol to be announced around Union Budget (March 16th) to be implemented from 1st April for existing urea units (note that two options have been approved by the GoM and it now seeks the Cabinet approval). Our sense is, while the government may retain price control (given political compulsions), it would raise retail prices (say 10~20%), the amount thus would partly help reduce subsidies and partly increase realizations of the industry. Net‐Net we see improvement in financials (for the existing urea units) both from a cash flow and marginally from a profitability (higher realization as also savings in interest outgo) perspective.

New investment policy key Assumptions Brownfield Greenfield Revamp

Delivered Gas Cost US$/mmbtu 6.5 6.5 7.5Energy Gcal (Norm) Gcal/mt 5 5 5.5Urea Capacity mmt 1.27 1.27 NAProject Capex Rs bn 40 46 Rs 15000/mtUrea realisations $/mt Floor $/mt 280/290 300 250* Cap $/mt 310 330 275*Linkage to IPP % 90 95 85

Allows revamp expansion under 2008 policy rates to be compensated under old rates of US$ 250/425 mt.


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ROE/ROCE workings at the floor/cap realizations (tax payout considered at 30%) Brownfield Greenfield

Delivered Gas Cost US$/mmbtu 6.5 6.5Energy Gcal (Norm) Gcal/mt 5 5

Urea Capacity mmt 1.27 1.27Project Capex Rs bn 40 46

Urea realisations $/mt Floor $/mt 280/290 300Cap $/mt 310 330Linkage to IPP % 90 95Debt Rs bn 26.67 30.67Equity Rs bn 13.33 15.33Exch Rate US$/INR 50.00 50.00

Revenues (@ Max realisations) Rs bn 19.69 20.96Costs Energy Rs bn 8.19 8.19Other overheads (conv costs) Rs bn 1.91 1.91Ebitda Rs bn 9.59 10.86Interest Rs bn 2.80 3.22Depreciation Rs bn 3.20 3.68PBT Rs bn 3.59 3.96Tax Rs bn 1.08 1.19PAT Rs bn 2.51 2.77ROE (%) % 18.85 18.08ROCE (%) % 16.98 16.61

ROE/ROCE Workings at floor realizations ROE (%) % 12.18 9.38ROCE (%) % 13.80 12.47

Source: Dept. of Fertiliser, PhillipCapital India Research

A policy for existing urea units to compensate for rise in fixed costs that was under consideration has been stalled. A maximum of Rs 350/mt increase in subsidies was proposed which would level to fixed costs of Rs 2,300/mt (floor) for all units. The proposal could have enhanced earnings of existing urea units (Chambal Fertilisers, Tata Chemicals, Nagarjuna fertilizers) by 5‐12%. The government is also considering raising urea retail prices by 10% that may reduce overall subsidy by 2% or Rs 15 bn. In our view the GoM approved NIP for urea investments is incentivizing enough to attract investment. A greater clarity on gas availability, pricing, gas transportation cost reimbursements could attract investments sooner than expected. We understand a view on NIP in Urea is of priority and under consideration to be sent to CCEA for a final view. Our discussion with urea companies suggests their keenness to add capacity, should the draft policy be notified. Most companies have acquired land, sought environment clearances, detailed feasibility to identification of technology has been almost complete. A decision on this would encourage capacity expansions sooner than later. The companies that intend adding capacity by 1.1 mmt are Chambal fertilizers, Tata Chemicals, Zuari Industries, Nagarjuna Fertilisers and RCF. Most companies would execute the new expansion at an SPV level given the inherent risk of higher gas prices/availability in light of the high capital intensity. This in our view would result in value‐unlocking and a partial re‐rating for the stocks (as most companies are trading at a fraction of their replacement costs).

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Nutrient‐based subsidy policy for P&K fertilizers has limited subsidy In Feb 2010, the government notified NBS for P&K fertilizers wef from 1st April 2010; that marked an important breakthrough from fixed retail prices to benchmarking prices on IPP for P&K fertilizers. Put simply, NBS means having a fixed subsidy and floating retail price. While the recommendations reduced the fertiliser subsidy bill by a meagre 3% in FY11E, it suggested the government’s preparedness to move away from populist measures to attaining fiscal prudence. NBS also to a limited extent lowered working capital requirement of the industry—enhanced efficiency/reduced waste/better products and attracted investment. Since implementation of NBS, P&K retail prices have more than doubled given rise in feedstock costs and International prices. Hadn’t for fixing subsidies, the fertilizer subsidy bill could have been higher by 15%. Despite current weakness in INR capping of subsidies is unlikely to inflate the subsidy bill. Fertilizer consumption trend

0

5

10

15

20

25

30

35

2008‐09 2008‐09 2009‐10 2010‐11 2011‐12

Vol. mmt

Urea Phosphates Potash

Source: Dept. of Fertilser, FAI

Monsoons and its impact on fertilizer consumption Monsoon uncertainties have a weak relation to fertilizer consumption. Correlation of different variables to Fertiliser consumption Fertiliser Consumption Correlation

To GDP 0.96To Agriculture GDP 0.96To Food Grain Production 0.97To Monsoon ‐0.19To Investments In Irrigation 0.98To Agricultural Credit 0.70

Source: FAI, IMD, PhillipCapital India Research

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Snapshot on Indian Fertiliser Industry NITROGENEOUS FERTILISERS PHOSPHATIC FERTILISERS POTASH

Urea A S C A N DAP ‐ DI Ammonium SSP ‐ Single Super NPKs* MOP

Nutriet content 46% N 20.6% N 20.5% N 46% P205 & 18% N 16% P205

Installed Capacity (MMT) 20.47 0.62 0.94 6.86 6.14 8.32 Nil

Utilisation (%) 101 98 101 44 40.7 85 NA

No of Units 27 10 3 11 64 19 NA

Growth Rate (%) 3.4 6~7% 6~7% flat

Pricing & Subsidy Policy Centre decides both the

subsidy & MRP. MRP is raised

only once in the last decade

by 10% to Rs 5,310/Mt. For

the purpose of subsidy

calculation, Urea units are

classified into 6 groups based

on the feedusage & plant

vintage. The subsidy is lower

of the group average or

retention price of respective

units.

Subsidy was withdrawn now

its been reintroduced under

NBS ‐ benefits ‐ FACT, GSFC &

RCF

No price support available ‐

losers GNFC & NFL (Nangal I

& II)

NBS introduced – Centre

decides subsidy every year,

MRP is freed.



MRP is freed



MRP is freed



MRP is freed

MRP Rs/Mt 5310 13000 NA 24500 7800 19000‐22000 17000

Largest Producer Iffco & NFL FACT & GSFC GNFC IFFCO, Coramandel, Paradeep IFFCO ,CFL ,FACT Entirely Imported


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Urea – Company location & consumption pockets

Jammu & Kashmir

Himachal Pradesh

Punjab

HaryanaUttarakhand

Delhi

Uttar Pradesh

Bihar

JharkhandWest

Bengal

Orissa

Chhatisgarh

Andhra Pradesh

Tamil Nadu

Karnataka

Kerala

Goa

Madhya Pradesh

Rajasthan

Gujarat

Maharashtra

Sikkim

Arunachal Pradesh

Manipur

NagalandAssam

Meghalaya

MizoramTripura

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

5.31

2.60

2.45

2.29

1.81

1.79

1.701.59

1.38

1.32

1.17

1.00

0.53

0.46

0.26

0.23

0.15

0.15

Jammu & Kashmir

Himachal Pradesh

Punjab

HaryanaUttarakhand

Delhi

Uttar Pradesh

Bihar

JharkhandWest

Bengal

Orissa

Chhatisgarh

Andhra Pradesh

Tamil Nadu

Karnataka

Kerala

Goa

Madhya Pradesh

Rajasthan

Gujarat

Maharashtra

Sikkim

Arunachal Pradesh

Manipur

NagalandAssam

Meghalaya

MizoramTripura

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

5.31

2.60

2.45

2.29

1.81

1.79

1.701.59

1.38

1.32

1.17

1.00

0.53

0.46

0.26

0.23

0.15

0.15

SrNo. State / Name of the plant and location Product

1 Nagarjuna Fertilizers & Chemicals Ltd., Kakinada Urea 2 Rashtriya Ispat Nigam Ltd AS 3 Zuari Industries Ltd, Zuari Nagar Urea 4 Gujarat Narmada Valley Fertilizers Co. Ltd., Bharuch Urea, CAN 5 Gujarat State Fertilizers & Chemicals Ltd., Vadodara Urea, AS 6 Indan Farmers Fertilizer Co‐op Lted., Kalol Urea 7 Krishak Bharati Co‐op. Ltd., (2plants) Hazira Urea 8 National Fertilizers Ltd., Panipat Urea 9 Mangalore Chemicals & Fertilizer Ltd., Mangalore Urea 10 Fertilisers & Chemicals Travancore Ltd., Udyogamandal Urea 11 Rashtriya Chemicals & Fertilizers Ltd., Trombay V* Urea 12 NFL, Nangal (I* & II) CAN, Urea 13 Chambal Fertilisers & Chemicals Ltd., Urea 14 IFFCO, Aonla Urea 15 IFFCO, Phulpur Urea 16 Tata Chemicals Ltd., Babrala Urea

* Plants not in operation

Urea Consumption (mmt)

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Complex fertiliser – Company location & consumption pockets

Jammu & Kashmir

Himachal Pradesh

Punjab

HaryanaUttarakhand

Delhi

Uttar Pradesh

Bihar

JharkhandWest

Bengal

Orissa

Chhatisgarh

Andhra Pradesh

Tamil Nadu

Karnataka

Kerala

Madhya Pradesh

Rajasthan

Gujarat

Maharashtra

Sikkim

Arunachal Pradesh

Manipur

NagalandAssam

Meghalaya

MizoramTripura

1

0.97

23

Goa

5

4

6

7

8

9

11

12

13

10

3.30

3.20

2.94

2.53

1.79

1.43

1.42

1.33

0.89

0.80

0.71

Jammu & Kashmir

Himachal Pradesh

Punjab

HaryanaUttarakhand

Delhi

Uttar Pradesh

Bihar

JharkhandWest

Bengal

Orissa

Chhatisgarh

Andhra Pradesh

Tamil Nadu

Karnataka

Kerala

Madhya Pradesh

Rajasthan

Gujarat

Maharashtra

Sikkim

Arunachal Pradesh

Manipur

NagalandAssam

Meghalaya

MizoramTripura

1

0.97

23

Goa

5

4

6

7

8

9

11

12

13

10

3.30

3.20

2.94

2.53

1.79

1.43

1.42

1.33

0.89

0.80

0.71

SrNo. State / Name of the plant and location Product

1 Andhra Pradesh, Coromandel Fertilisres Ltd., Visakhapatnam UAP, PAS/NPKs 2 Andhra Pradesh, Coromandel Fertilisres Ltd., Kakinada DAP, NP (APS)/NPKs 3 Goa, Zuari Industries Ltd., Zuari Nagar DAP, NP(APS)/NPKs 4 Gujarat, Gujarat State Fertilizers & Chemicals Ltd. (GSFC), Vadodara DAP, NP(APS) 5 Gujarat, IFFCO, Kandla DAP, NPKs 6 Karnataka, Mangalore Chemicals & Fertilizers Ltd. (Mangalore) DAP, NP(APS)/NPKs 7 Kerala, Fertilisers & Chemicals Travancore Ltd. (Udyogamandal APS 8 Kerala, FACT, Cochin ‐ II APS 9 Maharashtra, Deepak Fertilisers & Petro Chemicals Corp. Ltd., Taloja ANP 10 Maharashtra, Rashtriya Chemicals & Fertilizers Ltd., Trombay (I & IV) Nitrophosphate; ANP 11 Orissa, IFFCO, Paradeep DAP, NP/NPKs 12 Tamil Nadu, Southern Petrochemicals Industries Corpn., Ltd., Tuticorin DAP, NP(APS) 13 West Bengal, Tata Chemicals Ltd., Phosphatic Division, Haldia DAP, NP/NPKs

Complex Fertilizers Consumption (mmt)

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Pesticides Industry Overview India’s food grain production has not kept pace with increase in population According to UN estimates the world population grew by about 1.2% in the last decade to about 6.9 bn; however the growth in food production lagged population growth. India’s is not any different; the food production grew by 1.03% during FY01‐10 against the population growth of 1.51% during the same period. UN estimates India’s population to compound 1.25% during FY10‐20 and touch 1.39 bn; emphasizing the need to improve productivity and attain self‐sufficiency in food. Increasing population, rising incomes, change in dietary pattern (shift to more protein rich diet) limited farmland availability growth in horticulture and floriculture doesn’t just emphasize increase in yield per hectare but also the alarming need to reduce wastage.

Foodgrain production VS rising population

India Population (mn)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

CY2

001

CY2

005

CY2

010

CY2

012

CY2

020E

CY2

025E

CY2

030E

CY2

050E

Foodgrain Production (mmt)

0

50

100

150

200

250

300

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12*

* 4th advance estimates. Source: Indiastat, Ministry of Agriculture, PhillipCapital India Research

Pesticides – a tool to reduce wastage and improve yields Though India ranks top in acreage and production of key crops its yield is much below world average; needless to emphasize yields have to improve. Pests/weeds grow along with other crops and impact yields by competing with them for nutrition and water. Thus pesticides are one of the tools that help enhance yields and reduce wastage. Pesticide consumption in India is lowest when compared to the world. India’s per capita consumption of pesticides is 0.6 kg/ha vis a vis 7 kg/ha & 13 kg/ha in USA & China. Pesticides aren’t applied widely but only on about 40% of the total arable area. The consumption of pesticides is low on account of low awareness among farmers and it is perceived to be expensive (compared to other farm inputs) given no extension of subsidies unlike in fertilizers. Structural levers exists to drive Pest consumption Companies are increasing their marketing efforts to train farmers, among other things, about the right use of agrochemicals in terms of quantity to be used. With increased awareness, the use of agrochemicals will also increase. By some estimates the current crop losses (largely in fruits and vegetables) due to non‐use of pesticidies is estimated to be around ~ US $ 17 bn. Indian floriculture has grown by 50% in the last three years. The National Horticulture mission targets to double production, thus flourishing horticulture and floriculture will further increase demand for pesticides especially fungicides. The farm support prices termed as (Minimum support price or MSP) have been on the rise year after

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to year to compensate for increase in input costs and to ensure farmers earn a reasonable profit. The MSP’s would continue to be at higher levels, given it’s one of the populist tool to secure vote bank. Rising farm credit further gives the required impetus and wherewithal in‐turn generating demand for fertilisers. Enormous potential lies for consumption of crop protection products

Per capita pesticides consumption Kg/ha

0

2

4

6

8

10

12

14

16

18

Taiwan China Japan USA Korea France UK India

Source: Ficci, PMFAI, PhillipCapital India Research

Rise in MSP, remunerative crop prices making pesticides affordable for farmer Minimum support prices for all the crops including Paddy, Wheat, and Cotton have risen in the range of 10‐15% CAGR over last 5 years, which resulted in rising income of farmers. Fetching remunerative prices for their produce, rising income making it easily affordable for the farmer to apply pesticides in their farms. Also over the years, farmers have realized the role and significance of pesticides in protecting crops from pest, fungus & weeds, which ultimately enhances productivity MSP of rice and cotton on a rise, thus improving pesticide affordability

MSP Trend

0

1000

2000

3000

4000

5000

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Rs/Qtl

Paddy (F) Cotton WheatMaize Tur (Arhar) Soyabean Black


Global crop protection industry – an overview The global crop protection market has likely grown at about 6% in the last decade and the market size is estimated to be about US$ 45 bn of which China and India (the world's largest consumers of agrochemicals), account for 45%. Much of the demand has come from rising commodity prices and the desire to improve yields and thus attain food self‐sufficiency in Asian region. The growth could have been higher but for warmer climate (that reduces pest incidence) and GM seeds that have inbuilt resistance to pest attacks. Products going off patent and stiff competition depressed prices this inturn impacted the

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industry growth. Agrochemicals are classified as herbicides, insecticides and fungicides. Globally, herbicides constitute the largest share of agrichemical consumption at 49%, followed by insecticides and fungicides. In the case of India's agrochemical market, insecticides constitute the largest share at 60%, compared to a global consumption of 24%. The global market is matured and is consolidating through series of acquisitions. According to Lucintel, a global management consulting and market research firm the industry is likely to witness good growth and reach an estimated value of US$ 68 bn in 2017 with a CAGR of 5.5%. A rise in the global demand for nutritious and high‐quality food and the shrinking or arable land is expected to drive the agrochemical consumption. Over US$ 5 bn worth of products likely to go off patent The global crop protection industry is highly consolidated because of high entry barriers in the form of a tedious and expensive registration process and difficulty in penetrating the distribution network. The global agrochemical sector is dominated by the proprietary brand manufacturers, who control almost 80% of the overall sales in the industry. These players offer large product portfolios (largely patented products), which gives them a huge competitive advantage to enhance their influence on distributors. The top 10 generic manufacturers contribute approximately 15% (they are largely generic players focusing on either off‐patented products or engaged in R&D and formulations for large players) of the total agrochemical market. Our channel check suggests patented products share has been steadily declining and accounts for about a quarter of the overall agrochemical sales, while that of off patented product has been on the rise and forms the bulk of the industry. It is believed that new patent registrations have declined on account of huge R&D costs, stringent environment regulations and increased field trials; this implies opportunity for generic players. Globally over US$ 5 bn worth of products are likely to go off patent by 2015E, offering huge opportunity for the generic players. Indian crop protection industry Crop protection has assumed special importance in India, since food grains demand in the country is supposed to reach an estimated 343 mmt by 2020 from 240 mmt in 2011 (source: Ministry of Agriculture). India’s per capita consumption of pesticide is lower at 0.6 kg/ha vis‐a‐vis 7 kg/ha & 13 kg/ha in USA & China. The lower consumption hampers the yield per hectare due to crop loss, every year India loses Rs 900 bn of crops due to non application of agrochemicals. Government had taken a note of the quantum of losses arising due to non usage of agrochemicals, and is now taking necessary step to arrest the crop losses with the help of agrochemicals, given the responsibility to feed the growing population, limited land and rising crop prices. The global crop protection industry in CY11 had a very good year with growth at 17% primarily aided by significant improvement in crop commodity prices and higher demand and realization. The Indian agrochemicals market valued at US$ 1.5 bn in FY12 grew at a rate of 11% over the last 5 years. But however in FY12 it is estimated to have declined. While the year started on a good note, the season turned adverse from the middle of the year. The Kharif season had a delayed monsoon that impacted sowings; also Rabi reported less incidence of pests that impacted the demand outlook. Stressed farm profits and weak INR too made price increases rather difficult. Domestic crop protection industry overview • India’s crop protection industry is largely dependent on monsoon, as only ~50% of

land is irrigated. So monsoon has influence over the domestic pesticide sale. • Of the total Rs ~100 bn domestic pesticide market, ~47% is exported because of cheap

labour, lower manufacturing cost & skilled technical manpower. India has become favorable outsourcing destination for global agrochemical multinationals to carry out contract manufacturing for them.

• Insecticides consumption is highest over herbicide & fungicide, unlike global market where herbicide & fungicide finds higher consumption to insecticides. As domestic

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tropical climate is supportive for propagation of insects, which creates demand for insecticides. Even though the insecticide pie is larger, its share over the course of time has come down from ~69% to ~55% mainly due to increasing sales of genetically modified seeds like BT technology in cotton, in which seed by itself is pest resistant

• The share of herbicide and fungicide accounts for 20% each. However, issues of rising farm labor cost and crunch in labour availability could result in higher herbicide consumption

• Indian pesticides market is dominated by generic molecules with ~90% products being off patent

• In India the per capita land available for agriculture has been steadily decreasing coupled with decreasing yields per hectare for ex: avg. yield for rice, soya bean & corn is 3.2, 1.0 and 2.4 tons/ ha vis a vis 4.2, 2.5 and 5.0 tons/ha global benchmark

• AP, Maharashtra & Punjab are the major consumers of pesticides, which accounts for 24%, 13% and 11% of the total pesticides consumption

• Cotton & Rice crops finds greater application of pesticides with there share being ~20% and ~28%, as they attract larger pest due to climatic conditions which is suitable for propagation of pest, while rest of the crops share stands at ~52%

• The entry barriers are not very high as capital to set up a Greenfield 100‐200 mt pa costs about Rs 100‐150 mn and given it’s a low capital intensive industry it is highly fragmented and has about 125 technical grade manufacturers, about 800 small formulators and over 145,000 distributors. A significant market is dominated by top ten players that included Bayer, BASF, Gharda, Rallis India, Syngenta and United Phosphorus

• The market for unbranded spurious pesticides is very big • Pesticide sale is more discretionary in nature compared with fertilizers/seed which is

stable as it is perceived to be a necessity

Rice & Cotton production and yield performance

0

100

200

300

400

500

600

2001

‐02

2002

‐03

2003

‐04

2004

‐05

2005

‐06

2006

‐07

2007

‐08

2008

‐09

2009

‐10

2010

‐11*

2011

‐12*

*

0

5

10

15

20

25

30

35

40Yield (Kg/ha) (lhs)

Production mn bales (rhs)

1500

1600

1700

1800

1900

2000

2100

2200

2300

2001

‐02

2002

‐03

2003

‐04

2004

‐05

2005

‐06

2006

‐07

2007

‐08

2008

‐09

2009

‐10

2010

‐11*

2011

‐12*

*

50

60

70

80

90

100

110Yield (Kg/ha) (lhs)

Production mmt (rhs)


Cropwise application of crop protection products in India Segment Major Products (Active Ingrediants) Main Applications

Insecticides Acephate, Monocrotophos, Cypermethrin Cotton, Rice Fungicides Mancozeb, Copper Oxychloride, Ziram Fruits, Vegetables, Rice Herbicides Glyphosate, Isoproturan, 2,4‐D Rice, Wheat Bio‐Pesticides Spinosyns, neem based Rice, Maize, Tobacco Others Zinc Phosphide, Aluminium Phosphide Stored produce

Source: Ficci, PMFAI

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The Indian pesticide market is dominated largely by generic products about 90%. Since there is no major difference in the product offerings ‐ distribution networks, pricing, incentives/credit and brand image are key differentiating factors. Crop Protection Distribution Channel

CROP PROTECTION DISTRIBUTION NETWORK

Technical Grade manufacturers In-house formulators

Formulators

Distributors

Retailers

Retailers/ Dealers

End users

Distributors

Retailers

CROP PROTECTION DISTRIBUTION NETWORK

Technical Grade manufacturers In-house formulators

Formulators

Distributors

Retailers

Retailers/ Dealers

End users

Distributors

Retailers


The technical grade manufacturers prepare technical, which consist of concentrated chemicals and send these technical’s to formulators (at times in house), which add active ingredients in proportion with active inerts in order to make the product apt for the farm usage. Potential risks for domestic crop protection market • Genetically modified seed (Biotechnology), that bears pest resistant genes, is

continuing to pose serious threat to chemical pesticides. For ex: Biotechnology in cotton, which has significantly brought down the usage of pesticide on cotton from 33% in 2005 to 20% in 2009

• Lengthy and hectic patent product registration is the another factor affecting growth, as it takes 3‐5 years for any off patent product to get registered in India, which discourages the domestic players

• Increasing usage of eco friendly bio pesticides, which are made up of animal, plant waste are as easy inexpensive alternative to chemical pesticides

• The global market of pesticides and agro industry is very huge ~$ 50 bn. Globally, due to higher productivity, decline in the green movement, tight regulations and better crop management, the pesticide industry is not growing very rapidly. In fact, it is stagnant or slightly declining. In India, the agro industry has grown significantly over the last 30‐40 years from a mere Rs. 4 bn. to over Rs. 80 bn today.

The global demand for nutritious and high‐quality food and the shrinking of arable land is expected to drive the agrochemical industry going forward. With the global demand for food increasing at a rapid pace led by a rising population and higher living standards in developing nations, agro‐commodity prices are considerably higher compared to the past. Matters have been compounded by a shortage of area under cultivation leading to greater thrust on yield improvement. One of the major beneficiaries in the current situation is the crop protection market, especially generic players, which are set to grow at 10% CAGR in the next 3‐4 years.

The domestic crop protection industry is largely generic in nature, as ~90% of the molecules being off patented. In this scenario to gain market share, strong brand image and distribution network is a must.

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Key Pesticides company profile Rs mn Rallis UPL Sabero PI Ind

About the company Rallis India Ltd (50.06% subsidiary of Tata Chem) deals in crop protection, contract manufacturing in pesticides, and providing Agro solutions. Besides strong brand recognition for its products it also has strong domestic distribution network with ~1500 dealers & ~40000 retailers spread over 80% of districts across India. Of its total pesticides revenue, insecticides share is ~60%, while herbicide & fungicide accounts for rest.It derives 30% of its revenue through new products inspired by its concept of innovation turnover index. Of its FY12 revenue of Rs 12.5 bn (yoy +17%) exports contributed 33%. Metahelix (seed segment) reported FY12 revenue and PAT at Rs 0.8 bn (+93% yoy) and Rs 6 mn (against loss of Rs 143 mn in FY11)

UPL is a global generic crop protection, chemicals and seeds company. The company is engaged in the business of agrochemicals, industrial chemicals and chemical intermediates. The industrial chemicals segment consists of industrial chemicals and speciality chemicals. The company offers a range of products that includes insecticides, fungicides, herbicides, fumigants, plant growth nutrients and regulators and rodenticides.They operate in every continent and have a customer base in 123 countries. It has reported FY12 revenue & PAT at Rs 75 bn (+33%) & Rs 5.56 bn (‐0.4%)

Sabero Organics is a leader in crop protection and a leading producer and supplier of fungicides, herbicides and insecticides with manufacturing facilities in India and marketing offices in India, Brazil, Europe, Australia and Argentina. Its manufacturing facility is located at Vapi, Gujarat, apart from this it is implementing SEZ project in Dahej for manufacture of Synthetic pyrethroids. It derives ~52% of its revenues from exports

PI Industries is mainly focused into two business streams‐Agri Inputs and Custom Synthesis & Manufacturing. Its Agri Input division is largely inputs and services of Agrochemicals (namely insecticides, fungicides & herbicides), Speciality fertilisers, Plant nutrients and Seeds, which contributes ~60% to turnover. Whereas, Custom Synthesis division deals in contract research and production of intermediates and other niche fine chemicals for global innovators which accounts for rest of the revenue. Order book of this division is quite strong to the extent of USD 340 mn. It currently operates three formulation and two manufacturing facilities as well as four multi product plants under its two business units across Jammu and Gujarat.

Key Products Insecticides, Herbicides, Fungicides, Seeds Insecticides, Herbicides, Fungicides Insecticides, Herbicides, Fungicides & Speciality Chem.

Insecticides, Herbicides, Plant nutrient Fungicides, fine chemicals

Key Brands Taarak‐ Paddy Herbicide,Toran‐ Insecticide for cotton,RalliGold a plant growth nutrient, contaf, Applaud,Asataf, Tatamida

SAAF, Total Glyweed, Emzeb, Mophos, Acehero Nominee Gold‐ Herbicide, Fosmite, Biovita, Rocket, Foratox

Key Markets Domestic‐ Maharashtra, AP & Karnataka, Latin America & USA

North America, India, Europe Australia, Brazil, Europe, Argentina, China Punjab, Haryana, Rajasthan, Madhya Pradesh, Gujarat, Uttar Pradesh

Revenue FY12 12,452 75,342 3,466 8,770 PAT FY12 992 5,556 (636) 804 Market Cap 23,336 52,876 2,710 13,396 No. of Shares mn 194 462 34 25 CMP 149 115 131 506

Revenue break up Rs bn

Pesticides ‐ 11.6, Seeds ‐ 0.81 Pesticides‐ 71.4, Pesticides trading‐ 2.92 Pesticides‐ 1.99, Formulations ‐1.61 Agrochemicals‐ 5.19, Other Chemicals‐ 3.77

‐ exports as a % of total revenues

33 89 52 45

Share holding % ‐ Promoters 50 28 75 64 ‐ DII 11 16 2 1 ‐ FII 12 36 1 9 ‐ Others 27 20 22 27


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Comparative Valuation Matrix CHMB IN CRIN IN DFPC IN Kaveri PI Rallis TTCH IN UPL

CMP Rs. 67 278 130 1179 506 149 318 115Target Price Rs. 90 318 150 1500 650 150 400 135Upside (%) 34 14 15 27 28 1 26 17Recommendation Buy Buy Neutral Buy Buy Neutral Buy NeutralMarket Cap Rs bn 28 79 11 16 13 29 81 53 No. of Shares (mn) 416 283 88 14 25 194 255 462

Total Revenues (Rs bn) FY10 41,273 63,947 13,120 1,621 5,425 8,787 94,485 52,900FY11 56,780 75,279 16,131 2,337 7,202 10,657 110,602 56,497FY12 75,320 97,892 24,021 3,724 8,770 12,452 136,551 75,342FY13E 67,786 86,332 26,485 6,015 10,493 14,183 151,103 87,268FY14E 67,078 120,513 26,884 7,783 13,599 16,047 156,523 95,158CAGR (FY12‐14E) ‐5.6 11.0 5.8 44.6 24.5 13.5 7.1 12.4

Ebtida (Rs bn) FY10 6,589 7,100 3,276 353 872 1,449 18,369 9,996FY11 6,767 9,450 4,032 539 1,241 1,713 18,635 11,106FY12 8,155 9,389 4,867 770 1,457 1,830 21,527 13,674FY13E 8,695 9,825 4,201 1,302 1,840 2,109 24,912 15,248FY14E 8,408 11,902 5,312 1,528 2,547 2,568 24,598 15,477CAGR (FY12‐14E) 1.5 12.6 4.5 40.9 32.2 18.4 6.9 6.4

Operating Margins (%) FY10 16.0 11.1 25.0 21.8 16.1 16.5 19.4 18.9FY11 11.9 12.6 25.0 23.0 17.2 16.1 16.8 19.7FY12 10.8 9.6 20.3 20.7 16.6 14.7 15.8 18.1FY13E 12.8 11.4 15.9 21.6 17.5 14.9 16.5 17.5FY14E 12.5 9.9 19.8 19.6 18.7 16.0 15.7 16.3

PAT (Rs bn) FY10 2,153 4,677 1,228 291 419 1,015 7,071 5,529FY11 2,454 6,937 2,071 425 651 1,222 6,793 5,716FY12 2,935 6,356 2,567 581 804 1,043 8,376 6,665FY13E 3,525 5,974 1,787 1,137 1,017 1,316 9,688 7,037FY14E 3,441 7,542 2,363 1,359 1,509 1,598 10,907 7,667CAGR (FY12‐14E) 8.3 8.9 ‐4.1 52.9 37.0 23.8 14.1 7.3

EPS (Rs) FY10 5.2 16.7 13.9 21.2 29.6 7.8 29.1 12.6FY11 5.9 18.2 23.5 31.0 29.1 6.3 26.7 12.4FY12 7.1 20.8 29.1 42.4 32.1 5.4 32.9 14.4FY13E 8.5 21.1 20.3 83.0 40.6 6.8 38.0 15.2FY14E 8.3 26.7 26.8 99.2 60.2 8.2 42.8 16.6CAGR (FY12‐14E) 8.3 13.3 ‐4.1 52.9 37.0 24.0 14.1 7.3

RoCE (%) FY10 9.5 23.5 16.0 16.8 22.8 35.9 12.9 14.9FY11 10.2 29.2 17.8 20.6 22.2 30.0 13.7 18.5FY12 11.6 23.7 19.7 26.1 22.4 26.6 15.7 14.7FY13E 11.5 19.5 15.3 33.0 23.2 25.8 14.8 16.3FY14E 11.0 24.8 18.8 30.0 27.2 26.5 13.4 15.9

RoE (%) FY10 15.6 34.5 14.2 21.1 36.8 26.2 14.2 19.4FY11 15.8 29.7 20.9 25.0 38.3 26.2 12.4 16.9FY12 17.4 26.9 22.6 27.0 30.3 19.6 13.2 16.3FY13E 18.7 23.1 14.0 38.5 27.3 22.1 13.4 14.9FY14E 16.3 25.3 16.6 32.9 30.8 23.0 13.5 14.4

PER (x) FY10 12.9 16.7 9.3 55.6 17.1 19.0 10.9 9.1FY11 11.4 15.3 5.5 38.0 17.4 23.7 11.9 9.3FY12 9.5 13.4 4.5 27.8 15.8 27.8 9.7 8.0FY13E 7.9 13.2 6.4 14.2 12.5 22.0 8.4 7.5FY14E 8.1 10.4 4.9 11.9 8.4 18.1 7.4 6.9

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Contd.. CHMB IN CRIN IN DFPC IN Kaveri PI Rallis TTCH IN UPL

PBR (x) FY10 1.9 5.2 1.2 10.7 5.4 4.6 1.5 1.7FY11 1.7 4.0 1.1 8.5 5.5 5.7 1.4 1.4FY12 1.6 3.3 0.9 6.7 3.9 5.2 1.2 1.2FY13E 1.4 2.9 0.9 4.6 3.0 4.5 1.1 1.1FY14E 1.3 2.5 0.8 3.4 2.3 3.8 1.0 0.9

EV/Ebitda (x) FY10 8.1 12.6 5.1 46.5 9.9 13.3 6.3 5.9FY11 7.0 9.1 4.1 30.4 11.1 17.5 6.7 4.7FY12 7.3 10.5 3.7 21.2 10.3 16.6 5.9 5.7FY13E 5.3 9.7 4.6 12.1 8.2 14.3 5.6 5.0FY14E 4.9 7.7 3.4 9.6 5.7 11.4 5.6 4.6

EV/Sales (x) FY10 1.3 1.4 1.3 10.1 1.6 2.2 1.2 1.1FY11 0.8 1.1 1.0 7.0 1.9 2.8 1.1 0.9FY12 0.8 1.0 0.7 4.4 1.7 2.4 0.9 1.0FY13E 0.7 1.1 0.7 2.6 1.4 2.1 0.9 0.9FY14E 0.6 0.8 0.7 1.9 1.1 1.8 0.9 0.8

Working capital days FY11 52 ‐4 33 25 65 ‐5 36 ‐34FY12 109 20 35 25 66 6 65 88FY13E 74 31 56 25 66 5 55 100FY14E 74 17 50 25 66 5 55 100

Asset Turnover ratio (x)FY11 1.6 2.7 1.0 1.3 1.7 2.5 2.3 1.8FY12 1.9 2.8 1.3 2.2 1.6 2.2 2.5 1.6FY13E 1.6 2.1 1.3 3.4 1.6 2.3 2.3 1.4FY14E 1.8 2.9 1.2 3.7 1.8 2.4 2.0 1.4

DPS FY12 (Rs) 1.9 7.0 5.5 4.0 3.0 2.2 10 2.5Face Value (Rs) 10 1 10 10 5 1 10 2Dividend payout (%) 26.94 33.68 18.90 9.43 9.34 41.03 30.42 17.32Dividend Yield (%) 2.84 2.52 4.23 0.34 0.59 1.48 3.14 2.17

Source: PhillipCapital India Research Estimates

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Compa

nies Section

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Chambal Fertiliser Levers exist to surprise on the upside

FERTILISER: Company Update 12 November 2012


A proxy play on urea in India: Chambal Fertiliser (Chambal) is the largest domestic private urea producer (~7% market share) with urea capacity of ~ 2 mmt. Proximity to markets (sells 80% of its produce in North India) and being on the gas hub (connectivity to HBJ gas pipeline) are its unequalled strengths. On notification of favourable new investment policy, Chambal is likely to increase capacity further. To broaden its product offerings, Chambal trades in P&K fertilizers, specialty fertilizers, pesticides, seeds and micro nutrients. The share of trading has been steadily increasing in its earnings mix and the Q2FY13 EBIT touched a peak of Rs 840 mn. While stress on shipping and partly textile is expected in the near term, management is hopeful of a revival in the technology division. Earnings have compounded a solid 17% during FY10‐12 and we estimate it grow by 8% in FY12‐14E (assumes lower losses in tech and a no reform scenario).

India to be a urea deficit market; reforms a compulsion than a choice: India produces ~22 mmt of urea against the demand of ~30 mmt, which is bridged through ~ 7‐8mmt of imports. The urea consumption over FY07‐12 has compounded by 3.8% and various agencies point towards a 3% growth rate going forward. To attract investments, industry friendly policy initiatives (new investments & NBS) are a compulsion than a choice. A severe draught in US this year has pushed crop prices higher and the with rising gas prices, the International Urea prices have held firm in H1FY13 (US$ 465/mt CFR). As part of Chambal’s capacity has leverage to International prices, we expect it to benefit on rising prices.

Shipping to drag; technology is expected to revive: Chambal’s shipping division performance has been rather subdued and margins/returns have suffered due to excess global capacity that has led to fall in freight rates, which is unlikely to reverse anytime soon. If the freights rates and sentiments do revive, we expect Chambal to re‐consider hiving off its shipping division to lower its huge debt burden. Further, the IMACAID performance in H1CY12 has suffered due to lower production and drop in phosphoric acid realization however it’s expected to return to normalcy in FY14E. Technology division losses reduced by 31% to Rs 0.74 bn in FY12 and management indicated that losses could reduce further in FY13E, in a no loss scenario, Chambal’s profit could increase by 10‐12%.

Tailwinds from buoyant urea price and regulatory upside to aid gr: FY13E earnings driver could be firming urea prices (implies max realizations of US$400/mt) and profits from technology division, the two also to be helped by further INR weakening. Given poor offtake, likely erratic monsoon and excess channel inventory, we viewed opportunity to trade in fertilizers in FY13E to be limited; however the trading EBIT has increased by 80% to Rs 1.26 bn in H1FY13. Marginal improvement in performance of shipping and textile to be negated by lower profitability of IMACID in FY13E. We estimate a flat Ebitda in FY13/FY14E, however we argue levers exists in terms of higher urea prices, sooner than expected revival of software business, weak INR and policy support to help earnings surprise on the upside. Valuations attractive (7.9x FY13E PER; 1.4x PBR and 5.3x EV/Ebitda); offers dividend yield of 3.0%; positive policy pronouncements in urea to augment earnings and stock performance over term. Reiterate Buy a PT of Rs 90.

BUY CHMB IN | CMP RS 67

TARGET RS 90 (+34%) Company Data

O/S SHARES (MN) : 416MARKET CAP (RSBN) : 28MARKET CAP (USDBN) : 0.552 ‐ WK HI/LO (RS) : 96 / 62LIQUIDITY 3M (USDMN) : 2.3FACE VALUE (RS) : 10

Share Holding Pattern, %

PROMOTERS : 55.1FII / NRI : 9.0FI / MF : 10.4NON PROMOTER CORP. HOLDINGS : 5.8PUBLIC & OTHERS : 19.7

Price Performance, % 1mth 3mth 1yr

ABS ‐6.9 ‐6.4 ‐27.5REL TO BSE ‐7.7 ‐13.5 ‐34.8

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Source: Bloomberg, Phillip Capital Research

Other Key Ratios

Rs mn FY12 FY13E FY14E

Net Sales 75,320 67,786 67,078Ebidta 8,155 8,695 8,408Net Profit 2,935 3,525 3,441EPS, Rs 7.05 8.47 8.27PER, X 9.5 7.9 8.1EV/EBIDTA, x 7.3 5.3 4.9EV/Net Sales, x 0.8 0.7 0.6ROE, % 17.4 18.7 16.3Source: Phillip Capital India Research Gauri Anand (+ 9122 6667 9943) [email protected] Saurabh Rathi (+ 9122 6667 9951) [email protected]

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12 November 2012 / INDIA EQUITY RESEARCH / CHAMBAL FERTILISER COMPANY UPDATE

Investment Overview Sustainable Competitive Advantage

CHAMBAL Is The Third Largest Player In The Domestic Urea Market And The Largest Urea Manufacturer In The Private Sector, After Indian Farmers Fertilisers Cooperative Ltd. (IFFCO) And National Fertilisers Ltd (NFL), With A Capacity Share Of >7%. Thus, It’s A Proxy To Play For Any Upside In The Urea Policy. Being Along The HBJ Gas Pipeline, It’s On The Gas Grid And To That Extent, Availability Of Gas Would Not Be An Issue.

Financial Structure CHAMBAL Had Large Debt‐Funded Capex (Mostly For The Shipping Division), Which Weakened Its Gearing And Compressed ROCE To ~11‐12% For FY11‐12. However, With The Decline In Losses Of Technology Division, Higher Realisation For Urea Beyond Cutoff, We Expect Profits To Compound 8% During FY12‐14E. Roce Is Expected To Improve To 12% In FY13E.

Shareholder Value Creation Higher Profits Could Lead To Higher Dividends Too. We Have Assumed Dividend To IMPROVE Slightly TO Rs 2 Per Share. In FY13E & FY14E From Rs 1.9 Per Share In FY12

Earnings Visibility Levers Exists In Terms Of Higher Urea Prices, Sooner Than Expected Revival Of Software Business, Weak INR And Policy Support To Help Earnings Surprise On The Upside

Valuation In FY13E, The Stock Is Trading At 7.9x PER, 5.3x EV/Ebitda, 1.4x PBR

Future Event Triggers Favourable New Urea Investment Policy , Divestments Of Shipping Business, Positive Cash Flows From Technology Division

Expected Price Momentum With Spot Freight Rates For Ships Collapsing, There Are Concerns With Regard To Shipping Division, However If Company Succeed To Enclose Its Long Term Contracts At Higher Charter Rates And Improvement In International Freight Rates And Higher International Price Of Urea, We Expect The Stock To React Positively.

Risks • For production beyond cut off quantities, we have assumed Urea realizations of US$

400/mt and US$ 375/mt in our estimates. If CHAMBAL were to realize only US$ 250/mt (which is the floor price advised by the government) our EPS estimates would be lower by Rs 1.66 and Rs 1.35 in FY13E and FY14E.

• Shipping division accounted for loss of Rs 55 mn in FY12. Spot freight rates of Aframax tanker charter rates have collapsed and are trading below < US$ 13‐14,000/day. Most of the company’s Aframax tankers are yet to enter into long term charter contracts given the bleak global outlook. Every 10% change in Freight realization than our estimates of US$ 17000/day can impact EPS by 1% in FY13E and FY14E

• Given poor offtake, due to erratic monsoon and excess channel inventory, would limit the opportunity to trade in fertilizers in FY13E and thus risks trading profits for FY13E

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Chambal is the largest private sector player with ~ 2mmt of capacity. Urea has been a significant cash cow. Chambal has made some of the acquisitions (IMACID) and selling off (food processing unit & ships) at a steal, thus maximizing shareholderwealth. The investments in technology haven’t bearded fruit yet, but the company looks confident on the future prospects. It maydivest stake in shipping division for a better value (higher than itscapital costs).

Source: Company, Phillip Capital India Research

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Value Drivers

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Source: Company, PhillipCapital India Research Estimates

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Valuation & Target Price Chambal is expected to report growth in profits on the back of higher realization for quantities beyond cutoff limits and lower losses in technology division (profits to compound 8% in FY12‐14E). Being the largest private sector urea play, Chambal is also expected to benefit the most in the case of any positive urea policy pronouncement. Historically, the stock has been commanding EV/EBITDA multiple of ~8x, given the concerns on shipping business, we value the base business at 6.0 x EBITDA. We have assumed investments at book. We arrive at a target price of Rs 90 per share, an upside of 34% from current levels. We reiterate with a BUY rating on the stock. (Rs mn) FY14E

Fertiliser business (valued at 6x Ebitda) 50,447 Enterprise value of the business 50,448 Less: Debt 32,745 Add: Cash 19,081 Equity Value 36,784 Target Price 90CMP 67(%) 34


EBIT BRIDGE Figs. Rs mn FY10 FY11 FY12 FY13E FY14EUrea 3,672 3,614 5,031 5,214 4,815Textile 124 389 (120) 100 120 Shipping 412 441 (55) 70 110 IMACID 133 328 860 300 600 Traded Goods 221 929 1,668 1,372 1,176 Technology (441) (1,064) (738) (500) (400)


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About the Company Chambal Fertilisers & Chemicals Ltd. (Chambal) is one of the leading urea manufacturers in India. In FY12, its urea production of 2.13 mmt accounted for 7.2% of the total urea produced in the country. Chambal’s re‐assessed urea capacity is 1.73mmt, and the capacity utilisation levels over the last few years have been maintained above 121% levels. In FY12, urea accounted for 40% of its revenue, reporting 25% growth yoy. The new investment policy that recognizes incremental production at IPP‐linked prices for subsidy purposes has benefited the likes of Chambal. In April 2009, it has completed partial de‐bottlenecking of both its plants—Gadepan I & Gadepan II. Following the revamp and energy reduction project, the company has benefited from an increase in urea capacity as well as reduction in the cost of feedstock. Despite urea it also has presence in shipping & textiles which contributed 4.4% and 5.3% respt. to the consolidated FY12 revenues. It also earns revenue from trading fertilisers and pesticides that accounted for 36.2% of FY12 consolidated revenues. Chambal’s subsidiaries Subsidiaries State of OwnershipActivity

CHAMBAL Infrastructure Ventures Ltd. 100% Development of Power Projects CHAMBAL Overseas Ltd, Cayman Islands 100% Formed for consolidation of its entire software businessIndia Steamship Pte. Ltd, Singapore 100% Incorporated in Singapore, engaged in shipping activity


IMACID Chambal holds one‐third equity stake in the IMACID joint venture in Morocco. The other partners in the JV are Tata Chemicals and OCP Group of Morocco. In CY11, it reported sales of Rs 4.4 bn a 20% yoy growth as phosphoric acid witnessed 30% jump in realization yoy. Its utilisation levels in CY11 of 84% were lower compared to 97% in the corresponding period last year as they took a 2 months planned shutdown for maintenance purpose. Rising input cost and constraints in sulphur availability and other raw materials supply were the main factors attributable to low phosphoric acid production. In CY11, IMACID produced 0.363 mmt of phosphoric acid, a key input used for manufacturing DAP. Shipping Segment Chambal in owns 6 double hull Aframax Tankers and one single hull Aframax tanker, taking its total fleet size to 6 ships. Ships owned by the company are used for the transportation of crude. The shipping division accounted for more than 5% of consolidated revenues in FY12. It reported EBIT margins of ‐1.4 in FY12 quite below than +14.3% reported in corresponding period last year. Textiles Segment Chambal’s spinning unit is located at Baddi in Himachal Pradesh, which has a capacity of 83,500 man‐made and cotton spindles. The division has reported revenues of Rs 3.34 bn and contributes 4.4% to FY12 consolidated revenues. The FY12 reported EBIT margin came at ‐3.6% far below of +11.2% reported in corresponding period last year. The company has no plans to make any further investments in this business and could possibly hive it off to some group company in future.

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Investment Argument Positive policy pronouncements in urea to augment earnings Quite a few proposals with regard to urea are awaiting the cabinet approvals, which includes 1) 10% hike in urea retail price 2) adhoc increase of Rs 350/Mt as a fixed cost reimbursement are under primary deliberations. Being the largest private urea manufacturer and one of the most efficient players both the proposals would result in reduction of subsidy burden and hence lower the requirement of incremental working capital which in turn to save the interest cost Apart from the above, Nutrient Based Subsidy in urea and new urea investment policy are also long overdue. Group of ministers in April 2012 had given nod for the new urea investment policy, since then it is impending cabinet approval. The key silent features of the new urea investment policy are highlighted below:‐ • The policy seeks to link urea realizations (floor & ceiling) with the delivered cost of gas,

pipeline tariffs and other levies. Thus insulating the industry from volatility in gas & other associated costs


• It provides for cap of 20% on return on investment, this is the maximum return the industry could realize


The new policy seeks to incentivise and encourage additional urea production unlike the previous urea policy of the year 2008 which failed to attract new investments. Further, NBS in urea if implemented would benefit the likes of Chambal Fertilisers as it would reduce the subsidy dependence to some extent from the government and hence ease the working capital requirement and reduce interest cost burden of the companies. Moreover, industry would be free to decide the urea retail price and would implement cost cutting measures in order to remain competitive, so the efficient and significant urea player like Chambal Fertiliser will gain Management intent to hive off the shipping division still on agenda Since the year 2008 shipping business performance adversely impacted due to which financials remained under pressure, charter hire rates slipped to there lowest levels in the region of US$10000‐13000/day. Further, magnifying interest burden aggravating the problem by deteriorating the financials as approximately 50% of the consolidated debt belongs to shipping division. Management a year back boldly decided to hive off the shipping division into separate entity to maximize the shareholder return; however, it couldn’t succeed due to creditor’s objection. We believe that considering share holder’s interest it would once again revisit the decision to hive off the shipping business. If implemented EPS would see an upward revision of Rs 1.6, which in turn will increase the ROE

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Software division turned into EBIDTA positive Chambal’s software division has been categorized into two services 1) Technology segment, where the scope of activities includes providing certain software to banks for taking care of mortgage activities 2) secondly extending services to KPO which is further subdivided into three segments a) valuation b) title c) mortgage. Of these two segments technology division continues to deliver strong performance, whereas the performance of the other segment remains to be lackluster. Since last several years (barring FY10) software division reported losses at EBIDTA level, however this is the first time that it became EBIDTA positive in Q4 FY12. Management instills confidence about the superior prospects of Information technology business hence forth. For FY12 the reported EBIT stands at Rs ‐738 mn (drop of 31% yoy) against Rs ‐1,064 mn reported in corresponding period last year. Further, the company is hopeful that the outsourcing of mortgage business would provide a huge opportunity, going forward Declining losses of technology subsidiary, Rs mn

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Chambal made inroads into the software business in 1998 by setting up India Software Group (ISG)—its software division and by setting up a software development centre in Chennai. Subsequently, CHAMBAL acquired NovaSoft Information Technology Corporation, a company headquartered in New Jersey, USA, along with its subsidiaries. Today, ISGN, with its legacy business strengths spanning outsourced product development and applications maintenance for close to a decade, has shifted its focus to providing technology solutions and services the US$ 3tn US mortgage market. With the primary thrust in the residential mortgage space, ISGN has, by way of multiple acquisitions over a short span of time, gained complete domain expertise, market dominance and a unique position as a technology solution and services provider with BPO capabilities and one single domain focus. Lower charter rates impacting shipping division profitability Chambal has six ships on its board, of which five are double hull Aframax vessels and only one ship is single hull. Shipping accounts for more than 5% of its consolidated revenues, however, over the last couple of years its PBIT has witnessed a declining trend due to bleak scenario of global shipping industry and the charter rates are currently at their bottom. For FY12 the company reported loss of Rs 55 mn at PBIT level. Most of the tankers are yet to enter into long term charter hire contracts as the charter rates quoting are quite low, hence most of the tankers have been given on spot rate basis. Long term charter freight rates fetches better rates than spot charter rates. The outlook for near‐term freight rate is extremely weak, due to prevailing concerns and slow pick‐up in economic activity. Hence, we do not expect the excellent performance to continue.

– 48 of 142 –


Tanker Rates movement for Aframax, USD/day

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Financial discussion Revenue to decline during FY12‐14E We expect the revenues to grow at negative CAGR of 6% over FY12‐FY14E, mainly on account of lower trading and lower fertiliser subsidies. We expect the contribution of trading to overall revenues to decline to 29.5% in FY13E from 36.2% in FY12, mainly led by demand destruction of phosphatic fertilisers given the higher farm gate prices, that in turn prompting farmers to incline towards urea. Shipping business revenues are expected to show mild decline in FY13E & FY14E over FY12, given the beak outlook of global shipping business and lower freight rates. Revenue Mix (%) FY11 FY12 FY13E FY14E

Urea 42.5 39.9 47.4 44.1Textile 6.0 4.4 4.8 4.9Shipping 5.4 5.28 5.27 5.23IMACID 7.4 8.5 6.3 8.8Trading 28.3 36.2 29.5 29.8Others 10.4 5.8 6.7 7.1


Profits are expected to grow from all segments, except trading and IMACID. Trading margins are expected to suffer given higher international fertiliser prices and softening of demand; whereas IMACID profits to fall due to decline in international phosphoric acid prices (Phosphoric Acid prices have corrected 13% in H1FY13 over H1FY12). Operating profit margins are expected to improve 171bps to 12.5% in FY14E PBIT Mix (%) FY11 FY12 FY13E FY14E

Urea 77.9 75.7 79.5 75.0Textile 8.4 ‐1.8 1.5 1.9Shipping 9.5 ‐0.8 1.1 1.7IMACID 7.1 12.9 4.6 9.3Trading 20.0 25.1 20.9 18.3Technology ‐22.9 ‐11.1 ‐7.6 ‐6.2


– 49 of 142 –


Chambal is one of the most heavily geared companies in the fertiliser space with debt/equity of 2:1. As > 60% of Chambal’s loan is LIBOR‐linked, we expect interest outgo to remain higher given the rise in interest cost in FY13E & FY14E compared to FY12. We expect profits to compound 8% during FY12‐14E. Interest cost & profits on rise….

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– 50 of 142 –


Financials

Income Statement Y/E Mar, Rs mn FY11 FY12 FY13E FY14E

Net sales 56,780 75,320 67,786 67,078

Growth, % 38 33 ‐10 ‐1

Total income 56,780 75,320 67,786 67,078

Operating expenses ‐50,013 ‐67,165 ‐59,091 ‐58,670

EBITDA (Core) 6,767 8,155 8,695 8,408

Growth, % 2.7 20.5 6.6 (3.3)

Margin, % 11.9 10.8 12.8 12.5

Depreciation ‐3,229 ‐3,084 ‐2,841 ‐2,871

EBIT 3,538 5,071 5,854 5,537

Growth, % 2.7 20.5 6.6 (3.3)

Margin, % 11.9 10.8 12.8 12.5

Interest paid ‐1,137 ‐1,298 ‐1,526 ‐1,495

Other Non‐Operating Income 1,004 862 788 869

Pre‐tax profit 3,433 4,635 5,116 4,910

Tax provided ‐1,268 ‐3,347 ‐1,791 ‐1,718

Profit after tax 2,164 1,289 3,325 3,191

Net Profit 2,406 1,583 3,525 3,441

Growth, % 13.9 19.6 20.1 (2.4)

Net Profit (adjusted) 2,454 2,935 3,525 3,441

Unadj. shares (m) 416 416 416 416

Wtd avg shares (m) 416 416 416 416

Balance Sheet Y/E Mar, Rs mn FY11 FY12 FY13E FY14E

Cash & bank 6,164 4,796 15,442 19,081

Debtors 6,942 22,187 13,000 12,864

Inventory 4,242 5,278 5,181 5,304

Loans & advances 1,387 3,440 3,440 3,440

Other current assets 1,989 1,281 1,281 1,281

Total current assets 20,725 36,983 38,344 41,971

Gross fixed assets 54,254 56,520 57,123 57,727

Less: Depreciation ‐26,787 ‐29,507 ‐32,349 ‐35,220

Add: Capital WIP 731 603 603 603

Net fixed assets 28,198 27,616 25,378 23,111

Non‐current assets 2,937 5,123 1,912 1,912

Total assets 51,861 69,723 65,635 66,994

Current liabilities 6,041 9,229 5,754 5,882

Provisions 1,798 2,402 2,402 2,402

Total current liabilities 7,840 11,631 8,156 8,284

Non‐current liabilities 27,854 40,584 37,637 36,637

Total liabilities 35,693 52,215 45,793 44,921

Paid‐up capital 4,162 4,162 4,162 4,162

Reserves & surplus 11,560 12,798 15,364 17,845

Shareholders’ equity 16,175 17,624 19,990 22,221

Total equity & liabilities 51,861 69,723 65,635 66,994


Cash Flow Y/E Mar, Rs mn FY11 FY12 FY13E FY14E

Pre‐tax profit 3,433 4,635 5,116 4,910

Depreciation 3,229 3,084 2,841 2,871

Chg in working capital 1,366 ‐14,211 9,053 140

Total tax paid ‐1,268 ‐3,347 ‐1,791 ‐1,718

Other operating activities 979 1,037 1,037 1,037

Cash flow from operating activities 7,739 ‐8,801 16,256 7,240

Capital expenditure ‐825 ‐2,502 ‐603 ‐603

Chg in investments 630 0 0 0

Other investing activities ‐15 ‐15 ‐15 ‐14

Cash flow from investing activities ‐136 ‐2,256 ‐618 ‐617

Free cash flow 7,603 ‐11,057 15,638 6,623

Equity raised/(repaid) 228 799 0 0

Debt raised/(repaid) ‐1,609 10,921 ‐2,979 ‐1,000

Dividend (incl. tax) ‐918 ‐918 ‐959 ‐960

Other financing activities ‐979 ‐1,026 ‐1,026 ‐1,026

Cash flow from financing activities ‐3,062 10,282 ‐4,964 ‐2,987

Net chg in cash 4,541 ‐775 10,674 3,637

Valuation Ratios & Per Share Data FY11 FY12 FY13E FY14E

EPS, Rs 5.9 7.1 8.5 8.3

BVPS, Rs 38.9 42.3 48.0 53.4

DPS, Rs 1.9 1.9 2.0 2.0

Return on assets (%) 5.6 3.5 6.4 6.3

Return on equity (%) 15.8 17.4 18.7 16.3

Return on Invested capital (%) 11.7 5.6 13.2 14.6

RoIC/Cost of capital (x) 1.2 0.6 1.4 1.5

RoIC ‐ Cost of capital (%) 2.2 (4.1) 3.7 5.1

Return on capital employed (%) 6.3 4.0 7.1 6.8

Cost of capital (%) 9.5 9.7 9.5 9.5

RoCE ‐ Cost of capital (%) (3.2) (5.7) (2.4) (2.6)

Asset turnover (x) 1.6 1.9 1.6 1.8

Sales/Total assets (x) 1.1 1.2 1.0 1.0

Sales/Net FA (x) 1.9 2.7 2.6 2.8

Working capital/Sales (x) 0.2 0.3 0.3 0.3

Current ratio (x) 3.4 4.0 6.7 7.1

Quick ratio (x) 2.7 3.4 5.8 6.2

Interest cover (x) 3.1 3.9 3.8 3.7

Dividend cover (x) 3.1 3.7 4.2 4.1

PER (x) 11.4 9.5 7.9 8.1

Price/Book (x) 1.7 1.6 1.4 1.3

EV/EBIT (x) 7.0 7.3 5.3 4.9

EV/NOPLAT (x) 8.6 12.4 6.7 6.2

EV/CE 1.0 1.0 0.8 0.7

EV/IC (x) 1.3 1.5 1.1 1.1

– 51 of 142 –

Coromandel International An unequaled business model, valuations to remain rich



Leader in Phosphatics: Coromandel International (CRIN) is a leading manufacturer of phosphatic fertilizers (14% market share) and is also engaged in pesticides, other agri –inputs and agri services. Its earnings have compounded by 29%, whilst volumes by just 5% during FY08‐12, that suggests margins too have expanded. Favorable policy environment, effective procurement, assured sourcing, sound treasury management and higher share of non‐subsidy businesses has helped this margin expansion in our view. With limited threat to high margin mfg volumes (mid‐cycle US$ 50~60/mt) and share of non‐subsidy businesses rising, we expect earnings to compound 13% during FY12‐14E. Potential to produce 4 mmt over the next four years: We expect phosphatic fertiliser consumption to grow 6% p.a. till FY16E to ~29mmt. We expect players with firm tie‐ups for key inputs to meet the increase in demand without major additional capex. CRIN has invested ~ Rs 4 bn in expanding its capacity to 4 mmt. With supplies from Tunisia commencing this month and with further tie‐ups (if any) the volumes could ramp upto 4 mmt by FY16E from ~ 2 mmt in FY13E. Reach & offerings, an unequalled strength: Non‐subsidy related businesses earn margins of >25% and account for ~30% of total Ebitda and thus CRIN plans to increase its share to ~50% in the next 3 years. Coromandel’s initiatives to broaden its product offerings (pesticides, micro nutrients, (pesticides, micro nutrients, specialty nutrients, mechanised farming) and reach (about 641 agri‐retail centers in Andhra Pradesh & Karnataka) would likely act as a significant entry barrier for other players. Consumption of fertilisers in Coromandel’s main markets have been growing at above‐industry growth rates (refer details inside) and thus, these initiatives would likely result in maintaining/improving its market share over the long term. CRIN’s proximity to markets is its unequalled strength and likely to give it an edge over competition in the advent of diesel retail price decontrol. Input costs easing, will imports spoil the party? We gather that DAP imports are locked at US$ 580/mt CFR or breakeven cost is about ~ Rs 34500/mt; against realization of Rs 38348/mt; that indicates trade profit margins have leveled to manufacturers margins of about Rs 3500~4000/mt. The lucrative margins could likely hasten imports; a potential threat to manufacturers who cannot benefit from fall in feed costs and any appreciation of INR to the USD. However our discussion with importers’ suggests that given weak demand, importers too are extending similar credit (like manufacturers) and are unlikely to profiteer or destroy retail prices. Given already high inventory; importers are unlikely to import further. Manufacturing industry could sustain margins (either through trading or own production). Easing ammonia costs from Q4FY13E and strong INR should augur well going ahead. Reiterate Buy: Weakening demand and increase in key feed phosphoric acid supplies (following capacity addition globally) lowers prices outlook with this already weak INR point towards worst being behind for the industry. In our view, imports are a limited potential threat. Ahead of key state elections (over the next 18 months) the possibility of deep subsidy cuts is remote. As we value these players on a mid‐cycle margin of US$ 50~ 60/mt, we continue to believe in its structural growth story. We reiterate Buy with a PT of Rs 318.

BUY CRIN IN | CMP RS 278






ABS ‐5.4 12.4 ‐16.0REL TO BSE ‐6.1 5.3 ‐23.3


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– 52 of 142 –

12 November 2012 / INDIA EQUITY RESEARCH / COROMANDEL INTERNATIONAL COMPANY UPDATE


Cfl Is Domestic Major In Phosphatic Fertilisers, With About 2.8mmt Of Fertiliser Sales In FY12. The Key To Earnings In The Phosphatic Fertiliser Business Is An Assured Tie‐Up For Key Inputs Like Phosphoric Acid/Rock Phosphate And Ammonia. With Crin’s Firm 14% Stake In Foskor, South Africa, And 15% Stake In Upcoming Jv Project (Tifert) In Tunisia. Crin Has A Sustainable Competitive Edge Over Its Peers.

Financial Structure Non‐Fertiliser Business Accounts For 13% To Revenues And ~35% To Operating Profits. Thus, We Work ~10‐11.4% Operating Margins For Fy13e And Fy14e. Crin Has Minimum Long‐Term Debt And Marginal Capex Commitments And Thus, We Expect Crin To Add > Rs 7.7 Bn In Free Cash P.A. Also, The Key To Earnings Is The Availability Of Input At Affordable Prices And Absolute Capex Is Insignificant.

Shareholder Value Creation Crin’s Asset Light Business Model And Higher Ebitda Over The Years Has Helped It Maintain >25% Roe Over The Last Three Years. Given The Increase In Contribution From The Non‐Fertiliser Business, We Expect Roe’s At ~25% To Be Maintained. Crin Has Been Maintaining A Dividend Payout Ratio Of >35%, Since Last Two Years. Going Forward, We Expect Crin To Maintain Dividends, Which Could Amount To ~35% Of Profits In Dividends. We Have Assumed Rs 8 And Rs 9 In Dividend In Fy13e And Fy14e. This Translates Into a Yield Of 2.9% & 3.2% In Fy13e & Fy14e Respt.

Earnings Visibility Earnings Are Subject To Effective Procurement At Below‐Industry Average Cost, Better Logistics And Timely Subsidy Reimbursements. Supported By The Superior Performance From Non Subsidy Business We Expect The Profits To Compund 13% During FY12‐14e.

Valuation On FY13e, The Stock Is Trading At 13.2x PER, 2.9x PBR And 9.7x Ev/Ebitda

Future Event Triggers Crin Has Been Looking To Tie Up For Long‐Term Ammonia Supply, Besides Scouting For Opportunities To Enter Into Rock Mining. We Believe That Any Firm Arrangements/Acquisitions At The Right Price Could Be Positive.

Expected Price Momentum Standing By Strong Fundamentals, We Expect The Stock To Outperform Its Peers

Risks • CRIN has been maintaining higher spreads (cost of finished product – cost of input),

mainly on account of its business intelligence, superior risk management and cost effective raw material procurement. While we expect CRIN to enjoy higher spreads on account of the same, however, any expensive procurement against lower subsidy realization with inability to pass on higher feed costs, could adversely impact earnings.

• The key to higher utilization is un‐interrupted supply of key inputs like rock, sulphur, phosphoric acid and ammonia, any disruption of the above to affect topline and bottomline compared to our estimates.

• A deficient monsoon, higher raw material costs, with consequent inability to take price hikes and higher freight costs in the advent of diesel price hikes

– 53 of 142 –



PE band

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Given CRIN’s growth initiatives, ability to weather adversebusiness cycles and backward integration, the stock has beencommanding a premium (>25% on PER, >50% on PBR and >50%on EV/Ebitda) to its peers on almost every valuation parameter.We expect CRIN to sustain the premium.


– 54 of 142 –


Value Drivers


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– 55 of 142 –


Valuation & Target Price Despite worry on huge inventory pile up, we expect operating profit margins to improve by 179 bps to 11.4% led by savings in phosphoric acid costs and sharp increase in prices (up 30% yoy). Margin expansions and volume growth of 9% to help earnings compound 13% during FY12‐14E. We value CRIN using the sum‐of‐parts method. We assign CRIN’s base business at 6.5x FY14E EBITDA. To this, we add the investments (not including investments in Foskor) at book and net debt. We have assumed that Foskor will seek a valuation of US$ 1bn, thus CRIN’s 14% stake works to Rs 6.7 bn or Rs 24 /share. We arrive at a price target of Rs 318, which corresponds to PER of 15.0x FY13E EPS and PBR of 3.3x FY13E book. We reiterate with a BUY rating on the stock. SOTP (Rs mn) FY14E

Fertiliser business (6.5x EBITDA) 77,364Add: Investments 1,495Add: Cash 23,956Less: Debt 20,000Equity Value 82,815Assuming Foskars valuation at US$ 1 bn 6,720Fair Value 89,535Fair Value Rs. 318Upside from current levels (%) 14CMP Rs. 278


– 56 of 142 –


NBS in phosphates led to improved margins Government introduced nutrient based subsidy (NBS) wef 1st April 2010 with the intention to check the rising subsidy outgo. Under NBS mechanism the subsidy is fixed whereas MRP is decontrolled (govt. don’t fix the retail price), this is unlike the pre NBS practice of controlling MRP and floating subsidy. In the first year of NBS implementation, industry margins rose due to inexpensive procurement and higher subsidy and increases to retail prices thereafter ensured healthy margins for the industry. CRIN’s strong relationship with its suppliers of raw material bodes well for it in terms of uninterrupted supply of phos. acid from various locations at competitive prices. Its 14% stake in Fosker, (South Africa) facilitates it to source ~0.45 mmt of phos. acid apart from other sources like Phoschem of Israel (0.1 mmt). Further, it has its own captive facility (~0.2 mmt) of phos. acid that helps it to maintain higher margins per Mt. Over and above its TIFERT Jv is likely to commission during Nov‐Dec 2012, from where 0.18 mmt/annum of phos acid has been committed. All these factors augur well and gives it an edge over its competitors. We expect CRIN to report an EBIDTA/Mt of Rs 4,108 & Rs 4,079 in FY13E & FY14E respectively. Ebitda (Rs/mt)

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Coromandel’s primary markets are growing at above‐industry average Coromandel’s primary markets are growing at above‐industry average: Coromandel has a significant market share in the states of Andhra Pradesh, Tamil Nadu, Karnataka, Chattisgarh, Maharashtra, West Bengal and Orissa. The company saw improvement in its market share in Andhra Pradesh from 39% in past few quarters to 46% in Q2FY13. These states are high phosphatic fertiliser‐consuming areas and account for ~51% of the total phosphatic fertiliser consumed in India. AP, Maharashtra and Karnataka alone accounted for 12 mmt (40%) of the total 29mmt of phosphatic and potassic fertilisers consumed in FY12. Most of these states have grown at above‐industry average of ~15.7% during FY08‐12, mainly due to better irrigation.

– 57 of 142 –


States that consume highest Phosphatic and Potassic fertilisers mmt FY08 FY09 FY10 FY11 FY12 CAGR% (FY08‐12)Madhya Pradesh 1.0 1.1 1.3 2.8 2.9 30.5Chattisgarh 0.3 0.4 0.5 0.6 0.7 24.4Maharashtra 2.2 2.5 3.2 4.6 4.5 19.6Karnataka 1.6 2.2 2.5 2.7 3.0 17.0Total 13.1 15.9 17.9 22.9 23.5 15.7Uttar Pradesh 2.2 2.5 2.9 3.3 3.5 12.3Andhra Pradesh 2.6 3.2 3.3 4.1 4.1 12.1Tamil Nadu 1.1 1.3 1.4 1.5 1.7 11.5West Bengal 1.3 1.6 1.8 2.1 2.0 11.4Gujarat 1.2 1.4 1.4 1.8 1.8 10.7Orissa 0.4 0.6 0.6 0.6 0.6 9.9

Source: FAI, PhillipCapital India Research

Proximity to target markets, long term positive The company’s primary markets are Andhra Pradesh, Karnataka & Maharashtra. Its proximity to these markets is considered to be strong positive in terms of lower freight costs that ultimately improve its netbacks. In the eventuality of diesel deregulation, we expect CRIN to protect its turf from competition and this enhances scope to earn better margins in its principal markets. Supply from Tunisia JV to take care of most of the incremental phos. acid requirement post capacity expansion Coromandel sets a production target of 4mmt by FY13‐FY14E (CAGR of 10% during FY10‐13E); for which raw material tie‐ups is in place to the extent of 90%. Coromandel’s management had earlier indicated production volume target of 4mmt by FY13E from 2.6mmt in FY10, which now seems very difficult given the poor demand as a result of high channel inventory, rupee appreciation & higher phosphatic fertilser retail prices. To attain 4mmt of capacity (rated capacity is 3.2mmt at present), the company is de‐bottlenecking its plant in Kakinada at a capex of Rs 3.5bn to be completed by Q4FY13E. Feedstock arrangements for ramping up the near‐term/long‐term volumes are in place only to the extent of ~85%‐90%. However, given healthy free cashflows (over US$ 325 mn over the next two years) and an un‐leveraged balance sheet, the company could look for acquisition opportunities/expansions to meet its feedstock requirements over the next few quarters. The company is under process of expanding its phosphatic capacity from 3.1 mmt to 4 mmt by end the year FY13E, for which most of raw material tie up has already been put in place. It owns 15% stake in Tunisa India Fertiliser JV (TIFERT) with other co ventures being GSFC (15% stake) and Groupe Chimique Tunisien (GCT) of Tunisia owning the rest. The supply agreement with TIFERT JV to the tune of 0.18 mmt would take care of approximately 50% of its incremental capacity expansion. Though for FY13E, we expect the TIFERT to supply about 0.03 mmt of phos. acid, and supplies would ramp up in FY14E.

– 58 of 142 –


Raw Material tie‐ups in mmt FY12 FY13E FY14E

Production (Our estimate) 2.5 1.8 2.9Phosphoric acid tie up Foskor, South africa 0.35 0.33 0.43Tifert, Tunisia 0.03 0.14Own Mfg of phos.acid 0.23 0.15 0.24Phoschem, Israel 0.1 0.05 0.1Others (Bal fig….to be tied up) 0.02 0.02 0.01Total Phosacid reqd. 0.70 0.58 0.92Phos.acid be tied up for (%) 2.56 2.75 1.23


High margin non‐subsidy businesses share increasing Coromandel non‐subsidy businesses comprise of —Speciality Nutrients, micro nutrients, water solubles, organic compost, Crop protection and Retail (641 retail centres in AP & Karnataka). The non‐subsidy business roughly forms 11%, 24% and 27% of total revenues/gross margin and EBITDA, respectively in FY12. These are high‐margin non‐subsidy linked businesses (unregulated) and the company aims to take the share of these businesses in Ebitda to 50% levels from 35% (H1FY13) at present. On a lower base, these businesses have grown at a scorching pace (>~25%‐30%) and the management expects the growth momentum to continue. As per the guidance given in the previous years the company has geared itself to take the non subsidy business EBIDTA contribution to ~50% over the next couple of years. In Q1 FY13 the non subsidy business formed 31% of the EBIDTA, which has improved to 38.6% in Q2FY13. The company’s acquisition of 74.6% stake in Sabero organics Ltd (a technical & formulation pesticides manufacturing firm) for the total compensation of Rs 4.52 bn too is aligned with its strategy to increase the share of non subsidy business to the overall EBIDTA. After the consolidation of Sabero financials with the company, the agrochemicals sales are poised to grow by almost 100%. Sabero Organics is a leader in crop protection and is a leading producer and supplier of fungicides, herbicides and insecticides with manufacturing facilities in India and marketing offices in India, Brazil, Europe, Australia and Argentina. Its organic & specialty business (part of non fertiliser business) during FY12 has grown by 35% yoy & 20% yoy respectively and we expect this run‐rate to be maintained in the next couple of years

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Trend in revenue/gross margin break‐up for Coromandel’s different businesses FY10 FY11 FY12

Revenue Mix (%) Fertilisers 88.8 88.3 89.7Pesticides 5.8 6.5 5.0Others 5.4 5.2 5.3Gross margin Mix (%) Fertilisers 78.3 77.3 87.2Pesticides 8.4 10.8 7.6Others 13.4 11.9 5.2Gross margin (%) Fertilisers 32.0 27.7 32.2Pesticides 52.1 52.4 50.2Others 10.0 27.1 67.8


Captive phosphoric acid facility to help sustain higher spreads CRIN manufactures almost 27% of its phosphoric acid requirement of ~0.77mmt. Given the augmentation of capacities globally and locally, we have a lower price outlook for sulphur and phosphoric acid. The CIL has contracted phosphoric acid at US$ 855/Mt for Q3FY13, which is US$ 30/Mt lower qoq. Although ammonia prices have surged during the year due to supply constraints globally, we expect it to ease from Q4FY13 onwards. We thus expect DAP producers with captive phosphoric acid to have higher spreads/conversion margins over importers of phosphoric acid. We have assumed captive spreads of US$ 68/mt and US$ 56/mt for FY13E and FY14E for CRIN compared to US$ 64/mt in FY12. Higher dividends to be maintained Despite reduction in subsidy rates, putting strain on cash flows for FY13E and FY14E, we expect CRIN to pay higher dividend rate of 80% & 90% in FY13E & FY14E respectively, which would mean a significant increase in dividend payout of ~38% & ~34% levels. Considering the healthy cash flows, higher dividends are probable Dividend payout > 30% to be maintained

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FDI in Retail to boost its retail expansion plans Coromandel International operates more than 600 retail stores under the brand name “Mana Gromor”. Significant quantum of sales takes place through these retail outlets, which beside selling lifestyle & farm inputs products also extends farm services to farmers with the intention of brand building. FDI in retail proposal is under top consideration by the government, which if takes place would provide much needed boost in tern will address the finance and supply chain management issues of India’s retail sector. CRIN would also be a significant beneficiary of this initiative as it would get much needed capital for expand its stores on a large scale Foskor, SA listing, limits downside risk CRIN has increased its stake in Foskor, SA, from 2.5% to 14% in Q109 for a total amount of Rs 1,280 mn. Foskor, (South Africa) produces about 0.75mmt of phosphoric acid and has captive rock. The company contemplates listing in early 2010 at a valuation upwards of US$ 2bn. CRIN’s 15% stake works to about Rs 6.7bn or Rs 24/share, thus limiting the downside. In our fair value price target, after taking note of the subdued market conditions, we assume that Foskor will seek a valuation of US$ 1bn (or Rs 24/share for CRIN). Growth weaved inventively The decision to bring the farm inputs division of EID Parry under its roof and 51% stake acquisition in GFCL, was well‐timed and today, the CRIN‐GFCL combine enjoys a market share of >65% in AP. The ability of the management to predict the future and take appropriate steps much in advance has helped maximise operating profits. This strength, dynamism, vigour and fervent push would go a long way in shaping CRIN’s future. The ability of the management to turn around GFCL from a loss of Rs 136mn in FY03 to a profit of Rs 393mn in FY07 is a case in point. Capex initiative to provide volume led growth The company is in the process of capacity expansion at Kakinada from 3.2 to 4 mmt at a capex of Rs 3.5~4 bn to be commissioned by Q4 FY13, of which it has already spent Rs 1.09 bn till FY12. Further, it is also setting up 800tpd (0.27 mmt) Greenfield SSP capacity in Punjab at an outlay of Rs 1.16bn. Beside this it also spends Rs 0.5‐0.6 bn towards maintenance capex. Although the Kakinada debottlenecking to happen and get commission by Q4FY13, the ramp up the volumes to be seen in FY14E. We have assumed volumes of ~1.84 & ~2.92 mtpa for FY13E & FY14E.

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About the company CRIN is the leading manufacturer of phosphatic fertilisers and is also engaged in the business of pesticides and specialty nutrients. It is a subsidiary of EID Parry, which holds 62.8% in CRIN. The company’s fertiliser plants are located at Vishakhapatnam and Kakinada in AP, Ennore and Ranipet in Tamil Nadu and have a combined production capacity of 2.31mmt of complex fertlisers, 0.82mmt of DAP and 1.32mmt of SSP. It is currently under process to scale up the capacity of phosphatic (DAP + Complex) to 4 mmt by December 2012. The fertiliser business contributed about 89% to revenues and about 73% to operating profits during FY12. Besides fertilizers it is also deals in non subsidy business which covers crop protection, speciality nutrients and rural retail initiative (Mana Gromor stores). The non subsidy business accounts for 11% & 27% to Revenues & Ebidta. Manufacturing Operations • Complex Fertilisers: Vizag, AP, Kakinada, AP and Ennore, TN. • SSP is manufacturing facility: Ranipet, TN. • Pesticides –Formulation unit: Ranipet, TN, Jammu. • Pesticides –Technical unit: Thane, Maharashtra & Ankleshwar, Gujarat (Ficom Organics

Limited). Strategic Initiatives So Far • Acquisition of the farm inputs division of EID Parry, which facilitated a broadening

product portfolio and maintaining a lower cost profile. • Acquisition of 55% stake in Godavari Fertilisers & Chemicals (GFCL) for Rs 1.7bn. After

this, it inducted two strategic partners (GCT of Morocco and Foskar of South Africa) and placed 5% stake to each at Rs 124 per share.

• CRIN picked up a 2.5% stake in Foskar and entered into a business service agreement with the latter. This will ensure its phosphoric acid requirement adequately. CRIN gets ~Rs 22mn p.a. for providing technical assistance and services to Foskar. CRIN’s share in enhanced profits was reviewed in FY09 (after three years) and it has thus increased its stake to 14% in Foskor.

• CRIN has acquired 50.7% of the equity capital of FICOM. It manufactures Technical Grade Pesticides at its unit in Ankleshwar, Gujarat. Subsequently, it made an open offer to acquire another 24%, taking its stake holding to 74.27%.

• Coromandel International Ltd. has merged its subsidiary Godavari Fertilisers and Chemicals Ltd. into itself, with retrospective effect from 1 April 2007. The share swap agreement was agreed at 2:3, leading to a dilution in equity of about 10.2% or 13mn shares. We believe that for 100% holding in GFCL, CRIN over the years has paid about Rs 3.4bn. The acquisition is very attractive as it is 42% cheaper than the acquisition done by IFFCO of Oswal chemicals in September ‘05 (IFFCO acquired Oswal Chemicals, which has 2mmt DAP facility for a total consideration of Rs 4.79bn).

• CRIN and the Gujarat State Fertiliser Corporation (GSFC) signed a joint venture agreement with Groupe Chimique Tunisien (GCT) of Tunisia in 2005, for the manufacture of phosphoric acid at La Skhira, Tunisia, at an estimated cost of ~US$ 525mn‐ US$ 550million (including working capital requirements). Equity could be about US$ 190mn, with CRIN’s 15% stake being US$ 29mn. We expect CRIN to contribute towards debt too. The project would have a nameplate capacity of 0.36mmt and is scheduled to be commissioned by Q3FY13.

• CRIN acquired Sabero Organis Ltd which is a leader in crop protection and a leading producer and supplier of fungicides, herbicides and insecticides with manufacturing facilities in India and marketing offices in India, Brazil, Europe, Australia and Argentina. The company acquired 74.57% stake (including non‐compete fee) with the outlay of Rs 4.52 bn. The acquisition was in line with management’s guidance of taking share of

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non‐fertiliser businesses’ Ebitda to total Ebitda to ~ 50% from 27% over the next few years.

Business Facts Sales Vol.

In mmt Comments

Complex Fertilisers (different grades incl DAP)

2.4 CIL manufactures complex fertilisers of various N,P,K & S concentration and markets it under the brandname, Gromor & Paramfos. About 90% of its raw material requirement is imported and processed at its plant in Vizag and Ennore. However, unlike other complex manufacturers, CRIN imports phosphate rock and sulphur and turns them into acid for captive consumption (~27% of phosphoric acid requirement is met captively). This helps it reduce cost of operations as also meet a part of power requirement captively.

Single Super Phosphates (SSPs)

0.12 It is a highly fragmented industry with buyers having very low bargaining power. Post nutrient based subsidy (NBS) there has been rise in sales of SSP. With better bargaining power, enhanced product offerings and the recent hike in MRP, CRIN makes some money through this.

Pesticides 13.75 kl CRIN is one among the top 5 manufacturers of pesticides and post acquisition of Sabero its contribution of crop protection sales would grow by 100% in FY13E. Sabero acquisition marks its entry into global markets. Besides Sabero it has four facilities in India—Jammu, Thane,Ranipet and Ankleshwar. It has further established a new company in Brazil with a view to greater thrust in the Latin American markets for CRIN's technicals. We expect the division’s revenue to compound 10% during FY12‐14E.

Trading 0.83 Trades in DAP, Ammonia & MOP

Government subsidies Post Nutrient based subsidy (NBS) subsidy is fixed and MRP is decontrolled. For FY13E the government has reduced the subsidy rates by 27%, following the decline in the international fertilizer prices


Financial discussion CRIN has reported FY12 revenue at Rs 98 bn; which has been the highest revenue so far. A significant 30% yoy revenue growth of FY12 has been attributed to higher realization (6% yoy) and volumes (19% yoy). During the year FY12 there had been a sharp escalation in international fertiliser prices, this apart rupee depreciated by 5.2% yoy, these factors prompted government to raise subsidies and companies to raise retail prices in order to maintain its margins. Going forward, we expect revenues to compound 11% in FY12‐14E (despite 27% reduction in subsidy rates for FY13), mainly on account of higher volumes in fertiliser & non fertiliser business. We assume volumes to grow by 18% in14E over FY12. Given delay in phosphoric acid availability from Tunisia and weak demand, we expect FY13E volumes to be at 1.9 mmt. High margin mfg vols is modeled to increase by about 58% in FY14 (Tunisia JV commencing in Nov ’12); but the fall in margins to US$ 56/mt to result in Ebitda growth. For the next couple of years we expect operating profit margins to remain in the region of 9.9‐11.4%, slight improvement over FY12 margin of 9.6% lead by higher spreads as a result of subdued international fertiliser prices, higher retail prices and healthy conversion margins—however expensive FY13E opening inventory to compressed margins for FY13E. Revenues & margins to improve

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Mfg fertiliser 6,308 7,992 Ebitda of US$ 68/56 mt in FY13/14E

Fert traded 476 381 3% of revenues

Pesticides 845 929 15% Ebitda margins

Gypsum 1,000 1,000 1 mmt of Gypsum sale at netback of Rs 1,000/mt

Others 1,256 1,657 margins of 22%

Total 9,884 11,959


We expect CRIN to pay off about US$ 175mn in debt over the next two years. Despite reduction in debt the interest cost is expected to rise due to rise in cost of debt and interest cost on bonus debentures. We have estimated other income for CRIN (which includes only interest and dividend income) to decline in FY13E & slightly rise in FY14E over FY12. We expect profits to compound by 9% during FY12‐ FY14E mainly on account of higher EBIDTA. We assume dividends from Foskor; however, higher interests outgo (9% coupon bonus debenture and rising interest rates) to cap growth in PAT by 26%.

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Adjusted profits to rise, so is the interest cost

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Financials


Net sales 75,279 97,892 86,332 120,513

Growth, % 18 30 ‐12 40

Total income 75,279 97,892 86,332 120,513


EBITDA (Core) 9,450 9,389 9,825 11,902

Growth, % 33.1 (0.7) 4.6 21.1

Margin, % 12.6 9.6 11.4 9.9

Depreciation ‐621 ‐597 ‐783 ‐833

EBIT 8,830 8,792 9,042 11,069

Growth, % 33.1 (0.7) 4.6 21.1

Margin, % 12.6 9.6 11.4 9.9

Other Non‐Operating Income 1,896 1,904 1,344 1,976

Pre‐tax profit 9,857 9,080 8,298 10,775

Tax provided ‐2,921 ‐2,766 ‐2,323 ‐3,232

Profit after tax 6,937 6,314 5,974 7,542

Net Profit 6,937 6,356 5,974 7,542

Growth, % 9.7 14.5 1.7 26.3


Unadj. shares (m) 282 283 283 283

Wtd avg shares (m) 282 283 283 283


Cash & bank 9,605 9,847 9,207 7,697

Debtors 2,052 9,579 13,009 14,858

Inventory 15,138 19,218 25,153 23,805

Loans & advances 11,181 20,486 17,371 21,260

Other current assets 4,300 126 126 126


Investments 1,705 1,495 1,495 1,495



Add: Capital WIP 3,415 5,267 3,000 3,000

Net fixed assets 11,430 14,756 12,056 11,573

Non‐current assets 0 3,470 3,470 3,470

Total assets 55,411 78,977 81,887 84,283


Provisions 1,321 1,502 1,054 1,876




Paid‐up capital 282 283 283 283






Pre‐tax profit 9,857 9,080 8,298 10,775

Depreciation 621 597 783 833

Chg in working capital 1,186 ‐12,882 ‐3,071 ‐1,061

Total tax paid ‐2,961 ‐3,580 ‐2,323 ‐3,232

Other operating activities 981 800 800 800


Capital expenditure ‐2,474 ‐3,923 1,917 ‐350

Chg in investments ‐12 211 0 0

Cash flow from investing activities ‐2,487 ‐3,713 1,917 ‐350

Free cash flow 7,198 ‐9,699 6,403 7,765

Equity raised/(repaid) 3,413 3,347 0 0


Dividend (incl. tax) 2,308 2,314 2,645 2,976

Other financing activities ‐2,564 ‐5,395 ‐5,395 ‐5,395

Cash flow from financing activities ‐674 12,927 ‐6,350 ‐7,920

Net chg in cash 6,524 3,229 53 ‐155


EPS, Rs 18.2 20.8 21.1 26.7

BVPS, Rs 69.4 85.5 97.3 113.4

DPS, Rs 7.0 7.0 8.0 9.0

Return on assets (%) 14.7 10.6 9.1 10.8

Return on equity (%) 29.7 26.9 23.1 25.3



RoIC ‐ Cost of capital (%) 15.1 9.6 8.2 11.4


Cost of capital (%) 9.1 9.3 9.2 8.9

RoCE ‐ Cost of capital (%) 10.7 5.9 4.3 7.7



Sales/Net FA (x) 7.2 7.5 6.4 10.2


Receivable days 9.9 35.7 55.0 45.0

Inventory days 73.4 71.7 106.3 72.1

Payable days 87.2 87.3 130.0 100.0

Current ratio (x) 2.5 2.4 2.3 2.2

Quick ratio (x) 1.6 1.7 1.4 1.4



PER (x) 15.3 13.4 13.2 10.4

Price/Book (x) 4.0 3.3 2.9 2.5

EV/EBIT (x) 9.1 10.5 9.7 7.7

EV/NOPLAT (x) 13.2 14.9 12.7 10.5

EV/CE 2.3 1.8 1.8 1.7

EV/IC (x) 3.2 2.9 2.3 2.2

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Recommendation History Recommendation Target, Rs CMP, Rs Date

BUY 318 278 26‐Oct‐12

BUY 290 242 26‐JUL‐12

Neutral 300 283 04‐Apr‐12

Neutral 300 274 24‐Jan‐12

Neutral 320 337 21‐Oct‐11

SELL 275 341 26‐jul‐11

NEUTRAL 275 318 26‐APR‐11

NEUTRAL 295 278 17‐JAN‐11

neutral 680 (Post SPLIT 340) 670 26‐oct‐10

BUY 424 361 27‐apr‐10

BUY 363 273 25‐jan‐10

BUY 287 220 23‐oct‐09

BUY 224 188 14‐sep‐09

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Deepak Fertiliser Intricately linked to the economic growth



Earnings to remain flat during FY12‐FY14E: Deepak Fertiliser (Deepak) is the sole/largest producer of some specialty chemicals like Ammonium Nitrate, Isopropyl alcohol, Nitric acids and nitro phosphate fertilisers. Deepaks earnings have compounded 24% during FY08‐12; led by .Its margins have been under pressure since the past several quarters led by rise in feed costs (ammonia, gas/LNG & propylene) and we expect cost inflation to continue to exert pressure on its margins for next couple of years. A ramp up in capacity of its new Ammonium nitrate facility remains the sole near term earnings growth driver. As a result, we expect flat earnings during FY12‐FY14E. Sustained higher gas prices, a long term negative: We view higher gas/ammonia prices as a perennial concern for Deepak (part of this concern is captured in the low valuations). The surge in spot RLNG prices hampered the production of Methanol in Q2FY13 and higher prices are unlikely to reverse anytime soon. Dwindling KG D6 gas production risks allocation to P&K producers’ in the long term. A complete withdrawal to lead to fall in earnings by 30%. …..FY14E outlook, however is encouraging: RBI in its latest monetary policy lowered the GDP growth forecast for FY13 to 5.7% from 6.5%. As Deepak’s products are intricately linked to the economy, a cut in forecast likely lowers the TAN’s outlook in FY13E. However, Deepak has guided to raise new TAN plant utilization rate to 70‐75% in FY14E. This along with weakening international prices of phosphoric acid and rise in footfalls (70% occupancy) expected post modernized Ishanya mall (inclusive of lifestyle & foods) remain positive triggers that assuages concerns on rise in Ammonia & Gas cost to some extent in FY14E. H2FY13 to be slightly worse than H1FY13 H1FY13 had been subdued for Deepak as rise in ammonia, propylene & spot RLNG prices eroded the margins. Ammonia prices have risen by 21% in H1FY13 over corresponding period last year beside rupee depreciation by 21% yoy in H1FY13 has further aggravated the problem. Lower production of ammonium nitrate and methanol lowered the cash flows. While we expect situation to worsen in H2FY13 due to lower production of Methanol and margin pressure, however only positive is the improvement in the utilization rate for ammonium nitrate Valuations & View Near term headwinds due to rising feed prices (ammonia, propylene) to remain atleast for the couple of quarters which is likely to be set off against lower phosphoric acid prices. However weak INR and higher LNG prices limits the trading opportunity in fertilisers and would restrict the production of Methanol in FY13E. On FY13E it offers an attractive dividend yield of 4.2%, which limits the downside risk. Maintain Neutral with a PT of Rs 150.

Neutral DFPC IN | CMP RS 130






ABS ‐3.0 ‐2.0 ‐21.5REL TO BSE ‐3.7 ‐9.1 ‐28.8


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Other Key Ratios


Net Sales 24,021 26,485 26,884Ebidta 4,867 4,201 5,312Net Profit 2,567 1,787 2,363EPS, Rs 29.1 20.3 26.8PER, X 4.5 6.4 4.9EV/EBIDTA, x 3.7 4.6 3.4EV/Net Sales, x 0.7 0.7 0.7ROE, % 22.6 14.0 16.6Source: PhillipCapital India Research Est. Saurabh Rathi (+ 9122 6667 9951) [email protected] Gauri Anand (+ 9122 6667 9943) [email protected]

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12 November 2012 / INDIA EQUITY RESEARCH / DEEPAK FERTILISER COMPANY UPDATE


Deepak is the sole manufacturer of IPA and the largest manufacturer of Ammonium Nitrate in India. The company has no threat of competition as the country’s present capacity meets only a part of the country’s current demand. New capacity additions in the market at today’s capital cost would require higher international prices to be viable, and thus would pose a limited threat to Deepak. Also, the company has been executing projects in house, rather than awarding these projects on a turn‐key basis, which lowers capital cost as also manifests its inherent high‐end engineering skills. Being the largest producer of Ammonium Nitrate, it has immense pricing power too

Financial Structure Deepak has been consistently maintaining operating margins above 21% over the last 4 years except in FY12, where rise in ammonia & gas cost pressured margins. In our assessment, we expect margins to remain in the region of 21‐22% till FY14E. Debt/equity to be maintained at 0.6x despite additional borrowings of Rs 1bn over next two years to fund brown filed project of nitro phosphate fertilser and green filed project of sulphur bentonite. However, return ratios could hover in the range of 15 ‐17%, given that it is in the investment phase

Shareholder Value Creation We expect the company to maintain a pay‐out ratio of ~ 27% & 22%, thus translating into a DPS of Rs 5.5 and Rs 6 in FY13E and FY14E (DPS Rs 5.5 in FY12)—this works to a yield of 4.2%. and 4.6%

Earnings Visibility Earnings are subject to the availability of gas and firm prices for ammonia/ methanol/ IPA/ Ammonium Nitrate/ RLNG. We expect the profits to decline during FY12‐FY14E given the input cost pressure

Valuation On FY13E, stock is trading attractive at 6.4x PER, 0.9x PBR, 4.6x Ev/Ebitda Future Event Triggers Potential stake sale/spin‐off expected in key businesses, like Chemicals and

Retail. Also, the JV to import key feedstock ammonia and firm tie‐ups for gas could be positive.

Expected Price Momentum Led by new flow and the announcement of the joint venture, we expect the stock to outperform its peers. We recommend a neutral rating with a price target of Rs 150.

Risks • Weakening INR against US dollar would have an adverse impact on DEEPAK’s financials

as it is the net importer. Rupee has depreciated 21 % in H1 FY13 over H1FY12 and expected to remain firm, posing series threat to its margins. Most of the raw materials like Phosphoric acid, Ammonia for new TAN plant, propylene, natural gas are billed in US dollar.

• Continuous decline in KG D6 gas has been a cause of concern as of the total gas supply of 0.63 mmscmd it gets 0.155 mmscmd from KG D6 (~25% of the total gas) that was recently cut by 10% cut last quarter. A complete withdrawal of inexpensive KG D6, would likely lower its earnings by 30%. Any disruption in availability of gas is an important risk to our estimates and PT. Also most other feedstocks (ammonia & propylene and LNG prices) have spiraled too; a sustained rise in material costs is an important risk to our estimates and rating.

• Most of the raw materials for DEEPAK have spiraled over the last year. Ammonia & Propylene prices yoy soured by 25% & 7% respectively. Further the natural gas cost for FY12 has gone up by 47% yoy to Rs 9.2/SCM. All the mentioned raw material accounts for 68% of the total raw material cost. If in case the raw material prices sustain or rise from these levels, it would adversely affect its cash flows.

• There has been a strong correlation between IIP (Index of Industrial production) performance and Ammonium Nitrate demand, as later finds usage in mining activities of limestone, coal, and iron ore. Since last several months IIP has witnessed declining trend. Barring two quarters (Feb & August 2012) Output in mining sector has shown a declining trend. Any slowdown in mining activity would affect demand for Ammonium Nitrate, which accounts for 22% of revenues

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The stock has been trading lower compared to its peers on mostvaluation parameters (PER, PBR, EV/Ebitda) mainly on account ofunrelated diversification and a risk of increase in raw material cost. We expect the discount to narrow on stabilizing operations, risks of higher gas prices seems to have been adequatelyfactored in the estimates.


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Value Drivers


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Valuation & Target Price We use our sum‐of‐parts valuation to arrive at Deepak’s price target. The increase in gas & ammonia price and the volatility in key product realisation have been concerns. Historically, the stock has been commanding EV/EBITDA multiple of < 5x. Given the concerns on business, we value the base business at 3.9x EBITDA. We use the DCF method to value Ishaanya’s equity value. Ishaanya adds Rs 10 to Deepak’s price target. We have assumed investments at book. We arrive at a price target of Rs 150 per share, an upside of 15% from current levels. We maintain with a Neutral rating on the stock. Rs mn FY14E

Ebitda (Core Business at 3.9x) 18,360

Add: Ishaanya Equity Value 900Add: Investments 558Less: Net Debt (6,605)

Enterprise Value 13,213

Target Price, Rs 150

Upside/ (downside) (%) 15%CMP Rs. 130


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Business Description Deepak Fertiliser's business is broadly categorised into Industrial chemicals, Agribusiness, and specialty retailing, with these forming around 60.4%, 39.1%, and 0.5% respectively of the company's total consolidated FY12 sales. It is an integrated multi‐product company, which manufactures Ammonia, methanol, Ammonium Nitrate, Iso Propyl Alcohol and Nitro Phosphate fertiliser. It started commercial production of ammonia, using natural gas as feedstock in 1983. Thereafter, it diversified into forward‐integration of ammonia and methanol. It has laid a 42‐km gas pipeline from Bombay High to its plants at Taloja. It acquired Smartchem Technologies Limited to become the largest producer of ammonium nitrate in India. It has set up the first iso‐propyl alcohol (IPA) plant in the country and has completed the construction of a specialty mall, Ishanya, in Pune. The IPA plant has 70,000 mt capacity and was commissioned at a capex of Rs 1.6bn. Recent Capacity expansions and planned capex Capacity in Mt Project cost Rs Mn Commissioning

Nitro Phosphate capacity expansion 3,71,000 3,600 Jan '15ISHAANYA Modernization 0.55 mn sq ft 550 Dec'12Bentonite Sulphur green field project 32000 550 Jan '15


Key product Summary

Sales Vol. In mmt

Capacity In mmt Comments

Ammonium Nitrate 2,02,717 4,32,000 DEEPAK is the sole producer of Technical grade AmmoniumNitrate in India. Ammonium Nitrate is used as an explosive. Ithas a strong correlation with IIP and Mining growth, thus giventhe slowdown in the industrial activity, we expect the higherdemand for AN to slack to some extent. Its contribution to totalsales to go up in FY13E and FY14E

Methanol 62,226 1,00,000 It is a commodity chemical; however its contribution to theoverall total is expected to go up going forward.

IPA 71,016 70,000 It is the sole producer of IPA in India. The country consumesabout ~ 85000 mt, which as per the management is stagnatingat current levels. Propylene is the key feed, DEEPAK has a 7 yrvolume contract with BPCL for supply. IPA complementsmethanol. Globally IPA consumption is ~ 18 mmt. About 4% ofglobal propylene goes in making of IPA. We expect themanagement to have already recovered Rs 1.5 bn capex of inless than two years.

Acids 1,31,084 5,24,200 It is the largest producers of Acids in India.

Specialty Mall 550000* Post modernization by December 2012, the managementexpects the footfall to rise

Ammonium Nitro Phos (Fert)

1,76,203 2,29,500

*Leasable area in sq ft


– 73 of 142 –


Investment Argument Capacity ramp up at New TAN plant to provide volume led growth Against the prevailing indigenous demand of 0.7 mmt of Ammonium Nitrate the supply is to the extent of 0.3 mmt, this gap is being bridge through imports. DEEPAK being the sole domestic manufacturer of technical grade AN is well poised to capitalize on this shortfall. We have assumed the AN sale volume growth of 38% for FY14E over FY12 to 0.374 mmt, as the company plans to ramp up the capacity utilization at its new TAN plant. However, on the flip side we believe that its TAN margins will remain under pressure due to rising ammonia & gas cost. Price hikes to set off cost pressures are unlikely given soft demand (reflected in weak IIP growth) outlook. We assume a marginal growth of 5% in AN realization for FY14E over FY12 respectively. RBI in its October 29, 2012 policy report lowered India’s GDP growth forecast to 5.7% for FY13 from 6.5% earlier, as a result it will cast its shadow on the mining activities. Coal mining is also happening at a lackluster growth since the past several quarters (as witnessed from the chart below) which is creating a demand pressure on ammonium nitrate, While coal mining, where close to 65% of ammonium nitrate demand goes has shown slight improvement in coal demand (given the bleak demand for coal in 2nd half) however company’s monopolistic position insulates it from the battered macro factors. Moreover, Limestone & Iron Ore which accounts for 6% of ammonium nitrate demand each saw mining activities happening at a slower pace. Weak IIP growth impacts mining activities

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Cement (limestone) 6 36

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– 74 of 142 –


Agri & farm solutions business to reap the benefits in the long run Deepak is focused on Agri & Farm solutions business. The prospects of this business are promising, whose benefits will reap over a longer period that would translate into good returns on investments. Primarily the company is creating impression among farmers through brand loyalty and awareness. This concept has taken a form of “Mahadhan Saarrthie” farm solution centres, whose principal focus is to work closely with the farmers in order to increase the farm yields & productivity apart from providing complete farm solutions in order to improve farm economics. As of FY12 the company has 12 stores of Saarrthie which caters to approx. 11500 farmers. All this is being achieved by educating farmers through knowledge driven services. This initiative is building the brand image of the company & its products in the customers mind and hence forsee rise in revenues going forward. In order to further consolidate its position in agri business and to get the market access for domestic & global markets. It acquired 49% stake in Gujarat based Desai fruits & vegetables, which is one of the leading exporters of Banana’s. Desai fruits & vegetables has plans to focus on domestic market, this initiative to start revenue growth from FY14E onwards Input cost inflation to continue to exert pressure on margins Gas, Ammonia & Phosphoric acid are the key feed stock consumed by DEEPAK. Prices of the mentioned feeds (barring phosphoric acid) have risen over the past several quarters. DEEPAK consumes about ~0.63 mcm/d of gas of which RIL KG D6 forms ~0.132 mcm/d (after adjusting for10‐12% cut due to supply disruption) this shortfall is being met through expensive RLNG which dented the margins of its chemical division. Further, for its technical ammonium nitrate projects (existing & new), the key feed ammonia is being largely met through imports at higher prices as the international ammonia prices have soared over the last several quarters due to shut down of few ammonia plants worldwide. Ammonia prices have gone up by 21% in H1FY13 over H1FY12. Management has indicated that the situation to prevail at least for the couple of quarters which showcase a challenge for the company in the light of its inability to pass on the additional cost. Given the input cost pressure the chemical division of the company witnessed margin erosion over past several quarters. Moreover the company is in the mode of ramp up of its new TAN plant capacity to ~70%, which would further push the need for costly imported ammonia as a consequence of this would put further margin pressure Rising raw material prices denting margins

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Iso‐Propyl Alcohol (IPA) project have maximized shareholder return, but higher propylene prices are drag on margins DEEPAK commissioned its 70,000mt IPA plant in Aug ’06 at a capex of Rs 1.6bn. As per our calculations the project has pay back all the incurred capital expenditure by FY09, which in turn maximized shareholder returns which is also reflected in the overall ROE of the company that has gone up from 15% in FY07 to 18% in FY09. This business stream has proved to be cash cow for the company, as ever since it commissioned its monopoly situation facilitated it to command higher premium. However, IPA realization growth of 33% in FY12 over FY07, didn’t kept pace with stupendous rise in propylene prices (raw material for IPA) which over the similar period has risen by 98%, affected the cash flows. We believe the situation of margin pressure in this particular segment to remain at least for the next couple of years Propylene to IPA spreads to decline given the input cost pressure

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Source: Company, Bloomberg, PhillipCapital India Research Estimates

IPA Market The domestic demand is close to 85,000tpa, which is solely met by imports. The demand is growing at about 8% and it’s complementary to Methanol. The demand for IPA globally is likely to grow at 2% p.a. and is pegged at 18mn tpa. Global IPA exports account for 30% of the total production, which is down from 40%, a decade ago. Exxon Mobil, the largest producer of IPA in the world, has envisaged good growth for IPA in the Asian region. In the year 2004, it has increased its IPA capacity to 325,000 tpa at its plant in Baton Rouge, Louisiana. Shell Chemicals, through debottlenecking, has added another 50,000 tpa capacity at its Pernis refinery, Netherlands.

– 76 of 142 –


Application of IPA chemical It is one of the many chemical solvents that finds a variety of uses related to the paint, ink, adhesive industry as chemical intermediates for further chemical production, as cleaning media from dry cleaning of clothes to metal processing and degreasing, besides many small applications from nail varnish remover to surgical antiseptics.

Direct solvent6%

Personal care12%

Chemical derivatives

36%Others incl Pharma

46%


Feed, propylene prices on an upward trail IPA is manufactured by feeding conventional C3 splitter with 95% propylene, which then is concentrated to 99.6% in the column overheads. Besides being used in IPA, Propylene has manifold applications and is used in the making of propylene oxide/propylene glycol, etc. Demand for propylene is growing faster than ethylene as observed in the recent past. Over the years, with an increase in the crude oil price, International Propylene prices have risen sharply, and are hovering at about ~US$ 900/mt. The large number of plants that are expected to start up in the next three to four years will barely keep pace with accelerating demand. About 4% of the global propylene goes into the manufacturing of IPA. DEEPAK has a 7‐year quantity agreement with BPCL. As the current utilisation rates are between ~70‐75% levels, DEEPAK has plans to export. The company is in talks with local refiners for arrangement of additional propylene. We have propylene prices at US$ 905/mt and US$ 983mt in FY10E and FY11E compared to US$ 883 in FY09. Attractive Valuation restricts further downside for stock DEEPAK trades attractive to its peers on FY13E, it is available at 6.4x PE, 0.9x P/BV & 4.6x EV/EBIDTA. Stock has corrected by 24% from its 52 weak high, discounting concerns with regard to rise in raw material cost. Moving forward positives are 1) capacity utilization of its new TAN plant to go up around ~70% 2) weakening international prices of phosphoric acid 3) rise in footfalls (70% occupancy) expected at modernized Issanya mall (inclusive of lifestyle & foods) commissioning by Dec 2012. These positives expected to assuage the concerns of rise in Ammonia & Gas cost. Even though the company follows the conservative dividend policy given its capex requirement every year, on FY13E it offers an attractive dividend yield of 4.2%.

– 77 of 142 –


Ishannya mall continues to be drag on return ratios DEEPAK’s entry into realty segment through opening of Ishannya mall has not been a success so far. Ever since it began operation it remains to be drag on margins barring few quarters. Ishannya mall (5.5 mn sq ft.) which was opened with the concept of speciality, interior‐exterior mall, failed to attract foot falls besides fetching lower rentals in the range of Rs30‐40/sq ft. Its occupancy remained in the region of 30‐40% since it began to operate against the management expectation of 70%. Few years down the line management with the intent to make it profit centre decided to alter the concept. It planned to introduce food court, entertainment & complete lifestyle mall in order to attract more footfalls. It has been incurring the additional capex of Rs 550 mn to modernize the mall, post which it expects the occupancy to go up to around 70%. However, we believe the occupancy and lease rentals to remain lower as Pune city in particular has witnessed the influx of too many malls. Since last many quarters its reality segment has been incurring losses at PBIT level due to higher operating and depreciation cost. As seen in the chart below it’s reality division has been reporting negative cash flows Reality segment cash flows

Reality segment cash flows

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Financials We expect revenues to compound by 6% over FY12‐FY14E, mainly on account of higher sales from Ammonium Nitrate as a result of ramp up of production, whose contribution of total sales would go up from 22% in FY12 to 29% in FY14E. We have assumed the methanol capacity utilization rate at 38% & 68% in FY13E and FY14E. Methanol being an unviable proposition for the company (produce from spot RLNG) so the production is expected to be lowers in FY13. We have assumed that DEEPAK will receive 0.73 & 0.78mcm/d of gas in FY13E & FY14E against 0.64 mcm/d of actual consumption in FY12. We expect trading share in the total revenues to go up in FY13E to 28% from 21% reported in FY12. Revenue Mix (%) FY10 FY11 FY12 FY13E FY14E

Nitrophosphate 9.0 14.0 19.7 15.8 16.9DNA 1.6 2.6 2.5 2.1 2.8CAN 7.4 7.7 4.2 5.5 6.2Methanol 5.5 7.1 4.9 2.7 4.9Ammonium Ntirare 15.8 18.2 21.6 20.6 29.2IPA 20.8 24.8 21.1 20.5 21.2Trading 27.1 16.2 20.6 27.9 13.8Others 12.9 9.3 5.4 4.8 4.9Source: Company, PhillipCapital India Research Estimates

– 78 of 142 –


Company’s chemical division to witness margin pressure Delta for chemical division to remain under pressure due to rise in ammonia & gas cost, which together forms 44% of the total raw material cost. Imported ammonia prices (IPP prices) which finds usage in its new TAN plant, soared by 21% in H1FY13 over H1FY12. Whereas nonsubsidised RLNG which is consumed in Methanol, CNA & older AN facility, saw steep rise in cost as decline in KG D6 gas forcing it to replace it with costlier RLNG. Moreover, higher propylene prices likely to squeeze the IPA delta by 35%. Net net Operating profit margins of chemical division to remain under pressure over the next two years Increase in interest outgo to lower profits To fund the new capex of Rs 4.15 bn towards brownfield Nitro Phosphate facility & green field Bentonite Sulphur facility apart from usual maintenance capex, we expect that it is likely to borrow fresh loans worth of Rs 1 bn over its existing loans. Ballooning debt coupled with rising rate of interest doesn’t seems to relieve the company from interest burden for the next couple of years. For FY13E & FY14E we have assumed the interest cost of Rs 0.85 bn & Rs 0.97 bn respectively. We expect adj. PAT to degrow by 2% CAGR over FY12‐14E.

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– 79 of 142 –


Financials


Net sales 16,131 24,021 26,485 26,884

Growth, % 23 49 10 2

Other income 483 465 486 555

Total income 16,614 24,486 26,971 27,440


EBITDA (Core) 4,032 4,867 4,201 5,312

Growth, % 23.1 20.7 (13.7) 26.4

Margin, % 25.0 20.3 15.9 19.8

Depreciation ‐787 ‐890 ‐902 ‐869

EBIT 3,244 3,977 3,299 4,443

Growth, % 23.1 20.7 (13.7) 26.4

Margin, % 25.0 20.3 15.9 19.8

Interest paid ‐439 ‐682 ‐851 ‐969

Non‐recurring Items 34 0 1 1

Pre‐tax profit 2,839 3,295 2,449 3,475

Tax provided ‐734 ‐800 ‐661 ‐1,111

Profit after tax 2,105 2,494 1,788 2,364

Growth, % 68.6 24.0 (30.4) 32.2


Unadj. shares (m) 88 88 88 88

Wtd avg shares (m) 88 88 88 88


Cash & bank 2,697 1,558 ‐204 2,395

Marketable securities at cost 35 0 0 0

Debtors 2,596 5,619 6,168 5,082

Inventory 1,614 2,116 3,119 2,425

Loans & advances 1,515 1,558 1,558 1,558

Other current assets 0 41 41 41


Investments 548 558 558 558



Add: Capital WIP 2,717 1,206 1,500 3,500

Net fixed assets 13,308 14,622 15,220 17,351

Total assets 22,314 26,072 26,461 29,410


Provisions 737 622 622 666










Pre‐tax profit 2,839 3,295 2,449 3,475


Chg in working capital ‐639 ‐1,777 ‐1,955 1,470

Total tax paid ‐554 ‐566 ‐661 ‐1,111

Other operating activities 817 1,412 0 0

Cash flow from operating activities 3,251 3,253 736 4,703

Capital expenditure ‐1,862 ‐2,204 ‐1,500 ‐3,000

Chg in investments 396 ‐11 0 0

Chg in marketable securities ‐35 35 0 0

Cash flow from investing activities ‐1,501 ‐2,179 ‐1,500 ‐3,000

Free cash flow 1,750 1,074 ‐764 1,703

Debt raised/(repaid) 445 186 ‐442 1,500


Other financing activities ‐817 ‐1,412 ‐1,412 0

Cash flow from financing activities ‐875 ‐1,780 ‐2,408 897

Net chg in cash 875 ‐706 ‐3,172 2,600


EPS, Rs 23.5 29.1 20.3 26.8

BVPS, Rs 120.1 137.6 151.6 171.5

DPS, Rs 5.0 5.5 5.5 6.0

Return on assets (%) 11.4 12.1 8.9 10.7

Return on equity (%) 20.9 22.6 14.0 16.6





Cost of capital (%) 9.0 8.9 8.8 8.9




Sales/Net FA (x) 1.3 1.7 1.8 1.7



Inventory days 36.5 32.1 43.0 32.9

Payable days 69.2 80.6 63.0 59.0

Current ratio (x) 3.5 2.5 2.7 3.2

Quick ratio (x) 2.9 2.0 1.9 2.5



PER (x) 5.5 4.5 6.4 4.9

Price/Book (x) 1.1 0.9 0.9 0.8

EV/EBIT (x) 4.1 3.7 4.6 3.4

EV/NOPLAT (x) 5.0 4.4 5.4 4.3

EV/CE 0.8 0.8 0.8 0.7

EV/IC (x) 1.0 1.0 0.9 0.8

– 80 of 142 –



Neutral 150 132 22‐May‐12

Neutral 165 141 30‐January‐12

Neutral 190 168 24‐October‐11

Buy 200 155 17‐March‐11

Buy 220 177 28‐October‐10

Buy 195 152 23‐July‐10

Buy 150 110 27‐May‐10

Neutral 112 110 19‐March‐10

Buy 89 87 03‐November‐09

Buy 107 87 14‐September‐09

– 81 of 142 –

Kaveri Seeds Worth a seize!

FERTILISER: Initiating Coverage 12 November 2012


Kaveri Seed Company (Kaveri) is one of the reputed hybrid seeds play in India. It has a strong brand and is gaining market share in high value cotton segment. It has a pan‐India presence with a comprehensive product portfolio and a strong R&D team and it is well positioned to capitalise on the growth in the high‐yield/hybrid seed market and improving seed replacement rate. Profits have compounded a strong 48% during FY10‐12; mainly led by 30% jump in cotton seed prices, improvement in cotton acreage and a fall in Bt cotton seed production by competition. Indian seed industry to touch US$ 3bn by 2015‐16E: The US$ 2bn seed industry is growing at ~ 12% p.a and is expected to touch US$ 3bn by FY15‐16E. High value BT cotton accounts for roughly about 30% in value; however in volume terms it’s far less. The private sector accounts for about 75% of the industry but is dominated by saved seeds (75%) and purchased seeds are just about 25%; thus emphasizing the huge opportunity for hybrid seeds industry. Hybrid penetration to drive growth: Kaveri is expected to benefit from improving seed replacement rate and growth in hybridization. It has a strong in house developed portfolio of products that is likely to drive growth forward (12 hybrid corn varieties, 5 sunflower, 6 cotton and 23 varieties of paddy). It has spent about Rs 1.5 bn in expansions (highest in the industry) and this is expected to drive growth going forward. Diversified portfolio mitigates product risk: Over the past few years, Kaveri has diversified its product portfolio, which now includes Bajra, Corn, Cotton, Jowar, Rice, Sunflower and Vegetables. However, share of cotton has been steadily increasing and now it accounts for ~ 40% of revenues, the jump in cotton is also aided by rise in cotton prices. Kaveri has increased its market share in cotton to 10% (in H1FY13) with its strong brands ‘Jadoo’ and ‘Jackpot’ aims to increase it steadily. Kaveri with about 15% market share in Sunflower, Corn and Bajra is likely to benefit from increase in acreages and seed replacement rate in these crops. Kaveri’s OPV Sampada (red gram), Sampoorna (Paddy) have created a niche market for itself. According to the company its hybrids X 563 Bajra and KSH 950 (Jowar) are of great promise; we expect the diversified portfolio mitigates product related risks. Initiate coverage with a Buy: Kaveri is a proxy play on the emerging high growth seed opportunity in India. The seed space is attractive considering the macro opportunity, high entry barriers, asset‐light model, superior return ratios and less regulatory intervention. A strong germplasm base; huge land bank, sound relationship with growers, brand image and balance sheet strength makes Kaveri a formidable player in the seed industry. While the growth hitherto has been led by higher market share in cotton; but over the longer term increased rice, maize & bajra hybrid penetration would drive its growth. Valuations trading at historical low, initiate coverage with a Buy rating and FY13E PT of Rs 1500 (corresponds to 18x FY13PER).

BUY KSCL IN | CMP RS 1170






ABS 9.5 50.2 144.6REL TO BSE 8.7 43.1 137.3


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Net Sales 3,724 6,015 7,783Ebidta 770 1,302 1,528Net Profit 581 1,137 1,359EPS, Rs 42.4 83.0 99.2PER, X 27.8 14.2 11.9EV/EBIDTA, x 21.2 12.1 9.6EV/Net Sales, x 4.4 2.6 1.9ROE, % 27.0 38.5 32.9Source: Phillip Capital India Research Gauri Anand (+ 9122 6667 9943) [email protected] Saurabh Rathi (+ 9122 6667 9951) [email protected]

– 82 of 142 –

12 November 2012 / INDIA EQUITY RESEARCH / KAVERI SEEDS INITIATING COVERAGE


Kaveri Seed is a well penetrated player in the Indian seed industry. It has more than 95 portfolios of seeds which has good brand recall in farmer fraternity. It's distribution reach which entails the network of more than 15000 distributors which covers almost of the Indian districts and this gives it an edge over its peers. It has a strong product portfolio and given its excellent reach it is a preferred player for farmers

Financial Structure The D:E ratio for FY12 stands comfortably at 0.1 that provides it cushion to raise debt to meet its future capex plans and working capital requirement

Shareholder Value Creation The company has maintained the liberal dividend distribution policy which reflects the company’s strong cash flows generating ability. Over the past four years the dividend rate has been increasing from 20% in FY09 to 40% in FY12 reflecting value creation. For FY13E & FY14E we have maintained 40% dividend rate.

Earnings Visibility Earnings to compound 53% during FY12‐FY14E

Valuation In FY13E, the stock is trading at 14.2x PER, 12.1x EV/Ebitda, 4.6x PBR

Future Event Triggers Favourable monsoon, success in new product launches (seeds, micro nutrients)

Expected Price Momentum The company's success of its hybrid seeds translating into superior return ratios. For FY12 the ROE stood at 25%, which we expect to go up to 39% & 33% in FY13E & FY14E respectively .Its strong brand recall in its target market provides it a platform for higher growth. Further being the principal producer of hybrids in sunflower, corn & paddy gives it an opportunity to exploit its strong distribution network

Risks • Regulatory risk: The business of Kaveri Seeds is dependent on various laws,

regulations and policies announced from time to time. Any development in these areas curbing the company’s freedom to operate would have an adverse effect on its business and growth.

• Risk from weather, pests, etc: Seed production is dependent on weather conditions and unfavourable weather can affect the quality and quantity of production. Also, due to adverse weather conditions, there may be pest attacks, affecting the output and hampering growth.

• Competition from newer products: The seed business requires continuous development of improved seeds, and inability to develop these would result in loss of market share.

• Risks of corporate tax inching up: The management of Kaveri believes that the company’s income is non‐taxable, as it is agricultural income. However, Kaveri did pay income tax at an effective tax rate of 30% in FY08 and thereafter the tax outgo has been in the order of about 5~6%. We don’t assume the corporate income tax at 30%; however highlight a higher tax levy is an important risk to our earnings estimate and Price target.

– 83 of 142 –



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– 84 of 142 –


Value Drivers


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– 85 of 142 –


Investment Thesis Diversified portfolio mitigates product risk Over the past few years, Kaveri has diversified its product portfolio, which now includes Bajra, Corn, Cotton, Jowar, Rice, Sunflower and Vegetables. However, share of cotton has been steadily increasing and now it accounts for ~ 40% of revenues, the jump in cotton is also aided by rise in cotton prices. Kaveri has about 10% market share in cotton and with its strong brands ‘Jadoo’ and ‘Jackpot’ aims to increase it steadily. With increasing preference to hybrid seeds, we see a marked improvement in yield and production, Kaveri with about 15% market share in Sunflower, Corn and Bajra is likely to benefit from increase in acreages and seed replacement rate in these crops. Kaveri’s OPV Sampada (red gram), Sampoorna (Paddy) have created a niche market for itself. According to the company its hybrids X 563 Bajra and KSH 950 (Jowar) are of great promise and are likely to the hit the market very soon. Yields over the last decade have improved Area (mn hect) Production (mmt) Yield (kg/hectare)

Sunflower 2001‐02 1.18 0.68 5772010‐11* 0.90 0.65 726CAGR % ‐3.0 ‐0.5 2.6Corn 2001‐02 6.58 13.16 20002010‐11* 8.49 21.28 2507CAGR % 2.9 5.5 2.5Bajra 2001‐02 9.53 8.28 8692010‐12* 8.39 10.05 1091CAGR % ‐1.3 2.2 2.3


New launches and distribution to support topline growth Historically, Kaveri has been a player in Southern and Central India, but over the past few years it has expanded its geographical presence in the Northern, Eastern and Western markets too. ICAR has identified few of its hybrids for Western, Central and Northern markets. Kaveri Seeds has been continuously developing newer hybrids in different crops based on regional demand and is thus gaining significant market presence. In view of demand for high quality and more variety in vegetables, Kaveri’s R&D is laying new thrust on vegetables with emphasis on tomato, okra and chilly, presently these seeds account for 7% of revenues. We believe Kaveri Seeds is well positioned to capitalize on the increased demand for high‐yield/hybrid seeds because of its pan‐India distribution network and vast product portfolio.

– 86 of 142 –


Market share and revenue break up

Kaveri's market share

0%

2%

4%

6%

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16%

Paddy Cotton Sunflower Corn Bajra

Bajra9%

Corn/Maize27%

Cotton43%

Jowar3%

Rice9%

Sunflower9%

Source: PhillipCapital India Research

Hybrid rice a promising long term growth story Rice is one of the few crops that is grown round the year in India. It has the largest acreage under cultivation (45 mn hectares); and production could likely be ~ 104 mmt in FY13E. While we are the second largest producer of Rice the yields are half the global average. And that is because almost 95% of its ~ 45 mn hect of rice areas grows traditional high‐yielding varieties (i.e use of saved or varietal seeds), compared to only about 30% in China, the biggest rice grower, whose use of hybrid technology has boosted average yields to more than five tonnes a hectare. In India yield per/hectare has improved by 18% in the last decade; however it is stagnating over the last 5 years. Rice is a water intensive crop and only 55% of the acreage under cultivation is irrigated, partly explaining the lower yields and thus production. While Cotton seeds account for 40% of the seed industry (about US$ 2bn); it accounts for ~ 1% in volume terms. With more penetration of hybrid rice it could well become the largest (presently about Rs ~ 4 bn against cotton ie. about Rs 30 bn). Reports indicate the Union Government is aiming to increase the area under hybrid rice cultivation to 25% of all rice cultivated area by 2015; this would benefit the likes of Kaveri which already has a well entrenched presence in this segment. India’s Rice yield half of global average Rice mt/ha Comments

India 2.3 Production ~ 104 mmt, second largest producer. Hybrid penetration only about 5%, has

the highest acreage under cultivation of ~ 45 mn hect. However yields low given only ~

55% acreage of rice acreage is irrigated. The hybrid yields are about 3~4 mt/ha

China 6.5 Production 197 mmt, the largest producer. Almost 30% of the total acreage under rice

cultivation is high‐vielding variety hybrid seeds

Australia 10.1

Russia 5.2

US 7.5

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– 87 of 142 –


Rice yields though up 18% in the last decade, yields are stagnating over the last 5 years

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Kaveri has 5% market share in hybrid rice. Four of its hybrids (KPH 216, KPH 37, KPH 272 and KPH 199) have done well in the National trails and are promoted to next stage of evaluation. The answer to stalling output of rice in India increasingly appears to be in hybrid varieties that could not only plug growing demand but meet nutritional needs of poorest people (meets 70% calorific needs). The Food Security Bill promises grain of 61 mn mmt a year, the bulk of which would be wheat and rice. Thus hybrid varieties of rice may also be a key part of the answer to food security for India; we expect greater impetus on the same going forward. Strong R&D capabilities to help develop new and improved products KSCL has a large collection of germplasm, which it has amassed over last ~3 decades. It has also built a qualified and experienced research team. Kaveri has a sound R&D team that has helped develop hybrids that are superior to its peers and, thus, gain market share. The corn, sunflower, rice and bajra hybrid seeds developed by the R&D team have been highly successful in the domestic market. The R&D team has also developed hybrid GM cotton seeds that have found high acceptance in the domestic market and the company has steadily increased its market share. Germplasm or the genetic wealth is most vital asset for any seed company. Its vast “Gene Bank” is stored in its newly commissioned cold storage unit and Seed bank at Pamulaparty. In order to establish legal ownership of the company’s hybrids and their parental lines, Kaveri has filed for about 150 applications, of which about 20 have been approved. Kaveri Seeds is one of the few organised industry players with its own land for R&D. It also grows foundation seeds on these lands. As the company grows foundation seeds on its own land (about 600 acres), it has more control over germplasm and the total process of developing hybrid seeds which thus minimizes the possibility of misuse and piracy of the company’s hybrids. Kaveri Seeds spent about 3% of its sales on R&D and plans to spend about 4% of sales going forward. The R&D expense as a percentage of total sales is lower than the industry average (of 7–8%) as it saves on leased rentals for land. If one were to account for the company’s rentals in the R&D expense, then it would account for 7–8% of sales. We believe the company’s strong R&D team and large collection of germplasm will help it to continuously develop new and improved seeds and, thus, remain a significant player in the domestic seed industry.

– 88 of 142 –


Financials Topline to compound 45% during FY12‐14E to Rs 7.8 bn Kaveri Seeds had a predominantly kharif season focused seeds business. Thus, the first quarter (April to June) accounted for a major part of its revenues. However, over the years, the company has added rabi crops to its portfolio and revenues are now somewhat less skewed. During FY08‐12, revenues compounded a solid 52%, largely led by 28% jump in realizations and 16% jump in volumes. Increasing market share in cotton and new product launches like sunflower, maize and bajra have aided the excellent topline growth. Given increased acceptance to hybrid seeds (than in the past) and kaveri’s strong product portfolio and increase in its distribution netword, we model volumes to compound 30% and assume single digit growth in realization, which translates into a topline CAGR of 45% to Rs 7.8 bn in FY14E. Kaveri entered into the micronutrients segment in September 2006 by acquiring the business of Kaveri Agriteck. India’s micronutrients market is expanding rapidly and the company stands to benefit as these can be marketed through its existing distributor network. We model Micro nutrients revenues to grow 36% CAGR to Rs 438 mn over FY12‐FY14E .

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Ebitda to compound 41% to Rs 1.52 bn Ebitda grew a solid 35% during FY09‐12; however margins came off by 400 bps to 21% during the same period. We estimate increase in share of relatively low margin cotton seeds (given royalty share to be paid to Mahyco) and increased R&D spend to have led to fall in margins. With rising share of cotton, we estimate margins to fall by about 300 bps to 18%; however helped by excellent topline growth model Ebitda to be at Rs 1.52 bn, a jump of 41% during FY12‐14E. Deleveraging would result in savings in interest outgo; overall PAT is expected to compound 53% to Rs 1.36 bn in FY14E. We assume tax rates to sustain current tax rates of ~ 5%. With increase in operating cash flows and given most investments are already through, we expect Kaveri to pay off debt and likely be net debt free by FY13‐14E. However, it does take working capital loans as its business is seasonal. We model RoCE to increase to 30% in FY14E.

– 89 of 142 –


About the Company Kaveri is in the business of production, processing and marketing of high quality hybrid seeds (seeds that gives superior yield and is drought, pest and disease tolerant) for different crops like corn, sunflower, cotton, paddy, grain sorghum, etc. Kaveri also has presence in micronutrients and bioproducts. It has production, processing and R&D facilities in Andhra Pradesh and Karnataka. The research mainly focuses on developing superior hybrids in different crops like corn, cotton, sunflower, paddy, bajra, etc. All the hybrids developed by Kaveri’s R&D team are marketed under the brand name of ‘Kaveri Seeds’. We expect Kaveri’s R&D facilities to drive the future growth of the Company. Kaveri Seeds is engaged in the seeds business for about 3 decades. It has 12 hybrid varieties of corn, five of sunflower, six of cotton and 13 varieties of paddy besides other supplement products developed in‐house.The company owns about 600 acres of land in Andhra Pradesh and Karnataka where it undertakes R&D activities and also grows foundation seeds, thus enabling it to keep better control over germplasm. The company has also set up a biotech lab at Hyderabad to carry on R&D activities for development of high‐performance seeds. Kaveri Seeds is also in the business of micronutrients. Micronutrients are a group of nutrients essential for plant growth but required by plants only in small quantities. Intensive cropping depletes nutrients, including micronutrients from the soil at a fast rate. The micronutrients required by plants in trace quantities are iron, zinc, manganese, copper, boron, molybdenum and chlorine. Kaveri Seeds raised Rs 687 million through an IPO in 2007. The money was raised to acquire farmland for R&D, open new marketing offices around the country, set up a seed processing and a corn cob drying plant, and for working capital margin.

– 90 of 142 –


Financials


Net sales 2,337 3,724 6,015 7,783

Growth, % 44 59 62 29

Total income 2,337 3,724 6,015 7,783


EBITDA (Core) 539 770 1,302 1,528

Growth, % 52.7 42.9 69.2 17.4

Margin, % 23.0 20.7 21.6 19.6

Depreciation ‐102 ‐100 ‐104 ‐110

EBIT 437 669 1,198 1,418

Growth, % 40.3 53.3 79.0 18.3

Margin, % 18.7 18.0 19.9 18.2

Interest paid ‐43 ‐33 ‐28 ‐16

Other Non‐Operating Income 10 26 27 28

Non‐recurring Items 0 ‐53 0 0

Pre‐tax profit 403 609 1,197 1,431

Tax provided 22 ‐29 ‐60 ‐72

Profit after tax 425 581 1,137 1,359

Net Profit 425 581 1,137 1,359

Growth, % 46.1 36.8 95.7 19.5

Net Profit (adjusted) 425 581 1,137 1,359




Cash & bank 45 96 589 1,504

Debtors 362 285 989 1,279

Inventory 1,649 3,033 2,970 3,941

Loans & advances 231 87 231 231



Investments 368 1,175 1,175 1,175


Less: Depreciation ‐232 ‐232 ‐336 ‐446

Add: Capital WIP 63 21 150 150

Net fixed assets 1,116 1,074 1,120 1,160

Total assets 3,772 5,886 7,209 9,424


Provisions 69 95 69 69


Non‐current liabilities 28 26 29 29








Pre‐tax profit 403 609 1,197 1,431


Chg in working capital 111 298 ‐538 ‐343

Total tax paid 20 ‐27 ‐60 ‐72

Cash flow from operating activities 636 980 703 1,127

Capital expenditure ‐126 ‐58 ‐150 ‐150

Chg in investments ‐348 ‐807 0 0

Cash flow from investing activities ‐474 ‐865 ‐150 ‐150

Free cash flow 162 115 553 977

Debt raised/(repaid) ‐276 ‐3 3 0


Cash flow from financing activities 70 454 1,015 1,234

Net chg in cash 231 569 1,568 2,211


EPS, Rs 31.0 42.4 83.0 99.2

BVPS, Rs 138.2 176.2 254.6 349.2

DPS, Rs 2.5 4.0 4.0 4.0

Return on assets (%) 13.1 12.5 17.6 16.5

Return on equity (%) 25.0 27.0 38.5 32.9


RoIC/Cost of capital (x) 18.7 39.8 100.3 1,000.2



Cost of capital (%) 1.3 1.0 0.6 0.1




Sales/Net FA (x) 2.1 3.4 5.5 6.8



Inventory days 257.6 297.3 180.2 184.8

Payable days 310.5 386.9 265.0 265.0

Current ratio (x) 1.3 1.1 1.4 1.6

Quick ratio (x) 0.4 0.2 0.5 0.7

Interest cover (x) 10.0 20.5 42.1 91.4

Dividend cover (x) 12.4 10.6 20.7 24.8

PER (x) 38.0 27.8 14.2 11.9

Price/Book (x) 8.5 6.7 4.6 3.4

EV/EBIT (x) 37.5 24.4 13.2 10.4

EV/NOPLAT (x) 29.3 22.0 12.7 10.1

EV/CE 8.2 6.4 4.4 3.0

EV/IC (x) 9.0 9.8 9.0 6.9

– 91 of 142 –

PI Industries Best placed in the pack!



PI is a leading crop protection company in India: PI Industries (PI) PI has a focused portfolio of 17‐18 brands in crop protection space, which occupy leadership position and enjoy strong brand recall in their respective categories. PI’s Nominee Gold is the fastest growing herbicide in India and also likely the largest consumed rice herbicide brand in the country today. The other business custom synthesis (where it contract manufactures) business remains the key growth driver (accounts for about 42% of revenues and earns superior margins of ~ 18%). The strength of this business is underpinned from its long standing relationship with few Japanese and European companies. PI’s profits have doubled during FY10‐12 and earnings growth has been the most superior in the pack. Agri business to remain strong over the long‐term, interim doubtful: PI’s relationships with innovators and its strength in product development, registration and product trial remains key to its sustained growth. The tie‐ups with global innovators also helps launch novel products in India, PI has a strong product pipeline that could help sustain growth in the medium to longer term. Subdued start to the kharif moderates the immediate outlook though. Custom business to witness healthy growth: PI’s custom synthesis has a robust order book of US$ 350 mn executable over the next 3‐4 years (FY12 revenues of US$ 80 mn). Its portfolio comprises of early stage patented molecules and progressive build up in existing commercialized molecules. A ramp up in the patented products, order execution and new launches to favourably shift product mix and drive overall margins by 100‐200 bps. PI to capitalize on huge industry opportunity: With increasing realization to double crop output, it is estimated that pesticide usage will rise therefore benefiting the likes of PI that has exclusive marketing and co‐marketing arrangements with MNC’s. As for fine chemicals, PI is likely to capitalize on the outsourcing opportunity led by the need to save costs globally. PI offers innovators the access to its well entrenched network, has demonstrated deep understanding of chemistry and respect for IPRs which makes it a preferred partner in the Indian agrochem space. Initiate coverage with a Buy: With shift in product mix, we model margins to expand by over 200 bps during FY12‐14E; EPS thus is likely to double during this period. Considering the superior earnings CAGR of 37% over FY12‐14E, FY13E valuations of 12.5x PER, 3.0x PBR seems undemanding. We initiate coverage with a Buy and FY13E PT of Rs 650 (that corresponds to target multiple of 16x on FY13EPS).

BUY PI IN | CMP RS 506

TARGET RS 650 (+28 %) Company Data





ABS ‐5.0 0.3 ‐5.8REL TO BSE ‐5.7 ‐6.8 ‐13.1


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Net Sales 8,770 10,493 13,599Ebidta 1,457 1,840 2,547Net Profit 804 1,017 1,509EPS, Rs 32.1 40.6 60.2PER, X 15.8 12.5 8.4EV/EBIDTA, x 10.3 8.2 5.7EV/Net Sales, x 1.7 1.4 1.1ROE, % 30.3 27.3 30.8Source: Phillip Capital India Research Gauri Anand (+ 9122 6667 9943) [email protected] Saurabh Rathi (+ 9122 6667 9951) [email protected]

– 92 of 142 –

12 November 2012 / INDIA EQUITY RESEARCH / PI INDUSTRIES INITIATING COVERAGE


PI Industries is the significant player in the domestic pesticides industry supported by strong R&D facilities and strong brand identity among farmers. Its custom synthesis business has a strong order bookposition in excess of USD 350 mn spread over 4 years period and has robust pipeline of molecules under different stages of development, besides it also has good relationship with its cusomers. All these developments augurs well for the company's long term sustainability..

Financial Structure PI Industries FY12 debt equity ratio stands at 0.76, which we expect it to reduce to 0.44 in FY14E as a result of strong cash flows.

Shareholder Value Creation The company has distributed DPS of Rs 4/sh and we expect it to be maintained for FY13E & FY14E given its capex commitments

Earnings Visibility Custom synthesis to remain a key growth driver on the backdrop of its sound order book. We expect revenue from this stream to compound by 37% over FY12 to FY14E. Besides our analysis suggest that the company's earnings to compound ~37% during FY12‐14E.


Future Event Triggers Superior performance of its newly launched pesticide products, success of its new molecule of custom synthesis business, favourable monsoons, better capacity utilization are the key triggers

Expected Price Momentum Extraordinary sales achievement from its new products including Nominee Gold besides good acceptance of its molecule under custom synthesis business and reduction in crude oil prices will result in stock appreciation

Risks Adverse weather, lower acceptance of PI’s innovative (and presumably expensive) molecules, execution delays.

– 93 of 142 –



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– 94 of 142 –


Value Drivers


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– 95 of 142 –


Investment Thesis Domestic Agri input business: Partnerships, strong product pipeline to drive topline India offers huge opportunity for growth in crop protection chemicals The need to increase agricultural productivity, yields and sustain this over a long period, its imperative besides other things there is a judicious and optimum use of various agricultural inputs like quality seeds, fertilizers, pesticides, mechanization and irrigation to achieve critical levels of production. India uses only ~ 500 gms per hectare of crop protection chemicals whereas Japan uses 11kg/ha, Korea 6.6 kg/ha and USA about 2.25kg/ha. As per estimates, the low usage has led to massive losses crops of upto 30% or US$ 50 bn pa. With increasing realization to double crop output to meet the rising demand for higher quality food/fruits, vegetables, meat and poultry, the demand for crop protection chemicals that ensures safety against pest is likely to rise. PI with its strong product pipeline, extensive reach is likely to benefit from the rising demand for pesticides. Indian Pesticide industry, that is valued at US$ 1.5 bn, is likely to grow at 15% over the next few years (a failed monsoon being the singlemost risk as lower monsoon reduces the incidence of pest attack and thus lowers demand). Distribution reach and strong product pipeline to drive topline growth PI Agri business comprises of agrochemicals (insecticides, fungicides and herbicides), plant nutrients, specialty fertilizers and hybrid seeds. In the agri space it has a focused portfolio of 17‐18 brands, which occupy leadership positions and enjoys strong brand recall in their respective categories. PI in FY11 had successfully established Nominee Gold, which has now become the fastest growing herbicide in India; also it is likely the largest consumed rice herbicide brand in the country today. Similar to the rice herbicide, PI continues to evaluate newer molecules and is partnering with innovators for the same (termed as in‐licensing model). With a robust product pipeline, PI is confident of scaling up this business goingforward; which in turn would result in market share gains. PI has a long presence (about 5 decades) in the rural areas that has helped build a strong distribution network (over 1500 distributors and 25000 retailers) duly supported by an exemplary field force to provide the much needed extension to build brands and markets. Its exclusive marketing and distribution agreement with global agrochemical majors, long standing association with reputed innovator companies is a testament of its credibility as a company that respects IPR and this would help gains more traction in the coming years. Partnerships key to growth PI partners with overseas innovator companies to launch the formers novel products in India. The agri‐inputs business has benefited from India’s adoption of a product patent regime in 2005, which was followed by growing launches of proprietary products in India. Recently it has registered its 3 new molecules and signed 4 new agreements with the respective patent holders to evaluate these products in India, especially in the herbicide and the fungicide segments. It has also entered into an agreement with a leading multinational for marketing of its new generation insecticide/miticide in India. PI’s partnership with numerous innovators has led to rapid growth in PI’s agri‐inputs topline (over 25% FY10‐12). Profit margins have expanded in recent years led by shift in product mix towards novel products and by operating leverage due to strong topline growth. Net‐Net product launches with exclusive marketing rights and under co‐marketing arrangement with MNCs, expansion of product categories and markets will help PI sustain its growth momentum and benefit from long term potential of the agri business.

– 96 of 142 –


Custom synthesis & manufacturing: Sound order book gives visibility on earnings growth India a preferred outsourcing destination; PI to capitalize Globally innovators are keen to streamline operations and save on costs. Growing regulatory demand, competition, need to lower costs and improve efficiencies have made it imperative for global innovators to move operations to low cost region like China and India. This is subject to Indian companies meeting the stringent requirement for quality, timely delivery and reliability. India is a preferred outsourcing hub globally given its competitive labour costs, deep understanding of the chemistry, respect for IPR and other benefits that include lower tax regimes (SEZ zones) and intensified IT enabled R&D. PI capitalizes on these factors and is one of the preferred partners in agrochemicals and fine chemicals business. Swelling order book, capacity commissioning and partnerships provides visibility on topline growth The custom synthesis business remains the key growth driver for PI (accounts for about 42% of revenues and earns superior margins of ~ 18%). The strength of this business is underpinned from its long standing relationship with few Japanese and European companies. PI works with innovators in the area of process research for their newly discovered molecules for scale up and commercialization. This early stage participation enables it to capitalize on the complete product life cycle. This also earns PI the reputation of the 1st or 2nd supplier for active ingredients and intermediates for molecules under global patents. In custom synthesis business, PI focuses on exclusive patented, early stage molecules. The custom synthesis business grew a sharp 59% in FY12. It has a strong order book position in excess of > US$ 350 mn. Further long term sustainability is assured by a robust pipeline of molecules under different stages of development and increased flow of enquiries for new molecules/growing customer base. As majority of its business is already tied up, PI is focusing on delivery schedules to its customers. The commissioning of its new manufacturing facility at Jambusar, Gujarat (capex of Rs 1.25 bn) by Dec’12 will further aid in execution of current and future orders. The project enjoys a tax holiday for the first 10 years and is likely to lower the overall tax outgo for PI. The current order book excludes the likely renewals of annual contracts. Little risk of execution details, gives good visibility on topline led earnings growth. PI offers innovators the access to its well entrenched distribution network and services like support in commercializing new products/molecules, process research and commercial manufacturing. Its track record of successfully launching brands, deep understanding of chemistry and cost effective labour are all valuable traits for the innovators. Further its strategy to exit reverse engineering has helped secured trust from its client who doesn’t want potential conflict of interest. This value propositions have alone led to the order book jump from by 3x in last two years and we expect the splendid growth to continue. PI has sold of its low margin polymer division to Rhodia, SA (a French company) for a consideration of Rs 700 mn. The money thus would be utilized to expand the existing businesses.

Revenue, Ebit have compounded by 24/46% during FY08‐12; margins have expanded by 800 bps

– 97 of 142 –


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CAGR FY09‐12 % On FY13E* %

Companies Revenue PAT PER PBR EV/EBITDA Free float DII FII

PI Industries 23.7 49.1 12.5 3.0 8.2 35.0 1.3 9.2Rallis India 14.2 13.1 22.0 4.5 14.3 50.0 11.5 11.9United Phosphorus 16.2 12.7 7.5 1.1 5.0 75.0 35.7 16.2Industry Average 18.0 25.0 14.0 2.9 9.2 53.3 16.2 12.4

Estimates on trailing numbers where data not available


– 98 of 142 –


Financials Topline to compound a strong 25% during FY12‐14E PI has a healthy pipeline of products alongwith this its sizeable distribution reach, brand recall and further launches would drive topline growth of the agri business by about 15% during FY12‐14E.Its focused approach of launching high margin, novel products would lead to larger market share gains. PI has couple of proprietary products in‐lincesed by innovators (BASF, Mitsui Chemicals) under an exclusive marketing tie‐up, thus all the new launches provides visibility to topline growth. We model Agri‐business to account for 48% of total revenues in FY14E. As for the custom synthesis, it has an executable order book over next 3‐4 years of US$ 350 mn, giving immense topline visibility. The management indicated that in general about 35~45% of its molecules at the R&D stage reach up to the commercial stage. Its contracts are largely multi years (about 50~55%) of the total, while the balance being annual contracts. Custom synthesis to drive topline higher

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Expect margins to expand by 212 bps in FY14E over FY12 Led by increased contribution from high margin custom synthesis business, overall margins are likely to expand by 212 bps to 19% in FY14E. We model domestic agri‐business to earn margins of 16‐17% and estimate overall Ebitda to compound 32% to Rs 2.5 bn during FY12‐14E. Margins to Expand, with increase in share of revenues from high margin custom synthesis business

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– 99 of 142 –


PAT to compound 37% during FY12‐14E, most superior earnings in the pack With commissioning of custom synthesis Greenfield plant in Jambusar, Baroda by Dec’12, we expect the entire capital cost to be charged to P&L and a slower ramp up therefore would dwarf the EBIT/PBT in FY13/14E. Some savings in tax (as the new plant enjoys a tax holiday for initial 10 years) should support the overall growth in PAT of 37% during FY12‐14E. We estimate EPS of Rs 41/60 in FY13/14E. We expect PI to generate healthy free cash flows (as major capex almost over) in FY14E, raising possibility of higher dividends. The free cash flow yield for FY14E is around 3.5% at CMP. As most capex is over, FCF TO see a healthy RISE in FY14E

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– 100 of 142 –


About the Company PI Industries was founded by Mr. Piyush Singhal in 1947 as Mewar Oil & General Mills, a decade later it started selling agrochemical formulations, then forayed into active ingredients manufacturing and polymer compounding. In Dec’2011 it sold of its Polymer compounding to Rhodia SA, France for a consideration of Rs 700 mn. Presently it focuses on Agri‐Input & Custom Synthesis with strength of over 1,100 employees. PI Industries currently operates three formulation and two manufacturing facilities as well as four multi product plants under its three business units across Jammu and Gujarat. These state‐of‐art facilities have integrated process development teams with in‐house engineering capabilities. Agri‐Input Business PI is one of India’s leading players in the Agri‐Input industry, primarily dealing in agro‐chemicals, specialty fertilizers, plant nutrients and seeds. This venture is the flagship business (unit) for which PI enjoys tremendous brand recognition across several industry leading products. The Company has exclusive rights with several global Corporations for distribution in India and is constantly evaluating prospects to further expand its product portfolio. Given the inevitable surge in demand for food grain production in the agriculture sector, the opportunities for Argo‐Chem Companies are innumerable. PI Industries is favorably positioned to contribute to the growth in this space by leveraging its long standing association with business partners and intensive network of distributors across India. Custom Synthesis Business The Fine Chemicals business unit of PI focuses on Custom Synthesis which entails dealing in custom synthesis and contract manufacturing of chemicals including techno commercial evaluation of chemical processes, process development, lab & pilot scale up as well as commercial production. The Company has an impressive product portfolio as result of exclusive tie‐ups with leading agro‐chemical, pharmaceutical and fine chemical companies around the world. PI has made substantial investments in building state of art process research and manufacturing facilities of chemical intermediates and active ingredients with special focus on strong process R&D capabilities. This business unit is expected to be the primary growth driver with strong revenue visibility as India continues to be a preferred destination for outsourcing Custom Synthesis and contract manufacturing related projects. With exceptional growth opportunities in the offing this business segment is poised for great success.

– 101 of 142 –


Financials


Net sales 7,202 8,770 10,493 13,599

Growth, % 33 22 20 30

Total income 7,202 8,770 10,493 13,599


EBITDA (Core) 1,241 1,457 1,840 2,547

Growth, % 42.4 17.4 26.3 38.4

Margin, % 17.2 16.6 17.5 18.7

Depreciation ‐153 ‐173 ‐225 ‐264

EBIT 1,088 1,284 1,616 2,283

Growth, % 46.4 18.0 25.8 41.3

Margin, % 15.1 14.6 15.4 16.8

Interest paid ‐181 ‐199 ‐211 ‐223


Non‐recurring Items 0 321 0 0

Pre‐tax profit 914 1,434 1,412 2,067

Tax provided ‐263 ‐398 ‐395 ‐558

Profit after tax 651 1,035 1,017 1,509

Net Profit 651 1,035 1,017 1,509

Growth, % 55.3 23.6 26.4 48.4

Net Profit (adjusted) 651 804 1,017 1,509




Cash & bank 84 94 116 556

Debtors 1,766 1,722 2,587 3,353

Inventory 1,410 1,788 2,070 2,683

Loans & advances 503 586 503 503


Investments 5 5 5 5



Add: Capital WIP 335 1,083 500 500

Net fixed assets 2,875 3,785 4,060 4,296

Total assets 6,643 7,997 9,358 11,412


Provisions 134 166 166 166










Pre‐tax profit 914 1,434 1,412 2,067


Chg in working capital 317 ‐107 ‐634 ‐747

Total tax paid ‐207 ‐414 ‐395 ‐558

Cash flow from operating activities 1,177 1,085 607 1,026

Capital expenditure ‐941 ‐1,083 ‐500 ‐500

Cash flow from investing activities ‐941 ‐1,083 ‐500 ‐500

Free cash flow 236 2 107 526


Debt raised/(repaid) ‐147 0 0 0


Cash flow from financing activities ‐17 ‐76 ‐86 ‐86

Net chg in cash 219 ‐74 22 440


EPS, Rs 29.1 32.1 40.6 60.2

BVPS, Rs 91.9 129.9 167.1 223.9

DPS, Rs 2.2 3.0 3.0 3.0

Return on assets (%) 13.7 15.9 13.3 15.9

Return on equity (%) 38.3 30.3 27.3 30.8





Cost of capital (%) 5.7 4.5 3.9 3.2




Sales/Net FA (x) 2.9 2.6 2.7 3.3



Inventory days 71.4 74.4 72.0 72.0

Payable days 80.7 47.8 ‐ ‐

Current ratio (x) 1.1 1.2 1.3 1.5

Quick ratio (x) 0.7 0.7 0.8 1.0


Dividend cover (x) 13.0 10.7 13.5 20.1

PER (x) 17.4 15.8 12.5 8.4

Price/Book (x) 5.5 3.9 3.0 2.3

EV/EBIT (x) 12.6 11.7 9.3 6.4

EV/NOPLAT (x) 14.0 14.2 10.4 7.3

EV/CE 4.2 3.3 2.8 2.1

EV/IC (x) 3.3 2.7 2.3 2.0

– 102 of 142 –

Rallis India Wait till it gets better!



Proxy play on agrochem growth story in India: Rallis India (Rallis) is a proxy play on the secular agrochemicals growth story in India. It is the one of the oldest, largest and well established player in Indian pesticides market. It has a strong product portfolio and an excellent reach making it a preferred partner for global MNC’s. While pesticides industry struggled for existence, Rallis profits have compounded in the order of 13% during FY07‐12. We model its earnings to compound 24% during FY12‐14E. Pesticides consumption to grow at 12‐14% during FY12‐14E: Globally consumption for pesticides is likely to grow at 3~4% for next few years, while in India pesticides is expected to grow at 12‐14%. the India crop protection market over the next five years driven by 1) higher farm incomes, 2) shift towards non‐foodgrain crops, and 3) increasing cost of labour.. Rallis, with its strong reach, enhanced capacity and excellent product portfolio is well placed to benefit from this emerging opportunity. Product offerings, reach, capacity augmentation to drive longer term growth: Rallis manufactures various agrochemicals, intermediates and technical’s on a contract basis for export purposes. Capacity augmentation at Ankleshwar/Dahej would up exports further. The company has a wide distribution network in India with almost 2,000 outlets. Its foray into seeds (through acquisition of Metahelix) gives it an entry to fast‐growing seeds segment and completes its product offerings. It also has access to close to 1000 distributors of Metahelix and 700 outlets of Tata Chemicals. The seeds and contract manufacturing is likely to drive growth in some quarters. While the long term outlook is encouraging, it remains to be seen if key new product launches can offset the current competitive pressure on domestic business and drive near term growth. H2FY13 could be better: The H1FY13 performance was hurt due to delayed monsoon that impacted crop sowings and lower pesticides demand. A pressure on farm profits led by rising costs, meant the industry takes a slower and in proportionate hike, impacting industry profitability. Favourable exchange rate however supported the export business of most. A pick up in monsoons during Sep/Oct and a consequent healthy build up in water table levels, points to better sowings in Rabi season. Delayed price hikes would avert margin pressures too, however the tailwinds from a weak INR would like fade, thus lowering margins of the export business. Rich for right reasons: Rallis is best placed to tap the growing agrochemical market opportunity in India. It has been earning a huge valuation premium given its high returns and strong parentage; however considering its domestic focus (70% of total revenues) where poor monsoon lowers demand outlook and intensified competition limits opportunity to pass on entire cost pressure, the peak multiples have moderated somewhat. Given the excellent run up, rich valuations in the absence of material near term catalysts, we initiate coverage with a Neutral Rating and value Rallis at Rs 150 (22x FY13E EPS of Rs ~7).

Neutral RALI IN | CMP RS 149






ABS ‐2.3 17.2 ‐10.7REL TO BSE ‐3.1 10.1 ‐18.0


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Rallis India BSE Sensex


Other Key Ratios



– 103 of 142 –

12 November 2012 / INDIA EQUITY RESEARCH / RALLIS INDIA INITIATING COVERAGE

Investment Overview Sustainable Competitive Advantage Rallis India is a well established player in the Indian agrochemical industry.

It has a distribution reach which entails the network of more than 2500dealers & 37000 retailers which covers almost 80% of Indian districts andthis gives it an edge over its peers. It has a strong product portfolio andgiven its excellent reach it is a preferred partner for global MNC’s.

Financial Structure The D:E ratio for FY12 stands comfortably at 0.27 for FY12 that provides it cusion to raise debt to meet its future capex plans

Shareholder Value Creation The company has maintained the liberal dividend distribution policy which reflects the companys strong cash flows generating ability. Over the past five years the dividend rate has been in the region of 160% in FY08 to 220% in FY12. The dividend yield for FY12 works out to R s 1.76%. For both FY13E & FY14E we have maintained 220% dividend.

Earnings Visibility Earnings to compound 24% during FY12‐FY14E


Future Event Triggers

Favourable monsoon, success in new product launches (pests/seeds) & increase sales from its Dahej facility

Expected Price Momentum It has been earning a huge valuation premium given its high returns andstrong parentage; however considering its domestic focus (70% of totalrevenues) where poor monsoon lowers demand outlook and intensifiedcompetition limits opportunity to pass on entire cost pressure, the peakmultiples have moderated somewhat. We value Rallis at Rs 150 (22xFY13E EPS of Rs 7) and initiate coverage with a Neutral rating.

Risks Erratic monsoon lowers pest incidence and thus reduces demand. It could be referred from the chart that monsoons have been normal only in some years in the last two decades, which does have a bearing on the pest consumption.

Over all rainfall (june‐may) (in mn)

0

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1200

1400

1992

‐93

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‐25

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Source: Directorate of Economics and Statistics, Department of Agriculture and Cooperation.

– 104 of 142 –


Warming global surface temperature is significant long term risk for pesticides industry globally, as it lessens the incidence of pest attacks.

Source: NASA

Intense price competition by one player can create temporary distortions in the market. A large acquisition that is perceived as dilutive can impact valuations. Any slowdown in pesticides demand, rising competition, product acceptance and movements in INR have significant bearing on revenues and thus earnings. Any disappointment on earnings on this count is significant risk to our valuation and price target. Seeds that are coated to resist/reduce pest attack are a significant long term risk to industry growth; Rallis being a formidable player would likely be impacted too. Also significant delays in scaling up its seeds business are important risks to our estimates and rating.

– 105 of 142 –



PE band

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– 106 of 142 –


Value Drivers


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2.00

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2.80



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2,500

3,000

FY2010 FY2011 FY2012 FY2013E FY2014E

12.0

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NOPLAT and OPFCF

‐1,500

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Economic Profit

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FY2010 FY2011 FY2012 FY2013E FY2014E

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30



– 107 of 142 –


Investment Thesis Contract manufacturing‐ a huge opportunity The Indian agrochemicals industry, estimated at ~ Rs 100bn at the end of FY12 is expected to grow at 13‐14% (almost 2x GDP growth), with organized players, such as Rallis, expected to grow at a higher rate on account of greater share of unorganized players. Apart from domestic opportunities, the global agrochemicals industry also offers opportunities in the form of generics and contract manufacturing. Contract manufacturing of crop protection technical’s for the multinational companies is another area, which will drive the profits in the years to come. Agrochemical companies have been reducing the manufacturing capacity of low‐value off‐patent proprietary products. Approximately, a third of total agrochemicals sales are estimated to be that of proprietary off‐patent. Assuming this trend plays out in terms of growth for the agrochemical industry and the same rate of generalizations occurs, the agrochemical generic industry could log in 6‐8% yoy growth during the period. With drugs going off‐patent each year, generics represent a major outsourcing opportunity for agrochemical producers in India. In FY12, the Indian crop protection industry is estimated to have declined, however Rallis registered a revenue growth of 16%, which in our view is a testament of its structured approach to target sustainable growth. Rallis pesticides’ business comprises of 1/Domestic formulations (involves branding, marketing) 2/ Institutional business (largely low margin co‐marketing) and 3/Exports (partly for contract manufacturing and exports). We expect Rallis with its well entrenched network to capitalize on the rising contract manufacturing opportunity. Outlook for 2H improving. RALI has navigated a challenging environment over the past few quarters, with pressure on agri‐incomes from rising input costs, delayed monsoons and pressure on imported input costs as INR depreciated. RALI has managed to improve its domestic market share and maintain its balance sheet discipline. Going forward, we believe that the environment is set to improve. Late pick up in monsoons and consequent improvement in water levels in key reservoirs bodes well for the Rabi (winter) crop. As per RALI management, farmer sentiment is improving post recent MSP hikes. We believe improving fundamentals coupled with a low base going into 2H should bode well for earnings growth going forward. Dahej expansion to drive exports Taking advantage of India’s position as a low cost manufacturer for crop protection chemicals, Rallis has expanded its capacity at Ankleshwar in FY11 and also set up a new plant at Dahej to largely cater the exports market. Rallis has commissioned its Dahej plant in June 2011 (capex of Rs 1.75 bn) with a planned capacity of 5000 mt to be completed in three phases, however only the first phase is operational as of now. Presently two units are operational of which one is a formulation export and the other being contract manufacturing. In FY11/12 it has registered 12/16 products respectively in the international markets. We expect the expansions alongside weak INR would drive exports for Rallis. Rallis has now guided that it would beat its own initial target of Rs 5 bn topline over next three years from this facility.

– 108 of 142 –


Acquisition of Metahelix, provides entry into the fast growing seeds market and completes the boutique of product offerings by the group Rallis acquired 75% stake in Bangalore based Metahelix life sciences, in Dec’10 for a consideration of Rs 1.75 bn. Seeds business is poised for growth in India as disposable incomes and pressure on productivity increases. The Indian seed industry is the eighth largest in the world. The current Indian market size of commercially marketed seeds is estimated about US$ 2 bn. The future of the seed industry in India is expected to be very good, with the demand for branded and quality seeds increasing. Seeds will be an important contributor to the targeted 4% growth in agriculture. Seed Industry in India is growing at the rate of 12% as compared to 6‐7% internationally. In India, commercial Seeds account for only 25% of the potential, providing a huge opportunity in this space. The current trends indicate increasing demand for superior genetics and technologies. Adoption of new technologies is very high among Indian farmers. The acquisition of Metahelix, helps Rallis get a foothold in the fast growing high margin seeds industry. Metahelix is a research led seed company and India’s first company to have developed two versions of Bt cotton trait with proprietary cry1C and cry1Ac. These versions will act as resist pest attacks, eg: Spodoptera and Bollworm are the major insects which affects the cotton plant growth. Its other products include hybrid seeds for maize, cotton, rice and other vegetables. Rallis has indicated that Metahelix would contribute about Rs 10 bn to topline by FY15. In Q1FY12 Metahelix earned revenues of Rs 820 mn and PAT (after MI) of Rs 90 mn. In April this year, Rallis also acquired 51% stake in Maharashtra‐based organic manure and soil conditioners manufacturing company Zero Waste Agro Organics Private Limited (ZWAOPL) for a consideration of Rs 290 mn in an all cash deal. Rallis will have exclusive sales and marketing arrangements with ZWAOPL for domestic and international markets. With this acquisition, Rallis has strengthened its product portfolio with organic manure and soil conditioner products. It has guided that revenues would exceed Rs 1 bn mark in five years. It’s planning to launch GeoGreen, a carbon rich organic soil conditioner that will help restore soil health. In our view, the two acquisitions completes the boutique of product offerings by the group i.e Tata Chemicals (fertilizers) and Rallis (pesticides, seeds and plant growth nutrients). Innovative turnover index (that measures share of new products to total revenues) to improve in FY13E The concept of the innovative turnover index has helped Rallis to maintain the sales growth momentum and grab the market share over the years. Revenues from products newly introduced in the last four years to total turnover ‐ under this concept every year new products contribution to turnover is targeted to be about ~30%. This has empowered the company to unveil various brands over the years like Applaud, Taqat, Takumi, Ergon, Taarak, Toran which have received good response from the farmers. In FY11 Rallis introduced Ralligold, a plant growth nutrient for various crops like Paddy, Cotton, Vegetables & others. Encouraged with its performance, company is planning to introduce it for the other crops in FY13. The innovative turnover index however fell in FY12 to 11%; Rallis in its recently held meeting has guided to grow at a healthy rate in FY13E. New product launches FY08 Ishaan, Royal, Sedna, Takumi, Tebuchonazole FY09 Mantis FY10 Ergon FY11 Ralligold, Taarak, Toran FY12 Cylo, Ditaf, Fycol, Honcho, Neon, Saras, Sonic, Taffin, Tata Vaar

– 109 of 142 –


Innovative turnover index

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3130

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New

produ

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Rallis has a well entrenched distribution network Rallis has always made good efforts to understand the preferences of the farmers in terms of their requirement of the crop protection products. Their team is closely associated with the farmer community in order to listen to their preferences so as to formulate innovative products to suit their requirement. This strategy has resulted in strong brand recall for the company’s products, which is evident from the fact that 7 of the top 12 brands in India belong to Rallis India. Indian crop protection market is generic in nature, which means Indian crop protection product manufacturers can come out with only those molecules which have come out of patents. In this situation the branding and distribution reach is significant in order to gain market share. Rallis has an extensive distribution reach ‐ covers ~80% of the India’s districts with the network of its ~ 2500 dealers and ~ 37000 retailers. Rallis has compiled a digitized database of over 0.7 mn farmer members, to communicate and offer products and services. This data gives them immense market intelligence necessary to create new offerings. It has further leveraged technology to reach out to farmers through free help lines. These extended services helps Rallis serve farmers distinctively and retain them. Rallis foray into buying‐back farm produce to likely unlock value on opening of FDI in multi brand retail In 2009, Rallis introduced ‘Grow More Pulses’. The objective of the programme was to improve yields and buy back the produce with the dual purpose of empowering and thus engaging with the farmer. Rallis is present in Tamil Nadu and has now entered a MoU with Maharashtra Govt. The intention is to cover 1 Lakh Ha. of land under pulses over the next five years. In FY12 Rallis had 50,000 acres of land has been covered with focus on Red Gram, Black Gram, Green Gram and Bengal Gram. The initiative has not only improved the yield by 10 to 50% but also fetched price premium of Rs 100 ‐ 250 per quintal for the farmers. In the years to come, Rallis‐Tata Chem combine intend covering more staples like Rice and wheat. This foray of buying back farm produce will likely strengthen Rallis relationship with farmers and retain them over the longer term. We also view companies like Rallis as major aggregators of farm produce to the modern retail. The agri logistics/distribution is fairly complex; a hive off of this into a separate subsidiary would likely unlock value in future (i.e pursuant to opening of FDI in multi brand retail).

Introducing products on continuous basis makes it easier for the company to grab the market share, since FY05‐ FY11 it has come out with 30 products

– 110 of 142 –


Rallis follows a strict collection policy Following a huge writeoff in 2003 (refer trend in PAT chart below), Rallis observes a strict collection policy. While the industry extends credit for about 6 months, Rallis extends it only for about a month. However, on exports revenues, the credit is often given for over a month. The strict collection policy has lowered its working capital requirement and also helped maximize return ratios. Rallis debtor days have declined, when credit days have held steady, indicates less pressure on working capital figs in days FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Inventory Period (days) 63 79 67 74 69 88 75 74 93 93Debtors Period (days) 119 139 78 49 49 55 51 31 36 30Creditors Period (days) 127 84 73 67 75 84 99 129 135 118


Dividend Payout highest among peers Sound growth in profits over the years is consistently shared with stakeholders by way of higher dividends. Rallis payout is the highest among its peers. During FY12 it paid 220% dividend that a payout of 42%

Dividend payout (%) Trends in Pat (Rs mn)

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– 111 of 142 –


About the Company Rallis India is a subsidiary of Tata Chemicals Ltd (50.06% stake); it has business interest in crop protection, contract manufacturing in pesticides, seeds, plant growth nutrients and other agro solutions. It is one of the oldest and second largest pesticide agrichemical companies in the country. The company has a credible presence in the international market. Pesticide accounts for 97% of the company's total revenue, while plant nutrients, seeds and others constitute the balance. Over the years, share of exports to the total has risen and now it accounts for a third of the overall revenues. Of its total pesticide revenue, 60% is being contributed by insecticides, while herbicide & fungicide accounts for rest. In domestic market Rallis products enjoy a strong brand recall. Rallis has built strong brands and an extensive distribution network. Its Tata parentage also helps in creating trust with farmers. Its chemical process and manufacturing skills are also strong, which drives its contract manufacturing business. Financial Discussion Revenues to compound 13% during FY12‐14E We forecast 13% CAGR Revenue growth over FY12‐14E, driven by 18% CAGR in exports and 9% CAGR in domestic formulations. We estimate exports share to marginally inch up to 32% from ~ 30% in FY14E. Higher export growth will be driven by ramp‐up in the Dahej facility. figs in Rs mn FY08 FY09 FY10 FY11 FY12 FY13E FY14E

Domestic 5,430 5,936 7,231 8,425 8,189 8,771 9,648

Exports 1,610 2,880 1,900 2,546 3,766 4,519 5,197

Total Pesticides 7,040 8,816 9,131 10,971 11,955 13,290 14,845

Plant Growth Nutrients 123 114 132 238 252 277 319

Seeds (incl others) 245 615 883


Ebitda to compound 18% during FY12‐14E A shift in product mix (exports that benefit from weak INR and high margin seeds) and the operating leverage kicking led by higher utilization to result in margin expansion of about 100~ 150 bps to 16% in FY14E; translating into Ebitda growth of 18% during FY12‐14E. Further tax savings in Dahej would likely lower the overall tax outgo for Rallis, as a result, we expect earnings to compound further (over Ebitda growth) at 24% during FY12‐14E. We estimate FY13/14E EPS to be Rs 6.8/8.2 per sh respectively.

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– 112 of 142 –


Healthy FCF raises prospect for higher dividends As most capex is complete (Dahej expansion and Metahelix Acquisition), we expect free cash flow to remain healthy, raising possibility of higher dividends. The free cash flow yield for FY14E is ~ 4.1% at CMP. We expect RoE to increase to 22%. Healthy FCF raises probability of higher dividends

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Working capital is expected to rise

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– 113 of 142 –


Financials


Net sales 10,657 12,452 14,183 16,047

Growth, % 21 17 14 13

Total income 10,657 12,452 14,183 16,047


EBITDA (Core) 1,713 1,830 2,109 2,568

Growth, % 18.3 6.8 15.2 21.8

Margin, % 16.1 14.7 14.9 16.0

Depreciation ‐175 ‐287 ‐341 ‐405

EBIT 1,539 1,543 1,767 2,163

Growth, % 21.6 0.3 14.5 22.4

Margin, % 14.4 12.4 12.5 13.5

Interest paid ‐40 ‐146 ‐179 ‐204


Non‐recurring Items 0 ‐172 0 0

Pre‐tax profit 1,845 1,494 1,958 2,339

Tax provided ‐623 ‐487 ‐627 ‐725

Profit after tax 1,222 1,007 1,332 1,614

Net Profit 1,222 992 1,316 1,598

Growth, % 20.4 (14.7) 26.2 21.4


Unadj. shares (m) 194 194 194 194

Wtd avg shares (m) 194 194 194 194


Cash & bank 146 112 502 1,560

Debtors 1,064 1,035 1,166 1,319

Inventory 2,289 2,717 3,614 4,089

Loans & advances 1,154 1,358 1,358 1,358



Investments 256 227 227 227



Add: Capital WIP 1,695 1,922 500 500

Net fixed assets 4,009 4,236 4,395 4,490


Total assets 10,167 11,224 12,800 14,581


Provisions 586 622 622 622










Pre‐tax profit 1,845 1,494 1,958 2,339


Chg in working capital ‐1,742 ‐746 ‐546 ‐174

Total tax paid ‐537 ‐388 ‐627 ‐725

Cash flow from operating activities ‐259 647 1,127 1,845

Capital expenditure ‐1,536 ‐514 ‐500 ‐500

Chg in investments 1,146 29 0 0

Cash flow from investing activities ‐390 ‐485 ‐500 ‐500

Free cash flow ‐649 163 627 1,345


Debt raised/(repaid) 1,071 339 250 200


Cash flow from financing activities 897 42 ‐237 ‐287

Net chg in cash 249 204 390 1,058


EPS, Rs 6.3 5.4 6.8 8.2

BVPS, Rs 26.1 28.5 32.9 38.7

DPS, Rs 2.0 2.2 2.2 2.2

Return on assets (%) 14.2 10.3 12.0 12.7

Return on equity (%) 26.2 19.6 22.1 23.0





Cost of capital (%) 2.0 2.2 2.3 2.2




Sales/Net FA (x) 3.2 3.0 3.3 3.6



Inventory days 78.4 79.6 93.0 93.0

Payable days 1.6 117.6 118.0 118.0

Current ratio (x) 1.4 1.5 1.7 1.9

Quick ratio (x) 0.7 0.7 0.8 1.0

Interest cover (x) 38.6 10.6 9.9 10.6


PER (x) 23.7 27.8 22.0 18.1

Price/Book (x) 5.7 5.2 4.5 3.8

EV/EBIT (x) 19.5 19.7 17.1 13.5

EV/NOPLAT (x) 27.5 22.6 20.3 15.9

EV/CE 4.4 3.9 3.4 2.9

EV/IC (x) 7.1 5.4 4.8 4.3

– 114 of 142 –

Tata Chemicals Add LIFE to your portfolio



Maker of LIFE essentials: Tata Chemicals (TCL) businesses are classified under Living (salt, dals and water purifier); Industrial (soda ash, bicarbs) and Farm essentials (fertilizers, seeds, crop protection). TCL is the leader in the branded salt segment and its outlook remains encouraging. TCL’s fertiliser business is a huge cash cow and has leverage to International urea prices that supports earnings. We expect urea division to benefit on favourable regulatory change both from existing and new investments. Soda ash is a cyclical business; however, with its acquisitions and expansions it has access to world’s low‐cost ash, which, in our opinion, would act as a hedge in adverse commodity cycles. Non‐cyclical businesses share to increase in earnings pie: We expect TCL to add capacity on a favourable new investment policy for urea getting notified. It has picked up 25.1% stake in a urea Green field project (1.3mmt capacity) in Gabon, Africa for US$290 mn. Given feed gas cost is < 1$/mmbtu, the net backs are expected to be higher. Foray in branded pulses retailing, further impetus on crop protection/seeds and any expansion of capacity in GCIP,US could increase share of stable businesses to 64% from 49% in FY12E by FY17E (details inside). Recent initiatives to enhance ROE, instills confidence: TCL divested its non‐core‐ low‐profit ventures like Khet‐Se and Bio fuels. This followed the closing down of loss making Netherlands unit and STPP plant ops in Haldia. These actions were followed by capital light, high margin debottlenecks (GCIP & domestic Salt) and acquisition of Rallis and British salt; which has improved the earnings, returns and instills confidence in the future growth. Growth drivers in FY13E: 1/Expansions at GCIP plant by 0.1mmt; Salt by 0.2mmt and commissioning of SSP plant. 2/New ammonia convertor installation could improve Urea plant utilization rates; but given shutdowns production to be lower (incl. in our est) 3/Repaying high cost debt to result in savings in interest outgo 4/Price hikes (in soda ash), weak INR and firming up urea realizations to aid further earnings growth. Challenges remain on raising phosphatic retail prices given weak demand outlook. Rerating ahead of change in earnings mix, imminent: While apprehension on global events potentially weakening soda ash demand remains, we expect little threat to high margin GCIP volumes. Salt expansion further provides stability to earnings. Investment in potash mining (30% stake in EPM) is valued at Rs 8 bn or Rs 32/sh (read ahead). For, improving earnings mix (earnings mix improving from cyclical to stable businesses), deep value and attractive valuation, we maintain Buy with a revised PT of Rs 400.

BUY TTCH IN | CMP RS 318






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Net Sales 136,551 151,103 156,523Ebidta 21,527 24,912 24,598Net Profit 8,376 8,489 9,706EPS, Rs 32.9 38.0 42.8PER, X 9.7 8.4 7.4EV/EBIDTA, x 5.9 5.6 5.6EV/Net Sales, x 0.9 0.9 0.9ROE, % 13.2 13.4 13.5Source: PhillipCapital India Research Est. Gauri Anand (+ 9122 6667 9943) [email protected] Saurabh Rathi (+ 9122 6667 9951) [email protected]

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12 November 2012 / INDIA EQUITY RESEARCH / TATA CHEMICALS COMPANY UPDATE


Tata Chemicals is the second largest soda ash player worldwide after FMC, US. TCL has exposure to 35% of global low‐cost soda ash through natural soda ash reserves in the world (Wyoming, USA, and Magadi, Kenya). Access to low‐cost natural soda ash acts as a natural hedge against the commodity cycle. Through its global acquisitions, it has access to new markets (Latin America and certain markets in the Far east) too. On the other hand, apart from fertilisers (mainly urea) which earn a fixed ROE of 12%, the high margin salt business provides stable cash flows. With the IPP‐linked pricing for urea business and recently expanded GCIP soda ash & domestic salt capacity to augur well. Rallis India (subs of tata chem) further consolidates and complements TCL’s presence in the crop nutrition business though synergy benefits

Financial Financial Led by 10‐15% price hike taken across the plants worldwide, IPP linked higher urea realizations, we expect OPM margins to inch up by 72 bps in FY13E to 16.5%. Debt equity is at about 0.98 in FY12, which we expect to come down, going forward.

Shareholder Value Creation

Stake buyout in Rallis is earnings accretive while acquisition of stake in gabon urea project AND EPM mining would reap the benefits over longer term. Further, hiving off the loss making streams like khet se & bio fuel plant and shut down of unviable netherland plant have added share holder value. However, phosphatic business to remain under pressure as margins to squeeze given the poor demand outlook on the backdrop of rise in retail price and reduction in subsidy rates. TCL is recognised as a higer dividend payout company. For FY12 the dividend % Stood at 100%, we expect it to maintain this rate at least over the next two years.

Earnings Visibility Earnings are subject to availability of key inputs—gas/phosphoric acid/rock phosphates—and firm prices for soda ash/DAP and urea. We expect TCL’s profits to compound by 14% during FY12‐FY14E.

Valuation In FY13E, the stock is available at a PER of 8.4, PBR of 1.1, EV/EBITDA of 5.6x. Future Event Triggers TCL owns 10,237 shares (face value of Rs 1,000 each), book value of Rs 568mn in

Tata Sons. It is difficult to assess the fair value for these holdings with limited publicly available information. Any sale of investment in these could result in huge value unlocking.

Expected Price Momentum

Any pick‐up in construction activities / upturn in the auto industry could augur well for soda ash demand. Further, government consent to certain polices like NBS in urea and favourable new urea policy would be further positive. Higher profits could lead to an early retirement of debt. We expect the stock to perform based on news flow from the above.

Key Risks • Soda Ash realizations and volumes are important risks to our estimates and target

price, as revenue from soda ash accounts for ~40% of the consolidated revenues. We expect with an economic recovery in the second half of FY13E, soda ash prices to improve and hence we have assumed 6.9% improvement in FY13E. While soda margins have improved lately, a rise in inputs costs, with an inconsequent ability to pass on cost pressures could impact earnings and PT

• Deep P&K subsidy cuts, fall in International urea price (than assumed), adverse policy actions could impact estimates and rating

• Rallis contributes ~10% toward’s the company’s revenues, any demand destruction in pesticides sales could impact the revenues & cash flows of the company significantly

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Valuation We adopt sum‐of‐the‐parts valuation methodology for TCL, where we assigned 5.7x for TCL’s EBITDA and assume quoted investments at 70% of market value (most of the investments are in group companies, so we assume a higher discount at 30%) and unquoted investments at book. We value TCL at Rs 400, which offers an upside of 26% from current levels. We maintain Buy rating on the stock Sum of parts valuation for TCL (Rs mn) FY13E

Fertiliser & Chemical business 141,503Investments Quoted 9,150 Unquoted 10,500 Value of firm 161,152 Add: Cash 11,179 Less: Debt 70,335 Enterprise value 101,996 Target Price Rs. 400 CMP Rs. 318Upside from current levels % 26


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TCL Fact Sheet Chemicals & Others Capacity

in MMT Cap.

Utilised (%)

Revenues (Rs mn)

(%) of TO

Comments

Soda Ash ‐ India 0.9 76.0 11,211 8.2 Domestic demand is expected to be at 2.5 mmt and has grown by about 7‐8% led by growth from glass (used in automobile & construction), soap & detergent segment. TCL's market share stood at 35.3%(incl. imports). While the imposition of a 20% safeguard duty has lowered Chinese imports tosome extent, the duty is also applicable to imports from BMGL, Kenya, thus TCL's domestic volumescompete with its subsidiaries volume from Kenya. Acqusition of Brunner Mond & GCIP has helpedTCL consolidate its position in the global markets. In the near term, with fall in key input costs weexpect TCL to improve margins for Soda ash division.

Soda Ash ‐ GCIP, US 2.7 92.0 23,070 16.9 TCL acquired US‐based General Chemicals Industrial Products (GCIP) for US$ 1,005mn. GCIP is aclosely held chemicals company that mines natural trauna ‐ soda ash. About 25% of GCIP’s stake isheld by Owens Illinois. GCIP reported a top line and bottom line of Rs 23 bn and Rs 2.7 bn in FY12. In Jan‐Mar'12, TCL has expanded GCIP's capacity by 0.1 mmt and intends enhancing its capacity furtherby 0.5 mmt at a capex of US$ 400 mn

Soda Ash ‐ BMGL 1.7 0.8 20,880 15.3 Acquisition of Brunner Mond (BMGL), UK for Rs 7.98bn in December ‘05. BMGL has three soda ash manufacturing facilities spread across UK, Netherlands and Kenya, with a total production capacityof ~2mmt. However, Netherlands operation had been closed down following it became unviable. BMGL reported a top line and bottom line of Rs 20.9 bn and Rs 0.88 bn in FY12. TCL's closed downits loss making Netherlands unit in CY11. Kenyan operations have been facing production issues,partially due to unseasonal floods, however management indicated things have returned to normalcy in Q2FY13E. TCL is contemplating a fuel switchover project; however the optimum benefit,some capacity expansion in Kenya is likely.

Salt ‐ India 0.6 96.0 7,319 5.4 This division earns highest gross margins of ~ 55‐60%. TCL in Q1FY13 has enhanced salt capacity by 0.2 mmt and this could likely support higher earnings through FY13/14E. TCL is the market leader inbranded salt segment with a market share of 67% in Q2FY13. Strategy lies in having presence inun/under penetrated markets. Global acquisitions & widening geographic presence too is in theoffing.

Salt ‐ British Salt, UK. 0.6 NA 2,275 1.7 BMGL in Dec' 2010 acquired 100% in British Salt, UK for a consideration of GBP 93mn or Rs 6.5bn.The objective of the acquisition was to have backward integration, secure longer term input supplies and optimise costs. The acquisition price values British Salt at 6xCY09 Ebitda with no furtherprovisioning for pension liability. It added about ~Rs 900 mn to FY12 consol PAT.

Cement 0.4 98.0 1,755 1.3 It’s a niche player in this segment with a market share of < 10% in FY12. The cement business ismore premediated as the two important inputs are wastes/by‐products of other processes. Foreg unburnt lime from lime kiln and gypsum (by‐product from the ammonia absorber) form key inputs for cement division. We believe as the utilisation of soda ash & other businesses go up, the cementdivision could see higher utilisation with existing capacities.

Chemicals Total 66,510 Fertilisers Urea 1.2 85.0 13,981 10.0 Its one of the most efficient producer of urea in the country with about 6% capacity share. TCL has a

strong franchisee network through Tata Kisan Kendras and could benefit largely on urea decontrol.In December ‘08, TCL expanded its urea capacity to 1.15mmt from name plate capacity of0.864mmt. We expect TCL to reckon 0.192 mmt and 2.04 mmt units in FY13E and FY14E under IPP.

DAP/NPK 0.7 22.0 19,570 14.3 TCL optimally could produce about 1.95 mmt of DAP and Complexes. DAP and Complex Fertiliser capacity put together, TCL has a 11% capacity share as assessed by Tariff commission.

SSP 0.2 77.0 1,231 1.0 IMACID, Morocco 0.4 77.0 5,760 4.2 The acquisition of one‐third stake in Indo Maroc Phosphore S.A., Morocco, (IMACID) in May ‘05 for

Rs 1.66bn. TCL became an equal partner in the IMACID JV between Chambal Fertilisers and OCP,Morocco. IMACID initially had an installed capacity of 3, 30,000 mmt, which was increased to4,48,000 in H2FY08. IMACID’s share of sales & profits stands at Rs 5.76 bn & Rs 540 mn in FY12.

Rallis India 12,452 9.1 TCL, in 2009, picked up 50.06% stake in Rallis India. Rallis is in the crop nutrition business andcomplements TCL’s mainstay, that is, the fertiliser business. Rallis India helps in marketing and the operational synergy is immense.

Branded pulses retailing 960.0 0.7 TCL has forayed into branded pulses (or lentils), retailing under its 'i‐Shakti' brand. The pulses are priced around Rs 95~100/kg. The consumption of pulses in India is around 18.5mmt (FY06‐12 CAGR of 6%), with production at ~15mmt. The industry opportunity is huge (US$ 40bn) with the organisedmarket accounting for just about 4%. Tata Chemicals aims to capture 3% of the US$ 40bn market inthe next five years (indicating a turnover of Rs 54bn). The company, along with its (50.06%) subsidiary, Rallis India, would encourage farmers to grow pulses, provide them necessary farminputs (seeds/pests/fertilisers and other technical inputs) and would also pay them a higher price(compared to support prices) for their produce.

Water purifier 800.0 0.6 Sold 1 mn units of Water Purifier as of end April 2012 Others Total 15,288 11.2 It includes revenue through sale of value added by‐products viz other chlor‐alkalies and pure salt. It

also includes some revenue through sale of clinker & Gypsum. Total Consolidated Revenues (FY12)

136,551


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Investment Thesis Expansion in capital light, low gestation businesses would drive earnings in near term Taking the advantage of superior market dynamics and demand potential, Tata Chemicals did certain expansions: ‐ 1) Tata Chemical North America (TCNA) completed 0.1 mmt de‐bottleneck 2) its salt capacity debottlenecking by 200 TPA with an outlay of Rs 1.8 bn. 3) capacity expansion of SSP by 50K TPA with the cost of Rs 110 mn. All the aforesaid expansion plans augurs well for the company given there asset light nature which would maximize returns. These projects have the potential to drive the earnings in the near term and increase the cash flows given their low gestation period Positive policy pronouncements in urea to augment earnings Quite a few proposals with regard to urea are awaiting the cabinet approvals, which includes 1) 10% hike in urea retail price 2) adhoc increase of Rs 350/Mt as a fixed cost reimbursement are under primary deliberations. Being one of the larger urea manufacturers and one of the most efficient players both the proposals post implementation would benefit Tata Chemicals by reducing its interest cost burden. Apart from the above, Nutrient Based Subsidy in urea and new urea investment policy are also long overdue. Group of ministers in April 2012 had given nod for the new urea investment policy, since then it is impending cabinet approval. The key silent features of the new urea investment policy are highlighted below:‐ • The policy seeks to link urea realizations (floor & ceiling) with the delivered cost of gas,

pipeline tariffs and other levies. Thus insulating the industry from volatility in gas & other associated costs


• It provides for cap of 20% on return on investment, this is the maximum return the industry could realize


The new policy seeks to incentivise and encourage additional urea production unlike the previous urea policy of the year 2008 which failed to attract desired investments. Further, NBS in urea if implemented would benefit the likes of Tata Chemicals as it would reduce the subsidy dependence to some extent from the government and hence ease the working capital requirement and reduce interest cost burden of the companies. Moreover, industry would be free to decide the urea retail price and would implement cost cutting measures in order to remain competitive, so the efficient players like Tata chem will gain Gabon’s urea Greenfield project offers maximum return TCL has picked up 25.1% stake in a Greenfield urea project in Gabon, Africa at US$ 290mn from the erstwhile promoters (80:20 JV) Olam International (80% stake) and Republic of Gabon (RoG). Post Tata Chem’s induction, Olam’s & RoG’s equity stake has gone down to 62.9% and 12%, respectively. The project size is 1.3mmt; commissioning in CY15 and capex is about US$ 1.3bn (includes debt of US$ 845mn) We gather the erstwhile promoters (Olam & RoG) have offloaded their equity (together 25.1% stake) at almost 155% premium to induct TCL. The funds so raised would allow other partners to fund their share of equity. However, considering the above positives, conservative Ebitda of US$ 300~350mn, TCL seems to have paid a very decent acquisition price of 5.7x EV/Ebitda (EV of US$ 2bn that includes debt of US$ 845mn). Despite a

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significant premium; we think this is a most value‐accretive investment decision; which would further maximise returns on execution of stream II. This project being to be one of the lowest cost urea manufacturing facilities globally and its proximity to target markets is likely to maximize returns in the long run. Given below are the advantages of the Gabon project:‐ • Uninterrupted feed supply: RoG has agreed to supply gas for 25 yrs at a fixed price.

We gather Gabon has 1 TCF of proven gas reserves and this in our analysis is sufficient to run 2*1.3 mmt Urea plant for 25 yrs.

• Lowest opex: Gas prices are sub < US$ 1/mmbtu fixed translating into a lowest opex of US$70/mt. Given proximity to the port, project could offer freight savings too as much of this is marked for exports.

• Lowest capex: The site is expected to house 2 urea plants (2.6mmt) and matching ammonia capacity; port jetty; captive power plant and the much‐needed infrastructure to construct the township at about US$ 1.3bn. In our analysis, this project is much cheaper compared to other urea projects of similar size (for eg. Algeria Oman Fertiliser Company)

• Attractive fiscal sops: Given the site is in a free trade zone, the project has a IT holiday for 10 yrs and 10% concessional rate thereafter.

• Project management fees for consultancy and maintenance: Tata Chemicals to provide consultancy and carry out O&M activity post project commencement, towards which the company is expected to get attractive fees too.

Second stream to hold significant equity at no premium: Tata Chemicals is expected to hold a significant equity in Stream II (1.3mmt) at no premium, unlike in stream I where it has paid almost 155% premiums to acquire 25.1% stake. Opens avenues for additional fee income Tata Chemicals Ltd. (TCL) has executed a technical advisory services agreement with Notore Chemicals Industries Limited (Notore), Nigeria, for providing technical advisory services for improving efficiency of the Notore Fertiliser Plant at Onne, River State, Nigeria. Notore is in the business of manufacturing Urea and owns a KBR Ammonia Plant and a Stamicarbon Urea Plant of 1000 Te/1550 Capacity. TCL will send its experts to Notore to help them to improve the systems and processes, resulting in the efficiencies of area of Operations and Maintenance. TCL's fees are linked to improvement in the output from the plant performance. Notore runs a 0.5mmt Urea plant and it is an integrated facility to manufacture NPK fertilizers, power and seeds. The ammonia plant had a key equipment breakdown in 1999 and thus, later the company ran into almost a bankruptcy and subsequently, it was privatised in 2005; the stake to have been picked up by a group of investors. We note that TCL’s urea plant in Babrala is by far the best in Asia with energy consumption as low as 5.17 Gcal/Mt. We believe that the company’s enriched experience of running urea plants for over three decades should facilitate removing the technical snag of Notore Chemicals in Nigeria. Earnings to improve to the extent of additional technical fee income (amount and timelines unknown).

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Branded pulses retailing—A huge opportunity During FY11 TCL forayed into branded pulses (or lentils), retailing under its 'i‐Shakti' brand under which it introduced four variants—toor, moong, chana and urad—priced reasonably around Rs 95‐Rs 100 per kg. The consumption of pulses in India is more than 20mmt (FY07‐12 CAGR of 5%), with production at ~16mmt. The industry opportunity is huge (US$ 40bn) with the organised market accounting for just about 4%. TCL aims to capture 3% of the US$ 40bn market in the next five years (indicating a turnover of Rs 54bn). The company, along with its (50.06%) subsidiary, Rallis India, would encourage farmers to grow pulses, provide them necessary farm inputs (seeds/pests/fertilisers and other technical inputs) and would also pay them a higher price (compared to support prices) for their produce. At about 5% margins and 1% market share in FY13E, pulses could add Rs 900 mn to TCL’s Ebitda in FY17E. As of FY12 the branded pulses have been rolled out to 19 states. It is being sold through modern retail formats, traditional stores, Tata Kisan Sansar outlets as well as through its existing strong salt distribution network across the country. Market opportunity is huge at Rs 1800bn (imports account for Rs 300bn): The pulses market in India is a whopping Rs 1800bn (US$ 40bn), however, it is majorly unorganised. The organised pulses market accounts for just about 4% of this. India produced about 18.09 mmt of pulses, which has grown at a pace of 6.2% (FY06‐11); however, the consumption has grown at a healthy pace of 5% to ~20mmt. This demand‐supply gap of ~3.5mmt is fulfilled through imports, mainly from Canada and Myanmar. A major reason for the shortfall in pulses is the low yield in India at just 689kg per hectare, compared with 965kg in Sri Lanka and 807kg in Bangladesh. Better productivity could replace the import market that accounts for Rs 300bn, TCL and Rallis combined can play a major role in this. TCL’s 30.6% stake in EPM Mining valued at Rs 8 bn or Rs 32/sh EPM Mining (EPM) – EPM is a US$ 200 mn market cap company focused on developing a premium specialty potash fertilizer (named Sulfate of Potash) in Utah, USA. It claims to control 102,000 acres of brine deposit with a resource potential of 100 mmt at depth of only 300 feet. According to EPM, it’s likely to be the lowest cost producer as it would process natural SOP by solar evaporation method. Given the natural SOP (priced at US$ 675/mt) is at about 40% premium to MOP (priced at US$ 475/mt), the profits are likely to be much higher. EPM expects tax breaks for the project on grounds that it would be able to generate employment, notwithstanding the tax benefits it estimates NPV of US$ 527 mn (10% discount rate) with commercial production in 2016. TCL has invested about Rs 800 mn (US$ 16 mn) for 30.6% stake in EPM Mining. We work the value of TCL’s investment in EPM Mining at US$ 158 mn or Rs 8 bn. About SOP – Sulfate of Potash (SOP) is a premium product for chloride sensitive crops. This is a high value fertilizer that has worldwide demand of more than 6mmt and is used mainly on high value specialty crops like Citrus fruits, Strawberries, Peaches, some vegetables, tobacco and cotton

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EPM mining details

Name of the Product Sulfate of Potash

Resource Estimate in mmt 100

EPM MIniing Market Cap US$ mn 200

Estimated realisation / costs

MOP $/mt 475

SOP $/mt 675

Cost of production $/mt 130

Est Rev in 2016 US$ mn 621

Est Ebitda in 2016 US$ mn 276

Projected NAV (@ 10% discount) US$ mn 527

TCL's holding

‐ in EPM Mining mn sh 37

‐ in EPM Mining % stake 30.60%

‐ Invested amount US$ mn 16

‐ Value in EPM (30.6% stake) US$ mn 158

Source: EPM Mining Ventures Inc. Presentation

Non‐cyclical businesses to account for 64% of Ebitda in FY17E Considering all expansions (brownfield Urea, Gabon, GCIP and Salt) and branded pulses retailing/Rallis, we see its Ebitda compound by 10% during FY13‐17E. The share of non‐cyclical businesses share would increase to 64% from ~50% in FY13E.

EBITDA bridge Figs in Rs mn FY13E FY17E Assumptions for FY17E Standalone 11,276 15,234 Fert 4,260 7,673 Urea 2,680 5,583 Urea Babrala expansion by 1.3 mmt P&K 1,080 1,440 P&K business to revive on low base Trading 500 650 Chemicals 7,016 7,561 Salt 4,398 4,774 Salt expansion of 0.2mmt not considered fully in FY13E Soda ash 1,560 1,519 Cement 308 368 Others 750 900 GCIP 7,685 7,667 GCIP expansion by 0.3 mmt, however appreciation in INR to hurt margins BMGL 4,200 5,177 Salt 2,000 2,677 Soda ash 2,000 2,500 Energy saving initiatives to drive margins, appreciating INR however to negate the partial benefit IMACID 590 650 Rallis 1,074 3210 Dahej expansion and increased acceptance of seeds Others (bal.fig) 843 1000 Urea Gabon, Africa 3,503 Urea brownfield of 1.3 mmt, 25.1% stake proportionate consolidated Branded pulses retailing 900 Assumes 1% mk sh of 18 mmt industry size; margins of 5% Ebitda forecast for FY13E/FY17E 25,668 37,341 Share of stable businesses to total 49 64


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About the company With the two‐fold successive acquisitions of BMGL, UK in December ‘05 and GCIP, US in March ‘08, TCL is the world’s second‐largest producer of soda ash, next only to FMC, US. About 2/3rd of the soda ash capacity is based on the natural soda ash (were the energy intensity is lower compared to synthetic soda ash). Tata Chemicals operations are classified under four segments 1) Inorganic chemicals (natural & synthetic soda ash, Salt, sodium bicarbonate, caustic soda, cement) 2) Fertiliser manufacturing & trading (Urea, DAP & NPK, SSP, speciality fertilsiers, speciality nutrients) 3) Agri inputs which includes Rallis India operations 4) Others includes branded pulses retailing etc. The organic chemicals division contributed 48% to FY12 consolidated revenues while the division’s PBIT margins yoy has improved by 234bps in FY12 after it undertook 10‐15% price hikes in soda ash across the geographies. The Fertiliser division accounted for 41% of the consolidated revenues in FY12, while PBIT margins of the division slipped 100 bps yoy, as the economies of the division suffered due to higher international fertilser prices. 3) Further, its Agri inputs division formed 11% of the consolidated revenues in FY12, its margins declined by 401 pts, as overall year was tough. Revenue mix

Entity wise distribution of FY12 Revenues

TCL Standalone, 40.3

BMGL, 15.3

IMACID, 14.8

GCIP, 16.9

Others, 12.8


Strategic Initiatives • The IMACID stake secures uninterrupted phosphoric acid supply; Rallis consolidates its

strength in agricultural inputs/crop nutrition business, while BMGL & GCIP acquisition puts TCL in the global soda ash league

• The company during April 2011 has picked up 25.1% stake in a greenfield urea project in Gabon, Africa at US$ 290mn from the erstwhile promoters (80:20 JV) Olam International (80% stake) and Republic of Gabon (RoG). Post TCL’s induction, Olam’s & RoG’s equity stake has gone down to 62.9% and 12%, respectively. The project size is 1.3mmt; commissioning in CY15 and capex is about US$ 1.3bn (includes debt of US$ 845mn)

• TCL during April 2011 has executed a technical advisory services agreement with Notore Chemicals Industries Limited (Notore), Nigeria, for providing technical advisory services for improving efficiency of the Notore Fertiliser Plant at Onne, River State, Nigeria. Notore is in the business of manufacturing Urea and owns a KBR Ammonia Plant and a Stamicarbon Urea Plant of 1000 Te/1550 Capacity. TCL will send its experts to Notore to help them to improve the systems and processes, resulting in the efficiencies of area of Operations and Maintenance. TCL's fees are linked to improvement in the output from the plant performance. Notore runs a 0.5mmt Urea plant and it is an integrated facility to manufacture NPK fertilizers, power and seeds.

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• The company during August 2011 acquired 30.6% stake in EPM Mining. EPM is a US$ 200 mn market cap company focused on developing a premium specialty potash fertilizer (named Sulfate of Potash) in Utah, USA. It claims to control 102,000 acres of brine deposit with a resource potential of 100 mmt at depth of only 300 feet.Financials

• We expect revenues to compound by 7% during FY12‐FY14E to Rs 157 bn, mainly on account of :‐ 1) additional salt capacity of 0.2 mmt came on stream in April 2012 2) Tata Chemicals North America (TCNA) commissioned 0.1 mmt additional debottleneck capacity 3)10‐15% price hike taken in December 2011 for soda ash business across the geography. We have estimated TCL’s soda ash business to account for 41.8% & 40.7% in FY13E & FY14E consolidated revenues

Product wise Revenue Mix (%) FY11 FY12 FY13E FY14E

Soda Ash 39.4 39.1 41.8 40.7

Urea 15.9 12.9 10.4 10.0

Phosphatics 12.6 12.9 11.7 12.8

Salt 5.3 6.8 7.6 7.3

Pulses 0.0 0.7 1.3 1.2

Rallis 9.4 9.4 9.4 10.3

IMACID (Phos. acid) 3.9 4.8 3.7 3.7

Others (incl. Fert trading, Cement) 13.5 13.5 14.1 14.1

Total Revenue 100.0 100.0 100.0 100.0


We expect operating margins to increase by 72 bps in FY13E on the backdrop of operating efficiencies. The absolute EBITDA is also expected to rise by 16% yoy on account of excess salt (0.2 mmt) & TCNA’s additional soda ash (0.1 mmt) capacities got commissioned. Depreciation charge yoy is expected to rise by 6% in FY13E due to additional capex incurred, whereas interest costs are expected to grow by 24% yoy in FY13E due to rise in borrowing cost and fresh loans to be added during FY13E to fulfill capex requirement. Net‐Net led by a growth in operating profits. Net profit during FY12‐FY14E to compound 14% to Rs 10.9 bn with the help of higher EBIDTA

Slight improvement in margins in FY13E

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– 126 of 142 –


Financials


Net sales 110,602 136,551 151,103 156,523

Growth, % 17 23 11 4

Total income 110,602 136,551 151,103 156,523


EBITDA (Core) 18,635 21,527 24,912 24,598

Growth, % 1.4 15.5 15.7 (1.3)

Margin, % 16.8 15.8 16.5 15.7

Depreciation ‐4,511 ‐5,087 ‐5,386 ‐5,458

EBIT 14,125 16,440 19,526 19,140

Growth, % 1.4 15.5 15.7 (1.3)

Margin, % 16.8 15.8 16.5 15.7

Interest paid ‐3,508 ‐4,270 ‐5,275 ‐5,507

Other Non‐Operating Income 962 3,188 1,200 1,201

Non‐recurring Items ‐369 ‐1,524 0 0

Pre‐tax profit 11,210 13,834 15,451 14,833

Tax provided ‐2,749 ‐3,439 ‐4,329 ‐4,329

Net Profit 6,535 8,376 8,489 9,706

Growth, % (3.9) 23.3 15.7 12.6


Unadj. shares (m) 255 255 255 255

Wtd avg shares (m) 255 255 255 255


Cash & bank 13,450 16,780 11,179 12,076

Debtors 13,654 23,107 26,909 27,874

Inventory 11,456 18,634 19,015 19,879

Loans & advances 7,819 8,555 8,555 8,555


Investments 4,479 6,097 6,097 6,097



Add: Capital WIP 7,091 5,492 11,106 11,106

Net fixed assets 44,905 49,436 55,156 60,803


Total assets 153,722 189,546 191,841 200,215


Provisions 13,201 15,439 12,962 13,191




Paid‐up capital 2,548 2,548 2,548 2,548






Pre‐tax profit 11,210 13,834 15,451 14,833

Depreciation 4,511 5,087 5,386 5,458

Chg in working capital ‐7,523 ‐4,719 ‐14,514 ‐472

Total tax paid ‐2,844 ‐3,808 ‐4,329 ‐4,329

Other operating activities 4,650 4,700 4,700 4,700

Cash flow from operating activities 10,003 15,094 6,694 20,190


Chg in investments 1,098 ‐1,618 0 0


Free cash flow ‐5 3,858 ‐4,412 9,085

Equity raised/(repaid) 3,634 0 0 0

Debt raised/(repaid) 7,060 6,116 7,222 ‐1,493

Dividend (incl. tax) 2,905 2,905 2,905 3,195

Other financing activities ‐9,880 ‐9,930 ‐9,930 ‐9,930

Cash flow from financing activities 2,357 ‐2,512 ‐1,490 ‐8,115

Net chg in cash 2,352 1,346 ‐5,901 970


EPS, Rs 26.7 32.9 38.0 42.8

BVPS, Rs 229.9 269.4 299.8 333.6

DPS, Rs 10.0 10.0 10.0 11.0

Return on assets (%) 7.4 7.6 7.6 7.2

Return on equity (%) 12.4 13.2 13.4 13.5





Cost of capital (%) 9.2 9.2 9.2 9.1

RoCE ‐ Cost of capital (%) (0.5) 0.3 0.2 (0.5)



Sales/Net FA (x) 2.7 2.9 2.9 2.7



Inventory days 37.8 49.8 45.9 46.4

Payable days 46.9 46.6 65.0 65.0

Current ratio (x) 2.0 1.6 2.0 2.0

Quick ratio (x) 1.5 1.1 1.4 1.4


Dividend cover (x) (2.7) (3.3) (3.8) (3.9)

PER (x) 11.9 9.7 8.4 7.4

Price/Book (x) 1.4 1.2 1.1 1.0

EV/EBIT (x) 6.7 5.9 5.6 5.6

EV/NOPLAT (x) 7.8 7.0 6.8 6.8

EV/CE 1.0 0.9 0.9 0.8

EV/IC (x) 2.5 2.3 2.1 1.7

– 127 of 142 –



Buy 400 307 01/06/12

Buy 428 363 14/02/12

Neutral 400 351 28/01/11

Buy 450 390 01/11/10

Neutral 375 349 5/8/2010

Neutral 340 305 2/2/2010

Neutral 287 258 14/09/09

– 128 of 142 –

United Phosphorus Pain before the gain!



UPL – India’s largest agrochem co.: United Phosphorus Ltd. (UPL) is the seventh largest and fastest growing agrochemical company in the world with presence in global generic crop‐protection, chemicals and seeds. It is India’s largest agrochemical company with revenues of Rs 75 bn and it’s expected to benefit further from its fully integrated operations.

Industry prospects remain bright; leader in any segment benefits the most: As per estimates, the world population is likely to touch 9 bn from 7 bn in 2050. Rising incomes, rapid urbanization is likely to lead to a 3‐fold jump in food consumption. A number of countries including India under consume agrochemicals. A progressive decline in registration led by stringent vigilance or outsource of work to credible locations like India presents a favourable opportunity over the longer term, UPL being the leader would benefit the most.

PAT growth in acquisitions to restore confidence: While the profits have doubled during FY08‐12, the growth during FY10‐12 has been a dismal 8%; largely dent by higher interest expense and losses of the acquired companies. We expect ‐ a deleveraged balance sheet, volume growth in emerging markets and acquisitions turning to profits would aid profit growth during FY12‐14E.

H2FY13 to better H1FY13: UPL’s H1 results were rather subdued due to a severe draught in North America and delayed monsoons in India that lowered pesticides demand. Working capital cycle lengthened due to increase in share of Brazil, where higher receivable days are customary. A weak INR although averted some margin pressure. A pick up in monsoon and managements indication of outlook improving in North America and Europe for the remainder of FY13 is positive. A higher proportion of FX denominated loans and lower tax (over H1), with this management retaining its guidance for FY13 (15% FY13E topline growth against H1 growth at 12%) point towards a better H2 over H1.

Valuations attractive: Valuations are at a historic low, led by disappointment on the growth over its guidance in the past; adverse climatic conditions and rise in input costs that lowered farm profitability and thus pest demand. Regulatory risks of CCI imposing a fine, a slower turn around of subsidiaries into profits and lower offtake of agrochemicals in India led by stressed farm profits have lowered investor interest. We expect a turn around of its subsidiaries (successful integration of acquisition in Brazil; reduction in working capital cycle to throw cash) would drive growth and thus valuations for UPL in FY14E. As interim worries persist, we value the stock at Rs 135 (8x FY13E EPS of Rs 15) and initiate coverage with a Neutral rating. The 8x one year forward compares to the other geographically diversified global generic companies.

NEUTRAL UNTP IN | CMP RS 115


O/S SHARES (MN) : 461MARKET CAP (RSBN) : 54MARKET CAP (USDBN) : 152 ‐ WK HI/LO (RS) : 169 / 105LIQUIDITY 3M (USDMN) : 2.1FACE VALUE (RS) : 2




ABS ‐11.1 ‐3.4 ‐21.1REL TO BSE ‐11.8 ‐10.5 ‐28.3


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Other Key Ratios



– 129 of 142 –

12 November 2012 / INDIA EQUITY RESEARCH / UNITED PHOSPHORUS INITIATING COVERAGE


UPL is an attractive proxy play on global agrochemicals in India. It is the world's 7th largest agrochemical company. It has more than 1000 product registrations across geographies which allows it to access around 90% of the world markets, apart from this its ability to run the plants efficiently gives it an edge over competition

Financial Structure UPL's FY12 debt equity ratio stands at 0.78 which is above industry average. Higher leverage to fund acquisitions resulted in higher interest outgo and compressed ROCE to ~14.7% in FY11‐12. Around 3/4th of the company's debt are in forex currency. However, given an improvement in cashflows, we expect UPL to deleverage (debt repayment of Rs ~ 10 bn) and thus lower debt/ equity

Shareholder Value Creation DPS of Rs 2.5/ sh is likely to be it to maintain for FY13E & FY14E on the back of sustainable cash flows, results are expected to fall in FY13E and improve in FY14E

Earnings Visibility Its acquisition of DVA Agro, Brazil has strengthened its presence in Latin America and provides UPL an access to one of the key markets, which forms 15% of the world agrochemical market. We expect profits to compound 7% during FY12‐14E.


Future Event Triggers Favourable weather, increased acceptance to new launches, resolution on regulatory risks of CCI imposing a fine

Expected Price Momentum Co., has disappointed on its guidance, a turn around in its subsidiaries and reduction in working capital cycle is likely to restore confidence

Risks • Weather related risks: The demand for pesticides is largely dependent on weather

conditions and unfavorable weather can affect the quality and quantity of production. Also, due to adverse weather conditions, there may be less pest attacks, weakening the demand outlook.

• Delayed receivables: The receivable days have been steadily on the rise for the UPL (up from 80 days in FY10 to about 120 days in FY12) increasing the working capital requirement. With higher receivables days (at times over 250 days) being a norm in Brazil, and given increase in Brazil’s contribution to total, we expect the risk to rising receivables days exists, thereby pressuring working capital requirements and leading to interest outgo.

• CCI imposed penalty, a significant risk to estimates and rating: The competition regulator (CCI) has imposed 9% of revenues earned during 2008‐2012 (amounting to Rs 2.52 bn) in penalties for collusive bidding and rigging bid prices in supplying aluminium phosphide (ALP) tablets to state‐run Food Corporation of India (FCI). UPL has approached the tribunal against the CCI order and the matter is sub‐judice. As the penalty accounts a third of annual profits, this is a key risk to our estimates and rating.

• Regulatory risks: The business of UPL is dependent on various laws, regulations and policies announced from time to time. Any development in these areas curbing the company’s freedom to operate would have an adverse effect on its business and growth. Besides regulatory risks, intensified competition, commodity prices and currency movement are important risks to our earnings estimates and rating.

– 130 of 142 –



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– 131 of 142 –


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Investment Thesis Rising population, lower agro chem usage remain key agri input demand drivers The world’s population is growing steadily; experts indicate that today’s global population of 7 bn is expected to grow to 9 bn by 2050. Global incomes are also rising. We expect both these developments to converge into three‐fold food consumption growth by 2050 [Source: GIA report]. A number of countries are extensively under‐consumed for agrochemicals: even in a country like India with a deep agrarian tradition, pesticide consumption is a low 600 gms per hectare compared with the global average of around 3‐10 kg per hectare. These realities indicate that the market for agricultural inputs (including agrochemicals) products will continue to expand over the foreseeable future. Up to 40% of the world's potential crop production is lost annually because of the effects of weeds, pests and disease. These crop losses could double if existing pesticide use is abandoned. The value of the global chemical crop protection market is estimated to have increased 14.9% in 2011 to US$ 44 bn; use of agrochemical products in non‐farm sectors rose by 7.0% to US$ 6.29 bn. The total agrochemical market increased 13.8% to US$ 50.31 bn in 2011. The most significant crop protection market growth occurred in developing markets, especially Latin America. Asia fared well followed by Europe (double‐digit growth in many East European countries including Russia and Ukraine). Key drivers of agricultural demand • Increasing population • Declining arable land per person • Income growth in developing countries • Changing diets • Increasing demands for higher quality foods • Biofuel potential • Crop prices rose strongly reaching a new peak • Strong volume growth in Latin America, Europe and Asia • Stable glyphosate prices • Variable weather (floods, dry weather early summer, drought, tsunami etc) • Strong Brazilian farm economy (Brazil is the fastest growing agrochemical market in

the world and accounts for 15% of the global agricultural output) • Increased GM crop areas • Record US ethanol production Growing food price – The climatic erraticity arising out of global warming has reduced agricultural production across countries which have led to rise in food prices. There is concerted focus on enhancing crop yields, which would benefit the crop protection industry.

– 133 of 142 –


Price of key crops in last 10 years

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Pest consumption India

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Yield w ithout protection Actual y ield w ith cropprotection

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28% prev ented losses due to pests, w eeds and diseases

42% actual losses due to pests, w eeds

and diseases

30% further losses due to drought, heat,

cold, satinity


– 134 of 142 –


To feed the increasing population cereal demand is projected to reach some 3 bn tons by 2050 from today’s level of 2.1 bn tons, this calls for raising overall food production by 70% between 2005‐07 and 2050 [Source: FAO]. Some 90% of the growth in crop production globally (80% in developing countries) is expected to come from higher yields and increased cropping intensity, the remainder coming from land expansion. Arable land will expand by some 70 million ha (or less than 5%), with the expansion in developing countries by about 120 million ha (or 12%) being offset by a decline of some 50 million ha (or 8%) in developed countries. On average, annual crop yield growth rate over the projection period would be about half (0.8%) its historical growth rate (1.7%; 0.9 and 2.1% for the developing countries) according to FAO. This will require extensive use of agrochemicals. Indian crop losses in the country due to pest attack range from 10 to 30% each year depending upon attack severity. INDIA’s pesticides consumption has improved in the last decade FY91 72.13 FY96 61.62 FY01 43.58 FY06 39.77 FY10 41.82 FY11 55.54

Source: Directorate of Economics and Statistics, DAC

Market size by 2015 for agrochemicals across agro products 2015 Herbicides Insecticides Fungicides Others Total CCP AgBio TOTALCereals 4,184 592 2,464 249 7,489 0 7,489Maize 3,293 957 491 8 4,749 7,757 12,506Rice 1,873 1,374 867 92 4,206 60 4,266Soybean 2,340 983 1,251 3 4,577 5,332 9,909Rape 912 198 350 16 1,476 390 1,866Sunflower 450 45 25 3 523 0 523Cotton 559 1,289 87 315 2,250 1,224 3,474Sugarbeet 556 70 58 1 685 63 748Sugarcane 1,048 357 0 38 1,443 0 1,443Potato 316 412 796 40 1,564 0 1,564Vine 268 259 1,076 38 1,641 0 1,641Pome fruit 175 475 597 46 1,293 0 1,293Other F&V 1,623 2,570 2,169 202 6,564 0 6,564Fruit and vegetables 2,382 3,716 4,638 326 11,062 0 11,062Other crops 1,753 1,235 1,017 212 4,217 0 4,217Total 19,350 10,818 11,248 1,263 42,679 14,826 57,505

Source: Phillips McDougall, UPL Annual Report

– 135 of 142 –


UPL is a global agrochemicals play UPL is present across the extensive value chain – proprietary research in various formulations as well as access to research agencies engaged in fundamental research, direct and outsourced manufacture of active ingredients and formulations, packaging capacity and wide market access (registration and products). Competitive edge: In agrochemicals, the foundation of all competence is an ability to manufacture at competitive cost. Lower capex, utlisation rates at optimal capacity, product switch with speed and delivery mechanism (for eg. shortest processes) and superior quality determines competitiveness. It is one of the worlds lowest cost agrochemicals manufacturer as it supplies almost 52% of its produce from India. Some of the plants – mancozeb, aluminium phosphide, devrrinol, cypermethrin, and monocrotophos – have competitive raw material cost due to forward and backward integration, resulting in lower per unit cost of manufacture. Captive power plants and raw material building blocks like phosphorus and chloralkali) results in lower cost of operation. Registration competence: In a competitive business where the product quality influences human health, competence is derived from an ability to obtain permission to market products in various countries. It has over 1000 registrations in over 120 countries. These registrations are obtained through extensive research & company acquisitions. The acquisitions have reduced the gestation period usually associated with getting products registered in various countries. It possesses the capability to file for more than 300 registrations annually. Distribution reach: Distributors can influence farmer’s purchase decision, besides, distributors are selective and they only work with credible companies with a large, evolving product basket. Acquisitions too have helped build the missing distribution linkages. Product range: The wider the product basket, the stronger the relationship between a company and a distributor and farmer. Higher multiple products also lower distribution costs. UPL has a number of products comprising pests, seed encompassing a rich portfolio of more than 60 products of which 20 were launched in last five years. It is present across (pests, herbicides, insecticides and rodenticides) products are available in more than 15 SKU’s across 120 countries. Almost 65% of its revenues are from branded products. UPL’s integrated business model

Basic and applied research

Active ingredient manufacturing

Development

Formulation and packaging

Registration

Marketing and distribution

Basic and applied research

Active ingredient manufacturing

Development

Formulation and packaging

Registration

Marketing and distribution

– 136 of 142 –


UPL to benefit from the dominant off‐patent space The global agrichemical industry, valued at US$40bn, is dominated by the top six innovators, who enjoy a large market share of the patented (28%) and off‐patent (32%) market. Pertinently, the top six innovators also enjoy a large share of the off‐patent market due to high entry barriers for pure generic players. Thus, one‐third of the total pie provides a high‐growth opportunity for larger integrated generic players such as UPL. Generic segment's market share to increase: Generic players have been garnering a high market share, increasing from 32% in 1998 to 40% by 2006‐end. The industry registered a 3% CAGR over 1998‐2006, while generic players outpaced the industry with a 6% CAGR. In the business of agrochemicals, the ability to innovate new products through non‐patented routes or shorter processes is the key to success. At present UPL is the only Indian company to possess international and global patents for 20 products. Given the opportunities and a drop in the rate of new molecule introduction by innovators, we expect generic players to continue to outpace the industry's growth and increase their market share in the overall pie garnering a market share of 44‐45%. Generics are expected to register healthy growth due to increasing penetration and wresting market share from innovators and patent expiries during 2009‐14. Recent acquisitions boost presence in important markets UPL has made two acquisitions in Brazil (Sipcam and DVA) in FY12, which strengthen its presence in Latin America (particularly Brazil, the fastest growing agrochemical market in the world and accounting for 15% of the global agricultural output). Also, the Brazilian acquisitions will be margin accretive, but working capital intensive. Apart from these two acquisitions, UPL also made smaller acquisitions in the past few years. These acquisitions have come after a lull of almost two years of no inorganic activity. UPL also acquired, fully owned subsidiary of Punjab Chemicals in Europe for an undisclosed sum in July this year. Our estimates don’t include any numbers from Agchem acquisition. DVA Agro (part of a German group) is an attractive proxy of the Brazil agrochemical play. It formulates and markets crop protection products in Brazil (revenues around US$140m in CY 11). UPL acquired a 51% stake in DVA Agro Brasil for US$ 185 mnn to widen in Brazil. The acquisition helped access DVA Agro’s broad product portfolios while helping it leverage its longstanding manufacturing competencies to enhance the acquired Company’s efficiency. United Phosphorus also acquired a 50% stake in Sipcam Isagro, a manufacturer and distributor of formulations in Brazil. Both acquisitions to provide a significant presence in Latin America to UPL.With acquisitions filling in the gap in important markets, we believe the revenue and earnings growth trajectory will improve over the next 18‐24 months. Acquisitions since 2007 Year Product Sales (US$m) Consideration (US$m)2007 Cerexagri, (intially France now Europe) 250 1332007 ICONA, Argentina 13 102007 Super Tin, Vendex (Du Pont) NA NAFeb' 08 Evofarms, Columbia NA NAJun'10 Manzate (Mancozeb business), Columbia NA NADec'10 Propanil, USA NA NAApr'11 SIB, Brazil 100 NAJul'11 DVA, Brazil 130 150Jul’12 SD AGCHEM, Europe 1627 NA

Source: Company, PhillipCapital Research Estimates

– 137 of 142 –


Financials Topline growth to be aided by new product launches in India, acquisitions and weak currency UPL’s revenue can be largely broken into four key geographies – North America, India, Europe and Rest of the world, with geography accounting about a quarter of the total (refer below). Management has guided for a 15% growth in topline over the next two years, however this seems challenging to be attainted in light of somewhat deteriorating farm economics and likely demand softening following erratic monsoon. For India, despite new product launches (novel insecticides and one herbicide) we expect India revenues to sustain last year growth rate of 15% than increase. Two Brazilian acquisitions would translate into higher share of revenue’s from RoW. Overall we model for 12% growth in topline during FY12‐14E to Rs 95 bn. Revenue by geography – with key Brazilian acquisitions, share of revenues from RoW to rise Consol. Income by Region FY09 FY10 FY11 FY12 FY13E FY14E

North America 11,750 12,340 12,830 16,340 17,484 18,708 India 10,330 11,980 14,940 17,190 19,769 21,745 Europe 15,870 15,730 12,250 14,210 15,631 16,881Rest of the world 11,790 14,900 18,960 29,900 34,385 37,824Total 49,740 54,950 58,980 77,640 87,268 95,158Growth (Y‐Y)% 10 7 32 12 9


Rise in input cost and low margin acquisitions to lower overall margins Margins for UPL have declined steadily (by about 140 bps between FY10‐12) following acquisition of low margin entities. With increasing share of revenues from DVA Agro (low margin) and given weak farm economics in India, margin pressures would likely remain. While margin has indicated for about 18‐20% margins, we model margins around 16‐18%. We expect margins to fall by ~100 bps during FY12‐14E and estimate Ebitda to compound by 6% during FY12‐14E to Rs 15.4 bn. The Brazilian acquisitions are likely to exert pressure on working capital (given extended receivable days) and with this approved buy‐back (Rs 19.2 mn sh at a price of Rs 150/‐ amounting to Rs 2.88 bn) would likely result in higher interest outgo in FY13E; we assume huge operating cashflows with no major capex to likely result in paying off some debt in FY14E. Thus savings in interest outgo would drive PAT growth by 15% in FY14E over FY12.

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– 138 of 142 –


About the Company UPL is the seventh largest and the fastest growing agrochemical company in the world. It has grown through over 19 acquisitions in the last two decades, is present in major markets and is one of the most profitable agrochemical companies in the world. It is India’s largest agrochemicals company in revenue terms. The company’s product range comprises of fungicides, insecticides, herbicides, rodenticides, fumigants, plant growth regulators, agrochemicals as well as industrial and specialty chemicals. Its profits have compounded 21% during FY08‐12 helped equally by organic growth and acquisitions. The company has > 1000 product registrations that represent marketing permission by statutory authorities of local governments in many countries to market the product in their geographies. It was established in 1969 by Mr. Rajju Shroff (Chairman). It has 6 manufacturing locations in India and has two captive power plants of about 48.5 MW each. It has 89 subsidiaries globally and is present in about 120 countries. UPL is the seventh largest and the fastest growing agrochemical company in the world. It has grown through over 19 acquisitions in the last two decades, is present in major markets and is one of the most profitable agrochemical companies in the world. Its profits have compounded 21% during FY08‐12. We estimate a 7% CAGR in PAT over FY12‐14E driven by recent acquisitions.

– 139 of 142 –


Financials


Net sales 56,497 75,342 87,268 95,158

Growth, % 7 33 16 9

Other income 1,548 1,205 1,548 1,548

Total income 58,045 76,547 88,817 96,706


EBITDA (Core) 11,106 13,674 15,248 15,477

Growth, % 11.1 23.1 11.5 1.5

Margin, % 19.7 18.1 17.5 16.3

Depreciation ‐2,138 ‐2,924 ‐3,079 ‐3,235

EBIT 8,968 10,750 12,168 12,242

Growth, % 14.3 19.9 13.2 0.6

Margin, % 15.9 14.3 13.9 12.9

Interest paid ‐3,120 ‐4,146 ‐4,737 ‐3,964

Other Non‐Operating Income 937 1,089 1,000 930

Non‐recurring Items ‐140 ‐185 0 0

Pre‐tax profit 6,644 7,509 8,431 9,209

Tax provided ‐731 ‐1,280 ‐1,686 ‐1,842

Profit after tax 5,914 6,229 6,745 7,367

Net Profit 5,576 6,480 7,037 7,667

Growth, % 3.4 16.6 5.6 9.0


Unadj. shares (m) 462 462 462 462

Wtd avg shares (m) 462 462 462 462


Cash & bank 15,659 7,002 2,910 4,433

Debtors 14,795 25,066 30,417 33,119

Inventory 14,055 18,779 23,117 25,170

Loans & advances 4,611 7,724 7,724 7,724



Investments 8,232 7,945 7,945 7,945



Add: Capital WIP 568 1,338 1,500 1,500

Net fixed assets 23,776 33,568 31,988 30,253

Total assets 82,784 101,811 105,829 110,371


Provisions 1,552 2,083 3,007 3,007










Pre‐tax profit 6,644 7,509 8,431 9,209

Depreciation 2,138 2,924 3,079 3,235

Chg in working capital 7,804 ‐21,718 ‐5,398 ‐2,237

Total tax paid ‐924 ‐1,259 ‐1,686 ‐1,842



Chg in investments ‐620 287 0 0


Free cash flow 7,257 ‐24,973 2,926 6,865

Equity raised/(repaid) 3,208 11,499 0 0


Dividend (incl. tax) ‐1,074 ‐1,343 ‐1,343 ‐1,343

Cash flow from financing activities ‐7,008 30,200 ‐6,725 ‐5,043

Net chg in cash 249 5,227 ‐3,800 1,822


EPS, Rs 12.4 14.4 15.2 16.6

BVPS, Rs 81.1 95.8 108.1 121.8

DPS, Rs 2.0 2.5 2.5 2.5

Return on assets (%) 10.4 9.6 9.4 9.2

Return on equity (%) 16.9 16.3 14.9 14.4





Cost of capital (%) 3.0 4.4 3.7 3.0




Sales/Net FA (x) 2.7 2.6 2.7 3.1


Receivable days 95.6 121.4 127.2 127.0

Inventory days 90.8 91.0 96.7 96.5

Payable days 215.1 120.9 120.0 120.0

Current ratio (x) 1.8 2.8 2.7 2.7

Quick ratio (x) 1.3 1.9 1.7 1.7



PER (x) 9.3 8.0 7.5 6.9

Price/Book (x) 1.4 1.2 1.1 0.9

EV/EBIT (x) 5.8 7.3 6.3 5.8

EV/NOPLAT (x) 5.1 6.3 5.7 5.2

EV/CE 1.0 0.9 0.9 0.8

EV/IC (x) 1.7 1.7 1.2 1.1

– 140 of 142 –


Management Vineet Bhatnagar (Managing Director) (91 22) 2300 2999 Sajid Khalid (Head – Institutional Equities) (91 22) 6667 9972 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735

Research Automobiles, IT Services Deepak Jain (9122) 6667 9758 Neha Garg (9122) 6667 9996 Varun Vijayan (9122) 6667 9992 Banking, NBFCs Manish Agarwalla (9122) 6667 9962 Sachit Motwani, FRM (9122) 6667 9953 Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Ennette Fernandes (9122) 6667 9764 Vivekanand Subbaraman (9122) 6667 9766 Cement Vaibhav Agarwal (9122) 6667 9967

Economics Anjali Verma (9122) 6667 9969 Engineering, Capital Goods Ankur Sharma (9122) 6667 9759 Jishar Thoombath (9122) 6667 9986 Metals Dhawal Doshi (9122) 6667 9769 Dharmesh Shah (9122) 6667 9974 Infrastructure Vibhor Singhal (9122) 6667 9949 Raheel Arathodi (9122) 6667 9768 Oil&Gas, Agri Inputs Gauri Anand (9122) 6667 9943 Saurabh Rathi (9122) 6667 9951

Retail, Real Estate Abhishek Ranganathan, CFA (9122) 6667 9952 Neha Garg (9122) 6667 9996 Mid‐caps Kapil Bagaria (9122) 6667 9965 Raheel Arathodi (9122) 6667 9768 Technicals & Quant Neppolian Pillai (9122) 6667 9989 Shikha Khurana (9122) 6667 9948 Sr. Manager – Equities Support Rosie Ferns (9122) 6667 9971

Sales & Distribution Sudhir Padiyar (9122) 6667 9991 Kinshuk Tiwari (9122) 6667 9946 Pawan Kakumanu (9122) 6667 9934 Shubhangi Agrawal (9122) 6667 9964 Dipesh Sohani (9122) 6667 9756

Sunil Kamath (Sales Trader) (9122) 6667 9747 Chetan Savla (Sales Trader) (9122) 6667 9745 Rajesh Ashar (Sales Trader) (9122) 6667 9746

Mayur Shah (Execution) (9122) 6667 9945 Gurudatt Uchil (Execution) (9122) 6667 9750

Contact Information (Regional Member Companies)

SINGAPORE

Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

– 141 of 142 –


Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice.Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital (India) Pvt. Ltd. 2nd Floor, C‐Block, Modern Centre, Mahalaxmi, Mumbai ‐ 400011

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